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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997.
COMMISSION FILE NUMBER 0-18756
WESTERN WATER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 33-0085833
(State of incorporation) (I.R.S. Employer Identification No.)
4660 LA JOLLA VILLAGE DRIVE, SUITE 825, SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 535-9282
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 25, 1997 was approximately $108,927,000 (based on last
reported sale price of $14.00 per share of Common Stock on that date). All
directors are considered affiliates. There were 8,232,519 shares of registrant's
common stock outstanding as of June 25, 1997.
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
Inapplicable
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TABLE OF CONTENTS
Item Page
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Part I
1. Business............................................................................... 3
2. Properties............................................................................. 12
3. Legal Proceedings...................................................................... 13
4. Submission of Matters to a Vote of Security Holders.................................... 13
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 13
6. Selected Financial Data................................................................ 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................16
8. Consolidated Financial Statements and Supplementary Data............................... 22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 22
Part III
10. Directors and Executive Officers of the Registrant..................................... 23
11. Executive Compensation................................................................. 24
12. Security Ownership of Certain Beneficial Owners and Management..........................29
13. Certain Relationships and Related Transactions......................................... 30
Part IV
14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K.............................................................. 30
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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 1997
and 1998 and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Western Water Company (the "Company") is engaged in (i) a broad range
of activities related to the identification, acquisition, ownership,
development, transfer and sale of water and water rights primarily in the
Western United States and (ii) in the sale of real estate properties acquired in
connection with the Company's water supply business activities. The Company,
directly and indirectly, owns a diverse portfolio of water rights and real
estate interests in California and Colorado. The Company's principal business
plan is to develop, package and sell its water and water rights to
municipalities and other water users and to provide a variety of water-related
services to unaffiliated owners of water rights. Such services include
identifying, developing, marketing, transporting, distributing and selling water
or water rights that are owned by unaffiliated owners. In addition, the
Company's plan is to resell the real estate interests that it owns and
occasionally acquires in connection with its acquisition of water assets.
The Company has recently focused its efforts on becoming an independent
water provider to municipalities and other agencies located primarily in
Southern California. The Company's goal is to acquire water assets and to sell
or lease such water assets to municipalities or other water agencies or
districts. In order to fund a portion of the anticipated cost of acquiring
groundwater rights and other water-related assets, the Company recently
completed a $9 million private placement of its Series C Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, in November 1996
the Company entered into a letter agreement with J. P. Morgan Securities, Inc.
pursuant to which J. P. Morgan was appointed as the Company's financial advisor
and agent in arranging the placement of debt securities for the special
purpose entities to be formed for the purpose of acquiring Southern California
water assets. In order to effect a water transfer arrangement, the Company will
have to purchase water assets, finance such purchase, and then sell the water
rights. In June 1997, the Company entered into (i) a water purchase agreement
with Elsinore Valley Municipal Water District ("EVMWD") to buy at least 4,000
acre-feet of water from EVMWD during each of the next ten years and (ii) a water
sale agreement with Santa Margarita Water District pursuant to which Santa
Margarita agreed, subject to certain conditions still to be satisfied, to
purchase 10,000 acre-feet of water from a subsidiary of the Company. In
addition, the Company is currently evaluating certain other water transfer
opportunities in Southern California and, as of the date of this Annual Report,
is engaged in discussions with both Southern California water owners regarding
the purchase of water rights from such owners and with certain water districts
regarding the sale and transfer of water to water districts. To date, however,
no water transfers have been completed by the Company pursuant to any of these
agreements. See, "Item 1. Business--Water Transfer Program."
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The principal California water interests owned by the Company consist
of (i) certain riparian and appropriative water rights, together with certain
groundwater rights, associated with approximately 9,055 acres of real property
(the "Yuba Property") located along the Yuba River in California, (ii) the water
rights associated with 2,236 acres of California rice farms and ranches, (iii)
interests owned in various California mutual water companies, and (iv) certain
groundwater pumping rights in Los Angeles County and San Bernardino County,
California. The Company's real estate holdings consist of approximately 1,602
acres located in Northern California.
The principal Colorado water interests owned by the Company consist of
the water rights associated with an aggregate of 4,559 acres of undeveloped land
and certain other water rights in the Cherry Creek basin. The Cherry Creek basin
is the drainage area of Cherry Creek south of Denver, Colorado. The Cherry Creek
assets were acquired primarily for the purpose of developing, processing,
packaging and selling water and water rights in the Cherry Creek basin. The
Company's real estate holdings in Colorado currently consist of approximately
1,887 acres of primarily undeveloped land located in the Cherry Creek basin. See
"Item 1. Business -- Cherry Creek Water Rights Project."
On April 23, 1997 the Company sold its 35.3% interest in Nevada Land &
Resources Company, LLC (the "Nevada LLC") to Global Equity Corporation, an
Ontario, Canada corporation ("Global"). The Nevada LLC was formed by the Company
and a joint venture comprised of The Morgan Stanley Real Estate Fund II, L.P.
and two affiliates of that real estate partnership (collectively, "Western Land
JV") to own approximately 1.38 million acres of land and related water interests
in Nevada (the "Nevada Property"). The Company acquired its interest in the
Nevada LLC in October 1995 for $12,000,000. The purchase price received by the
Company for its interest in the Nevada LLC was $13,360,000, of which $12,024,000
was paid in cash and $1,336,000 was paid by the delivery to the Company of a
convertible note from Global due on December 31, 1997. In addition to the sale
of the Company's interest in the Nevada LLC to Global, the Nevada LLC entered
into a consulting agreement with Western Agua, L.P. (the "Consulting
Agreement"). Western Aqua, L.P. is a Delaware limited partnership formed by the
Company and Western Land JV. The Company owns a 70% interest in Western Agua,
L.P. and is the sole general partner of the partnership. In exchange for
providing consulting services to Nevada LLC in the development of water and
mineral, gas and oil resources on the Nevada Property, Western Agua, L.P. will
receive 50% of the net proceeds, if any, derived from the Nevada Property after
Global both recoups its investment in the Nevada LLC and earns a 20% cumulative
compounded return annually on its investment in the Nevada LLC. In addition, the
Western Land JV has agreed to provide the Company with a three-year right of
first offer to review all Western Land JV's water investment opportunities in
the Western United States.
The Company is currently engaged by The Atchison, Topeka and Santa Fe
Railway Company and by Burlington Northern Railroad Company (collectively,
"Burlington Santa Fe") to act as Burlington Santa Fe's exclusive agent in
California, Arizona, New Mexico, Colorado, Washington and Montana in connection
with identifying, developing and marketing water assets owned by Burlington
Santa Fe, and to identify and assist in marketing Burlington Santa Fe's Texas
water rights, and to advise Burlington Santa Fe in connection with such matters.
See "Item 1. Business -- Agency Activities."
The Company's principal executive office is located at 4660 La Jolla
Village Drive, Suite 825, San Diego, California 92122. Its telephone number is
(619) 535-9282. Unless the context requires otherwise, references to the
"Company" in this report include YG Procyon Corporation, its wholly-owned
subsidiary, and YG Rice Farms, L.P., a California limited partnership directly
and indirectly wholly owned and controlled by the Company. 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.
DESCRIPTION OF BUSINESS
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
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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 to meet
the current demand for water in the Cherry Creek basin, increased need for water
as a result of projected future residential, commercial, and industrial
development and growth in the Cherry Creek basin is expected to exceed the
currently available supply of water in the region. The goal of the Cherry Creek
Project is therefore to develop reliable additional water resources in the
Cherry Creek basin that can be packaged and sold to municipalities and other
water users to meet expected future demand for water.
The State of Colorado has enacted various laws and regulations that
identify and establish rights to tributary water (known as "junior" or "senior"
rights), which rights grant the holders thereof the right to use specified
amounts of tributary water on a fixed priority basis. Because junior water
rights do not constitute a reliable source of water, municipalities and water
districts have not relied solely on junior tributary wells to satisfy their
water requirements. However, under Colorado law, by combining various water
rights under a court approved plan of augmentation, junior water rights can
effectively be turned into senior rights. Because court approved plans of
augmentation allow water to be diverted from junior water sources without regard
to the priority system, such plans are currently the most common method by which
new reliable water supplies are developed for municipal uses in Colorado. As a
result, the Company believes that augmented packages of water rights can be sold
for significantly higher prices than water rights sold separately and that the
amount of water that can be sold is greater under a plan of augmentation.
The Company's plan is to develop and package augmented sources of water
that can be sold to municipalities and other major water users. The Company has
selectively acquired various water rights that, when packaged together, can, it
believes, be sold for municipal and other uses. Since the price of such
augmented water rights packages will depend on the demand for reliable water
resources, on the availability of such water, on the anticipated population
growth in the Cherry Creek basin, and on other factors, the Company cannot
currently estimate accurately the price at which such augmented water packages
can be sold in the future.
In furtherance of the Cherry Creek Project, the Company acquired a
total of approximately 4,559 acres of undeveloped land (primarily for the water
rights associated with the land) and the right to drill and service water wells
on land that was not acquired by the Company. The Company has the right to
operate 13 wells drawing tributary water in the Cherry Creek basin, of which 11
are currently existing wells. Twelve of the 13 well rights are located on
property that is not owned by the Company. With respect to these 12 wells, the
Company owns the right to drill and operate wells and to enter the real property
on which such wells may be located or drilled in order to operate or establish
wells. The total purchase price of these Cherry Creek assets was approximately
$9,846,000 of which approximately $4,359,000 was paid in cash and the balance of
which was financed by the sellers. To date, the Company has resold a total of
2,415 acres of the Cherry Creek Project properties and is in the process of
attempting to subdivide and sell certain other portions of its Cherry Creek real
estate. The Company has, however, retained substantially all of the water rights
associated with the land it has resold (including the right to drill and service
two wells on such resold land), and the Company's plan is to retain most water
rights associated with any Cherry Creek real properties it may sell in the
future. The real estate parcels that have been sold and that are proposed to be
sold are not needed to further the principal purposes of the Cherry Creek
Project. The total consideration received for the 2,415 acres sold to date by
the Company (including certain incidental water rights sold with such real
estate) is $10,156,000 plus the rights to 1,290 acre-feet of water.
In addition to the foregoing sales of Cherry Creek land, the Company in
April 1995 transferred approximately 257 acres of the Company's Cherry Creek
Project real estate to the State of Colorado in exchange for the rights to
withdraw and use 1,290 acre-feet of non-tributary water per year associated with
the adjacent park land owned by the state. The Company believes that the water
rights acquired pursuant to the foregoing exchange increases the amount of water
currently owned by the Company in Cherry Creek by approximately 20%.
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The Company has a Colorado Water Court plan of augmentation in effect
for one of its Cherry Creek Project assets, which plan authorizes the Company to
divert and deliver approximately 2,000 acre-feet of water per year for municipal
uses. In April 1995 the Company drilled a permitted production well to municipal
specifications on this site in accordance with the augmentation plan. The
Company has not yet sold any water from the site.
The Company currently has the right to resell the water and the various
water rights it owns. However, in order to sell packages of long-term, reliable
water resources to municipalities and other larger water users located in the
Cherry Creek basin, the Company must combine its various water resources in a
plan of augmentation that is approved by the Colorado District Court, Water
Division (the "Colorado Water Court"). Accordingly, in order to obtain such
court approved rights, the Company in August 1993 filed three applications with
the Colorado Water Court for adjudication of the Company's rights to (i) change
of use of junior tributary water rights, (ii) a plan of augmentation to support
domestic and other uses of the Company's water, and (iii) non-tributary water
and not non- tributary water. The application regarding the Company's
non-tributary water rights has been granted. However, on May 1, 1995, based on
objections to the applications filed with the court, the Colorado Water Court
dismissed the Company's applications for change of use of junior tributary water
rights and for the plan of augmentation on the basis that the applications
constituted blanket plans and hence were invalid because of their general and
comprehensive nature. The court indicated that the required specificity could
not be known until the Company entered into enforceable agreements for the
purchase and use of the Company's water rights with end-users. The Colorado
Water Court also stated that the Company's applications would be considered when
enforceable agreements with end-users have been entered into and the specific
nature of the water rights to be sold to such end-users is known.
The Company has reached an agreement with all of the original objectors
to its plan of augmentation and, based on the stipulated agreements, has filed a
revised plan of augmentation with the Colorado Water Court. The Company has also
filed a motion to have the dismissal of two of the Company's applications
reversed, which motion is still pending. In addition, as required by the Water
Court in its May 1, 1995 dismissal, the Company in its revised plan has
established specific uses for a portion of its water. Two new objections were
filed to the revised plan of augmentation by objectors who had not been parties
to the original plan. As of the date of this report, only one private water
rights owner still objects to the plan. The Company believes that its two
applications may be approved by the entry of a stipulated decree once the final
outstanding objection is resolved. However, no assurance can be given that the
Company will be able to obtain the consent of the last objector, or that the
Company will otherwise obtain the approval of the Water Court for its
application. To date, the Company has relinquished the rights to approximately
450 acre-feet of water and the rights to a well site in connection with settling
the concerns of objectors.
The Company believes that, based on the estimated current market price
for water in the Cherry Creek basin, it could resell its Cherry Creek water
assets for a price greater than the price it paid for the assets plus
capitalized costs incurred since acquisition. The Company, however, believes
that the total amount of consideration it could receive for its Cherry Creek
water assets would increase if the currently pending plan of augmentation is
approved. The sale of packaged water rights under a plan of augmentation would,
however, require the purchaser to develop and build the infrastructure necessary
to utilize the water available under the packaged water rights that the Company
has assembled. In order to more effectively offer and sell such packaged water
rights, the Company has held discussions with several developers of water
delivery systems regarding the joint development and sale of turnkey facilities
for delivering the Company's water to potential purchasers of the water. The
Company and certain infrastructure developers are currently jointly marketing
the Company's Cherry Creek water on turnkey basis to potential purchasers in the
Cherry Creek market. However, the Company has not entered into any binding
agreements with any infrastructure developer for the development of any such
system, and no assurance can be given that the Company will be able to enter
into an acceptable development and construction agreement should it receive an
offer to purchase some or all of its Cherry Creek water on a turnkey basis.
Yuba Property Water Rights. The Company owns certain riparian and
appropriative rights, together with certain groundwater rights, associated with
the approximately 9,055 acres of real property that constitutes the Yuba
Property. "Riparian" rights are inherent in the ownership of land adjacent to a
flowing stream, and entitle such
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owner to divert an indeterminate amount of water for reasonable beneficial use
on such land, but not elsewhere. "Appropriative" rights entitle the holder of
such rights, which may be transferred separately from any land, to divert a
specified amount of water for reasonable beneficial use on or off such land.
In May, 1991, the Company entered into the Yuba County Water
Exploration, Development and Marketing Agreement (the "Water Agreement") with
Western Aggregates, a wholly owned subsidiary of Centex, Inc., and the Yuba
County Water Agency (the "Water Agency"). The purpose of the Water Agreement was
to integrate water from both the Yuba Property and adjacent acreage owned by
Western Aggregates into the Water Agency's conjunctive use plans of developing
and marketing water to third parties outside of the Water Agency's boundaries.
Under the Water Agreement, the Water Agency agreed to develop and market the
water on behalf of all three parties with the objective of maximizing the
economic return to each of the parties.
Due primarily to the review by the California State Water Resources
Board of water rights on the Yuba River and the Water Agency's involvement in
the attempted settlement of issues raised in the review, the Water Agency did
not complete certain of its water development obligations under the Water
Agreement, and certain portions of the Water Agreement expired in May 1996
without any water having been marketed or sold by the Water Agency. Although the
Company and the Water Agency are currently engaged in discussions regarding a
possible new joint water development and marketing arrangement, Western
Aggregates has informed the Company and the Water Agency that at this time it
will not participate in any such future arrangement and that it may seek to
market its water rights on its own.
The Company is also currently considering developing, marketing and
selling its Yuba Property water rights on its own. The Yuba Property water
rights could also become part of the Company's water transfer program. See "Item
1. Business -- Water Transfer Program," below. The Company's Yuba Property water
resources, when distributed, could be distributed with the other water resources
of the Sacramento Delta, which water resources serve the San Francisco Bay area
and, through the statewide water distribution facilities, most of California,
including parts of Southern California. Accordingly, because of the
configuration of California's water distribution system, the Company believes
that sales could be made by the Company to municipal agencies and water
companies serving over half of the state's population. The Company has not,
however, developed a plan for marketing and selling its Yuba Property water
interests, and the Company cannot currently estimate when any water disposition
plan will be implemented. Accordingly, although the Company believes that its
Yuba Property water rights are a valuable asset, it is not known when the
Company will be able to realize any revenues or other financial benefits from
these water rights.
Water Transfer Program. The Company believes that recent changes in
California law have reduced the legal and institutional barriers to water
transfers and that public or private entities may now transport water through
the distribution systems of the state and local agencies if capacity exits. The
Company believes that water transfers can be a cost-effective means of providing
water and, accordingly, has implemented a plan to become an independent water
provider to municipalities and other agencies located primarily in Southern
California.
The Company believes that water transfer transactions will require the
Company to (i) purchase water that can be delivered in Southern California, (ii)
finance the purchase of such water, if the purchase price of such acquired water
is beyond the financial means of the Company, and (iii) enter into agreements
with Southern California water districts or other water users for the sale of
the Company's water rights to such districts or other water users. The Company
anticipates that each water transfer transaction that it enters into, if any,
will be unique and that the terms under which such transactions are financed and
completed will vary. All such transfer transactions will also involve
significant government regulation.
In order to be able to fund any water transfer acquisition, 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 purchase and
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resale transactions. The Company and J.P. Morgan are currently organizing the
first such special purpose entity. However, no financing has yet been obtained
by J.P. Morgan pursuant to the letter agreement.
In connection with its water transfer program, the Company is
considering purchasing water in Northern California and delivering the water to
Southern California for resale. On June 20, 1996, the Company entered into such
a water transfer agreement with the Placer County Water Agency (the "Placer
Transfer Agreement"). Pursuant to the Placer Transfer Agreement, the Company is
entitled to purchase from the Placer County Water Agency up to 40,000 acre-feet
of water for a price of $50 per acre-foot during 1996 and 1997. The Company has
also been involved in discussions with various water districts and has obtained
the approvals necessary to facilitate the water transfer, including
transportation and storage of the water. The purchase and sale of the water is
contingent upon, among other things, the Company obtaining all necessary
approvals of the State Water Resources Control Board, the Department of Fish and
Game, the Department of Water Resources, and the United States Bureau of
Reclamation for such transfer on terms that are acceptable to the agency and to
the Company. The Company has not yet entered into any agreement to sell the
water, nor has the Company obtained the required consents under the Placer
Transfer Agreement. Because the Company has not received the required approvals,
the Placer Transfer Agreement is now terminable by either party upon delivery of
notification to the other party. No assurance can be given that the Company will
be able to obtain the consents required to be obtained under the Placer Transfer
Agreement or, if such consents are obtained, that it will be able to find a
buyer for the water.
In June 1997 the Company entered into a water purchase agreement with
Elsinore Valley Municipal Water District ("EVMWD") pursuant to which the Company
agreed to purchase from EVMWD not less than 4,000 acre-feet of water per year
during the term of the agreement. The term of the agreement will commence on
July 1, 1997 and continue through June 30, 2006. The price to be paid by the
Company for the water it purchases from EVMWD will be $145 per acre-foot during
the first year, with the price increasing annually by 3.5% commencing on the
first anniversary. EVMWD has agreed to deliver the water to the Prado Flood
Control Basin. In addition, the water purchase agreement provides that if EVMWD
has any additional water available for sale, the Company will have the first
right of refusal to purchase up to 2,000 acre-feet of such water during each
year of the term of the agreement at a price and on the terms contained in the
agreement. If EVMWD breaches the agreement or for any reason is unable to comply
with its obligations to provide the Company with the quantities of water
required to be delivered by the agreement, the Company's sole remedy against
EVMWD is to terminate the agreement, and such termination shall not give rise to
any damages claim.
In June 1997, the board of directors of Santa Margarita Water District,
a water district located in Southern California ("Santa Margarita"), approved an
agreement with the Company pursuant to which Santa Margarita will purchase from
the Company 10,000 acre-feet of water annually for each of the next ten years.
The price to be paid for the water will initially be $250 per acre-foot of
water, which price will increase each year by the amount of any dollar increase
in the treated, non-interruptible water rate of the Metropolitan Water District
of Southern California. The Company is required to deliver the water to the
Prado Flood Control Basin. The agreement is conditioned upon Santa Margarita
obtaining the rights to exchange or store water in the Orange County Groundwater
Basin for its own account within 90 days of the date of the agreement. The
Company and Santa Margarita are jointly attempting to obtain the foregoing
storage rights for Santa Margarita. The agreement will become effective on the
date the Company obtains the financing to purchase the water to be sold to Santa
Margarita under the agreement. The Company plans to obtain the requisite
financing under its agreement with J.P. Morgan. However, the financing has not
been obtained, and no assurance can be given that the requisite financing will
be available on acceptable terms, if at all. The Company may use the water it
purchases from EVMWD to fulfill a portion of its water delivery obligations
under this agreement. In addition, the Company is pursuing various other
agreements for the purchase of the water that it would use to meet its
obligations to Santa Margarita under the agreement. No assurance can be given
that the Company will be able to enter into any such purchase agreement. The
consummation of the Santa Margarita transaction is, therefore, subject to
numerous uncertainties. No assurance can be given that the Santa Margarita
transaction will be able to be consummated or if consummated that the
transaction will materially benefit the financial condition or operations of the
Company.
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The Company has also taken certain other steps to facilitate future
water transfers. In May 1996, the Company obtained approval from the Board of
the San Bernardino Valley Municipal Water District, a State Water Contractor, to
transport water through state water facilities. In June 1996, the Board of the
Monte Vista Water District approved a program to store transferred water in the
Chino Groundwater Basin for the Company. The Monte Vista Water District's water
storage approval, when finalized, will allow the Company flexibility in the
timing and sale of transferred water in a centrally located region in Southern
California.
Agency Agreements. In December 1993, the Company entered into an
agreement with The Atchison, Topeka and Santa Fe Railway Company pursuant to
which the Company was engaged to act as the railway company's exclusive agent
for the state of California and as nonexclusive agent for the State of Colorado
in connection with identifying, developing and marketing water assets owned by
The Atchison, Topeka and Santa Fe Railway Company and advising the railway
company in connection with such matters. The agreement had an initial term of
two years, which term was automatically extended by three additional years upon
the Company's sale in September 1995 of certain of that railway company's water
rights and property to the City of Needles, California, for a total purchase
price of $2,600,000.
In March 1996, The Atchison, Topeka and Santa Fe Railway Company and
Burlington Northern Railroad Company (collectively, "Burlington Santa Fe") and
the Company entered into an amendment to the above-referenced December 3, 1993
agreement. Pursuant to the amendment, Burlington Santa Fe engaged the Company to
also act as Burlington Santa Fe's exclusive agent to identify, develop and
market Burlington Santa Fe's existing or developable water rights and
water-related rights in the states of Arizona, New Mexico, Colorado, Washington
and Montana, and to identify and assist in marketing such water rights in the
State of Texas, and to advise Burlington Santa Fe in connection with such
matters. The Company is currently evaluating certain possible sales of
Burlington Santa Fe's water rights pursuant to the foregoing agreement.
In April 1994, the Company, The Atchison, Topeka and Santa Fe Railway
Company and the Mojave Water Agency entered into an agreement to jointly
evaluate the means for providing water to the Mojave Water Agency. Pursuant to
its agreement with the railway company, the Company is acting as the railway
company's agent in connection with the foregoing Mojave Water Agency agreement.
Although the Mojave Water Agency, a public water agency located in the
"high-desert" region of San Bernardino County, California, had previously
indicated to the Company that it is interested in acquiring up to 400,000
acre-feet of water per year from the Atchison Topeka and Santa Fe Railway
Company, no sale has yet been consummated, and no assurance can be given that
such a sale will occur.
Other Water Assets. In March 1992, the Company acquired Nigel
Corporation ("Nigel"), a corporation wholly owned by Mr. Huston, the Senior Vice
President of the Company, by the merger of Nigel into YG Procyon Corporation, a
wholly-owned subsidiary of the Company. Nigel's principal asset is the on-going
right to receive 3.7398% of gross payments made by the Cucamonga County Water
District (San Bernardino County, California) in connection with certain water
sold or made available to the water district by a third party (the "Cucamonga
Water Fee Agreement"). The water made available to the Cucamonga County Water
District is obtained by the third party from Fontana Union Water Company, a
mutual water company, under a 100-year lease entered into in 1989. The Company
received approximately $230,000 during the fiscal year ended March 31, 1997
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 the Metropolitan Water District of Southern California for water available to
the Chino Basin Municipal Water District. The current posted price is $349 per
acre foot of water.
The Company also owns shares of certain Southern California mutual
water companies. A mutual water company is an entity that owns water and water
rights, which water is made available to the shareholders of the mutual water
company. Accordingly, the Company is entitled to receive its proportionate share
of water made available by the mutual water companies in which it owns shares.
These mutual water company shares entitle the Company to receive an aggregate of
2,600 acre-feet of water per year. The Company proposes to sell or lease its
9.
10
shares in those water companies to municipalities or other local users of water.
To date, the Company has not entered into any such water share transfer
agreements.
The Company also currently owns the rights to extract 700 acre-feet of
water per year from the groundwater located in the Central Water Basin, Los
Angeles County, California. Pursuant to an agreement with Golden West Refining
Company, the Company has agreed to purchase from Golden West the rights to
extract up to an additional 478 acre-feet of water annually from the Central
Water Basin if Golden West elects to sell such water rights to the Company. The
purchase price to be paid by the Company on any additional pumping rights that
the Company acquires is $3,200 per acre-foot. The foregoing purchase agreement
expires on September 27, 1997. 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.
Other Water-Related Activities and Interests. The Company owns an
option exercisable until April 1999 to purchase approximately 56% of the
outstanding common stock of Integrated Water Technologies, Inc. (formerly known
as BCI Geonetics, Inc.) In connection with acquiring the option, the Company
made a $100,000 secured loan to Integrated Water Technologies, Inc., which loan
is convertible at the Company's option into additional shares of the common
stock of Integrated Water Technologies. Integrated Water Technologies, Inc. is a
California- based company that specializes in water resource exploration, water
resource management, and constructed wetlands water treatment. To date, the
Company has not exercised its option and the promissory note has been paid by
Integrated Water Technologies.
Real Estate Held for Sale. In March 1993, the Company commenced
disposing of its real estate assets that were not needed for its water rights
development program. As of March 31, 1997, the Company still owned 1,887 acres
of real estate located in the Cherry Creek basis in Colorado. Through March 31,
1997, the Company has sold or exchanged, net of certain properties which were
repurchased, a total of 2,672 acres of land (but not the material water rights)
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 aggregate purchase price of all of the foregoing sales (including
the sale of certain incidental water rights) was $10,156,000, plus the right to
withdraw and use 1,290 acre-feet of water. The foregoing aggregate purchase
price was paid by the buyers of such land paying an aggregate of $4,191,000 of
cash, by issuing promissory notes payable to the Company in the aggregate
principal amount of $5,255,000, and by assuming $710,000 of the Company's
mortgage indebtedness. The promissory notes are secured by deeds of trusts on
the sold parcels, have terms ranging from one to 20 years and bear interest at
annual rates of 8-10%, with interest and principal payable monthly.
The Company is considering marketing for sale certain other parcels of
its Cherry Creek real estate holdings and, in connection therewith, is
subdividing approximately 1,887 acres for future sale. As with the other Cherry
Creek properties sold to date, the Company plans to retain the water rights
associated with such properties to the extent such water rights are needed for
the Cherry Creek Project. The Company also plans to sell the 136-acre parcel
owned by the Company in Glenn County, California. No assurance can be given that
the Company will in the future be able to sell any additional real estate
parcels or that any such sales will be on terms favorable to the Company.
Competition, Markets and Customers. Although the Company and its
predecessor have previously produced water from the Yuba Property and sold that
water on a commercial basis, the Company has not done so since 1987. In the
event that the Company elects to market its Yuba Property water interest
independently of the Water Agency, the Company may compete directly with the
Water Agency in the sale of water from Yuba County. Western Aggregates, the
owner of certain water rights in the Yuba Property, has informed the Company
that it may attempt to market its water rights and, therefore, will also compete
with the Company.
The Company's goal is to sell augmented water rights in the Cherry
Creek Project if and when the Colorado Water Court approves the Company's
augmentation plan. If the Company's plan of augmentation is not approved, the
Company will attempt to otherwise sell its existing water and water rights. The
Company believes that the
10.
11
market for water rights that are not part of an approved plan of augmentation
consists of both public and private users of water in the Cherry Creek basin.
The principal competitors of the Company in any attempted sale of water that is
not subject to a plan of augmentation are the numerous other public and private
land and water rights owners in the Cherry Creek basin. If an augmentation plan
is approved, the Company will seek to sell water and water rights to public
water agencies and other users in the Cherry Creek basin. As discussed above,
the Company's initial application for an augmentation plan was dismissed by the
Colorado Water Court. The Company has filed a motion to have the dismissal
reversed, and is taking other action to have its augmentation plan approved.
However, the Company believes that the amount of water that could be sold
without an approved augmentation plan would be lower than the amount that could
be sold with a plan of augmentation. On a limited basis, public agencies and
private holders of water rights currently also sell water and water rights in
the Cherry Creek basin.
The Company will compete with the Metropolitan Water District of
Southern California and with numerous other water districts, public agencies and
private water companies in trying to market any water rights that the Company
acquires pursuant to its new water transfer program.
The Company currently proposes to sell for residential uses
approximately 1,887 additional acres of real estate that it owns in the Cherry
Creek basin near Denver, Colorado. In selling its subdivided parcels, the
Company will be competing with numerous real estate development companies.
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, safety precautions, employee health and safety,
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
environmental laws will hinder or adversely affect its proposed Cherry Creek
Project operations. Compliance with existing environmental laws has to date had
no material effect on the Company's earnings or capital expenditures and is not
expected to have any such material effect in the future. However, 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 the consumers, these standards
only affect the water agencies that may buy or lease the Company's water. While
environmental regulations do not directly affect the Company, the regulations
regarding the quality of water distributed affects the Company's intended
customers and may, therefore, depending on the quality of the Company's water,
impact the price and terms upon which the Company may in the future sell its
water or water rights.
Under various federal, state and local laws, regulations and ordinances
(collectively, "Environmental Laws"), an owner or operator of real estate
interests may be liable for the costs of cleaning up, as well as certain damages
resulting from, past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in
11.
12
or from a property. Certain Environmental Laws including the federal
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
and Resource Conservation and Recovery Act ("RCRA"), impose such liability
without regard to whether the owner knew of, or was responsible for, the
presence of hazardous or toxic substances or wastes at or from the property. The
presence of such substances or wastes, or the failure to properly remediate any
resulting contamination, also may adversely affect the owner's or operator's
ability to sell, lease, or operate its property or to borrow using its property
as collateral. Although the Company is not aware of any such environmental
contamination on any of its real estate holdings or on any locations adjacent to
its holdings, there can be no assurance that such environmental contamination
does not exist.
Employees. As of the date of this report, the Company has eleven
full-time employees.
ITEM 2. PROPERTIES
The principal physical properties currently owned by the Company are
the following:
- Undeveloped land in the Cherry Creek basin, Colorado,
consisting of a total of approximately 1,887 acres and
associated water rights, the rights to operate five tributary
wells on property not owned by the Company, and water rights
reserved or acquired in connection with the 2,672 acres of
land in the Cherry Creek basin that the Company has sold or
exchanged. See "Item 1. Description of Business -- Cherry
Creek Water Rights Project." The Company's Cherry Creek land
is zoned for agricultural and residential uses.
- Various rice farms and ranches, located in Yuba County,
California, that collectively comprise 1,424 acres, and a
136-acre parcel in Glenn County, California. The rice farms
are graded for cultivation and watered by wells on the
properties. The Company has leased the rice farms and ranches
to unaffiliated operators. The Company expects to increase the
portion of the rice farms that may be cultivated on the
properties by supplying water to the rice farms either from
other Company properties or, in the event a nearby canal is
extended by the Water Agency (as to which there can be no
assurance), from such canal. The Water Agency has appropriated
$5,000,000 for the future extension of the canal. A portion of
the 136-acre parcel of land is currently used for rice farming
and is expected to be sold in the future.
- The Company's silica processing facility that has not been
operated since the ownership and business of the Company
changed in 1990, together with the land underlying the plant.
The silica plant is currently being liquidated by the Company.
The silica plant is located on part of a total of 42 acres of
real estate that is currently owned by the Company in Yuba
County, California. The property is zoned
industrial-extractive and is located along the Yuba River in
Yuba County, California, approximately ten miles northeast of
Marysville, California. The 42 acres may be used for
commercial but not residential purposes.
- Certain mineral interests and other property rights, including
hydrocarbon, oil, gas and entry rights, related to 440 acres
of real estate in Chico, California, and to 2,578 acres near
Sacramento, California. These property rights affect the
ability of the owners of the surface rights to the land to
develop, finance or transfer the land. The Company is
attempting to sell these property rights to the owners of the
surface rights.
Many of the Company's foregoing real estate properties are encumbered
by mortgages. For a description of the Company's mortgage indebtedness, see
"Note 8: Long-Term Debt" to the Company's financial statements included as part
of this Annual Report on Form 10-K.
12.
13
The Company leases its principal executive office in San Diego,
California, containing 3,511 net square feet, pursuant to a lease that expires
in May 1999. The Company's current monthly rental obligation for the facility is
$5,793.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
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. All prices listed below have been retroactively
adjusted to reflect the Stock Dividend effected on March 28, 1996.
LOW HIGH
--- ----
Year Ended March 31, 1996
- -------------------------
First Quarter (April-June) $ 10.12 $13.75
Second Quarter (July-September) 11.62 15.62
Third Quarter (October-December) 11.12 15.25
Fourth Quarter (January-March) 14.75 20.12
Year-Ended March 31, 1997
- -------------------------
First Quarter (April-June) $15.50 $23.25
Second Quarter (July-September) 14.69 23.00
Third Quarter (October-December) 13.00 21.00
Fourth Quarter (January-March) 13.00 17.00
On March 31, 1997, the Company had 1,709 record holders of its Common
Stock. The Company believes there are numerous additional beneficial owners of
the Common Stock whose shares are held in "street name."
To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors is
to retain earnings, if any, to provide for the growth of the Company.
Consequently, no cash dividends are expected to be paid on the Common Stock in
the foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends. Any dividends on the Common Stock would be subject to prior
payment of dividends on the Series C Preferred Stock.
On February 26, 1997, the Company sold 2,000 shares of its new Series B
Convertible Redeemable Preferred Stock to each of T. Rowe Price New Era Fund
Inc. and T. Rowe Price Small-Cap Value Fund Inc. The shares were sold at a price
of $1,000 per share. Credit Suisse First Boston Corporation acted as financial
advisor and exclusive placement agent to the Company in connection with the sale
of the shares and received a placement fee equal to 4% of the proceeds raised in
the sale of the preferred stock. The sale of the preferred stock was made in
reliance upon an exemption from registration available under Section 4(2) of the
Securities Act of 1933 and Rule
13.
14
506 promulgated thereunder. In April 1997, the 4,000 shares of Series B
Convertible Redeemable Preferred Stock were exchanged for 4,000 shares of the
Company's Series C Preferred Stock. The Series C Preferred Stock provides for
dividends in the amount of $72.50 per year, payable semi-annually, and is
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 initial 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 Company may redeem some or all of the shares of
Series C Preferred Stock on or after April 1, 1999 at a cash redemption price of
$1,000 per share, plus accrued but unpaid dividends. Each holder of Series C
Preferred Stock is entitled to vote on any matter submitted to the stockholders
as if the Series C Preferred Stock had been converted into Common Stock. Each
share of Series C Preferred Stock has a liquidation preference equal to its
$1,000 stated value.
14.
15
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes certain financial data for the periods shown
and is qualified in its entirety by, and should be read in conjunction with, the
Company's Consolidated Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Annual Report.
STATEMENT OF OPERATIONS DATA:
Year Ended March 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ------------ -----------
Revenue ................................. $ 1,770,771 $ 4,901,810 $ 2,669,801 $ 4,993,229 $ 962,295
Cost of revenue ......................... 1,034,750 2,163,848 975,786 2,387,268 531,888
----------- ----------- ----------- ----------- -----------
Gross profit ............................ 736,021 2,737,962 1,694,015 2,605,961 430,407
General and administrative expense ...... 2,946,252 2,122,525 1,974,535 1,575,306 1,009,338
----------- ----------- ----------- ----------- -----------
Operating income (loss) ................. (2,210,231) 615,437 (280,520) 1,030,655 (578,931)
Interest income (expense), net .......... (1,027,540) (398,025) 262,733 (63,586) (173,649)
Other income (expense) .................. (795,027) (201,827) 92,088 (50,896) 221,198
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes ................... (4,032,798) 15,585 74,301 916,173 (531,382)
Income taxes ............................ (1,102,400) (2,400) (2,400) (120,000)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (5,135,198) 13,185 71,901 796,173 (531,382)
Discontinued Operations:
Loss from discontinued operations ..... -- (67,949) (62,209) -- (189,512)
Estimated loss on disposal ............ (257,276) (251,200) -- (185,895) (143,200)
----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of change
in accounting principle ............... (5,392,474) (305,964) 9,692 610,278 (864,094)
Cumulative effect of change in accounting
principle - income taxes .............. -- -- -- 1,178,000 --
----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $(5,392,474) $ (305,964) $ 9,692 $ 1,788,278 $ (864,094)
----------- =========== =========== =========== ===========
Income (loss) per common share:
Continuing operation .................. $ (.64) $ -- $ (.03) $ .05 $ (.15)
Discontinued operation ................ (.03) (.04) (.01) (.03) (.06)
----------- ----------- ----------- ----------- -----------
Total before extraordinary item and
cumulative effect of change in
accounting principle .............. (.67) (.04) (.04) .02 (.21)
Cumulative effect of change in
accounting principle .................. -- -- -- .21 --
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share ...... $ (.67) $ (.04) $ (.04)(a) $ .23(a) $ (.21)(a)
----------- ----------- ----------- ----------- -----------
Average common shares outstanding ....... 8,088,089 7,939,746 6,633,868(b) 5,665,948(b) 5,043,618(b)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Year Ended March 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ------------ ------------ ------------ -----------
Current assets.................. $ 4,833,903 $ 3,921,948 $ 2,895,539 $ 6,874,181 $ 3,366,124
Total assets.................... 39,475,358 40,420,709 26,710,956 27,536,710 19,613,651
Working capital (deficit)....... 3,787,083 2,943,723 2,103,568 5,668,261 2,061,584
Long-term debt and debentures... 17,840,860 18,275,408 4,384,470 5,699,467 6,965,655
Preferred stock................. 3,807,517 -- -- 5,944,056 6,651,156
Common Stockholders' equity..... 16,680,161 21,067,076 21,195,745 14,687,267 3,947,343
- -----------------
(a) Net income (loss) per common share computation for the years ended March
31, 1995, 1994 and 1993 was adjusted to include dividends of $248,131,
$500,914 and $202,235 accrued on the preferred stock outstanding during
the respective periods.
(b) Figures presented represent number of shares outstanding adjusted
retroactively for a 100% stock dividend declared on March 28, 1996. A 100%
stock dividend effectively is the equivalent of a 2-for-1 stock split.
15.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In 1994, due to the significant changes in the Company's business,
an improvement of the Company's earnings potential, and a change in direction of
the intended method of disposing of the Company's discontinued silica operation,
the Company determined that it was appropriate to effect a quasi-reorganization.
The Company's Board of Directors authorized management to effect a
quasi-reorganization effective October 1, 1994, which reorganization was
ratified by the Company's stockholders in March 1995.
In a quasi-reorganization, assets and liabilities are restated to
current values as of the date of the reorganization. The amount of increases,
however, are limited to the decreases in other assets. In this regard, effective
October 1, 1994 the Company recognized a $1,830,914 write down in the value of
its non-operational silica sorting and grinding plant (the "Silica Plant"). This
write down was offset by a corresponding write up of a like amount which was
allocated proportionately, based on the relative excess of fair market value of
each asset over historic book basis, to real estate held for resale ($454,604),
water rights held for sale ($1,038,268), and water sale fees ($338,042).
Further, the accumulated deficit of $14,405,252, most of which was due to the
Company's prior and now discontinued operations, was eliminated by a
corresponding decrease in the Company's additional paid-in capital. Retained
earnings in the future will reflect only the results of operations subsequent to
October 1, 1994.
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"). After September
30, 1997, the Company may, at its option, redeem some or all of the Debentures
at a redemption price equal to 100% of the principal amount to be redeemed, plus
accrued and unpaid interest thereon through the redemption date, if on each of
the 20 consecutive trading days immediately prior to the mailing of the
redemption notice the trading price of the Common Stock is equal to or greater
than 150% of the then applicable Conversion Price.
In 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 Corporation 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 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 shall be entitled
to receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends at the annual rate of 7.25% of the stated
value of the Series C Preferred Stock ($1,000 per share). Such dividends shall
be payable semi-annually. The first four semi-annual dividend payments may be
made, at the discretion of the Board of Directors, in cash or, in full or in
part, by issuing fully paid and nonassessable shares of Series C Preferred Stock
of equal value. 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 dividends thereon if the average trading price of the Common Stock
for 20
16.
17
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 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, 1997, the Company had repurchased a total of 46,843
shares of Common Stock in the Odd Lot Tender Offer for a total of $473,922.
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.
RESULTS OF OPERATIONS
The following is a description of the Company's results of
operations for its three most recent fiscal years.
CONSOLIDATED
Year Ended March 31,
-------------------------------------------
1997 1996 1995
------------ --------- ---------
Income (Loss) From Continuing Operations
Before Income Taxes.......................... $(4,033,000) $ 15,000 $ 74,000
Income Taxes................................... (1,102,000) (2,000) (2,000)
Income (Loss) Continuing Operations............ (5,135,000) 13,000 72,000
Loss Discontinued Operations................... (257,000) (319,000) (62,000)
Net Income (Loss) ............................. (5,392,000) (306,000) 10,000
Net Income (Loss) Per Share.................... (.67) (.04) (.04)
Revenue........................................ 1,771,000 4,902,000 2,670,000
The Company reports its continuing operations in two segments, water
rights and real estate. As a result, upon the purchase of assets that contain
both real estate and water rights, the basis of such assets is allocated to real
estate and water rights based on the relative fair market values of the
components at the time of acquisition, and development costs are allocated to
the appropriate component whenever possible. Due to the limited number of
comparable water sales in the Cherry Creek Basin, the Company has relied on
periodic evaluations prepared by independent water engineers to determine the
relative fair values of the water rights acquired by the Company through its
purchases of real estate for the Cherry Creek Project. Accordingly, as
properties or water rights are sold, the allocated portion of the basis is
included in cost of revenue.
During the fiscal year ended March 31, 1997, the valuation
allowance was increased as a result of the current year's net operating loss
carryforward. In addition, the sale of the Company's interest in the Nevada LLC
resulted in a $1,100,000 adjustment to the beginning-of-the-year valuation
allowance.
The computation of income (loss) per common share from continuing
operations for the fiscal year ended March 31, 1995 ("Fiscal 1995") was adjusted
to include the $248,000 dividend payment made on the Series A Preferred Stock,
prior to the redemption of all shares of such preferred stock in March, 1995.
Since the Series A Preferred Stock was redeemed in Fiscal 1995, no preferred
stock dividends were paid during the years ended March 31, 1997 and March 31,
1996.
17.
18
WATER RIGHTS
Year Ended March 31,
-----------------------------------------
1997 1996 1995
---------- --------- ---------
Revenue........................................ $261,000 $974,000 $207,000
Cost of Revenue................................ 58,000 143,000 47,000
--------- --------- ---------
Gross Profit................................... $203,000 $831,000 $160,000
======== ======== ========
During the fiscal year ended March 31, 1997 ("Fiscal 1997"),
revenue from the Company's water rights business segment decreased by 73% due to
fees of $800,000 the Company received in fiscal year ended March 31, 1996
("Fiscal 1996") for acting as agent in connection with the sale of water rights
under its agreement with Burlington Santa Fe. Costs related to the transaction
were $90,000. Water rights revenue in Fiscal 1997 and Fiscal 1996 consisted
primarily of payments under the Cucamonga Water Fee Agreement. During Fiscal
1996, the Company acquired an additional 0.4878% interest in the Cucamonga Water
Fee Agreement for $350,000, and now receives payments equal to 3.7398% of
certain sales of water by a third party to the Cucamonga County Water District
(San Bernardino County, California). The other cost of revenue in each period
consist of amortization of the Cucamonga Water Fee Agreement.
REAL ESTATE
Year Ended March 31,
------------------------------------------
1997 1996 1995
---------- ----------- ----------
Revenue...................................... $1,510,000 $3,927,000 $2,463,000
Cost of Revenue.............................. 976,000 2,021,000 929,000
---------- ----------- -----------
Gross Profit................................. $ 534,000 $1,906,000 $1,534,000
========== ========== ==========
In Fiscal 1997, real estate revenue from Cherry Creek properties of
$1,510,000 were recognized from the sale of 353 acres. In Fiscal 1996 real
estate revenue from Cherry Creek properties of $2,470,000 were recognized from
the sale of 175 acres and the transfer of 257 acres in exchange for certain
water rights. The remaining balance of real estate revenue for Fiscal 1996 of
$1,457,000 was derived from the sale of 812 acres of the Company's California
rice farms and ranches. In Fiscal 1995 the Company disposed of 540 acres of its
Cherry Creek properties for total proceeds of $2,270,000. In addition, in Fiscal
1995 one 250 acre parcel was sold to a real estate developer, of which 215 acres
were subsequently reacquired by the Company in Fiscal 1996. In Fiscal 1995, the
Company also sold approximately 80 acres from its California rice farm
properties for $282,000. The Company has retained virtually all of the water
rights on the properties sold.
Cost of real estate revenue in each fiscal year includes the allocated
purchase price of the properties sold, directly related development costs, sales
commissions and other sales costs.
GENERAL AND ADMINISTRATIVE EXPENSES
Year Ended March 31,
----------------------------------------
1997 1996 1995
----------- ---------- ----------
General and Administrative Expenses................. $2,946,000 $2,123,000 $1,975,000
General and Administrative expenses for Fiscal 1997 increased by 39%
from Fiscal 1996. The increase was primarily due to increased salaries and
related expenses due to the addition of three employees and increased consulting
and travel expenses due to the Company's expanded efforts in developing its new
water transfer program.
18.
19
During Fiscal 1996, the Company also began amortizing costs related to the sale
of the Debentures, which amortization amounted to $82,000 for Fiscal 1997 as
compared to $41,000 for Fiscal 1996.
General and administrative expenses for Fiscal 1996 increased by
approximately 7% from Fiscal 1995 due to the expanded scope of the Company's
activities and legal expenses related to both the increased business and a
lawsuit which has now been resolved. An increase in salaries and related
expenses due to the addition of two employees was partially offset by a decrease
in consulting expenses. During Fiscal 1996, the Company also began amortizing
cost related to the sale of Debentures, which amortization amounted to $41,000
for the six-month period following the date on which the Debentures were issued.
OTHER NON-SEGMENT INFORMATION
Year Ended March 31,
--------------------------------------
1997 1996 1995
----------- --------- --------
Interest Income................................ $ 322,000 $ 432,000 $435,000
Interest Expense............................... (1,350,000) (830,000) (172,000)
Rental Income (Expense), Net................... 43,000 33,000 83,000
Loss From Disposition of Assets................ - (203,000) -
Equity in Loss of Limited Liability Company.... (857,000) (75,000) -
Interest income is comprised of interest earned on the Company's cash
reserves and investments and interest earned on the secured promissory notes the
Company received in connection with the properties that it has sold. The secured
notes bear interest at rates between 8% and 10% per annum.
Interest income decreased for Fiscal 1997 from Fiscal 1996 due to
lower outstanding balances on notes receivable. During Fiscal 1996, the Company
sold or discounted secured promissory notes with a principal amount of
$1,267,000. Since the promissory notes were sold at a discount, the Company
recognized a loss of $203,000.
Interest expense in Fiscal 1997 increased significantly due to interest
expenses related to the $15,000,000 Debentures that were issued in September
1995. Interest of $285,000, $199,000 and $315,000 on debt incurred in connection
with properties being developed was capitalized during Fiscal 1997, 1996, and
1995, 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.
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. For Fiscal 1997
and Fiscal 1996 the Company recorded a loss of $857,000 and $75,000,
respectively. The Company sold its interest in the Nevada LLC after the end of
Fiscal 1997.
DISCONTINUED OPERATION
Year Ended March 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Loss from Discontinued Operation............ $257,000 $319,000 $ 62,000
19.
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The Company is accounting for the inactive Silica Plant as a
discontinued operation. Prior to the quasi-reorganization, the Company had
attempted to sell the Silica Plant as an entire operating unit and accordingly
the annual impairment assessment of the plant had been based on the estimated
net realizable value of the plant in place. In that regard, the Company
considered an outstanding letter of intent for the sale of the plant and an
independent appraisal of the value of the Silica Plant to determine that the
value of the plant had not been further impaired from its carrying value as
determined at the time it was shutdown in 1989. In October 1994, in connection
with the quasi-reorganization, the Company committed to a formal plan to
liquidate the Silica Plant rather than continuing to attempt to sell it as an
entire operating unit. Accordingly, the plant was revalued in terms of the
present conditions, that is on a piecemeal, liquidation basis.
The Company has engaged an equipment liquidator to sell the Silica
Plant. As of March 31, 1997, the Company had disposed of approximately 53% of
the Silica Plant's equipment on which it recognized a loss of $149,000. Charges
in Fiscal 1997, 1996 and 1995 were for costs in excess of the reserve for
estimated loss on disposal and discontinued operations which was previously
recorded.
LIQUIDITY AND CAPITAL RESOURCES
In February 1997, the Company issued $4,000,000 of a new series of its
convertible non-participating preferred stock from which it received net
proceeds of approximately $3,808,000.
At March 31, 1997, the Company had working capital of $3,787,000 and
had a current ratio of 4.62. The Company's liquidity increased after the end of
Fiscal 1997 due to the sale in April 1997 of the Company's interest in the
Nevada LLC for a price of $13,360,000, of which $12,024,000 was paid in cash. In
addition, the Company's liquidity was further improved after the close of Fiscal
1997 due to the sale of an additional $5,000,000 of Series C Preferred Stock.
Operating Activities. During Fiscal 1997, the Company had negative cash
flow from operations of $2,327,000. In addition to operating expenses, the
Company used cash reserves of $183,000 for payments on accounts payable,
$126,000 for other current assets and $60,000 for accrued interest. The cash
outflow was partially offset by a net decrease in land held for sale of $548,000
and an increase in accrued expenses of $355,000. Other operating activities
provided cash of approximately $3,000.
In Fiscal 1997, the Company continued to receive revenue from the sale
of portions of its real property located in the Cherry Creek basin. The Company
intends to continue such sales by marketing the additional 1,887 acres it is
developing in Cherry Creek. The Company expects that its operating revenues will
continue to be highly volatile. Future revenue from disposition of real estate
will be dependent on the Company's ability to dispose of real estate parcels on
acceptable terms, as to which there can be no assurance. Revenue from sale of
water or water rights will likewise be dependent on individually negotiated
transactions. Revenues from leasing the Company's rice farms and ranches, from
the Cucamonga Water Fee Agreement, and from principal and interest payments
received on promissory notes held by the Company will be more predictable, but
will be insufficient by themselves to cover the Company's general and
administrative expenses and the Company's interest obligations under the
debentures. Accordingly, until the Company can increase its revenue from water
sales of its own water rights, or acting as an agent for others, the Company's
cash flow will be principally derived from the sale of its remaining real
estate.
Investing and Financing Activities. In February 1997, the Company
received approximately $3,808,000 of net proceeds from the private placement of
4,000 shares of a new series of its convertible preferred stock at a price of
$1,000 per share. The shares of preferred stock are part of the 9,000 shares of
currently outstanding shares of Series C Preferred Stock.
The Company is committed to certain material expenditures over the next
several years, including the following:
- Scheduled payments of principal and interest on existing
outstanding indebtedness, other than the Debentures, for
Fiscal Years ending March 31, 1998, 1999, 2000, 2001 and 2002
are approximately $369,000, $368,000, $1,010,000, $1,794,000,
and $54,000, respectively.
20.
21
- The Company will be required to make semiannual interest
payments of $675,000 on the $15,000,000 principal amount of
Debentures, beginning March 31, 1996.
- The holders of Series C Preferred Stock are entitled to
receive annual dividends in the amount of $72.50 per share,
payable semi-annually on January 15 and July 15 of each year
($36.25 semi-annually). 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, in the sole discretion of the Board of Directors, in
cash or, in full or in part, by issuing additional shares of
Series C Preferred Stock. Thereafter all dividend payments
made with respect to the Series C Preferred Stock are required
to be paid in cash.
The Company believes that its existing capital resources will be
sufficient to fund the Company's foreseeable working capital needs in excess of
revenue for a period of at least one year from the date of this report. The
Company plans to meet its commitments thereafter from revenues derived from the
sale of water or water rights, from refinancing or selling its remaining real
estate assets, and, if necessary, from future debt or equity financings. Certain
events that occurred subsequent to the end of Fiscal 1997 will impact the
Company's ability to meet its working capital requirements during the next
twelve months:
- In April 1997 the Company sold its 35.3% interest in Nevada
LLC for $13,360,000, of which $12,024,000 was paid in cash
and $1,336,000 was paid by the delivery to the Company of a
convertible note due on December 31, 1997.
- In April 1997 the Company sold $5,000,000 of its Series C
Preferred Stock. As a result of the private placement, the
Company received net proceeds of approximately $4,745,000.
The Company does not believe that inflation has had a material impact
on its results of operations.
IMPACT OF ACCOUNTING PRONOUNCEMENT ISSUED BUT NOT ADOPTED BY THE
COMPANY
In February, 1997 the Financial Accountant Standards Board issued
Statement of Financial Accountant Standards No. 128, "Earnings per share" ("SFAS
No. 128"). SFAS No. 128 simplifies the standards for computing earnings per
share and makes them comparable to international earnings per share standards.
It replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with a complex capital structure and requires certain reconciliation to be
disclosed.
The adoption of SFAS No. 128 will be reflected on the Company's
consolidated financial statements for the year ended March 31, 1998. The
Company is currently evaluating the impact of the implementation of SFAS
No. 128.
RISK FACTORS
The Company's business and operations involve numerous risks, some of
which are beyond the Company's control, that may affect future results and the
market price of the Company's Common Stock. The following discussion highlights
some of the risks the Company faces.
Uneven Patterns of Quarterly Operating Results. The Company's quarterly
operating results have varied in the past and are likely to vary significantly
in the future. These quarterly fluctuations are the result of a number of
factors, including the Company's dependence on isolated sales of real estate as
its principal source of revenues and the sporadic revenues generated to date
from the Company's water related activities. Until the Company enters into
agreements for the long-term sale/lease of water, the Company's revenues will
continue to be dependent upon periodic and isolated sales of water and/or real
estate. Because of the variations in the Company's quarterly results, the price
of the Company's Common Stock may continue to fluctuate significantly.
Limited History of Operations in Principal Business. To date, the
Company's activities have primarily consisted of (i) acquiring its various water
rights and related assets, (ii) raising capital to fund both the cost of such
acquisitions and its working capital needs, and (iii) developing its water
rights. Although the Company operates in two business segments (water rights
activities and its real estate development and disposition activities), the
21.
22
Company anticipates that a majority of its revenues in the future will be
derived from its water rights activities. However, the Company only generated
$261,000, $974,000 and $207,000 of revenue from its water rights activities
during the fiscal years ended March 31, 1997, 1996 and 1995, respectively.
Accordingly, the Company does not have an established record of water rights
transactions. To date, the Company's administrative and interest expenses have
exceeded its on-going revenue from its water and water rights development and
disposition business, and the majority of its operating revenue have been
derived from the sale of the Company's real estate assets. No assurance can be
given that the Company will continue to be able to profitably resell its
remaining real estate holdings in the future or that it will be able to
successfully develop, package and sell water rights.
Uncertainty of Future Real Estate Revenue. During the past three
fiscal years, revenue from the disposition of real estate have constituted
approximately 85%, 80% and 92%, respectively, of the Company's total revenue.
Accordingly, until the Company completes its water development activities and
derives revenue from the sale or other disposition of its water resources, the
Company's ability to generate revenue will continue to be dependent primarily
on its ability to sell its real estate holdings. To date, the Company's real
estate sales efforts in Colorado have benefitted from a strong demand for real
estate in the Cherry Creek basin. No assurance can, however, be given that the
current market conditions in the Cherry Creek market will continue or that the
Company will be able to profitably resell its real estate assets in the future.
The Company's ability to sell its Colorado and California real estate properties
will also be dependent on general economic conditions, on interest rates, and on
the location and particular characteristics of the properties offered for sale.
Uncertainty of Future Water Revenue. The Company's business plan is
twofold: to engage in various water acquisition, transfer, development and sale
activities, and to develop and dispose of the real estate that it acquires in
connection with the acquisition of water rights. While the Company's current
operating revenue has been primarily derived from real estate sales, the
Company's long-term future profitability will be primarily dependent on (i) the
Company's ability to sell significant quantities of water from the Company's
Northern California water assets, (ii) the Company's ability to develop and sell
water or water rights packages as part of the Cherry Creek Project, and (iii)
the Company's activities as an independent water provider in Southern
California. Until May 1996, the Company's plan was to permit the Yuba County
Water Agency to integrate the Company's Yuba Property water into the Water
Agency's conjunctive use plans for developing and marketing water to third
parties. The Company's agreement with the Yuba County Water Agency regarding the
joint development and marketing of water expired in May 1996, and the Company is
currently evaluating various alternative plans to commercially exploit its Yuba
Property water rights. The value of the Company's Cherry Creek Project is
dependent upon the approval of the Company's proposed plan of augmentation. The
Colorado Water Court has rejected the Company's initial Cherry Creek plan of
augmentation based on objections that were filed with the court by the third
parties. Although the Company has since received the consent of all but one of
the objectors, no assurance can be given that the Colorado Water Court will
approve the Company's plan of augmentation in the near future, or ever. 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 consents and approvals, and on its ability to
finance the foregoing activities. To date, the Company has not yet consummated
any water transfer transactions in Southern California, and no assurance can be
given that the Company will be able to do so in the future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the reports thereon and notes thereto,
which are attached hereto as pages F-1 through F-24, and indexed at page 30, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 12, 1997, the Board of Directors of the Company, based upon
the recommendation of its audit committee, agreed to engage the accounting firm
of KPMG Peat Marwick LLP as independent public accountants to audit the
Company's financial statements for the fiscal year ending March 31, 1997. The
firm of Harlan & Boettger LLP, former independent public accountants for the
Company, was dismissed.
22.
23
For the fiscal years ended March 31, 1996 and 1995, and for the
subsequent nine-month period ended December 31, 1996, there were no
disagreements with Harlan & Boettger LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of the former
accountants, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
Harlan & Boettger's report on the financial statements for the fiscal
years ended March 31, 1996 and 1995 contained no adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit, scope or
accounting principles.
In connection with the Company's fiscal years ended March 31, 1996 and
1995, and for the subsequent nine-month period ended December 31, 1996, there
was no consultation with KPMG Peat Marwick LLP as to the application of
accounting principles or the type of audit opinion that might be rendered on the
Company's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following chart sets forth information concerning the directors and
executive officers of the Company.
Current Positions Principal Occupation or Employment
Name Age with Company During Past Five Years
- ---------------- --- ------------------------------- --------------------------------------------
Peter L. Jensen 46 Director since October 1984; 1984 to April 1989: President and Chief
Chairman, President and Chief Operating Officer of the Company; 1983 to
Executive Officer since April April 1989: Director, President and Chief
1989 Operating Officer at Yuba National Resources,
Inc., a publicly-held company; April 1989 to
August 9, 1990: Director, President and Chief
Executive Officer at Yuba National Resources,
Inc.
Ronald I. Simon 58 Vice President, Chief Financial President of Ronald I. Simon, Inc. (Financial
Officer and Secretary since May Consulting) since 1974. Chairman of Sonant
1997 Corporation (interactive voice response
equipment) 1993-1997. Director of Citadel
Corporation (real estate investment company)
1995-present. Director of SoftNet Systems,
Inc. (document management and telecommuni-
cation equipment, internet services) 1995-
present. Managing Director and Chief
Financial Officer of Henley Group, Inc. 1986-
1990.
John H. Huston 46 Senior Vice President since November 1993 to present, Chairman of
March 1997; Vice President Integrated Water Technologies, Inc. (formerly
form February 1992 to March BCI Geonetics, Inc.); 1983 to 1992: Owner or
1997; Director since November co-owner of the Procyon Group; from 1987 to
1994 March 31, 1992, the date on which Nigel
Corporation was acquired by the Company,
Mr. Huston was a principal shareholder,
director and executive officer of Nigel
Corporation.
23.
24
Scott A. 41 Director since June 1997 March 1993 to present - Managing Director of
Katzmann Paramount Capital, Inc.; October 1982 to
March 1993, Director of CS First Boston
Corporation.
Eric R. Robbins 35 Vice President since November January 1995 to November 1995, Vice
29, 1995 President at L.H. Friend, Weinress, Frankson
& Presson; January 1994 to January 1995,
Senior Vice President - Public Finance at
Chilton & O'Connor, Incorporated; December
1992 to January 1994, Vice President at Sutro
& Co. Incorporated; November 1990 to
December 1992, Finance Budget Manager for
the California Department of Finance; and from
March 1988 to November 1990, Senior
Consultant, California Assembly Water, Parks
& Wildlife Committee.
William D. Watt 57 Director since December 1996 August 1995 to present, Principal and Director
at SCCOT Financial Group, Inc., a privately
held investment banking firm; November 1973
to August 1995, investment banker at Lazard
Freres and Company, an investment banking
firm.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, as well as persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of beneficial ownership and reports of
changes in beneficial ownership of the Common Stock. Directors, executive
officers and greater-than-ten-percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of copies of reports filed with the SEC and
submitted to the Company since April 1, 1996 and on representations by certain
directors and executive officers of the Company, the Company believes that, with
the exception of delinquent filings referred to below, all persons subject to
the reporting requirements of Section 16(a) filed all required reports on a
timely basis during the past fiscal year. The following persons failed to file
the required reports reflecting the grant of stock options to them during the
past fiscal year: Mr. Jensen, Mr. Abramson, Mr. Huston, Mr. Robbins, Ms. Dreyer,
and Mr. Beeman. In addition, Mr. Jensen failed to file a report in connection
with his gift of shares to a charitable organization.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following tables set forth certain
information concerning the annual and long-term compensation for services
rendered to the Company in all capacities for the fiscal years ended March 31,
1997, 1996 and 1995 of (i) all persons who served as the Chief Executive Officer
of the Company during the fiscal year ended March 31, 1997 and (ii) each of the
other executive officers of the Company whose total annual salary and bonus
during the fiscal year ended March 31, 1997 exceeded $100,000. (The Chief
Executive Officers and the other named officers are collectively referred to as
the "Named Executives.")
24.
25
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Name and Principal Position Number Stock
- --------------------------- Option Shares
Year Salary Bonus Granted
---- ------ ----- -------
Peter L. Jensen 1997 $215,460 $ -0- 125,000
Chairman, President and 1996 $198,510 $ -0- 60,000
Chief Executive Officer 1995 $180,000 $ -0- -0-
John H. Huston 1997 $179,550 $ -0- 100,000
Senior Vice President 1996 $157,115 $ -0- 36,000
1995 $140,655 $ -0- -0-
Eric R. Robbins 1997 $123,417 $-0- 100,000
Vice President 1996 $ 41,385 $-0- 60,000
1995 -0- $-0- -0-
Marilyn B. Dreyer 1997 $190,423(1) $ -0- 20,000(1)
Chief Financial Officer 1996 $ 92,500 $ -0- 15,000
1995 $ 82,500 $ -0- -0-
- ------------------
(1) Includes $102,500 and 20,000 options paid in February 1997 to Ms.
Dreyer in connection with the termination of her employment with the
Company.
Option Grants. The following table provides information on stock
options granted in the fiscal year ended March 31, 1997 to the Named Executives.
OPTIONS GRANTED IN FISCAL YEAR ENDED MARCH 31, 1997
Individual Grants
-------------------------------------------------------------
Potential Realizable
Percentage of Value at Assumed Annual
Total Options Rates of Stock Appreciation
Granted to Exercise or For Option Term(3)
Options Employees in Base Price Expiration ----------------------------
Name Granted Fiscal Year (per share)(2) Date 5% 10%
- ----------------------- ----------- ----------- -------------- ----------- ------------ -----------
Peter L. Jensen 125,000(1) 28% $13.750 Feb. 2007 $1,080,900 $2,739,200
John H. Huston 100,000(1) 23% $13.750 Feb. 2007 $864,700 $2,191,400
Eric R. Robbins 100,000(1) 23% $13.750 Feb. 2007 $864,700 $2,191,400
Marilyn B. Dreyer 20,000(4) 5% $14.125 Feb. 2007 $173,000 $438,200
- ------------------
(1) 34% of the options are exercisable commencing one year after the date
of grant, 33% are exercisable two years after the date of grant, and
33% are exercisable three years after the date of grant.
(2) All options were granted at a price equal to or greater than the market
value (the closing stock price for the Company's Common Stock as
reported on the Nasdaq National Market) on the date of grant.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated that the
stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the optionee is possible unless the
stock price increases over the option term, which will benefit all
stockholders.
(4) The options are immediately exercisable.
25.
26
Aggregated Option Exercises in Last Fiscal Year and Year-End Option
Values. The following table sets forth information regarding stock options that
were exercised by the Named Executives during the last fiscal year and the
number and value of unexercised options owned at March 31, 1997 by the Named
Executives.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1997
AND FISCAL YEAR-END OPTION VALUE
Number of Value of
Unexercised Options Unexercised Options
Shares at March 31, 1997 At March 31, 1997(1)
Acquired Value -------------------------------------------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Peter L. Jensen -0- $ -0- 100,000 145,000 $1,425,000 $2,066,000
John H. Huston -0- -0- 84,000 112,000 $1,197,000 $1,596,000
Eric R. Robbins -0- -0- 40,000 120,000 $ 570,000 $1,710,000
Marilyn B. Dreyer -0- -0- 50,000 -0- $ 712,500 $ -0-
- -----------------
(1) The value of unexercised options represents the excess of the market
value of the Common Stock on March 31, 1997 over the exercise price of
the options.
Director Compensation. Directors who are not employees of the Company
presently receive an annual fee of $10,000. In addition, all directors are
reimbursed for all out-of-pocket expenses incurred by them in connection with
attending board meetings. Each non-employee director will automatically be
granted an option on the first business day of each fiscal year to purchase
10,000 shares of Common Stock at an exercise price equal to the average of the
high and low bid prices for the Common Stock as reported by The Nasdaq Stock
Market for the 20 trading days preceding the date of grant of such option. If
the Common Stock is listed on the New York or American Stock Exchange on the
date of grant of the option, the high and low sale prices shall be used in place
of the high and low bid prices. All such options will be exercisable on the date
of grant as to 3,332 shares, with additional increments of 3,334 becoming
exercisable on the first and second anniversary of grant. In accordance with the
foregoing provisions, options to purchase 10,000 shares were granted to Mr.
Abramson on April 1, 1996, which options are exercisable at $18.697 per share,
and Mr. Watt and Mr. Abramson were each granted options to purchase 10,000
shares on April 1, 1997, which options are exercisable at a price of $13.650 per
share. In connection with Mr. Katzmann's appointment as director on June 1,
1997, Mr. Katzmann received options to purchase 10,000 shares. Mr. Katzmann's
options are exercisable at a price of $14.28 per share.
Employment Agreements. Peter Jensen currently serves as Chairman of the
Board and Chief Executive Officer of the Company for a salary and under the
terms of an employment agreement that expired. Under the terms of the prior
agreement, Mr. Jensen was entitled to a minimum annual salary of $210,000,
subject to adjustment for cost of living increases and to other specified
benefits such as reimbursement for expenses. The Company and Mr. Jensen have
orally agreed that Mr. Jensen will continue to serve under the foregoing
arrangement until the end of July 1997. Thereafter, Mr. Jensen will not be
subject to an agreement with the Company.
John Huston currently also serves as Senior Vice President of the
Company pursuant to the terms of an expired employment agreement. Under the
terms of the prior agreement, Mr. Huston was entitled to a minimum annual salary
of $175,000, subject to an adjustment for cost of living increases, and to other
specified benefits such as reimbursement for expenses. As with Mr. Jensen, Mr.
Huston has agreed to continue to serve under the prior arrangement until the end
of July 1997.
Eric R. Robbins serves as Vice President of the Company pursuant to an
employment agreement that expires on November 28, 1997. Under the employment
agreement, Mr. Robbins's current annual salary is $130,000. In connection with
his employment with the Company, Mr. Robbins was granted a ten-year option to
purchase 60,000 shares of Common Stock at an exercise price of $15.125 per share
(the market value on the date of grant). Of the options, 20,000 shares vested
immediately upon his employment, 20,000 shares in November 1996, and the balance
will vest in November 1997.
Ronald I. Simon serves as Vice President and Chief Financial Officer of
the Company at an annual salary of $175,000. In connection with his employment
by the Company in May 1997, Mr. Simon was granted a ten-year
26.
27
option to purchase 120,000 shares of Common Stock at an exercise price of $13.50
per share. Of the option, 40,000 shares will vest annually on each of the first
three anniversaries of his employment date. In addition Mr. Simon was granted an
option to purchase 80,000 shares of Common Stock at an exercise price of $6.75
per share. Of the option, 16,000 shares will vest on December 15 of 1997, 1998,
1999, 2000 and 2001. The option shall remain in effect until May 2007. The
Company has also agreed that Mr. Simon's salary and other benefits will remain
in effect for one year after the termination of his employment and the vesting
period of his options will be extended for an additional year if Mr. Simon is
terminated by the Company without cause.
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, the Company's Compensation
Committee consisted of Mr. Abramson and Mr. Watt. Neither Mr. Abramson nor Mr.
Watt are, or were, officers of the Company. The Compensation Committee fixes the
compensation of executive officers and administers the Company's two stock
option plans. In May 1997, Mr. Katzmann replaced Mr. Abramson on the
Compensation Committee.
STOCK OPTION PLANS
The Company currently has two stock option plans in effect.
1990 Stock Option Plan. Pursuant to a 1990 Stock Option Plan (the "1990
Plan") adopted by the Company on July 20, 1990, 400,000 shares of common stock
of the Company are reserved for issuance upon exercise of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and nonqualified stock options that may be granted to
officers, directors, employees, consultants and others performing services for
the Company. The 1990 Plan is currently administered by the Compensation
Committee of the Board of Directors (previously by the full Board), which
designates the optionees, exercise prices and dates of grant. The exercise price
may not be less than 100% of the fair market value of the common stock on the
date of grant (110% for qualified options with respect to optionees who are 10%
or more shareholders of the Company). Options are nonassignable and may be
exercised only by the option holder while in the service of the Company or
within three months after termination of employment or cessation of services to
the Company (one year for terminations resulting from death or disability).
Options may be exercisable from the date they are granted and, if they are
exercisable in installments, may be exercised on a cumulative basis at any time
before expiration. All options expire no later than ten years from the date of
grant.
1993 Stock Option Plan. The 1993 Stock Option Plan (the "1993 Plan")
authorizes the granting during the period commencing on April 20, 1993, the date
of adoption of the 1993 Plan by the Board of Directors of the Company, and
concluding on the tenth anniversary thereof, of both incentive stock options
within the meaning of Section 422 of the Code, and nonstatutory stock options to
officers, non-employee directors, employees, consultants and others performing
services for the Company to purchase in the aggregate 400,000 shares of the
Company's Common Stock. In December 1996, the stockholders of the Company
approved an amendment to the 1993 Plan to increase the total number of shares
available for option grants to 800,000. There are currently four officers, two
non-employee directors and seven other employees of the Company who would be
eligible for the grant of options.
The 1993 Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee designates the optionees, number
of options, exercise prices, dates of grant, exercise period and other terms and
conditions.
27.
28
The purchase price to be paid upon exercise of each incentive stock
option granted pursuant to the 1993 Plan will be at least 100% of the fair
market value of the Common Stock on the date the option is granted, or 110% of
such fair market value in the case of any optionee holding in excess of 10% of
the combined voting power of all classes of the Company's capital stock (or the
stock of a parent or subsidiary of the Company) as of the date of grant. Fair
market value shall mean the average of the bid and asked closing price of the
Company's Common Stock. The purchase price of each nonstatutory option granted
to officers and other key employees shall be determined by the Committee. The
purchase price is payable in full by cash, check, surrender of Common Stock of
the Company having a market value equal to the option price of the shares to be
purchased, or so-called cashless exercises as permitted by law, or any
combination of cash, check, shares and cashless exercises. The Compensation
Committee in its sole discretion may extend credit to pay the purchase price of
the shares of Common Stock acquired upon exercise of an option, such credit to
be evidenced by optionee's interest-bearing promissory note and secured by the
Common Stock issued on exercise of the option. The Compensation Committee will
have complete discretion to establish the amount and terms of any credit
extended. The Compensation Committee will also have complete discretion to
determine the interest rate to be charged on such credit.
Options granted under the 1993 Plan become exercisable and shall expire
on such dates as determined by the Compensation Committee, provided, however,
that no term may exceed ten years from the date of grant, or five years from the
date of grant in the case of any optionee holding more than 10 percent of the
combined voting power of all classes of the Company's capital stock (or the
stock of a parent or subsidiary of the Company) as of the date of grant. After
options become exercisable they may be exercised at any time or from time to
time as to any part thereof. The Compensation Committee may, at any time after
grant of the option and from time to time increase the number of shares
purchasable in any installment, subject to certain limitations.
Options granted under the 1993 Plan will expire on such date as the
Committee shall determine. Options will not be transferable except by will or by
the laws of descent and distribution; during the life of the person to whom the
option is granted, that person alone may exercise them. All rights to exercise
options terminate three months from the date a grantee ceases to be an employee
of the Company or any subsidiary for any reason other than death or disability.
If a grantee dies while in the employ of the Company, his or her option
may be exercised at any time within 12 months following the grantee's death by
his or her estate or by the person or persons to whom the grantee's rights under
the option passed by will or operation of law, but only to the extent such
option was exercisable by the grantee at the time of his or her death. Except
for certain stated provisions covering termination, disability or death, no
option may be exercised after the expiration of its original term.
The 1993 Plan also provides that each non-employee director will
automatically be granted an option on the first business day of each fiscal year
to purchase 10,000 shares of Common Stock at an exercise price equal to the
average of the high and low bid prices for the Common Stock as reported by The
Nasdaq Stock Market for the 20 trading days preceding the date of grant of such
option.
28.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series C Preferred Stock
as of June 27, 1997 by (i) each person who is known by the Company to own more
than 5% of the outstanding Common Stock or Series C Preferred Stock; (ii) each
of the Company's directors; (iii) each of the Named Executives; and (iv) all
officers and directors of the Company as a group.
Common Stock(1) Series C Preferred Stock Percent of
----------------------- -------------------------- ----------
Votes of
Name and Address of Number Percent Number Percent All Classes of
Beneficial Owner of Shares of Class of Shares of Class Capital Stock(2)
- ------------------------------------------- --------- -------- --------- -------- ----------------
Peter L. Jensen 346,870(3) 4.2% 0 0 3.9%
John H. Huston 289,126(4) 3.5% 0 0 3.3%
Eric R. Robbins 40,000(5) * 0 0 *
Marilyn B. Dreyer 109,517(6) 1.3% 0 0 1.2%
Scott A. Katzmann 39,426(11) * 0 0 *
William D. Watt 0 0 0 0 0%
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, MD 21202 818,200(7) 10.0% 4,000(8) 44.4% 12.1%
T. Rowe Price New Era Fund Inc. 0 0 2,000 22.2% 1.4%
T. Rowe Price Small-Cap Value Fund, Inc. 0 0 2,000 22.2% 1.4%
Ashford Capital Partners, L.P. 0 0 1,000(9) 11.1% *
Wisconsin Alumni Research Foundation 0 0 1,000 11.1% *
Ashford Capital Management, Inc. as
investment advisor for certain investment
accounts 0 0 1,725(10) 19.2% 1.2%
All directors and executive
Officers as a group
(6 persons) 715,422(11) 8.4% 0 0% 7.9%
- -------------------------
* Less than 1%.
(1) The information contained in this column excludes all shares of Common
Stock that may be issued upon the conversion of any shares of Series C
Preferred Stock.
(2) Based on 8,232,519 votes entitled to be cast by the holders of the
outstanding Common Stock and 541,516 votes entitled to be cast by the
holders of the 9,000 shares of outstanding Series C Preferred Stock.
(3) Includes 100,000 of Common Stock shares issuable upon exercise of
currently exercisable options.
29.
30
(4) Includes 84,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(5) Consists of 40,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(6) Includes 35,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(7) T. Rowe Price Associates, Inc. is the investment advisor of various
registered investment companies and investment advisory clients. T.
Rowe Price Associates, Inc. disclaims beneficial ownership of these
shares.
(8) Represents the shares of Series C Preferred Stock owned by T. Rowe
Price New Era Fund Inc. and T. Rowe Price Small-Cap Value Fund Inc.,
of which T. Rowe Price Associates, Inc. is the investment advisor.
(9) Reflects shares held of record and beneficially owned by Ashford
Capital Partners, L.P., a Delaware limited partnership, of which the
general partner is Ashford Capital Management, Inc. Excludes the 1,725
shares of Series C Preferred Stock (103,791 shares of Common Stock)
held of record and beneficially by or on behalf of certain investment
advisory client accounts managed by Ashford Capital Management, Inc.,
as investment adviser, as indicated in footnote (9) below. Ashford
Capital management, Inc., acting as general partner, has the sole power
to vote and dispose of securities on behalf of Ashford Capital
Partners, L.P.
(10) Reflects shares held of record and beneficially owned by separate
investment accounts on behalf of sixteen (16) different investors for
which Ashford Capital Management, Inc. acts as investment adviser and
has the sole power to vote and dispose of such securities as
attorney-in-fact with respect to such accounts. Excludes (i) shares
held by Ashford Capital Partners, L.P. for which Ashford Capital
Management, Inc. acts as general partner, as indicated in footnote (6)
above, and (ii) shares listed above of Wisconsin Alumni Research
Foundation, for whom Ashford Capital Management, Inc. also acts as
investment adviser and attorney-in-fact.
(11) Represents immediately exercisable stock purchase warrants.
(12) Includes 263,426 shares of Common Stock issuable upon exercise of
currently exercisable options and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
3.1 Certificate of Incorporation.(1)
3.2 By-Laws of the Company. (2)
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Convertible Subordinated Debenture Due 2005(3)
4.3 Certificate of Designations for Series C Convertible Redeemable
Preferred Stock.(7)
10.1 1990 Stock Option Plan. (2)
10.2 Amendment to 1990 Stock Option Plan. (1)
10.3 Form of Indemnity Agreement between the Company and its officers and
directors. (2)
10.4 Employment Agreement, dated November 28, 1995, between the Company and
Eric R. Robbins.(7)
10.5 1993 Stock Option Plan.(6)
10.6 Amendment to 1993 Stock Option Plan.(6)
10.7 Form of Water Sale Agreement between Water Service Company I and Santa
Margarita Water District, a California water district.
10.8 Form of Water Purchase Agreement between Elsinore Valley Municipal
Water District and the Company.
21 Subsidiary of the Company. (1)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Harlan & Boettger LLP.
30.
31
23.3 Consent of KPMG Peat Marwick LLP.
99 Audited financial statements, for the fiscal year ended December 31,
1996, of Nevada Land & Resource Company, LLC.
99.1 Agreement for Sale of Water Rights and Option to Sell Water Rights,
dated July 25, 1996, between the Company and Golden West.(5)
99.2 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 Februrary 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 by reference.
The following financial statements and schedules are filed as a part of this
report, appearing at the pages indicated:
Report of KPMG Peat Marwick LLP, independent certified public accountants.......................... F-1
Report of Harlan & Boettger LLP, independent certified public accountants.......................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996.......................................... F-3
Consolidated Statements of Operations for the years ended March 31,
1997, 1996 and 1995 ............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995.................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995 ........... F-6
Notes to Consolidated Financial Statements......................................................... F-8
(b) Reports on Form 8-K.
On March 31, 1997, the Company filed a Report on Form 8-K to disclose,
under "Item 4 Changes in Registrant's Certifying Accountant," the appointment of
KPMG Peat Marwick LLP as the Company's new auditors.
31.
32
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
WESTERN WATER COMPANY:
We have audited the accompanying consolidated balance sheet of Western Water
Company and subsidiaries (the "Company") as of March 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We did
not audit the financial statements of Nevada Land and Resource Company, LLC
("NLRC"), a 35.3% owned investee company. The Company's investment in NLRC at
March 31, 1997 was $11,068,188 and its equity in net loss of NLRC was $856,921
for the year ended March 31, 1997. The financial statements of NLRC were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for NLRC, is based solely on the
report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
1997 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, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
June 9, 1997
F-1
33
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
WESTERN WATER COMPANY:
We have audited the accompanying consolidated balance sheet of Western Water
Company and subsidiaries as of March 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Nevada Land and Resource Company, LLC ("NLRC"), the
investment which, as discussed in Note 6 to the financial statements, is
accounted for by the equity method of accounting. The investment in NLRC was
$11,925,109 as of December 31, 1995, and the equity in its net loss was $74,891
for the period October 19, 1995 (date of inception) through December 31, 1995.
The financial statements of NLRC were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included 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 audits 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 other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Western Water Company and subsidiaries as
of March 31, 1996, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended March 31, 1996, in
conformity with generally accepted accounting principles.
HARLAN AND BOETTGER LLP
San Diego, California
May 20, 1996
F-2
34
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and 1996
ASSETS 1997 1996
------------ -----------
Current Assets:
Cash and cash equivalents $ 3,022,008 540,883
Investment in available-for-sale securities 1,034,096 2,815,927
Current portion of notes receivable (Note 2) 563,629 343,530
Other current assets 214,170 221,608
------------ -----------
Total Current Assets 4,833,903 3,921,948
Notes receivable, less current portion (Note 2) 1,799,094 2,342,426
Land held for sale (Notes 4, 8 and 12) 5,078,521 5,626,857
Water rights (Note 5) 12,400,686 10,980,964
Other water assets, net of accumulated amortization 3,212,996 3,234,816
Investment in limited liability company (Note 6) 11,068,188 11,925,109
Deferred tax benefit (Note 13) -- 1,100,000
Debt issue costs, net of accumulated amortization (Note 9) 695,670 777,926
Discontinued operation, net (Note 11) 120,000 428,623
Property and equipment, net of accumulated depreciation (Note 3) 108,994 50,994
Other assets 157,306 31,046
------------ -----------
$ 39,475,358 40,420,709
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 127,883 310,905
Accrued expenses (Note 11) 682,518 327,606
Accrued interest 119,104 179,442
Current maturities of long-term debt (Note 8) 117,315 160,272
------------ -----------
Total Current Liabilities 1,046,820 978,225
Deposit 100,000 100,000
Long-term debt, less current maturities (Note 8) 2,840,860 3,275,408
9% Convertible subordinated debentures (Note 9) 15,000,000 15,000,000
------------ -----------
Total Liabilities 18,987,680 19,353,633
------------ -----------
Stockholders' Equity (Notes 10, 14 and 16):
Series B convertible preferred stock, $1,000 stated value, 1,000,000
shares authorized; 4,000 shares issued and outstanding 3,807,517 --
Common stock, $0.001 par value, 20,000,000 and 10,000,000 shares
authorized in 1997 and 1996, respectively; 8,134,796 and 8,068,486
shares issued and outstanding in 1997 and 1996, respectively 8,135 8,068
Additional paid-in capital 22,705,957 21,696,867
Unrealized loss on investment securities (28,040) (24,442)
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (6,005,891) (613,417)
------------ -----------
Total Stockholders' Equity 20,487,678 21,067,076
------------ -----------
Commitments and contingencies (Note 19)
$ 39,475,358 40,420,709
============ ===========
See accompanying notes to consolidated financial statements.
F-3
35
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995
----------- ---------- ----------
Revenue:
Water $ 261,103 974,458 207,111
Real estate 1,509,668 3,927,352 2,462,690
----------- ---------- ----------
1,770,771 4,901,810 2,669,801
----------- ---------- ----------
Costs of Revenue:
Water 58,375 142,968 47,215
Real estate 976,375 2,020,880 928,571
----------- ---------- ----------
1,034,750 2,163,848 975,786
----------- ---------- ----------
Gross Profit 736,021 2,737,962 1,694,015
General and Administrative Expenses (Note 17) 2,946,252 2,122,525 1,974,535
----------- ---------- ----------
Operating Income (Loss) (2,210,231) 615,437 (280,520)
----------- ---------- ----------
Other Income (Expenses):
Interest income 322,460 431,677 434,641
Interest expense (1,350,000) (829,702) (171,908)
Loss from investment in limited liability company (Note 6) (856,921) (74,891) --
Other 61,894 (126,936) 92,088
----------- ---------- ----------
(1,822,567) (599,852) 354,821
----------- ---------- ----------
Income (Loss) from Continuing Operations
Before Income Taxes (4,032,798) 15,585 74,301
Income Taxes (Note 13) 1,102,400 2,400 2,400
----------- ---------- ----------
Income (Loss) from Continuing Operations (5,135,198) 13,185 71,901
----------- ---------- ----------
Discontinued Operations (Note 11):
Loss from operations -- (67,949) (62,209)
Loss on disposal of silica plant (257,276) (251,200) --
----------- ---------- ----------
(257,276) (319,149) (62,209)
----------- ---------- ----------
Net Income (Loss) $(5,392,474) (305,964) 9,692
=========== ========== ==========
Income (Loss) Per Common Share:
Continuing operations $ (.64) -- (.03)
Discontinued operations (.03) (.04) (.01)
----------- ---------- ----------
Net Income (Loss) Per Common Share $ (.67) (.04) (.04)
=========== ========== ==========
Average Common Shares Outstanding (Note 15) 8,088,089 7,939,746 6,633,868
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
36
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1997, 1996 and 1995
Unrealized
Preferred Stock Common Stock Additional Loss on Total
------------------ -------------------- Paid-In Investment Accumulated Stockholders'
Shares Amount Shares Amount Capital Securities Deficit Equity
----- ---------- ---------- ------- ------------ -------- ------------ ------------
Balance at March 31, 1994 -- $ -- 3,225,170 $ 3,225 $ 28,984,300 $ -- $(14,300,258) $14,687,267
Net income (pre quasi-
reorganization) -- -- -- -- -- -- 111,570 111,570
Redeemable preferred
dividends -- -- -- -- -- -- (412,653) (412,653)
Conversion of redeemable
preferred stock -- -- 672,500 672 5,943,383 -- -- 5,944,055
Exercise of options -- -- 26,000 26 118,083 -- -- 118,109
Adjustment for quasi-
reorganization -- -- -- -- (14,405,252) -- 14,405,252 --
Purchase of mutual water
company stock and options -- -- 7,355 7 173,531 -- -- 173,538
Purchase of note and trust
deed -- -- 47,790 48 1,146,719 -- -- 1,146,767
Net loss (post quasi-
reorganization) -- -- -- -- -- -- (101,878) (101,878)
Cancellation of treasury
stock -- -- (23,286) (23) (471,007) -- -- (471,030)
----- ---------- ---------- ------- ------------ -------- ------------ -----------
Balance at March 31, 1995 -- -- 3,955,529 3,955 21,489,757 -- (297,967) 21,195,745
Net loss -- -- -- -- -- -- (305,964) (305,964)
Exercise of options with
payment of 9,883 shares
of common stock -- -- 79,117 79 327 -- -- 406
Adjustment for purchase
of note receivable -- -- -- -- 78,971 -- -- 78,971
Adjustment for purchase of
mutual water company stock
and cancellation of
treasury stock -- -- (403) -- (7,188) -- -- (7,188)
Unrealized loss on investment
securities -- -- -- -- -- (24,442) -- (24,442)
Deferred tax benefits
recognized due to pre quasi-
reorganization deductible
temporary differences and
carryforwards -- -- -- -- 135,000 -- -- 135,000
Adjustment for preferred
dividends -- -- -- -- -- -- (5,452) (5,452)
Stock split in form of stock
dividend -- -- 4,034,243 4,034 -- -- (4,034) --
----- ---------- ---------- ------- ------------ -------- ------------ -----------
Balance at March 31, 1996 -- -- 8,068,486 8,068 21,696,867 (24,442) (613,417) 21,067,076
Net loss -- -- -- -- -- -- (5,392,474) (5,392,474)
Exercise of options -- -- 6,994 7 92,431 -- -- 92,438
Purchase of water rights with
common stock -- -- 59,370 60 917,376 -- -- 917,436
Unrealized loss on investment
securities -- -- -- -- -- (3,598) -- (3,598)
Issuance of convertible
preferred stock, net of
offering costs of $192,483 4,000 3,807,517 -- -- -- -- -- 3,807,517
Cancellation of treasury stock -- -- (54) -- (717) -- -- (717)
----- ---------- ---------- ------- ------------ -------- ------------ -----------
Balance at March 31, 1997 4,000 $3,807,517 8,134,796 $ 8,135 $ 22,705,957 $(28,040) $ (6,005,891) $20,487,678
===== ========== ========== ======= ============ ======== ============ ===========
F-5
37
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- ----------
Cash Flows from Operating Activities
Net income (loss) $(5,392,474) (305,964) 9,692
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 171,421 104,697 55,382
Loss on sale of securities available for sale 21,409 -- --
Loss on disposition of assets -- 122,606 2,912
Loss on discount of notes receivable 12,729 202,825 --
Deferred gain on sale of land 104,832 -- --
Loss from investment in limited liability company 856,921 74,891 --
Loss on disposal of discontinued operation 257,276 -- --
Deferred income taxes 1,100,000 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets 7,438 (57,250) (107,924)
Land held for sale (including purchase from
related party of $264,198 in 1997) 548,336 792,338 (753,821)
Other water assets -- (727,033) (585,558)
Other assets (126,260) -- --
Increase (decrease) in:
Accounts payable (183,022) 346,910 (158,259)
Accrued expenses 354,912 -- --
Accrued interest (60,338) -- --
Other current liabilities -- (88,860) 88,860
Deposit -- -- 100,000
----------- ----------- ----------
Net cash provided by (used in) operating activities (2,326,820) 465,160 (1,348,716)
----------- ----------- ----------
Cash Flows from Investing Activities
Proceeds from disposition of discontinued operation 51,347 320,120 --
Purchase of property and equipment (88,841) (14,908) (39,071)
Purchase of available-for-sale securities (131,434) (3,165,369) --
Sales of available-for-sale securities 1,888,258 325,000 --
Investment in limited liability company -- (12,000,000) --
Payment for contingent liability -- (159,979) --
Additions to water rights (459,722) -- --
Purchase of water rights (42,564) (1,955,634) (675,569)
Additions to other water assets (36,504) -- --
----------- ----------- ----------
Net cash provided by (used in) investing activities 1,180,540 (16,650,770) (714,640)
----------- ----------- ----------
F-6
38
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended March 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- ----------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock $ 92,438 -- --
Net proceeds from issuance of debentures -- 14,345,000 --
Payment of debenture issue costs -- (163,870) --
Proceeds from issuance of convertible
preferred stock 4,000,000 -- --
Payment of private placement costs (192,483) -- --
Payments for stock registration -- -- (10,763)
Preferred stock dividends -- (5,452) (412,653)
Payments to acquire treasury stock (717) -- (471,030)
Proceeds from options and warrants -- -- 118,156
Payments on borrowings -- -- (549,396)
Proceeds from issuance of notes receivable (659,500) -- --
Principal payments received on notes receivable 865,172 1,266,904 173,428
Payments on notes payable (477,505) (1,051,621) (1,018,027)
----------- ----------- ----------
Net cash provided by (used in) financing activities 3,627,405 14,390,961 (2,170,285)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 2,481,125 (1,794,649) (4,233,641)
Cash and Cash Equivalents, beginning of year 540,883 2,335,532 6,569,173
----------- ----------- ----------
Cash and Cash Equivalents, end of year $ 3,022,008 540,883 2,335,532
=========== =========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of
amounts capitalized $ 1,410,338 841,091 217,055
=========== =========== ==========
Cash paid during the period for income taxes $ 2,400 2,400 2,400
=========== =========== ==========
Supplemental disclosure of noncash investing activities:
Water rights acquired in exchange for common stock $ 917,436 -- --
=========== =========== ==========
Quasi - reorganization adjustment:
Write-up water rights, land held for sale, and water
sales fees -- -- 1,830,914
==========
Write-down of discontinued operation -- -- (1,830,914)
==========
Common stock issued for assets -- -- 1,569,965
==========
Conversion of redeemable preferred stock into common stock -- -- 5,944,056
==========
See accompanying notes to consolidated financial statements.
F-7
39
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
NOTE 1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
Western Water Company and subsidiaries (the "Company") are engaged in
(i) a broad range of activities related to the identification,
acquisition, ownership, development, transfer and sale of water and
water rights primarily in the Western United States and (ii) the sale
of real estate properties acquired in connection with the Company's
water supply business activities. The Company, directly and
indirectly, owns a diverse portfolio of water rights and real estate
interests in California and Colorado. The Company's plan is to
develop and package its own water and water rights for sale to
municipalities and other water users and to provide a variety of
water-related services to unaffiliated owners of water rights. Such
services include identifying, developing, marketing, transporting,
distributing and selling water or water rights that are owned by the
unaffiliated owners. At March 31, 1997, the Company's plan of
augmentation for the Cherry Creek Basin water rights has been filed
with the Colorado Water Court. Final approval for this plan has not
been received. In addition, the Company's plan is to sell the real
estate interests that it owns and occassionally acquires in
connection with its acquisition of water interests.
Principles of Consolidation
The consolidated financial statements include the financial
statements of Western Water Company and two wholly-owned
subsidiaries, YG Rice Farms and YG Procyon. 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
Investment in available-for-sale securities at March 31, 1997 and
1996 consists of mutual funds. Available-for-sale securities are
recorded at fair value based on quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on an average cost
basis.
Allowance for Loan Losses
The Company provides for valuation allowances for loans receivable
when repayment becomes doubtful or amounts due are delinquent and in
excess of the value of the collateral. Notes are deemed delinquent
when they are more than 90 days past due. As of March 31, 1997 and
1996, 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
14). Costs are allocated to properties by the specific identification
method whenever possible. Otherwise, development costs are allocated
based on the relative fair value of the properties. In addition, real
estate taxes and interest costs are capitalized during the
development period. The amount of interest capitalized to land held
for sale in 1997 and 1996 was zero and $62,447, respectively. Real
estate operating revenues include proceeds from the sale of land.
F-8
40
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Water Rights
Water rights consist of various water interests acquired together
with 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 costs and an adjustment as a result of the
quasi-reorganization (see Note 14). Due to the limited number of
comparable sales of water rights in the Cherry Creek Basin, the
Company has relied on periodic valuations prepared by independent
water engineers to determine the relative fair values of water
rights.
Costs are allocated to properties by the specific identification
method whenever possible. Otherwise, development costs are allocated
based on the relative fair value of the properties. In addition
interest costs are capitalized during the development period.
Capitalized interest for the years ended March 31, 1997 and 1996 was
$285,429 and $136,156, respectively.
Other Water Assets
Other water assets 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, 1997 and 1996 is
$232,475 and $174,151 respectively.
Investment in Limited Liability Company
The Company accounts for its investment in the limited liability
company under the equity method. Accordingly, income or losses are
recorded in proportion to the Company's ownership interest.
Intercompany profits and losses are eliminated. The Company's
investment in and investment loss from the limited liability company
is based on the results of the limited liability company's year end
which ends 90 days prior to the Company's year end.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on
the straight-line method over the estimated useful lives ranging from
four to twenty years and totaled $30,841, $11,035 and $11,170 for the
years ended March 31, 1997, 1996 and 1995, respectively.
Debt Issue Costs
Debt issue costs are amortized using the interest method over the
life of the related debt. Accumulated amortization as of March 31,
1997, 1996 and 1995 was $126,890, $44,634 and zero, respectively.
F-9
41
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On
April 1, 1996, the Company adopted SFAS No 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made during the year
ended March 31, 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Revenue Recognition - Land
Sales of land are generally accounted for under the full accrual
method. Under that method, gain is recognized when the collectibility
of the sales price is reasonably assured and the earnings process is
virtually complete. When a sale does not meet the requirements for
full accrual recognition, gain is deferred until these requirements
are met.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", on April 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or
liquidity.
Loss Per Share
Loss per common share is computed by dividing net loss by the
weighted average number of shares outstanding during each period.
Convertible redeemable preferred stock, common stock options, and
warrants have been excluded from the calculation of loss per share as
their effect is anti-dilutive.
The income (loss) per common share computation for the year ended
March 31, 1995 was adjusted to include the cumulative preferred
dividends, prior to the preferred stocks redemption. Accordingly, net
income for 1995 was decreased by $248,131 for the income (loss) per
common share computation.
F-10
42
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
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. 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
8.65%. Terms of these notes generally require level payments of
principal and interest over periods of one to 20 years. The notes are
secured by the lots sold. During the year ended March 31, 1996, the
Company sold approximately $950,000 of its notes receivable
associated with retail land sales at 82% of their face value,
recognizing a loss of approximately $170,000.
Aggregate maturities due on notes receivable at March 31, 1997 are as
follows:
Non-Retail Retail
Land Sales Land Sales Total
---------- ---------- ---------
1998 (less deferred profit on non-retail
land sale of $104,832) $ 21,457 542,172 563,629
1999 136,595 84,688 221,283
2000 147,740 75,684 223,424
2001 159,797 81,222 241,019
2002 62,841 226,505 289,346
Thereafter 43,935 780,087 824,022
-------- --------- ---------
$572,365 1,790,358 2,362,723
======== ========= =========
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1997 and 1996 consists of:
1997 1996
-------- -------
Land $ 2,952 2,952
Equipment 170,178 81,337
-------- -------
173,130 84,289
Less accumulated depreciation (64,136) (33,295)
-------- -------
$108,994 50,994
======== =======
F-11
43
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 4.LAND HELD FOR SALE:
Land held for sale at March 31, 1997 and 1996 consists of the
following:
1997 1996
---------- ---------
Cherry Creek Basin, Colorado $1,949,853 2,504,413
Rice farms and ranches, Yuba and Glenn County, California 3,128,668 3,122,444
---------- ---------
$5,078,521 5,626,857
========== =========
NOTE 5. WATER RIGHTS:
Water rights held at March 31, 1997 and 1996 consists of the
following:
1997 1996
----------- ----------
Cherry Creek Basin, Colorado $11,117,872 10,700,166
Placer County, California 42,016 --
Los Angeles County, California 960,000 --
Rice farms and ranches, Yuba and Glenn County, California 280,798 280,798
----------- ----------
$12,400,686 10,980,964
=========== ==========
During the year ended March 31, 1997, the Company purchased the water
rights to 300 acre feet of water in Los Angeles County, California
from Golden West Refining Company. The purchase price of $960,000 was
primarily paid through the issuance of common stock.
During the year ended March 31, 1996, the Company exchanged 257 acres
of real estate in the Cherry Creek Basin for cash of $130,000 and
water rights located in the same area. In conjunction with this
transaction, water rights were increased by approximately $1,350,000
based on the fair market value of the real estate given up.
Additionally, a gain of approximately $1,250,000 was recognized,
determined by the excess of the fair market value of the property
surrendered plus the cash received over the basis of the property
given up.
F-12
44
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 6. INVESTMENT IN LIMITED LIABILITY COMPANY:
In October 1995, the Company and a joint venture comprised of The
Morgan Stanley Real Estate Fund II, L.P. ("Morgan Stanley"), an
affiliate of Morgan Stanley Group, and two affiliates of Morgan
Stanley (collectively, "Western Land Joint Venture") formed Nevada
Land and Resource Company, LLC, a Delaware limited liability company
("NLRC") which was owned 35.3% by the Company and 64.7% by Western
Land Joint Venture. NLRC acquired approximately 1,400,000 acres of
land and related water rights in the state of Nevada. The Company's
$12,000,000 investment in NLRC was funded with the proceeds from the
sale of 9% Convertible Subordinated Debentures.
A summary of financial information for NLRC at December 31, 1996 and
1995 follows:
1996 1995
----------- ----------
Current assets $ 1,765,000 4,435,000
Noncurrent assets 45,648,000 46,378,000
----------- ----------
Total assets $47,413,000 50,813,000
=========== ==========
Current liabilities $ 494,000 517,000
Non-current liabilities 15,633,000 16,553,000
----------- ----------
Total liabilities 16,127,000 17,070,000
----------- ----------
Members' capital:
Western Land Joint Venture 20,218,000 21,818,000
Company 11,068,000 11,925,000
----------- ----------
31,286,000 33,743,000
----------- ----------
Total liabilities and members' capital $47,413,000 50,813,000
=========== ==========
The following information reflects operations for the year ended
December 31, 1996 and the period from October 19, 1995 (Inception)
through December 31, 1995:
1996 1995
----------- --------
Net operating revenues $ 2,540,000 397,000
General and administrative expenses 4,968,000 654,000
----------- --------
Net loss $(2,428,000) (257,000)
=========== ========
Company's share of net loss $ (856,921) (74,891)
=========== ========
On April 23, 1997, the Company sold its interest in NLRC for
$13,360,000, of which $12,024,000 was paid in cash and $1,336,000 was
in the form of a note. The note bears interest at 6% per annum and is
due December 31,1997. In addition to the sale, NLRC entered into a
consulting agreement with Western Agua, L.P. (the "Consulting
Agreement"). Western Agua, L.P. is a Delaware limited partnership
formed by the Company and an affiliate of Morgan Stanley. The Company
owns a 70% interest in Western Agua, L.P. and is the sole general
partner of the partnership. In exchange for providing consulting
services to NLRC, Western Agua, L.P. is to receive 50% of all the net
proceeds, if any, derived from the subsequent sale of NLRC by the new
owners after they both recoup their investment in NLRC and earn a 20%
cumulative return compounded annually on their investment.
F-13
45
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires that the fair
values be disclosed for the Company's financial instruments. The
carrying amount of cash and cash equivalents, other current assets,
accounts payable, accrued expenses, and accrued interest are
reasonable estimates of their fair values due to the short-term
nature of those instruments.
The carrying amount of the notes receivable is a reasonable estimate
of fair value based on management's belief that the interest rates on
which the notes bear interest is not materially different than the
interest rate that would be charged to land buyers with similar
credit ratings.
The carrying amount of the long-term debt and debentures is a
reasonable estimate of fair value based on management's belief that
the interest rates and terms of the debt are comparable to those
commercially available to the Company in the marketplace for similar
instruments.
NOTE 8. LONG-TERM DEBT:
Long-term debt at March 31, 1997 and 1996 consists of debt related to
assets acquired in Cherry Creek Basin, Colorado, and the rice farms
and ranches in Yuba and Glenn County, California:
Cherry Creek Basin 1997 1996
---------- ---------
Mortgage note payable bearing interest at 8.5%. Principal
and interest are payable in four annual installments
of $225,320. Balance is due December, 2000. At maturity,
a balloon payment of $1,603,600 plus any accrued interest is due. $1,830,942 1,895,172
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. 89,373 96,000
Mortgage notes payable bearing interest at 7% to 8%
Paid in 1997. -- 369,046
F-14
46
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 8. LONG-TERM DEBT: (CONTINUED)
Rice farms and ranches 1997 1996
------------ --------
Mortgage note payable bearing interest at 9%
Principal and interest are payable in annual
installments of $39,786. Balance is due July, 2007. $ 270,754 284,744
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. 665,406 683,368
Mortgage note payable bearing interest at prime rate plus 2.00% (an
effective rate of 10.75% at March 31, 1997). Principal payments of
$5,650 plus accrued interest are due annually. The balance is due
July, 1999. At maturity, a balloon payment of $90,400 plus any
accrued interest is due. 101,700 107,350
----------- ----------
2,958,175 3,435,680
Less current maturities of long-term obligations (117,315) (160,272)
----------- ----------
$ 2,840,860 3,275,408
=========== ==========
Each mortgage note payable is collateralized by the individual
property to which it relates. As of March 31, 1997, the carrying
value of the collateral for notes payable was $7,569,000.
Aggregate maturities required on long-term debt at March 31, 1997 are
as follows:
1998 $ 117,315
1999 126,751
2000 824,161
2001 1,632,583
2002 31,502
Thereafter 225,863
----------
$2,958,175
==========
NOTE 9. 9% CONVERTIBLE SUBORDINATED DEBENTURES:
On September 22, 1995 the Company issued $15,000,000 of 9%
Convertible Subordinated Debentures (the "Debentures"), due in 2005.
The Debentures are unsecured and subordinate to all secured debt of
the Company. Interest accrues at 9% per annum and is payable on
September 30 and March 31 of each year.
The Debentures are initially convertible into 945,746 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). After
September 30, 1997, the Company may redeem the Debentures at a
redemption price equal to 100% of the principal amount redeemed (plus
accrued and unpaid interest thereon) if the trading price of the
common stock was 150% of the conversion price for the 20 preceding
trading days.
F-15
47
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 10. PREFERRED STOCK:
On February 26, 1997, the Company privately placed $4,000,000 of a
new series of its convertible non-participating preferred stock. Each
share of Series B Convertible Redeemable Preferred Stock ("Series B
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 an initial conversion price of $16.62 per
share.
The holders of Series B 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 B Preferred Stock is entitled to the number of votes
equal to the number of shares of common stock into which such share
of Series B Preferred Stock would have been convertible, if such
conversion had taken place on the record date set for determining
stockholders entitled to vote at a meeting or the date of the consent
of stockholders if action is being taken by written consent. In the
event that the Company is in default in the payment of two or more
semi-annual dividends, the holders of the Series B 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 B Preferred Stock, voting
as a single class.
The holders of Series B Preferred Stock are entitled to receive
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 B 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 B
Preferred Stock. Thereafter all dividend payments made with respect
to the Series B Preferred Stock are payable in cash.
The Company may, upon 30 days' written notice to the holders, redeem
all or any portion of the Series B Preferred Stock at any time after
April 26, 1999 at a cash redemption price of $1,000 per share plus
accrued but unpaid dividends. However, the Company may redeem the
Series B 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).
The Series B Preferred Stock has a preference in liquidation over the
holders of common stock of $1,000 per share plus accrued and unpaid
dividends.
On April 24, 1997, the Company privately placed $9,000,000 of a new
series of its convertible preferred stock. As a result of the private
placement, the Company exchanged all 4,000 outstanding shares of its
Series B Preferred Stock for the new Series C Convertible Redeemable
Preferred Stock ("Series C Preferred Stock"). Each share of Series C
Preferred Stock has a stated value of $1,000, a par value of $.001,
and is convertible at any time at the option of the holder into
shares of common stock at a conversion price of $16.62 per share. The
conversion price, and therefore the number of shares of common stock
issuable upon the conversion of the Series C Preferred Stock, is
subject to adjustment in certain events to prevent dilution.
The holders of Series C Preferred Stock are entitled to vote on all
matters presented to the stockholders, together with the holders of
common stock as one class, except as otherwise required by law. Each
share of Series C Preferred Stock is entitled to the number of votes
equal to the number of shares of common stock into which such share
of Series C Preferred Stock would have been convertible, if such
conversion had taken place on the record date set for determining
stockholders entitled to vote at a meeting or the date of the consent
of stockholders if action is being taken by written consent. In the
event that the Company is in default in the payment of two or more
semi-annual dividends, the holders of the Series C Preferred Stock
would have the right, voting as a class, to elect a majority of
the directors of the Company, and the holders of the Common Stock
would have the right to elect the remaining directors. The right of
the holders to elect a majority of the
F-16
48
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 10. PREFERRED STOCK: (CONTINUED)
directors of the Company would continue until dividends are paid for
at least two consecutive semi-annual periods, after which the right
to elect directors shall revert to the common stock and the Series C
Preferred Stock, voting as a single class.
The holders of Series C Preferred Stock are entitled to receive
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.
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
May 30, 1999 at a cash redemption price of $1,000 per share plus
accrued but unpaid dividends. However, the Company may redeem the
Series C Preferred Stock only if the average closing price of the
common stock during the 20 consecutive trading days prior to the
notice of redemption is not less than 150% of the conversion price
(initially $16.62 per share, subject to adjustment).
Commencing on April 1, 2006 and continuing until March 31, 2007, each
holder of shares of the Series C Preferred Stock may, from time to
time during such period, at such holder's option, cause the Company
to redeem for cash, out of funds legally available therefore, up to
an aggregate of one-half of all shares of Series C Preferred Stock
owned by such holder on April 1, 2006. Commencing on April 1, 2007,
each holder of shares of Series C Preferred Stock may, from time to
time thereafter, at such holder's option, cause the Company to redeem
for cash, out of funds legally available therefore, some or all of
such holder's shares of Series C Preferred Stock. The redemption
price for each share of Series C Preferred Stock shall be $1,000 per
share, plus, in each case, all declared and unpaid dividends, if any.
The Series C Preferred Stock has a preference in liquidation over the
holders of common stock of $1,000 per share plus accrued and unpaid
dividends.
NOTE 11. DISCONTINUED OPERATION:
During the fourth quarter of fiscal year 1993 , the Company adopted a
formal plan to discontinue the silica plant business. As of October
1994, the Board of Directors determined it was in the best interest
of the Company to alter its plan for disposing of the discontinued
silica operations. Under the revised plan, the Company intends to
liquidate the silica plant assets rather than sell the entire
operation as a unit. Accordingly, the silica plant business is
reported as a discontinued operation for the years ended March 31,
1997 and 1996. Net assets of the discontinued operation at March 31,
1997 and 1996 consist primarily of property, plant, and equipment.
During the fiscal year ended March 31, 1996, the Company realized
losses of $122,000 from the disposal of a portion of the discontinued
operation and provided for estimated losses on disposal of the
discontinued operation in the amount of $197,149 which included a
provision for the estimated loss on disposal of $129,200 and a
provision for additional anticipated operating losses until disposal
of $67,949. During the fiscal year ended March 31, 1997, the Company
provided for additional losses on disposal of the discontinued
operation of $257,276. The change in the provision in the current
year was primarily due to lower than anticipated sales proceeds from
the disposal of the discontinued operation. During the fiscal years
ended March 31, 1997, 1996 and 1995, actual income (loss) from the
operations of the discontinued operation were ($47,427), ($67,949),
and $27,791, respectively.
NOTE 12. RELATED PARTY TRANSACTION:
On April 2, 1996, the Company repurchased land previously sold in
1994 from a shareholder of the Company. The land was purchased for
$264,198.
F-17
49
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 13. INCOME TAXES:
Total income taxes for the years ended March 31, 1997, 1996 and 1995
were allocated to continuing operations. Income tax expense
attributable to income (loss) from continuing operations consists of:
CURRENT DEFERRED TOTAL
---------- --------- ----------
Year ended March 31, 1997:
Adjustment of the beginning-of-the-year
valuation allowance $ -- 1,100,000 $1,100,000
State 2,400 -- 2,400
---------- ---------- ----------
$ 2,400 1,100,000 $1,102,400
========== ========== ==========
Year ended March 31, 1996:
State $ 2,400 -- $ 2,400
========== ========== ==========
Year ended March 31, 1995:
State $ 2,400 -- $ 2,400
========== ========== ==========
Income tax expense attributable to income (loss) from continuing
operations was $1,102,400, $2,400 and $2,400 for the years ended
March 31, 1997, 1996 and 1995, 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:
1997 1996 1995
----------- -------- --------
Computed "expected" income tax expense
(benefit) $(1,411,000) 4,500 14,000
State income taxes, net of federal effect -- -- 5,000
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 (231,000) (231,000) (141,000)
Accrued expenses 11,400 4,000 (13,000)
Other 20,000 20,000 (5,000)
NOL carryforward 1,610,600 202,500 140,000
State income taxes 2,400 2,400 2,400
----------- -------- --------
$ 1,102,400 2,400 2,400
=========== ======== ========
F-18
50
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 13. 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, 1997 and 1996 are presented below.
1997 1996
----------- ----------
Deferred tax assets:
Property and equipment $ 978,000 1,248,000
Net operating loss carryforwards 6,300,000 4,342,000
----------- ----------
Total gross deferred tax assets 7,278,000 5,590,000
Less valuation allowance (6,574,000) (3,753,000)
----------- ----------
Net deferred tax assets 704,000 1,837,000
----------- ----------
Deferred tax liabilities:
Land held for sale and water rights, principally
due to differences in capitalized interest (578,000) (607,000)
Water sales fees (126,000) (130,000)
----------- ----------
Total gross deferred tax liabilities (704,000) (737,000)
----------- ----------
Net deferred tax asset $ -- 1,100,000
=========== ==========
The valuation allowance for deferred tax assets as of April 1, 1996
and 1995 was $3,753,000 and $3,885,000, respectively. The net change
in the total valuation allowance for the years ended March 31, 1997
and 1996 was an increase of $2,821,000 and a decrease of $132,000,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. During the year ended March 31, 1997, the valuation
allowance was increased as a result of the current year's net
operating loss carryforward. In addition, the sale of the Company's
interest in NLRC resulted in a $1,100,000 adjustment to the
beginning-of-the-year valuation allowance.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at March 31, 1997 and 1996.
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 are changed (see Note 14).
F-19
51
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 13.INCOME TAXES: (CONTINUED)
At March 31, 1997, 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
-----------
$17,100,000
===========
In addition, the Company has investment tax credit carryforwards of
approximately $80,000 which are available to reduce future federal
regular income taxes, if any, through March 31, 2001.
NOTE 14. QUASI-REORGANIZATION:
The Company's Board of Directors authorized management to effect a
quasi-reorganization as of October 1, 1994. Such reorganization was
ratified by the Company's stockholders in March, 1995, and
accordingly, the assets and liabilities have been restated to current
values as of the date of the reorganization. The amount of increases,
however, are limited to the decreases in other assets. In this
regard, effective October 1, 1994 the Company recognized a write-down
in the value of the silica plant of $1,830,914. This write-down was
offset by a corresponding write-up of a like amount which was
allocated proportionately, based on the relative excess of fair
market value of each asset over historic book basis, to real estate
held for sale of $454,604, to water rights of $1,038,268, and to
other water assets of $338,042. Further, the accumulated deficit of
$14,405,252, most of which was due to the Company's prior and now
discontinued operations, was eliminated by a corresponding decrease
in the Company's additional paid-in capital. Retained deficit is
dated to reflect only the 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.
F-20
52
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 15. STOCK OPTIONS AND WARRANTS:
Under the Company's 1993 and 1990 stock option plans (the "Plans"),
the Company may grant options to purchase up to 1,200,000 shares of
common stock to officers, directors, key employees and others
providing significant services to the Company. Stock options are
granted at an exercise price no less than fair value on the date of
grant. Shares available to be granted at March 31, 1997 and 1996 were
105,334 and 130,000, respectively.
The per share weighted-average fair value of stock options granted
during the years ended March 31, 1997 and 1996 was $6.76 and $7.29,
respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended March 31, 1997: expected dividend yield of zero, expected
volatility of .5156% risk-free interest rates ranging from 6.10% to
6.12%, and an expected life of 5 years; Year ended March 31, 1996:
expected dividend yield of zero, expected volatility of .4701%,
risk-free interest rates ranging from 5.62% to 6.93%, and an expected
life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plans
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 the Company's net loss and loss per
share would have been reduced to the pro forma amounts indicated
below:
Fiscal Fiscal
1997 1996
---------- --------
Net Loss As reported $5,392,474 $305,964
Pro forma 6,241,670 828,679
Loss per share As reported $ .67 $ .04
Pro forma .77 .10
Pro forma net loss and loss per share reflect only options granted
during the years ended March 31, 1997 and 1996. Therefore, the full
impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss and loss per share
amounts presented above because compensation cost is reflected over
the options vesting period of one to four years and compensation cost
for options granted prior to April l, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
------ --------------
Balance at March 31, 1995 403,000 $ 4.47
Granted 215,000 15.01
Exercised (178,000) 2.00
--------
Balance at March 31, 1996 440,000 10.62
Granted 440,000 15.84
Exercised (7,666) 14.03
Forfeited (15,334) 17.18
--------
Balance at March 31, 1997 857,000 $13.15
========
F-21
53
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 15. STOCK OPTIONS AND WARRANTS: (CONTINUED)
At March 31, 1997, the exercise prices of outstanding options ranged
from $5.44-$18.70, and the weighted-average remaining contractual
life of outstanding options was 7.5 years.
At March 31, 1997 and 1996, the number of options exercisable was
412,998 and 279,996, respectively, and the weighted-average exercise
price of those options was $12.84 and $8.42, 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, 1997 and 1996.
NOTE 16. COMMON STOCK SPLIT:
In March 1996, the Board of Directors of the Company approved a
two-for-one stock split effected in the form of a stock dividend on
shares of the Company's common stock to holders of record on March
18, 1996. The Company issued 4,034,224 additional shares of common
stock in connection with the stock split and retained the current par
value of $.001 per share for all outstanding shares of common stock.
An amount equal to the aggregate par value of the additional shares
of common stock issued was transferred from retained earnings to
common shares. Weighted average common shares outstanding and
per-share information for periods prior to March 28, 1996 have been
restated to reflect the effects of the stock split.
NOTE 17. GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the years ended March 31,
1997, 1996 and 1995 consist of the following:
1997 1996 1995
---------- --------- ---------
Payroll and related costs $1,081,574 720,540 581,428
Legal and accounting 357,710 498,485 413,087
Consulting and engineering 364,423 143,926 367,480
Travel 173,978 95,947 71,897
Other corporate 968,567 663,627 540,643
---------- --------- ---------
$2,946,252 2,122,525 1,974,535
========== ========= =========
F-22
54
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 18. SEGMENT INFORMATION:
The Company has three major business segments: acquisition and
development of water rights, sale of real estate interests and
discontinued silica plant operations. Information concerning the
segments at March 31, 1997, 1996 and 1995 and for the years then
ended is presented below:
1997 1996 1995
------------ ----------- -----------
Revenue:
Water $ 261,103 974,458 207,111
Real estate 1,509,668 3,927,352 2,462,690
------------ ----------- -----------
$ 1,770,771 4,901,810 2,669,801
============ =========== ===========
Operating Income (Loss):
Water $ 202,728 831,490 159,896
Real estate 533,293 1,906,472 1,534,119
Other operations and corporate (2,946,252) (2,122,525) (1,974,535)
------------ ----------- -----------
(2,210,231) 615,437 (280,520)
------------ ----------- -----------
Other income (expenses), net (1,822,567) (599,852) 354,821
------------ ----------- -----------
Income (loss) before income taxes $ (4,032,798) 15,585 74,301
============ =========== ===========
Capital Expenditures
Water $ 1,419,722 1,955,634 675,569
Real estate 22,449 -- 753,821
Other operations and corporate 125,345 14,908 42,023
------------ ----------- -----------
$ 1,567,516 1,970,542 1,471,413
============ =========== ===========
Depreciation and Amortization Expense:
Water $ 58,324 52,718 44,212
Other operations and corporate 113,097 51,979 11,170
------------ ----------- -----------
$ 171,421 104,697 55,382
============ =========== ===========
Identifiable Assets:
Water $ 15,613,682 14,215,780 11,593,019
Real estate 5,078,521 5,626,857 6,419,195
Discontinued operation, net 120,000 428,623 1,000,000
Other operations and corporate 18,663,155 20,149,449 7,698,742
------------ ----------- -----------
$ 39,475,358 40,420,709 26,710,956
============ =========== ===========
F-23
55
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
NOTE 19. COMMITMENTS AND CONTINGENCIES:
The Company has several noncancelable operating leases, primarily for
office equipment, office space and farm land that expire over the
next three 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 $103,987, $55,011, and $36,366 for
the years ended March 31, 1997, 1996 and 1995, respectively.
Future minimum leases payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
March 31, 1997 are:
YEAR ENDED MARCH 31, OPERATING LEASES
-------------------- ----------------
1998 $112,834
1999 114,979
2000 53,887
2001 20,224
2002 7,099
--------
Total minimum lease payments $309,023
========
The Company recognized revenue of $229,568 and $189,561 from Fontana
Water Resources for the years ended March 31, 1997 and 1996,
respectively. No other recurring customer accounted for more than 10%
of the Company's revenue.
The Company is subject to claims and legal proceedings arising in the
ordinary course of business. While complete assurance cannot be given
to the outcome of any pending or threatened legal actions, the
Company believes that any financial impact would not be material to
its financial position, annual operating results or cash flows.
F-24
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN WATER COMPANY
Date: June 27, 1997 By: /s/ PETER L. JENSEN
-------------------
Peter L. Jensen, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ PETER L. JENSEN Director, President and June 27, 1997
- ----------------------- Chief Executive Officer
Peter L. Jensen (Principal Executive Officer)
/s/ RONALD I. SIMON Chief Financial Officer June 27, 1997
- ----------------------- (Principal Financial and
Ronald I. Simon Accounting Officer)
/s/ JOHN H. HUSTON Senior Vice President and June 27, 1997
- ----------------------- Director
John H. Huston
/s/ SCOTT A. KATZMANN Director June 27, 1997
- -----------------------
Scott Katzmann
/s/ WILLIAM D. WATT Director June 27, 1997
- -----------------------
William D. Watt