<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
-----------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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>
<S> <C> <C>
NAME OF EACH EXCHANGE
Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------- -------------------
None None
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 August 6, 1999, there were 7,932,616 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> <C>
1 Financial statements:
Consolidated balance sheets-
June 30 (unaudited) and March 31, 1999 3
Unaudited consolidated statements of operations and
comprehensive income-
Three months ended June 30, 1999 and 1998 4
Unaudited consolidated statements of cash flows-
Three months ended June 30, 1999 and 1998 5
Notes to consolidated financial statements 6
2 Management's discussion and analysis of financial
condition and results of operations 10
3 Quantitative and qualitative market risk disclosures 17
PART II - OTHER INFORMATION
2 Changes in Securities and Use of Proceeds 17
6 Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30 and March 31, 1999
<TABLE>
<CAPTION>
1999
------------------------------
ASSETS June 30, March 31,
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,581,162 $ 739,126
Investment in available-for-sale securities 10,350,548 14,061,410
Current portion of notes receivable 279,395 216,912
Other current assets 673,995 518,835
------------ ------------
Total Current Assets 12,885,100 15,536,283
Notes receivable, less current portion 1,076,299 1,169,491
Land held for sale 4,868,740 4,505,227
Water rights 19,531,222 18,716,519
Prepaid leasing costs, net of accumulated amortization 3,627,205 3,585,759
Other water assets, net of accumulated amortization 3,338,328 3,276,872
Deferred debt costs, net of accumulated amortization 574,264 598,966
Property and equipment, net of accumulated depreciation 208,044 189,659
Other assets 73,294 52,084
------------ ------------
$ 46,182,496 $ 47,630,860
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 150,110 $ 92,108
Accrued expenses and other liabilities 448,653 490,095
Accrued interest 391,704 91,988
Current maturities of long-term debt 637,667 1,245,721
------------ ------------
Total Current Liabilities 1,628,134 1,919,912
Long-term debt, less current maturities (Note 3) 3,615,349 2,972,349
9% Convertible subordinated debentures 14,740,000 14,740,000
Deferred gain on sale 33,333 43,333
------------ ------------
Total Liabilities 20,016,816 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 June 30 and March 31, 1999, respectively 9,789,558 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 June 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 June 30 and March 31, 1999, respectively 8,240 8,240
Additional paid-in capital 24,372,823 24,347,502
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (16,690,633) (14,922,313)
Treasury stock, at cost, 307,200 and 292,200 shares at June 30,
and March 31, 1999, respectively (Note 2) (1,314,308) (1,259,030)
------------ ------------
Total Stockholders' Equity 6,376,122 8,174,399
------------ ------------
$ 46,182,496 $ 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 June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Water $ 472,420 $ 80,774
Real estate -- 278,115
----------- -----------
472,420 358,889
----------- -----------
Costs of Revenue:
Water 244,758 14,581
Real estate -- 128,352
----------- -----------
244,758 142,933
----------- -----------
Gross Profit 227,662 215,956
General and Administrative Expenses 1,616,214 886,756
----------- -----------
Operating Income (Loss) (1,388,552) (670,800)
----------- -----------
Other Income (Expenses):
Interest income 219,632 245,532
Interest expense (384,567) (337,500)
Gain on sale of investment in limited liability company 10,000 10,000
Other (25,442) 360,708
----------- -----------
(180,377) 278,740
----------- -----------
Income (Loss) before Income Taxes (1,568,929) (392,060)
Income Taxes (Note 4) 3,200 2,400
----------- -----------
Net Income (Loss) (1,572,129) (394,460)
Accretion of preferred stock to redemption value (8,691) (8,032)
Preferred stock dividends (187,500) --
----------- -----------
Net Income (Loss) Applicable to Common Stockholders (1,768,320) (402,492)
Other comprehensive income (loss), net of tax-
Unrealized holding gains (losses) arising during period -- (180,902)
----------- -----------
Comprehensive Income (Loss) $(1,768,320) $ (583,394)
=========== ===========
Basic and diluted net income (loss) per common share
applicable to common stockholders $ (0.22) $ (0.05)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Three months ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,572,129) $ (394,460)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 276,137 40,558
Compensation expense on vesting of unexercised
compensatory stock options 25,321 27,000
Gain on sale of investment in limited liability company (10,000) (10,000)
Loss on disposition of property and equipment 2,544 1,982
Allowance for water project costs 357,930 --
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (155,160) (160,960)
Land held for sale (363,513) 128,353
Other assets (21,210) --
Increase (decrease) in:
Accounts payable 58,002 82,049
Accrued expenses and other liabilities (41,442) (341,467)
Accrued interest 299,716 308,659
----------- -----------
Net cash used in operating activities (1,143,804) (318,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits for purchase of land and water rights -- (1,612,000)
Principal payments received on notes receivable 30,709 94,548
Purchase of property and equipment (33,525) (22,294)
Purchase of available-for-sale securities (295,988) (208,415)
Sales of available-for-sale securities 4,006,850 4,323,347
Additions to water rights (90,689) (333,859)
Purchase of water rights (975,000) (647,445)
Additions to other water assets (76,036) (1,931)
Prepayment of leasing costs (372,649) --
----------- -----------
Net cash provided by investing activities 2,193,672 1,591,951
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 800,000 --
Preferred stock dividends (187,500) --
Purchase of common stock (55,278) --
Principal payments on long-term debt (765,054) (20,952)
----------- -----------
Net cash used in financing activities (207,832) (20,952)
----------- -----------
Net increase in cash and cash equivalents 842,036 1,252,713
Cash and cash equivalents, beginning of period 739,126 304,988
----------- -----------
Cash and cash equivalents, end of period $ 1,581,162 $ 1,557,701
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
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 June 30,
1999, the consolidated statements of operations and comprehensive
income and cash flows for the three months ended June 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 7,933,440 and 8,235,816 shares for the three months ended
June 30, 1999 and 1998, respectively.
Stock options to purchase 1,669,876 and 1,704,066 shares of common
stock at exercise prices ranging from $4.00-$21.00 and $5.44-$18.70 for
the three months ended June 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 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 months ended June 30, 1999 and 1998 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, $16.62 and $8.99
per share, respectively, were not included in the computation of
diluted net income per share for the three months ended June 30, 1999
and 1998 as their effect would have been antidilutive:
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Convertible debentures 929,382 945,763
Series C redeemable preferred stock 611,593 569,625
Series D redeemable preferred stock 1,112,347 --
</TABLE>
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 June 30, 1999, the Company
repurchased 15,000 shares of common stock at a cost of $55,278. Since
November 1998, the Company has repurchased 307,200 shares of common
stock at a cost of $1,314,308.
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, 1999. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income
tax provision for the three months ended June 30, 1999.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5. SEGMENT INFORMATION:
The Company has two operating segments: a) the acquisition and
development of water rights and the sale or lease of its 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 months ended June 30, 1999 and 1998 is
presented below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Segment revenue:
Water $ 472,420 $ 80,774
Real estate -- 278,115
------------ ------------
$ 472,420 $ 358,889
============ ============
Net income (loss):
Segment:
Water $ 227,662 $ 66,193
Real estate -- 149,763
Non-segment (1,799,791) (610,416)
------------ ------------
$ (1,572,129) $ (394,460)
============ ============
Depreciation and amortization expense:
Segment-Water $ 238,839 $ 14,581
Non-segment 37,298 25,977
------------ ------------
$ 276,137 $ 40,558
============ ============
</TABLE>
The Company recognized revenue of $45,000 from Fontana Water Resources
for the three months ended June 30, 1999 and 1998. For the three months
ended June 30, 1999, the Company recognized revenue of $320,665 from
the City of Inglewood. No other recurring customer accounted for more
than 10% of the Company's revenue.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 102,120 $ 51,680
Interest capitalized during the period 17,269 38,140
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 (10,000) (10,000)
Accretion of preferred stock to redemption value 8,691 8,032
Unrealized loss on available-for-sale securities -- (180,902)
Disposition of property and equipment
and related accumulated depreciation:
Property and equipment (2,678) (2,477)
Accumulated depreciation 134 495
</TABLE>
NOTE 7. SUBSEQUENT EVENT:
On August 6, 1999, the Company repurchased $5,000,000 of its 9% Convertible
Subordinated Debenture plus accrued interest of $157,800 for $1,500,000. In its
second fiscal quarter, the Company will recognize a $3,490,000 extraordinary
gain, net of taxes on the extinguishment of debt.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Quarterly Report
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof based on information
currently available to management. Western Water Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the year ended March 31, 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
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 amount 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.
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 307,200 shares of common
stock at a cost of $1,314,308.
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
GENERAL (CONTINUED)
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"). Effective October
l, 1997, the Company may, at its option, redeem some or all of the Debentures at
a cash redemption price equal to 100% of the principal amount to be redeemed,
plus accrued and unpaid interest thereon through the redemption date, if on each
of the 20 consecutive trading days immediately prior to the mailing of the
redemption notice the trading price of the Common Stock is equal to or greater
than 150% of the then applicable Conversion Price.
In February 1997, the Company issued $4,000,000 of its Series B
Preferred Stock to two institutional investors, and in April 1997, the Company
issued an additional $5,000,000 of its Series C Preferred Stock. Upon the
issuance of the $5,000,000 of Series C Preferred Stock, the shares of Series B
Convertible Preferred Stock were exchanged for shares of Series C Preferred
Stock. There are no shares of Series B Convertible Preferred Stock currently
outstanding. Each share of Series C Preferred Stock has a stated value of $1,000
and is convertible at any time at the option of the holder into shares of Common
Stock at a conversion price of $16.62 per share. The conversion price, and
therefore the number of shares of Common Stock issuable upon the conversion of
the Series C Preferred Stock, is subject to adjustment in certain events to
prevent dilution. The holders of the Series C Preferred Stock are entitled to
receive, when and if declared by the Board of Directors, out of funds legally
available therefore, 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. The first four semi-annual dividend payments could be paid in
nonassessable shares of Series C Preferred Stock. Through June 30, 1999, the
Company paid $1,224,734 in dividends to the holders of the Series C Preferred
Stock, of which $59,856 was paid in cash and $1,164,878 was paid by the issuance
of 1,165 additional shares of Series C Preferred Stock. The Company may redeem,
in whole or in part, shares of Series C Preferred Stock for cash at $1,000 per
share, plus any unpaid declared dividends thereon if the average trading price
of the common stock for 20 consecutive days prior to the date of giving notice
of such redemption is not less than 150% of the conversion price then in effect.
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.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three months ended June 30, 1999 and 1998.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue $ 472,000 $ 359,000
=========== ===========
Loss before income taxes $(1,569,000) $ (392,000)
Income taxes 3,000 2,000
----------- -----------
Net loss (1,572,000) (394,000)
Accretion of preferred stock to
redemption value (9,000) (8,000)
Preferred stock dividends (187,000) --
----------- -----------
Net loss applicable to
common stockholders $(1,768,000) $ (402,000)
=========== ===========
Basic and diluted net loss
applicable to common stockholders $ (.22) $ (.05)
=========== ===========
</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, 2000. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income tax
provision for the three months ended June 30, 1999.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue $472,000 $ 81,000
Cost of Revenue 244,000 15,000
-------- --------
Gross Profit $228,000 $ 66,000
======== ========
</TABLE>
Water rights revenue for the three months ended June 30, 1999 resulted from
$321,000 of water sales to the City of Inglewood, $106,000 from the lease of
water rights, and $45,000 of payments received under
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
the Cucamonga Fee Agreement. Water rights revenue for the three months ended
June 30, 1998 resulted primarily from the lease of water rights ($33,000) and
payments received under the Cucamonga Fee Agreement ($45,000). Since the
agreement with the City of Inglewood was entered into in September 1998, no
revenues were received from this agreement in the 1998 fiscal quarter. Cost of
revenue for the three months ended June 30, 1999 includes $230,000 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 months ended
June 30, 1998 consists of amortization of the Cucamonga Water Fee Agreement.
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue $ -- $278,000
Cost of Revenue -- 128,000
-------- --------
Gross Profit $ -- $150,000
======== ========
</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 June 30, 1998 resulted from
the sale of 72 acres of Cherry Creek property. Cost of real estate revenue
include the allocated purchase price of the property sold, directly related
development costs, sales commissions and other sales costs.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended June 30,
---------- ----------
1999 1998
---------- ----------
<S> <C> <C>
General and Administrative Expenses $1,616,000 $ 887,000
</TABLE>
General and administrative expenses for the three months ended June 30, 1999
increased by $729,000 (82%) from the comparable period ended June 30, 1998. The
increase was primarily due to an allowance against water rights projects under
development ($358,000), to increased salaries and fringe benefits payable to
additional personnel ($122,000), and to increased non-capitalizable consulting
and engineering ($83,000) and travel expenses ($30,000) related to the Company's
expanded efforts to develop its water transfer program. The Company believes
that its future general and administrative expenses will remain at a higher
level than in the past due to the additional costs related to personnel
increases at the Company and the additional costs related to the Company's
increased efforts to develop its water transfer program. However, the size of
any future water rights development allowances will depend on projects being
developed at the time and, therefore, may vary significantly.
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income $ 220,000 $ 246,000
Interest expense (385,000) (338,000)
Gain on sale of investment in limited
liability company 10,000 10,000
Other (25,000) 361,000
</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 months ended June 30, 1999 from the comparable
period ended June 30, 1998 due primarily to lower investment balances.
Interest expense for the three months ended June 30, 1999 and 1998 includes
$332,000 and $338,000, respectively, of interest related to the principal amount
of outstanding Debentures. Interest expense for the three months ended June 30,
1999 also includes $53,000 of interest related to the $3,140,000 term loan.
Interest of $17,269 and $38,140 was capitalized during the three months ended
June 30, 1999 and 1998, respectively, in connection with the development of
water rights.
The Company accounted for its investment in the Nevada Land & Resource Company
("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 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 of
the deferred gain during the three months ended June 30, 1999 and 1998.
Other income/loss for the three months ended June 30, 1999 includes net rental
loss of $35,000 related to the Company's California rice farm and ranch
properties. Other income for the three months ended June 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.
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 the Company had working capital and a current ratio of
$11,256,966 and 7.91 to l, as compared to $13,616,371 and 8.09 to 1,
respectively, at March 31, 1999.
Operating Activities
For the three months ended June 30, 1999, the Company had a net loss of
$1,572,129 and net cash used in operating activities of $1,143,804. 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 sale transactions that are expected
to generate water revenues, and is attempting to complete other similar
transactions. However, while revenues from: (i) existing water sales contracts;
(ii) leasing the Company's rice farms and ranches; (iii) the Cucamonga 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 for some time into the future 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
and revenues, if any, derived from the Company's long-term water development
projects. Based on the Company's current estimates, the Company expects that
revenues from planned water sales and from its existing long-term water
development projects will continue 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 financing it may arrange using debt or equity
, and from proceeds the Company may derive from such future water sale
transactions that the Company may from time to time consummate.
Investing and Financing Activities
The Company is committed to certain material expenditures over the next several
years, including the following:
- - Scheduled payments of principal on existing outstanding indebtedness for the
remainder of the fiscal year ending March 31, 2000 and fiscal years ending
March 31, 2001, 2002, 2003 and 2004 are $481,000, $1,497,000, $781,000,
$903,000, and $463,000, respectively.
- - The Company is required to make semi-annual interest payments of $663,300 on
the $14,740,000 principal amount of Debentures.
- - The holders of Series C Preferred Stock are entitled to receive, when and if
declared, annual dividends in the amount of $72.50 per share, payable
semi-annually on January 15 and July 15 of each year (aggregating $736,963
per year).
- - 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).
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- - 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 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 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 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.
SUBSEQUENT EVENT
On August 6, 1999, the Company repurchased $5,000,000 of its 9% Convertible
Subordinated Debenture plus accrued interest of $157,800 for $1,500,000. In its
second fiscal quarter, the Company will recognize a $3,490,000 extraordinary
gain, net of taxes on the extinguishment of debt.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 136,
"Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That
Raises or Holds Contributions for Others" and 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 Nos. 136 and 137 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.
16
<PAGE> 17
WESTERN WATER COMPANY AND SUBSIDIARIES
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 financial instrument.
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 year ended is as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 27,000 $ 829,000 $ 31,000 $ 71,000 $ 26,000 $ 14,869,000 $ 15,853,000
Weighted average
interest rate 8.7% 8.0% 8.7% 8.3% 9.0% 9.0% 8.5%
Variable rate debt $ 454,000 $ 668,000 $ 749,000 $ 832,000 $ 437,000 -- $ 3,140,000
Weighted average
interest rate 6.5% 6.5% 6.5% 6.5% 6.5% -- 6.5%
</TABLE>
The Company's variable rate on its variable rate debt is capped at 7.5%.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 23, 1999, the Company declared a dividend distribution of one Preferred
Share Purchase Right ("Right") for each outstanding share of the Company's
common stock and for each share of Series C and Series D Preferred Stock based
on the number of common shares into which each share of Preferred Stock is
convertible. The dividend distribution to establish the new Rights Plan will be
payable to shareholders of record on August 12, 1999. Subject to limited
exceptions, the Rights will be exercisable if a person or group ("Acquiring
Person") acquires 20% or more of the Company's common stock or announces a
tender offer for 20% or more of the common stock. Under certain circumstances,
each Right will entitle shareholders to buy one-hundredth of a share of newly
created Series E Junior Participating Preferred Stock of the Company at an
exercise price of $25.00. Until the Rights become exercisable, the Rights will
not be represented by separate certificate, and will be a part of the common
stock certificate. The Company will be entitled to redeem the Rights at $.001
per Right at various times, including at any time before a person becomes an
Acquiring Person by acquiring 20% or more of the outstanding common stock of the
Company.
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.
17
<PAGE> 18
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: August 6, 1999 By: /s/ Michael Patrick George
--------------------------
Michael Patrick George
President and Chief Executive Officer
Date: August 6, 1999 By: /s/ Ronald I. Simon
-------------------
Ronald I. Simon
Executive Vice President and
Chief Financial Officer
18
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,581
<SECURITIES> 10,351
<RECEIVABLES> 279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,885
<PP&E> 290
<DEPRECIATION> (82)
<TOTAL-ASSETS> 46,182
<CURRENT-LIABILITIES> 1,628
<BONDS> 14,740
0
19,790
<COMMON> 8
<OTHER-SE> 6,368
<TOTAL-LIABILITY-AND-EQUITY> 46,182
<SALES> 0
<TOTAL-REVENUES> 473
<CGS> 0
<TOTAL-COSTS> 245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385
<INCOME-PRETAX> (1,569)
<INCOME-TAX> 3
<INCOME-CONTINUING> (1,572)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,572)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
