<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 SEPTEMBER 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
[LOGO OF SOUTHWEST WATER COMPANY
SOUTHWEST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WATER COMPANY]
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 November 4, 1997, there
were 3,152,560 common shares outstanding.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
- - ------- ----------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996................. 3
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1997 and 1996.. 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 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............ 8 - 12
Part II. Other Information:
- - -------- ------------------
Item 1. Legal Proceedings........................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...... 14
Item 6. Exhibits and Reports on Form 8-K......................... 14
Signatures............................................... 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 539 $ 790
Customers' accounts receivable, net 10,179 8,216
Other current assets 2,792 2,086
-------- --------
13,510 11,092
PROPERTY, PLANT AND EQUIPMENT:
Utility property, plant and equipment - at cost 131,144 119,731
Contract operations property, plant and equipment
- at cost 6,654 6,448
-------- --------
137,798 126,179
Less accumulated depreciation and amortization 37,487 34,765
-------- --------
100,311 91,414
OTHER ASSETS 9,233 8,910
-------- --------
$123,054 $111,416
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and bank notes payable $ 9,240 $ 6,089
Accounts payable 2,114 1,513
Other current liabilities 8,150 7,569
-------- --------
19,504 15,171
OTHER LIABILITIES AND DEFERRED CREDITS:
Long-term debt 30,700 30,700
Advances for construction 7,714 7,719
Contributions in aid of construction 26,555 21,556
Deferred income taxes 4,152 3,398
Other liabilities and deferred credits 2,499 2,472
-------- --------
TOTAL LIABILITIES AND DEFERRED CREDITS 91,124 81,016
STOCKHOLDERS' EQUITY:
Cumulative preferred stock 517 517
Common stock 31 31
Paid-in capital 26,477 26,159
Retained earnings 4,923 3,728
Unamortized value of restricted stock issued (18) (35)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 31,930 30,400
-------- --------
$123,054 $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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES $19,975 $18,476 $53,876 $49,903
OPERATING EXPENSES:
Direct operating expenses 14,590 13,918 40,020 38,348
Selling, general and administrative 2,658 2,449 8,221 7,430
------- ------- ------- -------
17,248 16,367 48,241 45,778
------- ------- ------- -------
OPERATING INCOME 2,727 2,109 5,635 4,125
OTHER INCOME (EXPENSE):
Interest expense (807) (720) (2,397) (2,074)
Interest income 28 25 91 72
Other 106 78 227 125
------- ------- ------- -------
(673) (617) (2,079) (1,877)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,054 1,492 3,556 2,248
Income tax provision 862 626 1,493 944
------- ------- ------- -------
NET INCOME 1,192 866 2,063 1,304
Dividends on preferred shares (6) (6) (20) (20)
------- ------- ------- -------
NET INCOME AVAILABLE FOR COMMON SHARES $ 1,186 $ 860 $ 2,043 $ 1,284
======= ======= ======= =======
EARNINGS PER COMMON SHARE (NOTE 8) $ 0.38 $ 0.28 $ 0.65 $ 0.41
======= ======= ======= =======
CASH DIVIDENDS PER COMMON SHARE (NOTE 8) $ 0.09 $ 0.083 $ 0.27 $ 0.249
======= ======= ======= =======
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES (NOTE 8) 3,146 3,114 3,137 3,107
======= ======= ======= =======
</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>
Nine Months Ended
September 30,
---------------------------
1997 1996
------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 3,662 $ 4,079
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,928) (8,256)
Investment in Windermere Utility Company - (3,000)
------- --------
Net cash used in investing activities (7,928) (11,256)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 3,151 7,311
Contributions in aid of construction 1,583 881
Net proceeds from dividend reinvestment and
employee stock purchase plans 292 208
Additions to advances for construction 75 140
Dividends paid (866) (783)
Payments of advances for construction (220) (250)
------- --------
Net cash provided by financing activities 4,015 7,507
------- --------
Net increase (decrease) in cash and cash equivalents (251) 330
Cash and cash equivalents at beginning of period 790 784
------- --------
Cash and cash equivalents at end of period $ 539 $ 1,114
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,151 $ 1,986
Income taxes $ $539 $ $695
Depreciation and amortization $ 3,139 $ 2,930
Non-cash contributions in aid of construction
conveyed to Company by developers $ 4,276 $ 2,595
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Southwest Water Company ("the Company") and its subsidiaries provide water
management services through contract and utility operations. The unaudited
condensed consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary to present fairly the financial
position of the Company as of September 30, 1997, and the Company's results
of operations for the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 net income and all other revenue, expenses, gains and
losses that under generally accepted accounting principles are typically
excluded from net income (such as extraordinary and non-recurring gains and
6
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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 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 through
condemnation by eminent domain, but must pay fair value if the election to
proceed with 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 were completed with values
ranging from $22,000,000 to $39,000,000.
On November 4, 1997 the City initiated legal action in New Mexico State
Court to acquire the operations of NMUI by eminent domain. The City
offered approximately $16,000,000, which includes the assumption of
$6,000,000 of NMUI First Mortgage Bonds. No agreement as to purchase price
or terms of sale has been reached. Based on the results of recent City
elections and public statements made by City officials, the Company
believes there is some doubt as to whether the City will proceed with the
eminent domain action against NMUI. The Company also believes that the
fair market value is substantially in excess of the amount offered by the
City. If fair market value is determined by a court trial, the Company
does not anticipate resolution of the matter in the near future.
10. The Company has completed a review of all computer software currently in
use to determine that it is year 2000 compliant. Most of the computer
software is already year 2000 compliant, and compliance of remaining
software should be completed in the coming months. Therefore, this issue
should not have a material effect on the Company's financial position or
results of operations.
7
<PAGE>
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. The operations of ECO Resources, Inc. ("ECO") are currently generating
positive cash flows for the Company; however, liquidity may be influenced in the
future by ECO's need to invest in operating and computer equipment, as well as
new business development and acquisition costs.
At September 30, 1997, the Company had cash and cash equivalent balances
totaling $539,000. The Company has three separate lines of credit from
different commercial banks. As of September 30, 1997, the Company had a total
line of credit facility with limits of $16,000,000, and unused lines of credit
of $7,660,000. Two of the lines of credit have limits of $6,000,000 each and
expire at December 31, 1997 and January 1, 1998, respectively. The third line
of credit which has a limit of $4,000,000 expires on April 30, 1998. All of the
lines of credit are expected to be renewed in the normal course of business. As
of September 30, 1997, the amount of additional borrowing capacity available
under short-term lines of credit was limited by financial covenants that
restrict additional current borrowing to a maximum of $3,954,000.
The Company expects to complete negotiations with two banks in November 1997
to renew the lines of credit expiring at the end of 1997. Based on negotiations
during November, and subject to completion of all documentation with the banks,
the Company has extended the two lines of credit through 1999 and has
renegotiated its financial covenants. If the revised covenants had been in
effect at September 30, 1997, the additional borrowing capacity available would
have been $9,051,000.
The Company has traditionally used its short-term credit facility primarily
for funding utility plant and equipment additions. When favorable long-term
opportunities exist or when short-term borrowing needs exceed available short-
term credit facilities, the Company has refinanced short-term borrowing with
long-term financing. For example, in 1996, the Company completed long-term
First Mortgage Bond financing aggregating $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 September
30, 1997, the additional secured borrowing capacity under these indentures was
approximately $28,858,000.
During the third quarter of 1997, the Company's additions to property, plant
and equipment were $12,204,000, representing an increase of $1,353,000 over the
same period in 1996. Developers made contributions in aid of construction
("CIAC") and advances totaling $5,934,000, of which $4,276,000 was non-cash CIAC
and the remaining $1,658,000 was received as cash. The Company-financed capital
additions amount was $6,270,000 which was funded through net short-term
borrowing of $3,151,000 with the remaining amount of $3,119,000 generated by
cash flow from operations. Capital expenditures and developer contributions are
expected to decrease approximately $2,000,000 over the next 12 months due to the
completion of major projects in 1997.
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 would 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
8
<PAGE>
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 has filed for an additional step increase
of 2.62% ($740,000) 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 a water utility 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 any 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 received after June 12, 1996. 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 when received. The new legislation also
eliminates the depreciation deduction for CIAC and changes the depreciation
method and useful lives for most non-CIAC water utility property.
The net impact of the repeal of the income tax on CIAC, combined with the
changes in depreciation calculations, is expected to favorably impact the
Company's utilities' cash flow. In 1997, the States of California and New
Mexico adopted the federal treatment of CIAC and the related depreciation
changes to their respective tax regulations. 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 requirements.
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.
9
<PAGE>
In 1996, the residents of the state of New Mexico voted to pass a
constitutional amendment 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. A legislative committee is currently
reviewing proposed changes to the Public Utilities Act (the "PUA"). The Company
cannot predict if or when changes to the PUA will ultimately occur; or if
changes are enacted, the impact on NMUI's financial position or results of
operations.
Contract Operations:
ECO's pricing is 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.
As discussed in the Company's Form 10-Q Report for the quarter ending June 30,
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 continues 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Earnings per common share were $.38 in 1997, compared to $.28 (adjusted for a
stock dividend of 20% on January 2, 1997) during the same period in 1996.
Operating income increased $618,000 or 29%, and, as a percentage of operating
revenues, was 14% in 1997 compared with 11% in 1996. Operating income at the
utilities increased $442,000, due primarily to
10
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increased water sales at Suburban and the positive effects of water rate
increases. ECO's operating results improved $476,000, 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. Parent company expenses increased $300,000, due primarily to
increases in insurance expenses, legal reserves, and payroll related costs.
Operating revenues
Operating revenues increased $1,499,000 or 8%. Water utility revenues
increased $404,000 due primarily to Suburban's rate increases. Warmer weather
in Southern California led to a modest increase in water consumption by
Suburban's customers. Water utility revenues increased at NMUI by 10% due to
the increase in the number of NMUI's customers in 1997 as compared to 1996.
ECO's revenues increased $1,095,000, primarily as a result of new contracts and
additional work performed outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses increased $672,000 or 5%. As a percentage of
operating revenues, these expenses were 73% in 1997 and 75% in 1996. Water
utility direct operating expenses decreased $84,000, primarily reflecting a
decrease in water purchased from outside suppliers which resulted in lower water
costs. ECO's direct operating expenses increased $756,000, 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 $209,000 or 9%. As a
percentage of operating revenues, these expenses were 13% in 1997 and 1996.
General and administrative expenses at the utilities increased $46,000. ECO's
selling, general and administrative expenses decreased $137,000, primarily due
to the restructuring of marketing responsibilities. As discussed above, general
and administrative expenses of the parent company increased $300,000.
Interest expense
Interest expense increased $87,000, due primarily to higher short-term and
long-term credit balances in 1997 as compared with 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Earnings per common share increased from $.41 (adjusted for a stock dividend
of 20% on January 2, 1997) in 1996 to $.65 in 1997.
Operating income increased $1,510,000, or 37%, and, as a percentage of
operating revenues, was 10% in 1997 as compared with 8% in 1996. Operating
income at the utilities increased $1,292,000, due primarily to increased water
consumption at Suburban and the positive effects of water rate increases. ECO's
operating results improved by $600,000 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. Parent company expenses increased $382,000 primarily due to
increases in insurance expenses, legal reserves, payroll related costs, and
increases in outside services.
11
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Operating revenues
Operating revenues increased $3,973,000 or 8%. Water utility sales increased
$1,841,000 due to warmer weather in Southern California resulting in a 5.2%
increase in water consumption by Suburban's customers. Water rate increases at
Suburban also favorably impacted operating revenues. ECO's revenues increased
$2,132,000, 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 $1,672,000 or 4%. As a percentage of
operating revenues, these expenses were 74% in 1997 and 77% in 1996. Water
utility direct operating expenses increased $289,000, which reflects the
increase in water consumption by Suburban's customers. ECO's operating expenses
increased $1,383,000 resulting primarily from higher expenses associated with
new contracts and increased billable work.
Selling, general and administrative
Selling, general and administrative expenses increased $791,000 or 11%. As a
percentage of operating revenues, these expenses were 15% in 1997 and 1996.
Selling, general and administrative expenses at the utilities increased $260,000
primarily due to increased legal reserves, insurance, payroll and payroll
related benefits, and outside services. ECO's selling, general and
administrative expenses increased $149,000 primarily due to higher insurance,
legal and consulting expenses, and payroll related expenses. This was offset by
a reduction in marketing costs resulting from the restructuring of marketing
responsibilities. As discussed above, general and administrative expenses of
the parent company increased $382,000.
Interest expense and other income
Interest expense increased $323,000, primarily due to higher total short-term
and long-term credit balances in 1997 as compared with 1996. Other income
increased $102,000, primarily due to consulting fees received as a result of an
investment in Windermere Utility Company.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 30, 1997, Suburban and the Company were served with a summons and
an amended complaint in the Kristin Santamaria, et al. vs. Suburban Water
Systems, et al. action. Information concerning these proceedings was included
in the Company's Form 10-Q Report for the quarter ended June 30, 1997. The only
changes from the original complaint filed in July 1997, but not served, were the
addition of approximately 250 additional plaintiffs (claiming on behalf of
themselves and for the alleged wrongful deaths of family members) and the
addition of two additional water purveyors in the San Gabriel Valley (the
"Valley") as defendants in the action. The plaintiffs contend, in essence, that
they or deceased family members are or were 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 and, in some cases, wrongful
deaths.
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. Southwest Water Company is a holding company
and not a water purveyor. 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. Based on information available at this time,
management does not expect that this matter will have a material effect on the
Company's financial position or results of operations.
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 and 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 this
action, the other defendants therein and the efforts of the Company and Suburban
to cause their insurers to defend the action is set forth in the Company's Form
10-Q Report for the quarter ended March 31, 1997. 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.
As discussed in Note 9 to the Condensed Consolidated Financial Statements, the
City of Albuquerque (the "City") on November 4, 1997 initiated an action in
eminent domain to acquire the operations of NMUI. The Company believes that the
fair market value of NMUI is substantially in excess of the amount offered in
the City's complaint and that there is some doubt whether the City will proceed
with the action. Under New Mexico state law, there are procedures which would
allow the City to take possession prior to a resolution of the fair market value
issue; however, the Company believes that it has adequate defenses should the
City choose to pursue these procedures. If the City pursues a final
determination of fair market value and possession of NMUI through a court trial,
the Company does not anticipate resolution of these matters in the near future.
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.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
4.6 Registration Statement for the Second Amendment to the Amended
and Restated Southwest Water Company Stock Option and Restricted
Stock Plan (incorporated by reference to Registrant's Form S-8
Registration Statement filed with the Commission on October 29,
1997).
10.4F Letter of Extension to Credit Agreement dated September 1, 1997,
between Registrant and Wells Fargo Bank, filed herewith.
10.4G Letter of Extension to Credit Agreement dated November 1, 1997,
between Registrant and Wells Fargo Bank, filed herewith.
10.13B Letter of Extension to Credit Agreement dated September 1,1997,
between Suburban Water Systems and Wells Fargo Bank, filed
herewith.
10.13C Letter of Extension to Credit Agreement dated November 1,1997,
between Suburban Water Systems and Wells Fargo Bank, filed
herewith.
10.14C Third Amendment to Credit Agreement dated August 11, 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
September 30, 1997.
14
<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: November 12, 1997 /s/ Peter J. Moerbeek
- - ------------------------ ---------------------
PETER J. MOERBEEK, Vice President Finance and
Chief Financial Officer
15
<PAGE>
EXHIBIT 10.4F
September 1, 1997
Southwest Water Company
225 N. Barranca Ave., Suite 200
West Covina, CA 91719
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
November 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 of
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal of further extension
<PAGE>
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 September 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 September 1, 1997
SOUTHWEST WATER COMPANY
By: /s/Peter J. Moerbeek
--------------------
PETER J. MOERBEEK
Title: Vice President Finance, CFO
---------------------------
By: /s/Stephen J. Muzi
------------------
STEPHEN J. MUZI
Title: Corporate Controller
--------------------
<PAGE>
EXHIBIT 10.4G
November 1, 1997
Southwest Water Company
225 N. Barranca Ave., Suite 200
West Covina, CA 91719
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
January 1, 1998. 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.
<PAGE>
Borrower acknowledges that Bank has not committed to make any renewal of
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal of 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 November 14, 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 October 1, 1997
SOUTHWEST WATER COMPANY
By: /s/Anton C. Garnier
-------------------
ANTON C. GARNIER
Title: President
---------
By: /s/Peter J. Moerbeek
--------------------
PETER J. MOERBEEK
Title: Vice President Finance,
-----------------------
<PAGE>
EXHIBIT 10.13B
September 1, 1997
Southwest Water Company
225 N. Barranca Ave., Suite 200
West Covina, CA 91719
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
November 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 of
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal of 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>
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 September 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 September 1, 1997
SOUTHWEST WATER COMPANY
By: /s/Daniel N. Evans
------------------
DANIEL N. EVANS
Title: Vice President Finance
----------------------
By: /s/Peter J. Moerbeek
--------------------
PETER J. MOERBEEK
Title: Secretary
---------
<PAGE>
EXHIBIT 10.13C
November 1, 1997
Southwest Water Company
225 N. Barranca Ave., Suite 200
West Covina, CA 91719
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
January 1, 1998. 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 of
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal of 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
November 1, 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 November 14, 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 October 1, 1997
SOUTHWEST WATER COMPANY
By: /s/Daniel N. Evans
------------------
DANIEL N. EVANS
Title: Vice President Finance
----------------------
By: /s/Peter J. Moerbeek
--------------------
PETER J. MOERBEEK
Title: Secretary
---------
<PAGE>
EXHIBIT 10.14C
THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of August
11, 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 91719-1605.
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 and that certain
Second Amendment to Credit Agreement dated as of June 17, 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 August 31, 1997 to December 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: December 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) Authorization. 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 his
-------------
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.
9. Estoppel. To induce Lender to enter into his Amendment an 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, their 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
------------------
Title: Controller
MELLON BANK, N.A.
By: /s/Kevin Kelly
--------------
Title: Vice President
4
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<RECEIVABLES> 10,755,000
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