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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
COMMISSION FILE NUMBER 0-18756
WESTERN WATER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 33-0085833
(State of incorporation) (I.R.S. Employer Identification No.)
4660 LA JOLLA VILLAGE DRIVE, SUITE 825, SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 535-9282
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
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
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
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 27, 1998 was approximately $92,195,000 (based on last
reported sale price of $11.50 per share of Common Stock on that date). All
directors are considered affiliates. There were 8,235,816 shares of registrant's
common stock outstanding as of May 27, 1998.
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 1998 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 Parts III of this Report.
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TABLE OF CONTENTS
Item Page
Part I
1. Business.................................................................... 3
2. Properties.................................................................. 10
3. Legal Proceedings........................................................... 11
4. Submission of Matters to a Vote of Security Holders......................... 11
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters....... 12
6. Selected Financial Data..................................................... 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................14
8. Consolidated Financial Statements and Supplementary Data.................... 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................... 21
Part III
10. Directors and Executive Officers of the Registrant.......................... 21
11. Executive Compensation...................................................... 21
12. Security Ownership of Certain Beneficial Owners and Management...............21
13. Certain Relationships and Related Transactions.............................. 21
Part IV
14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K................................................... 22
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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 1998
and 1999 and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Western Water Company (the "Company") identifies, acquires, develops and
markets water rights in the western United States. For the last few years, it
has been developing this business in several areas, through the acquisition of
land and water rights, the purchase of water rights, and the negotiation of
agreements for the marketing of water rights. 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
selection, acquisition, development and marketing of water rights. Although the
Company has sold and 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 to obtain revenue from their water rights.
Since 1996, the Company has focused its principal efforts on becoming an
independent water provider to municipalities and other agencies located in
Southern California. The Company's goal is to acquire water assets and to sell
or lease such water assets to municipalities or other water utilities, agencies
or districts. In February 1997, in order to fund a portion of the anticipated
cost of acquiring groundwater rights and other water-related assets, 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 Convertible Redeemable Preferred Stock (the "Series C Preferred
Stock"). In addition, in November 1996 the Company entered into a letter
agreement with J. P. Morgan Securities, Inc. pursuant to which J. P. Morgan was
appointed as the Company's financial advisor and agent in arranging the
placement of debt securities for the special purpose entities to be formed for
the purpose of acquiring or leasing Southern California water assets. In June
1997, the Company entered into ( i) a water purchase agreement with Elsinore
Valley Municipal Water District ("EVMWD") to buy at least 4,000 acre-feet of
water from EVMWD during each of the next ten years and (ii) a water sale
agreement with Santa Margarita Water District ("SMW") pursuant to which SMW
agreed, subject to certain conditions still to be satisfied, to purchase 10,000
acre-feet of water from a subsidiary of the Company. 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.
On September 30, 1997, the Metropolitan Water District of Southern California
("MWD") filed a complaint in the Superior Court of California for the County of
Los Angeles against SBVMWD, the Company and SMW in order to block the water
sale, and a separate, but similar action was filed by the California Department
of Water Resources ("DWR") in the California Superior Court for he County of
Sacramento against SBVMWD and the Company on December 22, 1997. See, "Item 3.
Legal Proceedings." In addition, the Company is currently evaluating certain
other water transfer opportunities in Southern California and, as of the date of
this Annual Report, is engaged in discussions with both Southern California
water owners regarding the purchase of water rights from such owners and with
certain water districts regarding the sale or lease of water to water districts.
To date, however, no water transfers have been completed by the Company pursuant
to any of these agreements. See "Item 1. Business--Water Transfer Program."
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The principal California water interests currently owned by the Company
consist of (i) 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, (ii)
the water rights associated with 2,236 acres of California rice farms and
ranches, (iii) interests owned in various California mutual water companies, and
(iv) certain groundwater pumping rights in Los Angeles County and San Bernardino
County, California. The Company's California real estate holdings consist of
approximately 1,590 acres located in Northern 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. The Cherry Creek basin
is the drainage area of Cherry Creek south of Denver, Colorado. The Cherry Creek
assets were acquired primarily for the purpose of developing, processing,
packaging and selling water and water rights in the Cherry Creek basin and most
of the land has been sold. The Company's real estate holdings in Colorado
currently consist of approximately 352 acres of primarily undeveloped land
located in the Cherry Creek basin. See "Item 1. Business -- Cherry Creek Water
Rights Project."
On April 23, 1997 the Company sold its 35.3% interest in Nevada Land &
Resources Company, LLC (the "Nevada LLC") to Global Equity Corporation, an
Ontario, Canada corporation ("Global"). The Nevada LLC was formed by the Company
and a joint venture comprised of The Morgan Stanley Real Estate Fund II, L.P.
and two affiliates of that real estate partnership (collectively, "Western Land
JV") to own approximately 1.38 million acres of land and related water interests
in Nevada (the "Nevada Property"). The Company acquired its interest in the
Nevada LLC in October 1995 for $12,000,000. The purchase price received by the
Company for its interest in the Nevada LLC was $13,360,000, of which $12,024,000
was paid in cash and $1,336,000 was paid by the delivery to the Company of a
convertible note from Global. During August 1997, the note plus the accrued
unpaid interest was converted into 723,911 shares of the Global Equity
Corporation. In addition to the sale of the Company's interest in the Nevada LLC
to Global, the Nevada LLC entered into a consulting agreement with Western Agua,
L.P. (the "Consulting Agreement"). Western Aqua, L.P. is a Delaware limited
partnership formed by the Company and Western Land JV. 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 Nevada LLC in the
development of water and mineral, gas and oil resources on the Nevada Property,
Western Agua, L.P. will receive 50% of the net proceeds, if any, derived from
the subsequent sale, leasing or other disposition of all or any portion of NLRC
or refinancing of NLRC, or other revenues derived from the disposition of NLRC
by the new owners after they both recoup their investment in NLRC 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 Company is currently engaged by The Atchison, Topeka and Santa Fe
Railway Company and by Burlington Northern Railroad Company (collectively,
"Burlington Santa Fe") to act as Burlington Santa Fe's exclusive agent in
California, Arizona, New Mexico, Colorado, Washington and Montana in connection
with identifying, developing and marketing water assets owned by Burlington
Santa Fe, and to identify and assist in marketing Burlington Santa Fe's Texas
water rights, and to advise Burlington Santa Fe in connection with such matters.
See "Item 1. Business - Agency Agreements."
The Company's principal executive office is located at 4660 La Jolla
Village Drive, Suite 825, San Diego, California 92122. Its telephone number is
(619) 535-9282. Unless the context requires otherwise, references to the
"Company" in this report include YG Procyon Corporation, the Company's
wholly-owned subsidiary, YG Rice Farms, L.P., a California limited partnership
directly and indirectly wholly owned and controlled by the Company and Western
Agua, L.P., a limited partnership. 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.
4.
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DESCRIPTION OF BUSINESS
Water Transfer Program. Recent statements by persons associated with
major California water agencies suggest that the legal and institutional
barriers to water transfers may be reduced, and if so, it could be easier for
private entities to transport water through the distribution systems of the
state and local agencies, if capacity exits. The Company believes that water
transfers can be a cost-effective means of providing water and, accordingly, has
implemented a plan to become an independent water provider to municipalities and
other agencies located primarily in Southern California.
The Company believes that water transfer transactions will require the
Company to ( i) purchase water that can be delivered in Southern California,
(ii) finance the development of infrastructure, such as wells, pipes, and pumps,
needed to deliver water, and (iii) enter into agreements with Southern
California water districts or other water users for the sale or lease of the
Company's water rights to such districts or other water users. The Company
anticipates that each water transfer transaction that it enters into, if any,
will be unique and that the terms under which such transactions are financed and
completed will vary. All such transfer transactions will also involve
significant government regulation and will be dependent upon the Company's
ability to obtain all required governmental approvals.
In addition, the Company has begun negotiations to provide financing to
certain municipalities in Southern California, in conjunction with the sale or
lease of water by the Company to such municipalities. In order to be able to
provide this financing, the Company in November 1996 entered into a letter
agreement pursuant to which the Company appointed J.P. Morgan Securities Inc.
("J.P. Morgan") as financial advisor and agent in arranging the placement of
approximately $150 million to $200 million of debt securities for one or more
special purpose entities to be formed by the Company for the purpose for
effecting water lease and leaseback transactions. The Company and J.P. Morgan
are currently organizing the first such special purpose entity. However, no
financing has yet been obtained pursuant to the letter agreement.
In June 1997 the Company entered into a water purchase agreement with
EVMWD pursuant to which the Company agreed to purchase from EVMWD not less than
4,000 acre-feet of water per year for ten years. The agreement commenced on July
1, 1997 and continues through June 30, 2006. The price to be paid by the Company
for the water it purchases from EVMWD will be $145 per acre-foot during the
first year, with the price increasing annually by 3.5%, beginning on the first
anniversary. EVMWD has agreed to deliver the water to the Prado Flood Control
Basin. In addition, the water purchase agreement provides that if EVMWD has any
additional water available for sale, the Company will have the first right of
refusal to purchase up to 2,000 acre-feet of such water during each year of the
term of the agreement at a price and on the terms contained in the agreement. If
EVMWD breaches the agreement or for any reason and is unable to comply with its
obligations to provide the Company with the quantities of water required to be
delivered by the agreement, the Company's sole remedy against EVMWD is to
terminate the agreement, and such termination shall not give rise to any damages
claim. The Company has not yet purchased any water under this agreement, because
it has not yet identified a purchaser to whom the water can be transported.
In June 1997, the board of directors of SMW approved an agreement with
the Company pursuant to which SMW will purchase from the Company 10,000
acre-feet of water annually for each of the next ten years. The price to be paid
for the water will initially be $250 per acre-foot of water, which price will
increase each year by the amount of any dollar increase in the treated,
non-interruptible water rate of MWD. The agreement is conditioned upon SMW
obtaining the rights to exchange or store water in the Orange County Groundwater
Basin for its own account within 180 days of the date of the agreement. The
Company and SMW are jointly attempting to obtain the foregoing storage rights
for SMW but as of March 31, 1998, no storage arrangements had been made, and the
Company and SMW have not yet negotiated an extension. Accordingly, the contract
is currently unenforceable. The Company may use the water it can purchase from
EVMWD to fulfill a portion of its water delivery obligations under this
agreement, if it can resolve water storage and transfer issues and the agreement
is then reinstated. In addition, the Company is pursuing various other
agreements for the purchase of the water that it could use to meet its
obligations to SMW under the agreement. No assurance can be given that the time
needed for SMW to obtain rights to exchange or store water in the Orange County
Groundwater Basin will be extended, or that the Company will be able to supply
water to SMW. In addition, on September 30, 1997, MWD filed a complaint in the
Superior Court of California
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for the County of Los Angeles against the Company in order to block the Santa
Margarita agreement. See "Item 3. -- Legal Proceedings."
In September 1997, the Company entered into a water purchase agreement
with 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. 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 SMW 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. See "Item 3.
Legal Proceedings."
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. "Riparian" rights are inherent in the ownership of land adjacent to a
flowing stream, and entitle such owner to divert an indeterminate amount of
water for reasonable beneficial use on such land, but not elsewhere.
"Appropriative" rights entitle the holder of such rights, which may be
transferred separately from any land, to divert a specified amount of water for
reasonable beneficial use on or off such land.
In May, 1991, the Company entered into the Yuba County Water
Exploration, Development and Marketing Agreement (the "Water Agreement") with
Western Aggregates, a wholly owned subsidiary of Centex, Inc., and the Yuba
County Water Agency (the "Water Agency"). The purpose of the Water Agreement was
to integrate water from both the Yuba Property and adjacent acreage owned by
Western Aggregates into the Water Agency's conjunctive use plans of developing
and marketing water to third parties outside of the Water Agency's boundaries.
Under the Water Agreement, the Water Agency agreed to develop and market the
water on behalf of all three parties with the objective of maximizing the
economic return to each of the parties.
Due primarily to the review by the California State Water Resources
Board of water rights on the Yuba River and the Water Agency's involvement in
the attempted settlement of issues raised in the review, the Water Agency did
not complete certain of its water development obligations under the Water
Agreement, and certain portions of the Water Agreement expired in May 1996
without any water having been marketed or sold by the Water Agency. As a result
of the termination of the Water Agreement, the Company and Western Aggregates
each may seek to market the water rights on their own.
The Company is currently considering developing its Yuba Property water
rights for sale or lease, as a part of the Water Transfer Program. See "Item 1.
Business--Water Transfer Program." The Company's Yuba Property water resources,
when distributed, could be distributed with the other water resources of the
Sacramento Delta. The Sacramento Delta water resources serve the San Francisco
Bay area and, through the statewide water distribution facilities, most of
California, including parts of Southern California. Accordingly, because of the
configuration of California's water distribution system, the Company believes
that sales could be made by the Company to municipal agencies and water
companies serving over half of the state's population. The Company has not,
however, developed a plan for marketing and selling its Yuba Property water
interests, and the Company cannot currently estimate when any water disposition
plan will be implemented. Accordingly, although the Company believes that its
Yuba Property water rights are a valuable asset, it is not known when or if the
Company will be able to realize any revenues or other financial benefits from
these water rights.
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 future
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
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goal of the Cherry Creek Project is therefore 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 (known as "junior" or "senior"
rights), which rights 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, municipalities and water
districts have not relied solely on junior tributary wells to satisfy their
water requirements. 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 augmented packages of water rights can be sold
for significantly higher prices than water rights sold separately and that the
amount of water that can be sold is greater under a plan of augmentation.
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. The Company has the
right to operate 13 wells drawing tributary water in the Cherry Creek basin, of
which 11 are currently existing wells. Eight of the 13 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. The total purchase price of these Cherry Creek assets was
approximately $9,846,000 of which approximately $4,359,000 was paid in cash and
the balance of which was financed by the sellers. To date, the Company has
resold a total of 3,950 acres of the Cherry Creek Project properties and is in
the process of attempting to subdivide and sell certain other portions of its
Cherry Creek real estate. The Company has, however, retained substantially all
of the water rights associated with the land it has resold (including the right
to drill and service two 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 and that are
proposed to be sold are not needed to further the principal purposes of the
Cherry Creek Project. The total consideration received for the 3,950 acres sold
to date by the Company (including certain incidental water rights sold with such
real estate) is $13,146,000 plus the rights to 1,290 acre-feet of water.
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 the water and the
various water rights it owns. However, in order to sell long-term, reliable
water resources to municipalities and other larger water users located in the
Cherry Creek basin, the Company must combine its various water resources in a
plan of augmentation that is approved by the Colorado District Court, Water
Division (the "Colorado Water Court"). Accordingly, in order to obtain such
court approved rights, the Company in August 1993 filed three applications with
the Colorado Water Court for adjudication of the Company's rights to gain
approval of: ( i) a change of use of junior tributary water rights, (ii) a plan
of augmentation to support domestic and other uses of the Company's water, and
(iii) a plan for non-tributary water and not non-tributary water. The
application regarding the Company's non-tributary water rights was granted in a
prior year. In February 1998, the Company received approval on the other two
applications by the Colorado Water Court.
With the plan of augmentation approved, the Company is now seeking to
market its water and/or water rights in the Cherry Creek basin. The Company is
considering a number of alternatives, from out right sale of its water rights to
a single buyer or user, to the short-term and/or long-term lease of water to
municipalities or other water users such as land developers. The sale or lease
of its water or water rights could, 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. If the Company were to
develop and build the infrastructure, this could result in significant capital
expenditure requirements.
7.
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Agency Agreements. On December 3, 1993, the Company entered into an
agreement with The Atchison, Topeka and Santa Fe Railway Company pursuant to
which the Company was engaged to act as the railway company's exclusive agent
for the state of California and as nonexclusive agent for the State of Colorado
in connection with identifying, developing and marketing water assets owned by
The Atchison, Topeka and Santa Fe Railway Company and advising the railway
company in connection with such matters. The agreement had an initial term of
two years, which term was automatically extended by three additional years upon
the Company's sale in September 1995 of certain of that railway company's water
rights and property to the City of Needles, California, for a total purchase
price of $2,600,000.
In March 1996, Burlington Santa Fe and the Company entered into an
amendment to the above-referenced December 3, 1993 agreement. Pursuant to the
amendment, Burlington Santa Fe engaged the Company to also act as Burlington
Santa Fe's exclusive agent to identify, develop and market Burlington Santa Fe's
existing or developable water rights and water-related rights in the states of
Arizona, New Mexico, Colorado, Washington and Montana, and to identify and
assist in marketing such water rights in the State of Texas, and to advise
Burlington Santa Fe in connection with such matters. The Company did not derive
any revenues during the fiscal year ended March 31, 1998 from its agreement with
Burlington Santa Fe.
Other Water Assets. In March 1992, the Company acquired Nigel
Corporation ("Nigel"), a corporation wholly owned by a former officer and
director, through the merger of Nigel into YG Procyon Corporation, a
wholly-owned subsidiary of the Company. Nigel's principal asset was the on-going
right to receive 2.168% of 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 a third party (the "Cucamonga
Water Fee Agreement"). The Company subsequently acquired an additional 1.5718%
interest that, when combined with its original purchase, currently totals
3.7398% of gross payments. The water made available to the Cucamonga County
Water District is obtained by the third party from Fontana Union Water Company,
a mutual water company, under a 100-year lease entered into in 1989. The Company
received approximately $152,000 during the fiscal year ended March 31, 1998
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 certain Southern California mutual water
companies. 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 companies in which it owns shares. These
mutual water company shares entitle the Company to receive an aggregate of 2,600
acre-feet of water per year, but the Company has not attempted to obtain any of
the water to which it is entitled. If and when such water is obtained, the
Company will attempt to sell or lease such water.
The Company also currently 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 may use the water it is
entitled to extract under the foregoing pumping allocation to supplement its
water transfer activities in Southern California. It is also considering the
further purchase of such ground water rights. The Company recognized $150,000 of
revenue from one year agreements it entered into during the third quarter of
fiscal 1998 to lease 1,000 acre-feet of these water rights.
8.
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Other Water-Related Activities and Interests. The Company and a former
officer/director own an option exercisable until March 1999 to purchase
approximately 30% of the outstanding common stock of Integrated Water
Technologies, Inc. (formerly known as BCI Geonetics, Inc.). Integrated Water
Technologies, Inc. ("IWT") is a California-based company that specializes in
water resource exploration, water resource management, and constructed wetlands
water treatment. The former officer/director has an option to purchase the
Company's interest in the IWT option.
Real Estate Held for Sale. In March 1993, the Company commenced
disposing of its real estate assets that were not needed for its water rights
development program. As of March 31, 1998, the Company still owned 352 acres of
real estate located in the Cherry Creek basin in Colorado. Through March 31,
1998, the Company has sold or exchanged, net of certain properties which were
repurchased, a total of 4,207 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 substantially all of the water rights
related to the land that was sold by the Company. The foregoing aggregate
purchase price was paid by the buyers of such land paying an aggregate of
$7,181,000 of cash, by issuing promissory notes payable to the Company in the
aggregate principal amount of $5,255,000, and by assuming $710,000 of the
Company's mortgage indebtedness. The Company has funded purchase money financing
in connection with the land disposition transactions which have terms ranging
from two to 20 years and bear interest at annual rates of 8-10%, with interest
and principal payable monthly.
The Company is considering marketing for sale certain other parcels of
its Cherry Creek real estate holdings and, in connection therewith, is
subdividing approximately 352 acres for future sale. As with the other Cherry
Creek properties sold to date, the Company plans to retain the water rights
associated with such properties to the extent such water rights are needed for
the Cherry Creek Project. The Company also plans to sell the 136-acre parcel
owned by the Company in Glenn County, California. No assurance can be given that
the Company will in the future 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. Although the Company and its
predecessor have previously produced water from the Yuba Property and sold that
water on a commercial basis, the Company has not done so since 1987. In the
event that the Company elects to market its Yuba Property water interest
independently of the Water Agency, the Company may compete directly with the
Water Agency in the sale of water from Yuba County. Western Aggregates, the
owner of certain water rights in the Yuba Property, has informed the Company
that it may attempt to market its water rights and, therefore, will also compete
with the Company.
The Company's goal in the Cherry Creek basin of Colorado is to sell or
lease water and water rights 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.
The Company will compete with MWD and with numerous other water
districts, public agencies and private water companies in trying to market in
Southern California any water rights that the Company acquires pursuant to its
new 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 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.
9.
10
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 Resources
Board acting pursuant to the California Safe Drinking Water Act (the "Cal Act").
The U.S. 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 producers which set MCLS for numerous contaminants. Since the
Company does not intend to sell water directly to the consumers, it believes
that these standards only affect the water agencies that may buy or lease the
Company's water. While environmental 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 eleven
full-time employees.
ITEM 2. PROPERTIES
The principal physical properties currently owned by the Company are the
following:
- - Undeveloped land in the Cherry Creek basin, Colorado, consisting of a
total of approximately 352 acres and associated water rights, the rights
to operate five tributary wells on property owned by the Company, and
water rights reserved or acquired in connection with the 4,207 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 136-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 expects to
increase the portion of the rice farms that may be cultivated on the
properties by supplying water to the rice farms either from other
Company properties or, in the event a nearby canal is extended by the
Water Agency (as to which there can be no assurance), from such canal.
The Water Agency has appropriated $5,000,000 for the future extension of
the canal. A portion of the 136-acre parcel of land is currently used
for rice farming.
- - The Company owns 30 acres of real estate located along the Yuba River in
Yuba County, California, approximately ten miles northeast of
Marysville, California. The 30 acres are zoned industrial-extractive and
may be used for commercial but not residential purposes.
10.
11
- - 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.
Many of the Company's foregoing real estate properties are encumbered by
mortgages. For a description of the Company's mortgage indebtedness, see
"Note 10: Long-Term Debt" to the Company's consolidated financial
statements included as part of this Annual Report on Form 10-K.
The Company leases its principal executive office in San Diego,
California, containing 3,511 net square feet, pursuant to a lease that expires
in May 1999. The Company's current monthly rental obligation for the facility is
$6,423.
ITEM 3. LEGAL PROCEEDINGS
In June 1997, the Company entered into a water sale agreement with SMW
pursuant to which SMW 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 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. SMW operates within the service area of the MWD. 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 SMW, and a
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. The MWD complaint makes a number of allegations, including an allegation
that the Company and SMW acted as agents of or co-conspirators with SBVMWD in
attempting to facilitate the sale of State Water Project water by SBVMWD in
MWD's service area, and it asks the court for several considerations, including
blocking the sale of State Water Project water by SBVMWD to the Company for use
within MWD's service area without the written consent of MWD and DWR. MWD also
challenges the validity of the contract between SBVMWD and the Company on the
ground that its execution and its implementation require compliance with the
California Environmental Quality Act ("CEQA"), including the preparation of an
environmental impact report.
By stipulation between the Company and DWR and MWD, approved by the
Court, the CEQA causes of action were dismissed without prejudice as against the
Company, provided that the Company will give DWR and MWD thirty days written
notice of its intent to take delivery of the water or any steps in compliance
with its obligations under its contract with SBVMWD.
A hearing is set for late July 1998 on the CEQA causes of action as
against SBVMWD. SBVMWD and the Company filed their answers to the complaints in
May 1998. The Company has 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. Except for
the service by MWD of a request for production of documents which documents were
produced for inspection and copying, there has been no additional formal
discovery efforts by any party.
The Company is currently evaluating the complaint of MWD and DWR. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND 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.
LOW HIGH
--- ----
Year-Ended March 31, 1997
- ----------------------------
First Quarter (April-June) $15.50 $23.25
Second Quarter (July-September) 14.69 23.00
Third Quarter (October-December) 13.00 21.00
Fourth Quarter (January-March) 13.00 17.00
Year-Ended March 31, 1998
- ----------------------------
First Quarter (April-June) 13.00 16.00
Second Quarter (July-September) 13.00 17.00
Third Quarter (October-December) 10.00 16.00
Fourth Quarter (January-March) 9.00 12.00
On March 31, 1998, the Company had 1,675 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 growth 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 C Preferred Stock.
As of March 31, 1998, there were outstanding 9,466 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. The Company may redeem some or
all of the shares of Series C Preferred Stock on or after April 1, 1999 at a
cash redemption price of $1,000 per share, plus accrued but unpaid dividends.
Each declared share of Series C Preferred Stock has a liquidation preference
equal to its $1,000 stated value. To date, the Company has paid all declared
dividends under the Series C Preferred Stock.
12.
13
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.
STATEMENT OF OPERATIONS DATA:
Year Ended March 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Revenue ..................................... $ 3,922,377 $ 1,770,771 $ 4,901,810 $ 2,669,801 $ 4,993,229
Cost of revenue ............................. 2,296,409 1,034,750 2,163,848 975,786 2,387,268
----------- ----------- ----------- ----------- -----------
Gross profit ................................ 1,625,968 736,021 2,737,962 1,694,015 2,605,961
General and administrative expense .......... 5,645,559 2,946,252 2,122,525 1,974,535 1,575,306
----------- ----------- ----------- ----------- -----------
Operating income (loss) ..................... (4,019,591) (2,210,231) 615,437 (280,520) 1,030,655
Interest income (expense), net .............. (209,694) (1,027,540) (398,025) 262,733 (63,586)
Other income (expense) ...................... 2,330,255 (795,027) (201,827) 92,088 (50,896)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes ....................... (1,899,030) (4,032,798) 15,585 74,301 916,173
Income taxes ................................ (2,400) (1,102,400) (2,400) (2,400) (120,000)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations .... (1,901,430) (5,135,198) 13,185 71,901 796,173
Discontinued operations:
Loss from discontinued operations ......... -- -- (67,949) (62,209) --
Loss on disposal of silica plant .......... -- (257,276) (251,200) -- (185,895)
----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of change
in accounting principle ................... (1,901,430) (5,392,474) (305,964) 9,692 610,278
Cumulative effect of change in accounting
principle - income taxes .................. -- -- -- -- 1,178,000
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................... (1,901,430) (5,392,474) (305,964) 9,692 1,788,278
Accretion of preferred stock
to redemption value ....................... (30,584) -- -- -- --
Preferred stock dividends ................... (526,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to
common stockholders ....................... $(2,458,014) $(5,392,474) $ (305,964) $ 9,692 $ 1,788,278
=========== =========== =========== =========== ===========
Basic and diluted net income (loss) per
common share applicable to common
shareholders:
Continuing operations ....................... $ (.30) $ (.64) $ (.04) $ (.03) $ .05
Discontinued operations ..................... -- (.03) -- (.01) (.03)
----------- ----------- ----------- ----------- -----------
Total before extraordinary item and
cumulative effect of change in
accounting principle ................. (.30) (.67) (.04) (.04) .02
Cumulative effect of change in
accounting principle ................. -- -- -- -- .21
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share applicable
to common stockholders .................... $ (.30) $ (.67) $ (.04) $ (.04)(a) $ .23(a)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
March 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Current assets ........................................... $17,388,488 $ 4,833,903 $ 3,921,948 $ 2,895,539 $ 6,874,181
Total assets ............................................. 41,891,968 39,475,358 40,420,709 26,710,956 27,536,710
Working capital .......................................... 16,517,459 3,787,083 2,943,723 2,103,568 5,668,261
Long-term debt and debentures............................. 16,028,470 17,840,860 18,275,408 4,384,470 5,699,467
Redeemable preferred stock ............................... 9,049,033 -- -- -- --
Preferred stock .......................................... -- 3,807,517 -- -- 5,944,056
Common stockholders' equity .............................. 15,860,103 16,680,161 21,067,076 21,195,745 14,687,267
- ---------------------
(a) Net income (loss) per common share computation for the years ended March
31, 1995 and 1994 was adjusted to include dividends of $248,131 and
$500,914 accrued on the preferred stock outstanding during the
respective periods.
13.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1994, due to the significant changes in the Company's business, an
improvement of the Company's earnings potential, and a change in direction of
the intended method of disposing of the Company's discontinued silica operation,
the Company determined that it was appropriate to effect a quasi-reorganization.
The Company's Board of Directors authorized management to effect a
quasi-reorganization effective October 1, 1994, which reorganization was
ratified by the Company's stockholders in March 1995.
In a quasi-reorganization, assets and liabilities are restated to
current values as of the date of the reorganization. The amount of increases,
however, are limited to the decreases in other assets. In this regard, effective
October 1, 1994 the Company recognized a $1,830,914 write down in the value of
its non-operational silica sorting and grinding plant (the "Silica Plant"). This
write down was offset by a corresponding write up of a like amount which was
allocated proportionately, based on the relative excess of fair market value of
each asset over historic book basis, to real estate held for resale ($454,604),
water rights held for sale ($1,038,268), and water sale fees ($338,042).
Further, the accumulated deficit of $14,405,252, most of which was due to the
Company's prior and now discontinued operations, was eliminated by a
corresponding decrease in the Company's additional paid-in capital. Accumulated
deficit reflects only the results of operations subsequent to October 1, 1994.
In 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"). As of March 31, 1998, the Company had repurchased a total of 47,146
shares of Common Stock in the Odd Lot Tender Offer for a total of $478,442.
On September 22, 1995, the Company completed the private placement of
$15,000,000 of its 9% Convertible Subordinated Debentures Due 2005 (the
"Debentures"). The Debentures bear interest at 9% per annum payable
semi-annually on September 30 and March 31 of each year, and mature on September
30, 2005. The Debentures are convertible at any time at the option of the holder
into shares of Common Stock at a conversion price of $15.865 per share, subject
to certain anti-dilution adjustments (the "Conversion Price"). Effective October
l, 1997, the Company may, at its option, redeem some or all of the Debentures at
a redemption price equal to 100% of the principal amount to be redeemed, plus
accrued and unpaid interest thereon through the redemption date, if on each of
the 20 consecutive trading days immediately prior to the mailing of the
redemption notice the trading price of the Common Stock is equal to or greater
than 150% of the then applicable Conversion Price.
In March 1996 the Company declared a 100% stock dividend (the "Stock
Dividend"). A 100% stock dividend is effectively a two-for-one stock split. All
share and per-share information for prior periods has been restated to reflect
the effects of the Stock Dividend.
In February 1997, the Company issued $4,000,000 of its Series B
Preferred Stock to two institutional investors, and in April 1997, the Company
issued an additional $5,000,000 of its Series C Preferred Stock. Upon the
issuance of the $5,000,000 of Series C Preferred Stock, the shares of Series B
Convertible Preferred Stock were exchanged for shares of Series C Preferred
Stock. There are no shares of Series B Convertible Preferred Stock currently
outstanding. Each share of Series C Preferred Stock has a stated value of $1,000
and is convertible at any time at the option of the holder into shares of Common
Stock at a conversion price of $16.62 per share. The conversion price, and
therefore the number of shares of Common Stock issuable upon the conversion of
the Series C Preferred Stock, is subject to adjustment in certain events to
prevent dilution. The holders of the Series C Preferred Stock are entitled to
receive, when and if declared by the Board of Directors, out of funds legally
available therefor, dividends at the annual rate of 7.25% of the stated value of
the Series C Preferred Stock ($1,000 per share). Such dividends are payable
semi-annually. The first four semi-annual dividend payments may be made, at the
discretion of the Board of Directors, in cash or, in full or in part, by issuing
fully paid and nonassessable shares of Series C Preferred Stock of equal value.
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
14.
15
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, the Company paid dividends of $331,144,
all of which was paid through the issuance of 331 shares of Series C Preferred
Stock. Commencing on April 1, 1999, the Company may redeem, in whole or in part,
shares of Series C Preferred Stock for cash at $1,000 per share, plus any unpaid
declared dividends thereon if the average trading price of the Common Stock for
20 consecutive days prior to the date of giving notice of such redemption is not
less than 150% of the conversion price then in effect.
In April 1997 the Company sold its 35.3% interest in the Nevada LLC for
a price of $13,360,000, of which $12,024,000 was paid in cash and $1,336,000 was
paid by the delivery to the Company of a convertible note due on December 31,
1997. In August 1997, the $1,336,000 promissory note and the related accrued
interest of $22,840 was converted into 723,911 common shares of Global Equity
Corporation, a Canadian corporation whose shares are traded on the Toronto Stock
Exchange and the Montreal Exchange. The Company had acquired its interest in the
Nevada LLC in October 1995 for $12,000,000.
On August 8, 1997 the Company announced that it had agreed to purchase
the water rights and fixed assets of the Willows Water District in Arapahoe and
Douglas Counties, Colorado. During the fourth quarter of Fiscal 1998, both the
Company and the District agreed to terminate the purchase agreement. Acquisition
costs of approximately $141,000 were expensed in Fiscal 1998 as a result of the
proposed transaction.
On December 15, 1997, The Company announced that it had signed a Letter
of Intent to acquire Vidler Water Company ("Vidler") from Global Equity
Corporation. On January 14, 1998, the Company announced that negotiations to
acquire Vidler had been terminated. Acquisition costs of approximately $429,000
were expensed in the quarter ended December 31, 1997 as a result of the proposed
transaction.
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations
for its three most recent fiscal years.
CONSOLIDATED
Year Ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue .................................................... $ 3,922,000 $ 1,771,000 $ 4,902,000
=========== =========== ===========
Income (Loss) From Continuing Operations
Before Income Taxes ...................................... $(1,899,000) $(4,033,000) $ 15,000
Income Taxes ............................................... (2,000) (1,102,000) (2,000)
----------- ----------- -----------
Income (Loss) From Continuing Operations ................... (1,901,000) (5,135,000) 13,000
Discontinued Operations .................................... -- (257,000) (319,000)
----------- ----------- -----------
Net Income (Loss) .......................................... (1,901,000) (5,392,000) (306,000)
Accretion of Preferred Stock to Redemption Value ........... (31,000) -- --
Preferred Stock Dividends .................................. (526,000) -- --
----------- ----------- -----------
Net Income (Loss) Applicable to Common Stockholders ........ $(2,458,000) $(5,392,000) $ (306,000)
=========== =========== ===========
Basic and Diluted Net Income (Loss) Per Share applicable to
Common Stockholders ..................................... $ (.30) $ (.67) $ (.04)
=========== =========== ===========
15.
16
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. Due to the limited number of
comparable water sales in the Cherry Creek Basin, the Company has relied on
valuations prepared by independent water engineers to determine the relative
fair values of the water rights acquired by the Company through its purchases of
real estate for the Cherry Creek Project. As properties or water rights are
sold, the allocated portion of the basis is included in cost of revenue.
During the fiscal year ended March 31, 1997, the valuation allowance for
deferred tax assets was increased as a result of the Company's net operating
loss carryforward. In addition, 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 on the Company's gross deferred tax assets.
WATER RIGHTS
Year Ended March 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
Revenue ..................... $932,000 $261,000 $974,000
Cost of Revenue ............. 867,000 58,000 143,000
-------- -------- --------
Gross Profit ................ $ 65,000 $203,000 $831,000
======== ======== ========
Water rights revenue for the fiscal year ended March 31, 1998 ("Fiscal
1998") increased $671,000 from the prior year primarily as a result of a
one-time sale of water rights in Cherry Creek ($600,000) and from the lease of
certain water rights in Southern California ($150,000). The remaining revenue
for Fiscal 1998 resulted primarily from payments received under the Cucamonga
Fee Agreement. Cost of revenue for Fiscal 1998 includes the allocated purchase
price of the water rights sold, directly related development costs, amortization
of Cucamonga Fee Agreement costs, sales commissions and other sales costs.
During the fiscal year ended March 31, 1997 ("Fiscal 1997"), revenue
from the Company's water rights business segment decreased by 73% due to fees of
$800,000 the Company received in fiscal year ended March 31, 1996 ("Fiscal
1996") for acting as agent in connection with the sale of water rights under its
agreement with Burlington Santa Fe. Costs related to the transaction were
$90,000. Water rights revenue in Fiscal 1997 and Fiscal 1996 consisted primarily
of payments under the Cucamonga Water Fee Agreement. During Fiscal 1996, the
Company acquired an additional 0.4878% interest in the Cucamonga Water Fee
Agreement for $350,000, and now receives payments equal to 3.7398% of certain
sales of water by a third party to the Cucamonga County Water District (San
Bernardino County, California). The other cost of revenue for Fiscal 1997 and
1996 consist of amortization of the Cucamonga Water Fee Agreement.
REAL ESTATE
Year Ended March 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue ..................... $2,990,000 $1,510,000 $3,927,000
Cost of Revenue ............. 1,429,000 976,000 2,021,000
---------- ---------- ----------
Gross Profit ................ $1,561,000 $ 534,000 $1,906,000
========== ========== ==========
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 1998, real estate revenues of $2,990,000 were
recognized from the sale of 1,607 acres of Cherry Creek properties.
16.
17
In Fiscal 1997, real estate revenues of $1,510,000 were recognized from
the sale of 353 acres of Cherry Creek properties. In Fiscal 1996, real estate
revenues of $2,470,000 were recognized from the sale of 175 acres and the
transfer of 257 acres of Cherry Creek properties in exchange for certain water
rights. The remaining balance of real estate revenue for Fiscal 1996 of
$1,457,000 was derived from the sale of 812 acres of the Company's California
rice farms and ranches.
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
Year Ended March 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
General and Administrative Expenses............................ $5,646,000 $2,946,000 $2,123,000
General and administrative expenses for Fiscal 1998 increased by 92%, or
$2,700,000, from Fiscal 1997. The increase was largely due to the full-year
impact of increased salaries and related expenses resulting from the Company's
new hires in Fiscal 1997. In addition, (a) Fiscal 1998 included one-time
acquisition charges of $570,000 related to the termination of both the proposed
Vidler transaction and the Willow Water District acquisition, (b) one-time
severance costs of approximately $628,000 related to the resignation of three of
its officers, (c) Fiscal 1998 included approximately $335,000 of compensation
expense related to the issuance and exercise of employee stock options, (d)
advisory fees in connection with programs to finance the acquisition of
additional water rights increased $159,000 over Fiscal 1997, and (e) legal
charges for Fiscal 1998 increased by $430,000 over Fiscal 1997 primarily due to
expenditures on certain outstanding legal matters.
General and administrative expenses for Fiscal 1997 increased by 39%
from Fiscal 1996. The increase was primarily due to increased salaries and
related expenses due to the addition of three employees and increased consulting
and travel expenses due to the Company's expanded efforts in developing its new
water transfer program. During Fiscal 1996, the Company also began amortizing
costs related to the sale of the Debentures, which amortization amounted to
$82,000 for Fiscal 1997 as compared to $41,000 for Fiscal 1996.
OTHER NON-SEGMENT INFORMATION
Year Ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Interest Income ....................................... $ 1,156,000 $ 322,000 $ 432,000
Interest Expense ...................................... (1,365,000) (1,350,000) (830,000)
Equity in Loss of Limited Liability Company ........... (308,000) (857,000) (75,000)
Gain on sale of investment in limited liability company 2,456,000 -- --
Rental Income, net .................................... 46,000 43,000 33,000
Loss From Disposition of Assets ....................... (4,000) -- (203,000)
Interest income is comprised of interest earned on the Company's cash
equivalents and investments and interest earned on the secured promissory notes
the Company received in connection with the properties that it has sold.
Interest income increased for Fiscal 1998 from Fiscal 1997 due to higher
investment balances resulting from net proceeds received from the sale of the
Company's investment in the Nevada LLC and from the net proceeds received from
the issuance of preferred stock. Interest income decreased for Fiscal 1997 from
Fiscal 1996 due to
17.
18
lower outstanding balances on notes receivable. During Fiscal 1996, the Company
sold or discounted secured promissory notes with a principal amount of
$1,267,000. Since the promissory notes were sold at a discount, the Company
recognized a loss of $203,000.
Interest expense for Fiscal 1998 included interest of $1,350,000 related
to the $15,000,000 principal amount of outstanding Debentures. Interest expense
in Fiscal 1997 increased significantly due to interest expense related to the
Debentures that were issued in September 1995. Interest of $185,000, $285,000
and $199,000 was capitalized during Fiscal 1998, 1997, and 1996, respectively,
in connection with the development of land held for sale and water rights.
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 $2,419,193, 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.
Rental income and expenses are primarily related to the Company's
California rice farm and ranch. The Company also receives miscellaneous rents on
certain of the Cherry Creek, Colorado properties.
DISCONTINUED OPERATION
Year Ended March 31,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
Loss from Discontinued Operation............................... $ -- $257,000 $319,000
During the fourth quarter of fiscal year 1993, the Company adopted a
formal plan to discontinue the silica sorting and grinding business. As of
October 1994, the Board of Directors determined it was in the best interest of
the Company to alter its plan for disposing of the discontinued silica
operations. Under the revised plan, the Company decided to liquidate the Silica
Plant assets rather than sell the entire operation as a unit. Accordingly, the
silica plant business was reported as a discontinued operation for Fiscal 1997
and 1996. Charges in Fiscal 1997 and 1996 were for costs in excess of the
provision for estimated loss on disposal and discontinued operation which was
previously recorded. During Fiscal 1998, the liquidation of the Silica Plant
assets was completed. No gain or loss was recognized on the sale in Fiscal 1998
since the Silica Plant assets were previously written down to reflect this sale.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had working capital and a current
ratio of $16,517,459 and 19.96 to 1 as compared to $3,787,083 and 4.62 to 1,
respectively, at March 31, 1997. The Company's liquidity increased primarily due
to net proceeds of $4,744,788 received from the issuance in April 1997 of
$5,000,000 of additional convertible preferred stock. In addition, the Company
received $12,024,000 in April 1997 from the sale of its interest in the Nevada
LLC.
Operating Activities. For Fiscal 1998, the Company had net loss of
$1,901,430 and net cash used in operating activities of $2,399,359. Since the
Company has sold most of its Cherry Creek real estate properties, revenues from
the sale of real estate in the near future are not expected to be sufficient to
fund the Company's operations. In Fiscal 1998, the Company completed its first
sale of water rights, realized revenue from the leasing of its water rights and
continued to receive revenue from the sale of portions of its real property
located in the Cherry Creek basin. The Company intends to continue such sales by
marketing the remaining 352 acres of real property it owns in Cherry Creek. The
Company expects that the timing and amount of its operating revenues will
continue to be highly volatile.
Revenues from leasing the Company's rice farms and ranches, from the
Cucamonga Water Fee Agreement, and from principal and interest payments received
on promissory notes held by the Company will be more predictable, but will be
insufficient by themselves to cover the Company's general and administrative
expenses and the Company's interest obligations under the Debentures. Revenue
from sale of water or water rights and from the
18.
19
leasing of water rights will be dependent on individually negotiated
transactions. There can be no assurance that such transactions can be made on
acceptable terms. Accordingly, the Company's future operations will be funded
primarily from the Company's existing financial resources and from proceeds the
Company may derive from such future water sale/transfer transactions that the
Company may from time to time consummate.
The Company's principal business plan is to develop, package and sell
its water and water rights to municipalities and other water users, to acquire
and sell other water rights, and to provide a variety of water-related services
to unaffiliated owners of water rights. Accordingly, the Company has and plans
to enter into water purchase and water sales agreements. These agreements are
typically subject to various conditions which have to be met before a purchase
or sale can take place. Management intends to structure such agreements so that
the commitments for water purchases and water sales are reasonably in balance.
However, no assurance can be given that management will be able to balance such
agreements in the future.
Investing and Financing Activities. In April 1997, the Company received
approximately $4,745,000 of net proceeds from the private placement of an
additional 5,000 shares of its convertible preferred stock at a price of $1,000
per share. In addition, the Company sold its interest in the Nevada LLC for a
price of $13,360,000, of which $12,024,000 was paid in cash.
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, 1999, 2000, 2001, 2002 and 2003 are
$51,000, $742,000, $29,000, $32,000 and $71,000, respectively.
- - The Company is required to make semi-annual interest payments of
$675,000 on the $15,000,000 principal amount of Debentures.
- - The holders of Series C Preferred Stock are entitled to receive, when
and if declared, annual dividends in the amount of $72.50 per share,
payable semi-annually on January 15 and July 15 of each year
(aggregating $652,500 per 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
required to be paid in cash.
The Company believes that its existing capital resources will be
sufficient to fund the Company's foreseeable working capital needs for a period
of at least one year from the date of this report. The Company plans to meet its
commitments thereafter from revenues derived from the sale of water or water
rights, from refinancing or selling its remaining real estate assets and, if
necessary, from future debt or equity financings.
The Company does not believe that inflation has had a material impact on
its results of operations.
Software issues related to the year 2000 do not materially affect the
Company's water or real estate assets or the Company's services or competitive
conditions. Accordingly, the Company does not expect a significant disruption in
operations or any significant expenditures as a result of computer software
issues related to the year 2000.
Impact of Accounting Pronouncement Issued But Not Adopted by the
Company. During Fiscal 1998, the Financial Accounting Standards Board issued
SFAS No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88 and 106." The Company anticipates that the adoption of
SFAS Nos. 129, 130, 131 and 132 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.
19.
20
RISK FACTORS
The Company's business and operations involve numerous risks, some of
which are beyond the Company's control, that may affect future results and the
market price of the Company's Common Stock. The following discussion highlights
some of the risks the Company faces.
Uneven Patterns of Quarterly Operating Results. The Company's quarterly
operating results have varied in the past and are likely to vary significantly
in the future. These quarterly fluctuations are the result of a number of
factors, including the Company's dependence on isolated sales of real estate as
its principal source of revenues and the sporadic revenues generated to date
from the Company's water related activities. Until the Company enters into
agreements for the long-term sale/lease of water, the Company's revenues will
continue to be dependent upon periodic and isolated sales of water and/or real
estate. Because of the variations in the Company's quarterly results, the price
of the Company's Common Stock may continue to fluctuate significantly.
Limited History of Operations 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, and (iii) developing its water
rights. Although the Company operates in two business segments (water rights
activities and its real estate development and disposition activities), the
Company anticipates that a majority of its revenues in the future will be
derived from its water rights activities. However, the Company only generated
$932,000, $261,000 and $974,000 of revenue from its water rights activities
during the fiscal years ended March 31, 1998, 1997 and 1996, respectively.
Accordingly, the Company does not have an established record of water rights
transactions. To date, the Company's administrative and interest expenses have
exceeded its on-going revenue from its water and water rights development and
disposition business, and the majority of its operating revenue have been
derived from the sale of the Company's real estate assets. No assurance can be
given that the Company will continue to be able to profitably resell its
remaining real estate holdings in the future or that it will be able to
successfully develop, package and sell water rights.
Uncertainty of Future Real Estate Revenue. During the past three fiscal
years, revenue from the disposition of real estate have constituted
approximately 76%, 85% and 80%, respectively, of the Company's total revenue. To
date, the Company's real estate sales efforts in Colorado have benefited from a
strong demand for real estate in the Cherry Creek basin. However, no assurance
can be given that the current market conditions in the Cherry Creek market will
continue or that the Company will be able to profitably sell its real estate
assets in the future. The Company's ability to sell its Colorado and California
real estate properties will also be dependent on general economic conditions, on
interest rates, and on the location and particular characteristics of the
properties offered for sale. Since the Company has sold most of its Cherry Creek
real estate properties, revenues from the sale of real estate in the near future
are not expected to be significant.
Uncertainty of Future Water Revenue. The Company's business plan is
twofold: to engage in various water acquisition, transfer, development and sale
activities, and to develop and dispose of the real estate that it acquires in
connection with the acquisition of water rights. While the Company's current
operating revenue has been primarily derived from real estate sales, the
Company's long-term future profitability will be primarily dependent on ( i) the
Company's ability to sell significant quantities of water from the Company's
Northern California water assets, (ii) the Company's ability to develop and sell
water or water rights packages as part of the Cherry Creek Project, and (iii)
the Company's activities as an independent water provider in Southern
California. Until May 1996, the Company's plan was to permit the Yuba County
Water Agency to integrate the Company's Yuba Property water into the Water
Agency's conjunctive use plans for developing and marketing water to third
parties. The Company's agreement with the Yuba County Water Agency regarding the
joint development and marketing of water expired in May 1996. The Company is
currently evaluating various alternative plans to commercially exploit its Yuba
Property water rights, but has not yet entered into any agreements to dispose of
its Yuba Property water. Although the Company has received the approval of its
plan of augmentation from the Colorado Water Court, to date, the Company has not
yet consummated any water or water rights transactions in the Cherry Creek area
and no assurance can be given that the Company will be able to do so in the
future. The Company's ability to become an independent water provider in
Southern California is dependent upon the Company acquiring groundwater rights
and other water assets, its ability to arrange for the transportation and
storage of water, its success in obtaining all necessary governmental and
regulatory consents and approvals, and on its ability to finance the foregoing
activities. The water transfer business is a new and developing business in
Southern California, and the market for such water transfers is still
developing. Accordingly, the hurdles that a company engaging in such activities
can expect to encounter are not
20.
21
all known, and the timing of completing such transactions is dependent on
numerous factors that may not yet be known. As a result, it is uncertain when or
if the Company will generate revenues from its new water transfer activities.
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-26, and indexed at
page 2, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 12, 1997, the Board of Directors of the Company, based upon the
recommendation of its audit committee, agreed to engage the accounting firm of
KPMG Peat Marwick LLP as independent public accountants to audit the Company's
financial statements for the fiscal year ending March 31, 1997. The firm of
Harlan & Boettger LLP, former independent public accountants for the Company,
was dismissed.
For the fiscal year ended March 31, 1996 and for the subsequent
nine-month period ended December 31, 1996, there were no disagreements with
Harlan & Boettger LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
Harlan & Boettger's report on the financial statements for the fiscal
year ended March 31, 1996 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit, scope or accounting
principles.
In connection with the Company's fiscal year ended March 31, 1996, and
for the subsequent nine-month period ended December 31, 1996, there was no
consultation with KPMG Peat Marwick LLP as to the application of accounting
principles or the type of audit opinion that might be rendered on the Company's
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Company's Proxy Statement to be filed by July 29,
1998 set forth under the caption "Election of Director" 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 29,
1998 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 29, 1998 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 29,
1998 set forth under the caption "Certain Relationships and Related
Transactions" is incorporated herein by reference.
21.
22
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 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.(7)
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 Employment Agreement, dated November 28, 1995, between the
Company and Eric R. Robbins.(7)
10.5 1993 Stock Option Plan.(6)
10.6 Amendment to 1993 Stock Option Plan.(6)
10.7 Form of Water Sale Agreement between Water Service Company I and
Santa Margarita Water District, a California water district.(8)
10.8 Form of Water Purchase Agreement between Elsinore Valley
Municipal Water District and the Company.(8)
10.9 Employment Agreement, dated April 20, 1998, between the Company
and Michael Patrick George.
10.10 Employment Agreement, dated April 20, 1998, between the Company
and Ronald I. Simon.
10.11 1997 Stock Option Plan.(9)
10.12 Resignation Agreement and Mutual General Release, dated December
18, 1997, between the Company and John H. Huston.
10.13 Resignation Agreement and Mutual General Release, dated January
30, 1998, between the Company and Eric R. Robbins.
21 Subsidiary of the Company.(1)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Harlan & Boettger LLP.
23.3 Consent of KPMG Peat Marwick LLP.
22.
23
99.0 Agreement for Sale of Water Rights and Option to Sell Water
Rights, dated July 25, 1996, between the Company and Golden
West.(5)
99.1 Form of Stock Purchase Agreement for the purchase and sale of
Series C Convertible Redeemable Preferred Stock.(4)
(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 Registration Statement
on Form S-3 filed on August 16, 1996, which exhibit is hereby
incorporated herein by reference.
(6) 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.
(7) 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.
(8) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 1997, which exhibit is hereby
incorporated herein by reference.
(9) 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.
The following financial statements are filed as a part of this report, appearing
at the pages indicated:
Report of KPMG Peat Marwick LLP, independent certified public accountants................F-1
Report of Harlan & Boettger LLP, former independent accountants..........................F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997................................F-3
Consolidated Statements of Operations for the years ended March 31,
1998, 1997 and 1996 ...................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1998, 1997 and 1996..........................................................F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996 .F-6
Notes to Consolidated Financial Statements...............................................F-8
Financial Statements of Nevada Land & Resource Company, LLC and related notes to the
financial statements as of and for the year ended December 31, 1996 ...................F-27
Financial Statements of Nevada Land & Resource Company, LLC and related notes to the
financial statements as of and for the year ended December 31, 1995 ...................F-35
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the prior fiscal quarter.
23.
24
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: May 28, 1998 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/ PETER L. JENSEN Director and Chairman of the Board May 28, 1998
- ------------------------------
Peter L. Jensen
/s/MICHAEL PATRICK GEORGE President and Chief Executive Officer May 28, 1998
- ------------------------------ (Principal Executive Officer)
Michael Patrick George
/s/ RONALD I. SIMON Chief Financial Officer May 28, 1998
- ------------------------------ (Principal Financial and
Ronald I. Simon Accounting Officer)
/s/ SCOTT A. KATZMANN Director May 28, 1998
- ------------------------------
Scott Katzmann
/s/ WILLIAM D. WATT Director May 28, 1998
- ------------------------------
William D. Watt
25
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. 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 did
not audit the financial statements of Nevada Land and Resource Company, LLC
("NLRC"), a 35.3% owned investee company. The Company's investment in NLRC at
March 31, 1997 was $11,068,188, and its equity in net loss of NLRC was $856,921
for the year ended March 31, 1997. The financial statements of NLRC as of and
for the year ended December 31, 1996 were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included in the Company's consolidated financial statements as of and for the
year ended March 31, 1997 for NLRC, is based solely on the report of the other
auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, 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, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
May 15, 1998
F-1
26
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
WESTERN WATER COMPANY:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Western Water Company and subsidiaries
for the year ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit and the report of the other auditor provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditor, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of Western Water Company
and subsidiaries for the year ended March 31, 1996, in conformity with generally
accepted accounting principles.
HARLAN AND BOETTGER LLP
San Diego, California
May 20, 1996
F-2
27
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and 1997
ASSETS 1998 1997
------------ ------------
Current Assets:
Cash and cash equivalents $ 304,988 $ 3,022,008
Investment in available-for-sale securities (Note 2) 16,453,147 1,034,096
Current portion of notes receivable (Note 3) 215,292 563,629
Other current assets 415,061 214,170
------------ ------------
Total Current Assets 17,388,488 4,833,903
Notes receivable, less current portion (Note 3) 1,386,403 1,799,094
Land held for sale (Notes 5, 10 and 14) 3,960,277 5,078,521
Water rights (Note 6) 15,264,710 12,400,686
Other water assets, net of accumulated amortization 3,188,357 3,212,996
Investment in limited liability company (Note 7) -- 11,068,188
Debt issue costs, net of accumulated amortization (Note 11) 613,782 695,670
Discontinued operation, net (Note 13) -- 120,000
Property and equipment, net of accumulated depreciation (Note 4) 85,951 108,994
Other assets 4,000 157,306
------------ ------------
$ 41,891,968 $ 39,475,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,274 $ 127,883
Accrued expenses and other liabilities (Notes 9 and 13) 732,954 682,518
Accrued interest 67,663 119,104
Current maturities of long-term debt (Note 10) 51,138 117,315
------------ ------------
Total Current Liabilities 871,029 1,046,820
Deposit -- 100,000
Deferred gain on sale (Note 7) 83,333 --
Long-term debt, less current maturities (Note 10) 1,028,470 2,840,860
9% Convertible subordinated debentures (Note 11) 15,000,000 15,000,000
------------ ------------
Total Liabilities 16,982,832 18,987,680
------------ ------------
Series C convertible redeemable preferred stock, $1,000 stated value, 100,000
shares authorized; 9,466 and zero shares issued and outstanding (aggregate
liquidation preference of $9,466,000 and zero)
in 1998 and 1997, respectively (Note 12) 9,049,033 --
Stockholders' Equity (Notes 12, 16 and 18):
Series B convertible preferred stock, $1,000 stated value, 1,000,000 shares
authorized; zero and 4,000 shares issued and outstanding in 1998
and 1997, respectively -- 3,807,517
Common stock, $0.001 par value, 20,000,000 shares
authorized in 1998 and 1997; 8,235,816 and 8,134,796
shares issued and outstanding in 1998 and 1997, respectively 8,236 8,135
Additional paid-in capital 24,198,539 22,705,957
Unrealized gain (loss) on investment securities 117,233 (28,040)
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (8,463,905) (6,005,891)
------------ ------------
Total Stockholders' Equity 15,860,103 20,487,678
------------ ------------
Commitments and contingencies (Note 21)
$ 41,891,968 $ 39,475,358
============ ============
See accompanying notes to consolidated financial statements.
F-3
28
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Revenue:
Water $ 932,377 $ 261,103 $ 974,458
Real estate 2,990,000 1,509,668 3,927,352
----------- ----------- -----------
3,922,377 1,770,771 4,901,810
----------- ----------- -----------
Costs of Revenue:
Water 867,238 58,375 142,968
Real estate 1,429,171 976,375 2,020,880
----------- ----------- -----------
2,296,409 1,034,750 2,163,848
----------- ----------- -----------
Gross Profit 1,625,968 736,021 2,737,962
General and Administrative Expenses (Note 19) 5,645,559 2,946,252 2,122,525
----------- ----------- -----------
Operating Income (Loss) (4,019,591) (2,210,231) 615,437
----------- ----------- -----------
Other Income (Expenses):
Interest income 1,155,606 322,460 431,677
Interest expense (1,365,300) (1,350,000) (829,702)
Loss from investment in limited liability company (Note 7) (307,623) (856,921) (74,891)
Gain on sale of investment in limited liability company, net (Note 7) 2,455,860 -- --
Other 182,018 61,894 (126,936)
----------- ----------- -----------
2,120,561 (1,822,567) (599,852)
----------- ----------- -----------
Income (Loss) from Continuing Operations
Before Income Taxes (1,899,030) (4,032,798) 15,585
Income Taxes (Note 15) 2,400 1,102,400 2,400
----------- ----------- -----------
Income (Loss) from Continuing Operations (1,901,430) (5,135,198) 13,185
----------- ----------- -----------
Discontinued Operations (Note 13):
Loss from operations -- -- (67,949)
Loss on disposal of silica plant -- (257,276) (251,200)
----------- ----------- -----------
-- (257,276) (319,149)
----------- ----------- -----------
Net Income (Loss) (1,901,430) (5,392,474) (305,964)
Accretion of preferred stock to redemption value (30,584) -- --
Preferred stock dividends (526,000) -- --
----------- ----------- -----------
Net Income (Loss) Applicable to Common
Stockholders $(2,458,014) $(5,392,474) $ (305,964)
=========== =========== ===========
Basic and Diluted Net Income (Loss) per Common Share
Applicable to Common Stockholders:
Continuing operations $ (.30) $ (.64) $ (.04)
Discontinued operations -- (.03) --
----------- ----------- -----------
Net Income (Loss) $ (.30) $ (.67) $ (.04)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
29
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1998, 1997 and 1996
Preferred Stock Common Stock Additional
---------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1995 -- $ -- 3,955,529 $ 3,955 $ 21,489,757
Net loss -- -- -- -- --
Exercise of options with payment of
9,883 shares of common stock -- -- 79,117 79 327
Adjustment for purchase of note
receivable -- -- -- -- 78,971
Adjustment for purchase of mutual water
company stock and cancellation of
treasury stock -- -- (403) -- (7,188)
Unrealized loss on investment securities -- -- -- -- --
Deferred tax benefits recognized due to
pre quasi-reorganization deductible
temporary differences and carryforwards -- -- -- -- 135,000
Adjustment for preferred dividends -- -- -- -- --
Stock split in form of stock dividend -- -- 4,034,243 4,034 --
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1996 -- -- 8,068,486 8,068 21,696,867
Net loss -- -- -- -- --
Exercise of options -- -- 6,994 7 92,431
Purchase of water rights with common
stock -- -- 59,370 60 917,376
Unrealized loss on investment securities -- -- -- -- --
Issuance of convertible preferred
stock, net of offering costs of $192,483 4,000 3,807,517 -- -- --
Purchase of common stock -- -- (54) -- (717)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1997 4,000 3,807,517 8,134,796 8,135 22,705,957
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 investment securities -- -- -- -- --
Exchange of convertible preferred stock (4,000) (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
============ ============ ============ ============ ============
Unrealized
Gain (Loss)
on Total
Investment Accumulated Stockholders'
Securities Deficit Equity
------------ ------------ ------------
Balance at March 31, 1995 $ -- $ (297,967) $ 21,195,745
Net loss -- (305,964) (305,964)
Exercise of options with payment of
9,883 shares of common stock -- -- 406
Adjustment for purchase of note
receivable -- -- 78,971
Adjustment for purchase of mutual water
company stock and cancellation of
treasury stock -- -- (7,188)
Unrealized loss on investment securities (24,442) -- (24,442)
Deferred tax benefits recognized due to
pre quasi-reorganization deductible
temporary differences and carryforwards -- -- 135,000
Adjustment for preferred dividends -- (5,452) (5,452)
Stock split in form of stock dividend (4,034)
------------ ------------ ------------
Balance at March 31, 1996 (24,442) (613,417) 21,067,076
Net loss -- (5,392,474) (5,392,474)
Exercise of options -- -- 92,438
Purchase of water rights with common
stock -- -- 917,436
Unrealized loss on investment securities (3,598) -- (3,598)
Issuance of convertible preferred
stock, net of offering costs of $192,483 -- -- 3,807,517
Purchase of common stock -- -- (717)
------------ ------------ ------------
Balance at March 31, 1997 (28,040) (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 -- 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 $ 117,233 $ (8,463,905) $ 15,860,103
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
30
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income (loss) $ (1,901,430) $ (5,392,474) $ (305,964)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 167,206 171,421 104,697
Compensation expense on vesting of unexercised compensatory
stock options 139,500 -- --
Compensation expense on cashless exercise of stock options 195,559 -- --
Gain on sale of investment in limited liability company (2,455,860) -- --
(Gain) loss on disposition of available-for-sale securities (38,488) 21,409 --
Loss on disposition of property and equipment 3,738 -- 122,606
Loss on discount of notes receivable 12,431 12,729 202,825
Deferred gain on sale of land -- 104,832 --
Loss on disposition of water rights 208,913 -- --
Loss from investment in limited liability company 307,623 856,921 74,891
Loss on disposal of discontinued operation -- 257,276 --
Deferred income taxes -- 1,100,000
Changes in assets and liabilities-(increase) decrease in:
Other current assets (223,731) 7,438 (57,250)
Land held for sale (including purchase from
related party of $264,198 in Fiscal 1997) 1,246,596 548,336 792,338
Other water assets -- -- (727,033)
Other assets 153,306 (126,260) --
Increase (decrease) in:
Accounts payable (113,717) (183,022) 346,910
Accrued expenses and other liabilities 50,436 354,912 --
Accrued interest (51,441) (60,338) --
Other current liabilities -- -- (88,860)
Deposit (100,000) -- --
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,399,359) (2,326,820) 465,160
------------ ------------ ------------
Cash Flows from Investing Activities:
Proceeds from disposition of discontinued operation 120,000 51,347 320,120
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) -- --
Proceeds from issuance of notes receivable -- (659,500) --
Principal payments received on notes receivable 625,353 865,172 1,266,904
Purchase of property and equipment (7,688) (88,841) (14,908)
Purchase of available-for-sale securities (19,511,773) (131,434) (3,165,369)
Sales of available-for-sale securities 5,635,323 1,888,258 325,000
Investment in limited liability company -- -- (12,000,000)
Payment for contingent liability -- -- (159,979)
Sales of water rights 600,000 -- --
Additions to water rights (222,487) (459,722) --
Purchase of water rights (2,288,306) (42,564) (1,955,634)
Additions to other water assets (33,686) (36,504) --
------------ ------------ ------------
Net cash provided by (used in) investing activities (3,119,506) 1,386,212 (15,383,866)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-6
31
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended March 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock -- 92,438 --
Net proceeds from issuance of debentures -- -- 14,345,000
Payment of debenture issue costs -- -- (163,870)
Proceeds from issuance of convertible
preferred stock -- 4,000,000 --
Proceeds from issuance of redeemable
preferred stock 5,000,000 -- --
Payment of private placement costs (255,212) (192,483) --
Preferred stock dividends (59,856) -- (5,452)
Purchase of common stock (4,520) (717) --
Principal payments on notes payable (1,878,567) (477,505) (1,051,621)
------------ ------------ ------------
Net cash provided by financing activities 2,801,845 3,421,733 13,124,057
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,717,020) 2,481,125 (1,794,649)
Cash and Cash Equivalents, beginning of year 3,022,008 540,883 2,335,532
------------ ------------ ------------
Cash and Cash Equivalents, end of year $ 304,988 $ 3,022,008 $ 540,883
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
32
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 and market water rights in the western United States.
For the last few years, it has been developing this business in several
areas, through the acquisition of land and water rights, the purchase of
water rights, and the negotiation of agreements for the marketing of
water rights. 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 selection,
acquisition, development and marketing of water rights. Although the
Company has sold and 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 to obtain
revenue from their water rights.
Principles of Consolidation
The consolidated financial statements include the financial statements
of Western Water Company's wholly-owned subsidiary, YG Procyon
Corporation in addition to its two limited partnerships, YG Rice Farms
and Western Agua, L.P., (see Note 7). 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. In
addition, investment in available-for-sale securities at March 31, 1998
consists of 576,611 shares of the Global Equity Corporation (see Note
7). 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 and
are reported as a separate component of stockholders' equity 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, 1998 and 1997, 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 16). 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. In addition, through 1996,
real estate taxes and interest costs were capitalized during the
development period. Real estate operating revenues include proceeds from
the sale of land.
F-8
33
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE. 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Water Rights
Water rights consist of various water interests acquired directly or
through the acquisition of real estate properties. Water rights are
stated at the lower of the carrying amount or fair value 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 16). Due to the limited number of
comparable sales of water rights in the Cherry Creek basin, the Company
has relied on valuations prepared by independent water engineers to
determine the relative fair values of water rights.
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. In addition, interest costs
are capitalized during the development period. Capitalized interest for
the years ended March 31, 1998, 1997 and 1996 was $184,729, $285,429 and
$136,156, respectively.
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, 1998 and 1997 was $290,800 and $232,475,
respectively. Other water assets also include the Company's investment
in shares of certain Southern California mutual water companies. The
investment is carried cost plus the Company's proportionate share of
capital assessments by the mutual water companies.
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 year ended which ends 90 days
prior to the Company's year end.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on
the straight-line method over the estimated useful lives ranging from
five to ten years and totaled $26,993, $30,841, and $11,035 for the
years ended March 31, 1998, 1997 and 1996, respectively.
Debt Issue Costs
Debt issue costs are amortized using the interest method over the life
of the related debt. Accumulated amortization as of March 31, 1998 and
1997 was $205,088 and $126,890, respectively.
F-9
34
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. 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. On April 1, 1996, the Company adopted SFAS
No 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma and basic
and diluted net income per share disclosures for employee stock option
grants made during the year ended March 31, 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
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 carryforwards. 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
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", on April 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be 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 values of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did
not have a material impact on the Company's financial position, results
of operations, or liquidity.
Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS No. 128"). 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 is 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. No prior period earnings per share
amounts were restated as a result of implementing SFAS No. 128.
F-10
35
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Income (Loss) Per Share (continued)
Basic earnings per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares
outstanding during each period. Earnings 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
EPS is computed by dividing the amount of earnings 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 8,213,747, 8,088,089 and 7,939,746
shares for the years ended March 31, 1998, 1997 and 1996, respectively.
Stock options to purchase the following number of shares of common stock
at exercise prices per share ranging from $5.44-$18.70, $5.44-$18.70 and
$1.00-$15.13 in fiscal years ended March 31, 1998, 1997 and 1996,
respectively, were not included in the computation of diluted earnings
per share as their effect would have been antidilutive:
1998 1997 1996
--------- --------- --------
Stock options 1,095,066 857,000 440,000
Warrants to purchase 98,000 shares of common stock at $17.50 per share
were not included in the computation of diluted earnings per share for
the years ended March 31, 1998, 1997 and 1996 as their effect would
have been antidilutive.
Convertible debentures, redeemable preferred stock and preferred stock
convertible into the following number of shares of common stock at
conversion prices of $15.86, $16.62 and $16.62 per share,
respectively, were not included in the computation of diluted earnings
per share for the years ended March 31, 1998, 1997 and 1996 as their
effect would have been antidilutive:
1998 1997 1996
--------- --------- --------
Convertible debentures 945,763 945,763 945,763
Redeemable preferred stock 569,551 -- --
Preferred stock -- 240,672 --
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.
F-11
36
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 2. 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, 1998 and 1997 are as
follows:
1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
Certificate of Deposit $ 1,000,000 $ - $ - $ 1,000,000
Commercial Paper 12,308,723 - - 12,308,723
Corporate Bonds 998,750 - - 998,750
U.S. Government Agency Note 946,350 - - 946,350
Common Stock 1,082,091 117,233 - 1,199,324
----------- -------- ------ -----------
Total $16,335,914 $117,233 $ - $16,453,147
=========== ======== ====== ===========
1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
Mutual Funds $1,062,136 $ - $(28,040) $1,034,096
========== ========== ======== ==========
Proceeds from the sales of available-for-sale securities were
$5,635,323, $1,888,258 and $325,000 for the years ended March 31,
1998, 1997 and 1996, respectively. Gross gain (loss) on the sale of
available-for-sale securities was a $51,201 gross gain and a $12,713
gross loss for the year ended March 31, 1998, and a $21,409 gross loss
for the year ended March 31, 1997. There was no gain or loss realized on
the sale of available-for-sale securities during the year ended March
31, 1996.
NOTE 3. NOTES RECEIVABLE:
Notes receivable arise 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 8.59%. Terms
of these notes generally require level payments of principal and
interest over periods of two 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 and 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). During the year ended
March 31, 1996, the Company sold approximately $950,000 of its notes
receivable associated with retail land sales at 82% of their face value,
recognizing a loss of approximately $170,000.
F-12
37
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 3. NOTES RECEIVABLE: (CONTINUED)
Aggregate maturities due on notes receivable at March 31, 1998 are as
follows:
Non-Retail Retail
Land Sales Land Sales Total
---------- ---------- -----
1999 $ 136,595 $ 78,697 $ 215,292
2000 147,740 69,172 216,912
2001 159,797 74,143 233,940
2002 62,841 218,805 281,646
2003 43,935 70,619 114,554
Thereafter - 539,351 539,351
--------- ----------- ----------
$ 550,908 $ 1,050,787 $1,601,695
========= =========== ==========
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1998 and 1997 consists of:
1998 1997
--------- --------
Land $ 2,952 $ 2,952
Equipment 123,750 170,178
--------- --------
126,702 173,130
Less accumulated depreciation (40,751) (64,136)
--------- ---------
$ 85,951 $ 108,994
========= =========
NOTE 5. LAND HELD FOR SALE:
Land held for sale at March 31, 1998 and 1997 consists of the following:
1998 1997
---------- -----------
Cherry Creek Basin, Colorado $ 831,609 $ 1,949,853
Rice farms and ranches, Yuba and Glenn County, California 3,128,668 3,128,668
---------- -----------
$3,960,277 $ 5,078,521
========== ===========
NOTE 6. WATER RIGHTS:
Water rights held at March 31, 1998 and 1997 consists of the following:
1998 1997
----------- -----------
Cherry Creek Basin, Colorado $10,465,244 $11,117,872
Los Angeles County, California 4,419,805 960,000
Rice farms and ranches, Yuba and Glenn County, California 280,798 280,798
Inyo County, California 96,539 -
Miscellaneous 2,324 42,016
----------- -----------
$15,264,710 $12,400,686
=========== ===========
F-13
38
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 6. WATER RIGHTS: (CONTINUED)
During the years ended March 31, 1998 and 1997, the Company purchased
the water rights to 1,152 and 300 acre feet of water, respectively, in
Los Angeles County, California. The purchase price of $3,450,450 and
$960,000, respectively, was paid in cash and through the issuance of
shares of the Company's common stock. Of the total purchase price,
$1,280,000 and $960,000, respectively, was paid through the issuance of
88,238 and 59,370, respectively, 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 and $42,564, respectively, related
thereto. The common stock issued was recorded at the purchase price less
the amount of the guarantee payment.
During the year ended March 31, 1996, the Company exchanged 257 acres of
real estate in the Cherry Creek Basin for cash of $130,000 and water
rights located in the same area. In conjunction with this transaction,
water rights were increased by approximately $1,350,000 based on the
fair market value of the real estate given up. Additionally, a gain of
approximately $1,250,000 was recognized, determined by the excess of the
fair market value of the property surrendered plus the cash received
over the basis of the property given up.
NOTE 7. INVESTMENT IN LIMITED LIABILITY COMPANY:
In October 1995, the Company and a joint venture comprised 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 ("NLRC")
which was owned 35.3% by the Company and 64.7% by Western Land Joint
Venture. NLRC 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 NLRC was funded with the proceeds from the sale of 9%
Convertible Subordinated Debentures.
On April 23, 1997, the Company sold its interest in NLRC to Global
Equity Corporation ("Global") for $13,360,000, of which $12,024,000 was
paid in cash and $1,336,000 was 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. As of March 31,
1998, the Global shares were valued at $1,199,324 and classified as
"Investment in available-for-sale securities" on the balance sheet. In
connection with the sale, NLRC 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 NLRC, 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 NLRC or
refinancing of NLRC or other revenues derived from the disposition of
NLRC by Global after they both recoup their investment in NLRC 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.
F-14
39
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 7. INVESTMENT IN LIMITED LIABILITY COMPANY: (CONTINUED)
A summary of financial information for NLRC at December 31, 1996
follows:
Current assets $ 1,765,000
Noncurrent assets 45,648,000
-----------
Total assets $47,413,000
===========
Current liabilities $ 494,000
Non-current liabilities 15,633,000
-----------
Total liabilities 16,127,000
-----------
Members' equity:
Western Land Joint Venture 20,218,000
Company 11,068,000
-----------
Total equity 31,286,000
-----------
Total liabilities and members' equity $47,413,000
===========
The following information reflects operations of NLRC for the period
from January 1, 1997 through April 23, 1997 (date of sale) and for the
year ended December 31, 1996 and the period from October 19, 1995
(inception) through December 31, 1995:
For the period
For the period Year ended October 19
January 1 through December 31, (inception) through
April 23, 1997 1996 December 31, 1995
----------------- ------------ -------------------
Net operating revenues $ 533,000 $ 2,540,000 $ 397,000
General and administrative
expenses 1,404,000 4,968,000 654,000
----------- ----------- -----------
Net loss $ (871,000) $(2,428,000) $ (257,000)
=========== =========== ===========
Company's share of net loss $ (307,623) $ (856,921) $ (74,891)
=========== =========== ===========
As a result of the sale of the Company's interest in NLRC, 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 1998, $36,667 of the deferred
gain was realized.
NOTE 8. 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, other current assets, accounts payable,
accrued expenses, 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 interest rates on which
the notes bear interest are not materially different than the interest
rates that would be charged to land buyers with similar credit ratings.
The carrying amount of the long-term debt and debentures is a reasonable
estimate of fair value based on 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.
F-15
40
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 9. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses at March 31, 1998 and 1997 consists of the following:
1998 1997
-------- --------
Severance $312,654 $ --
Consulting and engineering 141,011 25,503
Printing costs 73,614 50,000
Professional fees 55,500 50,000
Vacation 46,104 82,913
Private placement costs -- 180,000
Deposit -- 93,713
Other 104,071 200,389
-------- --------
$732,954 $682,518
======== ========
NOTE 10. LONG-TERM DEBT:
Long-term debt at March 31, 1998 and 1997 consists of debt related to
assets acquired in Cherry Creek Basin, Colorado, and the rice farms and
ranches in Yuba and Glenn County, California:
Cherry Creek Basin 1998 1997
----------- -----------
Mortgage note payable bearing interest at 8.5%. Paid in 1998 $ -- $ 1,830,942
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 82,217 89,373
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 255,335 270,754
Mortgage note payable bearing interest at 8%
Principal and interest are due in annual installments
of $72,632. Balance is due June 1999. At maturity,
a balloon payment of $625,054 plus any accrued
interest is due 646,006 665,406
Mortgage note payable bearing interest at prime rate plus 2.00%
(an effective rate of 11% at March 31, 1998). Principal payments
of $5,650 plus accrued interest are due annually. The balance is
due July 1999. At maturity, a balloon payment of $90,400 plus any
accrued interest is due 96,050 101,700
----------- -----------
1,079,608 2,958,175
Less current maturities of long-term obligations (51,138) (117,315)
----------- -----------
$ 1,028,470 $ 2,840,860
=========== ===========
Each mortgage note payable is collateralized by the individual property
to which it relates. As of March 31, 1998, the carrying value of the
collateral for notes payable was $2,865,000.
F-16
41
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 10. LONG-TERM DEBT: (CONTINUED)
Aggregate maturities required on long-term debt at March 31, 1998 are
as follows:
1999 $ 51,138
2000 742,121
2001 28,983
2002 31,502
2003 71,109
Thereafter 154,755
----------
$1,079,608
==========
NOTE 11. 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 of the Company.
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 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.
NOTE 12. 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 privately placed $5,000,000 of a new
series of convertible preferred stock. As a result of the private
placement, 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 Convertible Redeemable
Preferred Stock ("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. 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 right of the
holders to elect a majority of the
F-17
42
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 12. PREFERRED STOCK: (CONTINUED)
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. 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, the
Company paid dividends of $331,144, all of which was paid through the
issuance of 331 shares of Series C Preferred Stock.
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).
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 therefore, 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 therefore, 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.
NOTE 13. DISCONTINUED OPERATION:
During the fourth quarter of fiscal year 1993, the Company adopted a
formal plan to discontinue the silica plant business. As of October
1994, the Board of Directors determined it was in the best interest of
the Company to alter its plan for disposing of the discontinued silica
operations. Under the revised plan, the Company decided to liquidate the
silica plant assets rather than sell the entire operation as a unit.
Accordingly, the silica plant business is reported as a discontinued
operation for the years ended March 31, 1997 and 1996. During the year
ended March 31, 1998, the liquidation was completed.
During the fiscal year ended March 31, 1996, the Company realized losses
of $122,000 from the disposal of a portion of the discontinued operation
and provided for estimated losses on disposal of the discontinued
operation in the amount of $197,149 which included a provision for the
estimated loss on disposal of $129,200 and a provision for additional
anticipated operating losses until disposal of $67,949. During the
fiscal year ended March 31, 1997, the Company provided for additional
losses on disposal of the discontinued operation of $257,276. The change
in the provision in the current year was primarily due to lower than
anticipated sales proceeds from the disposal of the discontinued
operation. During the fiscal years ended March 31, 1997 and 1996, actual
income (loss) from the operations of the discontinued operation were
($47,427) and ($67,949), respectively.
F-18
43
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 14. RELATED PARTY TRANSACTION:
On April 2, 1996, the Company repurchased land previously sold in 1994
from a stockholder of the Company. The land was purchased for $264,198.
NOTE 15. INCOME TAXES:
Total income taxes for the years ended March 31, 1998, 1997 and 1996
were allocated to continuing operations. Income tax expense attributable
to income (loss) from continuing operations consists of:
Current Deferred Total
---------- --------------- ----------
Year ended March 31, 1998:
State $ 2,400 $ -- $ 2,400
========== =============== ==========
Year ended March 31, 1997:
Adjustment of the beginning-of-the-year
valuation allowance $ -- $ 1,100,000 $1,100,000
State 2,400 -- 2,400
---------- --------------- ----------
$ 2,400 $ 1,100,000 $1,102,400
========== =============== ==========
Year ended March 31, 1996:
State $ 2,400 $ -- $ 2,400
========== =============== ==========
Income tax expense attributable to income (loss) from continuing
operations was $2,400, $1,102,400, and $2,400 for the years ended March
31, 1998, 1997 and 1996, 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:
1998 1997 1996
----------- ----------- -----------
Computed "expected" income tax
expense (benefit) $ (646,500) $(1,411,000) $ 4,500
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated to
income tax expense -- 1,100,000 --
Depreciation and amortization of property
and equipment (326,800) (231,000) (231,000)
Accrued expenses 118,200 11,400 4,000
Cost of sale related to quasi adjustment 68,300 20,000 20,000
NOL carryforward 791,200 1,610,600 202,500
Other (4,400) -- --
State income taxes 2,400 2,400 2,400
----------- ----------- -----------
$ 2,400 $ 1,102,400 $ 2,400
=========== =========== ===========
F-19
44
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 15. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31, 1998 and 1997 are presented below.
1998 1997
----------- -----------
Deferred tax assets:
Property and equipment $ 933,000 $ 978,000
Net operating loss carryforwards 7,282,000 6,300,000
----------- -----------
Total gross deferred tax assets 8,215,000 7,278,000
Less valuation allowance (7,594,000) (6,574,000)
----------- -----------
Net deferred tax assets 621,000 704,000
----------- -----------
Deferred tax liabilities:
Land held for sale and water rights, principally
due to differences in capitalized interest (498,000) (578,000)
Water sales fees (123,000) (126,000)
----------- -----------
Total gross deferred tax liabilities (621,000) (704,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The valuation allowance for deferred tax assets as of April 1, 1997 and
1996 was $6,574,000 and $3,753,000, respectively. The net change in the
total valuation allowance for the years ended March 31, 1998 and 1997
was an increase of $1,020,000 and $2,821,000, 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 year ended March 31, 1997, the valuation
allowance was increased as a result of the current year's net operating
loss carryforward. In addition, the sale of the Company's interest in
NLRC 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, 1998 and 1997. 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
carryforward period change (see Note 16).
F-20
45
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 15. INCOME TAXES: (CONTINUED)
At March 31, 1998, the Company has net operating loss carryforwards 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
-----------
$19,500,000
===========
In addition, the Company has investment tax credit carryforwards of
approximately $80,000 which are available to reduce future federal
regular income taxes, if any, through March 31, 2001.
NOTE 16. 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 real estate 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
carryforwards 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 17. 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 1,800,000
shares of common stock to officers, directors, key employees and others
providing significant services to the Company. Stock options are
granted at an exercise price no less than fair value on the date of
grant. Shares available to be granted at March 31, 1998, 1997 and 1996
were 442,668, 105,334 and 130,000, respectively.
F-21
46
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 17. STOCK OPTION AND WARRANTS: (CONTINUED)
The per share weighted-average fair value of stock options granted
during the years ended March 31, 1998, 1997 and 1996 was $3.72, $6.76
and $7.29, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
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; Year ended March 31, 1997 -
Expected dividend yield of zero, expected volatility of .5156, risk-free
interest rates ranging from 6.10% to 6.12%, and an expected life of 5
years; Year ended March 31, 1996 - Expected dividend yield of zero,
expected volatility of .4701, risk-free interest rates ranging from
5.62% to 6.93%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, in Fiscal 1998 compensation expense of $139,500 has 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 would have been increased
to the pro forma amounts indicated below:
Fiscal Fiscal Fiscal
1998 1997 1996
---------- ---------- --------
Net Loss As reported $1,901,430 $5,392,474 $305,964
Pro forma 4,882,551 6,241,670 828,679
Basic and diluted
loss per share As reported $ .30 $ .67 $ .04
Pro forma .66 .77 .10
Pro forma net loss and loss per share reflect only options granted
during the years ended March 31, 1998, 1997 and 1996. 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.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- --------------
Balance at March 31, 1995 403,000 $4.47
Granted 215,000 15.01
Exercised (178,000) 2.00
--------
Balance at March 31, 1996 440,000 10.62
Granted 440,000 15.84
Exercised (7,666) 14.03
Forfeited (15,334) 17.18
-------
Balance at March 31, 1997 857,000 13.15
Granted 722,000 10.53
Exercised (24,600) 6.97
Cancelled/forfeited (459,334) 14.92
--------
Balance at March 31, 1998 1,095,066 10.82
=========
F-22
47
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 17. STOCK OPTION AND WARRANTS: (CONTINUED)
At March 31, 1998 and 1997, the exercise prices of outstanding options
ranged from $5.44-$18.70 and the weighted-average remaining contractual
life of outstanding options was 6.1 years and 7.5 years, respectively.
At March 31, 1998 and 1997, the number of options exercisable was
725,062 and 412,998, respectively, and the weighted-average exercise
price of those options was $11.74 and $12.84, 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 expire in September and October, 1999. No warrants were
exercised during the years ended March 31, 1998, 1997 and 1996.
In March 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.
NOTE 18. COMMON STOCK SPLIT:
In March 1996, the Board of Directors of the Company approved a
two-for-one stock split effected in the form of a stock dividend on
shares of the Company's common stock to holders of record on March 18,
1996. The Company issued 4,034,224 additional shares of common stock in
connection with the stock split and retained the current par value of
$.001 per share for all outstanding shares of common stock. An amount
equal to the aggregate par value of the additional shares of common
stock issued was transferred from retained earnings to common shares.
Weighted average common shares outstanding and per-share information
for periods prior to March 28, 1996 have been restated to reflect the
effects of the stock split.
NOTE 19. GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the years ended March 31, 1998,
1997 and 1996 consist of the following:
1998 1997 1996
---------- ---------- ----------
Payroll and related costs $2,596,407 $1,081,574 $ 720,540
Legal and accounting 760,057 357,710 498,485
Consulting and engineering 623,385 364,423 143,926
Travel 127,517 173,978 95,947
Other corporate 1,538,193 968,567 663,627
---------- ---------- ----------
$5,645,559 $2,946,252 $2,122,525
========== ========== ==========
F-23
48
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 20. SEGMENT INFORMATION:
The Company has three major business segments: acquisition and
development of water rights, sale of real estate interests and
discontinued silica plant operations. Information concerning the
segments at March 31, 1998, 1997 and 1996 and for the years then ended
is presented below:
1998 1997 1996
------------ ------------ ------------
Revenue:
Water $ 932,377 $ 261,103 $ 974,458
Real estate 2,990,000 1,509,668 3,927,352
------------ ------------ ------------
$ 3,922,377 $ 1,770,771 $ 4,901,810
============ ============ ============
Operating Income (Loss):
Water $ 65,139 $ 202,728 $ 831,490
Real estate 1,560,829 533,293 1,906,472
Other operations and corporate (5,645,559) (2,946,252) (2,122,525)
------------ ------------ ------------
(4,019,591) (2,210,231) 615,437
Other income (expenses), net 2,120,561 (1,822,567) (599,852)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes $ (1,899,030) $ (4,032,798) $ 15,585
============ ============ ============
Capital Expenditures:
Water $ 3,672,937 $ 1,419,722 $ 1,955,634
Real estate 128,352 22,449 --
Other operations and corporate 41,374 125,345 14,908
------------ ------------ ------------
$ 3,842,663 $ 1,567,516 $ 1,970,542
============ ============ ============
Depreciation and Amortization Expense:
Water $ 58,325 $ 58,324 $ 52,718
Other operations and corporate 108,881 113,097 51,979
------------ ------------ ------------
$ 167,206 $ 171,421 $ 104,697
============ ============ ============
Identifiable Assets:
Water $ 18,453,067 $ 15,613,682 $ 14,215,780
Real estate 3,960,277 5,078,521 5,626,857
Discontinued operation, net -- 120,000 428,623
Other operations and corporate 19,478,624 18,663,155 20,149,449
------------ ------------ ------------
$ 41,891,968 $ 39,475,358 $ 40,420,709
============ ============ ============
The Company recognized revenue of $151,938, $229,568 and $189,561 from
Fontana Water Resources for the years ended March 31, 1998, 1997 and
1996, respectively. No other recurring customer accounted for more than
10% of the Company's revenue.
F-24
49
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 21. COMMITMENTS AND CONTINGENCIES:
The Company has several noncancelable operating leases, primarily for
office equipment, office space and farmland 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 $112,834, $103,987 and $55,011 for the years ended
March 31, 1998, 1997 and 1996, respectively.
Future minimum leases payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
March 31, 1998 are:
Year ended March 31, Operating Leases
-------------------- ----------------
1999 $ 114,979
2000 53,887
2001 21,724
2002 592
---------
Total minimum lease payments $191,182
=========
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 Metropolitan Water District of Southern
California ("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 December 22,
1997. The Company is currently evaluating the complaint of MWD and DRW.
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.
In June 1997 the Company entered into a water purchase agreement with
Elsinore Valley Municipal Water District ("EVMWD") pursuant to which the
Company agreed to purchase from EVMWD not less than 4,000 acre-feet of
water per year for ten years. The agreement commenced on July 1, 1997
and continues through June 30, 2006. The price to be paid by the Company
for the water it purchases from EVMWD will be $145 per acre-foot during
the first year, with the price increasing annually by 3.5%, beginning on
the first anniversary. EVMWD has agreed to deliver the water to the
Prado Flood Control Basin. In addition, the water purchase agreement
provides that if EVMWD has any additional water available for sale, the
Company will have the first right of refusal to purchase up to 2,000
acre-feet of such water during each year of the term of the agreement at
a price and on the terms contained in the agreement. If EVMWD breaches
the agreement or for any reason and is unable to comply with its
obligations to provide the Company with the quantities of water required
to be delivered by the agreement, the Company's sole remedy against
EVMWD is to terminate the agreement, and such termination shall not give
to any damages claim. The Company has not yet purchased any water under
this agreement, because it has not yet identified a purchaser to whom
the water can be transported.
The Company is subject to claims and legal proceedings arising in the
ordinary course of business. While complete assurance cannot be given 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.
F-25
50
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1998 1997 1996
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,601,470 $ 1,695,769 $ 1,039,694
Interest capitalized during the period 184,729 285,43 198,603
Cash paid during the period for income taxes 2,400 2,400 2,400
Supplemental disclosure of noncash investing and financing activities:
Water rights acquired in exchange for common stock 1,162,144 917,436 --
Exchange of Series B convertible preferred stock for Series C
redeemable preferred stock 3,807,517 -- --
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 466,144 -- --
Accretion of preferred stock issuance costs 30,584 -- --
Common stock issued upon exercise of stock options 13 -- --
Unrealized gain on available-for-sale-securities 145,273 -- --
Foreclosure of note receivable secured by land:
Land held for sale 128,352 -- --
Notes receivables (123,244) -- --
Accounts payable (5,108) -- --
Write-off of property and equipment and related accumulated
depreciation:
Property and equipment (54,116) -- --
Accumulated depreciation 50,378 -- --
F-26
51
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
To the Members of
Nevada Land & Resource Company, LLC
We have audited the accompanying balance sheet of Nevada Land & Resource
Company, LLC as of December 31, 1996, and the related statements of
operations, members' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nevada Land & Resource
Company, LLC at December 31, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
February 8, 1997
F-27
52
NEVADA LAND & RESOURCE COMPANY, LLC
BALANCE SHEET
December 31, 1996
(In thousands)
ASSETS
Cash and cash equivalents - includes restricted cash and
cash equivalents of $927 (Note 1) $ 1,765
Investment in real estate 43,917
Other assets 1,731
-------
Total assets $47,413
=======
LIABILITIES AND MEMBERS' CAPITAL
Notes payable (Note 2) $15,633
Accrued expenses and other liabilities (Note 4) 494
-------
Total liabilities 16,127
Commitments and contingencies (Note 3) --
Members' capital 31,286
-------
Total liabilities and members' capital $47,413
=======
See accompanying notes.
F-28
53
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF OPERATIONS
December 31, 1996
(In thousands)
Revenues:
Rental income $ 781
Other 270
Sale of real estate 1,489
-------
Total Revenues 2,540
Expenses:
Real estate operating and other expenses (Note 4) $ 2,810
Cost of sales of real estate 639
Interest expense 1,519
-------
Total Expenses 4,968
-------
Net loss $(2,428)
=======
See accompanying notes.
F-29
54
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF MEMBERS' CAPITAL
Year ended December 31, 1996
(In thousands)
Western Land Western Water
Joint Venture Company Total
---------------------------------------
Beginning Balance at January 1, 1996 $21,834 $11,909 $33,743
Capital Distributions (19) (10) (29)
Net Loss (1,578) (850) (2,428)
---------------------------------------
Balance at December 31, 1996 $20,237 $11,049 $31,286
=======================================
See accompanying notes.
F-30
55
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF CASH FLOWS
Year ended December 31, 1996
(In thousands)
OPERATING ACTIVITIES
Net loss $(2,428)
Adjustments to reconcile net loss to net cash used in
operating activities:
Changes in operating assets and liabilities:
Investment in real estate 274
Other assets 456
Accrued expenses and other liabilities (23)
-------
Net cash used in operating activities (1,721)
FINANCING ACTIVITIES
Capital distributions (29)
Payments on notes payable (920)
-------
Net cash used in financing activities (949)
Decrease in cash and cash equivalents (2,670)
Cash and cash equivalents at beginning of year 4,435
-------
Cash and cash equivalents at end of year $ 1,765
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Total interest paid $ 1,157
=======
See accompanying notes.
F-31
56
NEVADA LAND & RESOURCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nevada Land & Resource Company, LLC ("the Company"), a Delaware limited
liability company, was formed in October 1995, in conjunction with the
acquisition of 1.4 million acres of land located in Nevada. The Company's sole
business is to hold, operate, sell, and otherwise realize investment returns
from operation or disposition of the land. The members are Western Water
Company and Western Land Joint Venture. Net income or loss is allocated to the
members proportionate to their capital contributions. The Limited Liability
Company Agreement specifies that the Company will terminate no later than
December 31, 2010, subject to extension by the agreement of the members.
The members' interest in the Company are as follows:
% Interest
----------
Western Land Joint Venture 64.71%
Western Water Company 35.29%
On October 19, 1995, Western Land Joint Venture contributed $22 million of
capital and Western Water Company contributed $12 million. In conjunction with
the land acquisition, the Company issued a $12 million secured note payable and
issued a $5 million note payable to the seller of the land.
OTHER ASSETS
Other assets include certain costs incurred to form the Company, including debt
issuance costs. These capitalized costs are being amortized over 10 years,
which is the anticipated period to dispose of the land.
INCOME TAXES
For federal and state income tax reporting purposes, each member will report
its share of taxable income or loss on its separate tax return. Accordingly, no
provision for income taxes has been reflected in the accompanying financial
statements.
INVESTMENT IN REAL ESTATE
Investment in real estate is carried at cost, which includes land and other
land acquisition costs, including title costs.
F-32
57
NEVADA LAND RESOURCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN REAL ESTATE (CONTINUED)
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121 ("SFAS No. 121,") Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. SFAS No. 121 also requires that the portions of the
investment in real estate ready for sale be valued at the lower of cost or fair
value less costs to sell and dispose. The Company's adoption of SFAS No. 121
did not have an impact on its financial statements.
Cost of sales of real estate is determined using the relative sales value
method.
REVENUES
Sales of real estate are recorded and profit is recognized when the buyer has
made a minimum down payment, and title has passed to the buyer.
The Company rents land to various tenants primarily for grazing purposes.
Rental income is recognized when earned.
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. The Company places temporary cash investments in high quality
financial instruments.
Cash and cash equivalents at December 31, 1996, includes $926,919 of restricted
cash used to pay principal and interest on the MSMC Note (see Note 2).
F-33
58
NEVADA LAND & RESOURCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE
The Company obtained a $12.0 million loan from Morgan Stanley Mortgage Capital,
Inc. (MSMC), an affiliate of Western Land Joint Venture, on October 19, 1995.
The loan bears interest at a rate equal to LIBOR plus four percentage points.
LIBOR is the London Interbank offered rate for one-month U.S. dollar deposits.
At December 31, 1996, LIBOR was 5.5%. Interest is payable monthly on the
notes, and principal, which is due October 19, 1997, is paid to the extent
funds are available. The note is a non-recourse obligation secured by the
Company's investment in real estate.
As partial consideration for the land acquired, the Company issued a $5 million
promissory note, maturing on October 1, 2000, to the Atchison Topeka and Santa
Fe Railway Company (the Seller). Interest is paid monthly to the extent that
payment is received on four geothermal leases associated with the acquired
land. At December 31, 1996, the outstanding principal balance was $5 million.
The loan bears a fixed 9.0% interest rate.
3. COMMITMENTS AND CONTINGENCIES
The Company is not aware of any material pending legal proceedings outside the
ordinary course of its business as to which the Company is subject.
4. OTHER RELATED PARTY TRANSACTIONS
The Company has incurred $119,258 for services rendered by its affiliates,
which is included in real estate operating and other expenses. The Company
has reimbursed its affiliates $62,931 for these costs for the year ended
December 31, 1996. The remainder of $56,327 is included in accrued expenses
and other liabilities.
F-34
59
(Ernst & Young, LLP letterhead)
REPORT OF INDEPENDENT AUDITORS
Nevada Land & Resource Company, LLC
We have audited the accompanying balance sheet of Nevada Land & Resource
Company, LLC as of December 31, 1995, and the related statements of operations,
members' capital and cash flows for the period October 19, 1995 (date of
inception) to December 31, 1995. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nevada Land & Resource Company,
LLC at December 31, 1995, and the results of its operations and its cash flows
for the period October 19, 1995 (date of inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
------------------------------------
February 23, 1996
F-35
60
NEVADA LAND & RESOURCE COMPANY, LLC
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 4,435
Investment in real estate 44,191
Other assets 2,187
-------
Total assets $50,813
=======
LIABILITIES AND MEMBERS' CAPITAL
Notes payable $16,553
Accrued expenses and other liabilities 517
-------
Total liabilities 17,070
Members' capital 33,743
-------
Total liabilities and members' capital $50,813
=======
See accompanying notes to financial statements.
F-36
61
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 19, 1995 (INCEPTION) TO DECEMBER 31, 1995
(IN THOUSANDS)
REVENUE
Rental Income $ 361
Interest Income 36
-----
Total Revenue 397
EXPENSES
Real Estate Operating Expenses 379
Interest Expense 275
-----
Total Expenses 654
Net Loss ($257)
=====
See accompanying notes to financial statements.
F-37
62
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF CHANGES OF MEMBERS' CAPITAL
FOR THE PERIOD FROM OCTOBER 19, 1995 (INCEPTION) TO DECEMBER 31, 1995
(IN THOUSANDS)
Western Land Western Water Total Members'
Joint Venture Company Capital
------------ ------------- --------------
Capital contributions $ 22,000 $ 12,000 $ 34,000
Net loss (166) (91) (257)
-------- -------- --------
Balance at December 31, 1995 $ 21,834 $ 11,909 $ 33,743
======== ======== ========
See accompanying notes to financial statements.
F-38
63
NEVADA LAND & RESOURCE COMPANY, LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 19, 1995 (INCEPTION) TO DECEMBER 31, 1995
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (257)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 60
Changes in operating assets and liabilities:
Other assets (2,247)
Accrued expenses and other liabilities 484
--------
Net cash used by operating activities (1,960)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in real estate (39,158)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 34,000
Proceeds from issuance of notes payable 12,000
Payments on notes payable (447)
--------
Net cash provided by financing activities 45,553
Cash and cash equivalents at end of period $ 4,435
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 95
SUPPLEMENTAL DISCLOSURE OF NON CASH FLOW INVESTING AND FINANCIAL ACTIVITIES:
Note payable assumed upon acquisition of real estate $ 5,000
See accompanying notes to financial statements.
F-39
64
NEVADA LAND & RESOURCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) Description of Company and Significant Accounting Policies
Nevada Land & Resource Company, LLC ("the Company"), a Delaware
limited liability company, was formed in October 1995 in conjunction
with the acquisition of 1.4 million acres of land located in Nevada.
The Company's sole business is to hold, collect, operate, sell and
otherwise realize investment returns upon operations or dispositions
of the land. The members are Western Water Company and Western Land
Joint Venture. Net income or loss is allocated to the members
proportionate to the capital contributions.
On October 19, 1995 Western Land Joint Venture contributed $22
million of capital and Western Water Company contributed $12 million.
In conjunction with the land acquisition the Company obtained a $12
million senior subordinated note payable and issued a $5 million note
payable to the seller of the land.
Capitalized Costs
Certain costs incurred to form the Company including debt issuance
have been capitalized and included in other assets on the balance
sheet. The amounts capitalized to form the Company are being
amortized on a straight-line basis over 10 years which is the
anticipated period to dispose of the land. The amounts capitalized
related to debt issuance are being amortized using the effective
interest method.
Income Taxes
The accompanying financial statements include no provision for income
taxes since, it is the intent of the Company and its members that the
Company be treated as a partnership for income tax purposes. As such,
income taxes on income or losses realized by the Company are
generally the obligation of the members.
Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and the
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Company places temporary
cash investments, primarily repurchase agreements, with its bank,
which is a high credit quality financial institution. The carrying
amount of cash and cash equivalents approximate fair value.
All cash and cash equivalents are restricted and pledged as
collateral for the senior subordinated note.
F-40
65
NEVADA LAND & RESOURCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(3) Notes Payable
The Company obtained a $12.0 million loan from Morgan Stanley
Mortgage Capital, Inc. (MSMC), an affiliate of Western Land Joint
Venture on October 19, 1995. The loan bears interest at a rate equal
to LIBOR plus four percentage points. LIBOR is the London Interbank
offered rate for one-month U.S. dollar deposits. At December 31, 1995
LIBOR was 5.72%. Interest is payable monthly on the notes, and
principal, which is due October 19, 1997, is paid to the extent funds
are available. Interest of $94,717 was paid to MSMC for the period
ended December 31, 1995. The note is a non-recourse obligation
secured by the Company's assets. In connection with the debt
issuance, the Company paid MSMC $121,900 in fees which were
capitalized and included in other assets.
As partial consideration for the land acquired the Company issued a
$5 million promissory note maturing on October 1, 2000 to the
Atchison Topeka and Santa Fe Railway Company (the Seller). Repayments
are made to the extent that payment is received on four geothermal
leases associated with the acquired land. At December 31, 1995 the
outstanding principal balance was 55.0 million. The loan bears a
fixed 9.0% interest rate. Interest incurred of $75,000 is included in
accrued expenses and other liabilities.
(4) Commitments and Contingencies
The Company is not aware of any material pending legal proceedings
outside the ordinary course of its business as to which the Company
is subject. However, various litigation matters incidental to the
business of the Company and the liquidation of its assets are pending
or threatened which may adversely affect the ability of the Company
to realize upon certain assets.
(5) Other Related Party Transactions
Included in accrued expenses and other liabilities are $185,698 of
capitalizable due diligence costs that pertain to the acquisition of
the land and the formation of the Company, and are due to the Member.
In addition, the Company accrued $76,402 in operating expenses that
are also payable to the Member.
F-41