<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, 2000
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.)
102 WASHINGTON AVENUE, POINT RICHMOND, CA 94801
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
(510) 234-7400
(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>
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
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 10, 2000, 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:
Unaudited Consolidated balance sheets-
September 30 and March 31, 2000 3
Unaudited consolidated statements of operations-
Three months ended September 30, 2000 and 1999 4
Unaudited consolidated statements of operations-
Six months ended September 30, 2000 and 1999 5
Unaudited consolidated statements of cash flows-
Six months ended September 30, 2000 and 1999 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 17
PART II - OTHER INFORMATION
4 Submission of Matters to Vote of Security Holders 18
6 Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30 and March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
2000
-------------------------------
ASSETS September 30, March 31,
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,002,024 $ 1,971,614
Current portion of notes receivable 154,235 154,235
Other current assets 1,056,071 991,729
------------ ------------
Total Current Assets 5,212,330 3,117,578
Notes receivable, less current portion 330,483 527,085
Cash and cash equivalents - restricted 4,041,431 4,416,431
Land held for sale 5,422,606 5,422,606
Water rights 14,532,038 18,380,807
Prepaid leasing costs, net of accumulated amortization 2,403,848 2,689,829
Other water assets, net of accumulated amortization 2,497,728 2,510,591
Deferred debt costs, net of accumulated amortization 316,297 351,324
Property and equipment, net of accumulated depreciation 143,400 172,703
Other assets 118,014 111,996
------------ ------------
$ 35,018,175 $ 37,700,950
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,885 $ 100,552
Accrued expenses and other liabilities 607,603 791,690
Accrued interest 78,223 66,573
Current maturities of long-term debt 1,446,000 1,454,983
------------ ------------
Total Current Liabilities 2,169,711 2,413,798
Long-term debt, less current maturities 1,921,399 2,275,366
9% Convertible subordinated debentures (Note 5) 9,740,000 9,740,000
Deferred gain on sale - 3,333
------------ ------------
Total Liabilities 13,831,110 14,432,497
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, 2000, respectively 9,835,496 9,816,686
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, 2000, respectively 10,000,000 10,000,000
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,235,212 shares issued
at September 30 and March 31, 2000, respectively 8,235 8,235
Additional paid-in capital 24,448,791 24,448,791
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in (21,730,587) (19,630,389)
quasi-reorganization of October 1, 1994)
Treasury stock, at cost, 341,200 shares at September 30, (1,374,870) (1,374,870)
and March 31, 2000 (Note 2)
------------ ------------
Total Stockholders' Equity 1,351,569 3,451,767
------------ ------------
$ 35,018,175 $ 37,700,950
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
Water revenue $ 375,258 $ 376,165
Cost of water revenue 244,689 244,759
----------- -----------
Gross Profit 130,569 131,406
General and administrative expenses 876,166 1,708,815
----------- -----------
Operating Income (Loss) (745,597) (1,577,409)
----------- -----------
Other Income (Expenses):
Interest income 194,044 162,962
Interest expense (286,783) (318,066)
Gain on sale of water rights (Note 3) 428,225 -
Gain on sale of investment in limited liability company - 10,000
Other (33,761) (37,687)
----------- -----------
301,725 (182,791)
----------- -----------
Income (Loss) before Income Taxes (443,872) (1,760,200)
Income taxes (Note 4) - -
----------- -----------
Income (loss) Before Extraordinary Item (443,872) (1,760,200)
Extraordinary income on early extinguishment of debt (Note 5) - 3,489,803
----------- -----------
Net Income (Loss) (443,872) 1,729,603
Accretion of preferred stock to redemption value (9,405) (8,865)
Preferred stock dividends (555,977) (555,977)
----------- -----------
Net Income (Loss) Applicable to Common Stockholders $(1,009,254) $ 1,164,761
=========== ===========
Earnings per share-Basic and Diluted:
Income (loss) applicable to common stockholders
excluding extraordinary item $ (0.13) $ (0.29)
Extraordinary item - 0.44
----------- -----------
Net income (loss) $ (0.13) $ 0.15
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Six months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
Water revenue $ 826,206 $ 848,585
Cost of water revenue 489,577 489,517
----------- -----------
Gross Profit 336,629 359,068
General and administrative expenses 1,680,348 3,325,029
----------- -----------
Operating Income (Loss) (1,343,719) (2,965,961)
----------- -----------
Other Income (Expenses):
Interest income 223,616 382,594
Interest expense (617,730) (702,633)
Gain on sale of water rights (Note 3) 428,225 -
Gain on sale of investment in limited liability company 3,333 20,000
Other (28,436) (63,129)
----------- -----------
9,008 (363,168)
----------- -----------
Income (Loss) before Income Taxes (1,334,711) (3,329,129)
Income Taxes (Note 4) 3,200 3,200
----------- -----------
Income (loss) Before Extraordinary Item (1,337,911) (3,332,329)
Extraordinary income on early extinguishment of debt (Note 5) - 3,489,803
----------- -----------
Net Income (Loss) (1,337,911) 157,474
Accretion of preferred stock to redemption value (18,810) (17,556)
Preferred stock dividends (743,477) (743,477)
----------- -----------
Net Income (Loss) Applicable to Common Stockholders $(2,100,198) $ (603,559)
=========== ===========
Earnings per share-Basic and Diluted:
Income (loss) applicable to common stockholders
excluding extraordinary item $ (0.27) $ (0.52)
Extraordinary item - 0.44
----------- -----------
Net income (loss) $ (0.27) $ (0.08)
=========== ===========
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,337,911) $ 157,474
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 529,493 547,319
Compensation expense on vesting of unexercised
compensatory stock options - 50,642
Gain on sale of investment in limited liability company (3,333) (20,000)
Gain on sale of water rights (428,225) -
Extraordinary income on early extinguishment of debt (3,489,803)
Loss on disposition of property and equipment - 2,544
Allowance for water project costs - 552,179
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (64,342) (55,872)
Land held for sale - (363,513)
Other assets (6,018) (40,375)
Increase (decrease) in:
Accounts payable (62,667) (20,859)
Accrued expenses and other liabilities (184,087) 132,563
Accrued interest 11,650 127,972
----------- -----------
Net cash used in operating activities (1,545,440) (2,419,729)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on notes receivable 196,602 259,064
Purchase of property and equipment - (38,277)
Purchase of available-for-sale securities - (667,345)
Sales of available-for-sale securities - 8,897,903
Proceeds from sale of water rights 4,290,880 -
Additions to water rights (13,886) (281,561)
Purchase of water rights - (975,000)
Additions to other water assets - (104,638)
Prepayment of leasing costs (166,319) (506,653)
----------- -----------
Net cash provided by investing activities 4,307,277 6,583,493
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 800,000
Release of restricted cash 375,000 -
Preferred stock dividends (743,477) (743,477)
Purchase of common stock - (115,840)
Purchase of convertible subordinated debentures - (1,500,000)
Principal payments on long-term debt (362,950) (923,373)
----------- -----------
Net cash used in financing activities (731,427) (2,482,690)
----------- -----------
Net increase in cash and cash equivalents 2,030,410 1,681,074
Cash and cash equivalents, beginning of period 1,971,614 739,126
----------- -----------
Cash and cash equivalents, end of period $ 4,002,024 $ 2,420,200
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(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, 2000, the consolidated statements of operations
for the three and six months ended September 30, 2000 and 1999 and
the consolidated statements of cash flows for the six months ended
September 30, 2000 and 1999. The results of the six-month period
ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
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, 2000.
On July 1, 2001 the Company adopted the provisions of FASB
Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation, which resulted in variable plan accounting for
certain stock options granted on September 12, 2000. The adoption of
this standard had no impact on the Company's financial position or
results of operations as of and for the quarter ended September 30,
2000.
Income (loss) per share
The weighted average shares used for basic and diluted net income per
share was 7,894,012 shares for the three and six months ended
September 30, 2000, and 7,899,725 and 7,932,468 shares for the three
and six months ended September 30, 1999.
Stock options to purchase 1,297,000 and 1,986,708 shares of common
stock at exercise prices ranging from $0.39-$13.50 and $3.63-$21.00
for the three and six months ended September 30, 2000 and 1999,
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 shares 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 as their
effect would have been antidilutive. These warrants expired
unexercised during the fiscal year ended March 31, 2000.
Debentures convertible into 614,123 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, 2000 and 1999, as their effect would have
been antidilutive.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES: (CONTINUED)
Series C redeemable preferred stock convertible into 611,593 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, 2000 and 1999, as its effect
would have been antidilutive.
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, 2000 and 1999, as its effect
would have been antidilutive.
Incentive Stock Options
During the quarter ended September 30, 2000, 838,000 options to
purchase common stock with exercise prices ranging from $2.00 to
$21.00 were surrendered by employees to the Company. On September 12,
2000 the Shareholders approved the granting of replacement options to
purchase 735,500 shares of common stock to various employees,
directors and consultants of the Company at an exercise price of $.39
per share, which exceeded the market value of the related common
stock on the date of the grant. These reissued stock options are
being accounted for under variable plan accounting until the stock
options are exercised, forfeited or expired. The remainder of the
stock options granted on September 12, 2000, (305,500) shares, were
new grants, and are being accounted for using fixed plan accounting.
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. GAIN ON SALE OF WATER RIGHTS:
During September 2000, the Company sold its water rights in the
Central Basin of Los Angeles for $4,290,880 in cash. The Company
realized a gain on the sale of $428,225.
NOTE 4. INCOME TAXES:
Management does not expect there will be taxable income for the
fiscal year ending March 31, 2001. 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, 2000.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
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.
NOTE 6. SUBSEQUENT EVENT:
On October 27, 2000, the Company repurchased $500,000 of its
outstanding 9% Debentures, plus accrued interest of $3,329, for
$278,329 in cash.
NOTE 7. 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, 2000 and
1999 is presented below:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Segment revenue:
Water $ 375,258 $ 376,165 $ 826,206 $ 848,585
Real estate -- -- -- --
----------- ----------- ----------- ---------
$ 375,258 $ 376,165 $ 826,206 $ 848,585
=========== =========== =========== =========
Net income (loss):
Segment
Water: $ 130,569 $ 131,406 $ 336,629 $ 359,068
Real estate -- -- -- --
Non-segment (574,441) 1,598,197 (1,674,540) (201,594)
----------- ----------- ----------- ---------
$ (443,872) $ 1,729,603 $(1,337,911) $ 157,474
=========== =========== =========== =========
Depreciation and amortization expense:
Segment-Water $ 229,523 $ 238,839 $ 465,163 $ 477,678
Non-segment 31,435 32,343 64,330 69,641
----------- ----------- ----------- ---------
$ 260,958 $ 271,182 $ 529,493 $ 547,319
=========== =========== =========== =========
</TABLE>
The Company recognized revenue of $45,000 and $90,000 from the
Fontana Water Resources Agreement for the three and six months ended
September 30, 2000 and 1999, respectively. For the three and six
months ended September 30, 2000 and 1999, respectively, 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
September 30, 2000
(Unaudited)
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 629,380 $ 614,680
Interest capitalized during the period -- 40,020
Cash paid during the period for income taxes 3,200 3,200
Supplemental disclosure of non-cash investing and financing activities:
Recognition of gain on sale of investment in limited
liability company (3,333) (20,000)
Accretion of preferred stock to redemption value 18,810 17,556
Disposition of property and equipment
and related accumulated depreciation:
Property and equipment -- (2,678)
Accumulated depreciation -- 134
</TABLE>
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, as amended, for the year ended March 31, 2000, the Quarterly
Reports on Form 10-Q filed by the Company in 2000, any Current Reports on Form
8-K filed by the Company and any Registration Statements on Form S-3 filed by
the Company.
GENERAL
Until the fiscal year ended March 31, 2000, the Company's principal activity had
been to acquire and develop water assets in California and in the Cherry Creek
basin in Colorado. The Company did so because it believes that there is a
growing demand for water resources in both of these areas, which demand is
expected to exceed the water resources currently available to these areas.
However, based on regulatory difficulties and administrative delays in
completing water transfers and generating revenue from water sales, the Company
has suspended additional water acquisitions. The Company is also facing
significant financial problems brought on by the expenditure of funds for
overhead and asset acquisitions in the face of constrained operating revenue.
Therefore, the Company is considering various alternatives, including the sale
of the Company or the sale of its assets and the liquidation of the Company, as
well as a voluntary restructuring of its capitalization and redirection of its
business efforts.
Capital structure changes
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, 2000 was $9,740,000. On October 27, 2000 the Company repurchased
an additional $500,000 of its outstanding Debentures, plus accrued interest of
$3,329 for $278,329 in cash.
In 1997, the Company issued $9,000,000 of its Series C Convertible Redeemable
Preferred Stock ("Series C Preferred Stock"). Each share of Series C Preferred
Stock has a stated value of $1,000, has a dividend rate of 7.25% per annum of
its stated value and is convertible at any time at the option of the holder into
the
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
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 $16.62 per
share and is subject to adjustment in certain events to prevent dilution.
Dividends are payable, when and if declared by the board of Directors,
semi-annually on January 15 and July 15 of each year, and the Series C Preferred
Stock is subject to partial redemption at its stated value plus accrued
dividends, at the option of the holder, from available cash of the Company
beginning in 2006, with the full amount redeemable in 2007.
On October 27, 1998, the Company issued $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% per
annum 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. Dividends are payable, when and if declared by the Board of Directors,
quarterly on March 15, June 15, September 15 and December 15 of each year and
the Series D Preferred Stock is subject to partial redemption at its stated
value plus accrued dividends, at the option of the holder, from available cash
of the Company beginning in 2007 with the full amount redeemable in 2008.
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.
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three and six months ended September 30, 2000 and 1999.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 375,000 $ 376,000 $ 826,000 $ 849,000
=========== =========== =========== ===========
Loss before income taxes $ (444,000) $(1,760,000) $(1,335,000) $(3,330,000)
Income taxes -- -- 3,000 3,000
----------- ----------- ----------- -----------
Loss before extraordinary item (444,000) (1,760,000) (1,338,000) (3,333,000)
Extraordinary item on early
extinguishment of debt -- 3,490,000 -- 3,490,000
----------- ----------- ----------- -----------
Net income (loss) (444,000) 1,730,000 (1,338,000) 157,000
Accretion of preferred stock to
redemption value (9,000) (9,000) (19,000) (18,000)
Preferred stock dividends (556,000) (556,000) (743,000) (743,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common stockholders $(1,009,000) $ 1,165,000 $(2,100,000) $ (604,000)
=========== =========== =========== ===========
Basic and diluted net income (loss)
applicable to common stockholders $ (.13) $ .15 $ (.27) $ (.08)
=========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
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 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 ending March 31, 2001. 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, 2000.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $375,000 $376,000 $826,000 $849,000
Cost of Revenue 245,000 245,000 489,000 490,000
-------- -------- -------- --------
Gross Profit $130,000 $131,000 $337,000 $359,000
======== ======== ======== ========
</TABLE>
Water revenue resulted from $321,000 and $641,000 of water sales to the City of
Inglewood, $9,000 and $95,000 from the lease of water rights, $45,000 and
$90,000 of payments received under the Fontana Water Resources Agreement for
the three and six months ended September 30, 2000, respectively. Water rights
revenue resulted from $321,000 and $641,000 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. Cost of revenue for the three and six months ended September 30,
2000 includes $245,000 and $489,000, respectively, of fees and lease costs
related to the water sales to the City of Inglewood and amortization of the
Fontana Water Resources Agreement. 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.
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. There were no real estate transaction during the three and six months
ended September 30, 2000 and 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General and Administrative Expenses $876,000 $1,709,000 $1,680,000 $3,325,000
</TABLE>
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
General and administrative expenses for the three months ended September 30,
2000 decreased by $838,000 (49%) from the comparable period ended September 30,
1999. The decrease was primarily due to a decrease in payroll and office
expenses as the Company downsized its staff, and consolidated its administrative
operations into its Point Richmond, California headquarters. Also, the 1999
period included an allowance against water rights projects under development of
$194,000.
General and administrative expenses for the six months ended September 30, 2000
decreased by $1,645,000 (49%) from the comparable period ended September 30,
1999. The decrease was primarily due to a decrease in payroll and office
expenses as the Company downsized its staff, and consolidated its administrative
operations into its Point Richmond, California headquarters. Also, the 1999
period included an allowance against water rights projects under development of
$552,000.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
--------------------------------- ------------------------------
2000 1999 2000 1999
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Interest income $ 194,000 $ 163,000 $ 224,000 $ 383,000
Interest expense (287,000) (318,000) (618,000) (703,000)
Gain on sale of investment in limited
liability company -- 10,000 3,333 20,000
Gain on sale of water rights 428,000 -- 428,000 --
Extraordinary income -- 3,490,000 -- 3,490,000
</TABLE>
Interest income is composed 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 increased for the three months ended September 30, 2000 from the
comparable periods ended September 30, 1999 due primarily to higher investment
balances during the period. Interest income decreased for the six months ended
September 30, 2000 from the comparable periods ended September 30, 1999 due
primarily to lower investment balances over the entire period.
Interest expense includes $219,000 and $438,000 and $266,000 and $598,000 of
interest related to the principal amount of outstanding Debentures for the three
and six months ended September 30, 2000 and 1999, respectively. Interest expense
also includes $52,000 and $105,000 and $52,000 and $105,000 of interest related
to the Inglewood term loan for the three and six months ended September 30, 2000
and 1999, respectively. No interest was capitalized during the three and six
months ended September 30, 2000. Interest of $22,751 and $20,899 was capitalized
during the three and six months ended September 30, 1999, 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 $0 and $3,333 and $10,000 and $20,000 of the deferred gain
during the three and six months ended September 30, 2000 and 1999, respectively.
The deferred gain had been completely realized as of June 30, 2000.
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
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 reduced the Company's
annual interest expense by $450,000.
On October 27, 2000, the Company repurchased $500,000 of its outstanding 9%
Debentures, plus accrued interest of $3,329, for $278,329 in cash. The
repurchase of these Debentures will reduce the Company's annual interest expense
by $45,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 the Company had working capital and a current ratio of
$3,042,619 and 2.40 to l, as compared to $703,780 and 1.29 to 1, respectively,
at March 31, 2000.
Operating Activities
For the six months ended September 30, 2000, the Company had a net loss of
$1,337,911 which included the Company's realization of a $428,225 gain on the
sale of its water rights in the Central Basin of Los Angeles. For the six months
ended September 30, 2000, the Company had negative cash flow from operating
activities of $1,545,440. 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.
The Company has 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 Fontana Water
Resources 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.
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
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.
On October 27, 2000, the Company repurchased $500,000 of its outstanding 9%
Debentures, plus accrued interest of $3,329, for $278,329.
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, 2001 and fiscal years
ending March 31, 2002, 2003, 2004 and 2005 are $1,112,000, $781,000,
$903,000, $463,000 and $28,000, respectively.
- The Company is required to make semi-annual interest payments of
$415,800 on the $9,240,000 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 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. However, under the Company's Strategic
Relationship Agreement with Agbar, the Company can only use the proceeds from
the sale of Series D Preferred Stock to fund development costs of specific water
projects and related capital costs, including Series D Preferred Stock
dividends, that were identified and agreed upon by Agbar. As of September 30,
2000, a total of $ 5,958,569 had been expended on such development, capital
costs and Series D Preferred Stock Dividends. As a result, $4,041,431 of the
Company's cash and cash equivalents are restricted as of September 30, 2000.
Nevertheless, the Company believes it will be able to meet its anticipated
financial obligations in the next twelve months
16
<PAGE> 17
WESTERN WATER COMPANY AND SUBSIDIARIES
from its unrestricted funds, proceeds derived from on-going operations and
proceeds from the sale of certain existing assets. The Company may also attempt
to improve its working capital position by raising additional equity funds, or
by entering into certain voluntary agreements to restructure its capital base.
However, no assurance can be given that the Company will be able to sell its
assets as planned or, if the Company elects to do so, that it will be able to
raise additional funds, or that it will be able to successfully negotiate a
voluntary restructuring. As noted above, the Company has suspended the
acquisition or development of water assets. In addition, because of delays and
uncertainty regarding regulatory and other approvals of pending water sales
transactions, the Company believes its revenue will be insufficient to support
its overhead. In view of its cash situation, the Company is considering the
possible sale of the Company or the sale of assets as well as a voluntary
restructuring of its capital base.
The Company does not believe that inflation will have a material impact on its
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue recognition in Financial Statements, (SAB 101), which
provides additional guidance in applying generally accepted accounting
principles to revenue recognition in the financial statements. Management has
not yet assessed the impact of SAB 101 on the Company's reporting of its results
of operations. The Company will adopt SAB 101, as amended, as required for its
first quarterly filing of fiscal year 2002.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
amended it with Statement No. 138 in June 2000. It establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Management has not yet assessed the impact on the Company's operations. The
Company will adopt Statement No. 133 as required for its first quarterly filing
of fiscal year 2002.
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 years ended is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 758,000 $ 32,000 $ 71,000 $ 26,000 $ 28,000 $ 9,820,000 $ 10,735,000
Weighted average
interest rate 8.0% 8.7% 8.3% 9.0% 9.0% 9.0% 8.9%
Variable rate debt $ 354,000 $ 749,000 $ 832,000 $ 437,000 -- -- $ 2,372,000
Weighted average
interest rate 7.5% 7.5% 7.5% 7.5% -- -- 7.5%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's variable rate on its variable rate debt is capped at 7.5%.
17
<PAGE> 18
WESTERN WATER COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on September 12, 2000.
The matters voted upon at the annual meeting were as follows: (i) the election
of one member of the Company's Board of Directors for the ensuing period; (ii)
the approval of the grant to certain officers, employees and consultants of the
Company of options to purchase a total of 1,041,000 shares of the Company's
common stock; and (iii) the ratification of the appointment of KPMG LLP as the
independent accountants of the Company for the fiscal year ending March 31,
2001.
The voting on each proposal was set forth in the table below.
1. Election of directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
--- ---------
<S> <C> <C>
Michael Patrick George
Common shares 6,128,685 838,412
Preferred shares 1,716,302 --
</TABLE>
No other person received any votes.
2. Approval of the grant to certain officers, employees and consultants of the
Company of options to purchase a total of 1,041,000 shares of the Company's
common stock.
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS(a)
--- ------- --------------
<S> <C> <C> <C>
Common shares 5,968,367 987,266 11,464
Preferred shares 1,716,302 -- --
</TABLE>
3. Ratify the appointment of KPMG LLP as the independent accountants of the
Company for the fiscal year ending March 31, 2001:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS(a)
--- ------- --------------
<S> <C> <C> <C>
Common shares 6,757,412 174,535 35,150
Preferred shares 1,716,302 -- --
</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) The Company filed Form 8-K on October 4, 2000 under Item 5 relating to
the sale of water rights.
18
<PAGE> 19
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 14, 2000 By: /s/ Michael Patrick George
-------------------------------------
Michael Patrick George
Chairman, President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ William T. Gochnauer
-------------------------------------
William T. Gochnauer
Senior Vice President and
Chief Financial Officer
19
