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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
COMMISSION FILE NUMBER 0-18756
WESTERN WATER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 33-0085833
(State of incorporation) (I.R.S. Employer Identification No.)
4660 LA JOLLA VILLAGE DRIVE, SUITE 825, SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 535-9282
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Securities registered pursuant to Section 12(b) of the Act: --------------------- ----------------------
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 [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 27, 1999 was approximately $24,116,000 (based on last
reported sale price of $3.13 per share of common stock on that date). All
directors are considered affiliates. There were 7,932,616 shares of registrant's
common stock outstanding as of May 27, 1999.
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 1999 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the close of the registrant's fiscal year, are incorporated herein by
reference in Part III of this Report.
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TABLE OF CONTENTS
Item Page
- ---- ----
Part I
1. Business........................................................................... 3
2. Properties......................................................................... 13
3. Legal Proceedings.................................................................. 13
4. Submission of Matters to a Vote of Security Holders................................ 15
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters.............. 16
6. Selected Financial Data............................................................ 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................18
7A. Quantitative and Qualitative Market Risk Disclosures............................... 26
8. Consolidated Financial Statements and Supplementary Data........................... 26
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................... 26
Part III
10. Directors and Executive Officers of the Registrant................................. 27
11. Executive Compensation............................................................. 27
12. Security Ownership of Certain Beneficial Owners and Management......................27
13. Certain Relationships and Related Transactions..................................... 27
Part IV
14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K.......................................................... 27
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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 1999
and 2000 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,
sells and leases water and water rights in the western United States. For the
last few years, the Company has been developing this business through the
acquisition of water rights and other interests in water, the purchase of real
estate for the water rights associated with such real estate, and recently, the
sale or lease of water. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as real estate, in California and Colorado.
The Company's current principal activity is the acquisition and development of
water rights and the sale or lease of its water. Although the Company has
commenced selling some of its water to municipalities and other users, prior to
this past fiscal year the Company derived most of its revenue from the sale of
real estate that it acquired for the associated water rights, and from assisting
unaffiliated owners of water rights to obtain revenue from their water rights.
Since 1998, the Company has focused its principal efforts on becoming an
independent water wholesaler to municipalities and other agencies located in
California and Colorado. The Company's goal is to acquire water assets, develop
the water assets for resale, and to then sell or lease water derived from those
assets to municipalities or other water utilities, agencies or districts. In
connection with its Southern California water transfer activities, the Company
has, to date, (i) acquired the rights to annually pump approximately 1,219 and
243 acre-feet of water from the Central Water Basin and West Coast Basin in Los
Angeles County, respectively, (ii) 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, (iii) acquired the rights to annually pump
approximately 2,996 acre-feet of water from the Mojave Basin in San Bernardino
County, (iv) initiated a water project in Inyo County to pump and deliver
approximately 6,000 acre-feet of groundwater to the Los Angeles Department of
Water & Power through the Los Angeles Aqueduct, (v) entered into a pumping
rights lease and a water sale agreement with the City of Inglewood, California
("Inglewood") pursuant to which Inglewood leased the rights to pump 4,450
acre-feet of water per year to the Company for a five-year period and
simultaneously agreed to buy, 5,950 acre-feet of water each year for the next
five years, (vi) entered into a water transfer agreement with Natomas Central
Mutual Water Company ("Natomas") pursuant to which Natomas agreed, subject to
certain conditions still to be satisfied, to transfer to the Company the
temporary use of up to 30,000 acre-feet of non-Central Valley Project water from
the Sacramento River by October 1999, and (vii) acquired various interests in
Southern California mutual water companies. Although the Company has commenced
reselling/leasing certain of these water assets, its ability to recognize the
full benefit of the foregoing water rights and water assets is subject to
various regulatory and litigation matters described below in this Annual Report.
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In order to fund a portion of the anticipated cost of acquiring and
developing Southern California groundwater rights and other water-related
assets, Company issued $9,000,000 of its Series C Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock") in April 1997 and
$10,000,000 of its Series D Convertible Redeemable Preferred Stock ("Series D
Preferred Stock") in October 1998. 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 addition to the assets and rights the Company acquired in connection
with its Southern California water transfer program, the other principal
California water interests currently owned by the Company consist of certain
riparian and appropriative water rights, together with certain groundwater
rights, associated with approximately 9,055 acres of real property (the "Yuba
Property") located along the Yuba River in California, and the water rights
associated with 2,236 acres of California rice farms and ranches (some of this
land has been previously sold by the Company) located in Northern California.
The Company's California real estate holdings consist of approximately 1,570
acres located in Northern California and 367 acres in Southern California.
The principal Colorado water interests owned by the Company consist of
the water rights associated with an aggregate of 4,559 acres of undeveloped land
and certain other water rights in the Cherry Creek basin. This land was
purchased by the Company in 1992 and most of the land has been sold. However,
the Company has retained almost all water rights from the land that was sold.
The Cherry Creek basin is the drainage area of Cherry Creek, south of Denver,
Colorado. The Cherry Creek assets were acquired primarily for the purpose of
developing, selling or leasing water in the Cherry Creek basin. The Company's
real estate holdings in Colorado currently consist of approximately 280 acres of
primarily undeveloped land located in the Cherry Creek basin.
On April 23, 1997 the Company sold its 35.3% interest in Nevada Land &
Resources Company, LLC (the "Nevada LLC") to a company now owned by PICO
Holdings, Inc. ("PICO"). The Nevada LLC owns approximately 1.38 million acres of
land and related water interests in Nevada (the "Nevada Property"). In
connection with the sale of the Company's interest in the Nevada LLC, the Nevada
LLC entered into a consulting agreement (the "Consulting Agreement") with
Western Agua, L.P., a limited partnership in which the Company owns a 70%
interest and in which the Company is the sole general partner. 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. is
entitled to receive 50% of the net proceeds, if any, derived from the subsequent
sale, leasing or other disposition of all or any portion of the Nevada LLC or
refinancing of the Nevada LLC, or other revenues derived from the disposition of
the Nevada LLC by the new owners after they both recoup their investment in the
Nevada LLC and earn a 20% cumulative return, compounded annually on their
investment, provided such net proceeds have begun to be earned within five years
from the date of sale. PICO is contesting Western Agua's right to the interest
in the net proceeds, and Western Agua has filed a lawsuit against the Nevada LLC
to affirm its rights. See "Item 3. Legal Proceedings," below.
The Company is also 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.
This agreement is scheduled to expire on December 31, 1999.
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 Western Water Company and to all of its
subsidiaries. On September 18, 1992, the Company changed its name from "YG
Development Company" to "Western Water Company," and on March 23, 1994, the
Company changed its state of incorporation from California to Delaware.
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OVERVIEW OF WATER MARKETS
The Company is currently directing most of its efforts to acquiring and
developing water assets in California and in the Cherry Creek basin in Colorado.
The Company believes that there is a growing demand for water resources in both
of these areas, which demand is expected to exceed the water resources currently
available to these areas.
There is a developing public policy to expand water markets in the
western United States to help meet the need for increased water supply and
reliability because of population growth. The objectives of this developing
public policy include improved clarity of water rights, access to existing
conveyance facilities at a fair price, and competitive price-sensitive
allocation of scarce water resources.
According to the State Water Plan (Bulletin 160-98) of the California
Department of Water Resources ("DWR"), last updated in November 1998, the
amount of water used in Southern California is estimated at 10.5 million
acre-feet in 1995, and is expected to grow to 11.4 million acre-feet in 2020.
Even assuming the development of a number of new water resources and
significant additional conservation efforts over the forecast period, the
shortage of water estimated at 200,000 acre-feet in 1995 is estimated to grow
to 1.3 million acre-feet by 2020, as the available supply is expected to
decrease from 10.3 million acre-feet in 1995 to 10.1 million acre-feet in 2020.
Douglas County, Colorado, south of Denver, is experiencing very rapid
population growth. This county also has very limited local surface water
supplies, and is reliant upon groundwater and some surface water from local
streams and the South Platte River. Additional surface water for the area is
not readily available, as existing supplies are already controlled by others
and development of new water supply projects has been blocked. Local agencies
are turning to the sustainable use of local groundwater as the key to meeting
new demands on their systems. Demand for local groundwater to supply new growth
is expected to exceed 50,000 acre-feet over the next 20 years.
REGULATORY OVERVIEW
Water rights in California are subject to complex laws, regulations and
jurisdictions that complicate the development of water for transfer and sale.
Under the doctrine of appropriation, a water user can publicly claim water from
a river for beneficial use, so long as the water is physically available from
the flow of the river after accounting for the rights of prior appropriators.
Thus, older appropriations are senior in right to later appropriations. However,
senior appropriative rights may be lost through non-use for long periods.
Beginning in 1914, surface water (generally, water in rivers) has been subject
to regulation by the State Water Resources Control Board ("SWRCB"). The SWRCB
oversees a registry of surface right appropriations and a dispute resolution
process designed to mediate competing claims to the use of the State's surface
water. The Company claims various appropriative rights on the Yuba River, some
of which predate SWRCB jurisdiction (pre-1914 rights) and are therefore
"grandfathered" from regulatory jurisdiction.
California law also recognizes the rights of landowners adjacent to a
river to divert an unquantified amount of water from the river for beneficial
use on such lands (riparian rights) or for instream beneficial use. Riparian
rights cannot be forfeited through non-use. The Company claims riparian rights
on the Yuba River; these riparian claims are supported, as well, by a court
decree dating from 1929.
Groundwater (generally, water in underground aquifers) is not subject to
statewide regulation. Overlying landowners have the right to place wells on
their property and pump water from the underlying aquifer. In some cases, such
water rights may be severed from the land and traded separately. The Company has
retained the substantial groundwater rights associated with the Yuba Property.
When there are disputes about groundwater rights--generally as the
result of overdrawing a water basin by multiple wells--such disputes are either
negotiated to resolution among the surrounding pumpers or submitted to
litigation. In Southern California, there are several basins in which such
litigation has resulted in a legal apportionment of the annual safe yield of the
basin among the historic pumpers. Such so-called adjudicated basins are
regulated by a court-appointed "watermaster" who manages an accounting system to
assure that extractions from the basins are limited in accordance with the
court's order. The Company has purchased water rights in three such adjudicated
basins.
The proposed transfer of water from a place of origin to a proposed area
of use in another region of the State generally requires a series of regulatory
approvals designed to assure that other water users and the environment are not
harmed by the transfer. For example, the Company is currently pursuing
clarification of the rules for such transfers in the context of a petition
before the SWRCB. Under the petition, Natomas Central Mutual Water Company is
seeking permission to transfer water it has the right to appropriate from the
Sacramento River to the Company. The water is available for transfer as a result
of Natomas's conservation efforts. The Company plans to resell the water
received from Natomas to unrelated third parties.
In order to transport water from area of origin (where the water may be
surplus to local needs) to distant areas of use, federal, state and local
governments have developed a complex interconnected infrastructure system to
augment conveyance through natural flow in rivers. Important portions of the
infrastructure include: (i) the Central Valley Project, operated by the U.S.
Bureau of Reclamation, (ii) the State Water Project (sometimes referred to as
the California Aqueduct), operated by the California Department of Water
Resources, (iii) the Colorado River Aqueduct, operated by the Metropolitan Water
District of Southern California, and (iv) the Los Angeles Aqueduct, operated by
the Los Angeles Department of Water and Power. In addition, there are a variety
of regional and local conveyance facilities throughout the State.
Under legislation enacted in 1986 ("the Wheeling Statute"), available
capacity in such public water systems is required to be made available to
facilitate voluntary water transfers, subject to "fair compensation" to the
owner of the infrastructure. In light of uncertainty regarding application of
the Wheeling Statute and the reluctance of system operators to accommodate water
transfers, the Company has sought clarification through request, negotiation and
further legislation. The outcome of the Company's efforts to gain such
clarification is not yet certain. Therefore, even as to water rights clearly
owned by the Company and eligible for transfer according to applicable water
rights law, there can be no assurance that the Company will gain access to
available conveyance capacity on a timely basis or at an economic cost. Without
such access, the Company's ability to sell water will be severely constrained.
DESCRIPTION OF BUSINESS
The Company's business goal is to create shareholder value by producing
annuity-like income through identifying undervalued water assets, and enhancing
the value of those assets via development, transmission and delivery to
customers in densely populated areas in the arid western United States.
Southern California Water Transfer Program. Based on statements made by
officials of major California water agencies, the Company believes that the
legal and institutional barriers to water transfers by private enterprises may
be reduced, making it easier for private entities to transport water through the
distribution systems of the state and local agencies during periods when those
systems have excess capacity. The Company believes that water transfers can be a
cost-effective means of providing water to underserved users and, accordingly,
has developed a plan to become an independent water provider to municipalities
and other agencies located primarily in Southern California and Colorado.
The Company believes that water transfer transactions will require the
Company to ( i) purchase water that can be delivered to urban areas in
California and Colorado, (ii) finance the development of infrastructure, such as
wells, pipes, and pumps, needed to deliver water, and (iii) enter into
agreements with utilities, cities, or water districts for the sale or lease of
the Company's water to such water retailers. The Company anticipates that each
water transfer transaction that it enters into 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
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approvals and to satisfy a series of environmental and other protective
conditions. In addition, the Company may need to provide financing to certain
municipalities, in order to be able to sell or lease water 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 saleback transactions such
as the transaction completed last year with the City of Inglewood, California.
However, no financing has yet been obtained pursuant to the letter agreement.
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 Santa Margarita Water District ("SMWD") 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."
On September 30, 1998, the Company entered into a pumping rights lease
and a water sale agreement with the City of Inglewood, California. Beginning
October 1, 1998, Inglewood leased the rights to pump 4,450 acre-feet of water
per year to the Company for a five-year period. In consideration of the lease,
the Company made a $3,603,200 lump-sum cash payment to Inglewood. Under the
water sale agreement, the Company agreed to sell, and Inglewood agreed to buy,
5,950 acre-feet of water each year for the next five years. In the first year,
Inglewood will pay the Company $200 per acre-foot ($1,190,000). After the first
year, the per acre-foot price will escalate over the remaining four-year period
at a rate equal to the sum of 3.75% per year plus 25% of any increase in the
MWD's rate for water, as defined.
The Company financed the pumping rights lease lump-sum payment through a
$3,560,000 five-year amortizing term loan. The loan was obtained from Union Bank
of California and is secured by the Company's rights under the pumping rights
lease with Inglewood in addition to the water rights associated with the other
1,500 acre-feet of water to be sold to Inglewood by the Company during the term
of the loan.
The Company will obtain 4,450 acre-feet of the 5,950 acre-feet of water
it needs to deliver to Inglewood annually from the lease it entered into with
Inglewood. The Company secured the balance of the water from its owned inventory
of West Basin ground water pumping rights and entering into two water rights
leases. The first is a five-year water rights lease for 1,008 acre-feet per year
at a price of $150 per acre-foot in the first year ($151,200). This price will
escalate over the remaining four-year period at $7.50 per acre-foot per year.
The second is a fifteen-year water rights lease for 250 acre-feet per year for a
price of $135 per acre-foot in the first year ($33,750). The costs for
subsequent years will be determined by multiplying the cost for the first year
by the ratio of the index price for each subsequent year divided by the index
price for the first year. The index price is based on prices established
annually by the MWD. The remaining 242 acre-feet per year of water to be
supplied to Inglewood is owned by the Company.
In December 1998, the Company completed a pilot water sale in
cooperation with MWD. For the first time in its 70-year history, MWD exchanged
water with a private company for delivery within MWD's service territory. In
this transaction, the Company sold 1,000 acre-feet of water to the SMWD. The
transaction involved water previously purchased by the Company in Central
California. The water was delivered into the State Water Project, where it was
then conveyed to MWD by the DWR. The MWD stored, treated and delivered the water
to the Municipal Water District of Orange County, and ultimately to the SMWD.
Although the transaction was not financially material or profitable for the
Company, the Company believes that the pilot sale may pave the way for larger
transactions in the future.
The Company owns the rights to extract 1,462 acre-feet of water per year
from the groundwater located in the Central and West Coast Water Basins, Los
Angeles County, California. In addition, the Company also owns the rights to
extract 2,996 acre-feet of water per year from the groundwater located in the
Mojave Basin, San Bernardino County, California. The Company purchased the
underlying Mojave Basin water rights during the fiscal year ended March 31,
1999, as part of its plan to expand its participation in the ownership and
marketing of water in Southern California. The Company may use the water it is
entitled to extract under the foregoing pumping allocation to supplement its
water transfer activities in Southern California. It is also considering the
further purchase of such ground water rights. The Company recognized $264,596 of
revenue for the fiscal year ended March 31, 1999 from agreements it entered into
for the fiscal year ended March 31, 1999 to lease its Central and West Coast
Basins water rights. In May 1999, the Company completed its first sales of water
derived from its water rights in the Mojave Basin of Southern California.
As of March 31, 1999, the Company has invested $1,011,000 in the
development of a water project in Inyo County. Subject to environmental and
other regulatory approvals, the timing and receipt of which are uncertain, the
project will involve pumping approximately 6,000 acre-feet of groundwater from
properties located in Inyo County and delivery of that water to the Los Angeles
Department of Water & Power at the Los Angeles Aqueduct, which is about one mile
from the site of the project. Accordingly, because of the aforementioned
uncertainty, the Company recorded an allowance against the total Inyo County
water project costs incurred as of March 31, 1999.
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In February 1999, the Company entered into a water transfer agreement
with Natomas Central Mutual Water Company ("Natomas") pursuant to which Natomas
agreed, subject to certain conditions still to be satisfied, to transfer to the
Company up to 30,000 acre-feet of non-Central Valley Project water from the
Sacramento River by October 1999. In April 1999, Natomas filed a petition with
the State Water Resources Control Board ("SWRCB") seeking authority to complete
this transfer according to the petition and subject to approval of the SWRCB. Up
to 18,000 acre-feet of the water will be reserved by the Company for resale and
delivery to end-users in and/or north of the Sacramento-San Joaquin Delta (the
"Delta"). Approximately 12,000 acre-feet of the water will be conveyed through
DWR and/or the U. S. Bureau of Reclamation facilities for resale and delivery to
end-users south of the Delta or for temporary storage south of the Delta. In
February 1999, the Company paid a nonrefundable deposit of $275,000 to Natomas
and is obligated to pay Natomas, upon delivery of the water to a third party
purchaser, $20 per acre-foot for any of the water transferred for use within or
north of the Delta and $50 per acre-foot for any of the water transferred for
use south of the Delta. In addition, the Company will also pay Natomas 50% of
the net proceeds, as defined, from the sale of water to a third party purchaser.
The Company has not yet entered into contracts for the purchase of this water.
Yuba Property Water Rights. The Company owns certain riparian and
appropriative rights, together with certain groundwater rights, associated with
the approximately 9,055 acres of real property that constitutes the Yuba
Property. The Yuba County Superior Court, in a 1929 judgement, recognized the
Company's predecessor in interest's riparian rights to the Yuba River and
pre-1914 appropriative rights. Additionally, the Company holds overlying rights
to the groundwater aquifer beneath the Company's Yuba property. [Appropriations
that began before December 19, 1914 do not require a permit from the State
Water Resources Control Board].
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
Control 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
for sale or lease, as a part of the Water Transfer Program. See "Item 1.
Description of Business--Water Transfer Program." The Company's Yuba Property
water resources, when distributed, could be distributed with the other water
resources originating in the Sacramento River Valley. The Sacramento River
Valley water resources serve most of Northern California and serves Southern
California through statewide water distribution facilities, which begin at the
southern end of the Sacramento-San Joaquin Bay Delta. Accordingly, because of
the configuration of California's water distribution system, the Company
believes that sales could be made by the Company to water utilities serving over
half of the state's population. The Company has not, however, developed a plan
for marketing and selling its Yuba Property water and the Company cannot
currently estimate when any water disposition plan will be implemented. In
addition, there are various regulatory hurdles that could delay or limit the
Company's ability to deliver or sell its Yuba Property water. Accordingly,
although the Company believes that its Yuba Property water rights are a valuable
asset, it is not known
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when or if the Company will be able to realize any revenues or other financial
benefits from these water rights.
The Company's efforts related to delivering transferable surface Yuba
water to other California users will be regulated by existing water transfer
statutes. Additional issues included environmental constraints associated with
the transfer of water through or around the Sacramento-San Joaquin Bay Delta and
conveyance limits of the State Water Project operated by the California
Department of Water Resources and the Central Valley Project operated by the
Federal Bureau of Reclamation. Unlike most western states, California has not
statewide ground water law but relies instead on a body of case law and local
regulations to manage the resource. Movement of groundwater from the Yuba
property out of the county would require a local vote of approval. However,
groundwater exchanges may be possible which benefit both the local and statewide
economies.
Cherry Creek Water Rights Project. In July 1992, the Company initiated a
project (the "Cherry Creek Project") to assemble, develop, and eventually sell
water or packaged water rights to municipalities and other water users located
in the Cherry Creek basin in the State of Colorado. Cherry Creek is a tributary
of the South Platte River that flows into the City of Denver, Colorado, and the
Cherry Creek basin is the drainage area of Cherry Creek, encompassing
approximately 60 square miles. Much of the Cherry Creek basin is part of the
greater metropolitan area of Denver, an area that historically has had water
shortages. Although the water supplies currently available in the Cherry Creek
basin are sufficient, in most cases, to meet the current demand for water in the
Cherry Creek basin, increased need for water as a result of projected
residential, commercial, and industrial development and growth in the Cherry
Creek basin is expected to exceed the currently available supply of water in the
region. The goal of the Cherry Creek Project is to develop the Company's water
rights to provide reliable additional water resources in the Cherry Creek basin
that can be sold or leased to municipalities and other water users to meet
expected future demand for water.
The State of Colorado has enacted various laws and regulations that
identify and establish rights to tributary water (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 water derived from augmented packages of water
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. To date, the Company
has sold or exchanged a total of 4,279 acres of the Cherry Creek Project
properties. 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 a number of wells on such resold land), and the Company's plan is to
retain most water rights associated with any Cherry Creek real properties it may
sell in the future. The real estate parcels that have been sold are not needed
to further the principal purposes of the Cherry Creek Project. The Company has
the right to operate 14 wells drawing tributary water in the Cherry Creek basin,
of which 12 are existing wells. Eight of the 14 well rights are located on
property that is not owned by the Company. With respect to these eight wells,
the Company owns the right to drill and operate wells and to enter the real
property on which such wells may be located or drilled in order to operate or
establish wells.
In addition to the foregoing sales of Cherry Creek land, the Company in
April 1995 transferred approximately 257 acres of the Company's Cherry Creek
Project real estate to the State of Colorado in exchange for the rights to
withdraw and use 1,290 acre-feet of non-tributary water per year associated with
the adjacent park land owned by the state. The Company believes that the water
rights acquired pursuant to the foregoing exchange increased the amount of water
owned by the Company in Cherry Creek by approximately 20%.
The Company currently has the right to sell or lease each of the various
water rights it owns. However, in order to package its water rights so that it
can sell long-term, reliable water resources to municipalities and other larger
water users located in the Cherry Creek basin, the Company combined its various
water resources in a plan of augmentation submitted to the Colorado District
Court, Water Division (the "Colorado Water Court"). In February 1998, the
Company received Colorado Water Court's approval of the Company's plan of
augmentation.
With the plan of augmentation approved, the Company is now seeking to
market its water in the Cherry Creek basin. The Company is considering a number
of alternatives, from sale of water to a single
- 8 -
9
buyer or user, to the short-term and/or long-term sale of water to
municipalities or other water users such as land developers. The sale of its
water will, however, require the Company or the purchaser to develop and build
the infrastructure necessary to utilize the water currently owned by the Company
in the Cherry Creek basin. This could result in significant capital expenditure
requirements. During the fourth quarter of the year ended March 31, 1999, the
Company drilled its first well since the approval of the augmentation plan. This
well provides the Company with additional information on the water resources in
the acquifer. In addition, water from this well is available for future water
sales.
Agency Agreements. On December 7, 1993, the Company entered into an
agreement with The Atchison, Topeka and Santa Fe Railway Company ("Burlington
Santa Fe") 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 Burlington Santa Fe 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 7, 1993 agreement. Pursuant to the
amendment, Burlington Santa Fe engaged the Company to also act as its 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.
On December 1, 1998, Burlington Santa Fe and the Company entered into a
second amendment to the above-referenced December 7, 1993 agreement. Pursuant to
the amendment, the term of the December 7, 1993 agreement was extended to
December 31, 1999. In addition, the Company would no longer be Burlington Santa
Fe's agent with respect to any water rights or water-related rights of
Burlington Santa Fe in San Bernardino County, California, but would continue to
be Burlington Santa Fe's agent with respect to such rights in other counties of
California. The Company did not derive any revenues during the fiscal years
ended March 31, 1999 from its agreement with Burlington Santa Fe.
Other Water Assets. The Company owns a right to receive 3.7398% of all
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 the Fontana Union Water Company, a mutual water company,
under a 100-year lease (the "Cucamonga Water Fee Agreement") which expires in
2089. The Company received approximately $199,000 during the fiscal year ended
March 31, 1999 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. The
Company believes that these mutual water company shares entitle the Company to
receive an aggregate of 2,600 acre-feet of water per year.
- 9 -
10
Real Estate Held for Sale. In March 1993, the Company commenced
disposing of its Colorado real estate assets that were not needed for its water
rights development program. As of March 31, 1999, the Company still owned 280
acres of real estate located in the Cherry Creek basin in Colorado. Through
March 31, 1999, the Company has sold or exchanged, net of certain properties
which were repurchased, a total of 4,279 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 Company is currently
considering alternatives for generating value from the remainder of its Cherry
Creek real estate holdings.
In Glenn County, California, the Company sold 20 acres of farmland
during the year ended March 31, 1999. The Company is currently considering
alternatives for generating value from the remainder of its Glenn County real
estate holdings. No assurance can be given that the Company will be able to sell
any additional real estate parcels in the future or that any such sales will be
on terms favorable to the Company.
During the year ended March 31, 1999, the Company acquired various land
and farms located in San Bernardino County, California, that collectively
comprise 367 acres. The Company is currently considering alternatives for
generating value from the property and is leasing portions of the farms to
unaffiliated operators.
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, the
Company may compete directly with the Yuba County Water Agency in the sale of
water from Yuba County. Western Aggregates, an unaffiliated owner of certain
water rights in the Yuba Property, has informed the Company that it may attempt
to market its Yuba Property water rights and, therefore, will also compete with
the Company.
The Company's goal in the Cherry Creek basin of Colorado is to sell or
lease water to public water agencies and other users in the Cherry Creek basin.
On a limited basis, public agencies and private holders of water rights
currently also sell water and water rights in the Cherry Creek basin.
The Company will compete in Southern California with MWD and other water
wholesalers in trying to market any water that the Company acquires pursuant to
its Water Transfer Program.
Environmental Regulation. The Company's operations are or may become
subject to federal, state and local laws and rules regulating the discharge of
materials into the environment, air quality standards, pollution of stream and
freshwater sources, odor, noise, dust and other environmental protection
controls. The Company believes that it currently is in substantial compliance
with all material environmental laws governing its operations. Furthermore, the
Company does not believe that federal or state environmental laws will hinder or
adversely affect its proposed
- 10 -
11
operations. Compliance with existing environmental laws has to date had no
material effect on the Company's earnings or capital expenditures, but in the
future it will have the effect of delaying the completion of projects in those
cases where environmental impact statements or other similar documents have to
be prepared and filed. Furthermore, future legislation designed to protect the
environment, as well as future interpretations of existing laws, could require
further expenditures by the Company, or have adverse effects on its operations,
the extent and nature of which cannot now be predicted.Water leased or sold by
the Company may be subject to regulation as to quality by the United States
Environmental Protection Agency (the "EPA") acting pursuant to the Federal Safe
Drinking Water Act (the "US Act"). In California, the responsibility for
enforcing the US Act is delegated to the California Department of Health
Services (the "Health Department") and to the 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 consumers, it believes that
these standards only affect the water agencies that may buy or lease the
Company's water. While drinking water regulations do not directly affect the
Company, the regulations regarding the quality of water distributed affects the
Company's intended customers and may, therefore, depending on the quality of the
Company's water, impact the price and terms upon which the Company may in the
future sell its water or water rights.
Under various federal, state and local laws, regulations and ordinances
(collectively, "Environmental Laws"), an owner or operator of real estate
interests may be liable for the costs of cleaning up, as well as certain damages
resulting from, past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in or from a property. Certain Environmental
Laws including the federal Comprehensive Environmental Response Compensation and
Liability Act and Resource Conservation and Recovery Act, impose such liability
without regard to whether the owner knew of, or was responsible for, the
presence of hazardous or toxic substances or wastes at or from the property. The
presence of such substances or wastes, or the failure to properly remediate any
resulting contamination, also may adversely affect the owner's or operator's
ability to sell, lease, or operate its property or to borrow using its property
as collateral. Although the Company is not aware of any such environmental
contamination on any of its real estate holdings or on any locations adjacent to
its holdings, there can be no assurance that such environmental contamination
does not exist.
Employees. As of the date of this report, the Company has fourteen
full-time employees.
ITEM 2. PROPERTIES
The principal physical properties currently owned by the Company are the
following:
o Undeveloped land in the Cherry Creek basin, Colorado, consisting of a
total of approximately 280 acres and associated water rights, the rights
to operate six tributary wells on property owned by the Company, and
water rights reserved or acquired in connection with the 4,279 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.
o Various rice farms and ranches, located in Yuba County, California, that
collectively comprise 1,424 acres, and a 116-acre parcel in Glenn
County, California. The rice farms are graded for cultivation and
watered by wells
- 11 -
12
on the properties. The Company has leased the rice farms and ranches to
unaffiliated operators.
o The Company owns 30 acres of real estate located along the Yuba River in
Yuba County, California, and approximately ten miles northeast of
Marysville, California. The 30 acres are zoned industrial-extractive and
may be used for commercial but not residential purposes.
o 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.
o Various cattle and crop farms, located in San Bernardino County, that
collectively comprise 367 acres. The Company is currently leasing
portions of the farms to unaffiliated operators.
Some of the Company's foregoing real estate properties are encumbered by
mortgages. For a description of the Company's mortgage indebtedness, see "Note
11: 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 2,894 net square feet, pursuant to a lease that expires
in April 2004. The Company's current monthly rental obligation for the facility
is $6,512. In addition, the Company has a Northern California office facility in
Point Richmond, California. The facility contains 2,400 square feet and the
Company's current monthly rental obligation is $3,600 pursuant to a lease that
expires in February 2002.
ITEM 3. LEGAL PROCEEDINGS
In June 1997 the Company entered into a water sale agreement with Santa
Margarita Water District ("SMWD") pursuant to which SMWD agreed, subject to
certain conditions still to be satisfied, to purchase from a subsidiary of the
Company 10,000 acre-feet of water annually during each of the next ten years. In
September 1997, the Company entered into a water purchase agreement with San
Bernardino Valley Municipal Water District ("SBVMWD") pursuant to which SBVMWD
agreed, subject to certain conditions still to be satisfied, to sell to the
Company 100,000 acre-feet of surplus California State Water Project water during
the next ten years. SMWD is located and operates within the service area of The
Metropolitan Water District of Southern California ("MWD").
On September 30, 1997, MWD challenged the validity of the Company's
water sales and purchase agreements with SBVMWD and SMWD by filing a lawsuit
against SBVMWD, the Company and SMWD in the Superior Court of the State of
California for the County of Los Angeles. That action was dismissed by MWD,
without prejudice, on December 18, 1997, but a substantially identical complaint
had previously been filed by MWD on December 10, 1997, against SBVMWD and the
Company (but not SMWD) in the Superior Court of the State of California for the
County of Sacramento. On December 22, 1997, the DWR filed its complaint against
SBVMWD and the Company, making substantially similar claims and allegations.
The MWD complaint alleges that the Company acted as an agent or
co-conspirator with SBVMWD in attempting to facilitate the sale of State Water
Project water by SBVMWD in MWD's service area. The DWR complaint alleges only
that the Company acted as SBVMWD's agent for that purpose. Both complaints seek
declaratory relief stating that the water purchase agreement between SBVMWD and
the Company is invalid, and request that injunctive relief be granted blocking
the sale and use of State Water Project water within MWD's service area without
the written consent of MWD and DWR. Both complaints also challenge the validity
of the water purchase agreement on the ground that its execution and
implementation require compliance with the California Environmental Quality Act
("CEQA"), including the preparation of an environmental impact report.
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13
On January 12, 1998, MWD's and DWR's actions were consolidated for all
purposes, including trial, before the Sacramento Superior Court. MWD, DWR and
the Company have stipulated to an order of court made July 21, 1998,
consolidating another action with the two actions brought by MWD and DWR. The
third action involves a complaint filed by SBVMWD against DWR and MWD on
February 11, 1980, in the Sacramento Superior Court. By that complaint SBVMWD
sought a declaratory judgment allowing it to sell, without MWD's consent, State
Water Project water to Orange County Water District, a district located within
MWD's service area. On May 17, 1982, the parties to that 1980 action entered
into a stipulation indefinitely extending the time to respond to the amended
complaint, and waiving any right to dismiss the action for failure to prosecute
it in a timely manner. Nothing has occurred in that action since the filing of
that stipulation. This third action involves the same basic legal issues as the
other two actions and its consolidation with those actions will not prejudice
the Company's position in either of them.
By stipulation between the Company and DWR and MWD, made and approved by
the Court on April 15, 1998, DWR and MWD dismissed, without prejudice, as
against the Company, their petitions for writ of mandate and injunctive relief
based on alleged non-compliance with CEQA, and in consideration thereof the
Company agreed to give DWR and MWD thirty (30) days written notice of its intent
to take delivery of water pursuant to the water purchase agreement with SBVMWD
or to take any steps in compliance with its obligation under that agreement.
By stipulation approved by order of court on July 12, 1998, MWD, DWR and
SBVMWD agreed that their prosecution of the two CEQA causes of actions in the
MWD and DWR complaints were stayed subject to conditions similar to the
dismissal of their CEQA causes of action as against the Company.
The Company has by its answer to the two complaints denied all material
allegations, and has asserted several defenses based on its position that both
complaints fail to allege facts sufficient to constitute a cause of action
against the defendants.
The Company has evaluated the complaints of MWD and DWR and has engaged
in considerable research on pertinent issues of fact and law. Based on said
evaluation and research, and while the outcome of these proceedings cannot be
predicted, the Company believes (1) that the validity of the challenged water
purchase and sale agreements should be upheld, and (2) that in all events the
actions will not have a material adverse impact on the Company's financial
condition, or the results of its operations. Until the lawsuits are resolved by
trial or by settlement, the Company does not expect to purchase or receive any
water under its water purchase agreement with SBVMWD.
No trial date has been set for this matter, and the Company does not
know when this matter will be resolved. In the meantime, the Company's ability
to effect similar water transfer transactions will be subject to challenge by
the MWD and others. Although the Company is still able to effect certain water
transfers that are not affected by the issues raised by the pending lawsuit, the
lawsuit will continue to limit the Company's ability to engage in certain types
of water transfers in Southern California.
As described in "Item 1. Business-Introduction" above, the Company is
the general partner of Western Agua, L.P. ("Western Agua"), a partnership that
agreed to provide consulting services to the Nevada LLC pursuant to the
Consulting Agreement. The Nevada LLC purported to terminate the Consulting
Agreement on March 13, 1998 based on Western Agua's purported willful breach of
the Consulting Agreement. On November 10, 1998, Western Agua filed an action in
the San Diego Superior Court against the Nevada LLC for breach of contract,
specific performance and an accounting relating to the Consulting Agreement.
Western Agua's complaint seeks a judicial declaration that the Consulting
Agreement is not terminated and remains in full force and effect. On March 12,
1999, after the Company successfully challenged the legal sufficiency of the
Nevada LLC's original cross-complaint, the Nevada LLC filed an amended
cross-complaint against Western Agua and the Company. The Nevada LLC had named
Peter L. Jensen, the Company's Chairman of the Board, as a cross-defendant in
the original cross-complaint but has dropped him as a cross-defendant in the
amended cross-complaint. The Nevada LLC has also
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dropped its previously-asserted claims for concealment and negligent
misrepresentation. The amended cross-complaint contains claims for breach of
contract, breach of fiduciary duty, and declaratory relief, and seeks
compensatory damages in excess of $100,000, an order enjoining cross-defendants
from the development, sale and/or management of sale of water in areas
prohibited by section 5 of the Consulting Agreement, and a judicial declaration
that cross-defendants have breached the Consulting Agreement and that the Nevada
LLC has not. The Company does not believe that the Nevada LLC has any grounds
for terminating the Consulting Agreement. Should, however, the court determine
that the Consulting Agreement has been validly terminated, Western Agua and the
company would lose their right to receive part of certain net proceeds, if any,
that the Nevada LLC may derive from the sale or other disposition of the Nevada
LLC's properties. Western Agua and the Company have filed a demurrer to the
amended cross-complaint, challenging its legal sufficiency, and intend to mount
a vigorous defense to its claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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15
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, 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
Year-Ended March 31, 1999
First Quarter (April-June) 9.00 12.00
Second Quarter (July-September) 5.56 10.38
Third Quarter (October-December) 4.00 6.50
Fourth Quarter (January-March) 3.13 6.00
On March 31, 1999, the Company had 1,600 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 D Preferred Stock and Series C Preferred
Stock.
As of March 31, 1999, there were outstanding 10,000 shares of the
Company's Series D Convertible Redeemable Preferred Stock. The Series D
Preferred Stock provides for annual dividends, when and if declared, in the
amount of $75.00 per year, payable quarterly. To date, the Company has paid all
declared dividends under the Series D Preferred Stock.
As of March 31, 1999, there were outstanding 10,165 shares of the
Company's Series C Convertible Redeemable Preferred Stock. The Series C
Preferred Stock provides for annual dividends, when and if declared, in the
amount of $72.50 per year, payable semi-annually. To date, the Company has paid
all declared dividends under the Series C Preferred Stock.
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16
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes certain financial data for the periods shown
and is qualified in its entirety by, and should be read in conjunction with, the
Company's Consolidated Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Annual Report.
Year Ended March 31,
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Revenue ...................................... $ 1,822,990 $ 3,922,377 $ 1,770,771 $ 4,901,810 $ 2,669,801
Cost of revenue .............................. 1,184,998 2,296,409 1,034,750 2,163,848 975,786
----------- ----------- ----------- ----------- -----------
Gross profit ................................. 637,992 1,625,968 736,021 2,737,962 1,694,015
General and administrative expense ........... 5,805,192 5,645,559 2,946,252 2,122,525 1,974,535
----------- ----------- ----------- ----------- -----------
Operating income (loss) ...................... (5,167,200) (4,019,591) (2,210,231) 615,437 (280,520)
Interest income (expense), net ............... (586,464) (209,694) (1,027,540) (398,025) 262,733
Other income (expense) ....................... 222,300 2,330,255 (795,027) (201,827) 92,088
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes ....................... (5,531,364) (1,899,030) (4,032,798) 15,585 74,301
Income taxes ................................. (3,200) (2,400) (1,102,400) (2,400) (2,400)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations ..... (5,534,564) (1,901,430) (5,135,198) 13,185 71,901
Discontinued operations:
Loss from operations ....................... -- -- -- (67,949) (62,209)
Loss on disposal of silica plant ........... -- -- (257,276) (251,200) --
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item ...... (5,534,564) (1,901,430) (5,392,474) (305,964) 9,692
Extraordinary income on extinguishment
of debt, net of income taxes ............... 99,656 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................ (5,434,908) (1,901,430) (5,392,474) (305,964) 9,692
Accretion of preferred stock
to redemption value ........... ............ (33,099) (30,584) -- -- --
Preferred stock dividends .................... (990,401) (526,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable
to common stockholders ....... ............. $(6,458,408) $(2,458,014) $(5,392,474) $ (305,964) $ 9,692
=========== =========== =========== =========== ===========
Basic and diluted net income (loss)
per common share applicable to
common stockholders:
Continuing operations ........................ $ (.80) $ (.30) $ (.64) $ -- $ (.03)
Discontinued operations ...................... -- -- (.03) (.04) (.01)
----------- ----------- ----------- ----------- -----------
Total before extraordinary item ......... (.80) (.30) (.67) (.04) (.04)
Extraordinary income on early
extinguishment of debt, net .. ............. .01 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share
applicable to common stockholders .......... $ (.79) $ (.30) $ (.67) $ (.04) $ (.04)(a)
=========== =========== =========== =========== ===========
March 31,
------------------------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Current assets............................. $15,536,283 $17,388,488 $ 4,833,903 $ 3,921,948 $ 2,895,539
Total assets............................... 47,630,860 41,891,968 39,475,358 40,420,709 26,710,956
Working capital............................ 13,616,371 16,517,459 3,787,083 2,943,723 2,103,568
Long-term debt and debentures.............. 17,712,349 16,028,470 17,840,860 18,275,408 4,384,470
Redeemable preferred stock ................ 19,780,867 9,049,033 -- -- --
Preferred stock ........................... -- -- 3,807,517 -- --
Common stockholders' equity................ 8,174,399 15,860,103 16,680,161 21,067,076 21,195,745
- ----------
(a) Net income (loss) per common share computation for the year ended March
31, 1995 was adjusted to include dividends of $248,131 accrued on the
preferred stock outstanding during the period.
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17
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 land held for sale ($454,604), water
rights ($1,038,268), and other water assets ($338,042). Further, the accumulated
deficit of $14,405,252, most of which was due to the Company's prior and now
discontinued operations, was eliminated by a corresponding decrease in the
Company's additional paid-in capital. Accumulated deficit reflects only the
results of operations subsequent to October 1, 1994.
In 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, 1999, 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. In
addition, in November 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock in the open
market. For the year ended March 31, 1999, the Company repurchased 292,200
shares of common stock at a cost of $1,259,030.
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 cash redemption price equal to 100% of the principal amount to be redeemed,
plus accrued and unpaid interest thereon through the redemption date, if on each
of the 20 consecutive trading days immediately prior to the mailing of the
redemption notice the trading price of the Common Stock is equal to or greater
than 150% of the then applicable Conversion Price.
In 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 therefore, dividends at the annual rate of 7.25% of the stated value
of the Series C Preferred Stock ($1,000 per share). Such dividends are payable
semi-annually. The first four semi-annual dividend payments could be paid in
nonassessable
- 17 -
18
shares of Series C Preferred Stock. Through March 31, 1999, the Company paid
$1,224,734 in dividends to the holders of the Series C Preferred Stock, of which
$59,856 was paid in cash and $1,164,878 was paid by the issuance of 1,164
additional 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. The Company had acquired its interest in the Nevada LLC in October 1995
for $12,000,000. 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, which was subsequently acquired by PICO Holdings, Inc. As of
March 31, 1999, the Company has completed the sale of its holdings in PICO. The
Company received proceeds of $1,222,695 from the sale of the 723,911 shares.
On October 27, 1998, the Company sold $10,000,000 of its Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock") to an
affiliate of Sociedad General de Aguas de Barcelona, S. A. ("Agbar"). Each share
of Series D Preferred Stock has a stated value of $1,000, has a dividend rate of
7.5% of its stated value, and is convertible at any time at the option of the
holder into the number of shares of common stock determined by dividing the
amount of the liquidation preference the conversion date by the conversion price
of such shares in effect on the conversion date. The conversion price is $8.99
per share and is subject to adjustment in certain events to prevent dilution.
Agbar has also agreed to make up to three subsequent $5,000,000 purchases of
Series D Preferred Stock to fund capital expenditures of the Company for water
projects which Agbar approves through October 2000.
Commencing on October 1, 2007 and continuing through September 30, 2008,
each holder of the Series D Preferred Stock may, from time to time during such
period, at such holder's option, cause the Company to redeem up to one-half of
the shares of Series D Preferred Stock held by such holder on October 1, 2007
for cash, out of funds legally available. Commencing on October 1, 2008, each
holder of shares of Series D Preferred Stock may, from time to time thereafter,
at such holder's option, cause the Company to redeem for cash, out of funds
legally available therefore, some or all of such holder's shares of Series D
Preferred Stock. The redemption price for each share of Series D Preferred Stock
will be $1,000 per share, plus, in each case, all declared and unpaid dividends,
if any.
- 18 -
19
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations
for its three most recent fiscal years.
CONSOLIDATED
Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenue ...................................................... $ 1,823,000 $ 3,922,000 $ 1,771,000
Income (Loss) From Continuing Operations Before Income Taxes.. $(5,532,000) $(1,899,000) $(4,033,000)
Income Taxes ................................................. (3,000) (2,000) (1,102,000)
----------- ----------- -----------
Income (Loss) From Continuing Operations ..................... (5,535,000) (1,901,000) (5,135,000)
Discontinued Operations ...................................... -- -- (257,000)
----------- ----------- -----------
Income (loss) before extraordinary item ...................... (5,535,000) (1,901,000) (5,392,000)
Extraordinary income on extinguishment of debt, net
of income taxes ........................................... 100,000 -- --
----------- ----------- -----------
Net Income (Loss) ............................................ (5,435,000) (1,901,000) (5,392,000)
Accretion of Preferred Stock to Redemption Value ............. (33,000) (31,000) --
Preferred Stock Dividends .................................... (990,000) (526,000) --
----------- ----------- -----------
Net Income (Loss) Applicable to Common Stockholders ......... $(6,458,000) $(2,458,000) $(5,392,000)
=========== =========== ===========
Basic and Diluted Net Income (Loss) Per Share
Applicable to Common Stockholders ......................... $ (.79) $ (.30) $ (.67)
=========== =========== ===========
The Company reports its continuing operations in two segments, water
rights and real estate. As a result, upon the purchase of assets that contain
both real estate and water rights, the basis of such assets is allocated to real
estate and water rights based on the relative fair market values of the
components at the time of acquisition, and development costs are allocated to
the appropriate component whenever possible. As properties or water rights are
sold, the allocated portion of the basis is included in cost of revenue.
During the fiscal years ended March 31, 1999, 1998 and 1997, the
valuation allowance for deferred tax assets was increased as a result of the
Company's net operating loss carryforward. In addition, in the fiscal year ended
March 31, 1997, the sale of the Company's interest in the Nevada LLC resulted in
a $1,100,000 adjustment to the beginning-of-the-year valuation allowance on the
Company's gross deferred tax assets.
The preferred stock dividends for the year ended March 31, 1999
represent dividends paid in cash on the Series D Preferred Stock and all other
dividends for the periods reported represent dividends paid in cash and
additional shares of preferred stock on the Series C Preferred Stock.
WATER RIGHTS
Years Ended March 31,
------------------------------------
1999 1998 1997
---------- -------- --------
Revenue................................... $1,477,000 $932,000 $261,000
Cost of Revenue........................... 1,001,000 867,000 58,000
---------- -------- --------
Gross Profit.............................. $ 476,000 $ 65,000 $203,000
========== ======== ========
Water rights revenue for the fiscal year ended March 31, 1999 ("Fiscal
1999") increased $545,000 (58%) from the prior year as a result of increased
water sales. Water rights revenue for Fiscal 1999 includes $641,000 from the
City of Inglewood and $370,000 from the Santa Margarita Water District, as well
as payments
- 19 -
20
received under the Cucamonga Fee Agreement ($199,000). In addition, water rights
revenue for Fiscal 1999 included revenue from the lease of water rights
($239,000). Cost of revenue for Fiscal 1999 included $943,000 of fees and lease
amortization costs related to water sales to the City of Inglewood ($462,000)
and the Santa Margarita Water District ($481,000) and the amortization of the
Cucamonga Fee Agreement costs ($58,000). The negative gross margin for the
Fiscal 1999 water transaction with the Santa Margarita Water District is not
indicative of gross margins that the Company expects to realize on similar water
transactions in the future. The sale to the SMWD was completed as a pilot
program to identify the price impediments to the use of idle capacity in the MWD
system.
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.
REAL ESTATE
Years Ended March 31,
--------------------------------------
1999 1998 1997
-------- ---------- ----------
Revenue ................................. $346,000 $2,990,000 $1,510,000
Cost of Revenue.......................... 184,000 1,429,000 976,000
-------- ---------- ----------
Gross Profit............................. $162,000 $1,561,000 $ 534,000
======== ========== ==========
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 1999, real estate revenues of $346,000 resulted from
the sale of 72 acres of Cherry Creek property and 20 acres of property sold in
Glenn County, California. In Fiscal 1998, real estate revenues of $2,990,000
were recognized from the sale of 1,607 acres of Cherry Creek properties. Cost of
real estate revenue in each fiscal year includes the allocated purchase price of
the properties sold, directly related development costs, sales commissions and
other sales costs.
GENERAL AND ADMINISTRATIVE EXPENSES
Years Ended March 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
General and Administrative
Expenses....................... $5,805,000 $5,646,000 $2,946,000
========== ========== ==========
General and administrative expenses for Fiscal 1999 increased by 3%, or
$159,000, from Fiscal 1998. The increase was primarily due to the $1,294,000
allowance against water projects under development, increased consulting and
engineering expenses of $317,000 and $74,000 of payroll taxes paid by the
Company in connection with the cancellation of stock options of a former officer
during Fiscal 1999. These increases were offset in part by decreases resulting
from $650,000 of one-time advisory fees in connection with a proposed
acquisition incurred in Fiscal 1998 which were not incurred in Fiscal 1999, and
a decrease of $753,000 in bonus and severance and $184,000 in professional fees
paid in Fiscal 1999 as compared to Fiscal 1998.
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 two proposed
transactions, (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
- 20 -
21
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.
OTHER NON-SEGMENT INFORMATION
Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest Income ........................... $ 879,000 $ 1,156,000 $ 322,000
Interest Expense .......................... (1,465,000) (1,365,000) (1,350,000)
Equity in Loss of Limited Liability
Company.................................. -- (308,000) (857,000)
Gain on Sale of Investment in Limited
Liability Company ....................... 40,000 2,456,000 --
Rental Income, net ........................ 9,000 46,000 43,000
Other ..................................... 173,000 136,000 (105,000)
Loss from discontinued operations ......... -- -- 257,000
Extraordinary income, net ................. 100,000 -- --
Interest income is comprised of interest earned on the Company's cash
and cash equivalents and investments and interest earned on the secured
promissory notes the Company received in connection with the real estate that it
has sold. The secured notes bear interest at rates between 8% and 10% per annum.
Interest income decreased for Fiscal 1999 from Fiscal 1998 due primarily to
lower investment balances.
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 expense for Fiscal 1999 and Fiscal 1998 included interest of
$1,348,000 and $1,350,000, respectively, related to the Debentures. Fiscal 1999
also included $117,000 of interest related to the five-year amortizing term loan
for the Inglewood project. Interest of $83,000, $185,000 and $285,000 was
capitalized during Fiscal 1999, 1998, and 1997, 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 $2,419,000, net of legal and other closing costs
totaling $60,000 and deferred $120,000 of the gain relating to estimated future
consulting services that are to be provided in accordance with the Consulting
Agreement. The Company realized $40,000 and $37,000 of the deferred gain in
Fiscal 1999 and Fiscal 1998, respectively.
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.
Other income for Fiscal 1999 includes the reversal of $291,000 of
severance costs recorded in Fiscal 1998 related to the resignation of an
officer. This reversal resulted from the Company selling to two of its former
officers its 40% interest in an option to purchase certain shares of stock of
Integrated Water Technologies, Inc., an unaffiliated water consulting company.
Other income for Fiscal 1999 also includes a $187,000 loss realized from the
sale of the Company's interest in PICO Holdings, Inc. that the Company received
in connection with its sale of its Nevada LLC interest.
- 21 -
22
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.
Charges in Fiscal 1997 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.
In Fiscal 1999, the Company repurchased $260,000 of its 9% Convertible
Subordinated Debentures for $151,000. After reducing related deferred debt costs
of $9,000, net of accumulated amortization of $5,000, the Company recognized an
extraordinary income on extinguishment of debt, net of income taxes of $100,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had working capital and a current
ratio of $13,616,371 and 8.09 to 1 as compared to $16,517,459 and 19.96 to 1,
respectively, at March 31, 1998.
Operating Activities. For Fiscal 1999, the Company had a net loss of
$5,434,908 and net cash used in operating activities of $4,186,491. 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 the past, the Company had received most of its
revenue from the sale of real estate, but it does not expect real estate sales
to be as significant in future periods.
The Company has recently entered into water sale transactions that are
expected to generate water revenues, and is attempting to complete other similar
transactions. However, while revenues from existing water sales contracts,
leasing the Company's rice farms and ranches, from the Cucamonga Fee Agreement,
and cash received from principal and interest payments on promissory notes held
by the Company will be more predictable than periodic income received on
historic sales of real estate assets, such recurring revenues will be
insufficient for some time into the future to cover general and administrative
expenses, interest on outstanding indebtedness and dividends declared on its
outstanding preferred stock. Revenue from water operations will continue to be
dependent on individually negotiated transactions and revenues, if any, derived
from the Company's long-term water development projects. Based on the Company's
current estimates, the Company expects that revenues from planned water sales
and from its existing long-term water development projects will continue to be
insufficient to fund the Company's working capital needs during the current
fiscal year. Accordingly, the Company's future operations will be funded
primarily from the Company's existing financial resources, from financing it may
arrange using debt or equity and from proceeds the Company may derive from such
future water sale transactions that the Company may from time to time
consummate.
On September 30, 1998, the Company entered into a pumping rights lease
and a water sale agreement with the City of Inglewood, California. On October 1,
1998, Inglewood leased the rights to pump 4,450 acre-feet of water per year to
the Company for a five-year period. In consideration of the lease, the Company
made a $3,603,200 lump-sum cash payment to Inglewood. Under the water sale
agreement, the Company agreed to sell, and Inglewood agreed to buy, 5,950
acre-feet of water per year for the next five years at a price of $200 per
acre-foot in the first year ($1,190,000), which price will escalate over the
remaining four-year period at a rate equal to the sum of 3.75% per year plus 25%
of any increase in the Metropolitan Water District's ("MWD") rate for water. The
Company financed the payment it made to Inglewood through a $3,560,000 five-year
loan that bears interest at the bank's Reference Rate or LIBOR (capped at 6%)
plus 1.5%, at the Company's option. Scheduled payments of principal on this loan
for the fiscal years ending March 31, 2000, 2001, 2002, 2003 and 2004 are
$594,000, $668,000, $794,000, $832,000 and $392,000, respectively.
On December 24, 1998, the Company completed a pilot water sale in
cooperation with MWD. For the first time in its 70-year history, MWD exchanged
water with a private company for delivery within MWD's service territory. As a
result of this agreement, the Company completed a transfer of 1,000 acre-feet of
water to the Santa Margarita Water District and recognized revenue of $370,155.
The transaction involves water previously purchased by the Company in Central
California for $63,000. The Company paid MWD a total of $410,313 for its
participation
- 22 -
23
in the pilot program. After considering other related costs of $7,778, the
Company realized a net loss of $110,936 on the transaction. Although the
foregoing transaction negatively impacted the Company's liquidity, the Company
completed the pilot program to test the feasibility of future MWD transactions.
The foregoing pilot program is not indicative of future water sales, and the
Company does not intend to regularly engage in such net loss transactions.
In February 1999, the Company entered into a water transfer agreement
with Natomas Central Mutual Water Company ("Natomas") pursuant to which Natomas
agreed, subject to certain conditions still to be satisfied, to transfer to the
Company the temporary use of up to 30,000 acre-feet of non-Central Valley
Project water from the Sacramento River by October 1999. The Company paid a
nonrefundable deposit of $275,000 to Natomas and is obligated to pay Natomas,
upon delivery of the water to a third party purchaser, $20 per acre-foot for any
of the water transferred for use within or north of the Delta and $50 per
acre-foot for any of the water transferred for use south of the Delta. In
addition, the Company will also pay Natomas 50% of the net proceeds, as defined,
from the sale of water to a third party purchaser.
In May 1999, the Company completed its first sales of water derived from
its water rights in the Mojave Basin of Southern California. The Company
purchased the underlying water rights during the fiscal year ended March 31,
1999, as part of its plan to expand its participation in the ownership and
marketing of water in Southern California. The Company anticipates that water
sales and trading activity in the Mojave Basin will expand in future years and
will provide a future source of revenue.
Investing and Financing Activities. In October 1998, the Company
received $10,000,000 of proceeds from the private placement of 10,000 shares of
its Series D Convertible Redeemable Preferred Stock at a price of $1,000 per
share. In addition, in September 1998 the Company received $3,560,000 proceeds
from a five-year term loan used to finance the pumping rights lease lump-sum
payment to Inglewood.
The Company is committed to certain material expenditures over the next several
years, including the following:
o Scheduled payments of principal on existing outstanding indebtedness for
fiscal years ending March 31, 2000, 2001, 2002, 2003 and 2004 are
$1,246,000, $697,000, $781,000, $903,000 and $463,000, respectively.
o The Company is required to make semi-annual interest payments of
$663,300 on the $14,740,000 principal amount of Debentures.
o The holders of Series C Preferred Stock are entitled to receive, when
and if declared, annual dividends in the amount of $72.50 per share,
payable semi-annually on January 15 and July 15 of each year
(aggregating $736,963 per year).
o The holders of Series D Preferred Stock are entitled to receive, when
and if declared, annual dividends in the amount of $75.00 per share,
payable quarterly on March 15, June 15, September 15, and December 15 of
each year (aggregating $750,000 per year).
o Commencing October 1998, the Company entered into a five-year and a
fifteen-year water rights lease. The five-year water rights lease is
expected to provide 1,008 acre-feet per year for a payment of $150 per
acre-foot in the first year ($151,200), which was prepaid. This amount
will escalate over the remaining four-year period at $7.50 per acre-foot
per year. The fifteen-year water rights lease is expected to provide 250
acre-feet per year for a payment of $135 per acre-foot in the first year
($33,750). The costs for subsequent years will be determined by
multiplying the cost for the first year by the ratio of the index price
for each subsequent year divided by the index price for the first year.
The index price is the sum of the price established by the MWD for full
service untreated water and the price components established by the West
Basin Municipal Water District for the MWD readiness-to-serve charge and
the West Basin surcharge for basic non-interruptible water.
The Company 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.
- 23 -
24
The Company does not believe that inflation has had a material impact on
its results of operations.
The Company formed a project team to identify Year 2000 impacts, resolve
Year 2000 problems and implement compliance plans. The Company has completed its
inventory and assessment of Year 2000 implications for vendor-supplied software
and hardware. The Company has no internally developed software. The Company
developed a plan for converting impacted items, and has completed the conversion
at a cost of approximately $1,500. Consequently, the Company does not expect
that there will be any material adverse effect on the Company's business,
results of operations or financial condition as a result of Year 2000 problems
with its computer systems and operations.
The Company has initiated discussions with its significant vendors in
order to assess their ability to successfully resolve the Year 2000 issue. Most
of the Company's vendors have confirmed that they already are or will be Year
2000 compliant. In addition, the Company receives payments from a variety of
external sources. Although the Company has made reasonable efforts to identify
and protect itself with respect to external Year 2000 problems, there can be no
assurance that the Company will not be affected by such problems. The Company
will consider the necessity of implementing a contingency plan to mitigate any
adverse effects associated with the Year 2000 issue, should one arise.
Impact of Accounting Pronouncement Issued But Not Adopted by the
Company. In June 1998, October 1998 and February 1999, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise", and SFAS No. 135, "Rescission of FASB Statement No. 75 and
Technical Corrections," respectively. The Company anticipates that the adoption
of SFAS Nos. 133, 134 and 135 will not have a effect on the financial position,
results of operations or liquidity of the Company, nor result in disclosures
that will be different from those presently included in its financial
statements.
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. The variations in the Company's quarterly results is one of the factors
that may contribute to fluctuations in the price of the Company's common stock.
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 operating segments (the acquisition
and development of water rights and the sale of water, and the sale of real
estate interests acquired in connection with the acquisition of water rights),
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
$1,477,000, $932,000 and $261,000 of revenue from its water rights activities
during the fiscal years ended March 31, 1999, 1998 and 1997, respectively.
Accordingly, the Company does not have an established record of water sales
transactions. To date, the Company's general and 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 successfully
develop, package and sell water.
Uncertainty of Future Water Revenue. The Company's long-term future
profitability is primarily dependent on (i) the Company's ability to sell
significant quantities of water from its Northern California water assets, (ii)
the Company's ability to develop and sell water as part of the Cherry Creek
Project, (iii) the Company's
- 24 -
25
activities as an independent water provider in Southern California, (iv) the
Company's ability to resolve issues regarding the transportation of water to the
customer, and (v) the Company's ability to develop and sell new sources of water
at a profit. 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 sell 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
consummated any water sales 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 Company expects
to encounter problems in developing a market for water transfers and the nature
of these problems, and timing, is not known at this time. As a result, it is
uncertain when, or if, the Company will generate revenues from its new water
transfer activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company is exposed to market risk primarily due to fluctuations in
interest rates. The Company's interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows and to
lower the Company's overall borrowing costs. To achieve our objectives, the
Company borrows primarily at fixed rates and may enter into derivative financial
instruments such as interest rate caps in order to mitigate our interest rate
risk on a related financial instrument. The Company does not enter into any
transactions for speculative or trading purposes. The Company utilizes both
fixed and variable rate debt. The following table presents principal cash flows
and related weighted average interest rates of the Company's long-term fixed
rate and variable rate debt for the periods indicated is as follows:
2000 2001 2002 2003 2004 Thereafter Total
-------- -------- -------- -------- -------- ---------- -----------
Fixed rate debt $651,721 $ 28,983 $ 31,502 $ 71,109 $ 25,858 $14,868,897 $15,678,070
Weighted average interest rate 8.0% 8.7% 8.7% 8.3% 9.0% 9.0% 9.0%
Variable rate debt $594,000 $668,000 $749,000 $832,000 $437,000 -- $3,280,000
Weighted average interest rate 6.5% 6.5% 6.5% 6.5% 6.5% -- 6.5%
The Company's variable rate on its variable rate debt is capped at 7.5%.
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-27, and indexed at
page 2, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 25 -
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Company's Proxy Statement to be filed by July 30,
1999 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 30,
1999 set forth under the caption "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" of the Company's Proxy Statement to be
filed by July 30, 1999 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Company's Proxy Statement to be filed by July 30,
1999 set forth under the caption "Certain Relationships and Related
Transactions" is incorporated herein by reference.
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)
4.4 Certificate of Designations for Series D Convertible Redeemable
Preferred Stock.(10)
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 August 15, 1997, between the Company
and Peter Jensen.
10.5 1993 Stock Option Plan.(6)
10.6 Amendment to 1993 Stock Option Plan.(6)
10.7 Form of Water Sale Agreement between Western Water Service
Company and Santa
- 26 -
27
Margarita Water District, a California water district.(8)
10.8 Employment Agreement, dated June 9, 1999, between the Company
and Zach McReynolds.
10.9 Employment Agreement, dated April 20, 1998, between the Company
and Michael Patrick George.(11)
10.10 Employment Agreement, dated April 20, 1998, between the Company
and Ronald I. Simon.(11)
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.(11)
10.13 Resignation Agreement and Mutual General Release, dated January
30, 1998, between the Company and Eric R. Robbins.(11)
10.14 Strategic Relationship Agreement, dated October 13, 1998, by and
between Western Water Company and Sociedad General de Aguas de
Barcelona, S.A.(10)
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
27 Financial Data Schedule
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.
(10) Previously filed as an exhibit to the Company's current report on Form
8-K filed on November 25, 1998, which exhibit is hereby incorporated
herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 1998, which is hereby incorporated
herein by reference.
- 27 -
28
The following financial statements are filed as a part of this report, appearing
at the pages indicated:
Report of KPMG LLP, independent certified public accountants .......................... F-1
Consolidated Balance Sheets as of March 31, 1999 and 1998 ............................. F-2
Consolidated Statements of Operations and Comprehensive Income for the years
ended March 31, 1999, 1998 and 1997 ................................................. F-3
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1999, 1998 and 1997 ....................................................... F-4
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997 ....................................................... F-5
Notes to Consolidated Financial Statements ............................................ F-7
Report of Ernst & Young, LLP, independent auditors .................................... F-28
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-29
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the prior fiscal
year.
- 28 -
29
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, 1999 By: /s/ MICHAEL PATRICK GEORGE
-------------------------------------
Michael Patrick George, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL PATRICK GEORGE President and Chief Executive Officer May 28, 1999
- -------------------------------- (Principal Executive Officer)
Michael Patrick George
/s/ PETER L. JENSEN Director and Chairman of the Board May 28, 1999
- --------------------------------
Peter L. Jensen
/s/ RONALD I. SIMON Executive Vice President May 28, 1999
- -------------------------------- & Chief Financial Officer
Ronald I. Simon (Principal Financial and
Accounting Officer)
/s/ SCOTT A. KATZMANN Director May 28, 1999
- ---------------------------------
Scott A. Katzmann
/s/ WILLIAM D. WATT Director May 28, 1999
- ---------------------------------
William D. Watt
/s/ DAVID A. ABEL Director May 28, 1999
- ---------------------------------
David A. Abel
/s/ JUAN RAS SIRERA Director May 28, 1999
- ---------------------------------
Juan Ras Sirera
30
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, 1999 and 1998, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1999. 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 & Resource Company, LLC
(NLRC), a 35.3% owned investee company. The Company's 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 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California
May 14, 1999
F-1
31
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
ASSETS 1999 1998
------------ ------------
Current Assets:
Cash and cash equivalents $ 739,126 $ 304,988
Investment in available-for-sale securities (Note 2) 14,061,410 16,453,147
Current portion of notes receivable (Note 3) 216,912 215,292
Other current assets 518,835 415,061
------------ ------------
Total Current Assets 15,536,283 17,388,488
Notes receivable, less current portion (Note 3) 1,169,491 1,386,403
Land held for sale (Notes 5, 11 and 16) 4,505,227 3,960,277
Water rights (Note 6) 18,716,519 15,264,710
Prepaid leasing costs, net of accumulated amortization (Note 7) 3,585,759 --
Other water assets, net of accumulated amortization (Note 1) 3,276,872 3,188,357
Deferred debt costs, net of accumulated amortization (Note 11 and 12) 598,966 613,782
Property and equipment, net of accumulated depreciation (Note 4) 189,659 85,951
Other assets 52,084 4,000
------------ ------------
$ 47,630,860 $ 41,891,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 92,108 $ 19,274
Accrued expenses and other liabilities (Notes 10) 490,095 732,954
Accrued interest 91,988 67,663
Current maturities of long-term debt (Note 11) 1,245,721 51,138
------------ ------------
Total Current Liabilities 1,919,912 871,029
Deferred gain on sale (Note 8) 43,333 83,333
Long-term debt, less current maturities (Note 11) 2,972,349 1,028,470
9% Convertible subordinated debentures (Note 12) 14,740,000 15,000,000
------------ ------------
Total Liabilities 19,675,594 16,982,832
------------ ------------
Series C convertible redeemable preferred stock,
$1,000 stated value, 100,000 shares authorized;
10,165 and 9,466 shares issued and outstanding
(aggregate liquidation preference of $10,165,000
and $9,466,000) at March 31, 1999 and 1998,
respectively (Note 13) 9,780,867 9,049,033
Series D convertible redeemable preferred stock,
$1,000 stated value, 25,000 shares authorized;
10,000 and zero shares issued and outstanding
(aggregate liquidation preference of $10,000,000
and zero) at March 31,1999 and 1998,
respectively (Note 13) 10,000,000 --
Stockholders' Equity (Notes 13, 14, 18 and 19):
Common stock, $0.001 par value, 20,000,000 shares
authorized in 1999 and 1998; 8,239,816 and 8,235,816
shares issued at March 31,1999 and 1998, respectively 8,240 8,236
Additional paid-in capital 24,347,502 24,198,539
Accumulated other comprehensive income -- 117,233
Accumulated deficit ($14,405,252 of accumulated
deficit eliminated in quasi-reorganization
of October 1, 1994) (14,922,313) (8,463,905)
Treasury stock, at cost, 292,200 and
zero shares at March 31, 1999
and 1998, respectively (1,259,030) --
------------ ------------
Total Stockholders' Equity 8,174,399 15,860,103
Commitments and contingencies (Note 25)
$ 47,630,860 $ 41,891,968
============ ============
See accompanying notes to consolidated financial statements.
F-2
32
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Revenue:
Water $ 1,477,375 $ 932,377 $ 261,103
Real estate 345,615 2,990,000 1,509,668
----------- ----------- -----------
1,822,990 3,922,377 1,770,771
----------- ----------- -----------
Cost of Revenue:
Water 1,000,998 867,238 58,375
Real estate 184,000 1,429,171 976,375
----------- ----------- -----------
1,184,998 2,296,409 1,034,750
----------- ----------- -----------
Gross Profit 637,992 1,625,968 736,021
General and Administrative Expenses (Note 22) 5,805,192 5,645,559 2,946,252
----------- ----------- -----------
Operating Income (Loss) (5,167,200) (4,019,591) (2,210,231)
----------- ----------- -----------
Other Income (Expenses):
Interest income 878,878 1,155,606 322,460
Interest expense (1,465,342) (1,365,300) (1,350,000)
Loss from investment in limited liability company (Note 8) -- (307,623) (856,921)
Gain on sale of investment in limited liability company, net (Note 8) 40,000 2,455,860 --
Other (Note 21) 182,300 182,018 61,894
----------- ----------- -----------
(364,164) 2,120,561 (1,822,567)
Income (Loss) from Continuing
Operations Before Income Taxes (5,531,364) (1,899,030) (4,032,798)
Income Taxes (Note 17) 3,200 2,400 1,102,400
----------- ----------- -----------
Income (Loss) from Continuing Operations (5,534,564) (1,901,430) (5,135,198)
Discontinued Operations (Note 15) -- -- (257,276)
----------- ----------- -----------
Income (Loss) before extraordinary item (5,534,564) (1,901,430) (5,392,474)
Extraordinary income on extinguishment of debt,
net of income taxes (Note 20) 99,656 -- --
----------- ----------- -----------
Net Income (Loss) (5,434,908) (1,901,430) (5,392,474)
Accretion of preferred stock to redemption value (33,099) (30,584) --
Preferred stock dividends (990,401) (526,000) --
----------- ----------- -----------
Net Income (Loss) Applicable to Common Stockholders (6,458,408) (2,458,014) (5,392,474)
Other Comprehensive Income (Loss), Net of Tax:
Unrealized holding gains (losses) arising during period (303,853) 183,761 (25,007)
Less: Reclassification adjustment - realized holding gains (losses) (186,620) 38,488 (21,409)
----------- ----------- -----------
(117,233) 145,273 (3,598)
----------- ----------- -----------
Comprehensive Income (Loss) $(6,575,641) $(2,312,741) $(5,396,072)
=========== =========== ===========
Basic and Diluted Net Income (Loss) per Common Share
Applicable to Common Stockholders:
Continuing operations $ (.80) $ (.30) $ (.64)
Discontinued operations -- -- (.03)
----------- ----------- -----------
Income (loss) before extraordinary item (.80) (.30) (.67)
Extraordinary income on extinguishment of debt, net . 01 -- --
----------- ----------- -----------
Net Income (Loss) per Common Share
Applicable to Common Stockholders $ (.79) $ (.30) $ (.67)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
33
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1999, 1998 and 1997
Accumulated
Series B Common Stock Additional Other
Preferred ------------------------- Paid-In Comprehensive
Stock Shares Amount Capital Income (Loss)
----------- --------- ----------- ------------ -------------
Balance at March 31, 1996 $ -- 8,068,486 $ 8,068 $ 21,696,867 $ (24,442)
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 -- -- -- -- (3,598)
Issuance of convertible preferred stock,
net of offering costs of $192,483 3,807,517 -- -- -- --
Purchase of common stock -- (54) -- (717) --
----------- --------- ----------- ------------ -----------
Balance at March 31, 1997
3,807,517 8,134,796 8,135 22,705,957 (28,040)
Net loss -- -- -- -- --
Exercise of options -- 13,085 13 195,546 --
Purchase of water rights with common stock -- 88,238 88 1,162,056 --
Unrealized gain on investment securities -- -- -- -- 145,273
Exchange of convertible preferred stock -- -- -- -- --
Vesting of compensatory stock options (3,807,517) -- -- 139,500 --
Preferred dividends -- -- -- -- --
Accretion of preferred stock -- -- -- -- --
Purchase of common stock -- (303) -- (4,520) --
----------- --------- ----------- ------------ -----------
Balance at March 31, 1998 -- 8,235,816 8,236 24,198,539 117,233
Net loss -- -- -- -- --
Exercise of options -- 4,000 4 26,996 --
Unrealized loss on investment securities -- -- -- -- (117,233)
Vesting of compensatory stock options -- -- -- 121,967 --
Preferred dividends -- -- -- -- --
Accretion of preferred stock -- -- -- -- --
Payments to acquire 292,200 shares of
treasury stock -- -- -- -- --
----------- --------- ----------- ------------ -----------
Balance at March 31, 1999 $ -- 8,239,816 $ 8,240 $ 24,347,502 $ --
=========== ========= =========== ============ ===========
Total
Accumulated Treasury Stockholders'
Deficit Stock Equity
------------ ------------ ------------
Balance at March 31, 1996 $ (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)
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
(6,005,891) -- 20,487,678
Net loss (1,901,430) -- (1,901,430)
Exercise of options -- -- 195,559
Purchase of water rights with common stock -- -- 1,162,144
Unrealized gain on investment securities -- -- 145,273
Exchange of convertible preferred stock -- -- (3,807,517)
Vesting of compensatory stock options -- -- 139,500
Preferred dividends (526,000) -- (526,000)
Accretion of preferred stock (30,584) -- (30,584)
Purchase of common stock -- -- (4,520)
------------ ------------ ------------
Balance at March 31, 1998 (8,463,905) -- 15,860,103
Net loss (5,434,908) -- (5,434,908)
Exercise of options -- -- 27,000
Unrealized loss on investment securities -- -- (117,233)
Vesting of compensatory stock options -- -- 121,967
Preferred dividends (990,401) -- (990,401)
Accretion of preferred stock (33,099) -- (33,099)
Payments to acquire 292,200 shares of
treasury stock -- (1,259,030) (1,259,030)
------------ ------------ ------------
Balance at March 31, 1999 $(14,922,313) $ (1,259,030) $ 8,174,399
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
34
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ -----------
Cash Flows from Operating Activities:
Net income (loss) $ (5,434,908) $ (1,901,430) $(5,392,474)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 625,947 167,206 171,421
Compensation expense on vesting of unexercised compensatory
stock options 121,967 139,500 --
Compensation expense on cashless exercise of stock options -- 195,559 --
Gain on sale of investment in limited liability company (40,000) (2,455,860) --
(Gain) loss on disposition of available-for-sale securities 186,620 (38,488) 21,409
Extraordinary income on early extinguishment of debt (99,656) -- --
Allowance for water project costs 1,294,065 -- --
Loss on disposition of property and equipment 1,982 3,738 --
Loss on discount of notes receivable -- 12,431 12,729
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
Loss on disposal of discontinued operations -- -- 257,276
Deferred income taxes -- -- 1,100,000
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (103,774) (323,731) 7,438
Land held for sale (including purchase from
related party of $264,198 in Fiscal 1997) (544,950) 1,246,596 548,336
Other assets (48,084) 153,306 (126,260)
Increase (decrease) in:
Accounts payable 72,834 (113,717) (183,022)
Accrued expenses and other liabilities (242,859) 50,436 354,912
Accrued interest 24,325 (51,441) (60,338)
------------ ------------ -----------
Net cash used in operating activities (4,186,491) (2,399,359) (2,326,820)
------------ ------------ -----------
Cash Flows from Investing Activities:
Proceeds from disposition of discontinued operations -- 120,000 51,347
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 215,292 625,353 865,172
Purchase of property and equipment (134,885) (7,688) (88,841)
Purchase of available-for-sale securities (10,931,503) (19,511,773) (131,434)
Sales of available-for-sale securities 13,019,387 5,635,323 1,888,258
Sales of water rights -- 600,000 --
Additions to water rights (1,189,062) (222,487) (459,722)
Purchase of water rights (3,278,630) (2,288,306) (42,564)
Additions to other water assets (271,151) (33,686) (36,504)
Prepayment of leasing costs (4,187,679) -- --
------------ ------------ -----------
Net cash provided by (used in) investing activities (6,758,231) (3,119,506) 1,386,212
------------ ------------ -----------
F-5
35
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended March 31, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from long-term debt 3,560,000 -- --
Net proceeds from exercise of options 27,000 -- 92,438
Payment of deferred debt costs (84,900) -- --
Proceeds from issuance of Series B convertible preferred stock -- -- 4,000,000
Proceeds from issuance of redeemable preferred stock 10,000,000 5,000,000 --
Payment of private placement costs -- (255,212) (192,483)
Purchase of convertible subordinated debentures (151,006) -- --
Preferred stock dividends (291,666) (59,856) --
Purchase of common stock (1,259,030) (4,520) (717)
Principal payments on long-term debt (421,538) (1,878,567) (477,505)
------------ ----------- -----------
Net cash provided by financing activities 11,378,860 2,801,845 3,421,733
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 434,138 (2,717,020) 2,481,125
Cash and Cash Equivalents, beginning of year 304,988 3,022,008 540,883
------------ ----------- -----------
Cash and Cash Equivalents, end of year $ 739,126 $ 304,988 $ 3,022,008
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-6
36
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES:
Description of Business
Western Water Company and subsidiaries (the "Company") identify,
acquire, develop, sell and lease water and water rights in the western
United States. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as real estate, in California and
Colorado. The Company's current principal activity is the acquisition
and development of water rights and the sale or lease of its water.
Although the Company has sold or leased certain of those water rights to
municipalities and other users, the Company to date has derived most of
its revenue from the sale of real estate that was acquired for its water
rights, and from assisting unaffiliated owners of water rights in
obtaining revenue from their water rights.
Principles of Consolidation
The consolidated financial statements of Western Water Company include
Western Water Service Company and YG Procyon Corporation, the Company's
wholly-owned subsidiaries, YG Rice Farms, L.P., a limited partnership
directly and indirectly wholly-owned and controlled by the Company, and
Western Agua, L.P., a limited partnership in which the Company owns a
70% interest. All intercompany balances and transactions have been
eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investment in Available-for-Sale Securities
The Company currently invests in only high quality, short-term
investments which it classifies as available-for-sale. Since the
investments are short-term and are generally allowed to mature, realized
gains and losses resulting from these investments are minimal. These
securities were 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 were excluded from earnings from
continuing operations and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the
sale of available-for-sale securities are determined on an average cost
basis.
Allowance for Loan Losses
The Company provides for valuation allowances for loans receivable when
repayment becomes doubtful or amounts due are delinquent and in excess
of the value of the collateral. Notes are deemed delinquent when they
are more than 90 days past due. As of March 31, 1999 and 1998, no
allowance for loan losses has been provided since the Company's
management believes that the value of the collateral is in excess of the
total of past due notes receivable.
Land Held for Sale
Land held for sale is carried at the lower of the carrying amount or
fair value less costs to sell. The basis of the properties includes the
allocation of original purchase price, direct development costs and an
adjustment as a result of the quasi-reorganization (see Note 18). Costs
are allocated to properties by the specific identification method
whenever possible. Otherwise, development costs are allocated based on
the relative fair value of the properties. Real estate operating
revenues include proceeds from the sale of land.
F-7
37
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 18). Due to the limited number of
comparable sales of water rights, the Company has relied on valuations
prepared by independent water engineers to determine the relative fair
values of water rights.
Costs are allocated to water rights by the specific identification
method whenever possible. Otherwise, development costs are allocated
based on the relative fair value of the water rights. In addition,
interest costs are capitalized during the development period.
Capitalized interest for the years ended March 31, 1999, 1998 and 1997
was $82,565, $184,729, and $285,429, respectively.
The Company capitalizes costs directly relating to water projects under
development that are considered probable. Effective July 1, 1998, the
Company adopted a policy of providing an allowance for these capitalized
water project costs, based primarily upon the Company's historical
experience with similar projects.
Prepaid leasing costs
Prepaid leasing costs are lease payments or other development costs
incurred directly in connection with water rights leased by the Company
that are considered probable of providing a benefit to the Company in
future periods. Effective July 1, 1998, the Company adopted a policy of
providing an allowance for certain prepaid leasing costs in which the
Company has not entered into a related water contract to sell such
leased water, based primarily upon the Company's historical experience
with similar projects. Upon the execution of a contract to sell such
leased water to a customer, the Company amortizes the prepaid leasing
costs over the life of the water sales contract using the straight-line
method.
Other Water Assets
Other water assets primarily represent the Company's right to receive
3.7398 percent of payments made over a 100-year period commencing July
1, 1989, with respect to sales of water by a non-affiliated third party
to the Cucamonga County Water District. These rights are being amortized
using the straight-line method over a 40-year period. The accumulated
amortization as of March 31, 1999 and 1998 was $349,124 and $290,800,
respectively. Other water assets also include the Company's investment
in shares of certain Southern California mutual water companies. The
investment is carried at cost plus the Company's proportionate share of
capital assessments by the mutual water companies. In addition, included
in other water assets is the Company's investment in water storage
projects. The Company capitalizes costs directly related to water
storage projects under development that are considered probable of
providing a benefit to the Company in future periods. Effective July 1,
1998, the Company adopted a policy of providing an allowance for these
water storage project costs based primarily upon the Company's
historical experience with similar projects. As of March 31, 1999, an
allowance of $124,312 is recorded as a reduction to other water assets
on the balance sheet.
Investment in Limited Liability Company
The Company accounted for its investment in the limited liability
company under the equity method. Accordingly, income or losses were
recorded in proportion to the Company's ownership interest. Intercompany
profits and losses were eliminated. The Company's investment in and
investment loss from the limited liability company were based on the
results of the limited liability company's years ended 90 days prior to
the Company's years end.
F-8
38
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE. 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Deferred Debt Costs
Deferred debt costs are amortized using the straight-line method, which
approximates the interest method, over the life of the related debt.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed on the straight-line method over the estimated useful lives
ranging from five to ten years and totaled $29,195, $26,993 and $30,841,
for the years ended March 31, 1999, 1998 and 1997, respectively.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
Revenue Recognition - Water
Water revenue is recorded when realizable and earned. Revenue from
long-term water sales contracts with non-cancelable, fixed rate
increases are recognized on a straight-line basis over the contractual
period of the water sale.
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
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows (undiscounted and without
interest) expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amounts of the assets exceed the
fair 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.
F-9
39
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE. 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Comprehensive Income
On April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. As it relates to the Company, comprehensive
income consists of net income and net unrealized gains (losses) on
securities and is presented in the consolidated statements of operations
and comprehensive income Prior year consolidated financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
Income (Loss) Per Share
In April 1997, the Company adopted SFAS No. 128, "Earnings per Share".
SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share 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.
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Net income available to common
stockholders is adjusted in Fiscal 1999 to include the Series D
Convertible Redeemable Preferred Stock and Series C Convertible
Redeemable Preferred Stock dividends of $990,401 and accretion of
$33,099. Net income available to common stockholders is adjusted for
Fiscal 1998 to include the Series B Convertible Preferred Stock and
Series C Convertible Redeemable Preferred Stock dividends of $526,000
and accretion of $30,584.
Diluted net income per share is computed by dividing the amount of net
income for the period available to each share of common stock
outstanding during the period by each share that would have been
outstanding assuming the issuance of common shares for all potentially
dilutive common shares outstanding during the reporting period. The
weighted average shares used for basic and diluted EPS computation were
8,186,772, 8,213,747 and 8,088,089 shares for the years ended March 31,
1999, 1998 and 1997, respectively.
Stock options to purchase the following number of shares of common stock
at exercise prices per share ranging from $5.25-$21.00, $5.44-$18.70 and
$5.44-$18.70 in fiscal years ended March 31, 1999, 1998 and 1997,
respectively, were not included in the computation of diluted earnings
per share as their effect would have been antidilutive:
1999 1998 1997
--------- --------- -------
Stock options 1,689,876 1,095,066 857,000
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, 1999, 1998 and 1997 as their effect would have
been antidilutive.
F-10
40
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE. 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES: (CONTINUED)
Convertible debentures, Series C redeemable preferred stock, Series D
redeemable preferred stock and Series B preferred stock convertible into
the following number of shares of common stock at conversion prices of
$15.86, $16.62, $8.99 and $16.62 per share, respectively, were not
included in the computation of diluted earnings per share for the years
ended March 31, 1999, 1998 and 1997 as their effect would have been
antidilutive:
1999 1998 1997
--------- ------- -------
Convertible debentures 929,382 945,763 945,763
Series C redeemable preferred stock 611,593 569,551 --
Series D redeemable preferred stock 1,112,347 -- --
Series B preferred stock -- -- 240,672
Segment Reporting
On April 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
This statement establishes standards for the way public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. See
Note 24 for segment disclosures.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made in order
to conform to the current year's presentation.
NOTE 2. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES:
The amortized cost, gross unrealized gains and losses and market value
of available-for-sale securities at March 31, 1999 and 1998 are as
follows:
1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gain Loses Value
----------- ---------- ---------- -----------
Certificate of Deposit $ 1,000,850 $ -- $ -- $ 1,000,850
Commercial Paper 7,813,898 -- -- 7,813,898
Corporate Bonds 2,830,518 -- -- 2,830,518
US Government Agency Note 2,416,144 -- -- 2,416,144
----------- ------ ------ -----------
Total $14,061,410 $ -- $ -- $14,061,410
=========== ====== ====== ===========
F-11
41
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES (CONTINUED):
1998
----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gain Loses Value
----------- ---------- ---------- -----------
Certificate of Deposit $ 1,000,000 $ -- $ -- $ 1,000,000
Commercial Paper 12,308,723 -- -- 12,308,723
Corporate Bonds 998,750 -- -- 998,750
US 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
=========== ======== ===== ===========
Proceeds from the sales of available-for-sale securities were
$13,019,387, $5,635,323 and $1,888,258 for the years ended March 31,
1999, 1998 and 1997, respectively. Results from the sale of
available-for-sale securities was a $186,620 gross loss for the year
ended March 31, 1999, 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.
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 8.7%. Terms
of these notes generally require level payments of principal and
interest over periods of five to 20 years. The notes are secured by the
lots sold. During the year ended March 31, 1998, the Company foreclosed
on a note received in connection with land it sold in March 1997. The
Company recorded the foreclosed land at $128,352, which represents the
lower of the carrying value of the note receivable or the fair market
value of the land. The carrying value of the note receivable was
comprised of the principal balance of the note receivable ($234,244),
accrued interest ($36,452) and legal fees ($5,108) less the deferred
profit from the prior year's sale ($147,452).
Aggregate maturities due on notes receivable at March 31, 1999 are as
follows:
Non-Retail Retail
Land Sales Land Sales Total
---------- ---------- ----------
2000 $147,740 $ 69,172 $ 216,912
2001 97,478 74,143 171,621
2002 99,424 218,805 318,229
2003 69,673 70,619 140,292
2004 -- 63,179 63,179
Thereafter -- 476,170 476,170
-------- ---------- ----------
$414,315 $ 972,088 $1,386,403
======== ========== ==========
NOT NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1999 and 1998 consists of:
1999 1998
--------- ---------
Land $ 2,952 $ 2,952
Equipment 256,158 123,750
--------- ---------
259,110 126,702
Less accumulated depreciation (69,451) (40,751)
--------- ---------
$ 189,659 $ 85,951
========= =========
F-12
42
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5.LAND HELD FOR SALE:
Land held for sale at March 31, 1999 and 1998 consists of the following:
1999 1998
---------- ----------
Cherry Creek Basin, Colorado $ 703,256 $ 831,609
San Bernardino County, California 721,481 --
Rice farms and ranches, Yuba and Glenn County, California 3,080,490 3,128,668
---------- ----------
$4,505,227 $3,960,277
========== ==========
NOTE 6. WATER RIGHTS:
Water rights held at March 31, 1999 and 1998 consists of the following:
1999 1998
------------ -----------
Cherry Creek Basin, Colorado $ 10,684,807 $10,465,244
Los Angeles County, California 4,428,788 4,419,805
San Bernardino County, California 3,326,617 --
Rice farms and ranches, Yuba and Glenn County, California 280,798 280,798
Inyo County, California 1,011,392 96,539
Miscellaneous -- 2,324
------------ -----------
19,732,402 15,264,710
Less: Allowance for project costs (1,015,883) --
------------ -----------
$ 18,716,519 $15,264,710
============ ===========
During the year ended March 31, 1998, the Company purchased the water
rights to 1,152 acre-feet of water in Los Angeles County, California.
The purchase price of $3,450,450 was paid in cash and through the
issuance of shares of the Company's common stock. Of the total purchase
price, $1,280,000 was satisfied through the issuance of 88,238 shares of
the Company's common stock. The Company guaranteed the price of its
stock, within a range, and subsequently paid cash of $117,856 in full
satisfaction of the guarantee. The common stock issued was recorded at
the purchase price less the amount of the guarantee payment.
NOTE 7. PREPAID LEASING COSTS:
On September 30, 1998, the Company entered into a pumping rights lease
and a water sale agreement with the City of Inglewood, California
("Inglewood"). Beginning October 1, 1998, Inglewood leased the rights to
pump 4,450 acre-feet of water per year to the Company for a five-year
period. In consideration of the lease, the Company made a $3,603,200
lump-sum cash payment to Inglewood. Under the water sale agreement, the
Company agreed to sell, and Inglewood agreed to buy, 5,950 acre-feet of
water each year for the next five years. In the first year, Inglewood
will pay $200 per acre-foot ($1,190,000). The per acre-foot price will
escalate over the remaining four-year period at a rate equal to the sum
of 3.75% per year plus 25% of any increase in the Metropolitan Water
District of Southern California's ("MWD") rate for water, as defined.
For the year ended March 31, 1999, the Company recognized revenue of
$641,330 from the agreement with Inglewood.
In order to secure a portion of the water that the Company agreed to
sell to Inglewood, the Company entered into a five-year and a
fifteen-year water rights lease during the year ended March 31, 1999.
The five-year water rights lease is expected to provide 1,008 acre-feet
per year for a payment of $150 per acre-foot in the first year
($151,200), which was prepaid.
F-13
43
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7. PREPAID LEASING COSTS (CONTINUED):
In February 1999, the Company entered into a water transfer agreement
with Natomas Central Mutual Water Company ("Natomas") pursuant to which
Natomas agreed, subject to certain conditions still to be satisfied, to
transfer to the Company the temporary use of up to 30,000 acre-feet of
non-Central Valley Project water from the Sacramento River by October
1999. Up to 18,000 acre-feet of the water will be reserved by the
Company for resale and delivery to end-users in and/or north of the
Sacramento-San Joaquin Delta (the "Delta"). A minimum of approximately
12,000 acre-feet of the water will be conveyed through the California
Department of Water Resources ("DWR") and/or the U.S. Bureau of
Reclamation facilities for resale and delivery to end-users south of the
Delta or for temporary storage south of the Delta. In February 1999, the
Company paid a nonrefundable deposit of $275,000 to Natomas and is
obligated to pay Natomas, upon delivery of the water to a third party
purchaser, $20 per acre-foot for any of the water transferred for use
within or north of the Delta and $50 per acre-foot for any of the water
transferred for use south of the Delta. In addition, the Company will
also pay Natomas 50% of the net proceeds, as defined, from the sale of
water to a third party purchaser.
As of March 31, 1999 and 1998, the allowance for prepaid leasing costs
was $153,870 and zero, respectively. Accumulated amortization as of
March 31, 1999 and 1998 was $435,920 and zero, respectively.
NOTE 8. 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 ("Nevada
LLC") which was owned 35.3% by the Company and 64.7% by Western Land
Joint Venture. Nevada LLC acquired approximately 1,400,000 acres of land
and related water rights in the state of Nevada. The Company's
$12,000,000 investment in Nevada LLC was funded with the proceeds from
the sale of 9% Convertible Subordinated Debentures.
On April 23, 1997, the Company sold its interest in Nevada LLC to Global
Equity Corporation ("Global") for $13,360,000, of which $12,024,000 was
received in cash and $1,336,000 was received in the form of a note.
During August 1997, the note plus the accrued unpaid interest was
converted into 723,911 shares of Global. During the year ended March 31,
1998, the Company sold 147,300 Global shares at a gain of $51,201. 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. During the year ended March 31, 1999, Global was acquired
by PICO Holdings, Inc. ("PICO"). Also during the year ended March 31,
1999, the Company sold its entire holdings in PICO, realizing a loss of
$186,620. The Company realized proceeds of $1,222,695 from the sale of
the 723,911 shares. In connection with the sale of the Company's
interest in the Nevada LLC, the Nevada LLC entered into a consulting
agreement with Western Agua, L.P. (the "Consulting Agreement"). Western
Agua, L.P. is a Delaware limited partnership formed by the Company and
Western Land Joint Venture. The Company owns a 70% interest in Western
Agua, L.P. and is the sole general partner of the partnership. In
exchange for providing consulting services to the Nevada LLC, Western
Agua, L.P. is to receive 50% of all the net proceeds, if any, derived
from the subsequent sale, leasing or other disposition of all or any
portion of the Nevada LLC or refinancing of the Nevada LLC or other
revenues derived from the disposition of Nevada LLC by Global after they
both recoup their investment in the Nevada LLC and earn a 20% cumulative
return, as defined, compounded annually on their investment, provided
such net proceeds have begun to be earned within five years from the
date of sale. In addition, the Western Land JV has agreed to provide the
Company with a three-year right of first offer to review all Western
Land JV's water investment opportunities in the Western United States.
The Nevada LLC is contesting Western Agua L.P.'s right to the interest
in the net proceeds, and Western Agua has commenced legal action against
the Nevada LLC to affirm its position.
F-14
44
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8. INVESTMENT IN LIMITED LIABILITY COMPANY (CONTINUED):
The following information reflects operations of the Nevada LLC for the
period from January 1, 1997 through April 23, 1997 (date of sale) and
for the year ended December 31, 1996:
For the period Year ended
January 1 through December 31,
April 23, 1997 1996
----------------- ------------
Net operating revenues $ 533,000 $ 2,540,000
General and administrative expenses 1,404,000 4,968,000
----------- -----------
Net loss $ (871,000) $(2,428,000)
=========== ===========
Company's share of net loss $ (307,623) $ (856,921)
=========== ===========
As a result of the sale of the Company's interest in the Nevada LLC, the
Company realized a gain of $2,419,193, net of legal and other closing
costs totaling $60,242 and deferred $120,000 of the gain relating to
estimated future consulting services that are to be provided in
accordance with the Consulting Agreement. During Fiscal 1999 and 1998,
$40,000 and $36,667, respectively, of the deferred gain was realized.
NOTE 9. 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 other liabilities, and accrued interest are
reasonable estimates of their fair values due to the short-term nature
of those instruments.
The carrying amount of the notes receivable is a reasonable estimate of
fair value based on management's belief that the terms are not
materially different than the terms that would be offered to land buyers
with similar credit ratings.
The carrying amount of the long-term debt and debentures is 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.
NOTE 10. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses at March 31, 1999 and 1998 consists of the following:
1999 1998
-------- --------
Severance $ -- $312,654
Consulting and engineering 100,985 141,011
Professional fees 99,925 77,676
Printing costs 73,451 73,614
Vacation 80,147 46,104
Other 135,587 81,895
-------- --------
$490,095 $732,954
======== ========
F-15
45
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11. LONG-TERM DEBT:
Long-term debt at March 31, 1999 and 1998 consists of debt related to
assets acquired in Cherry Creek Basin, Colorado, and the rice farms and
ranches in Yuba and Glenn County, California and the financing of the
lump-sum payment to the City of Inglewood related to the pumping rights
lease (see Note 7):
1999 1998
----------- -----------
Water leasing program
Five-year amortizing term loan beginning September 30, 1998. The
loan accrues interest at the bank's Reference Rate, as defined,
or LIBOR (capped at 6%) plus 1.5%, and is payable quarterly, or
sooner, at the Company's option. Principal is payable quarterly,
at the following annual rate based on the loan year of October 1
through September 30: Year 1, $560,000; Year 2, $628,000;
Year 3, $708,000; Year 4, $790,000; Year 5, $874,000 $ 3,280,000 $ --
Cherry Creek Basin
Mortgage note payable bearing interest at 8%. Principal and
interest are payable in annual installments of $14,307 Balance is
due December 2002. At maturity, a balloon payment of $47,386 plus
any accrued interest is due 74,487 82,217
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 238,529 255,335
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 625,054 646,006
Mortgage note payable bearing interest at prime rate plus
2%. The loan was repaid during the year ended March 31, 1999 -- 96,050
----------- -----------
4,218,070 1,079,608
Less current maturities of long-term obligations (1,245,721) (51,138)
----------- -----------
$ 2,972,349 $ 1,028,470
=========== ===========
Each of the notes payable above are collateralized by the related
individual property. As of March 31, 1999, the related carrying value of
the collateral for notes payable was $6,788,224.
During the year ended March 31, 1999, the Company incurred $84,900 of
deferred debt costs related to the five-year amortizing term loan.
Amortization expense on the deferred debt costs totaled $8,490 for the
year ended March 31, 1999. Accumulated amortization as of March 31, 1999
was $8,490.
F-16
46
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11. LONG-TERM DEBT (CONTINUED):
Aggregate maturities required on long-term debt at March 31, 1999 are as
follows:
2000 $1,245,721
2001 696,983
2002 780,502
2003 903,109
2004 462,858
Thereafter 128,897
----------
$4,218,070
==========
NOTE 12. 9% CONVERTIBLE SUBORDINATED DEBENTURES:
On September 22, 1995 the Company issued $15,000,000 of 9% Convertible
Subordinated Debentures (the "Debentures"), due in 2005. The Debentures
are unsecured and subordinate to all secured debt. Interest accrues at
9% per annum and is payable on September 30 and March 31 of each year.
The Debentures are initially convertible into 945,763 shares of the
Company's common stock at a conversion price of $15.86 per share (after
the effect of the March 28, 1996 stock dividend). Effective October 1,
1997, the Company may redeem the Debentures at a cash redemption price
equal to 100% of the principal amount redeemed (plus accrued and unpaid
interest thereon) if the trading price of the common stock was 150% of
the conversion price for the 20 preceding trading days. During the year
ended March 31, 1999, the Company repurchased $260,000 of its Debentures
for $151,006. As a result of this transaction, gross deferred debt costs
and accumulated amortization were reduced by $14,193 and $4,856,
respectively. Amortization expense on the deferred debt costs was
$81,888 for the years ended March 31, 1999 and 1998. Accumulated
amortization as of March 31, 1999 and 1998 was $282,120 and $205,088,
respectively.
NOTE 13. 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. 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
F-17
47
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. PREFERRED STOCK (CONTINUED):
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 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, July 15, 1998 and January 15, 1999
the Company paid dividends which totaled $1,029,879 for the three
payments, all of which was paid through the issuance of 1,029 shares of
Series C Preferred Stock.
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, up to an aggregate of one-half
of all shares of Series C Preferred Stock owned by such holder on April
1, 2006. Commencing on April 1, 2007, each holder of shares of Series C
Preferred Stock may, from time to time thereafter, at such holder's
option, cause the Company to redeem for cash, out of funds legally
available, some or all of such holder's shares of Series C Preferred
Stock. The redemption price for each share of Series C Preferred Stock
shall be $1,000 per share, plus, in each case, all declared and unpaid
dividends, if any.
The Series C Preferred Stock has a preference in liquidation over the
holders of common stock of $1,000 per share plus accrued and unpaid
dividends.
On October 27, 1998, the Company sold $10,000,000 of its Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock") to
an affiliate of Sociedad General de Aguas de Barcelona, S.A. ("Agbar").
Each share of Series D Preferred Stock has a stated value of $1,000, has
a dividend rate of 7.5% of its stated value, and is convertible at any
time at the option of the holder into the number of shares of common
stock determined by dividing the amount of the liquidation preference on
the conversion date by the conversion price of such shares in effect on
the conversion date. The conversion price is $8.99 per share (the
"Conversion Price") and is subject to adjustment in certain events to
prevent dilution. Agbar has also agreed to make up to three subsequent
$5,000,000 purchases of Series D Preferred Stock to fund capital
expenditures of the Company for water projects which Agbar approves,
through October 2000 (which can be extended to four years by mutual
agreement).
Commencing on October 1, 2007 and continuing through September 30, 2008,
each holder of the Series D Preferred Stock may, from time to time
during such period, at such holder's option, cause the Company to redeem
up to one-half of the shares of Series D Preferred Stock held by such
holder on October 1, 2007 for cash, out of funds legally available.
Commencing on October 1, 2008, each holder of shares of Series D
Preferred Stock may, from time to time thereafter, at
F-18
48
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. PREFERRED STOCK (CONTINUED):
such holder's option, cause the Company to redeem for cash, out of funds
legally available therefore, some or all of such holder's shares of
Series D Preferred Stock. The redemption price for each share of Series
D Preferred Stock will be $1,000 per share, plus, in each case, all
declared and unpaid dividends, if any.
In the event of any liquidation or winding up of the Company, the
holders of Series D Preferred Stock will be entitled to receive an
amount equal to $1,000 per share plus all declared but unpaid dividends
on the Series D Preferred Stock. The liquidation rights granted to the
holders of Series D Preferred Stock will be at a rate equal to the
liquidation rights granted to the holders of Series C Preferred Stock
and senior to the liquidation rights of any other shares of capital
stock of the Company. A merger, consolidation, sale of assets or other
transaction in which control of the Company is transferred will be
treated as a liquidation for the purpose of the Agbar agreement unless
holders of more than 50% of the shares of Series D Preferred Stock
otherwise agree.
The shares of the Series D Preferred Stock are not redeemable by the
Company prior to the later of (i) October 15, 2001 or (ii) the
termination of any obligation that the purchaser of the initial 10,000
shares has to purchase additional shares of Series D Preferred Stock
upon satisfaction of all conditions to any such obligation. Commencing
on the later of such dates, shares of the Series D Preferred Stock may
be redeemed, in whole or in part at any time at the option of the
Company by resolution of its Board of Directors, for a cash redemption
price equal to the total of (i) all accrued but unpaid dividends with
respect to the shares of Series D Preferred Stock being redeemed plus
(ii) an amount equal to the liquidation preference for the shares of
Series D Preferred Stock being redeemed, at the date of such redemption,
multiplied by a percentage, as defined.
Notwithstanding the foregoing, the Company may not redeem any shares of
the Series D Preferred Stock unless the common stock has had a trading
price, as defined, of not less than 150% of the Conversion Price for 20
consecutive trading days prior to the Company giving notice to the
holders thereof. In addition, the Company shall not have the right to
redeem more than 9,000 of the initial 10,000 shares without the consent
of the holders of the initial 10,000 shares so long as the shares of
Series C Preferred Stock are not subject to redemption at the option of
the Company, and any such redemption of shares of Series D Preferred
Stock at the option of the Company shall be done on a pro rata basis
with a redemption of shares of Series C Preferred Stock. The limitation
on the number of shares that can be redeemed by the Company if the
trading price, as defined, condition has been met, as set forth in the
preceding sentence, shall only apply to the initial 10,000 shares and
not to any of the other 15,000 shares of Series D Preferred Stock that
may be issued after the issuance of the initial 10,000 shares. In case
of the redemption of only a part of the outstanding shares of Series D
Preferred Stock, the shares so to be redeemed shall be selected pro
rata.
NOTE 14. TREASURY STOCK PURCHASE PROGRAM:
In November 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock in the
open market. For the year ended March 31, 1999, the Company repurchased
292,200 shares of common stock at a cost of $1,259,030. The purchase of
treasury shares was recorded using the cost method.
NOTE 15. DISCONTINUED OPERATIONS:
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.
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 during the year ended March 31, 1997 was
primarily due to lower than anticipated sales proceeds from the disposal
of the discontinued operation. During the fiscal year ended March 31,
1997, actual loss from the operations of the discontinued operation were
$(47,427). During the year ended March 31, 1998, the liquidation was
completed.
F-19
49
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16. 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 17. INCOME TAXES:
Total income taxes for the years ended March 31, 1999, 1998 and 1997
were allocated to continuing operations. Income tax expense attributable
to income (loss) from continuing operations consists of:
Current Deferred Total
---------- ---------- ----------
Year ended March 31, 1999:
State $ 3,200 $ -- $ 3,200
========== ========== ==========
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
========== ========== ==========
Income tax expense attributable to income (loss) from continuing
operations was $3,200, $2,400, and $1,102,400, for the years ended March
31, 1999, 1998 and 1997, 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:
1999 1998 1997
----------- ----------- -----------
Computed "expected" income tax expense (benefit) $(1,847,900) $ (646,500) $(1,411,000)
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)
Accrued expenses -- 118,200 11,400
Cost of sale related to quasi-reorganization -- 68,300 20,000
NOL carryforward 1,853,000 791,200 1,610,600
Other (5,100) (4,400) --
State income taxes 3,200 2,400 2,400
----------- ----------- -----------
$ 3,200 $ 2,400 $ 1,102,400
=========== =========== ===========
F-20
50
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17. 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, 1999 and 1998 are presented below.
1999 1998
----------- -----------
Deferred tax assets:
Allowance for water projects $ 518,000 $ --
Property and equipment 342,000 933,000
Net operating loss carryforwards 8,841,000 7,282,000
----------- -----------
Total gross deferred tax assets 9,701,000 8,215,000
Less valuation allowance 9,447,000 (7,594,000)
----------- -----------
Net deferred tax assets 254,000 621,000
----------- -----------
Deferred tax liabilities:
Land held for sale and water rights, principally
due to differences in capitalized interest (254,000) (498,000)
Water sales fees -- (123,000)
----------- -----------
Total gross deferred tax liabilities (254,000) (621,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The valuation allowance for deferred tax assets as of April 1, 1998 and
1997 was $7,594,000 and $6,574,000, respectively. The net change in the
total valuation allowance for the years ended March 31, 1999 and 1998
was an increase of $1,853,000 and $1,020,000, respectively. In assessing
the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. During the years ended March 31, 1999, 1998 and 1997,
the valuation allowance was increased as a result of the current year's
net operating loss carryforward. In addition, during the year ended
March 31, 1997, the sale of the Company's interest in the Nevada LLC
resulted in a $1,100,000 adjustment to the beginning-of-the-year
valuation allowance.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences, net of the
existing valuation allowances at March 31, 1999 and 1998. 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 18).
At March 31, 1999, 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
2019 4,300,000
-----------
$23,800,000
===========
F-21
51
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17. INCOME TAXES (CONTINUED):
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 18. QUASI-REORGANIZATION:
The Company's Board of Directors authorized management to effect a
quasi-reorganization as of October 1, 1994. Such reorganization was
ratified by the Company's stockholders in March, 1995, and accordingly,
the assets and liabilities have been restated to current values as of
the date of the reorganization. The amount of increases, however, are
limited to the decreases in other assets. In this regard, effective
October 1, 1994 the Company recognized a write-down in the value of the
silica plant of $1,830,914. This write-down was offset by a
corresponding write-up of a like amount which was allocated
proportionately, based on the relative excess of fair market value of
each asset over historic book basis, to land held for sale of $454,604,
to water rights of $1,038,268, and to other water assets of $338,042.
Further, the accumulated deficit of $14,405,252, most of which was due
to the Company's prior and now discontinued operation, was eliminated by
a corresponding decrease in the Company's additional paid-in capital.
Accumulated deficit is dated to reflect only results of operations
subsequent to October 1, 1994. Any future tax benefits from deductible
temporary differences and net operating loss 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 19. STOCK OPTIONS AND WARRANTS:
Under the Company's 1997, 1993 and 1990 stock option plans (the
"Plans"), the Company may grant options to purchase up to 2,600,000
shares of common stock to officers, directors, key employees and others
providing significant services to the Company. Effective with the
approval of the stockholders at the September 15, 1998 annual meeting,
the number of shares of common stock reserved for issuance under the
Company's 1997 Stock Option Plan increased from 600,000 to 1,400,000.
Stock options are generally granted at an exercise price no less than
fair value on the date of grant. Options available to be granted at
March 31, 1999, 1998 and 1997 were 607,000, 442,668 and 105,334,
respectively.
The per share weighted-average fair value of stock options granted
during the years ended March 31, 1999, 1998 and 1997 was $4.60, $3.72
and $6.76, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended March 31, 1999 - Expected dividend yield of zero, expected
volatility of .5832, risk-free interest rates ranging from 4.49% to
5.68%, and an expected life of 5 years. Year ended March 31, 1998 -
Expected dividend yield of zero, expected volatility of .384, risk-free
interest rates ranging from 5.72% to 6.55%, and an expected life of 5
years; 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.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, in Fiscal 1999 and 1998 compensation expense of $121,967
and $139,500, respectively, 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 applicable to common stockholders would have been
increased to the pro forma amounts indicated below:
Fiscal Fiscal Fiscal
1999 1998 1997
---------- ---------- ----------
Net Loss: As reported $6,458,408 $2,458,014 $5,392,474
Pro forma 7,669,176 5,439,135 6,241,670
Basic and diluted
loss per share: As reported $ .79 $ .30 $ .67
Pro forma .94 .66 .77
F-22
52
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19. STOCK OPTIONS AND WARRANTS (CONTINUED):
Pro forma net loss and loss per share reflect only options granted
during the years ended March 31, 1996 through 1999. 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 1, 1995 is not considered.
Effective March 16, 1999, the Company granted 20,000 stock options at
$5.75 which are not covered under existing plans.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- -----------------
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
Granted 1,300,000 15.21
Exercised (4,000) 6.75
Cancelled/forfeited (701,190) 12.02
---------
Balance at March 31, 1999 1,689,876 13.71
=========
At March 31, 1999 and 1998, the exercise prices of outstanding options
ranged from $5.25-$21.00 and $5.44-$18.70, respectively, and the
weighted-average remaining contractual life of outstanding options was
8.2 years and 6.1 years, respectively.
At March 31, 1999 and 1998, the number of options exercisable was
447,882 and 725,062, respectively, and the weighted-average exercise
price of those options was $11.00 and $11.74, 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, 1999, 1998 and 1997.
On March 6, 1998, the Company reduced the exercise prices on 396,000
previously awarded options. The exercise prices, which originally ranged
from $13.50-$18.18, were reduced to $9.50 which was the market price of
the Company's common stock on the date of modification. Subsequent to
Fiscal 1998, the Company rescinded the repricing on 285,000 of the
options effective March 6, 1998.
F-23
53
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20. EXTRAORDINARY INCOME:
During the year ended March 31, 1999, the Company repurchased $260,000
of its 9% Convertible Subordinated Debenture for $151,006. After
reducing related deferred debt costs of $9,337, net of accumulated
amortization of $4,856, the Company recognized an extraordinary income
on extinguishment of debt, net of income taxes of $99,656.
NOTE 21. OTHER INCOME:
On June 30, 1998, the Company entered into an agreement with two of its
former officers to sell its 40% interest in an option (the "IWT Option")
to purchase certain outstanding shares of Integrated Water Technologies,
Inc., an unaffiliated water consulting company. In exchange, one former
officer agreed to the cancellation of 56,858 stock options to purchase
Company common stock at $5.4375, and additional options to purchase
296,000 shares of the Company stock by these two former officers were
cancelled. In addition, the Company's obligation to pay $290,637 of the
remaining severance costs recorded in the prior fiscal year ended March
31, 1998 to one of the former officers, was cancelled as of May 15,
1998. Accordingly, the sale of the IWT Option resulted in the Company
recognizing other income of $290,637 for the year ended March 31, 1999.
NOTE 22. GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the years ended March 31, 1999,
1998 and 1997 consist of the following:
1999 1998 1997
---------- ---------- ----------
Payroll and related costs $1,989,138 $2,596,407 $1,081,574
Legal and accounting 576,055 760,057 357,710
Consulting and engineering 912,050 623,385 364,423
Travel 159,955 127,517 173,978
Allowance for water project costs 1,294,065 -- --
Other corporate 873,929 1,538,193 968,567
---------- ---------- ----------
$5,805,192 $5,645,559 $2,946,252
========== ========== ==========
NOTE 23. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Plan for all employees. This plan contains no
eligibility requirements and contributions by the Company are
discretionary. The Company matches a percentage of the contributions of
participating employees. Company matching contributions for the year
ended March 31, 1999 amounted to $9,892.
NOTE 24. SEGMENT INFORMATION:
The Company has two operating segments: a) the acquisition and
development of water rights and the sale or lease of its water, and b)
the sale of real estate interests acquired in connection with the
acquisition of water rights. Information concerning the operating
segments as of March 31, 1999, 1998 and 1997 and for the years then
ended is presented below:
F-24
54
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1999 1998 1997
------------ ------------ ------------
Segment revenue:
Water $ 1,477,375 $ 932,377 $ 261,103
Real estate 345,615 2,990,000 1,509,668
------------ ------------ ------------
$ 1,822,990 $ 3,922,377 $ 1,770,771
============ ============ ============
Net income (loss):
Segment:
Water $ 476,377 $ 65,139 $ 202,728
Real estate 161,615 1,560,829 533,293
Non-segment (6,072,900) (3,527,398) (6,128,495)
------------ ------------ ------------
$ (5,434,908) $ (1,901,430) $ (5,392,474)
============ ============ ============
Depreciation and amortization expense:
Segment-
Water $ 477,369 $ 58,325 $ 58,324
Non-segment 148,578 108,881 113,097
------------ ------------ ------------
$ 625,947 $ 167,206 $ 171,421
============ ============ ============
Assets:
Segment:
Water $ 25,579,150 $ 18,453,067 $ 15,613,682
Real estate 4,505,227 3,960,277 5,078,521
Non-segment 17,546,483 19,478,624 18,783,155
------------ ------------ ------------
$ 47,630,860 $ 41,891,968 $ 39,475,358
============ ============ ============
The Company recognized revenue of $199,118, $151,938, and $229,568 from
Fontana Water Resources for the years ended March 31, 1999, 1998 and
1997, respectively. For the year ended March 31, 1999, the Company
recognized revenue of $641,330 from the City of Inglewood. No other
recurring customer accounted for more than 10% of the Company's revenue.
NOTE 25. COMMITMENTS AND CONTINGENCIES:
The Company has several noncancelable office equipment, office space and
farmland operating leases that expire over the next four years. These
leases generally contain renewal options for periods ranging from three
to five years and require the Company to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases was
$123,866, $112,834 and $103,987 for the years ended March 31, 1999, 1998
and 1997, respectively.
In addition, the Company entered into a pumping rights lease and a water
sale agreement with the City of Inglewood in September 1998. In order to
secure a portion of the water that the Company agreed to sell to
Inglewood, the Company entered into a five-year and a fifteen-year water
rights lease. The five-year water rights lease is expected to provide
1,008 acre-feet per year for a payment of $150 per acre-foot in the
first year. This amount will escalate over the remaining four-year
period at $7.50 per acre-foot per year. The fifteen-year water rights
lease is expected to provide 250 acre-feet per year for a payment of
$135 per acre-foot in the first year. The fees for subsequent years will
be determined by multiplying the fee for the first year by the ratio of
the index price for each subsequent year divided by the index price for
the first year. The index price is the sum of the price established by
the MWD for full service untreated water and the price components
established by the West Basin Municipal Water District for the MWD
readiness-to-serve charge and the West Basin surcharge for basic
non-interruptible water.
F-25
55
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 25. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum leases payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
March 31, 1999 are:
Water
Year ended March 31, Rights Others Total
-------------------- ---------- -------- ----------
2000 $ 184,950 $163,034 $ 347,984
2001 192,510 145,939 338,449
2002 200,070 124,449 324,519
2003 207,630 87,630 295,260
2004 215,190 91,135 306,325
Thereafter 320,625 7,619 328,244
---------- -------- ----------
Total minimum lease payments $1,320,975 $619,806 $1,940,781
========== ======== ==========
In September 1997, the Company entered into a water purchase agreement
with the San Bernardino Valley Municipal Water District ("SBVMWD")
pursuant to which the SBVMWD agreed, subject to certain conditions still
to be satisfied, to sell to the Company 100,000 acre feet of surplus
California State Water Project water during the next ten years. The
agreement provides for the delivery of 10,000 acre-feet of water
annually, with an option for the Company to accelerate deliveries if
surplus water is available. The Company will pay SBVMWD $150 per
acre-foot of water in the first year, escalating at 3.5% annually. The
agreement requires the approval of the California Department of Water
Resources ("DWR") for the sale of the water from SBVMWD to the Company.
On September 30, 1997, the MWD filed a complaint in the Superior Court
of California for the County of Los Angeles, against SBVMWD, the Company
and Santa Margarita Water District in order to block the water sale, and
separate, but similar action was filed by DWR in the California Superior
Court for the County of Sacramento against SBVMWD and the Company
December 22, 1997. 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.
The Company is the general partner of Western Agua, L.P. ("Western
Agua"), a partnership that agreed to provide consulting services to the
Nevada LLC pursuant to the Consulting Agreement ("Consulting
Agreement"). The Nevada LLC purported to terminate the Consulting
Agreement on March 13, 1998 based on Western Agua's purported willful
breach of the Consulting Agreement. On November 10, 1998, Western Agua
filed an action in the San Diego Superior Court against the Nevada LLC
for breach of contract, specific performance and an accounting relating
to the Consulting Agreement. Western Agua's complaint seeks a judicial
declaration that the Consulting Agreement is not terminated and remains
in full force and effect. On March 12, 1999, after the Company
successfully challenged the legal sufficiency of the Nevada LLC's
original cross-complaint, the Nevada LLC filed an amended
cross-complaint against Western Agua and the Company. The Nevada LLC had
named Peter L. Jensen, the Company's Chairman of the Board, as a
cross-defendant in the original cross-complaint but has dropped him as a
cross-defendant in the amended cross-complaint. The Nevada LLC has also
dropped its previously-asserted claims for concealment and negligent
misrepresentation. The amended cross-complaint contains claims for
breach of contract, breach of fiduciary duty, and declaratory relief,
and seeks compensatory damages in excess of $100,000, an order enjoining
cross-defendants from the development, sale and/or management of sale of
water in areas prohibited by section 5 of the Consulting Agreement, and
a judicial declaration that cross-defendants have breached the
Consulting Agreement and that the Nevada LLC has not. The Company does
not believe that the Nevada LLC has any grounds for terminating the
Consulting Agreement. Should, however, the court determine that the
Consulting Agreement has been validly terminated, Western Agua and the
company would lose their right to receive part of certain net proceeds,
if any, that the Nevada LLC may derive from the sale or other
disposition of the Nevada LLC's properties. Western Agua and the Company
have filed a demurrer to the amended cross-complaint, challenging its
legal sufficiency, and intend to mount a vigorous defense to its claims.
F-26
56
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 25. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company is subject to claims and legal proceedings arising in the
ordinary course of business. While complete assurance cannot be given to
the outcome of any pending or threatened legal actions, the Company
believes that any financial impact would not be material to its
financial position, annual operating results or cash flows.
NOTE 26. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1999 1998 1997
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,523,582 $ 1,601,470 $ 1,695,769
Interest capitalized during the period 82,565 184,729 285,431
Cash paid during the period for income taxes 3,200 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
convertible 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 698,736 466,144 --
Accretion of preferred stock issuance costs 33,099 30,584 --
Common stock issued upon exercise of stock options -- 13 --
Unrealized gain (loss) on available-for-sale-securities (117,233) 145,273 --
Foreclosure of note receivable secured by land:
Land held for sale -- 128,352 --
Notes receivables -- (123,244) --
Accounts payable -- (5,108) --
Write-off of property and equipment and related accumulated
depreciation:
Property and equipment (2,477) (54,116) --
Accumulated depreciation 495 50,378 --
F-27
57
(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-28
58
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-29
59
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-30
60
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-31
61
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-32
62
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.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, ("SFAS No. 121,") Accounting for the Impairment of 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 the
liabilities, 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.
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63
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).
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 located 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