<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 March 31, 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] (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)
(818) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 2, 1997, there were
3,137,538 common shares outstanding.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 7-10
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------------- ----------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 637 $ 790
Customers' accounts receivable, net 8,874 8,216
Other current assets 2,127 2,086
--------- ---------
11,638 11,092
Property, Plant and Equipment:
Utility property, plant and equipment - at cost 121,978 119,731
Contract operations property, plant and equipment - at cost 6,510 6,448
--------- ---------
128,488 126,179
Less accumulated depreciation and amortization 35,786 34,765
--------- ---------
92,702 91,414
Other Assets 8,749 8,910
--------- ---------
$ 113,089 $ 111,416
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and bank notes payable $ 6,880 $ 6,089
Accounts payable 1,715 1,513
Other current liabilities 7,639 7,569
--------- ---------
16,234 15,171
Other Liabilities and Deferred Credits:
Long-term debt 30,700 30,700
Advances for construction 7,692 7,719
Contributions in aid of construction 21,924 21,556
Deferred income taxes 3,779 3,398
Other liabilities and deferred credits 2,475 2,472
Total Liabilities and Deferred Credits 82,804 81,016
Stockholders' Equity:
Cumulative preferred stock 517 517
Common stock 31 31
Paid-in capital 26,263 26,159
Retained earnings 3,504 3,728
Unamortized value of restricted stock issued (30) (35)
--------- ---------
Total Stockholders' Equity 30,285 30,400
--------- ---------
$ 113,089 $ 111,416
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
---------- ----------
(In thousands except per share amounts)
<S> <C> <C>
Operating Revenues $ 15,432 $ 13,989
Operating Expenses:
Direct operating expenses 11,950 11,275
Selling, general and administrative 2,678 2,311
-------- ---------
14,628 13,586
-------- ---------
Operating Income 804 403
Other Income (Expense):
Interest expense (782) (659)
Interest income 33 31
Other 55 10
-------- --------
(694) (618)
-------- --------
Income (Loss) Before Income Taxes 110 (215)
Income tax provision (benefit) 46 (90)
-------- --------
Net Income (Loss) 64 (125)
Dividends on preferred shares (7) (7)
-------- --------
Net Income (Loss) Available for (Applicable to)
Common Shares $ 57 ($ 132)
======== ========
Earnings (Loss) Per Common Share (Note 6) $ 0.02 ($ 0.04)
======== ========
Cash Dividends Per Common Share (Note 6) $ 0.090 $ 0.083
======== ========
Weighted Average Outstanding Common Shares (Note 6) 3,128 3,098
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1997 1996
--------------- ----------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 843 $( 202)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,411) (2,662)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions in aid of construction 822 288
Net borrowings of short-term debt 791 2,745
Net proceeds from dividend reinvestment and
employee stock purchase plans 93 64
Dividends paid (287) (254)
Payments on advances for construction (4) (43)
------- -------
Net cash provided by financing activities 1,415 2,800
------- -------
Net decrease in cash and cash equivalents (153) (64)
Cash and cash equivalents at beginning of year 790 784
------- -------
Cash and cash equivalents at end of period $ 637 $ 720
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 538 $ 605
Income taxes $ 263 $ 454
Depreciation and amortization $ 1,047 $ 978
Non-cash contributions in aid of construction
conveyed to Company by developers -- $ 56
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1997, and the Company's results of
operations for the three months ended March 31, 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 so that the
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
The first quarter of each year is 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 months ended March 31, 1997 and 1996, earnings (loss) per
common share were calculated using the weighted average number of common
shares and dilutive common equivalent shares outstanding during the period
after recognition of dividend requirements on preferred shares. Common
equivalent shares arise from stock options, 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
simplifies the standards for computing earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Diluted EPS replaces fully diluted EPS and reflects 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.
6. The 1996 first quarter loss per common share, cash dividends per common
share and weighted average outstanding common shares, as previously
reported, have been restated to reflect a 20% stock dividend granted to
stockholders of record on January 2, 1997.
7. 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.'s ("NMUI") assets 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. The current
expression of interest by the City is a continuation of intermittent
discussions
6
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held over a number of years as the City has expanded its
borders. Discussions with the City are continuing; however, at this time,
management cannot predict whether an agreement for the sale of NMUI's
assets is likely or whether the City would make an election to proceed with
condemnation if an agreement were not reached. Therefore, management
cannot predict any price the City would pay for the assets if it maintains
its interest in concluding a 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 March 31, 1997, the Company had cash and cash equivalent balances totaling
$637,000. The Company has three separate lines of credit from different
commercial banks. As of March 31, 1997, the Company had a total line of credit
capacity of $16,000,000, and unused lines of credit of $10,020,000. The amount
of additional borrowing capacity available under current short-term lines of
credit is limited by financial covenants that restricted additional borrowing at
March 31, 1997 to a maximum of $7,532,000. Each of the lines of credit expires
during 1997, and each is expected to be renewed in the normal course of
business. During the first quarter of 1997, the Company borrowed a net amount
of $791,000 on its lines of credit primarily to fund construction expenditures
at its utility operations.
In 1996, the Company completed a long-term First Mortgage Bond financing for
$12,000,000. The portion of proceeds not used to repay the Company's short-term
debt will be used to fund ongoing construction projects at the utilities. Among
other financial covenants, the First Mortgage Bond Indentures limit the amount
of utility property that may be pledged for additional secured borrowings. At
March 31, 1997, the additional secured borrowing capacity under these indentures
was approximately $23,610,000.
During the first quarter of 1997, the Company's additions to property, plant
and equipment were $2,411,000, representing a decrease of $307,000 over the same
period in 1996. Developers made cash contributions in aid of construction
("CIAC") totaling $822,000. The remaining $1,589,000 was funded by cash flow
from operations and short-term borrowing. Short-term borrowing is anticipated
to continue throughout 1997 in order to meet construction requirements not
funded by bond proceeds, operations or CIAC.
The Company anticipates that its available short-term borrowing capacity and
its 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.
7
<PAGE>
REGULATORY AFFAIRS AND INFLATION:
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. The
Company anticipates that future 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 entitled to file for an additional step increase
which, if approved, would become effective January 1, 1998.
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 eight years in the
utility's plant do not need to allocate any portion of the 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 effect 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 provides incentives for
utilities to operate more efficiently and improve productivity, and is intended
to reduce regulatory burden and promote efficiency among utilities. Ratepayers
and stockholders would both likely benefit from improved productivity.
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 developments will be enacted, or,
if enacted, what the terms of such developments 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.
8
<PAGE>
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 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. 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 operations revenues. However,
there is no assurance that recovery of such costs will be allowed.
RESULTS OF OPERATIONS:
Three Months Ended March 31, 1997 Compared To Three Months Ended March 31,
1996
Earnings per common share were $.02 in 1997, compared to a loss per common
share of $.04 (adjusted for a stock dividend of 20% on January 2, 1997) during
the same period in 1996.
Operating income increased $401,000 or 100%, and, as a percentage of operating
revenues, increased from 3% in 1996 to 5% in 1997. Operating income at the
utilities increased $546,000 due primarily to increased water consumption and
Suburban's rate increases. ECO's operating loss decreased by $41,000 due
primarily to new contracts and additional work outside the scope of existing
contracts. Parent company expenses increased $186,000 primarily due to
increased corporate reserves.
Operating revenues
Operating revenues increased $1,443,000 or 10%. Water utility revenues
increased $833,000 due to warmer weather in Southern California and rate
increases. ECO's revenues increased $610,000, primarily as a result of revenues
from new contracts and additional work outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses increased $675,000 or 6%. As a percentage of
operating revenues, these expenses decreased from 81% in 1996 to 77% in 1997.
Water utility direct operating expenses increased $251,000 primarily reflecting
the increase in water costs experienced to meet increased consumption by
Suburban's customers and higher maintenance and repair expenses. ECO's direct
operating expenses increased $424,000, resulting primarily from higher expenses
associated with new contracts and additional work outside the scope of existing
contracts.
Selling, general and administrative
Selling, general and administrative expenses increased $367,000 or 16%. As a
percentage of operating revenues, these expenses were 17% in 1997 and 1996.
General and administrative expenses at the utilities
9
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increased $36,000. ECO's selling, general and administrative expenses increased
$145,000 due to higher insurance, legal and consulting expenses. As discussed
above, general and administrative expenses of the parent company increased
$186,000.
Other income and expense
Interest expense increased $123,000 primarily due to higher short-term and
long-term credit balances in 1997 as compared with 1996. Other income increased
$45,000 primarily due to consulting fees received as a result of an investment
in Windermere Utility Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Suburban, the Company, and several unrelated parties were served with a
complaint in September 1995 by a former employee of Suburban. The plaintiff
claimed that, while he worked for an independent contractor hired by Suburban
and during his subsequent employment with 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. In 1995,
the former employee died and in 1996, the former employee'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 death of the former
employee. The two actions have been consolidated.
The plaintiffs claim the defendants are responsible on the basis of
negligence, breach of warranty and strict liability. Both actions seek
unspecified general damages and burial expenses. The Company has made written
demands for defense and indemnity against all general liability and workers'
compensation carriers who provided coverage during the last 30 years. Three
general liability carriers have agreed, on a very limited basis, to accept
defense obligations under liability policies issued by them. However, they have
reserved their rights with respect to indemnification. Suburban and the Company
are continuing discussions with other general liability carriers concerning
their acceptance of defense and indemnity obligations. The plaintiffs' claims
for damages appear to fall under Suburban's and the Company's general liability
coverage, since the plaintiffs' claims arise from employment of the decedent
while working for an independent contractor hired by Suburban.
Certain defendants who were alleged to be suppliers of asbestos cement pipe to
Suburban have been dismissed on the basis that they were not suppliers to
Suburban. The alleged manufacturer defendant may not be reachable in these
actions due to certain rulings made in a bankruptcy proceeding. As a result,
Suburban and the Company may be the only remaining defendants in the actions.
The plaintiffs have initiated discovery, and negotiations were successful in
limiting the scope of this discovery. 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 former employee 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
10
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A Report on Form 8-K was filed with the Securities and Exchange Commission
on February 24, 1997, regarding discussions concerning the potential sale
of the assets of NMUI to the City of Albuquerque.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: May 2, 1997 /s/ Peter J. Moerbeek
- ------------------ ---------------------
PETER J. MOERBEEK, Vice President Finance and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 637,000
<SECURITIES> 0
<RECEIVABLES> 9,412,000
<ALLOWANCES> 538,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,638,000
<PP&E> 128,488,000
<DEPRECIATION> 35,786,000
<TOTAL-ASSETS> 113,089,000
<CURRENT-LIABILITIES> 16,234,000
<BONDS> 30,700,000
0
517,000
<COMMON> 31,000
<OTHER-SE> 29,737,000
<TOTAL-LIABILITY-AND-EQUITY> 113,089,000
<SALES> 0
<TOTAL-REVENUES> 15,432,000
<CGS> 0
<TOTAL-COSTS> 14,628,000
<OTHER-EXPENSES> (55,000)
<LOSS-PROVISION> 59,000
<INTEREST-EXPENSE> 782,000
<INCOME-PRETAX> 110,000
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 64,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,000
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
