<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1995
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 0-8176
LOGO OF SOUTHWEST WATER COMPANY
SOUTHWEST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WATER COMPANY
DELAWARE 95-1840947
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 NORTH BARRANCA AVENUE, SUITE 200
WEST COVINA, CALIFORNIA 91791-1605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 915-1551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On July 31, 1995, there were 2,438,297 common shares outstanding.
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
- -------
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
June 30, 1995 and December 31, 1994 3 - 4
Consolidated Condensed Statements of Operations -
Three months ended June 30, 1995 and 1994 5
Consolidated Condensed Statements of Operations -
Six months ended June 30, 1995 and 1994 6
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 1995 and 1994 7
Notes to Consolidated Condensed Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Part II. Other Information:
- --------
Item 1. Legal Proceedings 14 - 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ---------------------------------------------------------------
June 30, December 31,
1995 1994
----------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $335 $828
Customers' accounts receivable 7,188 6,021
Other current assets 1,871 2,011
----------- ------------
9,394 8,860
Property, Plant and Equipment:
Utility property, plant and equipment - at cost 99,972 96,179
Non-utility property, plant and equipment - at cost 6,104 5,923
----------- ------------
106,076 102,102
Less accumulated depreciation and amortization 30,953 29,966
----------- ------------
75,123 72,136
Other Assets 6,244 5,838
----------- ------------
Total $90,761 $86,834
=========== ============
</TABLE>
See accompanying notes.
3
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
June 30, December 31,
1995 1994
----------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt and bank notes payable $6,882 $3,491
Accounts payable 1,200 1,185
Other current liabilities 6,616 6,455
----------- ------------
14,698 11,131
Other Liabilities and Deferred Credits:
Long-term debt 20,500 20,500
Advances for construction 9,083 9,151
Contributions in aid of construction 11,049 10,683
Deferred income taxes 3,459 3,260
Other liabilities and deferred credits 3,738 3,577
----------- ------------
Total Liabilities and Deferred Credits 62,527 58,302
Commitments and Contingencies
Stockholders' Equity:
Cumulative preferred stock 519 530
Common stock 24 24
Paid-in capital 17,361 17,241
Retained earnings 10,398 10,820
Unamortized value of restricted stock issued (68) (83)
----------- ------------
Total Stockholders' Equity 28,234 28,532
----------- ------------
Total $90,761 $86,834
=========== ============
</TABLE>
See accompanying notes.
4
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------------
1995 1994
-------------- --------------
(In thousands except
per share amounts)
<S> <C> <C>
Operating Revenues $13,329 $12,694
Operating Expenses:
Direct operating expenses 10,005 9,642
Selling, general and administrative 2,321 2,127
-------------- --------------
12,326 11,769
-------------- --------------
Operating Income 1,003 925
Other Income (Expense):
Interest expense (597) (569)
Interest income 19 23
Other 1 2
-------------- --------------
(577) (544)
-------------- --------------
Income Before Income Taxes 426 381
Provision for income taxes 178 140
-------------- --------------
Net Income 248 241
Dividends on preferred shares (7) (7)
-------------- --------------
Net Income Available For Common Shares $241 $234
============== ==============
Earnings Per Common Share:
Primary $0.10 $0.10
============== ==============
Fully diluted $0.10 $0.10
============== ==============
Cash Dividends Per Common Share $0.10 $0.10
============== ==============
Weighted-Average Outstanding Common
And Common Equivalent Shares:
Primary 2,431 2,401
============== ==============
Fully diluted 2,483 2,457
============== ==============
</TABLE>
See accompanying notes.
5
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the six months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
June 30,
---------------------
1995 1994
-------- --------
(In thousands except
per share amounts)
<S> <C> <C>
Operating Revenues $24,619 $23,796
Operating Expenses:
Direct operating expenses 19,025 18,354
Selling, general and administrative 4,440 4,255
-------- --------
23,465 22,609
-------- --------
Operating Income 1,154 1,187
Other Income (Expense):
Interest expense (1,157) (1,093)
Interest income 44 42
Gain on sale of land 84 -
Other 7 29
-------- --------
(1,022) (1,022)
-------- --------
Income Before Income Taxes 132 165
Provision for income taxes 55 55
-------- --------
Net Income 77 110
Dividends on preferred shares (14) (14)
-------- --------
Net Income Available For Common Shares $63 $96
======== ========
Earnings Per Common Share:
Primary $0.03 $0.04
======== ========
Fully diluted $0.03 $0.04
======== ========
Cash Dividends Per Common Share $0.20 $0.20
======== ========
Weighted-Average Outstanding Common
And Common Equivalent Shares:
Primary 2,427 2,396
======== ========
Fully diluted 2,479 2,453
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
June 30,
---------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $77 $110
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,874 1,830
Deferred income taxes 199 1,011
Changes in assets and liabilities:
Customers' accounts receivable (1,167) (799)
Other current assets 140 (288)
Accounts payable 15 (2,312)
Other current liabilities 161 (659)
Other, net (226) 389
-------- --------
Total adjustments 996 (828)
-------- --------
Net cash provided by (used in) operating activities 1,073 (718)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,918) (3,850)
Net redemption in U.S. Government securities - 1,014
-------- --------
Net cash used in investing activities (4,918) (2,836)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 3,391 2,650
Contributions in aid of construction 366 131
Net proceeds from dividend reinvestment and
employee stock purchase plans 161 147
Additions to advances for construction 122 -
Dividends paid (498) (491)
Payments on advances for construction (190) (534)
Decrease in long-term debt - (9)
-------- --------
Net cash provided by financing activities 3,352 1,894
-------- --------
Net decrease in cash and cash equivalents (493) (1,660)
Cash and cash equivalents at beginning of year 828 2,979
-------- --------
Cash and cash equivalents at end of quarter $335 $1,319
======== ========
</TABLE>
See accompanying notes.
7
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
1. In the opinion of management, the accompanying unaudited consolidated
condensed financial statements of Southwest Water Company (hereafter
together with its consolidated subsidiaries referred to as "Company" or
"Registrant" unless the context otherwise indicates) reflect all
adjustments (including adjustments which are of a normal recurring nature)
necessary to present fairly the financial position and results of
operations.
2. The results of operations for the periods ended June 30, 1995 and 1994 may
not necessarily be indicative of the results to be expected for the full
year. The second and third quarters normally incur the highest average
water usage per customer for the Company's water utilities. The operations
of the Company's service business are also seasonal in nature.
3. Primary earnings per share are calculated using the weighted-average number
of common shares and dilutive common equivalent shares outstanding during
the period, after recognition of dividend requirements on preferred shares.
Common equivalent shares arise from stock options. Fully diluted earnings
per share were computed based upon the weighted-average number of common
shares and dilutive common equivalent shares outstanding, assuming the 9.5%
convertible subordinated debentures were converted at the beginning of the
period and the related interest for the period, net of income taxes, was
eliminated.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1995, the Company had cash and cash equivalent balances totaling
approximately $335,000 and unused lines of credit from commercial banks of
$7,650,000. In 1995, the Company borrowed a net $3,400,000 on its lines of
credit to meet construction and operating requirements. Additional borrowing is
anticipated during 1995 to meet construction, operating and debt service
requirements.
The Company has additional borrowing capacity under its First Mortgage Bond
Indentures of approximately $22,300,000. The amount of additional borrowings
available to the Company under the indentures and lines of credit is limited by
certain financial covenants that restrict additional borrowings at June 30,
1995, to a maximum of approximately $8,400,000.
The Company's liquidity and capital resources are influenced primarily by
construction expenditures at Suburban Water Systems (Suburban) for the
replacement and renovation of existing water utility facilities and construction
expenditures for new water and wastewater utility facilities at New Mexico
Utilities, Inc. (New Mexico). Additionally, liquidity is influenced by the
Company's continuing investment in its service business, ECO Resources, Inc.
(ECO).
The Company's additions to property, plant and equipment approximated $4,918,000
for the six months ended June 30, 1995, representing an increase of $1,068,000
over the same period of 1994. This increase relates primarily to capital
expenditures incurred at New Mexico due to residential and commercial
construction in New Mexico's service area. Approximately $660,000 of the total
additions were received by the Company's utilities through developer
contributions. The Company will continue its construction programs, with 1995
capital expenditures estimated at approximately $12,000,000, of which
approximately $3,000,000 is estimated to be in the form of developer
contributions. Because these estimates are subject to management's ongoing
review, actual expenditures may vary. These construction expenditures, as well
as the Company's ongoing investment in ECO, affect the Company's liquidity.
The amount and timing of future long-term financings will depend on various
factors discussed earlier, the timeliness and adequacy of rate increases, the
availability of capital, and the Company's ability to meet interest and fixed
charge coverage requirements.
REGULATORY AFFAIRS AND INFLATION:
The rates and operations of the Company's utilities are regulated primarily by
the Public Utilities Commission of the State of California (CPUC) and the New
Mexico Public Utility Commission (NMPUC). The rates are intended to provide a
reasonable return on common equity. The Company's expected future construction
expenditures and increased direct operating expenses will require periodic
requests for rate increases.
Effective January 1, 1995, the CPUC granted Suburban an annual "step" adjustment
for its Whittier/La Mirada District customers, yielding additional annual
revenues of $286,000. Suburban is currently authorized an 11% return on common
equity. This authorized rate of return is moderately favorable in comparison to
rates currently granted to other water utilities by the CPUC.
9
<PAGE>
Suburban filed a general rate increase application with the CPUC in May 1995.
The general rate increase, if approved, would be effective early in 1996.
Suburban's general rate application covers both of its service districts based
upon recent suggestions by the CPUC. This general rate increase application
requests an increase in rates of approximately 11%. New Mexico filed a general
sewer rate increase application with the NMPUC in May 1995, requesting a 10%
increase in rates.
From 1989 through June 1995, the Company recorded pretax gains on five land
transactions which aggregated $1,900,000. On January 7, 1994, the CPUC ruled on
the 1989 sale and allowed Suburban to retain $210,000 in income, in accordance
with CPUC accounting regulations, as opposed to distributing it to ratepayers in
the form of water rate reductions. However, a more recent CPUC decision
involving an unrelated water company required that its gain on the sale of land
be split equally between the ratepayers and the stockholders. Suburban's
remaining transactions (with pretax gains of $1,690,000) are subject to CPUC
review; however, management believes these gains belong to the stockholders.
Accordingly, no provision for any liability has been recorded in the
accompanying consolidated condensed financial statements.
Both the California Assembly and Senate are reviewing legislation entitled the
Water Utility Infrastructure Improvement Act of 1995 (SB1025). This bill,
introduced by Senator Peace, would amend existing law to require water utilities
which sell property that is no longer necessary or useful, to invest the net
proceeds in utility plant. Additionally the bill authorizes the water utility
the opportunity to earn a reasonable return on the reinvestment. This bill, if
passed, will apply to properties sold in 1996 and later. CPUC review of any
such transaction will only be needed to ensure that net sale proceeds are
invested in utility plant.
The operations of ECO are not regulated. ECO's long-term water and wastewater
service contracts typically include annual inflation adjustments that
approximate inflation rates. Contracts with municipal utility districts, which
are usually shorter term contracts, do not generally include inflation
adjustments.
ENVIRONMENTAL AFFAIRS:
The Company's operations are subject to water and wastewater pollution
prevention standards and water and wastewater quality regulations of the United
States Environmental Protection Agency (EPA) and various state regulatory
agencies. The EPA and state regulatory agencies continue to promulgate new
regulations mandated by the Federal Water Pollution Control Act, the Safe
Drinking Water Act, and the Resource Conservation and Recovery Act. To date,
the Company has not experienced any material adverse effects upon its operations
resulting from compliance with governmental regulations. Costs associated with
the testing of the Company's water supplies have, however, increased and are
expected to increase further as the regulatory agencies adopt additional
monitoring requirements. The Company believes that future incremental costs of
complying with governmental regulations, including capital expenditures, if any,
will be recoverable through increased rates and contract revenues.
10
<PAGE>
RESULTS OF OPERATIONS:
Three Months Ended June 30, 1995 Versus Three Months Ended June 30, 1994
- ------------------------------------------------------------------------
Fully diluted earnings per common share for the three months ended June 30 was
$.10 in both 1995 and 1994. Results for the three months ended June 30, 1995
include a net gain of $105,000 resulting from the recovery of prior years'
property tax assessments recorded by Suburban.
Operating income increased $78,000 in the three months ended June 30, 1995, over
the same period in 1994, and, as a percentage of operating revenues, increased
from 7% in 1994 to 8% in 1995. Utility operating income increased $350,000
during the three months ended June 30, 1995. Suburban received the benefits of
a step revenue rate increase, effective January 1, 1995 and, as noted above,
recorded a benefit from recovery of disputed property tax assessments. New
Mexico experienced the positive effects of an increase in customer water
consumption resulting from the addition of new customers during 1995 as compared
with 1994. ECO experienced an increased operating loss of $202,000 during this
same period, due primarily to unusually high operating expenses associated with
new contracts, lower gross profit margins on billable and project services and
high expenses associated with acquiring new business.
The results of operations for the three-month period may not necessarily be
indicative of the results to be expected for the full year, due to the seasonal
nature of the Company's operations. The second and third quarters normally
include the highest average water usage per customer for the Company's water
utilities. The operations of ECO are also seasonal in nature. Moderate
rainfall hampers ECO's performance because less billable work can be performed.
Heavy rainfall often has the opposite effect, since it may create opportunities
for additional billable work.
Operating revenues
- ------------------
Operating revenues increased $635,000 or 5% during the three months ended June
30, 1995 over the same period in 1994.
Water utility operating revenues increased by $255,000. Southern California
experienced unusually heavy rainfall during this period as compared with 1994,
leading to a moderate decrease of water consumption by Suburban customers.
However, Suburban received the benefits of a step rate increase which resulted
in additional revenues of $87,000. New Mexico's customers' water consumption
increased by 9% during this period over 1994, representing an increase in water
revenues of $63,000. As anticipated, construction has continued in New Mexico's
service area with 144 new water customers added during the three months ended
June 30, 1995. Higher sewer collection revenues by New Mexico, resulting from
higher volume, led to an increase in revenues of $129,000.
ECO's revenues increased $380,000 during this period as compared to the same
period in 1994 as a result of revenues from new contracts, as well as increases
in billable and project revenues in Texas.
Direct operating expenses
- -------------------------
Direct operating expenses increased $363,000 or 4% in the three months ended
June 30, 1995, as compared to the same period of 1994. As a percentage of
operating revenues, these expenses decreased from 76% in 1994 to 75% in 1995.
11
<PAGE>
Water utility direct operating expenses decreased $172,000 during the three
months ended June 30, 1995, as compared to the same period of 1994. The
decrease in Suburban's water production resulted in a moderate decrease in
water, power and gas expenses. Suburban also recorded a $175,000 benefit from
the recovery of disputed property tax assessments as noted above. These
decreases in direct operating expenses were partially offset by higher sewer
collection expenses in New Mexico, related directly to the corresponding
increase in volume, as well as increases in payroll, associated payroll
benefits, depreciation, repairs and other expenses at Suburban and New Mexico.
ECO's direct operating expenses increased approximately $535,000 during this
period as compared with the same period of 1994, resulting in part from
unusually high expenses associated with the addition of new contracts in Texas.
ECO anticipates performing certain repairs and maintenance services for a new
contract customer in the Rio Grande Valley during the third and fourth quarters
of 1995. Once these repairs are completed, ECO will reduce the level of
operating expenses incurred for this customer because ECO anticipates fewer
operating inefficiencies and other system maintenance problems. Additionally,
higher expenses associated with increased billable and project revenues in Texas
also contributed to the increase in direct operating expenses.
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expenses increased $194,000 during the three
months ended June 30, 1995, as compared to the same period of 1994. As a
percentage of operating revenues, these expenses remained constant at 17% in
1995 and 1994. Suburban's legal expenses decreased $64,000 during this period
compared with the same period of 1994. This amount was offset by higher
payroll, associated payroll benefits and other expenses of $141,000 at Suburban
and New Mexico. ECO's selling, general and administrative expenses increased
$47,000 during this period due to ECO's expanded sales and marketing activity in
the pursuit of new contracts. General and administrative expenses of the parent
holding company increased $70,000, primarily due to higher consulting and
outside service expenses.
Six Months Ended June 30, 1995 Versus Six Months Ended June 30, 1994
- --------------------------------------------------------------------
Fully diluted earnings per common share for the six months ended June 30
decreased from $.04 per share in 1994 to $.03 per share in 1995. Results for
the six months ended June 30, 1995 include a net gain of $50,000, or $.02 per
fully diluted share, resulting from the sale of land by Suburban, and a net gain
of $105,000 due to recovery of disputed property tax assessments as discussed
earlier.
Operating income decreased $33,000 in the six months ended June 30, 1995 over
the same period in 1994, and, as a percentage of operating revenues, remained
level at 5% in 1994 and 1995. Utility operating income increased $295,000
during the six months ended June 30, 1995. Suburban experienced the negative
effects of a decrease in customer water consumption due to heavy rains and
cooler than normal temperatures in Southern California, but operating income
increased due to lower expenses and the recovery of disputed property tax
assessments. New Mexico experienced the positive effects of increases in
customer water consumption resulting from the addition of new customers during
this period as compared with the same period of 1994. ECO experienced an
increased operating loss of $308,000 during this same period, due primarily to
unusually high operating expenses associated with new contracts, lower gross
profit margins on billable and project services and higher expenses associated
with acquiring new business.
The results of operations for the six-month period may not necessarily be
indicative of the results to be expected for the full year, due to the seasonal
nature of the Company's operations. The second and third quarters normally
include the highest average water usage per customer for the Company's water
utilities. The operations of ECO are also seasonal in nature. Moderate
rainfall hampers ECO's performance because less billable work can be performed.
Heavy rainfall often has the opposite effect, since it may create opportunities
for additional billable work.
12
<PAGE>
Operating revenues
- ------------------
Operating revenues increased $823,000 or 3% during the six months ended June 30,
1995 over the same period in 1994.
Water utility operating revenues increased by $131,000. Heavy rainfall and
cooler temperatures in Southern California caused Suburban's customers to
decrease water consumption by approximately 5% during this period as compared
with 1994, resulting in a revenue decrease of approximately $394,000. However,
Suburban received the benefits of a step rate increase which resulted in
additional revenues of $164,000 in 1995. New Mexico's customers' water
consumption increased by 11% during this period over 1994, representing an
increase in water revenues of $109,000. As anticipated, construction has
continued in New Mexico's service area with 274 new water customers added during
the six months ended June 30, 1995. Higher sewer collection revenues by New
Mexico, resulting primarily from higher volume, led to an increase in revenues
of $252,000.
ECO's revenues increased $692,000 during this period as compared to the same
period in 1994 as a result of revenues from new contracts, as well as increases
in billable and project revenues in Texas.
Direct operating expenses
- -------------------------
Direct operating expenses increased $671,000 or 4% in the six months ended June
30, 1995 as compared to the same period of 1994. As a percentage of operating
revenues, these expenses remained constant at 77%.
Water utility direct operating expenses decreased $185,000 during the six months
ended June 30, 1995 as compared to the same period of 1994. The decrease in
Suburban's water production resulted in a decrease in water, power and gas
expenses. Suburban also recorded a $175,000 benefit from the recovery of
disputed property tax assessments as noted earlier. These decreases in direct
operating expenses were partially offset by higher sewer collection expenses in
New Mexico related directly to the corresponding increase in volume, as well as
increases in payroll, associated payroll benefits, depreciation, repairs and
other expenses at Suburban and New Mexico.
ECO's direct operating expenses increased approximately $856,000 during 1995 as
compared with 1994, resulting in part from unusually high expenses associated
with the addition of new contracts in Texas. ECO anticipates performing
certain repairs and maintenance services for a new contract customer in the Rio
Grande Valley during the third and fourth quarters of 1995. Once these repairs
are completed, ECO will reduce the level of operating expenses incurred for this
customer because ECO anticipates fewer operating inefficiencies and other system
maintenance problems. Higher expenses associated with increased billable and
project revenues also contributed to the increase in direct operating expenses.
Additionally, the new contracts entered into in 1995 earned lower gross profit
margins than similar contracts in 1994 due to competitive pressures and contract
start-up costs.
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expenses increased $185,000 during the six
months ended June 30, 1995, as compared to the same period of 1994. As a
percentage of operating revenues, these expenses remained constant at 18% in
1995 and 1994. Suburban's legal expenses decreased $138,000 during this period
compared with the same period of 1994. This amount was offset by higher
payroll, associated payroll benefits and other expenses of $159,000 incurred by
Suburban and New Mexico. ECO's selling, general and administrative expenses
increased $107,000 during this period, primarily related to ECO's expanded sales
and marketing activity in the pursuit of new contracts, as well as higher
consulting and insurance expenses. Additionally, ECO settled a lawsuit for
$37,000 during the first quarter of 1995.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
As described in Registrant's Form 10-K Reports for the years ended December
31, 1992, 1993 and 1994, and its Form 10-Q Report for the quarter ended March
31, 1995, Suburban was a defendant in three lawsuits arising from a chlorine gas
leak that occurred in October 1990 at a Suburban water distribution facility.
In two of the actions, the plaintiffs were, respectively, five employees and 22
employees (and some spouses) of a manufacturing plant located adjacent to a
water production facility owned and operated by Suburban. In the third action,
the plaintiff was the workers' compensation carrier for the operator of the
adjacent manufacturing plant. The plaintiffs in the three actions sought general
damages in excess of $3.8 million, and the plaintiffs in the action involving 22
employee plaintiffs sought unspecified punitive damages.
As earlier reported, in January 1994 Suburban settled with all of the
plaintiffs for aggregate cash payments of approximately $1.5 million. These
settlements included releases of all claims against Suburban and dismissals with
prejudice of the actions and are the last known claims arising out of this
incident.
At the time of the chlorine gas incident, Registrant and Suburban
maintained liability insurance coverage of $20 million. However, the
Registrant's primary and excess liability insurance carrier declined to defend
or indemnify Suburban on the basis of allegedly applicable exclusions in the
policies. Suburban believes it is entitled to defense and indemnity under these
policies and filed a lawsuit against the carrier to obtain reimbursement for the
full settlement amounts and all associated defense costs. On May 3, 1994, in
the U.S. District Court, Central District of California, the insurance carrier
was granted a summary judgment dismissing Suburban's action. On May 31, 1994,
Suburban appealed this judgment, and the appeal is pending. Suburban is seeking
recovery of a portion of these defense expenses in its current general rate
increase application. There is no assurance that recovery of such costs will be
allowed. Suburban will not recognize income on these potential recoveries until
amounts, if any, are received. Additionally, this litigation will have no
future material adverse effect on the Registrant's financial condition or
results of operations.
As described in the Registrant's Form 10-K Report for the year ended
December 31, 1994, and its Form 10-Q Report for the quarter ended March 31,
1995, ECO was named as a defendant in a lawsuit filed on April 15, 1992, in
Houston, Texas, by certain homeowners and Pulte Home Corporation of Texas
(Pulte). The plaintiffs allege that in 1989 ECO, as an independent contractor
for Municipal Utility District #81 (MUD #81) in Houston, Texas, failed to change
the treatment of the water supplied to plaintiffs after the plaintiffs made MUD
#81 and ECO aware of highly corrosive elements in the water supplied.
Plaintiffs allege that this resulted in accelerated corrosion of residential
plumbing pipes. The original complaint requested unspecified special damages
and reasonable attorneys' fees.
On April 24, 1994, the plaintiffs filed an amended complaint which alleges
additional causes of action against ECO. The amended complaint alleges that
plaintiffs have sustained more than $838,000 in repair damages and will incur
future expenses for home repairs in the sum of $1,000,000 if the water remains
untreated. Plaintiffs also allege mental pain and anguish as a result of
plumbing failures, loss of home values and that ECO's conduct constitutes gross
negligence. Plaintiffs are seeking at least $1,000,000 in exemplary damages.
Pulte now also claims that defendant MUD #81 failed to require its agent, ECO,
to change the treatment of the water to eliminate accelerated corrosion of pipes
and has included MUD #81 as a direct defendant in the amended complaint. On
June 14, 1995, the court granted ECO's motion for summary judgment on all causes
of action and granted MUD #81's motion for summary judgment on sovereign
immunity grounds. In July 1995, plaintiffs filed a motion for new trial and a
motion to reconsider and to vacate the court's summary judgments.
14
<PAGE>
As of the date when damages are first alleged to have occurred (1989) and
thereafter, the Registrant and ECO maintained liability insurance coverage of
$20 million. ECO's primary liability carrier is providing a defense for the
primary cause of action against ECO, but has reserved all rights as to
allegations that ECO knowingly committed intentional acts constituting
"deceptive trade practices" and "negligence." The Registrant believes the
ultimate resolution of this matter will not have a material adverse effect on
its consolidated financial condition or results of operations.
As described in the Registrant's Form 10-K Report for the year ended
December 31, 1994, and its Form 10-Q Report for the quarter ended March 31,
1995, Suburban is a defendant and cross defendant in two actions filed in,
respectively, March 1994 and June 1994 in the Superior Court of Los Angeles
County and arising out of a slope slide or failure in 1992 in a hilly,
residential development in West Covina, California. One of the plaintiffs, Dr.
Mendoza, is the owner of a residence located below the failed slope. The other
plaintiff, South Hills Home Partnership, is a developer of a tract of lots,
including one lot adjacent to the failed slope. Defendants in the actions
include the owners of the lot above and containing the failed slope, Suburban
and an engineer and contractor who directed and conducted repair work to the
slope after a prior failure in 1978. Claims raised by the plaintiffs and
certain cross defendants are described in Registrant's 1994 Form 10-K Report as
is the consolidation of the two cases.
As of the date of the 1992 slope failure, the Registrant and Suburban
maintained liability insurance coverage of $20 million. Suburban's primary
liability carrier is providing a defense in the consolidated action, and
Suburban is vigorously defending all claims. At the initiation of Suburban's
defense counsel, Dr. Mendoza dismissed his action against Suburban in March 1995
and defense counsel is discussing with South Hills Home Partnership a similar
dismissal as to Suburban. Suburban believes that it has meritorious defenses to
all claims in the consolidated action and that if Suburban were determined to
have any liability in the action such liability would be fully covered by the
liability insurance maintained by Suburban and the Registrant. Accordingly, the
Registrant believes that the ultimate resolution of this matter will not have a
material adverse effect on its consolidated financial condition or results of
operations.
As described in Registrant's Form 10-K Report for the year ended December
31, 1994, and its Form 10-Q Report for the quarter ended March 31, 1995, a
written request for information was received in June 1994 from the Enforcement
Division of the Securities and Exchange Commission (the "Commission") concerning
trading in the common stock of the Registrant from July 1993 to August 1993.
The Registrant voluntarily responded to such request in July 1994. In October
1994, the Registrant was again contacted by the Commission to arrange for oral
depositions of the Registrant's directors, its three officers and one employee
of the Registrant. Concurrently, the Commission served subpoenas requesting
documents and records of the deponents. The individual deponents responded to
such subpoenas, and the depositions were taken in late 1994. Legal counsel for
the Registrant was present at all depositions.
The Registrant believes that the Commission's inquiry is focused upon
several small sales of the Registrant's stock. These sales occurred prior to the
public announcement of a dividend reduction on August 13, 1993. The
Registrant's management believes that the Commission's inquiry is directed at
whether such sales were made on the basis of inside information concerning that
dividend reduction.
The Registrant has had a written policy for a number of years prohibiting
its officers, directors and employees both from trading on the basis of inside
information and from providing such information to others. This policy has been
communicated to all officers and directors as well as to key employees. The
Registrant is not aware of any officer, director or employee who provided any
inside information to any person making the sales being examined by the
Commission.
15
<PAGE>
To date, no formal action has been initiated by the SEC. Moreover, the
Registrant is aware of no allegation of any improper conduct by the Registrant,
its officers or directors. Because of the written policy of the Registrant on
insider trading described above, the absence of facts suggesting improper use of
inside information, and the absence of any formal charge to date, the Registrant
believes that should the SEC initiate a formal action, the Registrant would have
meritorious defenses and ultimately prevail.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K
3.2A Amendment to Registrant's Bylaws dated June 27, 1995.
10.5C Third Amendment to Credit Agreement and Promissory Note dated June
30, 1995, between the Registrant and First Interstate Bank.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended June 30,
1995.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: August 4, 1995 /s/ ANTON C. GARNIER
- ---------------------- ----------------------------------------------
Anton C. Garnier, Director and President
(Principal Executive Officer)
Dated: August 4, 1995 /s/ DIANE CASTELLO PITTS
- ---------------------- ------------------------
Diane Castello Pitts, Corporate Controller and
Treasurer (Principal Accounting Officer)
17
<PAGE>
EXHIBIT 3.2A AMENDMENT TO REGISTRANT'S BYLAWS DATED JUNE 27, 1995
SOUTHWEST WATER COMPANY
AMENDMENT TO THE BYLAWS TO INCREASE NUMBER OF DIRECTORS
-------------------------------------------------------
WHEREAS, this corporation hereby considers it advisable to
increase the authorized number of directors; and
WHEREAS, the Board of Directors desire to ratify and confirm
the increase in the authorized number of directors as empowered in
Article II, Section 1 of the bylaws of the Corporation;
THEREFORE, IT IS HEREBY RESOLVED, that Article II, Section
1, of the bylaws of this corporation is hereby amended as follows:
"Section 1. Number and Term of Office. The number of directors
--------------------------
shall be seven (7), and thereafter, shall be fixed from time to
time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such
resolution is presented to the Board for adoption). All
directors shall be elected at each annual meeting of
stockholders. Each director shall hold office until the next
annual meeting of stockholders and until his successor has been
elected and qualified or until his earlier resignation or
removal.
<PAGE>
EXHIBIT 10.5c THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE DATED
JUNE 30, 1995, BETWEEN THE COMPANY AND FIRST INTERSTATE BANK
THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE
This Third Amendment to Credit Agreement and Promissory Note ("Third
Amendment") is entered into this 30th day of June, 1995, by and between
SOUTHWEST WATER COMPANY, a Delaware corporation (hereinafter referred to as
"Borrower") and FIRST INTERSTATE BANK OF CALIFORNIA, a California banking
corporation (hereinafter referred to as "Bank"), who for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
hereby agree as follows:
This Third Amendment amends that certain Credit Agreement, dated December
22, 1992, as amended by that certain First Amendment to Credit Agreement and
Promissory Note, dated July 29, 1993 ("First Amendment"), and that certain
Second Amendment to Credit Agreement and Promissory Note, dated June 24, 1994
("Second Amendment") (said Credit Agreement, as amended, hereinafter referred to
as the "Agreement"), each of which were executed by and between Borrower and
Bank.
This Third Amendment also amends that certain Promissory Note in the
original principal amount of $5,000,000, dated December 22, 1992, as later
amended by the First Amendment and the Second Amendment (said Promissory Note,
as amended, hereinafter referred to as the "Note").
The parties hereto hereby amend the Agreement and the Note, as indicated
below:
<TABLE>
<S> <C>
AGREEMENT:
1. Page 4, "Maturity Date": delete "June 30, 1995" and replace
-------------
with "June 30, 1996".
2. Page 5, "Revolving Commitment": delete "$5,000,000" and
--------------------
replace with "$6,000,000".
3. Page 21, Paragraph 6.02 (f), subpart (v) is deleted in its
entirety and replaced with:
"(v) Eight Million Five Hundred Thousand Dollars
($8,500,000) in other Debt."
NOTE:
1. Page 1, Paragraph 1, Line 11: delete "June 30, 1995" and
replace with "June 30, 1996".
2. Page 1, in the upper left hand corner of the page: delete
"$5,000,000" and replace with "$6,000,000".
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3. Page 1, Paragraph 1, Line 5: delete "Five Million Dollars
($5,000,000)" and replace with " Six Million Dollars
($6,000,000)".
</TABLE>
Except as specifically amended in this Third Amendment, or to the extent
necessary to be consistent with the provisions of this Third Amendment, the
Agreement and Note shall continue in full force and effect and be binding upon
Borrower and Bank notwithstanding the execution of and delivery of this Third
Amendment.
IN WITNESS WHEREOF, the parties hereto have duly executed this Third Amendment
as of the day and year first hereinabove written.
BORROWER:
SOUTHWEST WATER COMPANY
BY:/s/ANTON C. GARNIER
ITS:DIRECTOR AND PRESIDENT
BY:/s/DIANE CASTELLO PITTS
ITS:CORPORATE CONTROLLER AND TREASURER
BANK:
FIRST INTERSTATE BANK OF CALIFORNIA
BY:/S/RICHARD MADSEN
ITS:VICE PRESIDENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 335,000
<SECURITIES> 0
<RECEIVABLES> 7,307,000
<ALLOWANCES> 119,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,394,000
<PP&E> 106,076,000
<DEPRECIATION> 30,953,000
<TOTAL-ASSETS> 90,761,000
<CURRENT-LIABILITIES> 14,698,000
<BONDS> 20,500,000
<COMMON> 24,000
0
519,000
<OTHER-SE> 27,691,000
<TOTAL-LIABILITY-AND-EQUITY> 90,761,000
<SALES> 0
<TOTAL-REVENUES> 24,619,000
<CGS> 0
<TOTAL-COSTS> 19,025,000
<OTHER-EXPENSES> 4,440,000
<LOSS-PROVISION> 114,000
<INTEREST-EXPENSE> 1,157,000
<INCOME-PRETAX> 132,000
<INCOME-TAX> 55,000
<INCOME-CONTINUING> 77,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
