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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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 Water Company
(Exact name of registrant as specified in its charter)
DELAWARE 95-1840947
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 NORTH BARRANCA AVENUE, SUITE 200 91791-1605
WEST COVINA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 915-1551
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(1) COMMON SHARES, $.01 PAR VALUE
(2) SERIES A, 5-1/4% PREFERRED SHARES, CUMULATIVE, $.01 PAR VALUE
(3) 9-1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 1995
(TITLE OF CLASSES)
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
--- ----
On March 10, 1995, there were 2,424,131 common shares outstanding. The
aggregate market value of the Registrant's common shares held by non-affiliates
of Registrant (2,230,631 shares) was approximately $19,239,000 based upon the
average of the bid and asked prices as of March 10, 1995. Registrant is unable
to estimate the aggregate market value of its preferred shares held by non-
affiliates of Registrant because there is no public market for such shares.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE
--------- -------------------
Portions of Registrant's 1994
Annual Report to Stockholders Parts I, II and IV
Proxy Statement dated March 20, 1995,
for Annual Meeting of Stockholders
on Tuesday, May 9, 1995 Part III
SEE PAGES 22 TO 24 FOR EXHIBIT INDEX FILED WITH THIS REPORT.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
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Page No.
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PART I.
Item 1: Business................................................... 1 - 10
Item 2: Properties................................................. 10 - 12
Item 3: Legal Proceedings.......................................... 12 - 14
Item 4: Submission of Matters to a Vote of Security Holders........ 15
Item 4A: Executive Officers of the Registrant....................... 15
PART II.
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 16
Item 6: Selected Financial Data.................................... 16
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 16
Item 8: Financial Statements and Supplementary Data................ 16
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 16
PART III.
Item 10: Directors and Executive Officers of the Registrant......... 17
Item 11: Executive Compensation..................................... 17
Item 12: Security Ownership of Certain Beneficial Owners and
Management................................................. 17
Item 13: Certain Relationships and Related Transactions............. 17
PART IV.
Item 14: Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 18 - 21
Exhibit Index.............................................. 22 - 24
Signatures................................................. 25
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
General Development of Business
Southwest Water Company (hereafter together with its consolidated subsidiaries
referred to as "Registrant" unless the context otherwise indicates) was
incorporated under the laws of the State of California on December 10, 1954.
The Registrant reincorporated in the State of Delaware effective June 30, 1988.
The Registrant and its subsidiaries are engaged in a single line of business,
the provision of water and water-related services in the water services
industry. Such business is conducted entirely through Registrant's
subsidiaries. The Registrant provides service to customers located throughout
California; the City of Albuquerque and Bernalillo County, New Mexico; the
greater Houston, Austin and Rio Grande, Texas, areas; and various cities in
Mississippi. All water utility operations of the Registrant are conducted
through Suburban Water Systems ("Suburban") and New Mexico Utilities, Inc.
("NMU"). The Registrant, located in West Covina, California, had 12 employees
at December 31, 1994. These employees perform support services for the
Registrant's subsidiaries as well as corporate administrative functions.
In 1985, the Registrant diversified into the management and operation of water
and wastewater treatment systems owned by others. In carrying out this
strategy, on September 30, 1985, the Registrant acquired all of the outstanding
common shares of ECO Resources, Inc. ("ECO") in Houston, Texas. From September
30, 1985 through 1994, the Registrant expanded its service business operations
of water and wastewater treatment systems through various acquisitions and by
internal growth. On August 31, 1993, ECO purchased all of the common stock of
Southern Municipal Services, Inc. ("SMS"). SMS provided contract operations
and maintenance services for municipal utility districts in the greater Houston,
Texas, area.
The following discussion describes the products and services provided by each
of the Registrant's subsidiaries, all of which are wholly owned by the
Registrant.
SUBURBAN WATER SYSTEMS
Product and Business
Suburban is a public utility water company engaged in the business of
producing and supplying water for residential, business, industrial and public
authorities use, and for private and public fire protection service under the
regulation of the California Public Utilities Commission (the "CPUC").
Suburban's service areas are located within Los Angeles County and Orange
County, California. These service areas include portions of the communities of
Glendora, Covina, West Covina, La Puente, City of Industry, Hacienda Heights,
Whittier, La Mirada and Buena Park, as well as unincorporated areas of Los
Angeles and Orange Counties.
Suburban or its predecessor entities have been engaged in supplying water
since approximately 1907. From the mid 1950s to the late 1960s, Suburban's
operations rapidly expanded as the transition from agricultural land use to
residential, business and industrial use occurred throughout its service areas.
Suburban has experienced moderate growth since the late 1960s, due to the
population saturation of existing service areas. Minor growth has also come
from the extension of water service into new residential subdivisions along the
periphery of these service areas.
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Suburban provides water service in two general service areas, designated as
the San Jose Hills Service Area, and the Whittier/La Mirada Service Area. These
areas contain an aggregate population of approximately 230,000.
The San Jose Hills Service Area is located in Los Angeles County. The
Whittier/La Mirada Service Area covers portions of both Los Angeles and Orange
Counties. The two service areas are separated by the Puente Hills and cover
approximately 38 square miles, consisting of predominantly residential
communities. At December 31, 1994, Suburban served 33,648 and 31,989 customers
in the San Jose Hills Service Area and the Whittier/La Mirada Service Area,
respectively. Suburban is franchised, as required in each of the areas it
serves, by the respective counties or cities in which it operates and has been
issued Certificates of Public Convenience and Necessity by the CPUC.
At December 31, 1994, Suburban served 65,637 customers, including 62,193
residential customers, 2,606 business and industrial customers, 276 public
authorities customers and 562 fire service customers. During 1994, Suburban's
operating revenues were 74% from sales to residential customers and 18% from
sales to business and industrial customers. No single customer accounts for a
material part of Suburban's sales, and there are no individual customers whose
loss would have a material adverse effect on Suburban's operations.
Suburban is engaged in the water utility service business and supplies a
single product: water. There has been no significant change in Suburban's
services or method of distribution since the beginning of its fiscal year.
Suburban's business is subject to material fluctuations resulting, in large
measure, from seasonal temperature and rainfall variations. As a result, most
of Suburban's revenue is obtained during the warm, dry months of each year.
California Water Availability
Over 70% of the water produced by Suburban is pumped from local underground
water basins using Suburban-owned wells. These local underground water basins
are currently at levels sufficient to eliminate any drought concerns. This
conclusion is subject to change depending on future weather patterns.
Supplementing this water supply is more expensive water purchased from external
sources. A new water well drilled in Suburban's Whittier/La Mirada Service Area
in November 1994 will increase the local groundwater component of total water
"mix" when the well is fully operational in 1995. It will also further reduce
Suburban's reliance on expensive purchased water from external sources.
Wells and Other Water Sources
Suburban supplies its customers from 18 wells it owns, and from purchases of
water produced from wells of one mutual water company and treated surface water
from another mutual water company. Through Suburban's ownership of shares in
each of these mutual water companies, and by leasing additional shares from
other stockholders of these companies and from other parties with pumping
entitlements in the two water basins from which Suburban pumps water, Suburban
has been able to increase its water entitlement, and accordingly reduce its cost
of water. Suburban has a connection to the "Lower Feeder" of the Metropolitan
Water District of Southern California ("MWD") through which it purchases water
to supplement the supply to its Whittier/La Mirada Service Area. Additionally,
Suburban has access to another MWD connection which serves to supplement the
supply of water in its San Jose Hills Service Area. Suburban also has
interconnections with other water purveyors which can be used as supplemental
and emergency sources of supply. Water purchased from MWD and other water
purveyors is more expensive to Suburban than water pumped from its owned wells.
Occasionally, Suburban can purchase water from MWD at lower prices when MWD has
a surplus of water in
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storage. No such water was purchased by Suburban from MWD in 1994.
Suburban's wells produce water from two of the major water basins in the
Southern California coastal watershed, the Central Basin and the Main San
Gabriel Basin. The rights to produce water from these basins, which are managed
by Watermaster Boards ("Boards"), have been fully adjudicated under the laws of
the State of California. These adjudications have established Suburban's rights
to produce water from its wells at the levels prescribed each year by the
Boards. When Suburban produces water from either basin in excess of prescribed
levels, an additional payment is required to provide for the replenishment of
the water supply. As the water levels in the Main San Gabriel Basin increase or
decrease, the Board adjusts the amount of water Suburban and other producers can
pump from this basin without paying an additional charge. There is no
assurance that the current allowable pumping level will continue in the future.
Water supplied by Suburban is 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"), and by the Office of Drinking
Water of the California Department of Health Services (the "Health Department")
acting pursuant to the California Safe Drinking Water Act (the "Cal Act"). The
US Act provides for 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 such as Suburban and which set MCLS for numerous
contaminants. These include: (a) 1991 EPA proposed regulations relating to
permissible levels of radionuclides (including radon), (b) 1991 final EPA
regulations governing lead and copper and mandating corrosion control studies
and sampling and (c) regulations, which became final in 1993, relating to
permissible levels of volatile organic compounds ("VOCs"), herbicides,
pesticides and inorganic parameters.
Suburban's water quality assurance department regularly monitors and samples
the quality of water being distributed. The corrosion control studies related
to sampling included in the lead and copper regulations were not required to be
conducted by Suburban because of acceptable water quality parameters. Samples
of water from throughout Suburban's system are tested regularly by independent,
state-certified laboratories for bacterial contamination, chemical contaminant
content and for the presence of pollutants and contaminants for which MCLS have
been promulgated. In addition, sampling and testing for certain pollutants such
as VOCs is conducted by independent engineers retained by the Boards of the
Central Basin and the Main San Gabriel Basin. The results of such sampling and
testing are made available to all producers, with the cost of such sampling and
testing covered by Board assessments to the producers, including Suburban.
Testing, sampling and inspections are conducted at the intervals, locations and
frequencies required by EPA and Health Department regulations.
Water supplied by Suburban meets all current requirements of the US Act, the
Cal Act and the regulations promulgated under such legislation, and Suburban
anticipates no significant capital expenditures to comply with current
requirements. There can be no assurance, however, that water supplied by
Suburban will meet future EPA or Health Department requirements or that such
requirements will not require capital expenditures by Suburban. Chlorination is
currently performed only to provide a chlorine residual required by the Health
Department.
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In late 1979, VOCs were discovered in the Main San Gabriel Basin.
Subsequently, underground water sampling resulted in the discovery of four large
areas of groundwater VOC contamination. The areas include Suburban's Bartolo
Well Field, which contains four of Suburban's producing wells and from which
Suburban produces approximately 25% of its total water production. In 1984,
these areas were designated as "Superfund" sites eligible for funding under the
Federal Superfund program. Most of the contamination located in the Main San
Gabriel Basin was found in the cities of Baldwin Park and El Monte, areas not
within Suburban's service areas. Costs associated with resolving past problems
affecting Suburban have been minimal and the CPUC has allowed Suburban to pass
such costs on to its customers. Suburban has experienced no shortage of water
sources as the result of these problems and there has been no material adverse
effect on the financial condition of Suburban to date.
Between 1984 and 1991, the EPA conducted numerous studies of underground water
in the Main San Gabriel Basin (including the Bartolo Well Field). The Main San
Gabriel Basin represents the source of approximately 70% of Suburban's total
water supply and is the main source of supply for the Whittier/La Mirada Service
Area. The actual amount of water pumped from the Main San Gabriel Basin is
dependent upon various factors including the amount of water available.
Separately, Suburban conducted similar studies and developed a design for a
facility to remove VOCs from water pumped from the Bartolo Well Field at a rate
of 10,000 gallons per minute, thus assuring Suburban an adequate potable water
supply. The EPA reviewed Suburban's proposal and assumed responsibility for
creating and developing a treatment facility. The EPA anticipated that it would
begin operating such a plant in mid-1992; numerous delays have substantially
extended this schedule. The EPA is currently evaluating relative contamination
levels in the Bartolo Well Field compared to other Superfund sites, and Suburban
does not know if an EPA treatment facility will be constructed. The EPA is also
attempting to identify parties in the Main San Gabriel Basin who are responsible
as sources of VOC contamination. The EPA has named as potentially responsible
parties ("PRPs") a few large industrial companies that allegedly caused the
contamination. Suburban's facilities are not sources of VOCs or other
contamination in any portion of the Main San Gabriel Basin (i.e., Suburban's
operations do not discharge VOCs into the ground or groundwater). It is
expected that the EPA will continue for several years to identify these sources
of contamination in order to establish legal responsibility for clean-up costs.
Currently, neither the EPA nor any governmental agency has targeted Suburban or
other water producers as PRPs.
To date, water produced from the Bartolo Well Field and other wells maintained
by Suburban in the Main San Gabriel Basin meets all applicable governmental
requirements. The treatment proposed by the EPA, and other measures taken by or
available to Suburban, are intended to ensure that Suburban continues to have an
adequate supply of water which meets all applicable governmental standards.
While technology exists to remove VOC contaminants from basin water, there can
be no assurance that either (i) such technology will in the future be adequate
to reduce the amounts of VOCs and other contaminants in water produced by
Suburban in the Main San Gabriel Basin to acceptable levels or (ii) the costs of
such removal will be fully recoverable from Suburban's customers. To date,
Suburban has been permitted to recover all expenses associated with water
quality maintenance.
Some commentators have suggested that the Main San Gabriel Basin water
producers have clean-up liability with respect to contaminants in the Main San
Gabriel Basin under applicable environmental statutes on various theories by
virtue of their pumping operations. Certain PRPs (i.e., alleged source
dischargers of VOCs) have espoused this view, however, water producers have
rejected any validity of these theories. Suburban is not aware of any
governmental or court decision which resolves this issue, and no governmental
authority, including the EPA, is currently seeking to recover any clean-up costs
from the Main San Gabriel Basin water producers. Instead, as described above,
the EPA is focusing on a few large industrial companies. In the cities of
Baldwin Park and El Monte, these industrial companies are working with their
water producers to build treatment facilities.
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Suburban believes that the combined efforts of the responsible parties and the
water producers will ultimately result in cleaning up portions of the Main San
Gabriel Basin, providing benefits to all water producers.
There can be no assurance that governmental authorities will not seek in the
future to recover clean-up costs from Suburban or that source polluters will not
seek contribution from water producers for clean-up costs which they may be
required to pay. If Suburban is required to pay any such clean-up costs,
Suburban will seek to recover such costs, and costs incurred in removing
contaminants from water produced, through increased rates to its customers as
has been permitted by the CPUC in the past. Moreover, there are over 100 water
producers in the Main San Gabriel Basin and Registrant believes that Suburban's
share of any clean up costs assessed against the producers would be only a
fraction of the total. Due to the potential recovery of the clean-up costs
through higher rates, the costs are not expected to have a material adverse
effect on Suburban's financial condition and results of operation.
Since 1984, Suburban has voluntarily chosen to stop pumping water from 10
older, shallower and/or less efficient wells because of the presence of nitrates
and certain VOCs. These wells have been replaced by four new, deeper and more
efficient wells. In the past, Suburban has been successful in replacing lost
production capacity by shutting down certain old wells, by introducing new,
deeper wells and by blending water produced from different wells. However, no
assurance can be given that Suburban will be able to do so in the future.
During 1992, a statute (HR 1679) was passed by the State of California
establishing a Water Quality Authority (the "WQA") to clean up the water in the
Main San Gabriel Basin. Assessments are levied against those who own
prescriptive pumping rights in the Main San Gabriel Basin, including Suburban.
The amount of Suburban's annual assessment is approximately $348,000. To date,
Suburban has been permitted to recover all costs related to such water quality
maintenance and preservation. Pursuant to a contract with the WQA, Suburban
will operate a WQA constructed water treatment facility and the third party well
to which such facility is connected. Treated water from such facility will be
distributed to Suburban's customers in lieu of pumping from Suburban's wells.
There will be no additional cost to Suburban for operation of such treatment
facility, and operation by Suburban of the facility is expected to commence by
late 1995.
To date, Suburban has experienced no material effects upon its operations or
capital expenditures resulting from compliance with governmental regulations
relating to protection of the environment. Suburban believes that the water
available from its wells and other sources is and will continue to be sufficient
for it to adequately serve its customers.
Competition, Regulation and Future Development
Suburban operates under long-term franchises and certificates of indefinite
duration granted by the CPUC and other governmental authorities having
jurisdiction over water service. The success of Suburban's water service
business is dependent upon maintaining these franchises and certificates and
upon various contracts and governmental and court decisions affecting Suburban's
water rights and service areas. Suburban has no patents, trademarks or
licenses.
Under the CPUC's practices, rates may be increased by two methods: general
rate increases and offsets for certain expense increases. General rate
increases typically are for three years and include "step" increases in rates
for the second and third years. General rate increases are authorized after
formal proceedings in which the overall rate structure, expenses and rate base
(i.e., utility plant investment) of the service area are examined by CPUC staff,
and public hearings are held. Because of delays occasioned by the administrative
process required for approval of rate increases, Suburban must anticipate future
operating costs well in advance and regularly apply
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for rate increases. Formal general rate proceedings require approximately 12
months from the filing of an application to the authorization of new rates by
the CPUC. Rates are based on estimated expenses and capital costs for a forward
two-year period and are established for each of the two years based on these
estimates, as approved by the CPUC. A major feature of the proceedings is the
use of an attrition mechanism for setting rates for the third year of the three-
year rate period by assuming that costs and expenses will increase in the same
proportion over the second year as the increase projected for the second year
over the first. The step rate increases for the second and third years are
allowed to compensate for the projected cost increases, but are subject to later
demonstration that earnings levels in the service area do not exceed the rate of
return authorized at the general rate proceeding. Suburban anticipates filing a
general rate increase application with the CPUC in 1995. The general rate
increase, if filed and approved, would be effective early in 1996. Suburban
expects to file a joint general rate application covering both of its service
areas based upon recent suggestions by the CPUC.
Rate increases to offset increases in certain expenses such as cost of
purchased water and energy costs to pump water are accomplished through an
abbreviated "offset" proceeding that requires approximately two months from the
time of filing a request for rate increases to the authorization of new rates.
Effective January 1, 1994, the CPUC granted Suburban two annual "step"
adjustments for its San Jose Hills and Whittier/La Mirada District customers.
Effective January 1, 1995, the CPUC granted Suburban an annual "step" adjustment
for its Whittier/La Mirada District customers. Suburban has been, and believes
that it will continue to be, permitted to increase its rates as necessary to
achieve a reasonable rate of return. However, any inability to do so will
adversely affect Suburban's results of operations.
During 1993, Suburban elected to record production cost balancing accounts due
to increased variability in the costs of water. As permitted by the CPUC,
Suburban records the difference between actual and CPUC-adopted production costs
in balancing accounts in the income statement, with a corresponding liability or
asset on the balance sheet, until the differences are refunded to or recovered
from utility customers through CPUC-authorized rate adjustments. The production
cost balancing accounts include such items as purchased water, production
assessments and power costs.
In recent years, Suburban's growth has been limited to minor extensions into
new subdivisions along the periphery of its service areas. Further material
expansion of Suburban's service areas is believed to be unlikely, since
Suburban's service areas are largely surrounded by those of other water
purveyors. Because there is little area available for new business and
industrial construction and because of recent low levels of residential growth,
no significant increases in business and industrial customers are projected for
the near future.
The laws of the State of California provide that no public agency can install
facilities within the service area of a public utility in order to compete with
it, except upon payment of just compensation for all damages incurred by the
public utility. Under California law, municipalities and certain other public
bodies have the right to acquire private water utility plants and systems within
their territorial limits by condemnation after proof of necessity is shown.
Registrant is not aware of any impending proceeding relating to the condemnation
of any portion of Suburban's facilities.
The water utility business requires substantial amounts of capital for the
construction, extension and replacement of water distribution facilities. This
capital is generated from Suburban's operations; from periodic debt financings
by Suburban; from contributions in aid of construction received from developers,
governmental agencies, municipalities or individuals; and from advances (i.e.,
loans) from developers which are repaid in accordance with a formula prescribed
by the CPUC. During 1994 and 1993, capital expenditures approximated $3,647,000
and $4,876,000, respectively. Suburban may draw upon two revolving lines of
credit of the Registrant which Registrant believes are sufficient for Suburban's
anticipated short-term needs. If necessary, and
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subject to its availability and approval by the CPUC, long-term financing is
arranged to fund capital expenditures. Registrant conducts no significant
research and development activities.
Employees
At December 31, 1994, Suburban had a total of 98 full-time employees at
Suburban's offices in Covina, La Puente and La Mirada, California. None of
Suburban's employees is a member of a union. Suburban considers its relations
with its employees to be satisfactory.
NEW MEXICO UTILITIES, INC.
Product and Business
In 1969, Suburban purchased NMU. On June 1, 1987, the New Mexico Public
Utility Commission ("NMPUC") authorized Suburban to transfer by stock dividend
all of the stock of NMU to the Registrant and, effective on that date, NMU
became a wholly owned subsidiary of the Registrant. NMU is a New Mexico public
water utility engaged in the business of producing and supplying water for
residential, commercial, irrigation and private fire protection customers under
the jurisdiction of the NMPUC. It also provides sewage collection in its
service area, located in the northwest part of the City of Albuquerque and in
the northern portion of Bernalillo County, New Mexico.
Since 1969, NMU has grown from approximately 800 water customers to
approximately 3,375 water customers. Most growth has come from extension of
water and sewer services into new residential subdivisions and the development
of commercial property. NMU has adequate capacity to service its current
customers.
NMU provides water and sewer services in one general service area, designated
as the NMU service area. This area contains a population of approximately 11,000
persons who are served through various service connections to NMU's distribution
mains and collector lines. The service area covers approximately 17 square
miles, of which approximately 19% has been developed. The developed area is
predominantly residential.
At December 31, 1994, NMU provided water service to 3,375 customers including
3,057 residential customers, 291 commercial and industrial customers, one golf
course with five service connections and 22 private fire protection customers.
NMU also provided sewer collection service at December 31, 1994, to 3,121
customers including 2,942 residential customers and 179 commercial and
industrial customers. During 1994, NMU's operating revenues were 45% from sales
to residential customers and 55% from sales to commercial and industrial
customers. There are no individual customers whose loss would have a material
adverse effect on Registrant's operations. NMU's water operation is subject to
material fluctuations from seasonal temperature and rainfall variations. As a
result, most of NMU's revenue is obtained during the summer months of each year.
The sewer operation revenues remain relatively constant throughout the year.
Wells and Other Water Sources
NMU supplies its customers from three wells which are owned by NMU. An
additional well was constructed in 1994, which will be equipped and operational
in the spring of 1995. A new, two-million gallon water storage reservoir will be
constructed at this new well site in 1995. The total estimated cost of the well
and reservoir is approximately $2,335,000. As customer growth continues in NMU's
service area, NMU may have to increase its water supply capability through
additional well construction. To ensure the availability of an emergency supply
of water, NMU has one interconnection with another water purveyor which can be
used only as an
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emergency source of supply for part of the developed area.
NMU's wells produce water from the Rio Grande Underground Water Basin. Well
water produced by NMU is of good quality. Chlorination is performed by NMU to
provide an allowable chlorine residual as a safeguard against bacteriological
contamination. Samples of water from throughout the system are tested regularly
by independent, state-certified laboratories, and the results are sent to the
State of New Mexico Environmental Improvement Division. To date, NMU has
experienced no material effects upon its operations or capital expenditures
resulting from compliance with governmental regulations relating to protection
of the environment.
Competition, Regulation and Future Development
NMU operates under a Certificate of Public Convenience and Necessity granted
by the NMPUC and is regulated by other state and local governmental authorities
having jurisdiction over water and wastewater service and other aspects of its
business. NMU has no patents, trademarks or licenses.
Requests for rate increases may be submitted to the NMPUC as required, with
the test year typically being the last year's actual results. NMU has been,
and, although no assurance can be given, believes that it will continue to be,
permitted to increase its rates as necessary to offset its operating costs and
achieve a reasonable rate of return. NMU anticipates filing a general sewer
rate increase application in 1995, with new rates effective early in 1996.
Since 1969, NMU has grown in customers, utility plant and its capacity to
service its customers. Because there is a large area available for residential,
commercial and industrial development and because of recent increased levels of
activity in the area, increases in residential and commercial customers are
projected for the near future. It should be noted, however, that as the City of
Albuquerque (the "City") has expanded to the northwest, it has annexed most of
NMU's service area. NMU has to date continued to serve the customers located in
the annexed areas. Certain representatives of the City have indicated on a
continuing basis over a number of years that the City may have an interest in
acquiring NMU's assets and merging them with water and sewer systems currently
operated by the City. To date, no formal action has commenced or been approved
by the City, and NMU does not know when or if such action will be taken by the
City.
The laws of the State of New Mexico provide that no public agency can install
facilities within the service area of a public utility in order to compete with
it, except upon payment of just compensation for all damages incurred by the
public utility. Under New Mexico law, municipalities and certain other public
bodies have the right to acquire private water utility plants and systems within
their territorial limits by condemnation. NMU is not aware of any impending
proceeding relating to the condemnation of any portion of NMU's facilities.
NMU's operations are capital intensive. Capital for construction and
extension of water distribution facilities is provided from operations, from
Registrant, from contributions in aid of construction and from advances from
developers. Advances from developers are repaid under the main line extension
rules as promulgated by the NMPUC. During 1994 and 1993, capital expenditures
approximated $4,295,000 and $927,000, respectively. NMU may draw upon its own
$2,500,000 line of credit or may draw upon two revolving lines of credit of
Registrant. Registrant believes these lines of credit are sufficient for NMU's
short-term anticipated needs. NMU conducts no significant research and
development activities.
8
<PAGE>
Employees
NMU employs 12 individuals at the NMU office which is located in NMU's service
area. None of NMU's employees is a member of a union. NMU considers its
relations with its employees to be satisfactory.
ECO RESOURCES, INC.
Product and Business
On September 30, 1985, the Registrant purchased all of the outstanding common
shares of ECO, a Texas corporation headquartered in the Houston, Texas,
metropolitan area. ECO is engaged in providing management and operating
services to 79 active governmental and quasi-governmental districts which
operate water and wastewater treatment systems in the greater Houston, Texas,
area. At December 31, 1994, these systems served 52,286 water and wastewater
service connections. ECO also performs associated specialized services for the
districts, including equipment maintenance and repair, sewer pipeline cleaning,
billing and collection, and state-certified laboratory analysis.
In addition, ECO operates water distribution systems and wastewater collection
systems under contracts with six cities and water districts in Mississippi.
These systems served 29,178 water service connections and 27,617 wastewater
service connections at December 31, 1994. ECO also operates 23 water and
wastewater service systems in the Austin, Texas, area that served 14,294 water
service connections and 7,986 wastewater service connections at December 31,
1994. In 1994, ECO began operating a water and wastewater service system in the
Rio Grande area of Southern Texas, serving 3,353 water and wastewater service
connections at December 31, 1994. ECO is also engaged in providing operating
and maintenance services to six cities or private entities in California. ECO
served 6,400 water connections and 11,200 wastewater service connections in
California at December 31, 1994.
Assets held by ECO consist primarily of contracts with water and wastewater
districts, 245 vehicles and other equipment used in daily operations.
Competition, Regulation and Future Development
ECO operates in an unregulated and competitive market. On August 31, 1993,
ECO purchased all of the common stock of SMS, a competitor in the contract
operations and maintenance services market in the greater Houston, Texas, area.
There is one company in the Houston area that is a significant competitor to ECO
and five smaller companies that compete with ECO. There are also four larger
competitors that ECO may compete with on an occasional basis. Additionally,
there are a number of cities which operate their own water and wastewater
facilities. ECO intends to continue to operate in Texas, Mississippi and
California, and expand into other areas in the western, southwestern and
southeastern United States. ECO will attempt to expand such services to other
customers through competitive bidding and negotiated contracts. This expansion
may influence the Registrant's liquidity and may also affect the Registrant's
results of operations. ECO may draw upon two revolving lines of credit of the
Registrant. The Registrant believes these lines of credit are sufficient for
ECO's anticipated needs.
As the City of Houston and other surrounding cities develop, the water and
wastewater treatment facilities currently owned by municipal utility districts
and operated by ECO may be condemned by the cities and annexed to the cities'
water and wastewater systems. Moreover, all of the contracts with water and
wastewater municipal utility districts in the greater Houston, Texas, area and
the majority of contracts in the Austin, Texas, area are short-term contracts,
which are cancelable on either 30 or 60 days' notice by either party. ECO's
operating
9
<PAGE>
contracts with cities in Mississippi and California and certain contracts in
the Austin and Houston, Texas, areas tend to average three to five years in
duration and are generally cancelable only upon breach of contract by either
party. In 1994, two contracts were canceled for competitive reasons, two
contracts were canceled due to annexation and 12 new contracts were added.
ECO uses certain equipment and commodities in its daily operations, such as
chemicals and supplies, which are available in large supply from a number of
suppliers, and no significant amounts of such items are required to be carried
in inventory. Additionally, ECO's business in Texas is subject to material
fluctuations resulting in large measure from seasonal weather variations. ECO
holds no patents, trademarks, licenses, franchises or other intangible property
believed to be material to its operations. Clients of ECO are, as described
above, governmental and quasi-governmental districts, cities or private entities
which own water distribution, wastewater collection or wastewater treatment
systems. There is no single customer of ECO whose loss would have a material
adverse effect on Registrant's operations. ECO conducts no significant research
and development activities. To date, ECO has experienced no material adverse
effects upon its operations or capital expenditures resulting from compliance
with governmental regulations relating to protection of the environment.
Employees
ECO employs 314 individuals in management, operations, maintenance and
administrative positions. Except for 62 employees in Mississippi, 21 employees
in the Rio Grande area of Texas and 23 employees in California, all employees
are employed at the offices of ECO in the greater Houston and Austin, Texas,
areas. None of its employees is a member of a union. ECO considers its
relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
SUBURBAN WATER SYSTEMS
Throughout its service areas, Suburban owns and operates water production and
distribution systems consisting of well pumping plants, booster pumping
stations, reservoir storage facilities, transmission and distribution mains, and
service connections to individual customers. In its service areas, Suburban
also has rights-of-way or easements necessary to provide its water services. At
December 31, 1994, Suburban owned approximately 704 miles of transmission and
distribution mains, 26 storage reservoirs with a total capacity of approximately
53 million gallons and 18 wells with a total pumping capacity of approximately
31,000 gallons per minute. These facilities vary as to age and quality, but
each is believed by Suburban to be adequate for current operations and in good
condition. Suburban is currently revising its master plan which evaluates the
adequacy of system operations. In accordance with this master plan, Suburban
will continue its capital expenditure program and construct and replace
reservoirs, wells, and transmission and distribution lines in future years, as
needed.
Normal maintenance and construction work on these facilities is performed by
employees of Suburban, and major construction projects are performed by outside
contractors chosen through competitive bidding. Ongoing maintenance and repair
is performed by Suburban and constitutes a significant portion of its expenses
($1,365,000 in 1994).
Virtually all property of Suburban, other than 11.4 acres of vacant land in La
Puente, California, is subject to the lien of an Indenture of Mortgage and Deed
of Trust dated October 1, 1986 (the "Indenture"), as amended February 7, 1990,
and January 24, 1992, securing Suburban's first mortgage bonds. The Indenture
contains certain restrictions regarding the disposition of property and includes
various covenants and restrictions common
10
<PAGE>
to such types of instruments, including limitations on the amount of cash
dividends which Suburban may pay to the Registrant. See Notes 3 and 6 of Notes
to Consolidated Financial Statements in the Registrant's 1994 Annual Report to
Stockholders, which information is hereby incorporated by reference.
Suburban's headquarters are located in Covina, California. Suburban is
leasing an office building of approximately 14,600 square feet. These
administrative offices are adequate for Suburban's headquarters. During 1988,
Suburban established a district office in La Mirada of approximately 3,300
square feet to handle customer service activities. This office is in a building
owned by Suburban and is believed to be adequate for the Whittier/La Mirada
district office operations. In January 1990, Suburban established a district
office in La Puente of approximately 3,600 square feet to handle customer
service activities. The office is in a building owned by Suburban and is
believed to be adequate for the San Jose Hills district office operations.
Suburban leases most of its vehicles. Maintenance of such vehicles is
performed by outside service garages. Each vehicle used in field or service
operations is equipped with two-way radio equipment owned by Suburban. A wholly
owned subsidiary of Suburban, Water Suppliers Mobile Communication Service,
leases and operates the base station and various other facilities necessary for
the operation of the two-way radio communication system.
NEW MEXICO UTILITIES, INC.
NMU owns and operates a water production and distribution system consisting of
well pumping plants, reservoir storage facilities, booster pumping stations,
transmission and distribution mains, and service connections to individual
customers. At December 31, 1994, NMU owned approximately 80 miles of
transmission and distribution mains and two storage reservoirs with a total
capacity in excess of five million gallons. The three wells operated by NMU
have a total pumping capacity in excess of 5,325 gallons per minute. In
addition, NMU owns and operates a sewer collection system consisting of one lift
station and approximately 64 miles of interceptor and collector lines. These
facilities vary as to age, and each is believed by NMU to be adequate for
current and foreseeable operations. Normal maintenance and construction work on
these facilities is performed by employees of NMU or outside contractors.
Maintenance and repair expenses approximated $138,000 in 1994. NMU also holds
rights-of-way or easements in its service area necessary for its water and sewer
services.
Virtually all of NMU's property is subject to the lien of an Indenture of
Mortgage dated February 14, 1992, securing NMU's first mortgage bonds. The
bonds are subject to certain restrictions regarding the disposition of such
property, and include various covenants and other restrictions, including
limitations on the amount of cash dividends which NMU may pay to the Registrant.
See Notes 3 and 6 of Notes to Consolidated Financial Statements in the
Registrant's 1994 Annual Report to Stockholders, which information is hereby
incorporated by reference.
NMU's administrative office, operating and system control headquarters are all
located in one building which is leased by NMU. NMU owns a warehouse building
of approximately 2,400 square feet that houses NMU's field supplies and
equipment. NMU believes these facilities are adequate for the operation of its
business. NMU owns its vehicles, and vehicle maintenance is performed by
outside service garages. All vehicles used in the field are equipped with two-
way radios owned by NMU.
11
<PAGE>
ECO RESOURCES, INC.
ECO leases approximately 34,000 square feet of office, warehouse and lab space
in eight facilities in the greater Houston, Texas, area; the Rio Grande, Texas,
area; Mississippi; and California. In 1987, the Registrant purchased the land
(4.3 acres) and building (17,000 square feet) that houses ECO's fleet and
maintenance department in the Houston, Texas, area. During 1993, ECO purchased
land (10 acres) and a building (10,000 square feet) in Austin, Texas. This
facility houses ECO's office and fleet and maintenance department that serves
the Austin, Texas, area. These facilities are believed to be adequate for the
conduct of its business. ECO owns 245 vehicles and other equipment which are
used in daily operations. Maintenance on these vehicles is performed by
personnel employed by ECO, or by outside service garages.
ITEM 3. LEGAL PROCEEDINGS
As described in Registrant's Form 10-K Reports for the years ended December
31, 1992 and 1993, in its Form 8-K Report filed in January 1994, and its Form
10-Q Reports filed March 31, June 30, and September 30, 1994, 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 also authorized
by the CPUC to seek recovery of defense expenses through future rate
proceedings. 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-Q Reports filed March 31, June 30,
and September 30, 1994, 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 additionally 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
12
<PAGE>
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.
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-Q Reports filed June 30, 1994, and
September 30, 1994, ECO and Southbend Municipal Utility District (Southbend)
were named as defendants in a lawsuit filed on February 15, 1993, in Harris
County, Texas, by a homeowner customer. The plaintiffs alleged that ECO, as an
independent contractor for Southbend in Houston, Texas, failed to adequately
test the water delivered to residents to detect contaminants that would cause
harm to persons in the Southbend subdivision. Plaintiffs also alleged physical
and mental personal injuries resulting from defendants' alleged negligence. ECO
vigorously defended the case and defense counsel discovered facts indicating
that the action was barred by res judicata resulting from a settlement in an
earlier similar action. Such counsel made an appropriate demand upon plaintiffs
and, on January 13, 1995, the plaintiffs filed a motion requesting dismissal of
this action against ECO. Such motion was granted without prejudice as to all
plaintiffs on January 20, 1995. As a result, the Registrant believes the
ultimate resolution of this matter will not have a material adverse effect on
its consolidated financial condition or its results of operations. A second
independent lawsuit by another Southbend customer was filed in March 1993 with
substantially the same allegations as to ECO's performance. No specific damages
were claimed in that action. The Registrant applied the successful defense
strategy used in the first litigation to this second litigation. In March 1995,
the plaintiffs filed a motion for non-suit of all plaintiffs' claims against ECO
which, if granted, will result in a dismissal of this action as to ECO. 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 of the dates of the alleged damages, the Registrant and ECO
maintained liability insurance coverage of $20 million. ECO's primary liability
carrier is providing a defense for these lawsuits.
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.
The two actions have been consolidated for all purposes and allege causes of
action for strict liability, negligence, nuisance, willful and negligent
trespass and intentional and negligent interference with prospective economic
advantage. Damages are unspecified as to amount and, in addition, the
plaintiffs request unspecified punitive damages and injunctive relief. As
against Suburban, the plaintiffs allege improper construction of a water line
maintained by Suburban in an easement on the failed slope, damage from breakage
of the line in 1978 and improper repair of the slope after the 1978 slope
failure. Certain of the defendants have also cross-complained against Suburban
for indemnity and contribution.
13
<PAGE>
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.
In June 1994, the Registrant received a written request for information 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 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.
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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant are elected each year by the Board of
Directors at its first meeting following the Annual Meeting of Stockholders, to
serve during the ensuing year and until their respective successors are elected
and qualify. There are no family relationships between any of the executive
officers of the Registrant, nor are there any agreements or understandings
between any such officer and another person pursuant to which he or she was
elected an officer. There are no legal proceedings involving any executive
officer of the types required to be disclosed pursuant to the instructions to
this item. The executive officers of the Registrant and its subsidiaries are as
follows:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES CURRENTLY HELD
NAME AGE AND BUSINESS EXPERIENCE DATE ELECTED
---- --- ----------------------- ------------
<C> <C> <S> <C>
Anton C. Garnier 54 Chief Executive Officer of Registrant and Suburban May 1992
President of Registrant and Suburban November 1968
Diane Castello Pitts 39 Corporate Controller of Registrant May 1988
Treasurer of Registrant May 1990
Director of Suburban and ECO May 1993
Secretary of Registrant, Suburban and ECO December 1994
James E. Furman 57 President and Chief Executive Officer of ECO April 1992
Director of ECO May 1993
President of various operating units
of Baker-Hughes, Inc. 1977 - 1992
Michael O. Quinn 48 Chief Operating Officer of Suburban April 1992
Director of Suburban May 1993
President of ECO October 1985 -
April 1992
Robert L. Swartwout 53 President and General Manager of NMU March 1992
Director of NMU May 1993
Consulting Associate, Robert Witter &
Associates, Inc. 1985 - 1992
</TABLE>
15
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information with respect to the market for and number of holders of the
Registrant's common shares and quarterly market and dividend information is set
forth under the caption "Market and Dividend Information" in the Registrant's
1994 Annual Report to Stockholders and is hereby incorporated by reference.
Portions of such Report are included as Exhibit 13.1 to this filing. The number
of holders of record of the Registrant's Common Shares was computed by a count
of record holders as of December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
The information included under the caption "Selected Financial Data" of the
Registrant's 1994 Annual Report to Stockholders is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Registrant incorporates by reference the information set forth under the
caption "Management's Discussion and Analysis" in the Registrant's 1994 Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated balance sheets indicating the financial position of the
Registrant at December 31, 1994 and 1993, and consolidated financial statements
reflecting the results of its operations and changes in its cash flows for the
three-year period ended December 31, 1994, together with the notes thereto and
the report thereon of KPMG Peat Marwick LLP, independent auditors, as well as
selected quarterly financial information under the caption "Unaudited Quarterly
Financial Information," are contained in the Registrant's 1994 Annual Report to
Stockholders, which statements, notes and report are hereby incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Registrant is set forth in the
Registrant's definitive Proxy Statement, dated March 20, 1995, and filed with
the Commission, under the captions "Proposal 1: Election of Directors" and
"Information Regarding the Board of Directors," and is hereby incorporated by
reference.
Information relating to the executive officers of the Registrant appears in
Item 4A of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to management remuneration is contained in the
Registrant's definitive Proxy Statement, dated March 20, 1995, and filed with
the Commission, under the captions "Executive Compensation and Other
Information" and "Information Regarding the Board of Directors," and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to beneficial ownership of the Registrant's voting
securities by each director and by all officers and directors as a group, and by
any person known to beneficially own five percent or more of any class of voting
security of the Registrant, is set forth in the Registrant's definitive Proxy
Statement, dated March 20, 1995, and filed with the Commission, under the
caption "Beneficial Ownership of the Company's Securities," and is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
set forth in the Registrant's definitive Proxy Statement, dated March 20, 1995,
and filed with the Commission, under the caption "Executive Compensation and
Other Information," and is hereby incorporated by reference.
17
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements listed below are incorporated from
Registrant's 1994 Annual Report to Stockholders included as Exhibit
13.1 to this filing:
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Changes in Common Stockholders'
Equity for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The supplementary financial statement schedules required to be filed
with this report are as follows:
Page
----
Independent Auditors' Report on Supplementary
Note to Consolidated Financial Statements and
supporting schedule..................................... 19
Supplementary Note to Consolidated Financial Statements... 20
Schedule VIII - Valuation and Qualifying Accounts......... 21
Schedules not listed above are omitted because of the absence of
conditions under which they are required, or because the information
required by such omitted schedules is included in the financial
statements or notes thereto.
(a)(3) Exhibit Index.................................................. 22-24
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1994.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Southwest Water Company:
Under date of January 23, 1995, we reported on the consolidated balance sheets
of Southwest Water Company and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, changes in common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1994, as contained in the 1994 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1994. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related supplementary note and
financial statement schedule as listed in the accompanying index. The
supplementary note and financial statement schedule is the responsibility of the
Registrant's management. Our responsibility is to express an opinion on the
supplementary note and financial statement schedule based on our audits.
In our opinion, such supplementary note and financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1995
19
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SUPPLEMENTARY NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 14. OPERATING REVENUES AND DIRECT OPERATING EXPENSES
Included in operating revenues and direct operating expenses are the following:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -------------
<S> <C> <C> <C>
Utility operating revenues $ 30,112,000 $ 29,304,000 $ 27,002,000
Other operating revenues 20,820,000 18,914,000 17,480,000
------------------------------------------------------------
Total operating revenues $ 50,932,000 $ 48,218,000 $ 44,482,000
============================================================
Utility direct operating expenses $ 18,687,000 $ 18,224,000 $ 16,123,000
Other direct operating expenses 20,131,000 17,737,000 15,543,000
------------------------------------------------------------
Total direct operating expenses $ 38,818,000 $ 35,961,000 $ 31,666,000
============================================================
</TABLE>
20
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
BALANCE PROVISION DEDUCTIONS - BALANCE
AT BEGINNING CHARGED ACCOUNTS AT END
OF YEAR TO INCOME WRITTEN OFF OF YEAR
------------ --------- ------------ --------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts $ 110,000 $ 207,000 $ (176,000) $ 141,000
=====================================================================
1993
Allowance for doubtful accounts $ 116,000 $ 208,000 $ (214,000) $ 110,000
=====================================================================
Other reserves $ 358,000 $ 250,000 $ (608,000) $ -
=====================================================================
1992
Allowance for doubtful accounts $ 140,000 $ 132,000 $ (156,000) $ 116,000
=====================================================================
Other reserves $ 300,000 $ 86,000 $ (28,000) $ 358,000
=====================================================================
</TABLE>
21
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. and
Applicable Section
of Item 601 of
Regulation S-K
-------------------
<C> <S>
2 Agreement and Plan of Merger of Registrant dated May 25, 1988 (incorporated by reference to Exhibit 2 to
Registrant's Form 10-K Report for the year ended December 31, 1988).
3.1 Registrant's Restated Certificate of Incorporation dated April 4, 1988 (incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988).
3.2 Registrant's Bylaws as amended April 4, 1988 (incorporated by reference to Exhibit 3.2 to Registrant's
Form 8-B Report filed with the Commission on July 5, 1988).
3.2A Amendment to Registrant's Bylaws dated March 15, 1991 (incorporated by reference to Exhibit 3.2A to
Registrant's Form 10-K Report for the year ended December 31, 1990).
4.1 Indenture dated as of August 15, 1975, between Registrant and Bank of America, formerly Security Pacific
National Bank (incorporated by reference to Exhibit 6(g) to Registrant's Form S-14 Registration Statement
filed with the Commission on June 19, 1975).
4.2 Indenture of Mortgage and Deed of Trust dated October 1, 1986, between Suburban Water Systems and Bank of
America, formerly Security Pacific National Bank (incorporated by reference to Exhibit 4.3 to
Registrant's Form 10-K Report for the year ended December 31, 1986).
4.2A First Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems
and Bank of America, formerly Security Pacific National Bank, dated February 7, 1990 (incorporated by
reference to Exhibit 4.2A to Registrant's Form 10-K Report for the year ended December 31, 1989).
4.2B Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems
and Bank of America, formerly Security Pacific National Bank, dated January 24, 1992 (incorporated by
reference to Exhibit 4.2B to Registrant's Form 10-K Report for the year ended December 31, 1991).
4.3 Bond Purchase Agreement dated October 1, 1986, for Suburban Water Systems (incorporated by reference to
Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1986).
4.3A Bond Purchase Agreement dated February 20, 1992, for Suburban Water Systems (incorporated by reference to
Exhibit 4.3A to Registrant's Form 10-K Report for the year ended December 31, 1991).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. and
Applicable Section
of Item 601 of
Regulation S-K
------------------
<C> <S>
4.4 Indenture of Mortgage dated February 14, 1992, between New Mexico Utilities, Inc., and Sunwest Bank of
Albuquerque (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year
ended December 31, 1991).
4.5 Bond Purchase Agreement dated March 12, 1992, for New Mexico Utilities, Inc. (incorporated by reference
to Exhibit 4.5 to Registrant's Form 10-K Report for the year ended December 31, 1991).
4.6 Article Fourth of the Restated Certificate of Incorporation of the Registrant as to the rights,
preferences, privileges and restrictions of all classes of stock (incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988.)
10.1 Thirteenth Amendment to the Utility Employees' Retirement Plan dated December 31, 1989 (incorporated
by reference to Exhibit 10.16 to Registrant's Form 10-K Report for the year ended December 31, 1990).
10.2 Amended and Restated Employee Qualified Stock Purchase Plan dated November 11, 1991 (incorporated
by reference to Exhibit 10.7 to Registrant's Form 10-Q Report for the quarter ended September 30, 1991).
10.3 Dividend Reinvestment and Stock Purchase Plan dated December 1, 1992 (incorporated by reference to
Registrant's Form S-3 Registration Statement filed with the Commission on December 1, 1992).
10.4 Line of Credit Agreement dated December 2, 1992, between Registrant and Wells Fargo Bank (incorporated
by reference to Exhibit 10.6 to Registrant's Form 10-K Report for the year ended December 31, 1992).
10.4A First Amendment to Credit Agreement dated December 1, 1993, between Registrant and Wells Fargo Bank
(incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K Report for the year ended
December 31, 1993).
10.4B Second Amendment to Credit Agreement dated December 1, 1994, between Registrant and Wells Fargo Bank,
filed herewith.
10.5 Line of Credit Agreement dated December 2, 1992, between Registrant and First Interstate Bank of
California (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-K Report for the year ended
December 31, 1992).
10.5A First Amendment to Credit Agreement and Promissory Note dated July 29, 1993, between Registrant and First
Interstate Bank (incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K Report for the
year ended December 31, 1993).
10.5B Second Amendment to Credit Agreement and Promissory Note dated June 24, 1994, between Registrant and
First Interstate Bank (incorporated by reference to Exhibit 10.16 to Registrant's Form 10-Q Report for
the quarter ended June 30, 1994).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. and
Applicable Section
of Item 601 of
Regulation S-K
------------------
<C> <S>
10.6 Amended and Restated Stock Option and Restricted Stock Plan dated November 11, 1991, and First Amendment
to the Amended and Restated Stock Option and Restricted Stock Plan dated March 21, 1993 (incorporated by
reference to Registrant's Form S-8 Registration Statement filed with the Commission on December 21, 1993).
10.7 Stock Purchase Agreement and First Amendment to Stock Purchase Agreement dated August 13, 1993, between
ECO Resources, Inc., and Robert E. Hebert (incorporated by reference to Exhibit 10.11 to Registrant's
Form 10-K Report for the year ended December 31, 1993).
10.8 Utility Employees' 401(k) Plan dated January 7, 1994 (incorporated by reference to Exhibit 10.13 to
Registrant's Form 10-K Report for the year ended December 31, 1993).
10.8A Amendment One to Utility Employees' 401(k) Plan, filed herewith.
10.9 Comprehensive Amendment to the Profit-Sharing 401(k) Plan for the Southwest Water Company's Related
Companies dated March 10, 1994 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K
Report for the year ended December 31, 1993).
10.9A Amendment One to the Profit Sharing 401(k) Plan for the Southwest Water Company's Related Companies,
filed herewith.
10.10 Line of Credit Agreement dated January 25, 1995, between New Mexico Utilities, Inc. and Sunwest Bank of
Albuquerque, filed herewith.
13.1 Portions of Registrant's Annual Report to Stockholders for year ended December 31, 1994.
21.1 Listing of Registrant's subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
</TABLE>
24
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirement 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:
SOUTHWEST WATER COMPANY
February 21, 1995 By: /s/ ANTON C. GARNIER
--------------------------------
Anton C. Garnier
Director and President
(Principal Executive Officer)
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.
/s/ DIANE CASTELLO PITTS
------------------------------
Diane Castello Pitts, 2/21/95
Corporate Controller and Treasurer
(Principal Financial and Accounting Officer)
Directors:
----------
/s/ MICHAEL J. FASMAN /s/ DONOVAN D. HUENNEKENS
------------------------------ --------------------------------
Michael J. Fasman, 2/21/95 Donovan D. Huennekens, 2/21/95
Director Director
/s/ MONROE HARRIS /s/ RICHARD G. NEWMAN
------------------------------ --------------------------------
Monroe Harris, 2/21/95 Richard G. Newman, 2/21/95
Director Director
/s/ RICHARD KELTON
------------------------------
Richard Kelton, 2/21/95
Director
25
<PAGE>
EXHIBIT 10.4B
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of December 1, 1994, by and between SOUTHWEST WATER COMPANY, a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of December 2, 1992, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, the Credit Agreement is hereby amended as follows:
1. Section 1.1 shall be amended by deleting "December 1, 1994" as the last
day on which Bank will make advances under the Line of Credit, and by
substituting for said date "December 1, 1995," with such change to be effective
upon the execution and delivery to Bank of a promissory note substantially in
the form of Exhibit A attached hereto (which promissory note shall replace and
be deemed the Line of Credit Note defined in and made pursuant to the Credit
Agreement) and all other contracts,
<PAGE>
instruments and documents required by Bank to evidence such change.
2. Section 1.2(c) shall be deleted in its entirety, and the following
substituted therefor:
"(c) Commitment Fee. Borrower shall pay to Bank a non-refundable fee
--------------
for the Line of Credit equal to one-half percent (1/2%) per annum of
the daily unused balance of the Line of Credit, calculated on a
calendar quarter basis, which fee shall be due and debited to
Borrower's account not later than ten days after billing is sent by
Bank."
3. Section 5.8 shall be amended by deleting the letter (c)
and the following substituted therefor:
"(c) additional indebtedness for unsecured borrowings which do not
exceed $10,000,000.00 in the aggregate at any time for Borrower and
Subsidiaries combined,"
4. Except as specifically provided herein, all terms and
conditions of the Credit Agreement remain in full force and
effect, without waiver or modification. All terms defined in the
Credit Agreement shall have the same meaning when used in this
Amendment. This Amendment and the Credit Agreement shall be read
together, as one document.
5. Borrower hereby remakes all representations and
warranties contained in the Credit Agreement and reaffirms all
covenants set forth therein. Borrower further certifies that as
of the date of this Amendment there exists no Event of Default as
defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both
would constitute any such Event of Default.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first written
above.
WELLS FARGO BANK,
SOUTHWEST WATER COMPANY NATIONAL ASSOCIATION
By: /S/ ANTON C. GARNIER By: /S/ NANCY K. GOREY
Nancy K. Gorey
Title: PRESIDENT Vice President
By: /S/ DIANE CASTELLO PITTS
Title: CONTROLLER / TREASURER
-3-
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$5,000,000.00 El Monte, California
December 1, 1994
FOR VALUE RECEIVED, the undersigned Southwest Water Company ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at 9000 Flair Drive, El Monte, California, or at such other place
as the holder hereof may designate, in lawful money of the United States of
America and in immediately available funds, the principal sum of Five Million
Dollars ($5,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement (computed on the basis of a 360-day year, actual days
elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in
effect from time to time, or (ii) at a fixed rate per annum determined by Bank
to be one and thirty hundredths percent (1.30%) above the Money Market Funds
Rate in effect on the first day of the applicable Fixed Rate Term. When
interest is determined in relation to the Prime Rate, each change in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank. With respect to each Money Market Funds Rate interest
selection hereunder, Bank is hereby authorized to note the date, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.
A.DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1."Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under Federal or California statute or regulation.
2."Fixed Rate Term" means a period commencing on a Business Day and continuing
for thirty (30), ninety (90) or one hundred eighty (180) days, as designated by
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to the Money Market Funds Rate;
provided however, that no Fixed Rate Term may be selected for a principal amount
less than Five Hundred Thousand Dollars ($500,000.00); and provided further,
that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.
If any Fixed Rate Term would end on a day which is not a Business Day, then such
Fixed Rate Term shall be extended to the next succeeding Business Day.
-4-
<PAGE>
3."Money Market Funds Rate" means the rate per annum which Bank estimates and
quotes to its borrowers as the rate, adjusted for reserve requirements, federal
deposit insurance and any other amount which Bank deems appropriate, at which
funds in the amount of a loan and for a period of time comparable to the term of
such loan are available for purchase in the money market on the date such loan
is made, with the understanding that the Money Market Funds Rate is Bank's
estimate only and that Bank is under no obligation to actually purchase and/or
match funds for any transaction. This rate is not fixed by or related in any
way to any rate that Bank quotes or pays for deposits accepted through its
branch system.
4."Prime Rate" means at any time the rate of interest most recently announced
within Bank at its principal office in San Francisco as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
B.INTEREST:
1.Payment of Interest. Interest accrued on this Note shall be payable on the
-------------------
first day of each month, commencing January 1, 1995.
2.Selection of Interest Rate Options. At any time any portion of the
----------------------------------
outstanding principal balance of this Note bears interest determined in relation
to the Money Market Funds Rate, it may be continued by Borrower at the end of
the Fixed Rate Term applicable thereto so that it bears interest determined in
relation to the Prime Rate or in relation to the Money Market Funds Rate for a
new Fixed Rate Term designated by Borrower. At any time any portion of the
outstanding principal balance of this Note bears interest determined in relation
to the Prime Rate, Borrower may convert all or a portion thereof so that it
bears interest determined in relation to the Money Market Funds Rate for a Fixed
Rate Term designated by Borrower. At the time each advance is requested
hereunder or Borrower wishes to select the Money Market Funds Rate interest
option for all or a portion of the outstanding principal balance hereof, and at
the end of each Fixed Rate Term, Borrower shall give Bank notice specifying (a)
the interest rate option selected by Borrower, (b) the principal amount subject
thereto, and (c) if interest is to be determined in relation to the Money Market
Funds Rate, the length of the applicable Fixed Rate Term. Any such notice may
be given by telephone so long as, with respect to each selection by Borrower of
a Fixed Rate Term, Bank receives written confirmation from Borrower not later
than three (3) Business Days after such telephone notice is given. If no
specific designation of interest is made at the time any advance is requested
hereunder
-5-
<PAGE>
or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a
Prime Rate interest selection for such advance or the principal amount to which
such Fixed Rate Term applied.
3.Default Interest. From and after the maturity date of this Note, or such
----------------
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
C.BORROWING AND REPAYMENT:
1.Borrowing and Repayment. Borrower may from time to time during the term of
-----------------------
this Note borrow, partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of any document executed in connection with this Note; provided however,
that the total outstanding borrowings under this Note shall not at any time
exceed the principal amount stated above. The unpaid principal balance of this
obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on December 1, 1995.
2.Advances. Advances hereunder, to the total amount of the principal sum stated
--------
above, may be made by the holder at the written request of any two (2) of the
following: (a) Diane C. Pitts or Michael O. Quinn or Anton C. Garnier or Dan
Evans, acting together, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (b) any
person, with respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by any Borrower.
3.Application of Payments. Each payment made on this Note shall be credited
-----------------------
first, to any interest then due and second, to the outstanding principal balance
hereof. All payments credited to principal shall be applied first, to the
outstanding principal balance of this Note which bears interest determined in
relation to the Prime Rate, if any, and second, to the outstanding principal
balance of this Note which bears interest determined in
-6-
<PAGE>
relation to the Money Market Funds Rate, with such payments applied to the
oldest Fixed Rate Term first.
4.Prepayment.
----------
(a)Prime Rate. Borrower may prepay principal on any portion of this Note which
----------
bears interest determined in relation to the Prime Rate at any time, in any
amount and without penalty.
(b)Money Market Funds Rate. Borrower may prepay principal on any portion of
-----------------------
this Note which bears interest determined in relation to the Money Market Funds
Rate at any time and in the minimum amount of Five Hundred Thousand Dollars
($500,000.00); provided however, that if the outstanding principal balance of
such portion of this Note is less than said amount, the minimum prepayment
amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:
(i)Determine the amount of interest which would have accrued each month on the
---------
amount prepaid at the interest rate applicable to such amount had it remained
outstanding until the last day of the Fixed Rate Term applicable thereto.
(ii)Subtract from the amount determined in (i) above the amount of interest
--------
which would have accrued for the same month on the amount prepaid for the
remaining term of such Fixed Rate Term at the Money Market Funds Rate in effect
on the date of prepayment for new loans made for such term and in a principal
amount equal to the amount prepaid.
(iii)If the result obtained in (ii) for any month is greater than zero, discount
that difference by the Money Market Funds Rate used in (ii) above.
Each Borrower acknowledges that prepayment of such amount will result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum two percent (2.00%)
above the Prime Rate in
-7-
<PAGE>
effect from time to time (computed on the basis of a 360-day year, actual days
elapsed).
D.EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that
certain Credit Agreement between Borrower and Bank dated as of December 2, 1992,
as amended from time to time. Any default in the payment or performance of any
obligation, or any defined event of default, under said Credit Agreement shall
constitute an "Event of Default" under this Note.
E.MISCELLANEOUS:
1.Remedies. Upon the occurrence of any Event of Default, the holder of this
--------
Note, at the holder's option, may declare all sums of principal and interest
outstanding hereunder to be immediately due and payable without presentment,
demand, protest or notice of dishonor, all of which are expressly waived by each
Borrower, and the obligation, if any, of the holder to extend any further credit
hereunder shall immediately cease and terminate. Each Borrower shall pay to the
holder immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of the holder's in-house counsel),
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding relating to any Borrower.
2.Obligations Joint and Several. Should more than one person or entity sign
-----------------------------
this Note as a Borrower, the obligations of each such Borrower shall be joint
and several.
3.Governing Law. This Note shall be governed by and construed in accordance
-------------
with the laws of the State of California, except to the extent Bank has greater
rights or remedies under Federal law, whether as a national bank or otherwise,
in which case such choice of California law shall not be deemed to deprive Bank
of any such rights and remedies as may be available under Federal law.
-8-
<PAGE>
SOUTHWEST WATER COMPANY
By: /S/ ANTON C. GARNIER
Title: PRESIDENT
By: /S/ DIANE CASTELLO PITTS
Title: CONTROLLER / TREASURER
-9-
<PAGE>
EXHIBIT 10.8A
CORPORATEplan for Retirement/SM/
Profit Sharing/401(k) Plan
Fidelity Basic Plan Document No. 07
Amendment One
Section 2.01(a) (7) "Compensation" is amended to include:
----------------------------------
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each Employee
taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with section 401(a) (17) (B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceeding 12
months, over which compensation is determined (determination period) beginning
in such calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation will be multiplied by a fraction, the
numerator of which is the number of months in the determination period, and the
denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in this
plan to the limitation under section 401(a) (17) of the Code shall mean the OBRA
'93 annual compensation limit set forth in this provision. Notwithstanding
2.01(a) (7) (A), for purpose of Section 4.02 (Additional Limit on Deferral
Contributions) and Section 4.04 (Limit on Matching Contributions), the Employer
may use Compensation as defined in section 5.03(e) (2) excluding reimbursements
or other expense allowances, fringe benefits (cash and non-cash), moving
expenses, deferred compensation and welfare benefits, but including amounts that
are not includable in the gross income of the Participant under a salary
reduction agreement by reason of the application of Section 125, 402(a) (8),
402(h) or 403(b) of the Code.
If compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current plan year, the
compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
first plan year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
Section 8.01(d) "Distribution of Benefits to Participants and Beneficiaries" is
----------------------------------------------------------------------------
amended to include:
(5) If a distribution is one to which sections 401(a) (11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less than 30
days after the notice required under section 1.411(a) - 11(c) of the Income Tax
Regulations is given, provided that:
(1) the administrator clearly informs the Participant that the
Participant has a
<PAGE>
right to a period of at least 30 days after receiving the notice to
consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
<PAGE>
ADDENDUM
to
CORPORATEplan for Retirement
THE PROFIT SHARING/401(K) PLAN
FIDELITY BASIC PLAN DOCUMENT No. 07
Re: Retroactive Effective Dates
This Addendum is intended to clarify and set forth the effective dates of
certain provisions of the Plan with respect to the adopting Employer. This
Addendum applies only to the extent that the Employer has not amended the Plan
with respect to the applicable provisions of the Tax Reform Act of 1986 ("TRA
'86"). Unless otherwise specifically provided by the terms of the Plan, this
amendment and restatement is effective with respect to each change made to
satisfy the provisions of (i) TRA '86, (ii) any other change in the Code or
ERISA, or (iii) regulations, rulings, or other published guidance issued under
the Code, ERISA, or TRA '86, the first day of the first period (which may or may
not be the first day of a Plan Year) with respect to which such change became
required because of such provision (including any day that became such as a
result of an election or waiver by an Employee or a waiver or exemption issued
under the Code, ERISA, or TRA '86), including, but not limited to, the
following:
(a) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1986, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable
exemption or waiver:
(1) Changes in the definition of Employee in Section 2.01(a)(10) to reflect
changes in the safe harbor exclusion for Leased Employees;
(2) Changes in the definition of Highly Compensated Employee in Section
2.01(a)(16);
(3) Addition of the aggregate deferral limit under Section 402(g) of the
Code in Section 4.01(c);
(4) Changes to the Code Section 401(k) discrimination test in Section 4.02;
(5) Addition of the Code Section 401(m) discrimination test and application
of the Aggregate Limit in Section 4.04;
(6) Compliance with the Code Section 414(s) compensation definition
requirements in Sections 5.03 and 9.03;
(7) Changes in the Participant Loan provisions in Section 7.09, if
applicable, to reflect new dollar limitations, repayment requirements,
and restrictions applicable to Highly Compensated Employees under
Section 72 (p) of the Code;
<PAGE>
(8) Changes in the definition of Key Employee in section 9.02(a); and
(9) Changes in the definition of Top-Heavy Ratio in section 9.02(c)(3) to
provide for ratable accrual.
(b) Changes in the 415 limitations in Section 5.03 as required by TRA '86 are
effective for limitation years beginning after December 31, 1986, unless a
delayed effective date applies because the Plan is collectively-bargained or
because of an applicable waiver or exemption; provided, however, that Annual
Additions shall not be recalculated to take into account all Employee
contributions for limitation years beginning before the effective date.
(c) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1987, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable waiver or
exemption:
(1) Changes required to provide that allocations shall not be decreased or
discontinued because of attainment of any age, if any; and
(2) Changes in the definition of Normal Retirement Age in Section 1.06(a),
if any, to reflect the five years of participation rule.
(d) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1988, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable
waiver or exemption:
(1) Changes in the vesting schedule specified in Section 1.07, if
applicable;
(2) Changes in the permitted disparity rules in Section 4.06(b)(2), if
applicable; and
(3) Changes in the requirements for electing a former vesting schedule in
Section 10.03, if applicable.
Notwithstanding the foregoing and subject to applicable law, with respect to
Plan Years beginning after December 31, 1986, and before the date of this
restatement of the Plan, the Employer may elect to operate the Plan in
accordance with any transitional rule published by the Internal Revenue Service
or a reasonable, good faith interpretation of TRA '86 and related applicable
law, in which event such transitional rule or good faith interpretation shall
prevail over the provisions in this restatement of the Plan with respect to such
Plan Year.
Each other change made under the Plan is effective as of the date specified in
Section 1.01(g) of the Adoption Agreement, unless otherwise specifically
provided by the terms of the Plan.
<PAGE>
EXHIBIT 10.9A
CORPORATEplan for Retirement/SM/
Profit Sharing/401(k) Plan
Fidelity Basic Plan Document No. 07
Amendment One
Section 2.01(a) (7) "Compensation" is amended to include:
----------------------------------
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each Employee
taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with section 401(a) (17) (B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceeding 12
months, over which compensation is determined (determination period) beginning
in such calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation will be multiplied by a fraction, the
numerator of which is the number of months in the determination period, and the
denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in this
plan to the limitation under section 401(a) (17) of the Code shall mean the OBRA
'93 annual compensation limit set forth in this provision. Notwithstanding
2.01(a) (7) (A), for purpose of Section 4.02 (Additional Limit on Deferral
Contributions) and Section 4.04 (Limit on Matching Contributions), the Employer
may use Compensation as defined in section 5.03(e) (2) excluding reimbursements
or other expense allowances, fringe benefits (cash and non-cash), moving
expenses, deferred compensation and welfare benefits, but including amounts that
are not includable in the gross income of the Participant under a salary
reduction agreement by reason of the application of Section 125, 402(a) (8),
402(h) or 403(b) of the Code.
If compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current plan year, the
compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
first plan year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
Section 8.01(d) "Distribution of Benefits to Participants and Beneficiaries" is
----------------------------------------------------------------------------
amended to include:
(5) If a distribution is one to which sections 401(a) (11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less than 30
days after the notice required under section 1.411(a) - 11(c) of the Income Tax
Regulations is given, provided that:
(1) the administrator clearly informs the Participant that the
Participant has a
<PAGE>
right to a period of at least 30 days after receiving the notice to
consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
<PAGE>
ADDENDUM
to
CORPORATEplan for Retirement
THE PROFIT SHARING/401(K) PLAN
FIDELITY BASIC PLAN DOCUMENT No. 07
Re: Retroactive Effective Dates
This Addendum is intended to clarify and set forth the effective dates of
certain provisions of the Plan with respect to the adopting Employer. This
Addendum applies only to the extent that the Employer has not amended the Plan
with respect to the applicable provisions of the Tax Reform Act of 1986 ("TRA
'86"). Unless otherwise specifically provided by the terms of the Plan, this
amendment and restatement is effective with respect to each change made to
satisfy the provisions of (i) TRA '86, (ii) any other change in the Code or
ERISA, or (iii) regulations, rulings, or other published guidance issued under
the Code, ERISA, or TRA '86, the first day of the first period (which may or may
not be the first day of a Plan Year) with respect to which such change became
required because of such provision (including any day that became such as a
result of an election or waiver by an Employee or a waiver or exemption issued
under the Code, ERISA, or TRA '86), including, but not limited to, the
following:
(a) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1986, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable
exemption or waiver:
(1) Changes in the definition of Employee in Section 2.01(a)(10) to reflect
changes in the safe harbor exclusion for Leased Employees;
(2) Changes in the definition of Highly Compensated Employee in Section
2.01(a)(16);
(3) Addition of the aggregate deferral limit under Section 402(g) of the
Code in Section 4.01(c);
(4) Changes to the Code Section 401(k) discrimination test in Section 4.02;
(5) Addition of the Code Section 401(m) discrimination test and application
of the Aggregate Limit in Section 4.04;
(6) Compliance with the Code Section 414(s) compensation definition
requirements in Sections 5.03 and 9.03;
(7) Changes in the Participant Loan provisions in Section 7.09, if
applicable, to reflect new dollar limitations, repayment requirements,
and restrictions applicable to Highly Compensated Employees under
Section 72 (p) of the Code;
<PAGE>
(8) Changes in the definition of Key Employee in section 9.02(a); and
(9) Changes in the definition of Top-Heavy Ratio in section 9.02(c)(3) to
provide for ratable accrual.
(b) Changes in the 415 limitations in Section 5.03 as required by TRA '86 are
effective for limitation years beginning after December 31, 1986, unless a
delayed effective date applies because the Plan is collectively-bargained or
because of an applicable waiver or exemption; provided, however, that Annual
Additions shall not be recalculated to take into account all Employee
contributions for limitation years beginning before the effective date.
(c) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1987, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable
waiver or exemption:
(1) Changes required to provide that allocations shall not be decreased or
discontinued because of attainment of any age, if any; and
(2) Changes in the definition of Normal Retirement Age in Section 1.06(a),
if any, to reflect the five years of participation rule.
(d) The following changes as required by TRA '86 are effective for Plan Years
beginning after December 31, 1988, unless a delayed effective date applies
because the Plan is collectively-bargained or because of an applicable
waiver or exemption:
(1) Changes in the vesting schedule specified in Section 1.07, if
applicable;
(2) Changes in the permitted disparity rules in Section 4.06(b)(2), if
applicable; and
(3) Changes in the requirements for electing a former vesting schedule in
Section 10.03, if applicable.
Notwithstanding the foregoing and subject to applicable law, with respect to
Plan Years beginning after December 31, 1986, and before the date of this
restatement of the Plan, the Employer may elect to operate the Plan in
accordance with any transitional rule published by the Internal Revenue Service
or a reasonable, good faith interpretation of TRA '86 and related applicable
law, in which event such transitional rule or good faith interpretation shall
prevail over the provisions in this restatement of the Plan with respect to such
Plan Year.
Each other change made under the Plan is effective as of the date specified in
Section 1.01(g) of the Adoption Agreement, unless otherwise specifically
provided by the terms of the Plan.
<PAGE>
EXHIBIT 10.10
LOAN AGREEMENT
--------------
This LOAN AGREEMENT is made and entered into by and between SUNWEST BANK OF
ALBUQUERQUE, NATIONAL ASSOCIATION, a national banking association, hereinafter
referred to as "Bank," and New Mexico Utilities, Inc., a New Mexico
corporation, hereinafter referred to as "Borrower".
For and in consideration of the mutual covenants, agreements and
obligations herein contained, it is agreed as follows:
1. CREDIT. Bank has agreed to furnish the following credit facilities
------
(the "Loans") to Borrower under the terms and conditions hereinafter set forth:
Note A: A revolving line of credit up to, but not exceeding, Two Million and
No/100 Dollars ($2,000,000).
Note B: A revolving line of credit up to, but not exceeding, Five Hundred
Thousand and 00/100 Dollars ($500,000).
2. LOANS. The Loans shall be extended in varying amounts from time to
-----
time as follows:
(a) Coincident with the execution hereof, Borrower will execute separate
promissory notes payable to Bank, the form and substance of which shall be
acceptable to Bank, and which shall bear interest and be due and payable as
follows:
(i) The per annum interest on the outstanding principal balance (the
"Interest Rate") shall be at a rate equal to one-half percent (0.5%) over the
Chase
<PAGE>
Manhattan Bank Prime Rate established from time to time by that Bank; the
Interest Rate shall be adjusted coincident with any change in the rate and
applied prospectively.
(ii) Interest only on the outstanding principal balance shall be
payable monthly. Payments shall be due and payable on the last day of the
each month beginning on the first (1st) month following the date of the
first advance and continuing until the principal balance with accrued
interest shall be paid in full.
(iii) The entire principal balance plus accrued interest shall be due
and payable March 31, 1996 or upon demand in the event Borrower becomes in
default under this Agreement.
(b) Payments shall be applied first to interest and the balance, if
any, shall then be applied to reduce principal, however, if Borrower is not in
default of this agreement, then at Bank's option payments may be applied to
principal.
3. PURPOSE. The proceeds of Note A shall be used only to pay for utility
--------
system improvements. The proceeds of Note B shall be used for working capital
purposes.
4. COLLATERAL. The Loans are unsecured.
----------
5. GUARANTY. The Loans shall be guaranteed by an Unlimited Continuing
---------
Guaranty of Southwest Water Company which shall be in form and substance
acceptable to Bank, which guarantees payment of
2
<PAGE>
Borrower's indebtedness evidenced by the Notes and which further guarantees
Borrower's performance of the provisions of this Loan Agreement.
6. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and
-----------------------------------------
warrants to Bank, which representations and warranties shall survive the
delivery of the Notes, that:
(a) Borrower is a corporation duly organized, legally existing and in good
standing under the laws of the State of New Mexico and has duly qualified as a
foreign corporation to do business in all other jurisdictions wherein the
property owned or the business transacted by it makes such qualification
necessary.
(b) The Borrower has full power and authority and legal right to incur the
obligations provided for in this Agreement, to execute and deliver, and to
perform and observe the terms and provisions of this Agreement, the Notes, and
any other agreements or documents referred to herein or contemplated hereby.
Such agreements and documents constitute the legal valid and binding obligations
of the Borrower enforceable in accordance with their respective terms.
(c) The last financial statements of Borrower, which are dated September
30, 1994, fully and accurately reflect the financial condition of Borrower as
of the date hereof and no material adverse change has since occurred in the
condition, financial or otherwise, of Borrower.
3
<PAGE>
(d) To the best of Borrower's knowledge, there is no litigation, legal or
administrative proceeding, investigation or other action of any nature pending
or, threatened against or affecting Borrower, which involves the possibility of
any judgment or liability which would materially and adversely affect the
business or the assets of Borrower or Guarantors or the right of Borrower to
carry on its business as now conducted; and no unusual or unduly burdensome
restriction, restraint or hazard exists by contract, law or governmental
regulation, other than by restrictions and obligations on and of Borrower to
comply with requirements of the New Mexico Public Utilities Commission, relative
to the business or properties of Borrower.
7. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that:
---------------------
(a) Borrower will furnish or cause to be furnished to the Bank in form
acceptable to Bank:
(i) Within forty-five (45) days after the end of each quarter, an
unaudited balance sheet of Borrower, an unaudited operating statement of
Borrower (showing income, expenses and net income or loss), in form
acceptable to Bank and such other financial information as Bank may
require, all as of the end of the preceding quarter, and certified by a
principal officer of Borrower
4
<PAGE>
as being true and correct and prepared in accordance with generally accepted
accounting principles consistently applied throughout the period indicated;
(ii) Within forty-five (45) days after Borrower's fiscal year end, copies
of Borrower's budget and forecasts for the ensuing fiscal year;
(iii) Within one hundred twenty (120) days after the end of Borrower's
fiscal year end, audited balance sheet and income statements.
(iv) Year end audited balance sheet and income statement, and related and
customary schedules of Guarantor within one hundred twenty (120) days of the end
of its fiscal year end.
(v) Within forty-five (45) days after issuance, a copy of Guarantor's
SEC Report Form 10-Q and 10-K and consolidating schedules for the Balance
Sheet,Income Statement and reconcilement of equity accounts as of the period
ending for which a Form 10-Q is issued.
(b) Borrower will maintain with financially sound and reputable insurers,
insurance with respect to its properties and business against such liabilities,
casualties, risk and contingencies and in such types and amounts as are
acceptable to Bank.
(c) Borrower will pay all fees incurred in connection with this Agreement
and all transactions pursuant thereto,
5
<PAGE>
including, without limitation, the fees and expenses attributable to the
preparation of all documentation, and all amendments thereto, and for necessary
filings.
(d) Borrower will upon the discovery of the existence of any event of
default hereunder, immediately furnish Bank written notification thereof.
(e) Borrower will keep accurate and complete records of its business
operations and Bank shall have the right, at Borrower's expense and during
normal working hours, without hindrance, to orderly inspect, audit, check and
make abstracts of the records at intervals determined by Bank.
(f) Borrower will provide Bank with written notification of all changes in
the directors or officers of Borrower, which notification shall be given within
ten (10) days of any such change.
8. NEGATIVE COVENANTS. Borrower covenants and agrees with Bank that:
------------------
(a) Borrower will not become a guarantor or surety to or for any other
person, firm or corporation except in ordinary course of business without the
prior written consent of Bank.
(b) Borrower will not mortgage, pledge or otherwise encumber assets in any
manner, nor allow any lien or encumbrance to be placed thereon without the prior
written
6
<PAGE>
consent of Bank, except that the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments and other governmental charges not yet
due or being contested in good faith if such reserve as shall be required
by generally accepted accounting principles shall have been made therefor;
(ii) Liens of landlords, vendors, suppliers, carriers, warehousemen,
mechanics, laborers and materialmen arising by law in the ordinary course
of business for sums not yet due or being contested in good faith if a
reserve, as shall be required by generally accepted accounting principles,
shall have been made therefor;
(iii) Lien of First Mortgage Bonds, Series A, due March 12, 2002 in the
amount of Two Million Dollars ($2,000,000) to Allstate Insurance Company.
(c) Borrower will not, without the prior written consent of the Bank:
(i) Amend its articles of incorporation in any way so as to adversely
affect the rights of Bank;
(ii) Consolidate or merge with or purchase all or a substantial part of
the assets or capital stock of any corporation, firm, association or
enterprise. However, purchases of all or a substantial part of the assets
or
7
<PAGE>
the capital stock of any corporation, firm, association or enterprise
aggregating less than One Million Dollars ($1,000,000) are not hereby
restricted.
(iii) Sell, lease or sell and lease-back or otherwise transfer all or
substantially all of its assets;
(iv) Engage in any material new or additional business line or
activity.
(d) Borrower will not permit its debt to tangible net worth ratio to be
more than 4.0 to 1.0. The debt to net worth ratio will be calculated excluding
amounts in the liability accounts on the Borrower's Balance Sheet entitled
"Contributions in Aid of Construction", and "Deferred Revenue" regardless of how
such amounts are titled on future Balance Sheets.
(e) On December 31, 1995 and at each fiscal year end thereafter, Borrower
will not permit its debt service ratio to be less than 1.20 to 1.0. The debt
service ratio shall be calculated by taking earnings before interest, taxes,
depreciation and amortization divided by principal and interest payments based
on a ten (10) year amortization of First Mortgage Bond obligations, this
commitment ($2,500,000), and other debt incurred, including obligations owed to
Southwest Water Company, for which interest is to accrue. The interest rate to
be considered in the amortization will be the
8
<PAGE>
rate in effect on the respective obligation effective at each fiscal year end.
(f) For purpose of paragraphs 7(d) and 7(e) all measurements and
calculations shall be determined on the last day of Borrower's fiscal year end.
(g) Borrower will not, unless approved in writing by Bank, pay
any dividend that exceeds ninety percent (90%) of net income after taxes in
any fiscal year.
(h) Borrower will not make any other distributions or loans to any of its
related entities without the prior written permission of the Bank, except
Borrower may continue payment of management fees to Southwest Water Company,
provided that the dollar amount of management fees paid in year 1995 and
succeeding years may not exceed One hundred Fifty Percent (150%) of the amount
actually paid in the prior year unless previously approved in writing by Bank.
9. EVENTS OF DEFAULT. If any one or more of the following events of
-----------------
default occurs and is continuing:
(a) Default in the payment of any installment of principal of, or any
interest on, any note executed and delivered pursuant to the terms of this
Agreement or any renewal or extension thereof; or
(b) Default in the due observance or performance of any negative covenant
contained in this Agreement; or
9
<PAGE>
(c) Any warranty or representation made herein by Borrower to the Bank
is untrue or misleading in any material respect as of the date such warranty or
representation is made or any certificate, statement, or writing furnished by
Borrower to the Bank is untrue in any material respect on the date as of which
the fact set forth are stated or certified; or
(d) Borrower discontinues its business; or
(e) Borrower becomes insolvent or admits in writing its inability to pay
its debts as they mature, or makes an assignment for the benefit of creditors,
or applies for, consents to or acquiesces in the appointment of a trustee or
receiver for Borrower or any of its property; or, in the absence of such
application, consent or acquiescence, proceedings for the appointment of a
trustee or receiver for Borrower or for a substantial part of its property is
authorized or instituted by or against Borrower; or any bankruptcy,
reorganization, debt arrangement or other proceedings under any bankruptcy or
insolvency law or any dissolution or liquidation proceeding is instituted by or
against Borrower; or provided that if any bankruptcy, receivership, liquidation
or similar proceedings are instituted otherwise than by Borrower, such an
occurrence will not constitute an event of default if such proceedings are
dismissed within thirty (30) days of their commencement; or
10
<PAGE>
(f) A final money judgment (after appeal, if any, has been decided
adversely to Borrower, or after the time to appeal therefrom shall have expired)
shall be entered against Borrower and the same shall remain unsatisfied for more
than thirty (30) days; or
(g) A material adverse change in the financial condition of Borrower occurs
which in the opinion of Bank affects the ability of Borrower to pay in
accordance with its terms any note executed and delivered pursuant to the terms
of this Agreement or any renewal or extension thereof; or
(h) Default in the due observance or performance by Borrower of the
Indenture of Mortgage dated February 14, 1992 securing First Mortgage Bonds,
Series A due March 12, 2002; or
then in any such event of default, the Bank may, at its option, declare all
indebtedness incurred hereunder immediately due and payable and the Bank shall
be under no other or further obligation to make further advances under the terms
of this Agreement. Upon such declaration, the Bank may then proceed to enforce
payment or collection of said indebtedness and to exercise any or all of the
rights and remedies afforded and provided for in this Agreement or in any note,
security agreement or other document executed in connection with the loans to be
made hereunder, anything in said documents to the contrary notwithstanding, or
the Bank may pursue any other remedy available to it, whether in law or
11
<PAGE>
in equity. All of the above rights and remedies are cumulative, and no delay on
the part of the Bank in exercising any right, power or privilege shall operate
as a waiver of such rights, power or privilege, nor will the partial exercise
thereof operate as a waiver of such right, power or privilege.
10. FUNDING. Bank shall not be obligated to fund the Loans until (i) Bank
-------
shall have received certified copies of resolutions of the Board of Directors of
Borrower in form and substance satisfactory to the Bank authorizing the
incurring of the indebtedness contemplated hereby; (ii) the execution and
delivery of this Agreement and of the other instruments and agreements provided
for herein to be executed and delivered by Borrower; (iii) all terms and
conditions of Bank's commitment letter dated January 9, 1995 have been duly
satisfied; and (iv) until all other terms and conditions of this Agreement and
such other terms and conditions as Bank may reasonably require have been duly
satisfied by Borrower.
11. MISCELLANEOUS COVENANTS. Bank and Borrower covenant and agree that:
-----------------------
(a) A waiver of any breach of this Agreement shall not be considered as a
waiver of any subsequent breach thereof, whether or not notice of such breach
and of waiver of same has been given.
12
<PAGE>
(b) If any term or provision of this Agreement or the application
thereof to any person, corporation, or under any circumstances shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement or the
application of such term or provision to a person or corporation or under
circumstances other than those as to which it has been held invalid or
unenforceable, shall not be affected hereby, and each term and provision of this
Agreement shall be valid and enforceable to the fullest extent permitted by law.
(c) This Agreement supersedes and replaces all prior agreements between the
parties hereto, and this Agreement shall not be amended or modified except by
agreement in writing duly executed by parties affected thereby or as otherwise
provided herein.
(d) Bank shall have no obligation to extend or renew the credit facilities
described herein, but if Bank shall renew or extend such credit facilities, the
terms of this Loan Agreement shall govern all extensions and renewals of the
credit facilities described herein.
(e) The laws of the State of New Mexico shall govern the construction of
this Agreement and the rights and duties of the parties.
13
<PAGE>
(f) Headings used in this Agreement are for the convenience of reference
only and shall not be deemed to be part of this Loan Agreement for any purpose.
(g) All notices given pursuant to this Agreement shall be in writing and
shall be validly given when hand delivered, mailed by prepaid first class mail
or transmitted by telefax
(1) if to Bank, addressed to:
Sunwest Bank of Albuquerque, National Association
P.O. Box 25500
Albuquerque, New Mexico 87125-0500
Attention: Commercial Loan Department
Telefax # (505) 764-4178
and (2) if to Borrower, addressed to:
New Mexico Utilities, Inc.
4700 Irving Blvd., N.W.
Albuquerque, New Mexico 87114
Attention: Mr. William C. Jasura, Vice President
Telefax # (505) 898-6379
and
Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, CA 91791-1605
Attention: Controller
Telefax # (818) 915-1558
(h) Borrower acknowledges that Borrower is aware of the provisions of
the New Mexico statutes including Section 58-6-5 NMSA 1990 Repl. Pamp. which
provide that a promise or commitment to loan money or to grant, extend or renew
credit or any modification thereof is unenforceable unless in writing and signed
by the Bank.
14
<PAGE>
(i) BORROWER AND BANK HEREBY WAIVE THE RIGHT TO A JURY TRIAL ON ANY
ISSUE ARISING OUT OF OR RELATING, DIRECTLY OR INDIRECTLY, TO THIS AGREEMENT, THE
NOTE, THE GUARANTY, OR ANY DOCUMENT EXECUTED AND DELIVERED PURSUANT TO THIS
AGREEMENT.
DATED: January 25, 1995.
---------- --
BORROWER:
NEW MEXICO UTILITIES, INC,
a New Mexico corporation
By: /S/ ROBERT L. SWARTWOUT
Robert L. Swartout,
President
By: /S/ WILLIAM C. JASURA
William C. Jasura
Vice President and
Chief Financial Officer
GUARANTOR:
SOUTHWEST WATER COMPANY
a Delaware corporation
By: /S/ DIANE CASTELLO PITTS
Diane Castello Pitts
Controller and Treasurer
LENDER:
SUNWEST BANK OF ALBUQUERQUE,
NATIONAL ASSOCIATION, a
national banking association
By: /S/ DON K. PADGETT
Don K. Padgett
Vice President
15
<PAGE>
PROMISSORY NOTE - NOTE A
SUNWEST BANK New Mexico Utilities, Inc.
of Albuquerque, N.A. A New Mexico Corporation
P.O. Box 25500
Albuquerque, NM 87125-5500
(505) 765-2211
"BANK" "BORROWER"
FOR VALUE RECEIVED, Borrower promises to pay to the order of Bank, its
successors and assigns at Albuquerque, New Mexico (or such other place as the
Bank may designate) (i) the principal amount of Two Million and No/100 Dollars
($2,000,000.00), or so much thereof as is advanced; (ii) the fees and other
charges as provided herein; and (iii) per annum interest on the outstanding
principal balance from Date of Disbursement, until paid at the rate of 0.500%
above the index rate for this loan which is Chase Manhattan Bank Prime, in
effect from time to time, and which is published by Chase Manhattan Bank, N.A.,
with a minimum rate of N/A%. As of the date of this note, the index rate is
8.500%. Adjustments in the interest rate will be effective as announced and may
increase or decrease the amount of the regular payments. If the index rate is
discontinued then the interest rate shall be the rate being charged by Bank on
similar loans.
Borrower agrees to pay as follows:
[X] Interest on the 28th day of every single month beginning February 28,
1995, and continuing until this Note is paid in full.
This Loan is payable in full on March 31, 1996. Borrower must repay the
outstanding principal balance of the loan and unpaid interest then due. The
Bank is under no obligation to refinance the loan at that time.
Borrower shall pay Bank a late charge of N/A% or N/A, whichever is less, of
any installment not received by Bank within fifteen (15) days after the
installment is due.
All payments shall be applied first to reduce fees and charges other than
interest, then to reduce interest, then to reduce principal.
[X] This is a multiple advance note. Borrower has received $0.00 and future
principal advances are contemplated. No principal advances will be made after
March 31, 1996. Repaying a part of the principal will entitle Borrower to
additional advances unless an event of default has occurred, or the open-end
feature has expired.
16
<PAGE>
Each of the following are events of default under this Note: (i) Failure to
make a payment on time or in the amount due; (ii) Default under any agreement
made in connection with or securing this Note; (iii) Borrower's default on any
other agreement with Bank; (iv) Borrower's death, incompetency, bankruptcy or
insolvency; (v) any written statement or financial information provided by
Borrower is untrue or inaccurate; or (vi) any other event which reasonably
causes Bank to be insecure about being repaid or about the adequacy of the
security for this Note.
Upon the occurrence of any event of default contained in this Note, the
Bank may declare the principal amount, accrued interest thereon, and fees and
other charges as provided in this Note immediately due and payable without
notice or demand, refuse to make any further advances under this Note, enforce
its rights under any document securing the indebtedness evidenced by this Note,
set off the amount Borrower owes Bank against any funds on deposit with Bank,
retain the proceeds of any checks, drafts, notes or other instruments or
acceptances which it may hold or have in the process of collection for the
account of any of the makers, endorsers and guarantors hereof and may apply such
proceeds (together with any funds on deposit with Bank) to the payment of the
indebtedness evidenced by this Note, and use any remedy available under state or
federal law.
No delay or omission on the part of Bank in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note.
A waiver on any occasion shall not be construed as a bar to, or waiver of, any
such right or remedy on any future occasion.
Every maker, endorser and guarantor of this Note, or the indebtedness
represented hereby waives presentment, demand, notice, protest, and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this note and assents to any extension or postponement
of the time of payment or other indulgence, to the addition or release of any
other party or person primarily or secondarily liable on this note or to the
addition or release of any security interest or collateral securing this note.
Any time this Note is placed in the hands of an attorney for collection, or
to defend or enforce any of the Bank's rights hereunder, Borrower shall pay to
the Bank its reasonable attorneys' fees, together with all court costs and other
expenses.
If no default exists hereunder, Borrower may prepay at any time, without
premium or fee, the entire indebtedness or any part thereof evidenced by this
Note and such prepayments shall be applied in the manner scheduled payments are
applied unless Borrower directs Bank to apply such prepayment in reduction of
the outstanding principal indebtedness. Partial prepayments shall not postpone
the due date of any subsequent monthly installments or change the amount of such
installments (other than the amount of interest) and shall not postpone the due
date for payment of the indebtedness evidenced by this Note.
Borrower has delivered and shall deliver to Bank within 120 days after the
end of each annual accounting period of Borrower and at such other times as Bank
may request, copies of its balance sheet, income statement, cash flow analysis,
list of contingent liabilities and such other financial information as Bank may
require, all in reasonable detail, and Borrower warrants and represents to
17
<PAGE>
Bank that the financial information delivered, and to be delivered, is and will
be true and correct in all material respects, prepared in accordance with
generally accepted accounting principles, consistently applied throughout the
period indicated, within a time and in a form acceptable to Bank.
Borrower acknowledges that a contract, promise or commitment to loan money
or to grant, extend or renew credit or any modification thereof, in an amount
greater that Twenty-Five Thousand Dollars ($25,000), not primarily for personal,
family or household purposes, made by a financial institution shall not be
enforceable unless in writing and signed by the party to be charged or that
party's authorized representative.
This Note is being executed pursuant to a Business Loan Agreement
("Agreement") dated January 25, 1995, and to the extent the terms of this Note
are inconsistent with the Agreement, the terms of the Agreement shall control.
This Note is secured by the following:
DATED this 25th day of January, 1995.
New Mexico Utilities, Inc.
A New Mexico Corporation
By: /S/WILLIAM C. JASURA By: /S/DIANE CASTELLO PITTS
William C. Jasura, V.P. Finance Diane Castello Pitts
and Chief Financial Officer Controller and Treasurer of
Southwest Water Company
Borrower's Primary Business Address: Borrower's Notice Address:
4700 Irving Blvd., N.W., Ste. 201 4700 Irving Blvd.,N.W.,Ste. 201
Albuquerque, NM 87114 Albuquerque, NM 87114
Borrower's Telephone Number: TIN/SS#: 85-0205240
(505) 898-2661
18
<PAGE>
PROMISSORY NOTE - NOTE B
SUNWEST BANK New Mexico Utilities, Inc.
of Albuquerque, N.A. A New Mexico Corporation
P.O. Box 25500
Albuquerque, NM 87125-5500
(505) 765-2211
"BANK" "BORROWER"
FOR VALUE RECEIVED, Borrower promises to pay to the order of Bank, its
successors and assigns at Albuquerque, New Mexico (or such other place as the
Bank may designate) (i) the principal amount of Five Hundred Thousand and No/100
Dollars ($500,000.00), or so much thereof as is advanced; (ii) the fees and
other charges as provided herein; and (iii) per annum interest on the
outstanding principal balance from Date of Disbursement, until paid at the rate
of 0.500% above the index rate for this loan which is Chase Manhattan Bank
Prime, in effect from time to time, and which is published by Chase Manhattan
Bank, N.A., with a minimum rate of N/A%. As of the date of this note, the index
rate is 8.500%. Adjustments in the interest rate will be effective as announced
and may increase or decrease the amount of the regular payments. If the index
rate is discontinued then the interest rate shall be the rate being charged by
Bank on similar loans.
Borrower agrees to pay as follows:
[X] Interest on the 28th day of every single month beginning February 28,
1995, and continuing until this Note is paid in full.
This Loan is payable in full on March 31, 1996. Borrower must repay the
outstanding principal balance of the loan and unpaid interest then due. The
Bank is under no obligation to refinance the loan at that time.
Borrower shall pay Bank a late charge of N/A% or N/A, whichever is less, of
any installment not received by Bank within fifteen (15) days after the
installment is due.
All payments shall be applied first to reduce fees and charges other than
interest, then to reduce interest, then to reduce principal.
[X] This is a multiple advance note. Borrower has received $0.00 and future
principal advances are contemplated. No principal advances will be made after
March 31, 1996. Repaying a part of the principal will entitle Borrower to
additional advances unless an event of default has occurred, or the open-end
feature has expired.
19
<PAGE>
Each of the following are events of default under this Note: (i) Failure to
make a payment on time or in the amount due; (ii) Default under any agreement
made in connection with or securing this Note; (iii) Borrower's default on any
other agreement with Bank; (iv) Borrower's death, incompetency, bankruptcy or
insolvency; (v) any written statement or financial information provided by
Borrower is untrue or inaccurate; or (vi) any other event which reasonably
causes Bank to be insecure about being repaid or about the adequacy of the
security for this Note.
Upon the occurrence of any event of default contained in this Note, the
Bank may declare the principal amount, accrued interest thereon, and fees and
other charges as provided in this Note immediately due and payable without
notice or demand, refuse to make any further advances under this Note, enforce
its rights under any document securing the indebtedness evidenced by this Note,
set off the amount Borrower owes Bank against any funds on deposit with Bank,
retain the proceeds of any checks, drafts, notes or other instruments or
acceptances which it may hold or have in the process of collection for the
account of any of the makers, endorsers and guarantors hereof and may apply such
proceeds (together with any funds on deposit with Bank) to the payment of the
indebtedness evidenced by this Note, and use any remedy available under state or
federal law.
No delay or omission on the part of Bank in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note.
A waiver on any occasion shall not be construed as a bar to, or waiver of, any
such right or remedy on any future occasion.
Every maker, endorser and guarantor of this Note, or the indebtedness
represented hereby waives presentment, demand, notice, protest, and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this note and assents to any extension or postponement
of the time of payment or other indulgence, to the addition or release of any
other party or person primarily or secondarily liable on this note or to the
addition or release of any security interest or collateral securing this note.
Any time this Note is placed in the hands of an attorney for collection, or
to defend or enforce any of the Bank's rights hereunder, Borrower shall pay to
the Bank its reasonable attorneys' fees, together with all court costs and other
expenses.
If no default exists hereunder, Borrower may prepay at any time, without
premium or fee, the entire indebtedness or any part thereof evidenced by this
Note and such prepayments shall be applied in the manner scheduled payments are
applied unless Borrower directs Bank to apply such prepayment in reduction of
the outstanding principal indebtedness. Partial prepayments shall not postpone
the due date of any subsequent monthly installments or change the amount of such
installments (other than the amount of interest) and shall not postpone the due
date for payment of the indebtedness evidenced by this Note.
Borrower has delivered and shall deliver to Bank within 120 days after the
end of each annual accounting period of Borrower and at such other times as Bank
may request, copies of its balance sheet, income statement, cash flow analysis,
list of contingent liabilities and such other financial
20
<PAGE>
information as Bank may require, all in reasonable detail, and Borrower warrants
and represents to Bank that the financial information delivered, and to be
delivered, is and will be true and correct in all material respects, prepared in
accordance with generally accepted accounting principles, consistently applied
throughout the period indicated, within a time and in a form acceptable to Bank.
Borrower acknowledges that a contract, promise or commitment to loan money
or to grant, extend or renew credit or any modification thereof, in an amount
greater that Twenty-Five Thousand Dollars ($25,000), not primarily for personal,
family or household purposes, made by a financial institution shall not be
enforceable unless in writing and signed by the party to be charged or that
party's authorized representative.
This Note is being executed pursuant to a Business Loan Agreement
("Agreement") dated January 25, 1995, and to the extent the terms of this Note
are inconsistent with the Agreement, the terms of the Agreement shall control.
This Note is secured by the following:
DATED this 25th day of January, 1995.
New Mexico Utilities, Inc.
A New Mexico Corporation
By: /S/WILLIAM C. JASURA By: /S/DIANE CASTELLO PITTS
William C. Jasura, V.P. Finance Diane Castello Pitts
and Chief Financial Officer Controller and Treasurer of
Southwest Water Company
Borrower's Primary Business Address: Borrower's Notice Address:
4700 Irving Blvd., N.W., Ste. 201 4700 Irving Blvd.,N.W.,Ste. 201
Albuquerque, NM 87114 Albuquerque, NM 87114
Borrower's Telephone Number: TIN/SS#: 85-0205240
(505) 898-2661
21
<PAGE>
EXHIBIT 13.1
Southwest Water Company And Subsidiaries
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
(Not covered by Independent Auditors' Report)
---------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary Of Operations
Operating revenues $50,932,000 $48,218,000 $44,482,000 $38,802,000 $41,089,000
Operating income $ 3,849,000 $ 3,421,000 $ 5,305,000 $ 996,000 $ 5,251,000
Litigation settlements $ -- $(1,437,000) $ -- $ -- $ --
Gain on condemnation and sale of land $ -- $ 67,000 $ -- $ 274,000 $ 1,265,000
Gain on settlement of estate with
related party $ -- $ -- $ -- $ 450,000 $ --
Net income $ 1,057,000 $ 127,000 $ 2,300,000 $ 206,000 $ 3,310,000
Net income available for common shares $ 1,029,000 $ 99,000 $ 2,271,000 $ 176,000 $ 3,280,000
---------------------------------------------------------------------------------------------------------------------------------
Common Share Data*
Primary earnings per share $ .43 $ .04 $ .97 $ .08 $ 1.44
Fully diluted earnings per share $ .42 $ .04 $ .95 $ .08 $ 1.40
Cash dividends per share $ .40 $ .665 $ .92 $ .91 $ .90
Weighted-average outstanding shares
and equivalent shares:
Primary 2,404,000 2,370,000 2,331,000 2,298,000 2,273,000
Fully diluted 2,460,000 2,430,000 2,398,000 2,367,000 2,347,000
---------------------------------------------------------------------------------------------------------------------------------
Statistical Data
Working capital (deficit) $(2,271,000) $ 1,161,000 $ 6,765,000 $(1,549,000) $ 2,099,000
Current ratio .8 1.1 1.8 .9 1.2
Capital additions $ 8,684,000 $ 7,133,000 $ 4,914,000 $ 4,485,000 $ 5,791,000
Property, plant and equipment, net $72,136,000 $67,076,000 $63,506,000 $61,574,000 $61,081,000
Total assets $86,834,000 $85,848,000 $83,672,000 $75,924,000 $76,768,000
Long-term debt $20,500,000 $21,550,000 $22,455,000 $13,375,000 $14,913,000
Stockholders' equity $28,532,000 $28,176,000 $29,153,000 $28,558,000 $30,066,000
Return on average common equity 3.7% .4% 8.0% .6% 11.4%
Number of customers 174,500 171,600 161,100 167,300 151,100
=================================================================================================================================
</TABLE>
* Primary earnings per share are calculated using the weighted-average number of
shares and dilutive common equivalent shares outstanding during each year
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 average number of common shares and dilutive
common equivalent shares outstanding, assuming the 9 1/2% convertible
subordinated debentures were converted at the beginning of the year and the
related interest for the year, net of income taxes, was eliminated. Factors
which materially affect the comparability of year-to-year data are discussed
under The Year In Review, Management's Discussion And Analysis and Notes To
Consolidated Financial Statements.
8
<PAGE>
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had cash and cash equivalent balances totaling
approximately $828,000 and unused lines of credit from commercial banks of
$8,050,000. In January 1995, the Company increased one of its lines of credit by
$2,000,000. In 1994, the Company borrowed $1,850,000 on its lines of credit to
meet construction, operating and litigation settlement 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 $20,195,000. 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 December 31,
1994, to a maximum of approximately $12,986,000.
The Company also has a dividend reinvestment plan and an employee stock purchase
plan. Net proceeds from common shares issued under these plans approximated
$274,000 for the year ended December 31, 1994.
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
$8,684,000 for the year ended December 31, 1994. Approximately $2,231,000 of the
total additions were received by the Company's utilities through developer
contributions.
The Company and its subsidiaries will continue their construction programs, with
1995 capital expenditures estimated at $13,000,000, of which approximately
$4,000,000 is estimated to be in the form of developer contributions. Higher
capital expenditures in New Mexico relating to the rapid growth in New Mexico's
service area account for the majority of the increase in 1995 versus 1994
capital expenditures. 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 its service business, 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
Effective January 1, 1994, the Public Utilities Commission of the State of
California (CPUC) granted Suburban two annual "step" adjustments for its San
Jose Hills and Whittier/La Mirada District customers, yielding additional annual
revenues of $642,000. 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. Suburban did not
file for a general rate increase in 1994.
Suburban anticipates filing a general rate increase application with the CPUC in
July 1995. The general rate increase, if filed and approved, would be effective
early in 1996. Suburban expects to file a joint general rate application
covering both of its service districts based upon recent suggestions by the
CPUC. New Mexico anticipates filing a general sewer rate increase application
with the New Mexico Public Utility Commission (NMPUC) in May 1995, with new
rates effective early in 1996.
In 1993, Suburban elected to record production cost balancing accounts due to
increased variability in the costs of water. Effective in November 1993,
Suburban requested and was granted a reduction in rates, which resulted in a
decrease in 1994 revenues of approximately $957,000 from customers in its San
Jose Hills District. This revenue rate reduction, coupled with lower water
costs, does not affect earnings due to recording of production cost balancing
accounts.
From 1989 through 1993, the Company recorded pretax gains on four land
transactions which aggregated $1,816,000. 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 $1,606,000) 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 financial statements.
9
<PAGE>
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
The rates and operations of the Company's utilities are regulated primarily by
the CPUC and the 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.
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.
In May 1993, the Financial Accounting Standards Board issued release No. 93-5,
"Accounting for Environmental Liabilities," which clarifies certain matters
regarding the recognition and measurement of loss contingencies. The Securities
and Exchange Commission, in June 1993, released Staff Accounting Bulletin
No. 92, "Accounting and Disclosures Relating to Loss Contingencies" (SAB92),
which provides guidance with respect to accounting and disclosures relating to
loss contingencies (e.g., product or environmental liabilities). SAB92 is
effective for periods beginning after December 15, 1993. The Company has not
experienced any material adverse impact on the results of operations relating to
the adoption of these new accounting pronouncements.
RESULTS OF OPERATIONS
Year Ended December 31, 1994,
Versus Year Ended December 31, 1993
Fully diluted earnings per common share increased from $.04 per share in 1993 to
$.42 per share in 1994. Results for 1993 include nonrecurring, pretax charges of
$2,259,000, or $.57 per fully diluted share, resulting from settlement and
defense costs of litigation associated with a 1990 chlorine gas leak, and
$250,000, or $.06 per fully diluted share, related to a loss on the liquidation
of certain collateral associated with a note receivable from a former
subsidiary.
Operating income increased $428,000 in 1994 compared to 1993, and, as a
percentage of operating revenues, increased from 7% in 1993 to 8% in 1994.
Utility operating income increased $1,162,000 in 1994 as compared to 1993.
Expenses relating to litigation defense costs decreased approximately $695,000
in 1994, resulting in higher utility operating income. Additionally, Suburban
experienced the positive effects of an increase in customer water consumption
resulting from warmer and drier weather in 1994 as compared to 1993. New Mexico
experienced higher customer water consumption due to an increase in the number
of customers. ECO experienced an increased operating loss during 1994 as
compared to 1993 due primarily to higher contract operating costs, lower gross
profit margins on Texas contracts and increased expenses associated with
expanded sales and marketing efforts.
Operating revenues increased $2,714,000, or 6%, during 1994 over 1993. Water
utility operating revenues increased by $808,000. Suburban's customers increased
water consumption by approximately 2% during 1994 as compared with 1993,
representing an increase of approximately $642,000. Suburban also experienced
the effects of two "step" rate revenue increases and one offset rate reduction
in revenues, as discussed earlier, which resulted in a net $315,000 decrease in
revenues. Higher sewer collection revenues from New Mexico's industrial
customers, attributable mainly to higher volume, as well as a 6% increase in
customer water consumption related to new customers, led to an increase in New
Mexico's revenues of $481,000.
10
<PAGE>
ECO's revenues increased a net $1,906,000 during 1994 as compared to 1993.
Approximately $2,042,000 is the result of a greater volume of billable service
revenue, including approximately $1,000,000 of material revenues, primarily on
Texas contracts. Material revenues represent amounts billed by ECO to customers
for the purchase of materials used at the customers' facilities. In 1993, the
majority of these Texas customers directly paid the suppliers for these material
purchases. In addition, ECO recorded a net decrease in 1994 revenues of
$136,000, resulting from lost contracts, which was largely offset by an increase
in revenues from new contracts.
Direct operating expenses increased $2,857,000, or 8%, in 1994 as compared to
1993. As a percentage of operating revenues, these expenses increased from 75%
in 1993 to 76% in 1994. Water utility direct operating expenses increased
$463,000 during 1994 as compared to 1993. Although Suburban's water production
increased slightly over the same period in 1993, changes in the sources of water
and the recording of the production cost balancing accounts resulted in a net
decrease of $397,000 in water, power and gas expenses. New Mexico experienced
higher sewer collection costs of $314,000 related directly to the corresponding
increase in volume. Increases in payroll and associated benefits, water
treatment and lab services, depreciation and other expenses at Suburban and New
Mexico also contributed to a net increase in direct operating expenses of
approximately $546,000.
ECO's direct operating expenses increased approximately $2,394,000 in 1994. Of
this increase, approximately $1,615,000 is the result of a greater volume of
billable service revenues. As discussed earlier, operating expenses increased in
1994, resulting from the direct purchase of materials from suppliers for Texas
contract customers. In 1993, Texas contract customers directly paid the
suppliers for these material purchases. Expenses for salaries, wages and
associated benefits also increased in anticipation of revenue growth in Texas.
In addition, during 1994 the mix of contracts changed. The new contracts entered
into in 1994 earned lower gross profit margins than similar contracts in 1993
due to competitive pressures and contract start-up costs.
Selling, general and administrative expenses decreased $571,000, or 6%, during
1994 as compared to 1993. As a percentage of operating revenues, these expenses
were 18% in 1993 and 16% in 1994.
The general and administrative expenses of the Company's water utilities
decreased $817,000 during 1994, due primarily to decreases in litigation defense
expenses of $695,000.
ECO's selling, general and administrative expenses increased $264,000 during
1994. Sales and marketing expenses increased in Texas and California due to
expanded sales and marketing activity in the pursuit of new contracts in these
areas.
General and administrative expenses of the parent holding company decreased by
approximately $18,000. The parent holding company recorded a $250,000 loss in
1993 on the liquidation of certain collateral associated with a note receivable,
as previously discussed. This amount was offset by higher payroll, legal,
insurance and other general and administrative expenses in 1994.
Interest expense increased $109,000 due to the Company maintaining higher line
of credit balances in 1994 and due to lower amounts of interest capitalized on
capital additions in 1994 as compared to 1993. Interest income decreased
$101,000 during 1994 as compared to 1993 due to reduced Company investments in
interest-bearing deposits and U.S. Government securities.
Year Ended December 31, 1993,
Versus Year Ended December 31, 1992
Fully diluted earnings per common share decreased from $.95 in 1992 to $.04 in
1993. Results for the year include a nonrecurring, pretax charge of $1,437,000,
or $.36 per fully diluted share, relating to out-of-court settlements of two
legal actions arising from a chlorine gas leak that occurred in October 1990 at
a Suburban water facility. Total charges to 1993 operating results associated
with this incident, including defense costs, were $2,259,000, or $.57 per fully
diluted share. A third action was settled earlier in 1993 for a nominal amount.
Results also include a separate pretax charge of $250,000, or $.06 per fully
diluted share, related to a loss on the liquidation of certain collateral
associated with a note receivable from a former subsidiary. During 1993,
Suburban elected to record production cost balancing accounts due to increased
variability in the costs of water. The effect of this change in accounting
estimates in 1993 was to reduce pretax income by $957,000, or $.24 per fully
diluted share.
11
<PAGE>
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating income decreased $1,884,000 in 1993 compared with 1992, and, as a
percentage of operating revenues, decreased from 12% in 1992 to 7% in 1993.
Water utility operating income decreased during 1993 as compared with 1992,
primarily as a result of the provision for production cost balancing accounts,
in spite of the positive effects of water rate increases and a minor increase in
customer water consumption. In addition, Suburban's operating income reflects
the effects of lower authorized rates of return granted by the CPUC as well as
increases in various other expenses. The Company's service business experienced
an operating loss in 1993 due primarily to higher expenses associated with the
upgrading of equipment, management and staff personnel.
Operating revenues increased $3,736,000, or 8%, in 1993. Water utility operating
revenues increased by $2,302,000, or 9%, in 1993. Increased water rates for
Suburban resulted in higher revenues of approximately $1,431,000 in 1993 as
compared with 1992. Suburban's customers increased water consumption by
approximately 3% in 1993 as compared with 1992, representing an additional
increase in revenues of approximately $491,000. Revenues of the Company's
service business increased $1,434,000, or 8%, during 1993. Additional billings
in Texas and three new operating contracts in Mississippi contributed to the
increase. These increases offset the loss of an operating contract in
California.
Direct operating expenses increased $4,295,000, or 14%, in 1993. Water utility
direct operating expenses increased $2,101,000 during 1993 as compared to 1992.
Suburban's purchased water and power costs increased a net $611,000. Suburban's
production cost balancing expense accounts reflected an increase of $957,000 in
1993. In the first six months of 1993, purchased water expenses increased
$185,000 over 1992 levels due to the purchase in 1992 of supplemental water at
favorable prices. However, in the last six months of 1993, Suburban reduced its
cost of water by $678,000 by pumping more water from one of its primary well
fields and using a new water transmission pipeline rather than purchasing the
water from other higher cost sources. Suburban's power costs increased $147,000
in 1993 as compared to 1992. Increased depreciation expense of $583,000 was due
to higher depreciation rates granted by the CPUC, as well as increased capital
expenditures. Increases of $907,000 in payroll and other expenses also
contributed to the increase in expenses.
The direct operating expenses of the Company's service business increased
approximately $2,194,000, or 14%, in 1993. Higher expenses associated with the
addition of new operating contracts in Mississippi, as well as higher expenses
associated with the upgrading of equipment and personnel, contributed to the
increase.
Selling, general and administrative expenses increased $1,325,000, or 18%,
during 1993. As a percentage of operating revenues, these expenses increased
from 17% in 1992 to 18% in 1993.
The general and administrative expenses of the Company's water utilities
increased $883,000 during 1993. Payroll, legal and rent expenses increased while
higher capitalized overhead applied to construction in progress reduced general
and administrative expenses.
The selling, general and administrative expenses of the Company's service
business decreased $5,000 during 1993. Increased legal expenses were offset by
decreases in other general and administrative expenses.
General and administrative expenses of the parent holding company increased by
approximately $447,000 during 1993. Higher payroll and employee benefit expenses
in 1993 were offset by a nonrecurring severance expense recorded in 1992. Also
included in general and administrative expenses is a nonrecurring, pretax charge
of $250,000 related to a loss on a note receivable, as discussed earlier.
Interest income decreased $236,000 in 1993 due to the reduced Company
investments in interest-bearing deposits and U.S. Government securities, as well
as the generally lower rates of return available on invested funds.
12
<PAGE>
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues $50,932,000 $48,218,000 $44,482,000
Operating Expenses:
Direct operating expenses 38,818,000 35,961,000 31,666,000
Selling, general and administrative 8,265,000 8,836,000 7,511,000
--------------------------------------------------------------------------------------------
47,083,000 44,797,000 39,177,000
--------------------------------------------------------------------------------------------
Operating Income 3,849,000 3,421,000 5,305,000
Other Income (Expense):
Interest expense (2,220,000) (2,111,000) (2,130,000)
Interest income 81,000 182,000 418,000
Litigation settlements (Note 12) -- (1,437,000) --
Gain on sale of land (Note 13) -- 67,000 --
Other 62,000 5,000 92,000
--------------------------------------------------------------------------------------------
(2,077,000) (3,294,000) (1,620,000)
--------------------------------------------------------------------------------------------
Income Before Income Taxes 1,772,000 127,000 3,685,000
Provision for income taxes (Note 7) 715,000 -- 1,385,000
--------------------------------------------------------------------------------------------
Net Income 1,057,000 127,000 2,300,000
Dividends On Preferred Shares (Note 9) 28,000 28,000 29,000
--------------------------------------------------------------------------------------------
Net Income Available For Common Shares $ 1,029,000 $ 99,000 $ 2,271,000
============================================================================================
Earnings Per Common Share (Note 8):
Primary $ .43 $ .04 $ .97
--------------------------------------------------------------------------------------------
Fully diluted $ .42 $ .04 $ .95
--------------------------------------------------------------------------------------------
Cash Dividends Per Common Share $ .40 $ .665 $ .92
--------------------------------------------------------------------------------------------
Weighted-Average Outstanding Common
And Common Equivalent Shares:
Primary 2,404,000 2,370,000 2,331,000
--------------------------------------------------------------------------------------------
Fully diluted 2,460,000 2,430,000 2,398,000
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
Southwest Water Company And Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------------------------------------
1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 828,000 $ 2,979,000
U.S. Government securities -- 1,503,000
Customers' accounts receivable 6,021,000 5,822,000
Other current assets 2,011,000 2,123,000
--------------------------------------------------------------------------------------------------------------
8,860,000 12,427,000
Property, Plant And Equipment:
Utility property, plant and equipment -- at cost (Note 3) 96,179,000 90,093,000
Non-utility property, plant and equipment -- at cost 5,923,000 5,511,000
--------------------------------------------------------------------------------------------------------------
102,102,000 95,604,000
Less accumulated depreciation and amortization 29,966,000 28,528,000
--------------------------------------------------------------------------------------------------------------
72,136,000 67,076,000
Other Assets 5,838,000 6,345,000
--------------------------------------------------------------------------------------------------------------
$ 86,834,000 $85,848,000
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 3,491,000 $ 1,500,000
Accounts payable 1,185,000 3,479,000
Other current liabilities (Note 5) 6,455,000 6,287,000
--------------------------------------------------------------------------------------------------------------
11,131,000 11,266,000
Other Liabilities And Deferred Credits:
Long-term debt (Note 6) 20,500,000 21,550,000
Advances for construction 9,151,000 9,641,000
Contributions in aid of construction 10,683,000 8,967,000
Deferred income taxes (Note 7) 3,260,000 2,992,000
Other liabilities and deferred credits 3,577,000 3,256,000
--------------------------------------------------------------------------------------------------------------
Total Liabilities And Deferred Credits 58,302,000 57,672,000
Commitments And Contingencies (Note 13)
Stockholders' Equity (Notes 8, 9 and 10):
Cumulative preferred stock 530,000 542,000
Common stock 24,000 24,000
Paid-in capital 17,241,000 16,981,000
Retained earnings 10,820,000 10,753,000
Unamortized value of restricted stock issued (83,000) (124,000)
--------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 28,532,000 28,176,000
--------------------------------------------------------------------------------------------------------------
$ 86,834,000 $85,848,000
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1992, 1993 and 1994
------------------------------------------------------------------------------------------------------------------------------------
Common Stock
----------------------------
Number Paid-in Retained
of Shares Amount Capital Earnings
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1991 2,309,000 $23,000 $16,056,000 $12,104,000
Dividend reinvestment and
employee stock purchase plans 32,000 403,000
Conversion of $15,000 face amount of 9 1/2%
convertible subordinated debentures 6,000 15,000
Restricted stock 2,000 28,000
Net income 2,300,000
Cash dividends declared (2,176,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 2,349,000 23,000 16,502,000 12,228,000
Dividend reinvestment and
employee stock purchase plans 31,000 1,000 474,000
Conversion of $5,000 face amount of 9 1/2%
convertible subordinated debentures 2,000 5,000
Net income 127,000
Cash dividends declared (1,602,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 2,382,000 24,000 16,981,000 10,753,000
Dividend reinvestment and
employee stock purchase plans 30,000 279,000
Conversion of $9,000 face amount of 9 1/2%
convertible subordinated debentures 4,000 9,000
Restricted stock cancellation (2,000) (28,000)
Net income 1,057,000
Cash dividends declared (990,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 2,414,000 $24,000 $17,241,000 $10,820,000
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,057,000 $ 127,000 $ 2,300,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,605,000 3,586,000 2,877,000
Deferred income taxes 268,000 110,000 (116,000)
Gain on sale of land -- (67,000) --
Changes in assets and liabilities:
Customers' accounts receivable (199,000) (292,000) (1,200,000)
Other current assets 112,000 (817,000) (69,000)
Accounts payable (2,294,000) 1,859,000 238,000
Other current liabilities 168,000 1,153,000 (284,000)
Other, net 849,000 (678,000) 764,000
-----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,509,000 4,854,000 2,210,000
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,566,000 4,981,000 4,510,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (8,684,000) (7,133,000) (4,914,000)
Net redemption of (investment in) U.S. Government securities 1,503,000 3,959,000 (5,462,000)
Proceeds from sale of land -- 70,000 --
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,181,000) (3,104,000) (10,376,000)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayment) of short-term debt 1,850,000 600,000 (2,100,000)
Contributions in aid of construction, net 1,716,000 105,000 621,000
Net proceeds from dividend reinvestment and employee stock purchase plans 274,000 465,000 403,000
Additions to advances for construction 208,000 971,000 458,000
Dividends paid (986,000) (1,981,000) (2,050,000)
Payments on long-term debt (900,000) (900,000) (1,538,000)
Payments on advances for construction (698,000) (658,000) (419,000)
Net proceeds from issuance of First Mortgage Bonds -- -- 9,416,000
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,464,000 (1,398,000) 4,791,000
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,151,000) 479,000 (1,075,000)
Cash and cash equivalents at beginning of year 2,979,000 2,500,000 3,575,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 828,000 $ 2,979,000 $ 2,500,000
===================================================================================================================================
Supplemental Disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,200,000 $ 2,148,000 $ 1,811,000
Income taxes $ 725,000 $ 799,000 $ 1,369,000
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Significant Accounting Policies
Description Of Business: Southwest Water Company (the Company) and its
subsidiaries operate in the water and wastewater services industry.
Principles Of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. The principal
subsidiaries are Suburban Water Systems (Suburban), New Mexico Utilities,
Inc. (New Mexico) and ECO Resources, Inc. (ECO). All significant intercompany
transactions have been eliminated.
Regulation: The consolidated financial statements are presented in accordance
with generally accepted accounting principles. Suburban and New Mexico
conform to the Uniform System of Accounts prescribed or authorized by the
California Public Utilities Commission (CPUC) and the New Mexico Public
Utility Commission (NMPUC), respectively.
Recognition Of Revenues: Water utility revenues include amounts billed to
customers and an amount of unbilled revenue representing amounts to be billed
for both the fixed portion of the customers' bills and estimated usage from
the last meter-reading date to the end of the accounting period. Service
business revenues are recognized as the related services are performed.
Cash And Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. At December 31, 1994 and 1993, cash and cash equivalents
included money market investments and certificates of deposit.
U.S. Government Securities: The Company adopted Statement of Financial
Accounting Standard No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) in the fourth quarter of 1993. At December 31,
1994, the Company had no investments in U.S. Government securities. At
December 31, 1993, the Company had certain investments in U.S. Government
securities that were recorded at amortized cost plus accrued interest that
approximated market.
Property, Plant And Equipment: The cost of additions to utility plant is
capitalized in the appropriate plant accounts. Cost includes labor, material,
interest ($56,000, $86,000 and $19,000 in 1994, 1993 and 1992, respectively)
and other direct and indirect charges. The cost of utility plant retired or
otherwise disposed of, including removal costs and excluding salvage, is
charged to accumulated depreciation. Depreciation on utility plant is
recorded primarily on the straight-line remaining life basis and was
equivalent to 3.3% of average gross depreciable plant at December 31, 1994,
3.4% at December 31, 1993, and 2.7% at December 31, 1992. Expenditures that
materially increase utility plant lives are capitalized, while the costs of
maintenance and repairs are charged to expense as incurred. Non-utility
property, plant and equipment is depreciated on the straight-line method over
the estimated useful lives of five to 30 years.
Other Assets: Included in other assets are deferred debt expenses that are
being amortized over the lives of the related debt issues. Additionally,
other assets include purchased contracts that are amortized using the
straight-line method over the estimated lives of the contracts, not to exceed
12 years. Also included are regulatory assets representing amounts that will
be recovered from utility customers through rate adjustments authorized by
the CPUC and NMPUC.
Income Taxes: In 1993, the Company adopted Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
an asset and liability approach to accounting for income taxes. Accordingly,
additional deferred income taxes were provided for temporary differences not
previously recognized, including items previously accounted for using the
flow-through method. These additional deferred taxes provided by Suburban and
New Mexico were offset by the recording of regulatory assets and regulatory
liabilities in accordance with current ratemaking practices of the CPUC and
NMPUC. The regulatory assets and liabilities will be recovered from or
refunded to utility customers through rate adjustments when such taxes become
payable or refundable.
Contributions in aid of construction and advances for construction are
taxable for Federal and state purposes when received, and deferred income tax
assets are recorded for financial reporting purposes. The income taxes are
recovered for contributions in aid of construction by amortizing the related
assets over a 20-year period. Income taxes are recovered for advances for
construction over a 40-year period. Deferred income taxes are also recorded
for differences between Federal and book depreciation. Unamortized investment
tax credits, included in other liabilities and deferred credits, have been
deferred and are amortized against Federal income taxes over the estimated
productive lives of the related assets as allowed by the CPUC and the NMPUC.
Production Cost Balancing Accounts: During 1993, Suburban elected to record
production cost balancing accounts due to increased variability in the costs
of water. As permitted by the CPUC, Suburban records the difference between
actual and CPUC-adopted production costs in balancing accounts in the income
statement, with a corresponding liability or asset on the balance sheet,
until the differences are refunded to or recovered from utility customers
through CPUC-authorized rate adjustments. The production cost balancing
accounts include such items as purchased water, production assessments and
power costs. The effect of this change in accounting estimates in 1993 was to
reduce pretax income by $957,000, or $.24 per fully diluted share.
17
<PAGE>
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advances For Construction: Advances for construction are primarily for water
pipeline extensions. Advance contracts issued prior to July 1982 are
refundable to the depositor at 22% of the revenue received from such
installations over a 20-year period. Advance contracts issued after June 1982
are refundable to the depositor at a rate of 2.5% each year over a 40-year
period.
Contributions In Aid Of Construction: Contributions in aid of construction
are contributions in cash, services or property from developers, governmental
agencies, municipalities or individuals for the purpose of constructing
utility plant. Book depreciation applicable to such plant is charged to the
contributions in aid of construction account rather than to depreciation
expense. The charges continue until the cost applicable to such properties
has been fully depreciated or the asset retired.
Other Liabilities And Deferred Credits: Other liabilities and deferred
credits include unamortized investment tax credits recorded by Suburban and
New Mexico as required by the CPUC and the NMPUC. Also included is the
deferred revenue component of contributions in aid of construction for New
Mexico, recorded under the policy prescribed by the NMPUC. Other liabilities
and deferred credits also include regulatory liabilities representing amounts
that will be refunded to utility customers through rate adjustments
authorized by the CPUC and the NMPUC. Also included are deposits received by
New Mexico for contributions in aid of construction related to major capital
improvement projects that will be built under New Mexico's master plan.
Reclassifications: Certain reclassifications have been made to the 1993 and
1992 consolidated financial statements to conform with the 1994 presentation.
NOTE 2. Acquisition And Disposition Of Businesses
ECO purchased from an unrelated party all of the common stock of Southern
Municipal Services, Inc. (SMS) for $200,000 in cash on August 31, 1993, and
$75,000 paid in August 1994 upon the attainment of certain contract goals by
the former owner of SMS. SMS provided contract operations and maintenance
services for municipal utility districts in the Houston, Texas, area. The
transaction was accounted for under the purchase method. Goodwill of $275,000
was recorded on the transaction and is being amortized over 10 years on a
straight-line basis. The operations of SMS have been included in the
Company's consolidated financial statements effective September 1, 1993.
In 1993, the Company recorded a nonrecurring, pretax charge of $250,000, or
$.06 per fully diluted share, related to a loss on the liquidation of certain
collateral associated with a note receivable from a former subsidiary.
NOTE 3. Utility Property, Plant And Equipment
The components of utility property, plant and equipment at December 31, 1994
and 1993, are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Land and land rights $ 494,000 $ 493,000
Source of supply 9,330,000 9,117,000
Pumping and purification 7,797,000 7,647,000
Transmission and distribution 70,553,000 64,928,000
General (including intangibles) 6,556,000 6,455,000
Construction work in progress 1,449,000 1,453,000
----------------------------------------------------------------------
$96,179,000 $90,093,000
======================================================================
</TABLE>
At December 31, 1994, substantially all of the Company's gross utility plant
is pledged as collateral for the First Mortgage Bonds issued by the Company.
Included in 1994 and 1993 general utility plant is $698,000 of investments in
two not-for-profit mutual water companies. The investments are recorded at
cost and entitle the Company to certain water rights. The Company's
investment in one of these mutual water companies is approximately 32%. The
Company does not exercise significant operating and financial control over
this mutual water company. The Company purchased water for its operations
from these mutual water companies at a cost of approximately $1,050,000,
$1,515,000 and $1,289,000 in 1994, 1993 and 1992, respectively.
NOTE 4. Lines Of Credit
At December 31, 1994, the Company had three revolving lines of credit
totaling $10,500,000 that expire on various dates through 1995. In January
1995, the Company increased one of its lines of credit by $2,000,000.
Interest charged on borrowings under the lines of credit is at the banks'
prime rates or prime rate plus one-half percent. On two of its lines of
credit, the Company may select a fixed interest rate, provided the Company
agrees to borrow the funds for a fixed minimum period. Borrowings are
unsecured. One of the lines of credit requires a commitment fee of one half
percent per year of the unused portion of the available line of credit,
calculated and payable on a quarterly basis. All of the lines of credit contain
certain financial restrictions. The Company expects to renew and update these
lines of credit in the normal course of business.
A summary of borrowings on the lines of credit is presented below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Notes payable to banks
at December 31 $2,450,000 $ 600,000
Weighted-average interest
rate at December 31 7.6% 4.9%
Maximum amount of borrowings
outstanding at any month-end $3,750,000 $1,500,000
Average borrowings $2,758,000 $ 228,000
Weighted-average interest rate 6.1% 4.9%
======================================================================
</TABLE>
18
<PAGE>
NOTE 5. Other Current Liabilities
Included in other current liabilities at December 31, 1994 and 1993, are the
following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Accrued salaries, wages and benefits $1,425,000 $1,610,000
Purchased water 1,093,000 486,000
Production cost balancing accounts 731,000 957,000
Franchise and other taxes 650,000 551,000
Accrued interest payable 570,000 578,000
Current portion of advances
for construction 449,000 623,000
Accrued dividends payable 249,000 245,000
Other 1,288,000 1,237,000
---------------------------------------------------------------------------
$6,455,000 $6,287,000
===========================================================================
</TABLE>
NOTE 6. Long-Term Debt
The long-term debt outstanding at December 31, 1994 and 1993, is summarized
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Suburban First Mortgage Bond,
Series A, due 2006, at 8.93%
interest rate, with semiannual
interest payments $11,400,000 $12,300,000
Suburban First Mortgage Bond,
Series B, due 2022, at 9.09%
interest rate, with semiannual
interest payments 8,000,000 8,000,000
New Mexico First Mortgage Bond,
Series A, due 2002, at 8.86%
interest rate, with semiannual
interest payments 2,000,000 2,000,000
Convertible subordinated
debentures, due August 1995,
at 9.50% interest rate, with
interest payable semiannually 141,000 150,000
---------------------------------------------------------------------------
21,541,000 22,450,000
Less current maturities 1,041,000 900,000
---------------------------------------------------------------------------
Long-term debt $20,500,000 $21,550,000
===========================================================================
</TABLE>
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments
of $900,000. The bond is nonrefundable and not redeemable prior to 2000.
Subsequent to 2000, the bond is redeemable at the option of the Company at a
price of par plus a call premium. Suburban's First Mortgage Bond, Series B, and
New Mexico's First Mortgage Bond, Series A, do not require annual sinking fund
payments. These bonds are nonrefundable and are redeemable at any time by the
Company at a price of par plus a call premium. Additional mortgage bonds may be
issued, subject to the provisions of the indentures. Each indenture limits the
amount of cash and property dividends that Suburban and New Mexico may pay to
the Company. At December 31, 1994, the unrestricted retained earnings of these
subsidiaries aggregated $6,100,000.
The 9.50% convertible subordinated debentures currently are convertible into
common stock at the rate of one share for each $2.55 principal amount of such
debentures. At December 31, 1994 and 1993, there were 55,000 and 59,000
common shares reserved for such conversion, respectively.
Aggregate annual maturities and sinking fund requirements of all long-term
debt for the five years ending December 31, 1999, are as follows: 1995 -
$1,041,000; 1996 - $900,000; 1997 - $900,000; 1998 - $900,000; and 1999 -
$900,000.
NOTE 7. Income Taxes
The Company adopted SFAS 109 during the first quarter of 1993. In connection
with the adoption of SFAS 109, the Company recorded additional deferred
income taxes. The increased deferred income taxes recorded by Suburban and
New Mexico were offset by the recording of regulatory assets and regulatory
liabilities. At December 31, 1994 and 1993, regulatory assets of $1,249,000
and $1,241,000, respectively, were recorded. Regulatory liabilities of
$687,000 and $651,000 were also recorded at December 31, 1994 and 1993,
respectively. The adoption of SFAS 109 had a minimal impact on current income
tax expense.
The components of the current and deferred income tax provisions are as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 395,000 $ 278,000 $1,250,000
State 73,000 252,000 300,000
---------------------------------------------------------------------------
468,000 530,000 1,550,000
---------------------------------------------------------------------------
Deferred income taxes (benefits):
Litigation settlement 570,000 (570,000) --
Depreciation 261,000 1,606,000 364,000
Production cost
balancing accounts 89,000 (379,000) --
Pension expense 65,000 83,000 (71,000)
Contributions in aid
of construction
and advances
for construction (539,000) (40,000) (387,000)
Gains on condemnation
of land (65,000) (18,000) (7,000)
Other reserves (42,000) 165,000 (72,000)
Investment tax credits (37,000) (596,000) --
Deferred debt expenses (9,000) (62,000) (8,000)
Other, net (25,000) (79,000) 65,000
---------------------------------------------------------------------------
268,000 110,000 (116,000)
---------------------------------------------------------------------------
Change in regulatory assets and
regulatory liabilities, net 28,000 (591,000) --
Investment tax credit
amortization (49,000) (49,000) (49,000)
---------------------------------------------------------------------------
$ 715,000 $ -- $1,385,000
---------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C>
Provision computed
at statutory rates 34 % 34 % 34 %
Depreciation 4 % 60 % -- %
Amortization of goodwill 2 % 20 % -- %
State income taxes,
net of Federal tax benefit 2 % (64)% 6 %
Investment tax credits (3)% (38)% (1)%
Other, net 1 % (12)% (1)%
----------------------------------------------------------------------
40 % -- % 38 %
----------------------------------------------------------------------
</TABLE>
Net deferred income tax liabilities consist of the following at December 31,
1994 and 1993:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Contributions in aid of
construction and advances
for construction $ 2,245,000 $ 1,706,000
Investment tax credits 633,000 596,000
Production cost
balancing accounts 290,000 379,000
Other reserves 137,000 95,000
Pension expense 60,000 125,000
Litigation settlement -- 570,000
Other 218,000 167,000
---------------------------------------------------------------------
3,583,000 3,638,000
---------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (5,577,000) (5,334,000)
Gains on condemnation of land (938,000) (985,000)
Deferred debt expenses (131,000) (140,000)
Other (197,000) (171,000)
---------------------------------------------------------------------
(6,843,000) (6,630,000)
---------------------------------------------------------------------
Net deferred income taxes $(3,260,000) $(2,992,000)
---------------------------------------------------------------------
</TABLE>
Management reviews annually the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December
31, 1994 or 1993.
NOTE 8. Earnings Per Share
Primary earnings per share are calculated using the weighted-average number
of shares and dilutive common equivalent shares outstanding during each year
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 average number of common shares and dilutive
common equivalent shares outstanding, assuming the 9.50% convertible
subordinated debentures were converted at the beginning of the year and the
related interest for the year, net of income taxes, was eliminated.
NOTE 9. Stockholders' Equity
The Company is currently authorized to issue 10,000,000 common shares at a
par value of $.01 per share. There were 2,414,061 and 2,382,491 shares
outstanding at December 31, 1994 and 1993, respectively. The Company is also
currently authorized to issue 250,000 preferred shares at a par value of $.01
per share. There were 10,373 1/4 Series A preferred shares outstanding at both
December 31, 1994 and 1993. The holders of Series A shares are entitled to
annual dividends of $2.625 per share. Series A shares are callable by the
Company at a price equal to $52 per share and have a preference in
liquidation of $50. There were 220 and 440 Series D preferred shares
outstanding at December 31, 1994 and 1993, respectively. The holders of
Series D shares were entitled to annual dividends of $2.75 per share. The
Company fully redeemed the Series D shares in January 1995.
The Company has a dividend reinvestment and stock purchase plan that allows
common stockholders the option of receiving their dividends in cash or common
stock at a 5% discount rate. The plan permits optional cash purchases of
stock at current market values to a maximum of $3,000 per quarter. At
December 31, 1994, there were 169,009 common shares reserved for issuance
under this plan. In addition, the Company has an employee qualified stock
purchase plan that allows eligible employees to purchase common stock through
payroll withholding in an amount of up to 10% of their salary (not to exceed
$25,000 per year) at a 10% discount rate. At December 31, 1994, 179,369
common shares were reserved for issuance under this plan.
NOTE 10. Stock Option And Restricted
Stock Plan
During 1988, the stockholders approved a stock option and restricted stock
plan (the Plan). In 1989, the Plan was amended to provide for the grant of
stock appreciation rights. In 1993, the stockholders approved an amendment to
the Plan (the Amendment). The Amendment provides for an increase in the
number of shares reserved for issuance under the Plan from 150,000 to
250,000, and an extension of the period during which the Company may grant
options to purchase the Company's common stock from February 17, 1998, to
February 17, 2003. In addition, the Amendment eliminates any future grants of
stock appreciation rights or issuances of restricted stock under the Plan and
amends certain provisions with respect to the outstanding restricted stock
issued thereunder.
Restricted stock issued to officers prior to the Amendment is held in escrow
until the restrictions lapse. Restricted stock issued prior to October 22,
1991, vests 10 years after grant. Restricted stock issued after October 22,
1991, was subject to repurchase by the Company. Unearned compensation of
$238,000 related to the issuance of 14,750 shares of restricted stock is
being amortized over the vesting period. During 1994, 2,000 shares were
repurchased and cancelled by the
20
<PAGE>
Company after the resignation of an officer. During 1993, 3,285 shares of
restricted stock were released from escrow to a former officer of Suburban. In
1994, 1993 and 1992, $13,000, $29,000 and $64,000, respectively, were recorded
as compensation expense. The Plan also allows the Company to grant nonqualified
stock options to officers, certain directors and employees at exercise prices
not less than the fair market value of the Company's common stock on the date of
grant. Generally, options vest over a period of five years and expire 10 years
from the date of grant. Activity for nonqualified stock options issued under the
Plan is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Number of Shares Exercise Prices
------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1992 118,650 $13.25 - $17.75
Cancelled (300) 15.50 --
------------------------------------------------------------------------
Outstanding, December 31, 1993 118,350 13.25 - 17.75
Granted 22,505 9.75 --
Cancelled (29,220) 9.75 - 17.75
------------------------------------------------------------------------
Outstanding, December 31, 1994 111,635 $ 9.75 - $17.75
------------------------------------------------------------------------
</TABLE>
At December 31, 1994, there were 118,030 shares available for grant as
options, and 69,170 options were exercisable.
NOTE 11. Employee Benefit Plans
The Company has a noncontributory pension plan under which employees of the
parent company, Suburban and New Mexico who have one or more years of service
and have attained the age of 21 years are qualified to participate. The
Company funds annually the minimum required statutory amount. In January
1994, the Company contributed $516,000 to the pension plan. No contributions
were required in 1993 and 1992. The benefits are based on employees' average
compensation during the highest five consecutive years of the last 10 years
before retirement, and their years of service. The benefit is reduced if a
participant retires early.
Net pension expense for 1994, 1993 and 1992 included the following
components:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
--------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $548,000 $357,000 $335,000
Interest cost on projected
benefit obligation 555,000 484,000 433,000
Actual return on plan assets 303,000 (750,000) (597,000)
Net amortization and deferral (961,000) 126,000 1,000
--------------------------------------------------------------------
Net pension expense $445,000 $217,000 $172,000
--------------------------------------------------------------------
</TABLE>
The funded status at December 31, 1994 and 1993, is reconciled to accrued
expense as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1994 1993
--------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit obligation $(4,687,000) $(4,920,000)
Effect of increase in compensation levels (1,855,000) (2,732,000)
--------------------------------------------------------------------
Projected benefit obligation for service
rendered through December 31 (6,542,000) (7,652,000)
Plan assets at fair value 7,121,000 7,180,000
--------------------------------------------------------------------
Plan assets greater (less) than
projected benefit obligation 579,000 (472,000)
Unrecognized net asset at transition date (997,000) (1,121,000)
Unrecognized prior service cost (185,000) --
Unrecognized net loss (gain)
from past experience, different
from that assumed and effects
of changes in assumptions (67,000) 852,000
--------------------------------------------------------------------
Accrued expense $ (670,000) $ (741,000)
--------------------------------------------------------------------
</TABLE>
The unrecognized prior service cost results from a change in the Internal
Revenue Service Code which decreased the maximum amount of compensation that
may be recognized for pension plan purposes from $235,840 to $150,000.
Included in accumulated benefit obligation are vested benefits of $4,583,000
and $4,806,000 at December 31, 1994 and 1993, respectively. Approximately 87%
of plan assets are invested in two mutual funds consisting of investments in
stocks, bonds, and money market investments, and a group retirement policy
consisting of a guaranteed insurance contract. The remaining 13% of plan
assets are invested primarily in the Company's common stock. The plan owns
64,064 common shares of the Company, which had a market value of
approximately $545,000 and $625,000 at December 31, 1994 and 1993,
respectively. The plan received dividends on these shares of approximately
$26,000, $53,000 and $56,000 in 1994, 1993 and 1992, respectively.
The discount rate and the rate of increase in compensation levels used in
determining the actuarial present value of the projected benefit obligation
(PBO) at December 31, 1994, were 8.5% and 5.5%, respectively. The discount
rate and the rate of increase in compensation levels used to compute the PBO
at December 31, 1993, were 7.25% and 6.0%, respectively. At December 31,
1992, the discount rate and rate of increase in compensation levels were 8.5%
and 6.5%, respectively. The expected long-term rate of return on assets used
in 1994 and 1993 was 7.5%.
21
<PAGE>
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1988, the Company established a 401(k) profit sharing plan (ECO 401(k)
Plan) covering employees of its service business. In 1993, the Company
amended the ECO 401(k) Plan to provide for monthly enrollment by employees
after the completion of three months of service, and made other minor
changes. Participants may elect to contribute up to 15% of their salary to
the ECO 401(k) Plan. The Company matches a participant's contribution for an
amount up to 50% of the first 4% of a participant's salary. Company
contributions vest immediately. Company contributions to the ECO 401(k) Plan
were $91,000, $77,000 and $68,000 in 1994, 1993 and 1992, respectively. The
assets of the ECO 401(k) Plan are invested at the discretion of the
individual employees in mutual funds consisting of stocks, bonds and money
market investments.
On January 1, 1994, the Company established a 401(k) plan (the Utility 401(k)
Plan) covering the parent company, Suburban and New Mexico employees. The
Utility 401(k) Plan provides for quarterly enrollment after the completion of
three months of service, and allows participants to contribute up to 15% of
their salary. The Utility 401(k) Plan does not allow Company contributions.
The assets of the Utility 401(k) Plan are invested at the discretion of the
individual employees in mutual funds consisting of stocks, bonds and money
market investments.
Note 12. Litigation Settlements
In January 1994, Suburban reached out-of-court settlements of two legal
actions arising from a chlorine gas leak that occurred in October 1990 at a
Suburban water supply facility. The two actions were settled for an aggregate
cash payment of approximately $1,437,000 paid in January 1994 and are the
last known claims arising out of this incident. The Company recorded in 1993
a nonrecurring charge of $.36 per fully diluted share associated with these
settlements. The plaintiffs sought general damages in excess of $3.7 million
plus unspecified punitive damages. The full impact of this incident on 1993
earnings was $.57 per fully diluted share, which included defense costs of
approximately $822,000 in addition to the $1,437,000 settlement. A third
action was settled earlier in 1993 for a nominal amount.
At the time of the chlorine gas incident, the Company maintained liability
insurance coverage of $20 million. However, the Company's primary and excess
liability insurance carrier declined to defend or indemnify the Company on
the basis of allegedly applicable exclusions in these policies. The Company
believes it is entitled to defense and indemnity under these policies and
filed a lawsuit against the carrier to obtain reimbursement for the full
amount of these settlements, plus associated defense costs. On May 3, 1994,
the insurance carrier was granted a summary judgment dismissing the Company's
action. On May 31, 1994, the Company appealed this judgment, and the appeal
is pending. Suburban is authorized by the CPUC to seek recovery of defense
expenses through future rate proceedings. There is no assurance that recovery
of such costs will be allowed. The Company will not recognize income on these
potential recoveries until amounts, if any, are received.
NOTE 13. Commitments And Contingencies
The Company leases certain equipment and office facilities under operating
leases that expire through 2003. Aggregate rental expense under all operating
leases approximated $1,724,000 in 1994, $1,244,000 in 1993, and $645,000 in
1992. At December 31, 1994, the minimum rental commitments under existing
noncancelable operating leases are as follows: 1995 - $1,826,000; 1996 -
$1,699,000; 1997 - $1,413,000; 1998 - $857,000; 1999 - $500,000; and
thereafter - $1,143,000.
The Company is the subject of certain litigation arising from the ordinary
course of operations. The Company believes the ultimate resolution of such
matters will not materially affect its consolidated financial condition,
results of operations or cash flow.
From 1989 through 1993, the Company recorded pretax gains on four land
transactions that aggregated $1,816,000. 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 $1,606,000) 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 financial statements.
22
<PAGE>
Southwest Water Company And Subsidiaries
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Southwest Water Company:
We have audited the accompanying consolidated balance sheets of Southwest
Water Company and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwest
Water Company and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1995
23
<PAGE>
Southwest Water Company And Subsidiaries
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
---------------------------------------------------------------------------------------------------------------
1994 Quarter Ended March June September December
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $11,102 $12,694 $ 14,533 $12,603
Operating income 262 925 1,623 1,039
Net income (loss) (131) 241 650 297
Net income (loss) available for common shares (138) 234 643 290
Primary earnings (loss) per common share (.06) .10 .27 .12
Fully diluted earnings (loss) per common share (.06) .10 .26 .12
<CAPTION>
---------------------------------------------------------------------------------------------------------------
1993 Quarter Ended March June September December
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 9,620 $12,644 $13,992 $11,962
Operating income 334 1,485 1,278 324
Net income (loss) (81) 604 499 (895)
Net income (loss) available for common shares (88) 597 492 (902)
Primary earnings (loss) per common share (.04) .25 .21 (.38)
Fully diluted earnings (loss) per common share (.04) .25 .20 (.38)
---------------------------------------------------------------------------------------------------------------
</TABLE>
The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of the water utility and service business
operations, the nonrecurring charges in the second half of 1993, and the
timing of utility rate relief.
MARKET AND DIVIDEND INFORMATION
The following table sets forth the range of market prices of Southwest Water
Company's Common Shares. Such prices reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions. The shares are traded on the NASDAQ National Market --
symbol SWWC. The current annual dividend rate is $.40 per share. At December
31, 1994, there were 1,914 stockholders of record.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------------------------------------
Market Price Range Market Price Range
Dividends High Low Dividends High Low
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $.10 $11 1/4 $8 3/4 $.2325 $18 $14 3/4
2nd Quarter .10 12 1/4 8 1/2 .2325 17 3/4 15 1/4
3rd Quarter .10 11 8 1/4 .10 16 3/4 8 1/2
4th Quarter .10 9 3/4 7 1/2 .10 13 3/4 9 1/4
-----------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
EXHIBIT 21.1
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (1)
<TABLE>
<CAPTION>
Jurisdiction
of
Name of Subsidiary Incorporation Parent
------------------ ------------- ------
<S> <C> <C>
Suburban Water Systems California Southwest Water Company
New Mexico Utilities, Inc. New Mexico Southwest Water Company
ECO Resources, Inc. Texas Southwest Water Company
Water Suppliers Mobile
Communication Service California Suburban Water Systems
SW Resource Management
Company Delaware Southwest Water Company
SOCI, Inc. (2) Delaware Southwest Water Company
SW Operating
Services Co. (2) Delaware Southwest Water Company
Southwest Environmental
Laboratories, Inc. (2) Texas ECO Resources, Inc.
Southern Municipal
Services, Inc. (2) Texas ECO Resources, Inc.
</TABLE>
All above listed subsidiaries have been consolidated in the Registrant's
financial statements.
(1) As of March 17, 1995
(2) Inactive
<PAGE>
EXHIBIT 23.1
The Board of Directors and Stockholders
Southwest Water Company:
We consent to incorporation by reference in the registration statement (No. 33-
21154) on Form S-3 and the registration statements (Nos. 33-28918 and 33-73174)
on Form S-8 of Southwest Water Company of our reports dated January 23, 1995
relating to the consolidated balance sheets of Southwest Water Company and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in common stockholders' equity and cash flows and
related schedule for each of the years in the three-year period ended December
31, 1994, which reports appear in the December 31, 1994 annual report on Form
10-K of Southwest Water Company.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
March 22, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 69,691,000
<OTHER-PROPERTY-AND-INVEST> 2,780,000
<TOTAL-CURRENT-ASSETS> 8,860,000
<TOTAL-DEFERRED-CHARGES> 2,053,000
<OTHER-ASSETS> 3,450,000
<TOTAL-ASSETS> 86,834,000
<COMMON> 24,000
<CAPITAL-SURPLUS-PAID-IN> 17,158,000
<RETAINED-EARNINGS> 10,820,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 28,002,000
11,000
519,000
<LONG-TERM-DEBT-NET> 20,500,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 2,450,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,041,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 34,311,000
<TOT-CAPITALIZATION-AND-LIAB> 86,834,000
<GROSS-OPERATING-REVENUE> 50,932,000
<INCOME-TAX-EXPENSE> 715,000
<OTHER-OPERATING-EXPENSES> 47,083,000
<TOTAL-OPERATING-EXPENSES> 47,798,000
<OPERATING-INCOME-LOSS> 3,134,000
<OTHER-INCOME-NET> 62,000
<INCOME-BEFORE-INTEREST-EXPEN> 3,196,000
<TOTAL-INTEREST-EXPENSE> 2,139,000
<NET-INCOME> 1,057,000
28,000
<EARNINGS-AVAILABLE-FOR-COMM> 1,029,000
<COMMON-STOCK-DIVIDENDS> 962,000
<TOTAL-INTEREST-ON-BONDS> 1,983,000
<CASH-FLOW-OPERATIONS> 3,566,000
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
