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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000.
Commission file number 0-18756
WESTERN WATER COMPANY
(Exact name of registrant as specified in its charter)
(www.wwtr.com)
DELAWARE 33-0085833
(State of incorporation) (I.R.S. Employer Identification No.)
102 WASHINGTON AVENUE, POINT RICHMOND, CALIFORNIA 94801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 234-7400
NAME OF EACH EXCHANGE
Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS ON WHICH REGISTERED
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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
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 filing requirements
for the past 90 days.
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 26, 2000 was approximately $2,950,775 (based on last
reported sale price of $0.375 per share of common stock on that date). All
directors are considered affiliates. There were 7,894,012 shares of registrant's
common stock outstanding as of June 26, 2000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the close of the registrant's fiscal year, are incorporated herein by
reference in Part III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business............................................................................... 3
2. Properties............................................................................. 12
3. Legal Proceedings...................................................................... 13
4. Submission of Matters to a Vote of Security Holders.................................... 15
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 16
6. Selected Financial Data................................................................ 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................18
7A. Quantitative and Qualitative Market Risk Disclosures................................... 26
8. Consolidated Financial Statements and Supplementary Data............................... 26
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 26
PART III
10. Directors and Executive Officers of the Registrant..................................... 27
11. Executive Compensation................................................................. 27
12. Security Ownership of Certain Beneficial Owners and Management..........................27
13. Certain Relationships and Related Transactions......................................... 27
PART IV
14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K.............................................................. 28
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual 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 sections entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Risk Factors." 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 herein and in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in 2000
and 2001 and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
INTRODUCTION
The principal business of Western Water Company (the "Company") has been to
identify, acquire, develop, sell and lease water and water rights in the western
United States. For the last few years, the Company has been developing this
business through the acquisition of water rights and other interests in water,
the purchase of real estate for the water rights associated with such real
estate, and recently, the sale or lease of water. The Company, directly and
indirectly, owns a diverse portfolio of water rights, as well as real estate, in
California and Colorado. Prior to the fiscal year ended March 31, 1999, the
Company derived most of its revenue from the sale of real estate that it
acquired for the associated water rights, and from assisting unaffiliated owners
of water rights to obtain revenue from their water rights. In the most recent
fiscal year, virtually all revenues were generated from the sale of water owned
by the Company, or the sale of water which the Company purchased for the purpose
of reselling it. However, the Company's inability to overcome regulatory
obstacles to additional water transfers has forced the Company to reconsider its
business plans and to consider other alternatives, including the sale of the
Company or the sale of its principal assets.
Through 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, in which
demand is expected to exceed the water resources currently available to these
areas. During the fiscal year ended March 31, 2000, the Company executed a
variety of "take if delivered" wholesale water supply contracts with a number of
retail municipal water agencies. However, it has encountered significant
regulatory obstacles to its attempts to develop and transfer water for delivery
to such customers. Based on its inability to generate revenues from water sales,
the Company has suspended its asset acquisition program, has reduced its
marketing activities, has curtailed other overhead expenditures, and deferred
certain development activities. The Company is concentrating its current efforts
on overcoming the regulatory obstacles to water transfers and in arranging water
transfers that do not face such obstacles. Given its current financial
situation, however, the Company is considering various alternatives, including
the sale of the Company, or the sale of certain assets. The Company has retained
Houlihan, Lokey, Howard & Zukin Capital to assist it in evaluating various
alternatives.
Since 1998, the Company has focused its efforts on becoming an independent water
wholesaler to municipalities and other agencies located in California and
Colorado. The Company's goals were to acquire water assets, develop the water
assets for resale, and to then sell or lease water derived from those assets to
municipalities or other water utilities, agencies or districts. In connection
with its Southern California water transfer activities, the Company has, to
date, (i) acquired the rights to annually pump approximately 1,219 and 243
acre-feet of water from the Central Water Basin and West Coast Basin in Los
Angeles County, respectively, (ii) acquired the rights to annually pump
approximately 2,996 acre-feet of water from the Mojave Basin in San Bernardino
County, (iii) entered into a
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pumping rights lease and a water sale agreement with the City of
Inglewood, California ("Inglewood") pursuant to which Inglewood leased the
rights to pump 4,450 acre-feet of water per year to the Company for a five-year
period and simultaneously agreed to buy, 5,950 acre-feet of water each year for
the same five-year period, and (iv) acquired various interests in Southern
California mutual water companies. Although the Company has commenced
reselling/leasing certain of these water assets or the water derived there from,
its ability to maximize the revenue potential of the foregoing water assets is
subject to various regulatory hurdles and litigation matters described below in
this Annual Report. Furthermore, as noted elsewhere in this report, a number of
the Company's water transfer projects may be delayed indefinitely due to the
opposition of various regulatory bodies or the uncertainty and cost associated
with litigation.
In addition to the assets and rights the Company acquired in connection with
its Southern California water transfer program, the other principal California
water interests currently owned by the Company consist of certain riparian and
appropriative water rights, together with certain groundwater rights, associated
with approximately 9,055 acres of real property (the "Yuba Property") located
along the Yuba River in California, and the water rights associated with 2,236
acres of California rice farms and ranches (some of this land has been
previously sold by the Company) located in Northern California. As disclosed
elsewhere in this report, the Company believes there are significant obstacles
to realizing value from its water rights associated with the Yuba Property. The
Company's California real estate holdings consist of approximately 1,570 acres
located in Northern California and 607 acres in Southern California.
The principal Colorado water interests owned by the Company consist of the
water rights associated with an aggregate of 4,559 acres of undeveloped land and
certain other water rights in the Cherry Creek basin. This land is in the
drainage area of Cherry Creek, south of Denver, in Douglas County, Colorado. It
was purchased by the Company in 1992 and most of the land has been sold.
However, the Company has retained almost all water rights from the land that was
sold. The Cherry Creek assets were acquired primarily for the purpose of
developing, selling or leasing water in the Cherry Creek basin. The Company's
real estate holdings in Colorado currently consist of approximately 408 acres of
primarily undeveloped land located in the Cherry Creek basin.
The Company's principal executive office has been relocated to 102
Washington Avenue, Point Richmond, CA 94801. Its telephone number is (510)
234-7400. Unless the context requires otherwise, references to the "Company" in
this report include Western Water Company and to all of its subsidiaries. On
September 18, 1992, the Company changed its name from "YG Development Company"
to "Western Water Company," and on March 23, 1994, the Company changed its state
of incorporation from California to Delaware.
OVERVIEW OF WATER MARKETS
There is a developing public policy to expand water markets in the western
United States to help meet the need for increased water supply and reliability
because of population growth and chronic imbalances between areas of water
abundance and areas of deficit. The objectives of this developing public policy
include improved clarity of water rights, access to existing conveyance
facilities at a fair price, and competitive price-sensitive allocation of scarce
water resources.
According to the State Water Plan (Bulletin 160-98) of the California
Department of Water Resources ("DWR"), last updated in November 1998, the amount
of water used in Southern California is estimated at 10.5 million acre-feet in
1995, and is expected to grow to 11.4 million acre-feet in 2020. Even assuming
the development of a number of new water resources and significant additional
conservation efforts over the forecast period, the shortage of water estimated
at 200,000 acre-feet in 1995 is estimated to grow to 1.3 million acre-feet by
2020, as the available supply is expected to decrease from 10.3 million
acre-feet in 1995 to 10.1 million acre-feet in 2020. Although such deficits have
historically been made up through overdraft of groundwater, this source is
already under severe strain and limitations on availability are expected to
constrict the overall supply in certain areas of California.
Douglas County, Colorado, south of Denver, is experiencing very rapid
population growth. This county also has very limited local surface water
supplies, and is reliant upon groundwater and some surface water from local
streams and the South Platte River. Additional surface water for the area is not
readily available, as existing supplies are already controlled by others and
development of new water supply projects has been blocked. Local agencies are
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turning to the sustainable use of local groundwater as the key to meeting new
demands on their systems. Demand for water to supply new growth is expected to
exceed 50,000 acre-feet over the next 20 years.
REGULATORY OVERVIEW
Water rights in California are subject to complex laws, regulations and
jurisdictions that complicate the development of water for transfer and sale.
Under the doctrine of appropriation, a water user can publicly claim water from
a river for beneficial use, so long as the water is physically available from
the flow of the river after accounting for the rights of prior appropriators.
Thus, older appropriations are senior in right to later appropriations. However,
senior appropriative rights may be lost through non-use for long periods.
Beginning in 1914, surface water (generally, water in rivers) has been subject
to regulation by the State Water Resources Control Board ("SWRCB"). The SWRCB
oversees a registry of surface right appropriations and a dispute resolution
process designed to mediate competing claims to the use of the State's surface
water. In the past, the Company has claimed various appropriative rights on the
Yuba River, some of which predate SWRCB jurisdiction (pre-1914 rights) and
should therefore be "grandfathered" from regulatory jurisdiction, but
information developed in the most recent fiscal year indicates that development
of these rights associated with the Yuba Property for transfer and use outside
the immediate area of Yuba County will take longer and cost more than the
Company had formerly anticipated.
California law also recognizes the rights of landowners adjacent to a river
to divert an unquantified amount of water from the river for beneficial use on
such lands (riparian rights) or for instream beneficial use. Riparian rights
cannot be forfeited through non-use. Through its interest in the water rights
associated with the Yuba Property, the Company claims riparian rights on the
Yuba River; these riparian claims are supported, as well, by a court decree
dating from 1929.
Groundwater (generally, water in underground aquifers) is not subject to
statewide regulation. Overlying landowners have the right to place wells on
their property and pump water from the underlying aquifer. In some cases, such
water rights may be severed from the land and traded separately. The Company has
retained the groundwater rights associated with the Yuba Property, but
information developed in the most recent fiscal year indicates that development
of such rights will take longer and cost more than formerly anticipated. In
addition, recovery and export of groundwater originating in Yuba County is
subject to extensive area of origin protections that the Company must observe in
realizing value from such rights.
When there are disputes about groundwater rights, generally as the result of
overdrawing a water basin by multiple wells, such disputes are either negotiated
to resolution among the surrounding pumpers or submitted to litigation. In
Southern California, there are several basins in which such litigation has
resulted in a legal apportionment of the annual safe yield of the basin among
the historic pumpers. Such so-called adjudicated basins are regulated by a
court-appointed "watermaster" who manages an accounting system to assure that
extractions from the basins are limited in accordance with the court's order.
The Company has purchased water rights in three such adjudicated basins located
in Southern California.
The proposed transfer of water from a place of origin to a proposed area of
use in another region of the State generally requires a series of regulatory
approvals designed to assure that other water users and the environment are not
harmed by the transfer. For example, the Company had sought clarification of the
rules for such transfers in the context of a petition before the SWRCB. Under
the petition, Natomas Central Mutual Water Company sought permission to transfer
water it has the right to appropriate from the Sacramento River to the Company.
During the most recent fiscal year, the SWRCB issued Order WR 99-012, which
significantly limited the amount of water available for transfer as a result of
Natomas's conservation efforts. The Company is currently engaged in arranging
for the resale of such water to its customers, but the timing and value of such
resale remains subject to a variety of regulatory and cost hurdles including the
lack of available conveyance capacity in the State Water Project and the
prohibitive cost of using such capacity as may exist.
In order to transport water from area of origin (where the water may be
surplus to local needs) to distant areas of use, federal, state and local
governments have developed a complex interconnected infrastructure system to
augment conveyance through natural flow in rivers. Important portions of the
infrastructure include: (i) the Central Valley Project, operated by the U.S.
Bureau of Reclamation, (ii) the State Water Project (sometimes referred to as
the
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California Aqueduct), operated by the California Department of Water Resources,
(iii) the Colorado River Aqueduct, operated by the Metropolitan Water District
of Southern California, and (iv) the Los Angeles Aqueduct, operated by the Los
Angeles Department of Water and Power. In addition, there are a variety of
regional and local conveyance facilities throughout the State.
Under legislation enacted in 1986 ("the Wheeling Statute"), available
capacity in such public water systems is required to be made available to
facilitate voluntary water transfers, subject to "fair compensation" to the
owner of the infrastructure. In light of uncertainty regarding application of
the Wheeling Statute and the reluctance of system operators to accommodate water
transfers, the Company has sought clarification through request, negotiation and
further legislation. The outcome of the Company's efforts to gain such
clarification is not yet certain. Therefore, even as to water rights clearly
owned by the Company and eligible for transfer according to applicable water
rights law, there can be no assurance that the Company will gain access to
available conveyance capacity on a timely basis or at an economic cost. Without
such access, the Company's ability to sell water has been and will continue to
be severely constrained. The results of the Company's efforts in the most recent
fiscal year to gain such clarification have been unsatisfactory, and the Company
now anticipates that obtaining clarification of these issues may take several
more years.
DESCRIPTION OF BUSINESS
The Company's business goal has been to create shareholder value by
producing annuity-like income through identifying undervalued water assets, and
enhancing the value of those assets via development, transmission and delivery
to customers in densely populated areas in the arid western United States.
However, the Company's inability to overcome regulatory obstacles to economic
water transfers, has forced it to reconsider its business plans and consider
other alternatives, including the sale of the Company or the sale of assets.
Until this past fiscal year, the Company had believed that the regulatory
obstacles that have prevented the creation of a water market would be lowered
and that the Company would be able to monetize its various water assets. The
Company has been acquiring water assets and marketing those water assets to
numerous water agencies and other potential buyers based on these assumptions.
The Company now believes that the regulatory hurdles may not be lowered in the
near future and that revenues that it had anticipated from water transfers will
not be received as expected. Accordingly, the Company has taken steps to
restructure its operations in line with its financial condition, which steps
have included the closure of its San Diego office and the reduction of the
number of officers and employees from 15 to 10 employees as of the date of this
report. In addition, the Company has suspended its acquisition of additional
water assets and has deferred its efforts to market and sell water derived from
its existing water assets. The Company has also re-evaluated its plans to
develop its existing water assets because of both the regulatory difficulties
that the Company is facing and the Company's existing financial resources. As a
result, the Company has sold, and plans to sell, some of its assets that it no
longer believes it will be able to profitably develop, manage and/or montetize.
Southern California Water Transfer Program
Based on the Company's interpretation of California law and the statements
made by officials of major California water agencies, the Company believed that
the legal and institutional barriers to water transfers by private entities
would be reduced, making it easier for such entities to transport water through
the distribution systems of the state and local agencies during periods when
those systems have excess capacity. The Company believes that water transfers
can be a cost-effective means of providing water to under-served users and,
accordingly, had developed a plan to become an independent water provider to
municipalities and other agencies located primarily in Southern California.
However, events of the last fiscal year have made it clear that such transfers
will continue to be constrained because the legal and institutional barriers to
water transfers are going to be maintained for the indefinite future by the
public agencies which currently distribute water in Southern California.
Until recently, the Company believed that water transfer transactions would
require the Company to (i) purchase water that can be delivered to urban areas
in California, (ii) finance the development of infrastructure, such as wells,
pipes, and pumps, needed to deliver water, and (iii) enter into agreements with
utilities, cities, or water districts for the sale or lease of the Company's
water to such water retailers. The Company anticipated that each water transfer
transaction that it entered into would be unique and that the terms under which
such transactions were financed and completed would vary. All such transfer
transactions would be expected to involve significant government regulation
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and would be dependent upon the Company's ability to obtain all required
governmental approvals and to satisfy a series of environmental and other
protective conditions.
In September 1997, the Company entered into a water purchase agreement with
San Bernardino Valley Municipal Water District (SBVMWD) pursuant to which SBVMWD
agreed, subject to certain conditions still to be satisfied, to sell to the
Company 100,000 acre feet of surplus California State Water Project water during
the next ten years. The agreement provides for the delivery of 10,000 acre-feet
of water annually, with an option for the Company to accelerate deliveries if
surplus water is available. The Company will pay SBVMWD $150 per acre-foot of
water in the first year, escalating at 3.5% annually. On September 30, 1997, MWD
filed a complaint in the Superior Court of California for the County of Los
Angeles against SBVMWD, the Company and Santa Margarita Water District ("SMWD"),
a possible customer for this water, in order to block the water sale, and
separate, but similar action was filed by DWR in the California Superior Court
for the County of Sacramento against SBVMWD and the Company on December 22,
1997. As a result of these legal challenges, the Company now does not expect
water to be sold or delivered under this agreement in the foreseeable future.
See "Item 3. Legal Proceedings."
On September 30, 1998, the Company entered into a pumping rights lease and a
water sale agreement with the City of Inglewood, California. Beginning October
1, 1998, Inglewood leased the rights to pump 4,450 acre-feet of water per year
to the Company for a five-year period. In consideration of the lease, the
Company made a $3,603,200 lump-sum cash payment to Inglewood. Under the water
sale agreement, the Company agreed to sell, and Inglewood agreed to buy, 5,950
acre-feet of water each year for the next five years. In the first year,
Inglewood paid the Company $200 per acre-foot ($1,190,000). After the first
year, the per acre-foot price will escalate over the remaining four-year period
at a rate equal to the sum of 3.75% per year plus 25% of any increase in the
MWD's rate for water, as defined.
The Company financed the pumping rights lease lump-sum payment through a
$3,560,000 five-year amortizing term loan. The loan was obtained from Union Bank
of California and is secured by the Company's rights under the pumping rights
lease with Inglewood in addition to the water rights associated with the other
1,500 acre-feet of water to be sold to Inglewood by the Company during the term
of the loan.
The Company will obtain 4,450 acre-feet of the 5,950 acre-feet of water it
needs to deliver to Inglewood annually from the lease it entered into with
Inglewood. The Company secured the balance of the water from its owned inventory
of West Basin groundwater pumping rights and entered into two water rights
leases. The first is a five-year water rights lease for 1,008 acre-feet per year
at a price of $150 per acre-foot in the first year ($151,200). This price will
escalate over the remaining four-year period at $7.50 per acre-foot per year.
The second is a fifteen-year water rights lease for 250 acre-feet per year for a
price 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 based on prices established
annually by the MWD. The remaining 242 acre-feet per year of water to be
supplied to Inglewood is owned by the Company.
In December 1998, the Company completed a pilot water sale in cooperation
with MWD. For the first time in its 70-year history, MWD exchanged water with a
private company for delivery within MWD's service territory. In this
transaction, the Company sold 1,000 acre-feet of water to the SMWD. The
transaction involved water previously purchased by the Company in Central
California. The water was delivered into the State Water Project, where it was
then conveyed to MWD by the DWR. The MWD stored, treated and delivered the water
to the Municipal Water District of Orange County, and ultimately to the SMWD.
The transaction was not financially material or profitable for the Company.
However, pursuant to the precedent set by the pilot transfer, the Company
arranged a similar transaction with SMWD and, on July 16, 1999, applied to MWD
for facilitation of the transfer under the same conditions and pursuant to the
same statutory authority as the 1998 transfer. Throughout the fiscal year ended
March 31, 2000, MWD refused to enter into good faith negotiations to facilitate
the 1999 transfer. Because of MWD's refusal to enter into good faith negotiation
of transfer facilitation (essentially, allowing use of available capacity in its
water conveyance system in exchange for fair compensation), the Company does not
expect to be able to meet the needs of its customers within the MWD service
area.
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The Company owns the rights to extract 1,462 acre-feet of water per year
from the groundwater located in the Central and West Coast Water Basins, Los
Angeles County, California. The Company recognized $283,779 of revenue for the
fiscal year ended March 31, 2000 from agreements it entered into for the fiscal
year ended March 31, 2000 to lease its Central and West Coast Basins water
rights.
The Company also owns the rights to extract 2,996 acre-feet of water per
year from the groundwater located in the Mojave Basin, San Bernardino County,
California. The Company purchased the underlying Mojave Basin water rights
during the fiscal year ended March 31, 1999, as part of its plan to expand its
participation in the ownership and marketing of water in Southern California.
The Company may use the water it is entitled to extract under the foregoing
pumping allocation to supplement its water transfer activities in Southern
California. Currently, the Company is restricted to selling only 80% of its
rights, or 2,397 acre feet, and leased such rights for a one-year period,
earning $106,755 during the fiscal year ended March 31, 2000. The Company
recently completed new agreements to lease its carry-over rights for the
1999-2000 water year. Revenue from the recent leases is expected to be
received in the fiscal year ending March 31, 2001.
As of March 31, 2000, the Company had invested $1,274,678 in the development
of a water project in Inyo County, California, which includes the purchase of
240 acres of land for a cost of $1,005,000. Subject to environmental and other
regulatory approvals, the timing and receipt of which are uncertain, the project
will involve pumping approximately 6,000 acre-feet of groundwater from
properties located in Inyo County and delivery of that water to the Los Angeles
Department of Water & Power at the Los Angeles Aqueduct, which is about one mile
from the site of the project. However, because of the aforementioned
uncertainties, the Company recorded an allowance against the total Inyo County
water project costs incurred as of March 31, 2000 (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."). As
a result of the Company's financial limitations, the Company is seeking to sell
its rights in the project.
In February 1999, the Company entered into a water transfer agreement with
Natomas Central Mutual Water Company ("Natomas") pursuant to which Natomas
agreed, subject to certain conditions still to be satisfied, to transfer to the
Company up to 30,000 acre-feet of non-Central Valley Project water from the
Sacramento River. In February 1999, the Company paid a nonrefundable deposit of
$275,000 to Natomas as an advance against its obligation to pay Natomas, upon
delivery of the water to a third party purchaser, $20 per acre-foot for any of
the water transferred for use within or north of the Delta and $50 per acre-foot
for any of the water transferred for use south of the Delta. In addition, the
Company will also pay Natomas 50% of the net proceeds, as defined, from the sale
of water to a third party purchaser. In July 1999, the Company entered into a
contract for the sale of a portion of this water to a customer within the
service area of the Metropolitan Water District of Southern California (MWD).
The Company thereupon made a request to MWD to convey the water to the customer.
In April 1999, Natomas and the Company jointly filed a petition with the State
Water Resources Control Board ("SWRCB") seeking authority to complete this
transfer. On December 28, 1999, the SWRCB entered its Order WR 99-012 which
significantly limits the amount of water available for transfer based on
Natomas's conservation efforts. Subsequently, MWD approved the Company's
request, but it is uncertain whether the transfer can be completed, because
there is insufficient availability of capacity in the State Water Project to
accommodate the transfer during the 2000 irrigation season. The Company is
re-evaluating its alternatives regarding this transfer and has provided an
allowance for water project costs equal to 100% of its deposit for this
contract.
In May 1999, the Company also entered into a water transfer agreement with
the Sutter Mutual Water Company that is similar to the arrangement with Natomas,
and has made a deposit of $100,000 for water to be delivered under that
contract. As a result of the regulatory and other difficulties that the Company
has encountered with the Natomas transfer and other water projects, the Company
is re-evaluating the feasibility of the Sutter Mutual arrangement, and has also
provided an allowance for water project costs equal to 100% for its deposit for
this contract.
Yuba Property Water Rights
The Company owns certain riparian and appropriative rights, together with
certain groundwater rights, associated with the approximately 9,055 acres of
real property that constitutes the Yuba Property. The Yuba County Superior
Court, in a 1929 judgment, recognized the Company's predecessor-in-interest's
riparian rights to the Yuba River and pre-1914 appropriative rights.
(Appropriations that began before December 19, 1914 do not require a
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permit for transfer or change in place or purpose of use from the State Water
Resources Control Board). Additionally, the Company holds overlying rights to
the groundwater aquifer beneath the Yuba property.
The Company is currently considering developing its Yuba Property water for
sale or lease, as a part of the Water Transfer Program. See "Item 1. Description
of Business--Southern California Water Transfer Program." The Company's Yuba
Property water resources, if and when distributed, could be distributed with the
other water resources originating in the Sacramento River Valley. The Sacramento
River Valley water resources serve most of Northern California and serve
Southern California through statewide water distribution facilities which begin
at the southern end of the Sacramento-San Joaquin Bay Delta. Accordingly,
because of the configuration of California's water distribution system, the
Company believes that sales could be made by the Company to water utilities
serving over half of the state's population. The Company has not, however,
developed a plan for marketing and selling its Yuba Property water, and the
Company cannot currently estimate when any water disposition plan will be
implemented. In addition, there are various regulatory hurdles that could delay
or limit the Company's ability to deliver or sell its Yuba Property water. As a
result of various legal and engineering investigations undertaken by the Company
in the fiscal year ended March 31, 2000, the Company believes that development
and delivery of water from the Yuba Property will take longer and cost more than
it had formerly anticipated.
Cherry Creek Water Rights Project
In July 1992, the Company initiated a project (the "Cherry Creek Project")
to assemble, develop, and eventually sell water or packaged water rights to
municipalities and other water users located in the Cherry Creek basin in the
State of Colorado. Cherry Creek is a tributary of the South Platte River that
flows into the City of Denver, Colorado, and the Cherry Creek basin is the
drainage area of Cherry Creek, encompassing approximately 60 square miles. Much
of the Cherry Creek basin is part of the greater metropolitan area of Denver, an
area that historically has had water shortages. Although the water supplies
currently available in the Cherry Creek basin are sufficient, in most cases, to
meet the current demand for water in the Cherry Creek basin, increased need for
water as a result of projected residential, commercial, and industrial
development and growth in the Cherry Creek basin is expected to exceed the
currently available supply of water in the region. The goal of the Cherry Creek
Project is to develop the Company's water rights to provide reliable additional
water resources in the Cherry Creek basin that can be sold or leased to
municipalities and other water users to meet expected future demand for water.
The State of Colorado has enacted various laws and regulations that identify
and establish rights to tributary water which grant the holders thereof the
right to use specified amounts of tributary water on a fixed priority basis.
Because junior water rights do not constitute a reliable source of water and
because of the scarcity of tributary resources in the area, municipalities and
water districts in the Cherry Creek basin have relied on supplemental
groundwater resources and other non-tributary supplies. However, under Colorado
law, by combining various water rights under a court-approved plan of
augmentation, junior water rights can effectively be turned into senior rights.
Because court approved plans of augmentation allow water to be diverted from
junior water sources without regard to the priority system, such plans are
currently the most common method by which new reliable water supplies are
developed for municipal uses in Colorado. As a result, the Company believes that
water derived from the Cherry Creek Project constitutes a reliable future supply
to meet the growing demand within the area.
At the beginning of its Cherry Creek Project in 1992, the Company acquired a
total of approximately 4,559 acres of undeveloped land (primarily for the water
rights associated with the land) and the right to drill and service water wells
on land that was not acquired by the Company. To date, the Company has sold or
exchanged a total of 4,279 acres of the Cherry Creek Project properties, and in
the year ended March 31, 2000, it repurchased 128 acres which it had previously
sold because the Company determined that the repurchased property is important
to the full development of the Cherry Creek Project. The Company has retained
substantially all of the water rights associated with the land it has resold
(including the right to drill and service a number of wells on such resold
land), and the Company's plan is to retain most water rights associated with any
Cherry Creek real properties it may sell in the future. The real estate parcels
that have been sold are not needed to further the principal purposes of the
Cherry Creek Project. The Company has the right to operate 14 wells drawing
tributary water in the Cherry Creek basin, of which 12 are existing wells. Eight
of the 14 well rights are located on property that is not owned by the Company.
With respect to these eight wells, the Company owns the right to drill and
operate wells and to enter the real property on which such wells may be located
or drilled in order to operate or establish wells.
-9-
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In addition to the foregoing sales of Cherry Creek land, the Company in
April 1995 transferred approximately 257 acres of the Company's Cherry Creek
Project real estate to the State of Colorado in exchange for the rights to
withdraw and use 1,290 acre-feet of non-tributary water per year associated with
the adjacent park land owned by the state. The Company believes that the water
rights acquired pursuant to the foregoing exchange increased the amount of water
owned by the Company in Cherry Creek by approximately 20%.
The Company currently has the right to sell or lease each of the various
water rights it owns. However, in order to package its water rights so that it
can sell long-term, reliable water resources to municipalities and other larger
water users located in the Cherry Creek basin, the Company combined its various
water resources in a plan of augmentation approved by the Colorado District
Court, Water Division (the "Colorado Water Court") in February 1998. During the
fourth quarter of the year ended March 31, 1999, the Company drilled its first
non-tributary well to begin implementation of the augmentation plan. This well
provides the Company with additional information on the water resources in the
acquifer. In addition, water from this well is available for future water sales.
With the plan of augmentation approved and implementation begun, the Company
is now seeking to market its water in the Cherry Creek basin. The Company is
considering a number of alternatives, from sale of water to a single buyer or
user, to the short-term and/or long-term sale of water to municipalities or
other water users. The sale of its water will, however, require the Company or
the purchaser to develop and build the infrastructure necessary to utilize the
water currently owned by the Company in the Cherry Creek basin. This could
result in significant capital expenditure requirements. To date, the Company has
not entered into any agreements for the sale of its Cherry Creek water assets,
with the exception of one sale in fiscal 1998.
Other Water Assets
The Company owns a right to receive 3.7398% of the gross payments made by
the Cucamonga County Water District (San Bernardino County, California) in
connection with certain water sold or made available to the water district by
the Fontana Union Water Company, a mutual water company, under a 100-year lease
(the "Cucamonga Water Fee Agreement") which expires in 2089. The Company
received approximately $180,000 during the fiscal year ended March 31, 2000
under the Cucamonga Water Fee Agreement. The amount of proceeds the Company will
receive in the future will vary depending on the amount of non-interruptible
water available to the Cucamonga County Water District and on the posted price
of MWD for water available to the Chino Basin Municipal Water District. The
current posted price is $349 per acre-foot of water.
The Company also owns shares of a Southern California mutual water company.
A mutual water company is an entity that owns water and water rights, which
water is made available to the shareholders of the mutual water company.
Accordingly, the Company is entitled to receive its proportionate share of water
made available by the mutual water company in relation to its shares.
Originally, the Company acquired the water company shares, as well as shares in
other mutual water companies, in order to acquire and re-sell water it would be
entitled to receive from each of the companies. However, the Company was unable
to arrange for the practical delivery of water based on its shares. Therefore,
during the fiscal year ended March 31, 2000, the Company has re-evaluated its
overall water strategy and has decided to sell or otherwise deploy certain of
its mutual water company interests. The Company sold the shares in a such mutual
water company during the year ended March 31, 2000, and is considering the sale
of the shares it owns in another mutual water company. The Company realized
total proceeds of approximately $950,000 from the sale of the shares in this
mutual water company, and recorded a gain of $395,000 on the sale. However,
during the last fiscal year, the Company also wrote down the value of the shares
it owns in a mutual water company by $204,295, because it believed that the
market value of such shares was less than the book value of such shares.
Real Estate Held for Sale
In March 1993, the Company commenced disposing of its Colorado real estate
assets that were not needed for its water rights development program. As of
March 31, 2000, the Company still owned 408 acres of real estate located in the
Cherry Creek basin in Colorado. Through March 31, 2000, the Company has sold or
exchanged, net of certain properties which were repurchased, a total of 4,151
acres of land in the Cherry Creek basin that were not needed for the Cherry
Creek Project. In connection with the Cherry Creek land transfers, the Company
retained
-10-
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substantially all of the water rights related to the land that was sold by the
Company. The Company is currently considering alternatives for generating value
from the remainder of its Cherry Creek real estate holdings.
In Glenn County, California, the Company owns 112 acres of farmland which it
leases on an annual basis to an unrelated agricultural operator. The Company is
currently considering alternatives for generating increased value from its Glenn
County real estate holdings, although the Company is not currently considering
the export of water rights associated with this property for sale outside of
Glenn County.
During the year ended March 31, 1999, the Company acquired various land and
farms located in San Bernardino County, California, that collectively comprise
367 acres. The Company is currently marketing water rights acquired with the
land and the Company is in the process of subdividing or otherwise preparing to
sell these properties.
During the year ended March 31, 2000 the Company purchased 240 acres of land
in Inyo County, California, as a part of the water project the Company has been
attempting to complete in that area. However, because of the financial
commitment required to complete the project as proposed, the Company's current
financial condition, and other factors, the Company is currently considering
selling the water project in its early stage of development and intends to sell
the 240 acres in connection with the sale of the overall project.
No assurance can be given that the Company will be able to sell any
additional real estate parcels or that any such sales will be on terms favorable
to the Company.
Competition, Markets and Customers
In the event that the Company elects to market its Yuba Property water
interest, the Company may compete directly with the Yuba County Water Agency in
the sale of water from Yuba County. Western Aggregates, an unaffiliated owner of
certain water rights in the Yuba Property, has informed the Company that it may
attempt to market its Yuba Property water rights and, therefore, may also
compete with the Company. In order to maximize the value of its water rights
associated with the Yuba Property, the Company is exploring various alternatives
for cooperating with both the Yuba County Water Agency and Western Aggregates.
However, there can be no assurance that any such cooperative arrangement will,
in fact, be consummated nor that its terms will be favorable to the Company.
The Company's goal in the Cherry Creek basin of Colorado is to sell or lease
water to public water agencies and other users in the Cherry Creek basin. On a
limited basis, public agencies and private holders of water rights currently
also sell water and water rights in the Cherry Creek basin and, therefore, also
compete with the Company.
The Company will compete in Southern California with MWD and other
governmental water wholesalers in trying to market any water that the Company
acquires pursuant to its Water Transfer Program.
Environmental Regulation
The Company's operations are or may become subject to federal, state and
local laws and rules regulating the discharge of materials into the environment,
air quality standards, pollution of stream and freshwater sources, odor, noise,
dust and other environmental protection controls. The Company believes that it
currently is in substantial compliance with all material environmental laws
governing its operations. Furthermore, the Company does not believe that federal
or state environmental laws will hinder or adversely affect its proposed
operations. Compliance with existing environmental laws has to date had no
material effect on the Company's earnings or capital expenditures, but in the
future it will have the effect of delaying the completion of projects in those
cases where environmental impact statements or other similar documents have to
be prepared and filed. Furthermore, future legislation designed to protect the
environment, as well as future interpretations of existing laws, could require
further expenditures by the Company, or have adverse effects on its operations,
the extent and nature of which cannot now be predicted. Water leased or sold by
the Company may be subject to regulation as to quality by the United States
Environmental Protection Agency (the "EPA") acting pursuant to the Federal Safe
Drinking Water Act (the "US Act"). In California, the responsibility for
enforcing the US Act is delegated to the California Department of Health
Services (the "Health Department") and to the SWRCB acting pursuant to the
California Safe Drinking Water
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Act (the "Cal Act"). The US Act provides for the establishment of uniform
minimum national water quality standards, as well as governmental authority to
specify the type of treatment processes to be used for public drinking water.
Moreover, the EPA has an ongoing directive to issue regulations under the US Act
and to require disinfection of drinking water, specification of maximum
contaminant levels ("MCLS") and filtration of surface water supplies. The Cal
Act and the mandate of the Health Department are similar to the US Act and the
mandate of the EPA, and in many instances MCLS and other requirements of the
Health Department are more restrictive than those promulgated by the EPA.
Both the EPA and the Health Department have promulgated regulations and
other pronouncements, which require various testing and sampling of water and
inspections by distributors and retailers, which set MCLS for numerous
contaminants. Since the Company does not intend to sell water directly to
consumers, it believes that these standards only affect the water agencies that
may buy or lease the Company's water. While drinking water regulations do not
directly affect the Company, the regulations regarding the quality of water
distributed affects the Company's intended customers and may, therefore,
depending on the quality of the Company's water, impact the price and terms upon
which the Company may in the future sell its water or water rights.
Under various federal, state and local laws, regulations and ordinances
(collectively, "Environmental Laws"), an owner or operator of real estate
interests may be liable for the costs of cleaning up, as well as certain damages
resulting from, past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in or from a property. Certain Environmental
Laws including the federal Comprehensive Environmental Response Compensation and
Liability Act and Resource Conservation and Recovery Act, impose such liability
without regard to whether the owner knew of, or was responsible for, the
presence of hazardous or toxic substances or wastes at or from the property. The
presence of such substances or wastes, or the failure to properly remediate any
resulting contamination, also may adversely affect the owner's or operator's
ability to sell, lease, or operate its property or to borrow using its property
as collateral. Although the Company is not aware of any such environmental
contamination on any of its real estate holdings or on any locations adjacent to
its holdings, there can be no assurance that such environmental contamination
does not exist.
Employees
As of the date of this report, the Company has ten regular employees, as
well as three part-time consultants.
ITEM 2. PROPERTIES
The principal non-water properties currently owned by the Company are the
following:
- - Undeveloped land in the Cherry Creek basin, Colorado, consisting of a total
of approximately 408 acres and associated water rights, the rights to
operate six tributary wells on property owned by the Company, and water
rights reserved or acquired in connection with the 4,151 acres of land in
the Cherry Creek basin that the Company has sold or exchanged. See "Item 1.
Business - Description of Business - Cherry Creek Water Rights Project." The
Company's Cherry Creek land is zoned for agricultural and residential uses.
- - Various rice farms and ranches, located in Yuba County, California, that
collectively comprise 1,424 acres, and a 116-acre parcel in Glenn County,
California. The rice farms are graded for cultivation and watered by wells
on the properties. The Company has leased the rice farms and ranches to
unaffiliated operators.
- - The Company owns 30 acres of real estate located along the Yuba River in
Yuba County, California, and approximately ten miles northeast of
Marysville, California. The 30 acres are zoned industrial-extractive and may
be used for commercial but not residential purposes.
- - Certain mineral interests and other property rights, including hydrocarbon,
oil, gas and entry rights, related to 440 acres of real estate in Chico,
California, and to 2,578 acres near Sacramento, California. These property
rights affect the ability of the owners of the surface rights to the land to
develop, finance or transfer the land.
-12-
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- - Various cattle and crop farms with four associated residences, located in
San Bernardino County, that collectively comprise 367 acres.
- - A farm of approximately 240 acres in Inyo County, California, which is being
leased to an unaffiliated operator.
Some of the Company's foregoing real estate properties are encumbered by
mortgages. For a description of the Company's mortgage indebtedness, see "Note
12: Long-Term Debt" to the Company's consolidated financial statements included
as part of this Annual Report on Form 10-K.
In order to reduce its on-going operating expenses, the Company decided,
during the quarter ended December 31, 1999, to consolidate its corporate
headquarters into its Point Richmond, California office and to close its San
Diego office. The consolidation, which is expected to be completed during the
quarter ending September 30, 2000, will result in the net reduction of three
administrative personnel and the early termination of (or other provision for)
its office and equipment leases in San Diego.
The Company leases its principal executive office in Point Richmond,
California, containing 2,400 net square feet, pursuant to a lease that expires
in February 2002. The Company's current monthly rental obligation for the
facility is $3,600.
ITEM 3. LEGAL PROCEEDINGS
In June 1997 the Company entered into a water sale agreement with Santa
Margarita Water District ("SMWD") pursuant to which SMWD agreed, subject to
certain conditions still to be satisfied, to purchase from a subsidiary of the
Company 10,000 acre-feet of water annually during each of the next ten years. In
September 1997 the Company entered into a water purchase agreement with San
Bernardino Valley Municipal Water District ("SBVMWD") pursuant to which SBVMWD
agreed, subject to certain conditions still to be satisfied, to sell to the
Company 100,000 acre-feet of surplus California State Water Project water during
the next ten years. SMWD is located and operates within the service area of The
Metropolitan Water District of Southern California ("MWD").
On September 30, 1997, MWD challenged the validity of the Company's water
sales and purchase agreements with SBVMWD and SMWD by filing a lawsuit against
SBVMWD, the Company and SMWD in the Superior Court of the State of California
for the County of Los Angeles. That action was dismissed by MWD, without
prejudice, on December 18, 1997, but a substantially identical complaint had
previously been filed by MWD on December 10, 1997, against SBVMWD and the
Company (but not SMWD) in the Superior Court of the State of California for the
County of Sacramento. On December 22, 1997, the DWR filed its complaint against
SBVMWD and the Company, making substantially similar claims and allegations.
The MWD complaint alleges that the Company acted as an agent or
co-conspirator with SBVMWD in attempting to facilitate the sale of State Water
Project water by SBVMWD in MWD's service area. The DWR complaint alleges only
that the Company acted as SBVMWD's agent for that purpose. Both complaints seek
declaratory relief stating that the water purchase agreement between SBVMWD and
the Company is invalid, and request that injunctive relief be granted blocking
the sale and use of State Water Project water within MWD's service area without
the written consent of MWD and DWR. Both complaints also challenge the validity
of the water purchase agreement on the ground that its execution and
implementation require compliance with the California Environmental Quality Act
("CEQA"), including the preparation of an environmental impact report.
On January 12, 1998, MWD's and DWR's actions were consolidated for all
purposes, including trial, before the Sacramento Superior Court. MWD, DWR and
the Company have stipulated to an order of court made July 21, 1998,
consolidating another action with the two actions brought by MWD and DWR. The
third action involves a complaint filed by SBVMWD against DWR and MWD on
February 11, 1980, in the Sacramento Superior Court. By that complaint SBVMWD
sought a declaratory judgment allowing it to sell, without MWD's consent, State
Water Project
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water to Orange County Water District, a district located within MWD's service
area. On May 17, 1982, the parties to that 1980 action entered into a
stipulation indefinitely extending the time to respond to the amended complaint,
and waiving any right to dismiss the action for failure to prosecute it in a
timely manner. Nothing has occurred in that action since the filing of that
stipulation. This third action involves the same basic legal issues as the other
two actions and its consolidation with those actions will not prejudice the
Company's position in either of them.
By stipulation between the Company and DWR and MWD, made and approved by the
Court on April 15, 1998, DWR and MWD dismissed, without prejudice, as against
the Company, their petitions for writ of mandate and injunctive relief based on
alleged non-compliance with CEQA, and in consideration thereof the Company
agreed to give DWR and MWD thirty (30) days written notice of its intent to take
delivery of water pursuant to the water purchase agreement with SBVMWD or to
take any steps in compliance with its obligation under that agreement.
By stipulation approved by order of court on July 12, 1998, MWD, DWR and
SBVMWD agreed that their prosecution of the two CEQA causes of actions in the
MWD and DWR complaints were stayed subject to conditions similar to the
dismissal of their CEQA causes of action as against the Company.
The Company has by its answer to the two complaints denied all material
allegations, and has asserted several defenses based on its position that both
complaints fail to allege facts sufficient to constitute a cause of action
against the defendants. MWD served upon SBVMWD and the Company
specially-prepared interrogatories and requests to produce documents for
inspection and copying. Responses were served to the interrogatories, and
documents, to the extent they were responsive and not privileged, were produced.
The Company has served upon both MWD and DWR requests for the production of
documents for inspection and copying and extensive specially-prepared
interrogatories. Responses have been received to those interrogatories and no
further responses are being sought. With respect to the requests for production
of documents MWD has produced the requested documents and DWR has produced most
of the documents that remain to be inspected. Neither SBVMWD nor DWR has engaged
in any formal discovery. There have been no depositions.
No additional formal discovery is pending or scheduled at this time. These
actions have been relatively inactive since December 1998. No law and motion
matters are pending. No trial date has been set, and the court has not yet
scheduled any status conference.
The Company has evaluated the complaints of MWD and DWR and has engaged in
considerable research on pertinent issues of fact and law. Based on said
evaluation and research, and while the outcome of these proceedings cannot be
predicted, the Company believes (1) that the validity of the challenged water
purchase and sale agreements should be upheld, and (2) that in all events the
actions will not have a material adverse impact on the Company's financial
condition, or the results of its operations. Until the lawsuits are resolved by
trial or by settlement, the Company does not expect to purchase or receive any
water under its water purchase agreement with SBVMWD.
No trial date has been set for this matter, and the Company does not know
when this matter will be resolved. In the meantime, the Company's ability to
effect similar water transfer transactions will be subject to challenge by the
MWD and others. Although the Company is still able to effect certain water
transfers that are not affected by the issues raised by the pending lawsuit, the
lawsuit will continue to limit the Company's ability to engage in certain types
of water transfers in Southern California.
The Company is the general partner of Western Agua, L.P. ("Western Agua"), a
partnership that agreed to provide consulting services to the Nevada Land and
Resources Company, LLC, an unaffiliated limited liability company (the "Nevada
LLC"), pursuant to a certain consulting agreement. The Nevada LLC purported to
terminate the Consulting Agreement on March 13, 1998 based on Western Agua's
purported willful breach of the consulting agreement. On November 10, 1998,
Western Agua filed an action in the San Diego Superior Court against the Nevada
LLC for breach of contract, specific performance and an accounting relating to
the Consulting Agreement. Western Agua's complaint sought a judicial declaration
that the consulting agreement was not terminated
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and remains in full force and effect. The Nevada LLC filed a cross complaint
against Western Agua and the Company containing claims for breach of contract,
breach of fiduciary duty, declaratory relief, compensatory damages in excess of
$100,000, an order enjoining cross-defendants from the development, sale and/or
management of sale of water in certain areas, and a judicial declaration that
cross-defendants have breached the Consulting Agreement and that the Nevada LLC
has not.
Effective September 1, 1999 (the "Effective Date"), the Company, Western
Agua and Nevada LLC entered into an agreement wherein they agreed that: (1) The
action would be dismissed without prejudice; (2) From the Effective Date
forward, the Company and Western Agua were relieved of restrictions on certain
water-related business activities; (3) All claims, counterclaims and defenses by
Western Agua and the Company, on the one hand, against Nevada LLC, on the other
hand, and all claims, counterclaims and defenses by Nevada LLC, on the one hand,
against Western Agua and/or the Company, on the other hand, would be preserved
without regard to the passage of time, from the Effective Date through and
including July 31, 2002; and (4) Nevada LLC would deliver notice to Western Agua
on or before June 30, 2002 of the amount of the consulting fee, if any, which
would be owed by Nevada LLC to Western Agua if the consulting agreement were in
effect as of April 23, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "WWTR." The following table sets forth for the prior two fiscal years the
high and low closing sales prices of the common stock as reported by the Nasdaq
National Market.
The Company recently received notice from The Nasdaq Stock Market that the
Company's common stock is out of compliance with two of the maintenance
standards necessary for the common stock to be traded on the Nasdaq National
Market. Accordingly, unless by the end of August 2000 (i) the bid price of the
common stock increases above $1.00 for at least 10 consecutive days and (ii) the
market value of the Company's public float increases to above $5,000,000 for a
minimum of 10 consecutive trading days, the Company's common stock will be
delisted from trading on the Nasdaq National Market effective August 30, 2000.
If the Company's common stock is delisted, the Company intends to apply to have
its common stock traded electronically on the OTC Bulletin Board. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Delisting of Common Stock from Nasdaq National
Market."
- ----------------------------------------------------------------
LOW HIGH
-------- --------
YEAR-ENDED MARCH 31, 1999
First Quarter (April-June) $ 9.00 $ 12.00
Second Quarter (July-September) 5.56 10.38
Third Quarter (October-December) 4.00 6.50
Fourth Quarter (January-March) 3.13 6.00
YEAR-ENDED MARCH 31, 2000
First Quarter (April-June) $ 3.00 $ 4.38
Second Quarter (July-September) 1.50 3.31
Third Quarter (October-December) .87 1.50
Fourth Quarter (January-March) 1.03 1.50
- ----------------------------------------------------------------
On March 31, 2000, the Company had 1,587 record holders of its common stock.
The Company believes there are numerous additional beneficial owners of the
common stock whose shares are held in "street name."
To date, the Company has not declared or paid any cash dividends with
respect to its common stock, and the current policy of the Board of Directors is
to retain earnings, if any, to provide for the expenses of the Company.
Consequently, no cash dividends are expected to be paid on the common stock in
the foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends. Any dividends on the Common Stock would be subject to prior
payment of dividends on the Series D Preferred Stock and Series C Preferred
Stock.
As of March 31, 2000, there were outstanding 10,000 shares of the Company's
Series D Convertible Redeemable Preferred Stock. The Series D Preferred Stock
provides for annual dividends, when and if declared, in the amount of $75.00 per
year, payable quarterly. To date, the Company has paid all declared dividends
under the Series D Preferred Stock.
As of March 31, 2000, there were outstanding 10,165 shares of the Company's
Series C Convertible Redeemable Preferred Stock. The Series C Preferred Stock
provides for annual dividends, when and if declared, in the amount of $72.50 per
year, payable semi-annually. To date, the Company has paid all declared
dividends under the Series C Preferred Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes certain financial data for the periods shown and
is qualified in its entirety by, and should be read in conjunction with, the
Company's Consolidated Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Annual Report.
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------
Statement of Operations Data: 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Revenue ........................................... $ 2,796,037 $ 1,822,990 $ 3,922,377 $ 1,770,771 $ 4,901,810
Cost of revenue ................................... 1,767,714 1,184,998 2,296,409 1,034,750 2,163,848
------------ ------------ ------------ ------------ ------------
Gross profit ...................................... 1,028,323 637,992 1,625,968 736,021 2,737,962
General and administrative expense ................ 7,448,615 5,805,192 5,645,559 2,946,252 2,122,525
------------ ------------ ------------ ------------ ------------
Operating income (loss) ........................... (6,420,292) (5,167,200) (4,019,591) (2,210,231) 615,437
Interest income (expense), net .................... (624,966) (586,464) (209,694) (1,027,540) (398,025)
Other income (expense) ............................ 373,352 222,300 2,330,255 (795,027) (201,827)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes ............................. (6,671,906) (5,531,364) (1,899,030) (4,032,798) 15,585
Income taxes ...................................... (3,200) (3,200) (2,400) (1,102,400) (2,400)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations .......... (6,675,106) (5,534,564) (1,901,430) (5,135,198) 13,185
Discontinued operations:
Loss from operations ............................ -- -- -- -- (67,949)
Loss on disposal of silica plant ................ -- -- -- (257,276) (251,200)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item ........... (6,675,106) (5,534,564) (1,901,430) (5,392,474) (305,964)
Extraordinary income on extinguishment of debt,
net of income taxes ............................... 3,489,803 99,656 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................. (3,185,303) (5,434,908) (1,901,430) (5,392,474) (305,964)
Accretion of preferred stock to redemption
value ........................................... (35,819) (33,099) (30,584) -- --
Preferred stock dividends ......................... (1,486,954) (990,401) (526,000) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders ..................................... $ (4,708,076) $ (6,458,408) $ (2,458,014) $ (5,392,474) $ (305,964)
============ ============ ============ ============ ============
Basic and diluted net income (loss) per
common share applicable to common
stockholders:
Continuing operations .......................... $ (1.03) $ (.80) $ (.30) $ (.64) $ --
Discontinued operations ........................ -- -- -- (.03) (.04)
------------ ------------ ------------ ------------ ------------
Total before extraordinary item .............. (1.03) (.80) (.30) (.67) (.04)
Extraordinary income on early extinguishment of
debt, net ........................................ .44 .01 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) per common share
Applicable to common stockholders ............... $ (0.59) $ (.79) $ (.30) $ (.67) $ (.04)
------------ ------------ ------------ ------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
Balance Sheet Data: 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Current assets ..................................... $ 7,534,009 $ 15,536,283 $ 17,388,488 $ 4,833,903 $ 3,921,948
Total assets ....................................... 37,700,950 47,630,860 41,891,968 39,475,358 40,420,709
Working capital .................................... 703,780 13,616,371 16,517,459 3,787,083 2,943,723
Long-term debt and debentures ...................... 12,015,366 17,712,349 16,028,470 17,840,860 18,275,408
Redeemable preferred stock ......................... 19,816,686 19,780,867 9,049,033 -- --
Preferred stock .................................... -- -- -- 3,807,517 --
Common stockholders' equity ........................ 3,451,767 8,174,399 15,860,103 16,680,161 21,067,076
- -----------------------------------------------------------------------------------------------------------------------------------
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ITEM 7. 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.
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 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. Through March 31, 2000, the Company paid
$1,961,686 in dividends to the holders of the Series C Preferred Stock, of which
$796,810 was paid in cash and $1,164,878 was paid by the issuance of 1,165
additional shares of Series C Preferred Stock.
On October 27, 1998, the Company sold $10,000,000 of its Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock") to an
affiliate of Sociedad General de Aguas de Barcelona, S. A. ("Agbar"). Each share
of Series D Preferred Stock has a stated value of $1,000, has a dividend rate of
7.5% of its stated value, and is convertible at any time at the option of the
holder into the number of shares of common stock determined by dividing the
amount of the liquidation preference at 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.
In order to reduce its ongoing operating expenses, the Company decided,
during the quarter ended December 31, 1999, to consolidate its corporate
headquarters into its Point Richmond, California office and to close its San
Diego office. The consolidation, which is expected to be completed during the
quarter ending June 30, 2000, will result in the net reduction of three
administrative personnel and the early termination of (or other provision for)
its office and equipment leases in San Diego. Total severance costs and payroll
taxes related to the termination of the five employees in the San Diego office
amounting to $56,216 were charged to general and administrative expenses, of
which $12,114 was accrued as of March 31, 2000. In addition, exit costs of
$96,339 comprised of lease termination and other costs, were also charged to
general and administrative expenses, of which $8,564 was accrued at March 31,
2000. Total accrued costs amounting to $20,678 were included on the consolidated
balance sheet as of March 31, 2000 as "accrued expenses and other liabilities."
The consolidation resulted in the elimination of three administrative
positions and the transfer of three positions to Point Richmond. The Company
believes that the expected increase in future earnings and cash flow from
reduced employee expense and lease costs associated with the consolidation will
approximate $230,000 per year.
In April 1994, the Company commenced a program to repurchase shares of
common stock held by stockholders who, in the aggregate, owned less than 200
shares (as adjusted for the stock dividend) of common stock (the "Odd Lot Tender
Offer"). In addition, 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 year ended March 31, 2000, the Company repurchased
49,000 shares of common stock at a cost of $115,840, and since November 1998,
the Company has repurchased a total of 341,200 shares at a total cost of
$1,374,870. No further share repurchases are currently planned.
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RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for
its three most recent fiscal years.
The Company reports its continuing 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 market 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 cost of revenue.
During the fiscal years ended March 31, 2000, 1999, and 1998, the valuation
allowance for deferred tax assets was increased as a result of the Company's net
operating loss carry-forward.
The preferred stock dividends for the year ended March 31, 2000 represent
dividends paid in cash on the Series C and D Preferred Stock.
WATER
- ------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
2000 1999 1998
---------- ---------- ----------
Revenue ........................................ $2,796,037 $1,477,000 $ 932,000
Cost of Revenue ................................ 1,767,714 1,001,000 867,000
---------- ---------- ----------
Gross Profit ................................... $1,028,323 $ 476,000 $ 65,000
- ------------------------------------------------------------------------------------------------
Water revenue for the fiscal year ended March 31, 2000 ("Fiscal 2000")
increased $1,319,000 (89%) from the prior year as a result of increased water
sales. Water rights revenue for Fiscal 2000 includes both water sales and income
from water lease agreements with various municipal and agricultural water
districts in California. Cost of revenue for Fiscal 2000 includes the cost of
water purchased for resale and amortization of other resource acquisition costs.
Delivery of water to one agricultural water district has not yet taken place,
but the Company received a down-payment of one-third of the purchase price, and
expects to make delivery of the water, and collect the balance due, during
fiscal 2001, although delivery is not required until fiscal 2003, nor is
delivery a condition for ultimate payment.
Water revenue for the fiscal year ended March 31, 1999 ("Fiscal 1999")
increased $545,000 (58%) from the prior year as a result of increased water
sales. Water revenue for Fiscal 1999 includes both water sales and income from
water lease agreements with various municipal and agricultural water districts
in California. Cost of revenue for Fiscal 1999 includes the cost of water
purchased for resale and amortization of other resource acquisition costs.
REAL ESTATE
- ------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
2000 1999 1998
---------- ---------- ----------
Revenue ........................................ $ 0 $ 346,000 $2,990,000
Cost of Revenue ................................ 0 184,000 1,429,000
---------- ---------- ----------
Gross Profit ................................... $ 0 $ 162,000 $1,561,000
- ------------------------------------------------------------------------------------------------
The Company has a program to dispose of real estate acquired in connection
with the acquisition of water rights, but not needed for water rights
development. The Company retains virtually all of the water rights on the
properties sold. In Fiscal 2000, the Company did not sell any real estate, and
therefore had no revenue or cost of sales from the sale of real estate. The
Company does not expect to have significant real estate revenue and cost of
sales in future years.
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In Fiscal 1999, real estate revenues of $346,000 resulted from the sale of
72 acres of Cherry Creek property and 20 acres of property sold in Glenn County,
California. In Fiscal 1998, real estate revenues of $2,990,000 were recognized
from the sale of 1,607 acres of Cherry Creek properties. Cost of real estate
revenue in each fiscal year includes the allocated purchase price of the
properties sold, directly related development costs, sales commissions and other
sales costs.
GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
2000 1999 1998
-------------- --------------- ---------------
General and Administrative Expenses ............ $ 7,449,000 $ 5,805,000 $ 5,646,000
- ------------------------------------------------ -------------- --------------- ---------------
General and administrative expenses for Fiscal 2000 increased by 28%, or
$1,644,000, from Fiscal 1999. The increase was primarily due to higher payroll
costs, and the termination expense of one officer ($253,718), higher costs for
consulting and engineering ($542,852), due in part to the cost of retaining a
financial advisory firm to assist the Company, a decrease in the allowance for
water project costs ($275,348), and an impairment of asset adjustments
($1,165,982) in Fiscal 2000, compared to zero in Fiscal 1999.
General and administrative expenses for Fiscal 1999 increased by 3%, or
$159,000, from Fiscal 1998. The increase was primarily due to the $1,294,000
allowance against water projects under development, increased consulting and
engineering expenses of $317,000 and $74,000 of payroll taxes paid by the
Company in connection with the cancellation of stock options of a former officer
during Fiscal 1999. These increases were offset in part by decreases resulting
from $650,000 of one-time advisory fees in connection with a proposed
acquisition incurred in Fiscal 1998 which were not incurred in Fiscal 1999, and
a decrease of $753,000 in bonus and severance and $184,000 in professional fees
paid in Fiscal 1999 as compared to Fiscal 1998.
OTHER NON-SEGMENT INFORMATION
- -----------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
2000 1999 1998
----------- ----------- -----------
Interest Income ................................ $ 622,000 $ 879,000 $ 1,156,000
Interest Expense ............................... (1,247,000) (1,465,000) (1,365,000)
Equity in Loss of Limited Liability Company .... -- -- (308,000)
Gain on Sale of Investment in Limited ......... 40,000 40,000 2,456,000
Liability Company
Rental Income, net ............................. -- 9,000 46,000
Other .......................................... -- 173,000 136,000
Extraordinary income, net ...................... $ 3,490,000 $ 100,000 --
- -----------------------------------------------------------------------------------------------------
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 the Company received in connection with the real estate that it has sold.
The secured notes bear interest at rates between 8% and 9.5% per annum. Interest
income decreased for Fiscal 2000 from Fiscal 1999 due primarily to lower
investment balances.
Interest income decreased for Fiscal 1999 from Fiscal 1998 due primarily to
lower investment balances.
Interest expense for Fiscal 2000 and Fiscal 1999 included interest of
$1,036,000 and $1,348,000, respectively, related to the Debentures. Fiscal 2000
and Fiscal 1999 also included $193,904 and $116,817 respectively of interest
related to the five-year amortizing term loan for the Inglewood project.
Interest of $84,000, $83,000 and $185,000 was capitalized during Fiscal 2000,
1999, and 1998, respectively, in connection with the development of land held
for sale and water rights.
Interest expense for Fiscal 1998 included interest of $1,350,000 related to
the Debentures.
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The Company accounted for its investment in the Nevada LLC under the equity
method of accounting and accordingly, income or losses were allocated according
to the Company's ownership interest in the Nevada LLC. The Company sold its
interest in the Nevada LLC in April 1997. As a result of the sale, the Company
realized a gain of $2,419,000, net of legal and other closing costs totaling
$60,000 and deferred $120,000 of the gain relating to estimated future
consulting services that are to be provided in accordance with the Consulting
Agreement. The Company realized $40,000 of the deferred gain in each of Fiscal
2000 and Fiscal 1999.
Rental income and expenses are primarily related to the Company's California
rice farms and ranches. The Company also receives miscellaneous rents on certain
of the Cherry Creek, Colorado properties.
Other income for Fiscal 1999 includes the reversal of $291,000 of severance
costs recorded in Fiscal 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., an unaffiliated water consulting company. Other income for
Fiscal 1999 also includes a $187,000 loss realized from the sale of the
Company's interest in PICO Holdings, Inc. that the Company received in
connection with its sale of its Nevada LLC interest.
In Fiscal 2000, the Company repurchased $5,000,000 of its 9% Convertible
Subordinated 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 an extraordinary income on
extinguishment of debt, net of income taxes of $3,489,303. In Fiscal 1999, the
Company repurchased $260,000 of its 9% Convertible Subordinated Debentures for
$151,000. After reducing related deferred debt costs of $9,000, net of
accumulated amortization of $5,000, the Company recognized an extraordinary
income on extinguishment of debt, net of income taxes of $100,000.
LIQUIDITY AND CAPITAL RESOURCES
A portion of the proceeds derived from the sale of the Series D Preferred
Stock are required to be used for new water projects approved by Agbar. Since
the Company does not currently have any plans to initiate any such new projects,
as of March 31, 2000 the Company classified $4,416,431 of its current assets as
restricted and non-current. Considering this adjustment, the Company had working
capital and a current ratio of $703,780 and 0.29 to l, as compared to
$13,616,371 and 8.09 to 1, respectively, at March 31, 1999.
Operating Activities
For the year ended March 31, 2000 the Company recognized revenues of
$2,796,037 and a gross profit of $1,028,323, primarily from water sales and the
lease of water rights. However, the gross profit was offset by $7,448,615 of
general and administrative expenses consisting of payroll and fringes
($2,242,856), consulting and engineering costs ($1,454,902), allowance for water
rights project costs under development ($1,018,717), asset impairment loss on
certain water assets ($1,165,982), and miscellaneous costs of $ 1,555,693. The
Company recognized $622,239 from interest income earned primarily from its cash
and cash equivalents and investments. This interest income was offset by $
1,035,809 interest expense incurred on its Debentures and $211,396 of interest
expense incurred on its term loan and other obligations. The Company's Fiscal
2000 operating loss of $ 6,675,106 was partially offset by a $3,489,803
extraordinary non-cash gain on the early extinguishment of debt.
For the year ended March 31, 2000, the Company had negative cash flow from
operating activities of $3,692,975. During prior periods, the Company generated
cash from the sale of its real estate, including in particular, its real estate
in Cherry Creek that offset part of its negative cash flow. However, the Company
has made no real estate sales this past fiscal year and it does not expect real
estate sales to be significant in future periods.
On September 30, 1998, the Company entered into a pumping rights lease and a
water sale agreement with the City of Inglewood, California. On October 1,1998,
Inglewood leased the rights to pump 4,450 acre-feet of water per year to the
Company for a five-year period. In consideration of the lease, the Company made
a $3,603,200 lump-sum cash payment to Inglewood. Under the water sale agreement,
the Company agreed to sell, and Inglewood agreed to buy, 5,950 acre-feet of
water per year for the next five years at a price of $200 per acre-foot in the
first year
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22
($1,190,000), which price will escalate over the remaining four-year period at a
rate equal to the sum of 3.75% per year plus 25% of any increase in the
Metropolitan Water District's ("MWD") rate for water. The Company financed the
payment it made to Inglewood through a $3,560,000 five-year loan that bears
interest at the bank's Reference Rate or LIBOR (capped at 6%) plus 1.5%, at the
Company's option. Scheduled payments of principal on this loan for the fiscal
years ending March 31, 2001, 2002, 2003 and 2004 are $668,000, $794,000,
$832,000, and $392,000, respectively.
In May 1999, the Company completed its first sales of water derived from its
water rights in the Mojave Basin of Southern California. The Company purchased
the underlying water rights during the fiscal year ended March 31, 1999, as part
of its plan to expand its participation in the ownership and marketing of water
in Southern California.
In order to reduce its on-going operating expenses the Company decided,
during the quarter ended December 31, 1999, to consolidate its corporate
headquarters into its Point Richmond, California office and to close its San
Diego office. The consolidation, which is expected to be completed during the
quarter ending June 30, 2000, will result in the net reduction of three
administrative personnel and the early termination of (or other provision for)
its office and equipment leases in San Diego. The consolidation is anticipated
to result in the elimination of three administrative positions and the transfer
of three positions to Point Richmond. The Company believes that the expected
increase in future earnings and cash flow from reduced employee expense and
lease costs associated with the consolidation will approximate $230,000 per
year.
During the quarter ended March 31, 2000, the Company reduced the carrying
value of its water rights in the Mojave Basin from $3,326,618 to its estimated
fair value of $2,500,000. This reduction of $826,618 has been recorded as an
asset impairment loss and included in general and administrative expenses and
reflects the Company's belief that the market value of such rights has declined
since they were purchased. This decline is due, in part, to uncertainty
surrounding the appeal of the Mojave Basin adjudication to the California
Supreme Court. The Company also took additional asset impairment losses against
the carrying value of certain mutual water company shares ($204,295) and against
the carrying value of certain water storage activities ($124,312), reducing the
carrying value of the water storage assets to zero.
In the fiscal year ended March 31, 2000, the Company completed the sale of
water previously acquired by the Company. The sale generated gross profit, and
the Company is attempting to complete other similar transactions. The completion
of any such future transactions depends, however, on certain regulatory,
administrative, and environmental review and decision-making processes, the
outcome of which are not predictable. However, while revenues from (i) existing
water sales contracts; (ii) leasing the Company's rice farms and ranches; (iii)
the aforementioned Cucamonga Water Fee Agreement; and (iv) cash received from
principal and interest payments on promissory notes held by the Company will be
more predictable than the occasional sales of real estate assets, such recurring
revenues will be insufficient to cover general and administrative expenses, and
interest on outstanding indebtedness and dividends when and if declared on its
outstanding preferred stock. Revenue from water operations will continue to be
dependent on individually negotiated transactions. Based on the Company's
current estimates, revenues from planned water sales and from its existing
long-term water development projects are expected to be insufficient to fund the
Company's working capital needs during the current fiscal year. Accordingly, the
Company's future operations will have to be funded primarily from the Company's
existing financial resources, from revenues derived from such water sales as the
Company hereafter may from time to time consummate, and from any future
financing it may arrange.
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.
During the fiscal year ended March 31, 2000, the Company executed a variety of
"take if delivered" wholesale water supply contracts with a number of retail
municipal water agencies. However, it has encountered significant regulatory
obstacles to its attempts to develop and transfer water for delivery to such
customers. Based on its inability to generate revenues from water sales, the
Company has suspended its asset acquisition program, has reduced its marketing
activities, has curtailed other overhead expenditures and deferred certain
development activities. The Company is concentrating its current efforts on
overcoming the regulatory obstacles to water transfers and in arranging water
transfers that do not face such
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23
obstacles. Given its current financial situation, however, the Company is
considering various alternatives, including the sale of the Company, or the sale
of certain assets.
Investing and Financing Activities
During the past fiscal year, 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 $3,185,303 extraordinary gain on the
early extinguishment of debt.
The Company is committed to certain material expenditures over the next
several years, including the following:
- - Scheduled payments of principal on existing outstanding indebtedness for
fiscal years ending March 31, 2001, 2002, 2003, 2004 and 2005 are
$1,454,983, $780,502, $903,109, $462,858 and $28,186, respectively.
- - The Company is required to make semi-annual interest payments of $438,300 on
the $9,740,000 principal amount of Debentures.
- - The holders of the 10,165 outstanding shares 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 $736,964 per year).
- - The holders of the 10,000 outstanding shares of Series D Preferred Stock are
entitled to receive, when and if declared, annual dividends in the amount of
$75.00 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 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's ability to operate over the long term will be dependent upon
its ability to derive revenues from its water resources, arrange the purchase
and sale of water it doesn't own at a profit, and/or arrange additional
financing. The Company's ability to derive revenue from its own water assets
depends, in part, on the outcome of regulatory, administrative and environmental
review processes. The Company's ability to derive profits from the sale of water
it does not currently own depends on its ability to acquire such water, make
sales to customers, and arrange delivery, all on an economic basis. Consummation
of profitable water sales is subject to a variety of restrictions designed to
protect third-party water users and the environment. The Company believed that
it could operate profitably within these restrictions. However, public agencies
which control critical segments of the public infrastructure necessary to
transport and deliver water in California, the Company's principal area of
operation at the current time, have restricted access to such facilities through
pricing and administrative action. The Company believes that many of these
latter restrictions violate the State's Wheeling Act (Section 1810 of the
California Water Code). Therefore, and in order to permit it to complete
profitable water sales, the Company has undertaken a variety of administrative,
legal, regulatory and legislative initiatives to identify and remove such
artificial barriers to voluntary water transfers. There can, of course, be no
assurance that the Company's initiatives will result in removal of such
artificial barriers to voluntary water transfers in California or, if they are
removed, when that might happen.
Based on its existing assets and on its projected operating income and
expenses, the Company anticipates that it will be able to fund its foreseeable
working capital needs for 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,
-23-
24
including Series D Preferred Stock dividends, that were identified and agreed
upon by Agbar. As of March 31, 2000, a total of $ 5,583,569 had been expended on
such development and capital costs. Prior to the quarter ended December 31,
1999, management of the Company had a reasonable expectation that Agbar would
waive or modify the restrictions under the Strategic Relationship Agreement.
During the quarter ended December 31, 1999, management initiated discussions
with Agbar seeking such a waiver or modification of these restrictions. Pending
a resolution of this issue, management decided to classify the remaining
proceeds of the Series D Preferred Stock as restricted. As a result, $ 4,416,431
of the Company's cash and cash equivalents are restricted. 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, and has retained Houlihan Lokey Howard & Zukin Capital to
assist in this effort.
The Company does not believe that inflation will have a material impact on
its results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective date of FASB Statement No. 133-an amendment of FASB Statement No.
133". The Company anticipates that the adoption of SFAS No. 133 will not have a
material effect on the financial position, results of operations or liquidity of
the Company, nor result in disclosures that will be materially different from
those presently included in its financial statements.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101). The Company anticipates
that the provisions of SAB 101 will not have a material effect on the financial
position, results of operations, or liquidity of the Company, nor result in
disclosures that would be materially different from those presently included in
the financial statements.
RISK FACTORS
The ownership of the Company's common stock involves numerous risks. The
following discussion highlights some of the risks the Company faces and some of
the risks related to the ownership of the Company's Common Stock.
History of Losses in Principal Business
To date, the Company's activities have primarily consisted of (i) acquiring
its various water rights and related assets, (ii) raising capital to fund both
the cost of such acquisitions and its working capital needs, (iii) developing
its water rights, and (iv) attempting to market and sell its water assets.
However, the Company has only generated $2,796,037, $1,822,990, and $3,922,377
of total revenues during the fiscal years ended March 31, 2000, 1999 and 1998,
respectively, while incurring losses of $4,708,076, $6,458,408 and $2,458,014
during each of those years, respectively. Until this past fiscal year, the
Company had believed that the regulatory obstacles that have prevented the
creation of a water market would be lowered and that the Company would be able
to monetize its principal water assets and to substantially increase its
revenues and generate profits. The Company now believes that the regulatory
hurdles may not be lowered in the near future and that revenues that it had
anticipated from water transfers will not be received as expected. As a result,
the Company now does not believe that it will be able to generate significant
revenues in the foreseeable future from the development and sale of water in
accordance with its original business plan. Because of the foregoing
circumstances, the Company may not ever be able to profitably sell water.
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Uncertainty of Future Water Revenue
The Company's ability to generate material revenues in the future is
dependent on (i) the Company's ability to sell significant quantities of water
from its Northern California Yuba Property water assets, (ii) the Company's
ability to develop and sell water as part of the Colorado Cherry Creek Project,
(iii) the Company's activities as an independent water wholesaler in Southern
California, (iv) the Company's ability to resolve regulatory issues restricting
its ability to sell and transport water to potential customers. The Company has
encountered significant regulatory obstacles to its attempts to develop and
transfer its California water for delivery to its potential customers, which
regulatory obstacles the Company does not expect to overcome in the near future.
Unless the regulatory impediments are removed, the Company now believes that its
ability to generate significant revenues from its water assets will be severely
limited. No assurance can be given that the regulations currently limiting the
Company's ability to exploit its water assets will be changed, or if changed,
that the change will occur in the near future. In addition to the foregoing
regulatory difficulties, before the Company can consummate significant water
deliveries in the Cherry Creek area, the Company or the purchaser of such water
will have to build the infrastructure necessary to utilize the water. The
requirement to build the infrastructure will affect the ability of the Company
to sell its water, the price at which the water can be sold, and the revenues
that the Company can derive from its Colorado water assets. Finally, in addition
to its ability to overcome numerous regulatory impediments, the Company's
ability to become an independent water wholesaler in Southern California is
dependent upon the Company's ability to arrange for the transportation and
storage of water and on its ability to finance the foregoing activities. As a
result, no assurance can be given if the Company will ever be able to generate
significant revenues from its water transfer activities.
Inadequate Financial Resources
As a result of the operating losses sustained by the Company during the last
few years, and the funds expended to acquire water and land assets, the
Company's financial resources have been significantly reduced. Due to these
factors, and the restriction on cash imposed by the Strategic Relationship
Agreement, the Company does not have sufficient free cash to carry out its
business plan over the longer term. In addition, due to the regulatory
difficulties that the Company has encountered, the Company's ability to exploit
its water assets in accordance with its business plan has become questionable,
and the time period in which a return could be realized has been extended for an
unknown period. These uncertainties will make it difficult for the Company to
obtain new financing, and the Company may not be able to raise the proceeds that
it would need to complete its business plan. Unless the Company raises
additional funds, the Company will have to restructure its business, sell its
assets, and/or sell the Company.
Restructured Business/Sale of Company
The Company has retained Houlihan Lokey Howard & Zukin Capital to assist it
in evaluating various alternatives for resolving the Company's current financial
situation, including the sale of the Company, or the sale of certain assets. To
date, neither Houlihan Lokey nor the Company have proposed such a restructuring
or other plan. No assurance can be given that the Company will be able to devise
a plan that will permit the Company to realize the potential value of its water
assets and provide a return to the shareholders.
Delisting of Common Stock from Nasdaq National Market
The Company recently received notice from The Nasdaq Stock Market that the
Company's common stock has failed to maintain a minimum bid price of $1.00 per
share over a 30-day period and that the market value of the Company's public
float is below $5,000,000. Unless by the end of August 2000 (i) the bid price
increases above $1.00 for at least 10 consecutive days and (ii) the market value
of the Company's public float increases to above $5,000,000 for a minimum of 10
consecutive trading days, the Company's common stock will be delisted from
trading on the Nasdaq National Market effective August 30, 2000. If the
Company's common stock is delisted, the Company intends to apply to have its
common stock traded electronically on the OTC Bulletin Board. The effects of
such a delisting are unknown, but the Company anticipates that the delisting
will make it more difficult to effect trades, that the trading volume in the
Company's common stock may decrease significantly, and that the trading price of
the common stock may be subject to larger swings in price. In addition, the
delisting may reduce the Company's visibility with investors and may adversely
effect the Company's ability to attract and obtain financing because of the
-25-
26
decreased liquidity of the Company's shares. See Item 5. "Market for
Registrant's Common Equity and Related Stockholder Matters."
ITEM 7A. 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 this objective, the Company borrows
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate caps in order to mitigate 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 periods indicated is as follows:
- --------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ------------- ----------
Fixed rate debt ....... $ 786,983 $ 31,502 $ 71,109 $ 25,858 $ 28,186 $ 9,840,711 $10,784,349
Weighted average
Interest rate ..... 8.0% 8.7% 8.3% 9.0% 9.0% 9.0% 8.9%
Variable rate debt..... $ 668,000 $ 749,000 $ 832,000 $ 437,000 -- -- $2,686,000
Weighted average
Interest rate ..... 7.5% 7.5% 7.5% 7.5% -- -- 7.5%
- --------------------------------------------------------------------------------------------------------------------------
The Company's variable rate on its variable rate debt is capped at 7.5%.
The carrying amount of the long-term debt and debentures is based on the
principal amount owed, and does not represent management's belief that the
interest rates and terms of the debt are comparable to those commercially
available to the Company in the marketplace for similar instruments. The
Company repurchased $5,000,000 principal amount of its debentures for
$1,500,000 during the fiscal year ended March 31, 2000.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the reports thereon and notes
thereto, which are attached hereto as pages F-1 through F-31, and indexed at
page 2, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-26-
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Company's Proxy Statement to be filed by July 30,
2000 set forth under the caption "Election of Directors" and "Executive
Officers" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Company's Proxy Statement to be filed by July 30,
2000 set forth under the caption "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Company's Proxy Statement to be filed
by July 30, 2000 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Company's Proxy Statement to be filed by July 30,
2000 set forth under the caption "Certain Relationships and Related
Transactions" is incorporated herein by reference.
-27-
28
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
EXHIBITS
The following exhibits are filed as a part of this report
3.1 Certificate of Incorporation. (1)
3.2 By-laws of the Company. (2)
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Convertible Subordinated Debenture Due 2005. (3)
4.3 Certificate of Designations for Series C Convertible Redeemable
Preferred Stock. (6)
4.4 Certificate of Designations for Series D Convertible Redeemable
Preferred Stock. (8)
4.5 Certificate of Designations of Series E Participating Preferred
Stock (12)
10.1 1990 Stock Option Plan. (2)
10.2 Amendment to 1990 Stock Option Plan. (1)
10.3 Form of Indemnity Agreement between the Company and its
officers and directors. (2)
10.4 Resignation Agreement dated October 27, 1999, between the
Company and Peter Jensen.
10.5 1993 Stock Option Plan. (5)
10.6 Amendment to 1993 Stock Option Plan. (5)
10.7 1997 Stock Option Plan. (7)
10.8 Strategic Relationship Agreement, dated October 13, 1998, by and
between Western Water Company and Sociedad General de Aguas de
Barcelona, S. A. (8)
10.9 Point Richmond Office Lease, dated December 18, 1998, by and
between Western Water Company and Janis & Martin McNair.
21 Subsidiaries of the Company.
21.1 Consent of KPMG LLP
99.1 Form of Stock Purchase Agreement for the purchase and sale of
Series C Convertible Redeemable Preferred Stock. (4)
99.2 Rights Agreement, dated as of July 23, 1999, between the
Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, which includes the Form of Right Certificate (9)
-28-
29
(1) Previously filed as an exhibit to the Company's Form S-1, file no.
33-47606, and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Form 10, file no.
000-18756, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Form 8-K dated September
22, 1995, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 filed on June 6, 1997 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Proxy Statement on
Schedule 14A filed on February 7, 1994, which exhibit is hereby
incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended March 31, 1996, which exhibit is hereby incorporated
herein by reference.
(7) Previously filed as an exhibit to the Company's Proxy Statement on
Schedule 14A filed on September 12, 1997, which exhibit is hereby
incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's current report on Form 8-K
filed on November 25, 1998, which exhibit is hereby incorporated herein by
reference.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A filed on August 8, 1999, which exhibit is hereby incorporated
herein by reference.
The following financial statements are filed as a part of this report, appearing
at the pages indicated:
Report of KPMG LLP, independent auditors......................................................F-1
Consolidated Balance Sheets as of March 31, 2000 and 1999.....................................F-2
Consolidated Statements of Operations and Comprehensive Income for the years ended March 31,
2000, 1999 and 1998.........................................................................F-3
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998...............................................................F-4
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998.......F-5
Notes to Consolidated Financial Statements....................................................F-7
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the prior
fiscal year.
-29-
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN WATER COMPANY
Date: June 29, 2000 By: /s/ MICHAEL PATRICK GEORGE
------------------------------------
Michael Patrick George, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL PATRICK GEORGE President, Chief Executive Officer June 29, 2000
- -------------------------------- Chairman of the Board & Acting Chief Financial
Michael Patrick George Officer
/s/ RONALD I. SIMON
- --------------------------------
Ronald I. Simon Director June 29, 2000
/s/ DAVID A. ABEL Director June 29, 2000
- --------------------------------
David A. Abel
/s/ JUAN RAS SIRERA Director June 29, 2000
- --------------------------------
Juan Ras Sirera
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Water Company:
We have audited the accompanying consolidated balance sheets of Western Water
Company and subsidiaries (the Company) as of March 31, 2000 and 1999, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Water
Company and subsidiaries as of March 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2000, in conformity with generally accepted accounting
principles.
KPMG LLP
San Diego, California
May 10, 2000
32
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 and 1999
- ---------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,971,614 739,126
Investment in available-for-sale securities (Note 3) -- 14,061,410
Current portion of notes receivable (Note 4) 154,235 216,912
Other current assets 991,729 518,835
------------ ------------
Total Current Assets 3,117,578 15,536,283
Cash and cash equivalents - restricted (Note 2) 4,416,431 --
Notes receivable, less current portion (Note 4) 527,085 1,169,491
Land held for sale (Notes 6, 12 and 17) 5,422,606 4,505,227
Water rights (Notes 7 and 17) 18,380,807 18,716,519
Prepaid leasing costs, net of accumulated amortization (Note 8) 2,689,829 3,585,759
Other water assets, net of accumulated amortization (Note 1) 2,510,591 3,276,872
Deferred debt costs, net of accumulated amortization (Note 12 and 13) 351,324 598,966
Property and equipment, net of accumulated depreciation (Note 5) 172,703 189,659
Other assets 111,996 52,084
------------ ------------
Total Assets $ 37,700,950 $ 47,630,860
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 100,552 $ 92,108
Accrued expenses and other liabilities (Notes 11) 791,690 490,095
Accrued interest 66,573 91,988
Current maturities of long-term debt (Note 12) 1,454,983 1,245,721
------------ ------------
Total Current Liabilities 2,413,798 1,919,912
Deferred gain on sale (Note 9) 3,333 43,333
Long-term debt, less current maturities (Note 12) 2,275,366 2,972,349
9% Convertible subordinated debentures (Note 13) 9,740,000 14,740,000
------------ ------------
Total Liabilities $ 14,432,497 $ 19,675,594
------------ ------------
Series C convertible redeemable preferred stock, 100,000 shares 9,816,686 9,780,867
authorized; 10,165 shares issued and outstanding (aggregate liquidation
preference of $10,165,000 at March 31, 2000 and 1999. (Note 14)
Series D convertible redeemable preferred stock, $1,000 stated value, 10,000,000 10,000,000
25,000 shares authorized; 10,000 shares issued and outstanding
(aggregate liquidation preference of $10,000,000) at March 31, 2000
and 1999. (Note 14)
Stockholders' Equity (Notes 14, 15, 18 and 19):
Common stock, $.001 par value, 20,000,000 shares authorized in 2000 8,235 8,240
and 1999; 8,235,212 and 8,239,816 shares issued at March 31,2000 and
1999, respectively
Additional paid-in capital 24,448,791 24,347,502
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in (19,630,389) (14,922,313)
quasi-reorganization of October 1, 1994)
Treasury stock, at cost, 341,200 and 292,200 shares at March 31,2000 (1,374,870) (1,259,030)
------------ ------------
and 1999, respectively
Total Stockholders' Equity 3,451,767 8,174,399
------------ ------------
Commitments and contingencies (Note 25)
Total Liabilities and Stockholders' Equity $ 37,700,950 $ 47,630,860
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
33
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Years Ended March 31, 2000, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------
Revenue:
Water $ 2,796,037 $ 1,477,375 $ 932,377
Real estate -- 345,615 2,990,000
----------- ----------- -----------
2,796,037 1,822,990 3,922,377
----------- ----------- -----------
Cost of Revenue:
Water 1,767,714 1,000,998 867,238
Real estate -- 184,000 1,429,171
----------- ----------- -----------
1,767,714 1,184,998 2,296,409
----------- ----------- -----------
Gross Profit 1,028,323 637,992 1,625,968
General and Administrative Expenses (Note 22) 7,448,615 5,805,192 5,645,559
----------- ----------- -----------
Operating Income (Loss) (6,420,292) (5,167,200) (4,019,591)
----------- ----------- -----------
Other Income (Expenses):
Interest income 622,239 878,878 1,155,606
Interest expense (1,247,205) (1,465,342) (1,365,300)
Loss from investment in limited liability company (Note 9) -- -- (307,623)
Gain on sale of investment in limited liability company, net (Note 9) 40,000 40,000 2,455,860
Other (Note 21) 333,352 182,300 182,018
----------- ----------- -----------
(251,614) (364,164) 2,120,561
----------- ----------- -----------
Income (Loss) Before Income Taxes (6,671,906) (5,531,364) (1,899,030)
Income Taxes (Note 16) 3,200 3,200 2,400
----------- ----------- -----------
Income (Loss) before extraordinary item (6,675,106) (5,534,564) (1,901,430)
Extraordinary income on extinguishment of debt,
net of income taxes (Note 20) 3,489,803 99,656 --
----------- ----------- -----------
Net Income (Loss) (3,185,303) (5,434,908) (1,901,430)
Accretion of preferred stock to redemption value (35,819) (33,099) (30,584)
Preferred stock dividends (1,486,954) (990,401) (526,000)
----------- ----------- -----------
Net Income (Loss) Applicable to Common Stockholders (4,708,076) (6,458,408) (2,458,014)
----------- ----------- -----------
Other Comprehensive Income (Loss), Net of Tax:
Unrealized holding gains (losses) arising during period -- (303,853) 183,761
Less: Reclassification adjustment - realized holding gains (losses) -- (186,620) 38,488
----------- ----------- -----------
-- (117,233) 145,273
----------- ----------- -----------
Comprehensive Income (Loss) $(4,708,076) $(6,575,641) $(2,312,741)
=========== =========== ===========
Basic and Diluted Net Income (Loss) per Common Share
Applicable to Common Stockholders:
Income (loss) applicable to common shareholders excluding extraordinary item $ (1.03) $ (0.80) $ (0.30)
Extraordinary income on extinguishment of debt, net .44 .01 --
----------- ----------- -----------
Net Income (Loss) per Common Share
Applicable to Common Stockholders $ (0.59) $ (0.79) $ (0.30)
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
34
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 2000, 1999, and 1998
- ----------------------------------------------------------------------------------------------------------------------
Series B Additional Accumulated
Preferred Common Stock Paid-In Other
Stock Capital Comprehensive
Income (Loss)
----------- ----------- ------------ ----------- ------------
Shares Amount
Balance at March 31, 1997 $ 3,807,517 8,134,796 $ 8,135 22,705,957 (28,040)
Net loss -- -- -- -- --
Exercise of options -- 13,085 13 195,546 --
Purchase of water rights with --
common stock -- 88,238 88 1,162,056 --
Unrealized gain on investment
securities -- -- -- -- 145,273
Exchange of convertible
preferred stock (3,807,517) -- -- -- --
Vesting of compensatory
stock options -- -- -- 139,500 --
Preferred dividends -- -- -- -- --
Accretion of preferred stock -- -- -- -- --
Purchase of common stock -- (303) -- (4,520) --
----------- ----------- ------------ ----------- -----------
Balance at March 31, 1998 -- 8,235,816 8,236 24,198,539 117,233
Net loss -- -- -- -- --
Exercise of options -- 4,000 4 26,996 --
Unrealized loss on investment
securities -- -- -- -- (117,233)
Vesting of compensatory stock
options -- -- -- 121,967 --
Preferred dividends -- -- -- -- --
Accretion of preferred stock -- -- -- -- --
Payments to acquire 292,200
shares of treasury stock -- -- -- -- --
----------- ----------- ------------ ----------- -----------
Balance at March 31, 1999 -- 8,239,616 8,240 24,347,502 --
Net loss -- -- -- -- --
Vesting of compensatory -- -- -- 101,284 --
stock options
Preferred dividends -- -- -- -- --
Accretion of preferred stock -- -- -- -- --
Payments to acquire 49,000 shares of -- -- -- -- --
treasury stock
Cancellation of Common Stock (4,604) (5) 5
----------- ----------- ------------ ----------- -----------
Balance at March 31, 2000 $ -- 8,235,212 $ 8,235 24,448,791 --
- ------------------------------------------ ----------- ----------- ------------- ----------- -----------
- ----------------------------------------------------------------------------------------
Accumulated Treasury Total
Deficit Stock Stockholders'
Equity
--------------------------------------------
Balance at March 31, 1997 (6,005,891) -- 20,487,678
Net loss (1,901,430) -- (1,901,430)
Exercise of options -- -- 195,559
Purchase of water rights with
common stock -- -- 1,162,144
Unrealized gain on investment
securities -- -- 145,273
Exchange of convertible
preferred stock -- -- (3,807,517)
Vesting of compensatory
stock options -- -- 139,500
Preferred dividends (526,000) -- (526,000)
Accretion of preferred stock (30,584) -- (30,584)
Purchase of common stock -- -- (4,520)
----------- ---------- -----------
Balance at March 31, 1998 (8,463,905) -- 15,860,103
Net loss (5,434,908) -- (5,434,908)
Exercise of options -- -- 27,000
Unrealized loss on investment
securities -- -- (117,233)
Vesting of compensatory stock
options -- -- 121,967
Preferred dividends (990,401) -- (990,401)
Accretion of preferred stock (33,099) -- (33,099)
Payments to acquire 292,200
shares of treasury stock -- (1,259,030) (1,259,030)
----------- ---------- -----------
Balance at March 31, 1999 (14,922,313) (1,259,030) 8,174,399
Net loss (3,185,303) -- (3,185,303)
Vesting of compensatory -- -- 101,284
stock options
Preferred dividends (1,486,954) -- (1,486,954)
Accretion of preferred stock (35,819) -- (35,819)
Payments to acquire 49,000 shares of -- (115,480) (115,840)
treasury stock
Cancellation of Common Stock
----------- ---------- -----------
Balance at March 31, 2000 (19,630,389) (1,374,870) 3,451,767
- ------------------------------------------ ----------- ---------- -----------
See accompanying notes to consolidated financial statements.
F-4
35
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2000, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) (3,185,303) (5,434,908) (1,901,430)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,097,346 625,947 167,206
Compensation expense on vesting of unexercised 101,284 121,297 139,500
compensatory stock options
Compensation expense on cashless exercise of stock options -- -- 195,559
Gain on sale of investment in limited liability company (40,000) (40,000) (2,455,860)
Gain on sale of other water assets (394,745)
(Gain) loss on disposition of available-for-sale securities -- 186,620 (38,488)
Asset impairment charge 1,165,982 -- --
Extraordinary income on early extinguishment of debt (3,489,803) (99,656) --
Allowance for water project costs 1,018,717 1,294,065 --
Discount on accrued income receivable 75,880 -- --
Loss on disposition of property and equipment 2,544 1,982 3,738
Loss on discount of notes receivable -- -- 12,431
Loss on disposition of water rights -- -- 208,913
Loss from investment in limited liability company -- -- 307,623
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (570,099) (103,774) (323,731)
Land held for sale (including purchase from
related party of $264,198 in Fiscal 1997) (594,353) (544,950) 1,246,596
Water rights 737,055 -- --
Other assets (59,912) (48,084) --
Increase (decrease) in:
Accounts payable 8,444 72,834 (113,717)
Accrued expenses and other liabilities 301,595 (242,859) 50,436
Accrued interest 132,393 24,325 (51,441)
----------- ----------- -----------
Net cash used in operating activities (3,692,975) (4,186,491) (2,399,359)
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from disposition of discontinued operations -- -- 120,000
Proceeds from sale of investment in limited liability company -- -- 12,024,000
Closing costs paid in conjunction with the sale of investment
in limited liability company (60,242)
Principal payments received on notes receivable 361,382 215,292 625,353
Purchase of property and equipment (44,155) (134,885) (7,688)
Purchase of available-for-sale securities (3,008,387) (10,931,503) (19,511,773)
Sales of available-for-sale securities 17,069,797 13,019,387 5,635,323
Sales of water rights -- -- 600,000
Sales of other water assets 929,535 -- --
Additions to water rights (419,991) (1,189,062) (222,487)
Purchase of water rights (1,325,000) (3,278,630) (2,288,306)
Additions to other water assets (155,439) (271,151) (33,686)
Prepayment of leasing costs (517,333) (4,187,679) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 12,890,409 (6,758,231) (3,119,506)
- ------------------------------------------------------------------------------------------------------------------------
F-5
36
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended March 31, 2000, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------
Cash Flows from Financing Activities:
Proceeds from long-term debt 800,000 3,560,000 --
Net proceeds from exercise of options -- 27,000 --
Payment of deferred debt costs -- (84,900) --
Proceeds from issuance of redeemable preferred stock -- 10,000,000 5,000,000
Payment of private placement costs -- -- (255,212)
Purchase of convertible subordinated debentures (1,500,000) (151,006) --
Preferred stock dividends (1,486,954) (291,666) (59,856)
Purchase of common stock (115,840) (1,259,030) (4,520)
Principal payments on long-term debt (1,245,721) (421,538) (1,878,567)
Cash restricted to fund water development costs (4,416,431) -- --
----------- ----------- ----------
Net cash provided by (used in) financing activities (7,964,946) 11,378,860 2,801,845
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 1,232,488 434,138 (2,717,020)
Cash and Cash Equivalents, beginning of year 739,126 304,988 3,022,008
----------- ----------- ----------
Cash and Cash Equivalents, end of year $ 1,971,614 739,126 304,988
==================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
37
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES:
Description of Business
Western Water Company and subsidiaries (the "Company") identify,
acquire, develop, sell and lease water and water rights in the western
United States. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as real estate, in California and
Colorado. The Company's current principal activity is the acquisition
and development of water rights and the sale or lease of its water.
Although the Company has sold or leased certain of those water rights to
municipalities and other users, the Company to date has derived most of
its revenue from the sale of real estate that was acquired for its water
rights, and from assisting unaffiliated owners of water rights in
obtaining revenue from their water rights.
Principles of Consolidation
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. All intercompany balances and transactions have been
eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investment in Available-for-Sale Securities
The Company currently invests in only high quality, short-term
investments, which it classifies as available-for-sale. Since the
investments are short-term and are generally allowed to mature, realized
gains and losses resulting from these investments are minimal. These
securities are recorded at fair value based on quoted market prices.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings from continuing
operations and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the
sale of available-for-sale securities are determined on an average cost
basis.
Allowance for Loan Losses
The Company provides for valuation allowances for loans receivable when
repayment becomes doubtful or amounts due are delinquent and in excess
of the value of the collateral. Notes are deemed delinquent when they
are more than 90 days past due. As of March 31, 2000 and 1999, no
allowance for loan losses has been provided since the Company's
management believes that the value of the collateral is in excess of the
total of past due notes receivable.
Land Held for Sale
Land held for sale is carried at the lower of the carrying amount or
fair value less costs to sell. The basis of the properties includes the
allocation of original purchase price, direct development costs and an
adjustment as a result of the quasi-reorganization (see Note 18). Costs
are allocated to properties by the specific identification method
whenever possible. Otherwise, development costs are allocated based on
the relative fair value of the properties. Real estate operating
revenues include proceeds from the sale of land.
Water Rights
Water rights consist of various water interests acquired directly or
through the acquisition of real estate properties. Water rights are
stated at cost and consist of an allocation of the original purchase
price between water rights and real estate properties based on their
relative fair values, plus other direct development and acquisition
costs and an adjustment as a result of the quasi-reorganization (see
Note 18).
Costs are allocated to water rights by the specific
identification method whenever possible. Otherwise, development costs
are allocated based on the relative fair value of the water rights. In
addition, interest costs are capitalized during the development period.
Capitalized interest for the years ended March 31, 2000, 1999 and 1998
was $83,749, $82,565, and $184,729, respectively.
F-7
38
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE. 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
The Company capitalizes costs directly related to water projects under
development that are considered probable. Effective July 1, 1998, the
Company adopted a policy of providing an allowance for these capitalized
water project costs, based primarily upon the Company's historical
experience with similar projects.
Prepaid leasing costs
Prepaid leasing costs are lease payments or other development costs
incurred directly in connection with water rights leased by the Company
that are considered probable of providing a benefit to the Company in
future periods. Effective July 1, 1998, the Company adopted a policy of
providing an allowance for certain prepaid leasing costs in which the
Company has not entered into a related water contract to sell such
leased water, based primarily upon the Company's historical experience
with similar projects. Upon the execution of a contract to sell such
leased water to a customer, the Company amortizes the prepaid leasing
costs over the life of the water sales contract using the straight-line
method.
Other Water Assets
Other water assets primarily represent the Company's right to receive
3.7398 percent of payments made over a 100-year period commencing July
1, 1989, with respect to sales of water by a non-affiliated third party
to the Cucamonga County Water District.
These rights are being amortized using the straight-line method over a
40-year period. The accumulated amortization as of March 31, 2000 and
1999 was $407,444 and $349,124, respectively. Other water assets also
include the Company's investment in shares of a mutual water company.
The Company carries this investment at its estimated fair market value.
In addition, included in other water assets is the Company's investment
in water storage projects. The Company capitalizes costs directly
related to water storage projects under development that are considered
probable of providing a benefit to the Company in future periods.
Effective July 1, 1998, the Company adopted a policy of providing an
allowance for these water storage project costs based primarily upon the
Company's historical experience with similar projects. As of March 31,
2000, the Company's investment in water storage assets of $248,624 and
the related allowance for water storage project costs of $124,312 was
written off as a result of a decision to cease work on these projects
(see Note 17).
Investment in Limited Liability Company
The Company accounted for its investment in the limited liability
company under the equity method. Accordingly, income or losses were
recorded in proportion to the Company's ownership interest. Intercompany
profits and losses were eliminated. The Company's investment in and
investment loss from the limited liability company were based on the
results of the limited liability company's years ended 90 days prior to
the Company's year ends.
Deferred Debt Costs
Deferred debt costs are amortized using the straight-line method, which
approximates the interest method, over the life of the related debt.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed on the straight-line method over the estimated useful lives
ranging from five to ten years and totaled $58,567, $29,195 and $26,993,
for the years ended March 31, 2000, 1999 and 1998, respectively.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
Revenue Recognition - Water
Water revenue is recorded when realizable and earned. Revenue from
long-term water sales contracts with non-cancelable, fixed rate
increases are recognized on a straight-line basis over the contractual
period of the water sale.
F-8
39
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Revenue Recognition - Land
Sales of land are generally accounted for under the full accrual method.
Under that method, gain is recognized when the collectibility of the
sales price is reasonably assured and the earnings process is virtually
complete. When a sale does not meet the requirements for full accrual
recognition, gain is deferred until these requirements are met.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows (undiscounted and without
interest) expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less costs to sell (Note
17).
Comprehensive Income
On April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. As it relates to the Company, comprehensive
income consists of net income and net unrealized gains (losses) on
securities and is presented in the consolidated statements of operations
and comprehensive income. Prior year consolidated financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
Income (Loss) Per Share
In April 1997, the Company adopted SFAS No. 128, "Earnings per Share".
SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share are very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented to conform to SFAS No. 128 requirements.
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Net income available to common
stockholders is adjusted in Fiscal 2000 to include the Series D
Convertible Redeemable Preferred Stock and Series C Convertible
Redeemable Preferred Stock dividends of $1,486,954 and accretion of
$35,819. Net income available to common stockholders is adjusted in
Fiscal 1999 to include the Series D Convertible Redeemable Preferred
Stock and Series C Convertible Redeemable Preferred Stock dividends of
$990,401 and accretion of $33,099. Net income available to common
stockholders is adjusted for Fiscal 1998 to include the Series B
Convertible Preferred Stock and Series C Convertible Redeemable
Preferred Stock dividends of $526,000 and accretion of $30,584.
Diluted net income per share is computed by dividing the amount of net
income for the period available to each share of common stock
outstanding during the period by each share that would have been
outstanding assuming the issuance of common shares for all potentially
dilutive common shares outstanding during the reporting period. The
weighted average shares used for basic and diluted EPS computation were
7,913,542, 8,186,772 and 8,213,747 shares for the years ended March 31,
2000, 1999 and 1998, respectively.
F-9
40
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Stock options to purchase the following number of shares of common stock
at exercise prices per share ranging from $2.00 - $12.00, $5.25 - $21.00
and $5.44 - $18.70, in fiscal years ended March 31, 2000, 1999 and 1998,
respectively, were not included in the computation of diluted earnings
per share as their effect would have been antidilutive:
----------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------
Stock options 1,927,376 1,689,876 1,095,066
----------------------------------------------------------------------------------------------------
Warrants to purchase 98,000 shares of common stock at $17.50 per share
expired as of March 31, 2000. These warrants were not included in the
computation of diluted earnings per share for the years ended March 31,
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 a conversion price of $15.86, $16.62 and
$8.99 per share, were not included in the computation of diluted
earnings per share for the years ended March 31, 2000, 1999 and 1998,
respectively, as their effect would have been anti-dilutive:
---------------------------------------------------------------- --------------------------------------------
2000 1999 1998
-------------------------------------------------------------
Convertible debentures 614,123 929,382 945,763
Series C redeemable preferred stock 611,593 611,593 569,551
Series D redeemable preferred stock 1,112,347 1,112,347 --
---------------------------------------------------------------- --------------------------------------------
Segment Reporting
On April 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
This statement establishes standards for the way public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. See
Note 24 for segment disclosures.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made in order
to conform to the current year's presentation.
NOTE 2. RESTRICTED CASH:
Under the Company's Strategic Relationship Agreement (the "Agreement")
with Sociedad General de Aguas de Barcelona, S. A. ("Agbar"), the
Company has agreed to use the proceeds from the sale of Series D
Preferred Stock only 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 March
31, 2000, a total of $5,583,569 had been expended on such project
development and capital costs.
Prior to the quarter ended December 31, 1999, management of the company
had a reasonable expectation that Agbar would waive or modify the
restrictions under the Agreement. During the quarter ended December 31,
1999, management initiated discussions with Agbar seeking such a waiver
or modification of these restrictions. Pending a resolution of this
issue, management has decided to classify the remaining proceeds of the
Series D Preferred Stock as restricted. Thus, the Company treats as
restricted the remaining proceeds from the Series D Preferred Stock
amounting to $4,416,431.
F-10
41
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES:
The amortized cost, gross unrealized gains and losses and market value
of available-for-sale securities at March 31, 1999 are as follows:
---------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gain Loses Value
--------------------------------------------------------------
Certificate of Deposit $ 1,000,850 $ -- $ -- $ 1,000,850
Commercial Paper 7,813,898 -- -- 7,813,898
Corporate Bonds 2,830,518 -- -- 2,830,518
US Government Agency Note 2,416,144 -- -- 2,416,144
--------------------------------------------------------------
Total $14,061,410 $ -- $ -- $14,061,410
---------------------------------------------------------------------------------------------
The sale of available-for-sale securities resulted in no gross gain or
loss for the year ended March 31, 2000, a $186,620 gross loss for the
year ended March 31, 1999, and a $51,201 gross gain and a $12,713 gross
loss for the year ended March 31, 1998.
NOTE 4. NOTES RECEIVABLE:
Notes receivable arises from the retail land sales of undeveloped land
in Cherry Creek Basin, Colorado and from the sale of non-retail farm
property in Yuba County, California. The notes receivable bear interest
at rates ranging from 8% to 10%, with a weighted average of 8.7%. Terms
of these notes generally require level payments of principal and
interest over periods of five to 20 years. The notes are secured by the
lots sold. During the year ended March 31, 1998, the Company foreclosed
on a note received in connection with land it sold in March 1997. The
Company recorded the foreclosed land at $128,352, which represents the
lower of the carrying value of the note receivable or the fair market
value of the land. The carrying value of the note receivable was
comprised of the principal balance of the note receivable ($234,244),
accrued interest ($36,452) and legal fees ($5,108) less the deferred
profit from the prior year's sale ($147,452).
Aggregate maturities due on notes receivable at March 31, 2000 are as
follows:
--------------------------------------------------------------------------------
Non-Retail Retail
Land Sales Land Sales Total
------------------------------------------------
2001 $ 97,477 $ 56,758 $ 154,235
2002 0 110,006 110,006
2003 99,422 45,665 145,087
2004 69,673 49,476 119,149
2005 0 40,272 40,272
Thereafter 0 112,571 112,571
------------------------------------------------
Total $ 266,572 $ 414,748 $ 681,320
--------------------------------------------------------------------------------
F-11
42
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 2000 and 1999 consists of the
following:
----------------------------------------------------------------------
2000 1999
-----------------------------
Land $ 2,952 $ 2,952
Equipment 297,635 256,158
-----------------------------
300,587 259,110
Less accumulated depreciation (127,884) (69,451)
-----------------------------
$ 172,703 $ 189,659
----------------------------------------------------------------------
NOTE 6. LAND HELD FOR SALE:
Land held for sale at March 31, 2000 and 1999 consists of the following:
-----------------------------------------------------------------------------------------
2000 1999
--------------------------
Cherry Creek Basin, Colorado $1,299,120 $ 703,256
San Bernardino County, California 1,042,996 721,481
Rice farms and ranches, Yuba and Glenn County, California 3,080,490 3,080,490
--------------------------
$5,422,606 $4,505,227
-----------------------------------------------------------------------------------------
NOTE 7. WATER RIGHTS:
Water rights held at March 31, 2000 and 1999 consist of the following:
----------------------------------------------------------------------------------------------
2000 1999
-------------------------------
Cherry Creek Basin, Colorado $ 10,725,357 $ 10,684,807
Los Angeles County, California 5,132,886 4,428,788
San Bernardino County, California 2,500,000 3,326,617
Rice farms and ranches, Yuba and Glenn County, California 280,798 280,798
Inyo County, California 1,274,678 1,011,392
-------------------------------
19,913,719 19,732,402
Less: Allowance for project costs (1,532,912) (1,015,883)
-------------------------------
$ 18,380,807 $ 18,716,519
----------------------------------------------------------------------------------------------
During the fiscal year ended March 31, 2000, the Company recognized the
impairment of the value of certain water rights it owns in the Mojave
Basin of San Bernardino County and reduced the carrying value of such
water rights by $826,618 to its estimated fair value. This impairment is
due, in part, to uncertainty surrounding the appeal of the Mojave Basin
adjudication to the California Supreme Court.
During the year ended March 31, 1998, the Company purchased the water
rights to 1,152 acre-feet of water in Los Angeles County, California.
The purchase price of $3,450,450 was paid in cash and through the
issuance of shares of the Company's common stock. Of the total purchase
price, $1,280,000 was satisfied through the issuance of 88,238 shares of
the Company's common stock. The Company guaranteed the price of its
stock, within a range, and subsequently paid cash of $117,856 in full
satisfaction of the guarantee. The common stock issued was recorded at
the purchase price less the amount of the guarantee payment.
F-12
43
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8. PREPAID LEASING COSTS:
On September 30, 1998, the Company entered into a pumping rights lease
and a water sale agreement with the City of Inglewood, California
("Inglewood"). Beginning October 1, 1998, Inglewood leased the rights to
pump 4,450 acre-feet of water per year to the Company for a five-year
period. In consideration of the lease, the Company made a $3,603,200
lump-sum cash payment to Inglewood. Under the water sale agreement, the
Company agreed to sell, and Inglewood agreed to buy, 5,950 acre-feet of
water each year for the next five years. In the first year, Inglewood
paid $200 per acre-foot ($1,190,000). The per acre-foot price will
escalate over the remaining four-year period at a rate equal to the sum
of 3.75% per year plus 25% of any increase in the Metropolitan Water
District of Southern California's ("MWD") rate for water, as defined.
For the years ended March 31, 2000 and 1999, the Company recognized
revenue of $1,282,660 and $641,330 respectively from the agreement with
Inglewood.
In order to secure a portion of the water that the Company agreed to
sell to Inglewood, the Company entered into a five-year and a
fifteen-year water rights lease during the year ended March 31, 1999.
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. 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).
In February 1999, the Company entered into a water transfer agreement
with Natomas Central Mutual Water Company ("Natomas") pursuant to which
Natomas agreed, subject to certain conditions still to be satisfied, to
transfer to the Company the temporary use of up to 30,000 acre-feet of
non-Central Valley Project water from the Sacramento River by October
1999.
In February 1999, the Company paid a nonrefundable deposit of $275,000
to Natomas and is obligated to pay Natomas, upon delivery of the water
to a third party purchaser, $20 per acre-foot for any of the water
transferred for use within or north of the Delta and $50 per acre-foot
for any of the water transferred for use south of the Delta. In
addition, the Company will also pay Natomas 50% of the net proceeds, as
defined, from the sale of water to a third party purchaser. During the
year ended March 31, 2000, the State Water Resources Control Board
entered its Water Rights Order 99-012 limiting the amount of water
available for transfer under the Company's agreement with Natomas and
imposing certain restrictions on any such transfer. As a result, the
Company has provided an allowance for water project costs of 100% of its
investment in this agreement as of March 31, 2000.
During Fiscal 2000, the Company entered into a similar arrangement with
Sutter Mutual Water Company, and paid a nonrefundable deposit of
$100,000, and incurred other costs as well. The Company has provided an
allowance for water project costs of 100% of its investment in this
agreement as of March 31, 2000 because of the uncertainty regarding its
ability to obtain and sell the water based on the possible application
of similar transfer limitations.
As of March 31, 2000 and 1999, the allowance for prepaid leasing costs
was $644,797 and $153,870, respectively. Accumulated amortization as of
March 31, 2000 and 1999 was $904,608 and $435,920, respectively.
NOTE 9. INVESTMENT IN LIMITED LIABILITY COMPANY:
In October 1995, the Company and a joint venture composed of The Morgan
Stanley Real Estate Fund II, L.P. ("Morgan Stanley"), an affiliate of
Morgan Stanley Group, and two affiliates of Morgan Stanley
(collectively, "Western Land Joint Venture") formed Nevada Land and
Resource Company, LLC, a Delaware limited liability company ("Nevada
LLC") which was owned 35.3% by the Company and 64.7% by Western Land
Joint Venture. Nevada LLC acquired approximately 1,400,000 acres of land
and related water rights in the state of Nevada. The Company's
$12,000,000 investment in Nevada LLC was funded with the proceeds from
the sale of 9% Convertible Subordinated Debentures.
On April 23, 1997, the Company sold its interest in Nevada LLC to Global
Equity Corporation ("Global") for $13,360,000, of which $12,024,000 was
received in cash and $1,336,000 was received in the form of a note.
During August 1997, the note plus the accrued unpaid interest was
converted into 723,911 shares of Global. During the year ended March 31,
1998, the Company sold 147,300 Global shares at a gain of $51,201.
During the year ended March 31, 1999, Global was acquired
F-13
44
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9. INVESTMENT IN LIMITED LIABILITY COMPANY: (CONTINUED)
by PICO Holdings, Inc. ("PICO"). Also during the year ended March 31,
1999, the Company sold its entire holdings in PICO, realizing a loss of
$186,620. The Company realized proceeds of $1,222,695 from the sale of
the 723,911 shares. In connection with the sale of the Company's
interest in the Nevada LLC, the Nevada LLC entered into a consulting
agreement with Western Agua, L.P. (the "Consulting Agreement"). Western
Agua, L.P. is a Delaware limited partnership formed by the Company and
Western Land Joint Venture. The Company owns a 70% interest in Western
Agua, L.P. and is the sole general partner of the partnership. In
exchange for providing consulting services to the Nevada LLC, Western
Agua, L.P. is to receive 50% of all the net proceeds, if any, derived
from the subsequent sale, leasing or other disposition of all or any
portion of the Nevada LLC or refinancing of the Nevada LLC or other
revenues derived from the disposition of Nevada LLC by Global after they
both recoup their investment in the Nevada LLC and earn a 20% cumulative
return, as defined, compounded annually on their investment, provided
such net proceeds have begun to be earned within five years from the
date of sale. In addition, the Western Land JV has agreed to provide the
Company with a three-year right of first offer to review all Western
Land JV's water investment opportunities in the Western United States.
The Nevada LLC has contested Western Agua L.P.'s right to the interest
in the net proceeds. Legal action has been stayed by mutual agreement of
the parties until June 30, 2002.
The following information reflects operations of the Nevada LLC for the
period from January 1, 1997 through April 23, 1997 (date of sale):
- -----------------------------------------------------------------------------------
For the period 1/1-4/23/97
-----------------------------
Net operating revenues $ 533,000
General and administrative expenses 1,404,000
-----------
Net loss $ (871,000)
===========
Company's share of net loss $ (307,623)
- -----------------------------------------------------------------------------------
As a result of the sale of the Company's interest in the Nevada LLC, the
Company realized a gain of $2,419,193, net of legal and other closing
costs totaling $60,242 and deferred $120,000 of the gain relating to
estimated future consulting services that are to be provided in
accordance with the Consulting Agreement. During Fiscal 2000,1999 and
1998, $40,000, $40,000, and $36,667, respectively, of the deferred gain
was realized.
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the fair values be
disclosed for the Company's financial instruments. The carrying amount
of cash and cash equivalents, cash and cash equivalents-restricted,
other current assets, accounts payable, accrued expenses and other
liabilities, and accrued interest are reasonable estimates of their fair
values due to the short-term nature of those instruments.
The carrying amount of the notes receivable is a reasonable estimate of
fair value based on management's belief that the terms are not
materially different than the terms that would be offered to land buyers
with similar credit ratings.
The carrying amount of the long-term debt and debentures is based on the
principal amount owed, and does not represent management's belief that
the interest rates and terms of the debt are comparable to those
commercially available to the Company in the marketplace for similar
instruments. The Company repurchased $5,000,000 principal amount of its
debentures for $1,500,000 during the fiscal year ended March 31, 2000.
F-14
45
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities at March 31, 2000 and 1999
consists of the following:
- --------------------------------------------------------------------------------------------------------
2000 1999
----------------------
Severance and costs of closing San Diego office $ 20,768 $ --
Consulting and engineering 377,124 100,985
Professional fees 89,153 99,925
Printing costs 95,269 73,451
Vacation 51,147 80,147
Other 158,229 135,587
----------------------
$791,690 $490,095
- --------------------------------------------------------------------------------------------------------
During the quarter ended December 31, 1999, the Company decided to
consolidate its corporate headquarters into its Point Richmond,
California office and to close its existing San Diego office. The
consolidation, which is expected to be completed during the quarter
ending June 30, 2000, resulted in the reduction of five administrative
personnel from its San Diego office, and the early termination of (or
other provision for) its office and equipment leases in San Diego.
During the year ended March 31, 2000, total accrued severance costs for
payroll and related charges were $70,836, and had been charged to
general and administrative expenses.
The consolidation resulted in the elimination of three administrative
positions and the transfer of two positions to Point Richmond.
In addition, the Company identified certain fixed assets that will be
sold upon the closing of its existing San Diego office. Accordingly, the
Company has revised the estimated useful lives of these fixed assets
which will be used until the closing of its existing San Diego office,
and has recorded an additional depreciation charge amounting to $6,253
for the year ended March 31, 2000.
NOTE 12. LONG-TERM DEBT:
Long-term debt at March 31, 2000 and 1999 consists of debt related to
assets acquired in Cherry Creek Basin, Colorado, the rice farms and
ranches in Yuba and Glenn County, California, and a ranch in Inyo
County, California and the financing of the lump-sum payment to the City
of Inglewood related to the pumping rights lease (see Note 8):
------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------
Water leasing program
Five-year amortizing term loan beginning September 30, 1998. The
loan accrues interest at the bank's Reference Rate, as defined,
or LIBOR (capped at 6%) plus 1.5%, and is payable quarterly, or
sooner, at the Company's option. Principal is payable quarterly,
at the following annual rate, based on the loan year of October 1
through September 30: Year 1, $560,000; Year 2, $628,000; Year 3,
$708,000; Year 4, $790,000; Year 5, $874,000. $2,686,000 $3,280,000
Cherry Creek Basin
Mortgage note payable bearing interest at 8%. Principal and
interest are payable in annual installments of $14,307. Balance
is due December 2002. At maturity, a balloon payment of $47,386
plus any accrued interest is due. 66,139 74,487
Rice farms and ranches
Mortgage note payable bearing interest at 9%. Principal and
interest are payable in annual installments of $39,786. Balance
is due July 2007. 220,210 238,529
------------------------------------------------------------------------------------------------------------
F-15
46
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------------------------------------
Mortgage note payable bearing interest at 8%. Principal and -- 625,054
interest are due in annual installments Of $72,632. The note
reached maturity, June 30, 1999 and a balloon payment of $625,054
plus any accrued interest was paid.
Mortgage note payable bearing interest at 8%. Interest is payable
in semi-annual installments. The entire principal balance plus
any unpaid interest are due at maturity, February 28, 2001. 758,000 --
----------------------------------------
3,730,349 4,218,070
Less current maturities of long-term obligations (1,454,983) (1,245,721)
----------------------------------------
$2,275,366 $2,972,349
--------------------------------------------------------------------------------------------------------------
Each of the notes payable above is collateralized by the related
individual property. As of March 31, 2000 and 1999, the carrying value
of the collateral for notes payable was $5,464,604 and $6,788,224
respectively.
During the year ended March 31, 1999, the Company incurred $89,400 of
deferred debt costs related to the five-year amortizing term loan.
Amortization expense on the deferred debt costs totaled $16,980 and
$8,490 for the years ended March 31, 2000 and 1999, respectively.
Accumulated amortization as of March 31, 2000 and 1999 was $25,470 and
$8,490, respectively.
During the year ended March 31, 2000, the Company purchased a ranch in
Inyo County, California. As partial consideration, it gave a mortgage
note payable of $800,000. Prior to year-end, certain personal property
assets acquired with the land were sold, and the proceeds of $42,000
were used to reduce the balance of the note to $758,000 at March 31,
2000.
Aggregate maturities required on long-term debt at March 31, 2000 are as
follows:
--------------------------------------------------
2001 $1,454,983
2002 780,502
2003 903,109
2004 462,858
2005 28,186
Thereafter 100,711
--------------------
$3,730,349
--------------------------------------------------
NOTE 13. 9% CONVERTIBLE SUBORDINATED DEBENTURES:
On September 22, 1995 the Company issued $15,000,000 of 9% Convertible
Subordinated Debentures (the "Debentures"), due in 2005. The Debentures
are unsecured and subordinate to all secured debt. Interest accrues at
9% per annum and is payable on September 30 and March 31 of each year.
The Debentures are initially convertible into 945,763 shares of the
Company's common stock at a conversion price of $15.86 per share (after
the effect of the March 28, 1996 stock dividend). Effective October 1,
1997, the Company may redeem the Debentures at a cash redemption price
equal to 100% of the principal amount redeemed (plus accrued and unpaid
interest thereon) if the trading price of the common stock was 150% of
the conversion price for the 20 preceding trading days. During the year
ended March 31, 2000, the Company repurchased $5,000,000 of the
Debentures for $1,500,000. As a result of this transaction, gross
deferred debt costs and accumulated amortization were reduced by
$272,956 and $89,287, respectively. During the year ended March 31,
1999, the Company repurchased $260,000 of its Debentures for $151,006.
As a result of this transaction, gross deferred debt costs and
accumulated amortization were reduced by $14,193 and $4,856,
respectively. Amortization expense on the deferred debt costs was
$62,659 and $81,888 for the years ended March 31, 2000 and 1999.
Accumulated amortization as of March 31, 2000 and 1999 was $239,826 and
$282,120, respectively.
F-16
47
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14. PREFERRED STOCK:
On February 26, 1997, the Company privately placed $4,000,000 of a new
series of convertible non-participating preferred stock. Each share of
Series B Convertible Redeemable Preferred Stock ("Series B Preferred
Stock") had a stated value of $1,000, a par value of $.001, and was
convertible at any time at the option of the holder into shares of
common stock at an initial conversion price of $16.62 per share. The
holders of Series B Preferred Stock were 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.
On April 21, 1997, the Company issued 569,551 shares of Series C
Convertible Redeemable Preferred Stock ("Series C Preferred Stock")
through a private offering. The Company received $5,000,000 in cash and
incurred $255,212 of placement costs. In addition, in connection with
the private placement, the shareholders exchanged all 4,000 outstanding
shares of Series B Preferred Stock for Series C Preferred Stock. The
Series C Preferred Stock was recorded at fair value on the date of
issuance less issue costs. The excess of the preference value over the
carrying value of $447,695 is being accreted by periodic charges to
accumulated deficit until the redemption date in April 2007. Each share
of Series C Preferred Stock has a stated value of $1,000, a par value of
$.001, 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 Series C Preferred Stock are entitled to vote on all
matters presented to the stockholders, together with the holders of
common stock as one class, except as otherwise required by law. Each
share of Series C Preferred Stock is entitled to the number of votes
equal to the number of shares of common stock into which such share of
Series C Preferred Stock would have been convertible, if such conversion
had taken place on the record date set for determining stockholders
entitled to vote at a meeting or the date of the consent of stockholders
if action is being taken by written consent. 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. The first four semi-annual dividend
payments (July 15, 1997 through and including January 15, 1999) to be
made with respect to Series C Preferred Stock may be made, at the sole
discretion of the Board of Directors, in cash or, in full or in part, by
issuing additional shares of Series C Preferred Stock. Thereafter all
dividend payments made with respect to the Series C Preferred Stock are
payable in cash. On July 15, 1997, the Company paid dividends of
$151,952 to the Series C Preferred Stockholders of which $40,261 was
paid in cash and $111,691 was paid through the issuance of 112 shares of
Series C Preferred Stock. In addition, the Company paid dividends of
$42,904 to the Series C Preferred Stockholders related to the Series B
Preferred Stock (owned prior to its conversion on April 21, 1997), of
which $19,595 was paid in cash and $23,309 was paid through the issuance
of 23 shares of Series C Preferred Stock. On January 15, 1998, July 15,
1998 and January 15, 1999 the Company paid dividends which totaled
$1,029,879 for the three payments, all of which was paid through the
issuance of 1,029 shares of Series C Preferred Stock. During the fiscal
year ended March 31, 2000, the Company paid cash dividends of $736,954
on the Series C Preferred Stock.
The right of the holders to elect a majority of the directors of the
Company would continue until dividends are paid for at least two
consecutive semi-annual periods, after which the right to elect
directors shall revert to the common stock and the Series C Preferred
Stock, voting as a single class. In the event that the Company is in
default in the payment of two or more semi-annual dividends, the holders
of the Series C Preferred Stock would have the right, voting as a class,
to elect a majority of the directors of the Company, and the holders of
the common stock would have the right to elect the remaining directors.
The Company may, upon 30 days' written notice to the holders, redeem all
or any portion of the Series C Preferred Stock at any time after April
l, 1999 at a cash redemption price of $1,000 per share plus accrued but
unpaid dividends. However, the Company may redeem the Series C Preferred
Stock only if the average closing price of the common stock during the
20 consecutive trading days prior to the notice of redemption is not
less than 150% of the conversion price (initially $16.62 per share,
subject to adjustment).
F-17
48
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14. PREFERRED STOCK: (CONTINUED)
Commencing on April 1, 2006 and continuing until March 31, 2007, each
holder of shares of the Series C Preferred Stock may, from time to time
during such period, at such holder's option, cause the Company to redeem
for cash, out of funds legally available, up to an aggregate of one-half
of all shares of Series C Preferred Stock owned by such holder on April
1, 2006. Commencing on April 1, 2007, each holder of shares of Series C
Preferred Stock may, from time to time thereafter, at such holder's
option, cause the Company to redeem for cash, out of funds legally
available, some or all of such holder's shares of Series C Preferred
Stock. The redemption price for each share of Series C Preferred Stock
shall be $1,000 per share, plus, in each case, all declared and unpaid
dividends, if any.
The Series C Preferred Stock has a preference in liquidation over the
holders of common stock of $1,000 per share plus accrued and unpaid
dividends.
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 (the
"Conversion Price") and is subject to adjustment in certain events to
prevent dilution.
Commencing on October 1, 2007 and continuing through September 30, 2008,
each holder of the Series D Preferred Stock may, from time to time
during such period, at such holder's option, cause the Company to redeem
up to one-half of the shares of Series D Preferred Stock held by such
holder on October 1, 2007 for cash, out of funds legally available.
Commencing on October 1, 2008, each holder of shares of Series D
Preferred Stock may, from time to time thereafter, at such holder's
option, cause the Company to redeem for cash, out of funds legally
available therefore, some or all of such holder's shares of Series D
Preferred Stock. The redemption price for each share of Series D
Preferred Stock will be $1,000 per share, plus, in each case, all
declared and unpaid dividends, if any.
In the event of any liquidation or winding up of the Company, the
holders of Series D Preferred Stock will be entitled to receive an
amount equal to $1,000 per share plus all declared but unpaid dividends
on the Series D Preferred Stock. The liquidation rights granted to the
holders of Series D Preferred Stock will be at a rate equal to the
liquidation rights granted to the holders of Series C Preferred Stock
and senior to the liquidation rights of any other shares of capital
stock of the Company. A merger, consolidation, sale of assets or other
transaction in which control of the Company is transferred will be
treated as a liquidation for the purpose of the Agbar agreement unless
holders of more than 50% of the shares of Series D Preferred Stock
otherwise agree.
The shares of the Series D Preferred Stock are not redeemable by the
Company prior to the later of (i) October 15, 2001 or (ii) the
termination of any obligation that the purchaser of the initial 10,000
shares has to purchase additional shares of Series D Preferred Stock
upon satisfaction of all conditions to any such obligation. Commencing
on the later of such dates, shares of the Series D Preferred Stock may
be redeemed, in whole or in part at any time at the option of the
Company by resolution of its Board of Directors, for a cash redemption
price equal to the total of (i) all accrued but unpaid dividends with
respect to the shares of Series D Preferred Stock being redeemed plus
(ii) an amount equal to the liquidation preference for the shares of
Series D Preferred Stock being redeemed, at the date of such redemption,
multiplied by a percentage, as defined.
Notwithstanding the foregoing, the Company may not redeem any shares of
the Series D Preferred Stock unless the common stock has had a trading
price, as defined, of not less than 150% of the Conversion Price for 20
consecutive trading days prior to the Company giving notice to the
holders thereof. In addition, the Company shall not have the right to
redeem more than 9,000 of the initial 10,000 shares without the consent
of the holders of the initial 10,000 shares so long as the shares of
Series C Preferred Stock are not subject to redemption at the option of
the Company, and any such redemption of shares of Series D Preferred
Stock at the option of the Company shall be done on a pro rata basis
with a redemption of shares of Series C Preferred Stock. The limitation
on the number of shares that can be redeemed by the Company if the
trading price, as defined, condition has been met, as set forth in the
preceding sentence, shall only apply to the initial 10,000
F-18
49
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14. PREFERRED STOCK: (CONTINUED)
shares and not to any of the other 15,000 shares of Series D Preferred
Stock that may be issued after the issuance of the initial 10,000
shares. In case of the redemption of only a part of the outstanding
shares of Series D Preferred Stock, the shares so to be redeemed shall
be selected pro rata.
During the year ended March 31, 2000, the Company paid cash dividends of
$750,000 on the Series D Preferred Stock.
NOTE 15. 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. As of March 31, 2000, the Company had repurchased 341,200
shares of common stock at a cost of $1,374,870. The purchase of treasury
shares was recorded using the cost method.
NOTE 16. INCOME TAXES:
Total income taxes for the years ended March 31, 2000, 1999 and 1998
were allocated to continuing operations. Income tax expense attributable
to income (loss) from continuing operations consists of:
-------------------------------------------------------------------------------------------------------------
Current Deferred Total
-----------------------------------------------------------------
Year ended March 31, 2000 (State): $3,200 -- $3,200
Year ended March 31, 1999 (State): $3,200 -- $3,200
Year ended March 31, 1998 (State): $2,400 -- $2,400
-------------------------------------------------------------------------------------------------------------
Income tax expense attributable to income (loss) from continuing
operations was $3,200, $3,200 and $2,400, for the years ended March 31,
2000, 1999 and 1998, respectively, and differed from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax
income (loss) from continuing operations as a result of the following:
------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------
Computed "expected" income tax expense (benefit) $(1,083,000) $(1,847,900) $ (646,500)
Depreciation and amortization of property and equipment 85,800 -- (326,800)
Accrued expenses 666,000 -- 118,200
Cost of sale related to quasi-reorganization -- -- 68,300
NOL carry-forward 289,000 1,853,000 791,200
Other 42,200 (5,100) (4,400)
State income taxes 3,200 3,200 2,400
-----------------------------------------------
$ 3,200 $ 3,200 $ 2,400
------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31, 2000 and 1999 are presented below.
--------------------------------------------------------------------------------------------------
Deferred tax assets: 2000 1999
------------ -----------
Allowance for water projects $ 1,483,000 $ 518,000
Property and equipment 103,000 342,000
Net operating loss carry-forwards 9,136,000 8,841,000
------------------------------
Total gross deferred tax assets 10,722,000 9,701,000
Less valuation allowance (10,250,000) (9,447,000)
------------------------------
Net deferred tax assets 472,000 254,000
------------------------------
Deferred tax liabilities: Land held for sale and water rights,
principally due to differences in capitalized interest (472,000) (254,000)
Total gross deferred tax liabilities (472,000) (254,000)
------------------------------
Net deferred tax asset $ 0 $ 0
--------------------------------------------------------------------------------------------------
F-19
50
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16. INCOME TAXES: (CONTINUED)
The valuation allowance for deferred tax assets as of April 1, 1999 and
1998 was $9,447,000 and $7,594,000, respectively. The net change in the
total valuation allowance for the years ended March 31, 2000 and 1999
was an increase of $803,000 and $1,853,000, respectively. In assessing
the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. During the years ended March 31, 2000, 1999 and 1998,
the valuation allowance was increased as a result of the current year's
net operating loss carry-forward. In addition, during the year ended
March 31, 1997, the sale of the Company's interest in the Nevada LLC
resulted in a $1,100,000 adjustment to the beginning-of-the-year
valuation allowance.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowances at March 31, 2000 and 1999. The amount of
the deferred tax asset considered realizable, however, could be adjusted
in the near term if estimates of future taxable income during the
carry-forward period change.
At March 31, 2000, the Company has net operating loss carry-forwards for
federal income tax purposes which are available to offset future federal
taxable income, if any, as follows:
------------------------------------------------------------------
2001 $ 800,000
2002 1,200,000
2004 900,000
2005 400,000
2006 2,000,000
2007 1,600,000
2008 1,800,000
2009 400,000
2010 1,300,000
2011 1,800,000
2012 4,900,000
2018 2,400,000
2019 4,300,000
2020 850,000
-----------
$25,475,000
------------------------------------------------------------------
In addition, the Company has investment tax credit carry-forwards of
approximately $80,000 which are available to reduce future federal
regular income taxes, if any, through March 31, 2001.
NOTE 17. IMPAIRMENT OF LONG-LIVED ASSETS:
During fiscal 2000, based on a comprehensive review of the Company's
water rights and other assets, the Company recorded a noncash impairment
of water rights of $826,618, and an impairment of other water assets of
$339,364. These impairments were to reduce the recorded asset values of
certain water rights held by the Company in San Bernardino County,
California, and certain other water-related assets to their estimated
fair market value.
F-20
51
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 18. QUASI-REORGANIZATION:
The Company's Board of Directors authorized management to effect a
quasi-reorganization as of October 1, 1994. Such reorganization was
ratified by the Company's stockholders in March 1995, and accordingly,
the assets and liabilities have been 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 write-down in the value of the
silica plant of $1,830,914. 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 of $454,604,
to water rights of $1,038,268, and to other water assets of $338,042.
Further, the accumulated deficit of $14,405,252, most of which was due
to the Company's prior and now discontinued operation, was eliminated by
a corresponding decrease in the Company's additional paid-in capital.
Accumulated deficit is dated to reflect only results of operations
subsequent to October 1, 1994. Any future tax benefits from deductible
temporary differences and net operating loss carry-forwards that existed
at the date of the quasi-reorganization will be reported as a direct
credit to paid-in capital. Accordingly, the $135,000 increase to the
deferred tax asset for the year ended March 31, 1996 was offset by an
equal increase to paid-in capital.
NOTE 19. STOCK OPTIONS AND WARRANTS:
Under the Company's 1997, 1993 and 1990 stock option plans (the
"Plans"), the Company may grant options to purchase up to 2,600,000
shares of common stock to officers, directors, key employees and others
providing significant services to the Company. Effective with the
approval of the stockholders at the September 15, 1998 annual meeting,
the number of shares of common stock reserved for issuance under the
Company's 1997 Stock Option Plan increased from 600,000 to 1,400,000.
Stock options are generally granted at an exercise price no less than
fair value on the date of grant. Options available to be granted at
March 31, 2000, 1999 and 1998 were 369,500, 607,000, and 442,668,
respectively.
The per share weighted-average fair value of stock options granted
during the years ended March 31, 2000, 1999 and 1998 was $2.40, $4.60
and $3.72, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended March 31, 2000 - Expected dividend yield of zero, expected
volatility of .8319, risk-free interest rates ranging from 4.70% to
5.68%, and an expected life of 5 years. Year ended March 31,
1999--Expected dividend yield of zero, expected volatility of .5832,
risk-free interest rates ranging from 4.49% to 5.68%, and an expected
life of 5 years. Year ended March 31, 1998 - Expected dividend yield of
zero, expected volatility of .384, risk-free interest rates ranging from
5.72% to 6.55%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, in Fiscal 2000, 1999, and 1998, compensation expenses of
$101,284, $121,967, and 139,500 respectively, have been recognized in
conjunction with the vesting of unexercised stock options. Had the
Company determined compensation expense based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net
loss and basic and diluted loss per share applicable to common
stockholders would have been increased to the pro forma amounts
indicated below:
------------------------------------------------------------------------------------------------
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------------------------------------------
Net Loss: As reported $4,708,076 $6,458,408 $2,458,014
Pro forma 6,460,011 7,669,176 5,439,135
Basic and diluted loss per share: As reported $ 0.59 $ 0.79 $ 0.30
Pro forma 0.82 0.94 0.66
------------------------------------------------------------------------------------------------
Pro forma net loss and loss per share reflect only options granted
during the years ended March 31, 1996 through 2000. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss and loss per share
amounts presented above because compensation cost is reflected over the
options vesting period of one to five years and compensation cost for
options granted prior to April l, 1995 is not considered.
Effective April 1, 1999, the Company granted 10,000 stock options at
$5.33 to Agbar which are not covered under existing plans. These options
would normally be granted to Agbar's representative on the Company's
Board of Directors, however, as Agbar's policy prohibits him from
accepting them, the options were granted to Agbar.
F-21
52
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19. STOCK OPTIONS AND WARRANTS: (CONTINUED)
Stock option activity during the periods indicated is as follows:
-------------------------------------------------------------------------------------
Number of Shares Weighted-Average
Exercise Price
-------------------------------------
Balance at March 31, 1997 857,000 $ 13.15
Granted 722,000 10.53
Exercised (24,600) 6.97
Forfeited (459,334) 14.92
----------
Balance at March 31, 1998 1,095,066 10.82
----------
Granted 1,300,000 15.21
Exercised (4,000) 6.75
Cancelled/forfeited (701,190) 12.02
----------
Balance at March 31, 1999 1,689,876 13.71
----------
Granted 368,500 5.37
Exercised --
Cancelled/forfeited (436,809) 10.85
----------
Balance at March 31, 2000 1,621,567 12.58
-------------------------------------------------------------------------------------
At March 31, 2000 and 1999, the exercise prices of outstanding options
ranged from $2.00-$21.00 and $5.25-$21.00, respectively, and the
weighted-average remaining contractual life of outstanding options was
7.3 years and 8.2 years, respectively.
At March 31, 2000 and 1999, the number of options exercisable was
685,309 and 447,882, respectively, and the weighted-average exercise
price of those options was $12.58 and $11.00, respectively.
During the year ended March 31, 1996, the Company granted warrants to
purchase a total of 98,000 shares of common stock at $17.50 per share in
consideration for services provided by unrelated third parties. The
warrants expired in September and October, 1999. No warrants were
granted or exercised during the years ended March 31, 2000, 1999 and
1998.
On March 6, 1998, the Company reduced the exercise prices on 396,000
previously awarded options. The exercise prices, which originally ranged
from $13.50-$18.18, were reduced to $9.50 which was the market price of
the Company's common stock on the date of modification. Subsequent to
Fiscal 1998, the Company rescinded the repricing on 285,000 of the
options effective March 6, 1998.
NOTE 20. EXTRAORDINARY INCOME:
During the year ended March 31, 2000, the Company repurchased $5,000,000
of its 9% Convertible Subordinated 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 an extraordinary gain on extinguishment of debt, net of
income taxes, of $3,489,803.
During the year ended March 31, 1999, the Company repurchased $260,000
of its 9% Convertible Subordinated Debentures for $151,006. After
reducing related deferred debt costs of $9,337, net of accumulated
amortization of $4,856, the Company recognized an extraordinary income
on extinguishment of debt, net of income taxes of $99,656.
F-22
53
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 21. OTHER INCOME:
On June 30, 1998, the Company entered into an agreement with two of its
former officers to sell its 40% interest in an option (the "IWT Option")
to purchase certain outstanding shares of Integrated Water Technologies,
Inc., an unaffiliated water consulting company. In exchange, one former
officer agreed to the cancellation of 56,858 stock options to purchase
Company common stock at $5.4375, and additional options to purchase
296,000 shares of the Company stock by these two former officers were
cancelled. In addition, the Company's obligation to pay $290,637 of the
remaining severance costs recorded in the prior fiscal year ended March
31, 1998 to one of the former officers, was cancelled as of May 15,
1998. Accordingly, the sale of the IWT Option resulted in the Company
recognizing other income of $290,637 for the year ended March 31, 1999.
In March 2000, the company sold 714.5 shares of the Fontana Mutual Water
Company which it owned for a net price of $950,000, and realized a gain
on the sale in the amount of $394,745.
NOTE 22. GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the years ended March 31, 2000,
1999 and 1998 consist of the following:
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------
Payroll and related costs $2,242,856 $1,989,138 $2,596,407
Legal and accounting 425,112 576,055 760,057
Consulting and engineering 1,454,902 912,050 623,385
Travel 220,380 159,955 127,517
Allowance for water project costs 1,018,717 1,294,065 --
Impairment of assets 1,165,982 -- --
Other corporate 920,666 873,929 1,538,193
------------------------------------------
$7,448,615 $5,805,192 $5,645,559
- --------------------------------------------------------------------------------------------------------------------------
NOTE 23. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Plan for all employees. This plan contains no
eligibility requirements and contributions by the Company are
discretionary. The Company matches a percentage of the contributions of
participating employees. Company matching contributions for the year
ended March 31, 2000 and 1999 amounted to $16,194 and $9,892,
respectively. There was no 401(k) plan in fiscal 1998.
NOTE 24. 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 as of March 31, 2000, 1999 and 1998 and for the years then
ended is presented on the following page:
F-23
54
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 24. SEGMENT INFORMATION: (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------
Segment revenue:
Water $ 2,796,037 $ 1,477,375 $ 932,377
Real estate -- 345,615 2,990,000
------------ ------------ ------------
$ 2,796,037 $ 1,822,990 $ 3,922,377
============ ============ ============
Net income (loss):
Water $ 1,028,323 $ 476,377 $ 65,139
Real estate -- 161,615 1,560,829
Non-segment (4,213,626) (6,072,900) (3,527,398)
------------ ------------ ------------
$ (3,185,303) $ (5,434,908) $ 1,901,430
============ ============ ============
Depreciation and amortization expense:
Water $ 959,387 $ 477,369 $ 58,325
Non-segment 137,959 148,578 108,881
------------ ------------ ------------
$ 1,097,346 $ 625,947 $ 167,206
============ ============ ============
Assets:
Water $ 23,581,227 $ 25,579,150 $ 18,453,067
Real estate 5,422,604 4,505,227 3,960,277
Non-segment 8,697,119 17,546,483 19,478,624
------------ ------------ ------------
$ 37,700,950 $ 47,630,860 $ 41,891,968
- --------------------------------------------------------------------------------------------------------------------------------
For the years ended March 31, 2000 and 1999, the Company recognized
revenue of $1,282,600 and $641,330, respectively, from the City of
Inglewood. No other recurring customer accounted for more than 10% of
the Company's revenue.
NOTE 25. COMMITMENTS AND CONTINGENCIES:
The Company has several noncancelable office equipment, office space and
farmland operating leases that expire over the next four years. These
leases generally contain renewal options for periods ranging from three
to five years and require the Company to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases was
$163,034, $123,866 and $112,834 for the years ended March 31, 2000, 1999
and 1998, respectively.
In addition, the Company entered into a pumping rights lease and a water
sale agreement with the City of Inglewood in September 1998. In order to
secure a portion of the water that the Company agreed to sell to
Inglewood, 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. 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. The fees for subsequent years will
be determined by multiplying the fee for the first year by the ratio of
the index price for each subsequent year divided by the index price for
the first year. The index price is the sum of the price established by
MWD for full service untreated water and the price components
established by the West Basin Municipal Water District for MWD
readiness-to-serve charge and the West Basin surcharge for basic
non-interruptible water.
Future minimum leases payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
March 31, 2000 are:
F-24
55
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 25. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
---------------------------------------------------------------------------------------------------
Water Rights Others Total
--------------------------------------------
Year ended March 31, 2001 $ 192,510 $ 145,939 $ 338,449
Year ended March 31, 2002 200,070 124,449 324,519
Year ended March 31, 2003 207,630 87,630 295,260
Year ended March 31, 2004 215,190 91,135 306,325
Year ended March 31, 2005 33,750 7,619 41,369
Thereafter 286,883 -- 286,883
------------------------------------------
Total minimum lease payments $1,136,033 456,772 1,592,805
---------------------------------------------------------------------------------------------------
In September 1997, the Company entered into a water purchase agreement
with the San Bernardino Valley Municipal Water District ("SBVMWD")
pursuant to which the SBVMWD agreed, subject to certain conditions still
to be satisfied, to sell to the Company 100,000 acre feet of surplus
California State Water Project water during the next ten years. The
agreement provides for the delivery of 10,000 acre-feet of water
annually, with an option for the Company to accelerate deliveries if
surplus water is available. The Company will pay SBVMWD $150 per
acre-foot of water in the first year, escalating at 3.5% annually. The
agreement requires the approval of the California Department of Water
Resources ("DWR") for the sale of the water from SBVMWD to the Company.
On September 30, 1997, the MWD filed a complaint in the Superior Court
of California for the County of Los Angeles, against SBVMWD, the Company
and Santa Margarita Water District in order to block the water sale, and
separate, but similar action was filed by DWR in the California Superior
Court for the County of Sacramento against SBVMWD and the Company on
December 22, 1997. While the outcome of these proceedings cannot be
predicted, the Company believes that these lawsuits will not have a
material adverse impact on the Company's financial condition, or results
of operations. Until the lawsuits are settled, the Company does not
expect to purchase any water under its contract with SBVMWD.
The Company is the general partner of Western Agua, L.P. ("Western
Agua"), a partnership that agreed to provide consulting services to the
Nevada LLC pursuant to the Consulting Agreement ("Consulting
Agreement"). The Nevada LLC purported to terminate the Consulting
Agreement on March 13, 1998 based on Western Agua's purported willful
breach of the Consulting Agreement. On November 10, 1998, Western Agua
filed an action in the San Diego Superior Court against the Nevada LLC
for breach of contract, specific performance and an accounting relating
to the Consulting Agreement. Western Agua's complaint seeks a judicial
declaration that the Consulting Agreement is not terminated and remains
in full force and effect. On March 12, 1999, after the Company
successfully challenged the legal sufficiency of the Nevada LLC's
original cross-complaint, the Nevada LLC filed an amended
cross-complaint against Western Agua and the Company. The amended
cross-complaint contains claims for breach of contract, breach of
fiduciary duty, and declaratory relief, and seeks compensatory damages
in excess of $100,000, an order enjoining cross-defendants from the
development, sale and/or management of sale of water in areas prohibited
by section 5 of the Consulting Agreement, and a judicial declaration
that cross-defendants have breached the Consulting Agreement and that
the Nevada LLC has not.
Effective September 1, 1999 (the "Effective Date"), the Company, Western
Agua and Nevada LLC entered into an agreement wherein they agreed that:
(1) The action would be dismissed without prejudice; (2) From the
Effective Date forward, the Company and Western Agua were relieved of
restrictions on certain water-related business activities; (3) All
claims, counterclaims and defenses by Western Agua and the Company, on
the one hand, against Nevada LLC, on the other hand, and all claims,
counterclaims and defenses by Nevada LLC, on the one hand, against
Western Agua and/or the Company, on the other hand, would be preserved
without regard to the passage of time, from the Effective Date through
and including July 31, 2002; and (4) Nevada LLC would deliver notice to
Western Agua on or before June 30, 2002 of the amount of the consulting
fee, if any, which would be owed by Nevada LLC to Western Agua if the
Consulting Agreement were in effect as of April 23, 2002.
The Company is obligated under its consulting agreement with Houlihan,
Lokey Howard & Zukin Capital to pay advisory fees in connection with the
financial advisory work being performed by that firm, and additional
amounts depending on the completion of certain transactions. The minimum
remaining obligation of the Company as of March 31, 2000 is $100,000.
F-25
56
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 25. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company is subject to claims and legal proceedings arising in the
ordinary course of business. While complete assurance cannot be given as
to the outcome of any pending or threatened legal actions, the Company
believes that any financial impact would not be material to its
financial position, annual operating results or cash flows.
NOTE 26. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,197,160 $ 1,523,582 $ 1,601,470
Interest capitalized during the period 83,749 82,565 184,729
Cash paid during the period for income taxes 3,200 3,200 2,400
Supplemental disclosure of noncash investing and financing activities:
Water rights acquired in exchange for common stock -- -- 1,162,144
Exchange of Series B convertible preferred stock for Series C Convertible -- -- 3,807,517
redeemable preferred stock
Deferred gain on sale of investment in limited liability company -- -- 83,333
Issuance of note receivable in conjunction with sale of limited
Liability company -- -- 1,336,000
Conversion of note receivable and related accrued interest
receivable into investment in available-for-sale
security:
Note Receivable -- -- (1,336,000)
Other current assets -- -- (22,840)
-----------------------------------------
-- -- (1,358,840)
Preferred stock issued in lieu of cash dividend -- 698,736 466,144
Accretion of preferred stock issuance costs 35,819 33,099 30,584
Common stock issued upon exercise of stock options -- -- 13
Unrealized gain (loss) on available-for-sale-securities -- (117,233) 145,273
Foreclosure of note receivable secured by land:
Land held for sale -- -- 128,352
Notes receivables -- -- (123,244)
Accounts payable -- -- (5,108)
Forgiveness of debt resulting from sale of land held for sale:
Long-term debt (42,000) -- --
Land held for sale 42,000 -- --
Forgiveness of note receivable and related accrued interest
From purchase of land held for sale:
Land held for sale (365,024) -- --
Note Receivable 343,699 -- --
Other current assets 21,325
Write off of water rights and other water assets
Other water assets (339,364) -- --
Water rights 826,618 -- --
Write-off of property, equipment and related accumulated depreciation:
Property and equipment (2,678) (2,477) (54,116)
Accumulated depreciation 134 495 50,378
- ---------------------------------------------------------------------------------------------------------------------------------
F-26