<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
-------------------
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, 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 98405
(Address of principal executive offices) (Zip Code)
(510) 234-7400
(Registrant's telephone number, including area code)
<TABLE>
<S> <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 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> <C>
1 Financial statements - unaudited:
Consolidated balance sheets-
June 30 and March 31, 2000 3
Consolidated statements of operations-
Three months ended June 30, 2000 and 1999 4
Consolidated statements of cash flows-
Three months ended June 30, 2000 and 1999 5
Notes to consolidated financial statements 6
2 Management's discussion and analysis of financial
condition and results of operations 9
3 Quantitative and qualitative market risk disclosures 14
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30 and March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
2000
---------------------------------
June 30, March 31,
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 966,760 $ 1,971,614
Current portion of notes receivable 136,958 154,235
Other current assets 1,090,695 991,729
------------ ------------
Total Current Assets 2,194,413 3,117,578
Cash and cash equivalents, restricted 4,228,931 4,416,431
Notes receivable, less current portion 416,771 527,085
Land held for sale 5,422,606 5,422,606
Water rights 18,391,051 18,380,807
Prepaid leasing costs, net of accumulated amortization 2,459,652 2,689,829
Other water assets, net of accumulated amortization 2,505,128 2,510,591
Deferred debt costs, net of accumulated amortization 333,811 351,324
Property and equipment, net of accumulated depreciation 157,321 172,703
Other assets 111,996 111,996
------------ ------------
$ 36,221,680 $ 37,700,950
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,220 $ 100,552
Accrued expenses and other liabilities 395,571 791,690
Accrued interest 295,626 66,573
Current maturities of long-term debt 1,474,983 1,454,983
------------ ------------
Total Current Liabilities 2,196,400 2,413,798
Deferred gain on sale -- 3,333
Long-term debt, less current maturities 2,098,366 2,275,366
9% Convertible subordinated debentures 9,740,000 9,740,000
------------ ------------
Total Liabilities 14,034,766 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 June 30 and March 31, 2000, respectively 9,826,091 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 June 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 June 30 and March 31, 1999, 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
quasi-reorganization of October 1, 1994) (20,721,333) (19,630,389)
Treasury stock, at cost, 341,200 shares at June 30,
and March 31, 2000 (1,374,870) (1,374,870)
------------ ------------
Total Stockholders' Equity 2,360,826 3,451,767
------------ ------------
$ 36,221,680 $ 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 June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Water $ 450,948 $ 472,420
Real estate -- --
----------- -----------
450,948 472,420
----------- -----------
Costs of Revenue:
Water 244,888 244,758
Real estate -- --
----------- -----------
244,888 244,758
----------- -----------
Gross Profit 206,060 227,662
General and Administrative Expenses 804,182 1,616,214
----------- -----------
Operating Income (Loss) (598,122) (1,388,552)
----------- -----------
Other Income (Expenses):
Interest income 29,572 219,632
Interest expense (330,947) (384,567)
Gain on sale of investment in limited liability company 3,333 10,000
Other 5,325 (25,442)
----------- -----------
(292,717) (180,377)
----------- -----------
Income (Loss) before Income Taxes (890,839) (1,568,929)
Income Taxes (Note 2) 3,200 3,200
----------- -----------
Net Income (Loss) (894,039) (1,572,129)
Accretion of preferred stock to redemption value (9,405) (8,691)
Preferred stock dividends (187,500) (187,500)
----------- -----------
Net Income (Loss) Applicable to Common Stockholders $(1,090,944) (1,768,320)
=========== ===========
Basic and diluted net income (loss) per common share
applicable to common stockholders $ (0.14) $ (0.22)
=========== ===========
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (894,039) $(1,572,129)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 268,535 276,137
Compensation expense on vesting of unexercised
compensatory stock options -- 25,321
Gain on sale of investment in limited liability company (3,333) (10,000)
Loss on disposition of property and equipment -- 2,544
Allowance for water project costs -- 357,930
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (98,966) (155,160)
Land held for sale -- (363,513)
Other assets -- (21,210)
Increase (decrease) in:
Accounts payable (70,332) 58,002
Accrued expenses and other liabilities (396,119) (41,442)
Accrued interest 229,053 299,716
----------- -----------
Net cash used in operating activities (965,201) (1,143,804)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on notes receivable 127,591 30,709
Purchase of property and equipment -- (33,525)
Purchase of available-for-sale securities -- (295,988)
Sales of available-for-sale securities -- 4,006,850
Additions to water rights (10,244) (90,689)
Purchase of water rights -- (975,000)
Additions to other water assets -- (76,036)
Prepayment of leasing costs -- (372,649)
----------- -----------
Net cash provided by investing activities 117,347 2,193,672
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 800,000
Release of restricted cash 187,500 --
Preferred stock dividends (187,500) (187,500)
Purchase of common stock -- (55,278)
Principal payments on long-term debt (157,000) (765,054)
----------- -----------
Net cash used in financing activities (157,000) (207,832)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,004,854) 842,036
Cash and cash equivalents, beginning of period 1,971,614 739,126
----------- -----------
Cash and cash equivalents, end of period $ 966,760 $ 1,581,162
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
1
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,
2000, the consolidated statements of operations and cash flows for the
three months ended June 30, 2000 and 1999. 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.
Income (loss) per share
The weighted average shares used for basic and diluted net income per
share were 7,894,012 and 7,933,440 shares for the three months ended
June 30, 2000 and 1999, respectively.
Stock options to purchase 456,002 and 1,669,876 shares of common stock
at exercise prices ranging from $2.00-$18.70 for the three months ended
June 30,2000 and $4.00-$21.00 for the three months ended June 30, 1999,
respectively, were not included in the computation of diluted net
income per share as their effect would have been antidilutive.
During the quarter ended June 30, 2000, 749,000 options to purchase
common stock were surrendered by employees to the Company.
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 as their effect would have been
antidilutive. These warrants expired unexercised during the fiscal year
ended March 31, 2000.
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, 2000 and 1999
as their effect would have been antidilutive:
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Convertible debentures 614,124 929,382
Series C redeemable preferred stock 591,221 611,593
Series D redeemable preferred stock 1,112,347 1,112,347
</TABLE>
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
NOTE 2. 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 months ended June 30, 2000.
NOTE 3. SEGMENT INFORMATION:
The Company has two operating segments: a) the 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, 2000 and 1999 is presented below:
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Segment revenue: $ 450,948 $ 472,420
Water -- --
----------- -----------
Real estate 450,948 472,420
----------- -----------
Net income (loss):
Segment:
Water $ 206,060 $ 227,662
Real estate -- --
Non-segment (1,093,696) (1,799,791)
----------- -----------
(887,636) (1,572,129)
----------- -----------
Depreciation and amortization expense:
Segment - Water $ 235,640 $ 238,839
Non-segment 32,895 37,298
----------- -----------
$ 268,535 $ 276,137
----------- -----------
</TABLE>
The Company recognized revenue of $45,000 from Fontana Water Resources
for the three months ended June 30, 2000 and 1999. For each of the three
months ended June 30, 2000 and 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.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 108,338 $ 102,120
Interest capitalized during the period -- 17,269
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) (10,000)
Accretion of preferred stock to redemption
value 9,405 8,691
Disposition of property and equipment and
related accumulated depreciation:
Property and equipment -- (2,678)
Accumulated depreciation -- 134
</TABLE>
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 fiscal year 2000, any Current Reports on
Form 8-K filed by the Company and any Registration Statements on Form S-3 filed
by the Company.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 June
30, 2000 was $9,740,000.
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 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.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
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 months ended June 30, 2000 and 1999.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenue $ 451,000 $ 472,000
----------- -----------
Loss before income taxes (891,000) (1,569,000)
Income taxes 3,000 3,000
----------- -----------
Net loss (894,000) (1,572,000)
Accretion of preferred stock to redemption value (9,000) (9,000)
Preferred stock dividends (188,000) (188,000)
----------- -----------
Net loss applicable to common stockholders (1,091,000) (1,768,000)
----------- -----------
Basic and diluted net loss applicable to common
stockholders $ (.14) $ (.22)
</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. 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 months ended June 30, 2000.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
-------- --------
<S> <C> <C>
Revenue $451,000 $472,000
Cost of Revenue 245,000 245,000
-------- --------
Gross Profit $206,000 $228,000
</TABLE>
Water rights revenue for the three months ended June 30, 2000 resulted from
$321,000 of water sales to the City of Inglewood, and $130,000 from the lease of
water rights. Cost of revenue for the three months ended June 30, 2000 was
$245,000 including $10,000 of fees and lease costs related to the water sales to
the City of Inglewood and amortization of the Fontana Water Resources Agreement.
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
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 the Fontana Water Resources
Agreement. 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 Fontana Water Resources Agreement.
REAL ESTATE
From time to time, the Company disposes 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. During the three months ended June 30, 2000 and 1999, there
were no such real estate sale transactions. The Company does not expect to have
significant real estate revenue and cost of sales in future years.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
--------- ----------
<S> <C> <C>
General and Administrative Expenses $ 805,000 $1,616,000
</TABLE>
General and administrative expenses for the three months ended June 30, 2000
decreased by $811,000 (50%) from the comparable period ended June 30, 1999. The
decrease was partially due to a decrease in salaries and fringe benefits 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 $582,000.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Interest income $ 30,000 $ 220,000
Interest expense (331,000) (385,000)
Gain on sale of investment in limited liability company 3,000 10,000
</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, 2000 from the comparable
period ended June 30, 1999 due primarily to lower investment balances.
Interest expense for the three months ended June 30, 2000 and 1999 primarily
includes $219,000 and $332,000, respectively, of interest related to the
principal amount of outstanding Debentures. The decrease in interest expense was
primarily due to the lower principal balance related to the debentures during
the quarter ended June 30, 2000, partially offset by an increase in interest
expense on the Company's variable rate debt due to an increase in interest rates
during the same quarter. Interest of $0 and $17,269 was capitalized during the
three months ended June 30, 2000 and 1999, respectively, in connection with the
development of water rights.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
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 a 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 the
remaining $3,333 and $10,000 of the deferred gain during the three months ended
June 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 the Company had working deficit and a current ratio of
($2,000) and (.001) to 1, as compared to working capital and a current ratio of
$704,000 and 1.29 to 1, respectively, at March 31, 2000.
Operating Activities
For the three months ended June 30, 2000, the Company had a net loss of $894,000
and net cash used in operating activities of $965,000.
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.
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, 2001 and fiscal years ending
March 31, 2002, 2003, 2004 and 2005 are $1,298,000, $781,000, $903,000,
$463,000 and $28,000, respectively.
- The Company is required to make semi-annual interest payments of $438,000 on
the $9,740,000 principal amount of Debentures.
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
- 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).
- 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 June 30, 2000, a
total of $5,771,069 had been expended on such development, and capital costs and
Series D Preferred Stock dividends. As a result, $4,228,931 of the Company's
cash and cash equivalents are restricted as of June 30, 2000. Nevertheless, the
Company believes it will be able to meet its anticipated financial obligations
in the next twelve months 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. 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.
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.
The Company does not believe that inflation will have a material impact on its
results of operations.
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 133, Accounting for Derivatives Instruments and Hedging
Activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management believes that the adoption of
this statement will not have a material impact on the Company's financial
statements.
In December 1999, the SEC Staff issued Staff Accounting Bulleting No. 101,
Revenue Recognition in Financial Statements (SAB 101). SAB 101, as amended,
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Management
believes that SAB 101 will not have a material impact on the Company's financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation - an interpretation of APB
Opinion No. 35 (FIN 44). The provisions of FIN 44 are effective July 1, 2000.
Management believes that the adoption of FIN 44 will not have a material impact
on the Company's 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 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 $ 787,000 $ 32,000 $ 71,000 $ 26,000 $ 28,000 $9,840,000 $10,784,000
Weighted average
interest rate 8.0% 8.7% 8.3% 9.0% 9.0% 9.0% 8.9 %
Variable rate debt $ 511,000 $ 749,000 $ 832,000 $ 437,000 $ -- -- $ 2,529,000
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%.
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27-Financial Data Schedule
(b) No reports on Form 8-K were filed during the prior fiscal quarter.
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 14, 2000 By: /s/ Michael Patrick George
---------------------------------------
Michael Patrick George
Chairman, President and Chief Executive
Officer and Acting Chief Financial Officer
15
