<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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
SOUTHWEST WATER COMPANY
[LOGO OF 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
WEST COVINA, CALIFORNIA 91791-1605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(626) 915-1551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On August 8, 1997, there
were 3,145,029 common shares outstanding.
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
- ------- ----------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 11
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 505 $ 790
Customers' accounts receivable, net 9,506 8,216
Other current assets 3,019 2,086
-------- --------
13,030 11,092
Property, Plant and Equipment:
Utility property, plant and equipment - at cost 127,791 119,731
Contract operations property, plant and
equipment - at cost 6,608 6,448
-------- --------
134,399 126,179
Less accumulated depreciation and amortization 36,621 34,765
-------- --------
97,778 91,414
Other Assets 8,734 8,910
-------- --------
$119,542 $111,416
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and bank notes payable $ 7,120 $ 6,089
Accounts payable 1,593 1,513
Other current liabilities 9,578 7,569
-------- --------
18,291 15,171
Other Liabilities and Deferred Credits:
Long-term debt 30,700 30,700
Advances for construction 7,533 7,719
Contributions in aid of construction 25,645 21,556
Deferred income taxes 3,990 3,398
Other liabilities and deferred credits 2,473 2,472
-------- --------
Total Liabilities and Deferred Credits 88,632 81,016
Stockholders' Equity:
Cumulative preferred stock 517 517
Common stock 31 31
Paid-in capital 26,364 26,159
Retained earnings 4,022 3,728
Unamortized value of restricted stock issued (24) (35)
-------- --------
Total Stockholders' Equity 30,910 30,400
-------- --------
$119,542 $111,416
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $18,469 $17,438 $33,901 $31,427
Operating Expenses:
Direct operating expenses 13,480 13,155 25,430 24,430
Selling, general and administrative 2,885 2,670 5,563 4,981
------- ------- ------- -------
16,365 15,825 30,993 29,411
------- ------- ------- -------
Operating Income 2,104 1,613 2,908 2,016
Other Income (Expense):
Interest expense (808) (695) (1,590) (1,354)
Interest income 30 16 63 47
Other 66 37 121 47
------- ------- ------- -------
(712) (642) (1,406) (1,260)
------- ------- ------- -------
Income Before Income Taxes 1,392 971 1,502 756
Income tax provision 585 408 631 318
------- ------- ------- -------
Net Income 807 563 871 438
Dividends on preferred shares (7) (7) (14) (14)
------- ------- ------- -------
Net Income Available for Common Shares $ 800 $ 556 $ 857 $ 424
======= ======= ======= =======
Earnings Per Common Share (Note 8) $ 0.25 $ 0.18 $ 0.27 $ 0.14
======= ======= ======= =======
Cash Dividends Per Common Share (Note 8) $ 0.09 $ 0.083 $ 0.18 $ 0.166
====== ====== ======= =======
Weighted Average Outstanding
Common Shares (Note 8) 3,138 3,108 3,133 3,103
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES, NET $3,171 $ 428
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,624) (5,598)
Investment in Windermere Utility Company - (2,300)
------- -------
Net cash used in investing activities (4,624) (7,898)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 1,031 7,320
Contributions in aid of construction 693 784
Net proceeds from dividend reinvestment and
employee stock purchase plans 184 130
Dividends paid (576) (519)
Payments of advances for construction (164) (192)
------- -------
Net cash provided by financing activities 1,168 7,523
------- -------
Net increase (decrease) in cash and cash equivalents (285) 53
Cash and cash equivalents at beginning of year 790 784
------- ------
Cash and cash equivalents at end of period $ 505 $ 837
======= ======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $1,555 $1,318
Income taxes $ 284 $ 462
Depreciation and amortization $2,089 $1,943
Non-cash contributions in aid of construction
conveyed to Company by developers $3,966 $1,197
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. Southwest Water Company ("the Company") and its subsidiaries provide water
management services through contract and utility operations. The unaudited
consolidated condensed financial statements reflect all adjustments which,
in the opinion of management, are necessary to present fairly the financial
position of the Company as of June 30, 1997, and the Company's results of
operations for the three and six months ended June 30, 1997. All such
adjustments are of a normal recurring nature. Certain reclassifications
have been made to the 1996 financial statements to conform to the 1997
presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
3. There is seasonality to the water management services industry; thus, the
results of operations for the three and six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
The first and fourth quarters of each year are normally the lowest in terms
of average customer water usage for the Company's water utilities.
Rainfall and weather conditions affect utility operations, and utility
revenues usually peak during the second and third quarters of each year.
The Company's contract operations business can also be seasonal in nature.
Heavy rainfall during a quarter hampers the Company's ability to perform
billable work such as pipeline maintenance, manhole rehabilitation and
other outdoor services.
4. For the three and six months ended June 30, 1997 and 1996, earnings per
common share were calculated using the weighted average number of common
shares and dilutive common equivalent shares outstanding during the period.
Common equivalent shares arise from stock options, but since common stock
equivalents do not exceed 3% of weighted average common shares outstanding,
primary and fully diluted earnings are not reported separately.
5. The Company will be subject to Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" ("SFAS No. 128") for interim and annual
financial statements issued after December 15, 1997. SFAS No. 128 changes
the standards for computing earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Diluted EPS
will replace fully diluted EPS and will reflect the potential dilution that
could occur if common stock equivalents were exercised or converted into
common stock that could share in the earnings of the entity. SFAS No. 128
requires a dual presentation of basic and diluted EPS by entities with
complex capital structures. Management does not expect that SFAS No. 128
will materially impact the Company's financial position or results of
operations.
6. The Company will also be subject to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS No.130") for
interim and annual financial statements issued for periods beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components. Comprehensive
income is defined as revenue, expenses, gains and losses that under
generally accepted accounting principles are excluded from net income (such
as extraordinary and non-recurring gains and losses). SFAS No. 130 requires
that items of comprehensive income be classified separately in the
financial statements. The statement also requires that the accumulated
balance of comprehensive income
6
<PAGE>
items be reported separately from retained earnings and paid-in capital in
the equity section of the balance sheet. Management does not expect that
the implementation of SFAS No. 130 will have a material effect on the
Company's financial position or results of operations.
7. The Company will be subject to Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") for annual financial statements issued for
periods beginning after December 15, 1997. SFAS No. 131 is not required in
interim financial statements in the initial year of application. SFAS No.
131 requires that financial and descriptive information about operating
segments of a company be provided. Generally, financial information will
need to be reported on the same basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 will require additional financial disclosure by
the Company, but will not have any effect on the Company's financial
position or results of operations.
8. The 1996 earnings per common share, cash dividends per common share and
weighted average outstanding common shares have been restated to reflect a
20% stock dividend granted to stockholders of record on January 2, 1997.
9. As discussed in the Company's 1996 Annual Report on Form 10-K, the Company
was approached by the City of Albuquerque ("the City") during the first
quarter of 1997 concerning the potential sale of New Mexico Utilities, Inc.
("NMUI") to the City. Under New Mexico state law, municipalities have the
right to acquire private water utility plants and systems within their
territorial limits by condemnation, but must pay fair value if the election
to proceed with a condemnation is made. During the second quarter of 1997,
the City and NMUI hired independent third parties to perform separate
appraisals of NMUI. Three separate appraisals have been completed with
values ranging from $22,000,000 to $39,000,000. Discussions with the City
are continuing; however, at this time, management cannot predict whether an
agreement for the sale of NMUI is likely, whether the City will continue to
pursue an agreement to purchase NMUI, or whether the City will elect to
proceed with condemnation if an agreement is not reached. Therefore,
management cannot predict a price that the City would pay if it maintains
its interest in concluding the transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban Water Systems ("Suburban") for the
replacement and renovation of existing water utility facilities and by
construction expenditures for new water and wastewater utility facilities at
NMUI. To a lesser extent, liquidity may also be influenced by the Company's
continuing investment in ECO Resources, Inc. ("ECO").
At June 30, 1997, the Company had cash and cash equivalent balances totaling
$505,000. The Company has three separate lines of credit from different
commercial banks. As of June 30, 1997, the Company had a total line of credit
capacity of $16,000,000, and unused lines of credit of $9,780,000. The amount
of additional borrowing capacity available under current short-term lines of
credit is limited by financial covenants that restricted additional borrowing at
June 30, 1997 to a maximum of $3,992,000. Two of the lines of credit expire
during 1997. The banks have notified the Company that they want to renew the
lines of credit and the lines are currently being renegotiated. The
other line of credit expires in 1998 and is expected to be renewed in the normal
course of business. During the first six months of 1997, the Company borrowed a
net amount of $1,031,000 on its lines of credit, primarily to fund construction
expenditures at its utility operations.
7
<PAGE>
In 1996, the Company completed a long-term First Mortgage Bond financing for
$12,000,000. Among other financial covenants, the First Mortgage Bond Indentures
limit the amount of utility property that may be pledged for additional secured
borrowings. At June 30, 1997, the additional secured borrowing capacity under
these indentures was approximately $27,021,000.
During the second quarter of 1997, the Company's additions to property, plant
and equipment were $8,590,000, representing an increase of $1,795,000 over the
same period in 1996. Developers made contributions in aid of construction
("CIAC") totaling $4,659,000, of which $3,966,000 was non-cash CIAC and the
remaining $693,000 was received as cash. The Company financed capital additions
of $3,931,000 which were funded by cash flows from operations and short-term
borrowing. Capital expenditures at NMUI are expected to decrease approximately
$2,000,000 over the next 12 months due to the completion of major projects in
1997. Suburban's capital expenditures are expected to continue at the same level
over the next 12 months due to the construction of additional new plant and the
refurbishment of existing utility plant.
The Company anticipates that the available short-term borrowing capacity and
the cash flow generated from operations will be sufficient to fund its
activities for the next year. If additional cash were needed to fund
improvements or to acquire additional assets, the Company would consider
alternative sources, including long-term financing. The amount and timing of
any future long-term financing will depend on various factors, including 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 approval is required for any long-term financing by Suburban and
NMUI. If the Company were unable to renew its existing lines of credit or
obtain additional long-term financing, capital spending would be reduced or
delayed until new arrangements were secured. Such financing arrangements could
include seeking equity financing through a private placement or a public
offering.
REGULATORY AFFAIRS:
Regulation:
The rates and operations of the Company's utilities are regulated by the
California Public Utilities Commission ("CPUC") and the New Mexico Public
Utility Commission ("NMPUC"). The rates allowed are intended to provide the
utilities an opportunity to earn a reasonable return on common equity and to
fund necessary investments in property, plant and equipment. The Company
anticipates that continuing construction expenditures and increased direct
operating expenses will require periodic requests for rate increases.
Suburban received CPUC approval for a 4.25% ($1,100,000) general rate
increase, effective April 24, 1996, as well as a 2.62% ($705,000) step increase,
effective January 1, 1997. Suburban is authorized to file for an additional
step increase of 2.62% ($740,000) which, if approved, would become effective
January 1, 1998.
8
<PAGE>
Tax Legislation:
In 1996, the California legislature enacted Senate Bill 1099, which became
effective January 1, 1997. This legislation provides that water utilities which
sold excess property and reinvested the sale proceeds within an eight-year
period in the utility's plant do not need to allocate any portion of a gain on
sale to the ratepayers. From 1990 through 1995, Suburban recorded pretax gains
on land sales of four parcels of excess real property totaling $1,690,000.
Since the proceeds of the four land sales were reinvested in utility plant, the
gains should not be subject to allocation to the ratepayers.
In 1996, legislation was enacted that changed the federal tax treatment of
CIAC. This legislation repealed the requirement to include CIAC as a component
of taxable income, eliminating the requirement for the Company to pay taxes on
CIAC as it is received. The new legislation also eliminates the depreciation
deduction for CIAC, and sets forth new requirements for the depreciation method
and useful life to be used for most non-CIAC water utility property. The law
was effective for CIAC received after June 12, 1996.
The net impact of the repeal of the income tax on CIAC, combined with the
changes in depreciation calculations, is expected to favorably impact NMUI's
cash flow, since significant amounts of CIAC are expected in its fast-growing
service area. The impact on Suburban's earnings is not expected to be
significant; however, future cash flow could be negatively affected by the
change in depreciation methods since Suburban does not anticipate high levels of
CIAC. Until the Internal Revenue Service completes final regulations, and until
California and New Mexico complete changes, if any, to their tax regulations,
the full impact of this tax change cannot be determined. The Company does not
believe that these tax law changes will have a material adverse impact on its
ability to fund ongoing operations and capital needs.
Regulatory Developments:
The California legislature has held hearings discussing the CPUC's
organization and operation. Among other options, the CPUC has proposed
consideration of performance-based rate making, which would provide incentives
for utilities to operate more efficiently and improve productivity. If enacted,
these changes are expected to reduce regulatory burden and promote efficiency
among utilities which, if accomplished, would likely benefit both ratepayers and
stockholders. Legislative and CPUC developments are closely monitored by the
Company and by the various water industry associations in which the Company
actively participates. Whether such legislative or CPUC changes will be
enacted, or, if enacted, what the terms of such changes would be, are not known
by the Company. Therefore, management cannot predict the impact of final
legislative or CPUC developments on the Company's financial condition or results
of operations.
In 1996, the residents of the state of New Mexico voted to combine the NMPUC
and the New Mexico Corporation Commission ("NMCC") and create the New Mexico
Public Regulatory Commission ("NMPRC"). Presently, the NMPUC consists of three
appointed officials and the NMCC consists of three elected officials. Under the
newly enacted legislation, the NMPRC will consist of five elected officials who
will be elected in November 1998, and take office on January 1, 1999.
The voters of the state of New Mexico also passed a constitutional amendment
which will require the state legislature to make changes to the Public Utilities
Act ("PUA") that may result in changes to the present process of ratemaking. A
legislative committee is currently reviewing the proposed changes to the PUA.
Management cannot predict if or when changes will ultimately occur; or if
changes were enacted, the impact on NMUI's financial position or results of
operations.
Contract Operations:
The operations of ECO are not subject to regulation by a public utilities
commission. ECO's long-term water and wastewater service contracts typically
include annual inflation adjustments. Most contracts with municipal utility
districts are short-term contracts and do not generally include inflation
adjustments. Changes in prices are negotiated on a contract-by-contract basis.
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 (the "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 (as reenacted in 1996), and the Resource Conservation and
Recovery Act. Both the EPA and state regulatory agencies require periodic
testing and sampling of water. To date, the Company has not experienced any
material adverse effects upon its operations resulting from compliance with
governmental regulations.
9
<PAGE>
During the second quarter of 1997, Suburban was advised by the San Gabriel
Basin Water Quality Authority that the California Department of Health Services
("CDHS") was monitoring groundwater sources for the contaminant "perchlorate",
which had been detected in the Main San Gabriel Valley Upper Basin. In June
1997, the contaminant was detected in a well that is operated but not owned by
Suburban, at a level in excess of the state's allowable standards. Suburban has
been able to blend water produced from this well with other water sources,
bringing the concentration within the CDHS standards. The impact of this
contaminant on the results of operations for Suburban is not fully known at the
time; however, costs associated with testing of Suburban's water supplies have
increased and are expected to increase further as regulatory agencies adopt
additional monitoring requirements. Suburban believes that these costs will be
recoverable from ratepayers in future rate increases; however, there is no
assurance that recovery of these costs will be allowed.
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 operations revenues. However,
there is no assurance that recovery of such costs will be allowed.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Earnings per common share were $.25 in 1997, compared to $.18 (adjusted for a
stock dividend of 20% on January 2, 1997) during the same period in 1996.
Operating income increased $491,000 or 30%, and, as a percentage of operating
revenues, increased from 9% in 1996 to 11% in 1997. Operating income at the
utilities increased $304,000, due primarily to increased water sales at Suburban
and the positive effects of water rate increases. ECO's operating results
improved $83,000, due to increased revenue from new contracts, additional work
performed outside the scope of existing contracts, aggressive cost containment
measures, and restructuring of marketing responsibilities and focus. Parent
company expenses decreased $104,000, due primarily to a reduction in corporate
reserve expenses in comparison to 1996 levels.
Operating revenues
Operating revenues increased $1,031,000 or 6%. Water utility revenues
increased $604,000 due to warmer weather in Southern California which led to a
6.3% increase in water consumption by Suburban's customers. Suburban's rate
increases also favorably impacted operating revenue. ECO's revenues increased
$427,000, primarily as a result of new contracts and additional work performed
outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses increased $325,000 or 2%. As a percentage of
operating revenues, these expenses decreased from 75% in 1996 to 73% in 1997.
Water utility direct operating expenses increased $122,000, primarily reflecting
the increase in water costs experienced to meet increased consumption by
Suburban's customers. ECO's direct operating expenses increased $203,000,
resulting primarily from higher expenses associated with new contracts and
additional work performed outside the scope of existing contracts.
Selling, general and administrative
Selling, general and administrative expenses increased $215,000 or 8%. As a
percentage of operating revenues, these expenses increased from 15% in 1996 to
16% in 1997. General and administrative expenses at the utilities increased
$178,000, primarily due to an increase in legal reserves at Suburban.
10
<PAGE>
ECO's selling, general and administrative expenses increased $141,000, primarily
due to higher insurance, legal and consulting expenses. As discussed above,
general and administrative expenses of the parent company decreased $104,000.
Other income and interest expense
Interest expense increased $113,000, due primarily to higher short-term and
long-term credit balances in 1997 as compared with 1996. Other income increased
$29,000, due primarily to consulting fees received as a result of an investment
in Windermere Utility Company ("Windermere").
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Earnings per common share increased from $.14 (adjusted for a stock dividend
of 20% on January 2, 1997) in 1996 to $.27 in 1997.
Operating income increased $892,000, or 44%, and, as a percentage of operating
revenues, increased from 6% in 1996 to 9% in 1997. Operating income at the
utilities increased $850,000, due primarily to increased water consumption at
Suburban and the positive effects of water rate increases. ECO's operating loss
decreased $124,000 due to increased revenues from new contracts, additional work
performed outside the scope of existing contracts, aggressive cost containment
measures, and restructuring of marketing responsibilities and focus. Parent
company expenses increased $82,000 primarily due to increases in payroll and
associated payroll benefits, and increases in outside services.
Operating revenues
Operating revenues increased $2,474,000 or 8%. Water utility sales increased
$1,437,000 due to warmer weather in Southern California resulting in an 8.4%
increase in water consumption by Suburban's customers. Water rate increases at
Suburban also favorably impacted operating revenues. ECO's revenues increased
$1,037,000, primarily as a result of revenues from new contracts and additional
work performed outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses increased $1,000,000 or 4%. As a percentage of
operating revenues, these expenses decreased from 78% in 1996 to 75% in 1997.
Water utility direct operating expenses increased $373,000, which reflects the
corresponding increase in water consumption by Suburban's customers. ECO's
operating results improved $83,000, due to new contracts, additional work
performed outside the scope of existing contracts, aggressive cost containment
measures, and restructuring of marketing responsibilities and focus. ECO's
direct operating expenses increased $627,000, resulting primarily from higher
expenses associated with new contracts and increased billable work.
Selling, general and administrative
Selling, general and administrative expenses increased $582,000 or 12%. As a
percentage of operating revenues, these expenses were 16% in 1997 and 1996.
Selling, general and administrative expenses at the utilities increased $214,000
primarily due to increased legal reserves. ECO's selling, general and
administrative expenses increased $286,000 primarily due to higher insurance,
legal and consulting expenses. As discussed above, general and administrative
expenses of the parent company increased $82,000.
Other income and Interest expense
Interest expense increased $236,000, primarily due to higher total short-term
and long-term credit balances in 1997 as compared with 1996. Other income
increased $74,000, primarily due to consulting fees received as a result of an
investment in Windermere.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 29, 1997, an action entitled Kristin Santamaria, et al. vs. Suburban
Water Systems, etc. et al., was filed as Case No. KC025995 in the Superior Court
for the County of Los Angeles, California. The plaintiffs in the action are
approximately 85 individuals who allege that they are residents in the San
Gabriel Valley (the "Valley"), a portion of Los Angeles County, California. The
defendants in the action consist of the Company, Suburban and three other water
purveyors that provide water service in the Valley and 19 other entities
operating in the Valley which manufacture a variety of products.
The plaintiffs contend, in essence, that they are long-time residents of the
Valley and that, by virtue of their residence in the Valley, they have suffered
long-term exposure to various hazardous substances, including, but not limited
to, trichloroethylene ("TCE"), perchloroethene ("PCE"), carbon tetrachloride
("CTC") and perchlorate. The plaintiffs allege that they have suffered physical
and mental injury, six wrongful deaths, loss of income, medical expenses, loss
of future earnings, loss of property values, and expenses for property testing
and remediation. The plaintiffs contend that the defendants are liable for the
alleged losses of the plaintiffs either by virtue of release of these hazardous
materials into the soil, air and water in the Valley or by delivery of water
which contains these hazardous materials for domestic consumption. The
plaintiffs allege 12 separate causes of action, including 10 causes of action
against the Company, Suburban and the other water purveyors, ranging from
negligence, wrongful death and strict liability to trespass, nuisance, absolute
liability and fraudulent concealment. The plaintiffs seek general, special and
punitive damages in unspecified amounts as well as injunctive relief ordering a
cessation of the acts of which the plaintiffs complain.
The Company and Suburban have not been served with the summons and complaint
in the action, and the Company understands that the attorneys for the plaintiffs
are currently seeking more plaintiffs to join in the action. Accordingly, no
response to the complaint is due from the Company or Suburban at this time.
Suburban annually takes over 4,000 water samples from reservoirs, wells and
residences, which are then tested by independent, state-certified laboratories.
Water tested by these laboratories has continued to comply with all state and
Federal drinking water standards. The Company does not provide any water
service. The Company and Suburban will vigorously defend against all claims
made by the plaintiffs and believe they are not liable for any damages to the
plaintiffs.
Suburban, the Company, and several unrelated parties were served with a
complaint in September 1995, wherein the plaintiff claimed that while working in
the 1950's and 1960's for an independent contractor hired by Suburban, he was
exposed to asbestos fibers. As a result of such exposure, he contracted
mesothelioma. Suburban and the Company denied all allegations in their response
to the complaint. The plaintiff died In 1995, and in 1996 the plaintiff's widow
and children filed a wrongful death action against Suburban and the Company.
This complaint alleges the same facts as the first complaint, plus the wrongful
death of the original plaintiff. The two actions have been consolidated.
Information concerning the claims made by the plaintiffs, the efforts of the
Company and Suburban to cause their insurance carrier to provide indemnity and
defense in the action, and information concerning other defendants in the action
is set forth in the Company's Form 10-Q Report for the quarter ended March 31,
1997 and is hereby incorporated by reference. To date, there has been no
specific claim for damages by the plaintiffs. Suburban and the Company maintain
that they have no responsibility for the death of the original plaintiff and
intend to contest these claims vigorously.
The Company and its subsidiaries are 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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 22, 1997, all of the members
of the Board of Directors were re-elected by the following votes:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
- ---------------- --------- --------------
<S> <C> <C>
H. Frederick Christie 2,553,579 120,411
Michael J. Fasman 2,433,274 240,716
Anton C. Garnier 2,549,871 124,119
Monroe Harris 2,545,309 128,681
Donovan D. Huennekens 2,547,901 126,089
Richard Kelton 2,552,396 121,594
Richard G. Newman 2,552,786 121,204
</TABLE>
The selection of KPMG Peat Marwick LLP as the Company's independent auditors
was ratified by the following vote: votes for - 2,636,723; votes against -
23,093; and votes abstaining - 14,174. No broker non-votes were recorded.
Also, the second amendment to the Amended and Restated Stock Option and
Restricted Stock Plan was approved with the following votes: votes for -
1,747,219; votes against - 227,541; votes abstaining -130,422; and broker non-
votes - 568,808.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
10.4E Letter of Extension to Credit Agreement dated June 30, 1997,
between Registrant and Wells Fargo Bank, filed herewith.
10.10E Fifth Amendment to Loan Agreement and Promissory Note dated June
20, 1997, between New Mexico Utilities, Inc., and Sunwest Bank of
Albuquerque, filed herewith.
10.13A Letter of Extension to Credit Agreement dated June 30, 1997,
between Suburban Water Systems and Wells Fargo Bank, filed
herewith.
10.14A First Amendment to Credit Agreement dated March 31, 1997, between
Registrant and Mellon Bank, filed herewith.
10.14B Second Amendment to Credit Agreement dated June 17, 1997, between
Registrant and Mellon Bank, filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended June 30,
1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: August 8, 1997 /s/ Peter J. Moerbeek
- --------------------- ----------------------
PETER J. MOERBEEK, Vice President Finance
and Chief Financial Officer
14
<PAGE>
Exhibit 10.4E
Inland Empire LPO
3633 Inland Empire Blvd., Suite 855
Ontario, CA 91764
June 30, 1997
Southwest Water Company
225 N. Barranca Ave, Suite 200
West Covina, CA 91719-160525
Gentlemen:
This letter is to confirm that Wells Fargo Bank, National Association
successor-by-merger to First Interstate Bank of California ("Bank") has agreed
to extend the maturity date of that certain credit accommodation granted by Bank
to Southwest Water Company ("Borrower") in the original maximum principal amount
of FIVE MILLION DOLLARS ($5,000,000.00) with said principal amount subsequently
increased to SIX MILLION DOLLARS ($6,000,000.00) pursuant to the terms and
conditions of that certain Credit Agreement between Bank and Borrower dated as
of December 22, 1992, as amended from time to time (the "Agreement").
The maturity date of said credit accommodation is hereby extended until
September 1, 1997. Until such date, all terms and conditions of the Agreement
which pertain to said credit accommodation shall remain in full force and
effect, except as expressly modified hereby. The promissory note dated as of
December 22, 1992, as modified and/or amended from time to time, executed by
Borrower and payable to the order of Bank which evidences said credit
accommodation, a copy of which is attached hereto as Exhibit A (the "Note"),
---------
shall be deemed modified as of the date this letter is acknowledged by Borrower
to reflect the new maturity date set forth above. All other terms and
conditions of the Note remain in full force and effect, without waiver or
modification.
Borrower acknowledges that Bank has not committed to make any renewal or
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date
<PAGE>
specified herein, and that any such renewal or further extension remains in the
sole discretion of Bank. This letter constitutes the entire agreement between
Bank and Borrower with respect to the maturity date extension for the above-
described credit accommodation, and supersedes all prior negotiations,
discussions and correspondence concerning said extension.
Please acknowledge your acceptance of the terms and conditions
contained herein by dating and signing one copy below and returning it to my
attention at the above address on or before July 15, 1997.
Very truly yours,
WELLS FARGO BANK,
NATIONAL ASSOCIATION, SUCCESSOR-
BY-MERGER TO FIRST INTERSTATE
BANK OF CALIFORNIA
By: /s/RICHARD MADSEN
-----------------------------
Richard Madsen
Vice President
Acknowledged and accepted as of June 30, 1997:
SOUTHWEST WATER COMPANY
By: /s/PETER J. MOERBEEK
--------------------
Peter J. Moerbeek
Title: VP Finance, CFO
---------------
By: /s/ STEPHEN J. MUZI, JR.
------------------------
Stephen J. Muzi, Jr.
Title: Corporate Controller
--------------------
<PAGE>
EXHIBIT 10.10E
FIFTH AMENDMENT TO
LOAN AGREEMENT
This Amendment made this 20/th/ day of June, 1997 by and between SUNWEST
BANK OF ALBUQUERQUE, NATIONAL ASSOCIATION, a national banking association
("BANK") and New Mexico Utilities, Inc. a New Mexico corporation ("BORROWER").
WHEREAS, on January 25, 1995 Bank and Borrower entered into a certain Loan
Agreement ("Agreement") pursuant to the terms and condition of which credit has
been extended by Bank to Borrower;
WHEREAS, Bank and Borrower entered into a First Amendment to Loan Agreement
dated October 10, 1995 (the "First Amendment").
WHEREAS, Bank and Borrower entered into a Second Amendment to Loan
Agreement dated April 17, 1995 (the "Second Amendment").
WHEREAS, Bank and Borrower entered into a Third Amendment to Loan Agreement
dated July 16, 1996 (the "Third Agreement").
WHEREAS, Bank and Borrower entered into a Fourth Amendment to Loan
Agreement dated January 28, 1997, effective as of December 31, 1996 (the "Fourth
Amendment"). (The Loan Agreement, First Amendment, Second Amendment, Third
Amendment and Fourth Amendment collectively referred to as "Agreement").
WHEREAS, Borrower and Lender are desirous of amending the Agreement upon
the following terms and condition.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which is hereby
acknowledged by the undersigned, Bank and Borrower agree as follows:
<PAGE>
1. Paragraph 2. (a) (iii) shall be amended by deleting the phrase "March
31, 1996" and substituting therefor the phrase "April 30, 1998".
2. Paragraph 3. shall be amended by deleting the phrase "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" and substituting therefor
the phrase "General corporate purposes, working capital and utility systems
improvements. Note B is to be used up to its maximum amount prior to advances on
Note A. Payments will be applied first to note A until paid to zero then to Note
B".
3. Paragraph 9 (d) shall be amended by deleting the phrase "Borrower
discontinues its business; or" and substituting therefor the phrase "Borrower
discontinues its business; or its assets are obtained by any public entity
through condemnation or purchased through actions authorized by the laws of the
State of New Mexico. Should such actions be appealed by Borrower through actions
authorized by the laws of the State of New Mexico, Bank may, in its option,
waive such a default until conclusion of appeals.
4. Paragraph 9 (h) shall be amended by deleting the phrase "Series A due
March 12, 2002;" and substituting therefor the phrase "Series a due March 12,
2002, the First Mortgage Bonds, Series B, due 2006;"
Except as expressly amended hereby, the terms and conditions of the
Agreement and the documents executed and delivered in conjunction with the
credit extended thereunder shall remain in full force and effect and are hereby
ratified.
<PAGE>
BORROWER: New Mexico Utilities, Inc.,
a New Mexico corporation
BY: /s/ROBERT L. SWARTWOUT
------------------------------------
Robert L. Swartwout, President
GUARANTOR: Southwest Water Company,
a Delaware corporation
BY: /s/PETER J. MOERBEEK
------------------------------------
Peter Moerbeek, Vice President
Finance & Chief Financial Officer
BANK: SUNWEST BANK OF ALBUQUERQUE,
NATIONAL ASSOCIATION, a national
association
BY: /s/ DON K. PADGETT
------------------------------------
Don K. Padgett,
Senior Vice President
<PAGE>
Exhibit 10.10E
New Mexico Utilities Inc.
a New Mexico Corporation
SUNWEST BANK PROMISSORY NOTE
of Albuquerque, N.A.
P.O. Box 25500
Albuquerque, NM 87125-5500
(505) 765-2211
"BANK" "BORROWER"
New Mexico Utilities, Inc.
A New Mexico Corporation
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 Three Million Five Hundred
Thousand and no/100 Dollars ($3,500,000.00), 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 [_] _____%; [_] 1.500% above the index rate for this loan which is
the one-month LIBOR rate in effect from time to time and which is published by
Wall Street Journal, with a minimum rate of N/A% per annum and a maximum rate of
N/A% per annum. The initial index rate is 5.719%. Adjustments in the interest
rate will be effective __ and may increase or decrease: [_] the amount of the
regular payments; [_] the amount of interest payments; [_] the amount of the
single or final payment. 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:
[_] an Origination Fee of ___________ [_] on the date hereof [_] with the first
advance hereunder.
[X] Other $10,000.00 [X] on the date hereof [_] with the first
advance hereunder.
[X] Interest on the 30th day of every single month beginning July 30, 1997, and
continuing until this Note is paid in full.
[_] _____ payments of _____ of principal and interest on the _____ day of every
_____ month beginning __________, 19__, and continuing until this Note is
paid in full.
[_] _____ payments of _____ of principal and interest on the _____ day of every
_____ month beginning __________, 19__, and continuing until this Note is
paid in full.
[_] Other:
This Loan is payable in full on April 30, 1998. 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 N/A days after the installment is
due.
All payments shall be applied first to reduce fees and charges other than
interest, then to reduce principal.
[_] This is a multiple advance note and future principal advances are
contemplated. No principal advances will be made after April 30, 1998.
[X] 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. [X] Repaying a part of the principal will not entitle Borrower to
additional advances.
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 document
made in connection with or securing this Note; (iii) Borrower's default on any
other loan or 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 or in any
document securing this Note, Bank may (i) declare the principal amount, accrued
interest thereon and fees and other charges provided in this Note, immediately
due and payable without notice or demand and enforce its rights under any
document securing the indebtedness evidenced by this Note, (ii) set off the
amount Borrower owes Bank against any funds on deposit with Bank, (iii) if this
is a multiple advance note, refuse to make any further advances under this Note,
retain the proceeds of any checks, drafts, notes or other instruments or
acceptances which it may hold or have in the process of collection the account
of any of the makers, endorsers and guarantors hereof and may apply such
proceeds (together with any funds on
<PAGE>
deposit withheld by Bank) to the payment of the indebtedness evidenced by this
Note, and (v) 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 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 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 shall also
deliver to Bank copies of its federal income tax returns 30 days after filing,
or if such return is not filed on or before its due date, Borrower shall deliver
to Bank copies of the appropriate IRS extension form reflecting IRS approval of
Borrower's request for extension, if required.
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.
[X] This Note is being executed pursuant to a Commercial Loan Agreement
("Agreement") dated 01/25/95, amended 10/10/95, 04/17/96, 07/16/96, 01/27/97,
and 06/20/97, 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 20th day of June, 1997.
New Mexico Utilities, Inc.
a New Mexico Corporation
By: /s/ ROBERT L. SWARTWOUT By: /s/ PETER J. MOERBEEK
---------------------------------- ----------------------------------
Robert L. Swartwout, President Peter J. Moerbeek, Vice President
Finance and Chief Financial
Officer
Borrower's Primary Business Address: Borrower's Notice Address:
4700 Irving Blvd., N.W., Suite 201 4700 Irving Blvd., N.W., Suite 201
Albuquerque, NM 87114 Albuquerque, NM 87114
Borrower's Telephone Number: TIN/SS#: 85-0205240
Business (505) 898-2661
<PAGE>
Exhibit 10.10E (continued)
New Mexico Utilities Inc
A New Mexico Corporation
SUNWEST BANK PROMISSORY NOTE
of Albuquerque, N.A.
P.O. Box 25500
Albuquerque, NM 87125-5500
(505) 765-2211
"BANK" "BORROWER"
New Mexico Utilities, Inc.
A New Mexico Corporation
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 June 5, 1997, until paid at the rate of [_]
______%; [X] 1.750% above the index rate for this loan which is the one-month
LIBOR Rate in effect from time to time and which is published by Wall Street
Journal, with a minimum rate of N/A% per annum and a maximum rate of N/A% per
annum. The initial index rate is 5.719%. Adjustments in the interest rate will
be effective ___________ and may increase or decrease: [_] the amount of the
regular payments; [_] the amount of interest payments; [_] the amount of the
single or final payment. 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:
[_] an Origination Fee of __________ [_] on the date hereof [_] with the first
advance hereunder
[_] Other ____________ [_] on the date hereof [_] with the first
advance hereunder
[X] Interest on the 30th day of every single month beginning July 30, 1997, and
continuing until this Note is paid in full.
[_] _____ payments of _____ of principal and interest on the _____ day of every
_____ month beginning ____________, 19__, and continuing until this Note is
paid in full.
[_] _____ payments of _____ of principal and interest on the _____ day of every
_____ month beginning ____________, 19__, and continuing until this Note is
paid in full.
[_] Other:
This Loan is payable in full on April 30, 1998. 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 N/A 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 and future principal advances are
contemplated. No principal advances will be made after April 30, 1998.
[X] 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. [_] Repaying a part of the principal will not entitle Borrower to
additional advances.
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 document
made in connection with or securing this Note; (iii) Borrower's default on any
other loan or 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 or in any
document securing this Note, Bank may (i) declare the principal amount, accrued
interest thereon and fees and other charges provided in this Note, immediately
due and payable without notice or demand and enforce its rights under any
document securing the indebtedness evidenced by this Note, (ii) set off the
amount Borrower
<PAGE>
owes Bank against any funds on deposit with Bank, (iii) if this is a multiple
advance note, refuse to make any further advances under this Note, retain the
proceeds of any checks, drafts, notes or other instruments or acceptances which
it may hold or have in the process of collection the account of any of the
makers, endorsers and guarantors hereof and may apply such proceeds (together
with any funds on deposit withheld by Bank) to the payment of the indebtedness
evidenced by this Note, and (v) 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 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 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 shall also
deliver to Bank copies of its federal income tax returns 30 days after filing,
or if such return is not filed on or before its due date, Borrower shall deliver
to Bank copies of the appropriate IRS extension form reflecting IRS approval of
Borrower's request for extension, if required.
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.
[X] This Note is being executed pursuant to a Commercial Loan Agreement
("Agreement") dated 01/25/95, amended 10/10/95, 04/17/96, 07/16/96, 01/27/97,
06/20/97, 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 20th day of June, 1997.
New Mexico Utilities, Inc.
a New Mexico Corporation
By: /s/ ROBERT L. SWARTWOUT By: /s/ PETER J. MOERBEEK
---------------------------------- ----------------------------------
Robert L. Swartwout, President Peter J. Moerbeek, Vice President,
Finance and Chief Financial
Officer
Borrower's Primary Business Address: Borrower's Notice Address:
4700 Irving Blvd., N.W., Suite 201 4700 Irving Blvd., N.W., Suite 201
Albuquerque, NM 87114 Albuquerque, NM 87114
Borrower's Telephone Number: TIN/SS#: 85-0205240
Business (505) 898-2661
<PAGE>
Exhibit 10.13A
Inland Empire LPO
3633 Inland Empire Blvd., Suite 855
Ontario, CA 91764
June 30, 1997
Suburban Water Systems
1211 E. Center Court Dr.
Covina, CA 91724-360311
Gentlemen:
This letter is to confirm that Wells Fargo Bank, National Association
("Bank") has agreed to extend the maturity date of that certain credit
accommodation granted by Bank to Suburban Water Systems ("Borrower") in the
maximum principal amount of FOUR MILLION DOLLARS ($4,000,000.00) pursuant to the
terms and conditions of that certain Credit Agreement between Bank and Borrower
dated as of June 30, 1996, as amended from time to time (the "Agreement").
The maturity date of said credit accommodation is hereby extended until
September 1, 1997. Until such date, all terms and conditions of the Agreement
which pertain to said credit accommodation shall remain in full force and
effect, except as expressly modified hereby. The promissory note dated as of
June 30, 1996, executed by Borrower and payable to the order of Bank which
evidences said credit accommodation, a copy of which is attached hereto as
Exhibit A (the "Note"), shall be deemed modified as of the date this letter is
- ---------
acknowledged by Borrower to reflect the new maturity date set forth above. All
other terms and conditions of the Note remain in full force and effect, without
waiver or modification.
Borrower acknowledges that Bank has not committed to make any renewal or
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal or further extension remains in the sole discretion of Bank. This
letter constitutes the entire agreement between Bank and Borrower with respect
to the maturity date extension for the above-described credit accommodation, and
supersedes all prior negotiations, discussions and correspondence concerning
said extension.
<PAGE>
Suburban Water Systems
June 30, 1997
Page 2
Please acknowledge your acceptance of the terms and conditions
contained herein by dating and signing one copy below and returning it to my
attention at the above address on or before July 15, 1997.
Very truly yours,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/RICHARD MADSEN
-----------------------------
Richard Madsen
Vice President
Acknowledged and accepted as of __June 30,1997:
SUBURBAN WATER SYSTEMS
By: /s/PETER J. MOERBEEK
--------------------
Peter J. Moerbeek
Title: Secretary
---------
By: /s/DANIEL N. EVANS
------------------
Daniel N. Evans
Title: VP Finance, CFO
---------------
<PAGE>
Exhibit 10.14A
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), effective as of
---------
March 31, 1997, is entered into between MELLON BANK, N.A. ("Lender"), with a
------
place of business at 400 South Hope Street, Fifth Floor, Los Angeles, California
90071 and SOUTHWEST WATER COMPANY, a Delaware corporation ("Borrower"), with its
--------
chief executive office at 225 North Barranca Avenue, Suite 200, West Covina,
California 91791-1605.
RECITAL
-------
A. Borrower and Lender have previously entered into that certain Credit
Agreement dated as of August 29, 1996 (the "Credit Agreement"), pursuant to
----------------
which Lender has made certain loans and financial accommodations available to
Borrower. Terms used herein without definition shall have the meanings ascribed
to them in the Credit Agreement.
B. Borrower has requested Lender to modify the financial covenant in the
Credit Agreement relating to the ratio of Consolidated Liabilities to
Consolidated Tangible Net Worth.
C. Lender is willing to amend the Credit Agreement under the terms and
conditions set forth in this Amendment. Borrower is entering into this Amendment
with the understanding and agreement that, except as specifically provided
herein, none of Lender's rights or remedies as set forth in the Credit Agreement
is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Section 6.02(a) of the Credit Agreement is hereby amended to read in
its entirety as follows:
"(a) Leverage Ratio. At any time, permit the ratio of Consolidated
--------------
Liabilities to Consolidated Tangible Net Worth to be more than 3.20:1.00."
2. Effectiveness of this Amendment. Lender must have received the
-------------------------------
following items, in form and content acceptable to Lender, before this Amendment
is effective and before Lender is required to extend any credit to Borrower as
provided for by this Amendment. The date on which all of the following
conditions have been satisfied is the "Closing Date".
------------
<PAGE>
(a) Amendment. This Amendment fully executed in a sufficient number of
---------
counterparts for distribution to Lender and Borrower.
(b) Authorizations. Evidence that the execution, delivery and
--------------
performance by Borrower of this Amendment has been duly authorized.
(c) Representations and Warranties. The Representations and
------------------------------
Warranties set forth in the Credit Agreement must be true and correct.
3. Representations and Warranties. The Borrower represents and warrants
------------------------------
as follows:
(a) Authority. The Borrower has the requisite corporate power and
---------
authority to execute and deliver this Amendment and to perform its
obligations hereunder and under the Loan Documents (as amended or modified
hereby) to which it is a party. The execution, delivery and performance by
the Borrower of this Amendment and the performance by the Borrower of each
Loan Document (as amended or modified hereby) to which it is a party have
been duly approved by all necessary corporate action of the Borrower and no
other corporate proceedings on the part of the Borrower are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and
--------------
delivered by the Borrower. This Amendment and each Loan Document (as
amended or modified hereby) is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its
terms, and is in full force and effect.
(c) Representations and Warranties. The representations and
------------------------------
warranties contained in each Loan Document (other than any such
representations or warranties that, by their terms, are specifically made
as of a date other than the date hereof) are correct on and as of the date
hereof as though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing that
----------
constitutes an Event of Default.
4. Choice of Law. The validity of this Amendment, its construction,
-------------
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
5. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Amendment.
2
<PAGE>
6. Due Execution. The execution, delivery and performance of this
-------------
Amendment are within the power of Borrower, have been duly authorized by all
necessary corporate action, have received all necessary governmental approval,
if any, and do not contravene any law or any contractual restrictions binding on
Borrower.
7. Reference to and Effect on the Loan Documents.
---------------------------------------------
(a) Upon and after the effectiveness of this Amendment, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Documents to "the Credit Agreement", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to
the Credit Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents, are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed and shall constitute
the legal, valid, binding and enforceable obligations of Borrower to
Lender.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Loan Documents, nor constitute a
waiver of any provision of any of the Loan Documents.
(d) To the extent that any terms and conditions in any of the Loan
Documents shall contradict or be in conflict with any terms or conditions
of the Credit Agreement, after giving effect to this Amendment, such terms
and conditions are hereby deemed modified or amended accordingly to reflect
the terms and conditions of the Credit Agreement as modified or amended
hereby.
8. Ratification. Borrower hereby restates, ratifies and reaffirms each
------------
and every term and condition set forth in the Credit Agreement, as amended
hereby, and the Loan Documents effective as of the date hereof.
3
<PAGE>
9. Estoppel. To induce Lender to enter into this Amendment and to
--------
continue to make advances to Borrower under the Credit Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default and no right of offset,
defense, counterclaim or objection in favor of Borrower as against Lender with
respect to the obligations owing by Borrower to Lender under the Loan Documents.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first above written.
SOUTHWEST WATER COMPANY,
a Delaware corporation
By: /s/PETER J. MOERBEEK
-------------------------------------
Title: VP Finance, Chief Financial Officer
-----------------------------------
MELLON BANK, N.A.
By: /s/KEVIN KELLY
--------------------------------------
Title: Vice President
-----------------------------------
4
<PAGE>
Exhibit 10.14B
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
---------
June 17, 1997, is entered into between MELLON BANK, N.A. ("Lender"), with a
------
place of business at 400 South Hope Street, Fifth Floor, Los Angeles, California
90071 and SOUTHWEST WATER COMPANY, a Delaware corporation ("Borrower"), with its
--------
chief executive office at 225 North Barranca Avenue, Suite 200, West Covina,
California 91791-1605.
RECITALS
--------
A. Borrower and Lender have previously entered into that certain Credit
Agreement dated as of August 29, 1996, as amended by that certain First
Amendment to Credit Agreement effective as of March 31, 1997 (collectively, the
"Credit Agreement"), pursuant to which Lender has made certain loans and
----------------
financial accommodations available to Borrower. Terms used herein without
definition shall have the meanings ascribed to them in the Credit Agreement.
B. Borrower has requested Lender to amend the Credit Agreement to extend
the Maturity Date from July 15, 1997 to August 31, 1997.
C. Lender is willing to amend the Credit Agreement under the terms and
conditions set forth in this Amendment. Borrower is entering into this Amendment
with the understanding and agreement that, except as specifically provided
herein, none of Lender's rights or remedies as set forth in the Credit Agreement
is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. The definition of "Maturity Date" set forth in Section 1.01 of the
-------------
Credit Agreement is hereby amended to read in its entirety as follows:
"'Maturity Date': August 31, 1997."
-------------
2. Effectiveness of this Amendment. Lender must have received the
-------------------------------
following items, in form and content acceptable to Lender, before this Amendment
is effective and before Lender is required to extend any credit to Borrower as
provided for by this Amendment. The date on which all of the following
conditions have been satisfied is the "Closing Date".
------------
(a) Amendment. This Amendment fully executed in a sufficient number of
---------
counterparts for distribution to Lender and Borrower.
<PAGE>
(b) Authorizations. Evidence that the execution, delivery and
--------------
performance by Borrower of this Amendment has been duly authorized.
(c) Representations and Warranties. The Representations and
------------------------------
Warranties set forth in the Credit Agreement must be true and correct.
3. Representations and Warranties. The Borrower represents and warrants
------------------------------
as follows:
(a) Authority. The Borrower has the requisite corporate power and
---------
authority to execute and deliver this Amendment and to perform its
obligations hereunder and under the Loan Documents (as amended or modified
hereby) to which it is a party. The execution, delivery and performance by
the Borrower of this Amendment and the performance by the Borrower of each
Loan Document (as amended or modified hereby) to which it is a party have
been duly approved by all necessary corporate action of the Borrower and no
other corporate proceedings on the part of the Borrower are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and
--------------
delivered by the Borrower. This Amendment and each Loan Document (as
amended or modified hereby) is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its
terms, and is in full force and effect.
(c) Representations and Warranties. The representations and
------------------------------
warranties contained in each Loan Document (other than any such
representations or warranties that, by their terms, are specifically made
as of a date other than the date hereof) are correct on and as of the date
hereof as though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing that
----------
constitutes an Event of Default.
4. Choice of Law. The validity of this Amendment, its construction,
-------------
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
5. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Amendment.
6. Due Execution. The execution, delivery and performance of this
-------------
Amendment are within the power of Borrower, have been duly authorized by all
necessary corporate
2
<PAGE>
action, have received all necessary governmental approval, if any, and do not
contravene any law or any contractual restrictions binding on Borrower.
7. Reference to and Effect on the Loan Documents.
---------------------------------------------
(a) Upon and after the effectiveness of this Amendment, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Documents to "the Credit Agreement", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to
the Credit Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents, are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed and shall constitute
the legal, valid, binding and enforceable obligations of Borrower to
Lender.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Loan Documents, nor constitute a
waiver of any provision of any of the Loan Documents.
(d) To the extent that any terms and conditions in any of the Loan
Documents shall contradict or be in conflict with any terms or conditions
of the Credit Agreement, after giving effect to this Amendment, such terms
and conditions are hereby deemed modified or amended accordingly to reflect
the terms and conditions of the Credit Agreement as modified or amended
hereby.
8. Ratification. Borrower hereby restates, ratifies and reaffirms each
------------
and every term and condition set forth in the Credit Agreement, as amended
hereby, and the Loan Documents effective as of the date hereof.
9. Estoppel. To induce Lender to enter into this Amendment and to
--------
continue to make advances to Borrower under the Credit Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default and no right of offset,
defense, counterclaim or objection in favor of Borrower as against Lender with
respect to the obligations owing by Borrower to Lender under the Loan Documents.
3
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first above written.
SOUTHWEST WATER COMPANY,
a Delaware corporation
By: /s/PETER J. MOERBEEK
-------------------------------------
Title: Vice President Finance and
Chief Financial Officer
By: /s/STEPHEN J. MUZI, JR.
------------------------------------
Title: Controller
MELLON BANK, N.A.
By: /s/KEVIN KELLY
------------------------------------
Title: Vice President
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 505,000
<SECURITIES> 0
<RECEIVABLES> 10,085,000
<ALLOWANCES> 579,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,030,000
<PP&E> 134,399,000
<DEPRECIATION> 36,621,000
<TOTAL-ASSETS> 119,542,000
<CURRENT-LIABILITIES> 18,291,000
<BONDS> 30,700,000
0
517,000
<COMMON> 31,000
<OTHER-SE> 30,362,000
<TOTAL-LIABILITY-AND-EQUITY> 119,542,000
<SALES> 0
<TOTAL-REVENUES> 33,901,000
<CGS> 0
<TOTAL-COSTS> 30,993,000
<OTHER-EXPENSES> (121,000)
<LOSS-PROVISION> 158,000
<INTEREST-EXPENSE> 1,590,000
<INCOME-PRETAX> 1,502,000
<INCOME-TAX> 631,000
<INCOME-CONTINUING> 871,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,000
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
