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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998 or
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[_ ] 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
(Exact name of registrant as specified in its charter)
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Delaware 95-1840947
(State or other jurisdiction of incorporated organization) (IRS Employee Identification No.)
225 N. Barranca Avenue, Suite 200
West Covina, CA 91791-1605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (626) 915-1551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(1) Common Shares, $.01 par value Nasdaq
(2) Series A, 5-1/4%, Cumulative Preferred Shares None
$.01 par value
(Title of each class) (Name of each exchange on which registered)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ].
On March 22, 1999, there were 4,253,272 common shares outstanding. The
aggregate market value of the voting common equity held by non-affiliates of the
registrant was approximately $53,610,000 based upon the average high and low
stock prices as of March 22, 1999. The registrant is unable to estimate the
aggregate market value of its preferred shares held by non-affiliates of the
registrant because there is no public market for such shares.
Documents incorporated by reference: Form 10-K Reference
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Proxy Statement dated on or about April 15, 1999 for
Annual Meeting of Stockholders on Thursday, May 27, 1999 Part III
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III in this Form 10-K or any amendment to this
Form 10-K. [X]
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
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INDEX
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PART I
Item 1. Business......................................................................... 1
Item 2. Properties....................................................................... 7
Item 3. Legal Proceedings................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............................. 10
Item 4a Executive Officers of the Registrant............................................. 10
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters........ 11
Item 6: Selected Financial Data.......................................................... 12
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 13
Item 8: Financial Statements and Supplementary Data...................................... 19
Item 9: Changes and Disagreements with Accountants on Accounting and Financial Disclosure 38
PART III
Item 10: Directors and Executive Officers of the Registrant............................... 39
Item 11: Executive Compensation........................................................... 39
Item 12: Security Ownership of Certain Beneficial Owners and Management................... 39
Item 13: Certain Relationships and Related Transactions................................... 39
PART IV
Item 14: Exhibits, Financial Statement Schedule and Reports on Form 8-K................... 40
Exhibit Index.................................................................... 42
Signatures....................................................................... 46
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
Certain statements contained in this Annual Report on Form 10-K are "forward-
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risk, uncertainties and other factors that may cause actual results, performance
or achievements of the Company to be materially different from any performance
or achievements planned, expressed or implied by such forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors that could cause actual results to
differ from expectations are discussed in Part II; Item 7, Risk Factors on pages
15-17.
PART I
Item 1. Business
General Development of Business
Southwest Water Company (hereafter, together with its subsidiaries, referred
to as the "Company" or "Registrant") was incorporated under the laws of the
State of California on December 10, 1954. The Company reincorporated in the
State of Delaware on June 30, 1988. The Company is engaged in the water
management business, providing water and wastewater services to nearly three-
quarters of a million people located throughout California, New Mexico, Texas
and Mississippi. Through its wholly owned subsidiary, ECO Resources, Inc.
("ECO"), the Company operates and manages water and wastewater treatment
facilities owned by cities, municipal utility districts and private entities.
The Company conducts regulated water utility operations through two wholly owned
subsidiaries, Suburban Water Systems ("Suburban"), and New Mexico Utilities,
Inc. ("NMUI"). The Company also owns an interest in Windermere Utility Company
("Windermere"); a small regulated water utility in Texas.
General Information
The focus of the water management industry is customer service, and it does
not rely heavily on technological or proprietary manufacturing processes. The
Company does not conduct significant research and development activities, and
has no patents, licenses or trademarks (except for certain logos and artwork
used in marketing). The Company uses certain commodities such as chemicals and
supplies in its daily operations that are currently readily available from a
number of suppliers. During the past year, there were no significant changes in
the way the Company does business.
There are no individual customers of the Company who generated revenues that
exceeded 10-percent of the Company's consolidated revenues, or whose loss would
have a material adverse effect on the Company's consolidated operations. The
Company is subject to various regulatory agencies with respect to its water and
wastewater treatment services. To date, the Company has experienced no material
adverse effects upon its operations or capital expenditures resulting from
compliance with governmental regulations relating to protection of the
environment. At December 31, 1998, the Company employed 524 people, none of
whom was represented by an employee union.
A. Contract Operations
ECO Resources, Inc.
Product, Business and Regulation
In 1985, the Company purchased all of the outstanding common stock of ECO,
thereby entering into the contract water and wastewater management industry.
ECO was established in 1970 and incorporated under the laws of the State of
Texas in 1974. ECO provides water and wastewater operations and maintenance
services as well as performing related services such as facility equipment
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maintenance and repair, sewer pipeline cleaning, water and wastewater
operations, billing and collection, and state-certified laboratory analysis. As
a contract operator, ECO does not own any of the water sources, water production
facilities or water distribution systems that it operates for its clients, nor
does ECO own any of the wastewater collection systems or wastewater treatment
facilities that it operates for its clients. Although not the owner, ECO is
responsible for operating these water and wastewater facilities in compliance
with all federal and local health standards and regulations.
ECO has two distinct types of contractual relationships: time and material
contracts primarily with municipal utility districts and fixed fee operations
and maintenance contracts.
Municipal Utility District Contracts
A Municipal Utility District ("MUD") is a utility district created under the
rules of the Texas Natural Resource Conservation Commission in order to provide
water, wastewater and drainage services to areas where existing municipal
services are not available. ECO has MUD contracts in the suburbs of Houston,
Austin and El Paso, Texas. ECO negotiates each MUD contract with the MUD's
Board of Directors. As the large Texas cities expand their boundaries, they
periodically condemn MUD-owned facilities and annex them to city-owned
facilities. As of January 1, 1998, ECO had 135 MUD contracts. During 1998, 18
new MUD contracts were added, two MUD contracts were canceled due to annexation
and one MUD contract was canceled for competitive reasons, bringing the total to
150 MUD contracts as of December 31, 1998.
Typically, a MUD contract provides for a monthly base fee that ensures a
certain level of maintenance and operations services, billing, collection and
customer services; and environmental monitoring and reporting. Additional
services provided beyond each contract typically generate revenues on a time and
materials basis as such services are rendered. Most MUD contracts are short-
term contracts and are cancelable on 30 or 60-day notice by either party. Most
contracts allow ECO to increase its monthly fee as the number of connections
increases.
Operations and Maintenance Contracts
Operations and maintenance ("O&M") contracts are contracts with cities and
private entities located in Texas, Mississippi, New Mexico and California.
Typical O&M contracts tend to average three to five years in duration and are
generally cancelable during that period only after a specific breach of the
contract by either party. Typical O&M contracts provide for a specified level
of services, such as facility operation and maintenance, meter reading and
billing or management of the entire water or wastewater system. Most contracts
provide for a fee that covers a specified level of services with contractual
limitations on ECO's liability in the event of a major system failure or
catastrophe. For additional billings, ECO provides services beyond the scope of
the contract or provides services after a system failure or catastrophe. ECO
has the ability to seek fee increases from the city or private entity and to
request specific payment for services when the cost of such services exceeds a
reasonable amount. Additionally, if the system being serviced undergoes rapid
growth that exceeds the parameters of the contract beyond a certain level, ECO
has the right to increase its fixed fee accordingly. As of December 31, 1998,
ECO had 20 O&M contracts, compared to 18 O&M contracts as of December 31, 1997.
Competition and Future Development
ECO provides contract water and wastewater services in Texas, Mississippi, New
Mexico and California. It continues to improve its market position by adding
new MUD and O&M contracts and aggressively pursuing renewal of its existing
contracts. The contract water and wastewater management industry continues to
undergo rapid growth and change. New contracts are awarded based on both lowest
cost and technical expertise. ECO's competition in the O&M portion of its
business includes a number of significantly larger companies that provide O&M
services on a national and international basis, as well as several regional
competitors. In the Texas MUD market, competitors include two large national
companies and several smaller, local companies.
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At December 31, 1998, ECO's anticipated future revenue from firm contractual
commitments was approximately $70 million. Industry renewal rates tend to be
high; however, the contract water and wastewater management business is very
competitive. ECO intends to continue expanding its current business base in the
southwestern and southern United States.
B. Regulated Utility Operations
Suburban Water Systems
Product and Business
Suburban is a regulated public water utility that produces and supplies water
for residential, business, industrial and public authority use, and for private
and public fire protection service under jurisdiction of the California Public
Utilities Commission (the "CPUC"). Suburban's service area contains a
population of approximately 234,000 people within Los Angeles and Orange
counties, California.
Suburban or its predecessor entities have supplied water since approximately
1907. From the mid-1950s to the late 1960s, Suburban's operations rapidly
expanded as the transition from agricultural land use to residential, business
and industrial use occurred throughout its service areas. Primarily due to the
population saturation of its existing service area, Suburban has experienced
only modest customer growth since the late 1960s.
At December 31, 1998, Suburban served 66,843 customers, including 63,148
residential customers, 2,752 business and industrial customers, 313 public
authority customers and 630 other customers. During 1998, Suburban's operating
revenues were 74.5% from sales to residential customers, 18% from sales to
business and industrial customers, and 7.5% from sales to other customers.
Seasonal temperature and rainfall variations subject Suburban's business to
significant revenue and profitability fluctuations. Since most of Suburban's
residential customers use more water in hot, dry weather, the third quarter of
each year is usually the highest in terms of customer consumption, revenues and
profitability.
Wells and Other Water Sources
Suburban owns 15 active wells that pump water from two of the major
groundwater basins in the Southern California coastal watershed: the Central
Basin and the Main San Gabriel Basin (the "Basins"). The Basins are the source
of approximately 77% of the water produced from Suburban's wells. The rights to
pump water from the Basins have been fully adjudicated under the laws of the
State of California. These adjudications have established Suburban's right to
produce water at levels prescribed each year by the Watermaster Boards (the
"Boards") that manage the Basins. As the water level in the Basins increases or
decreases, the Boards may adjust the amount of water that Suburban and other
producers may pump without paying additional charges. When Suburban produces
water from either of the Basins in excess of permitted levels, an additional
payment is required to provide for the replenishment of the water supply;
however, even when additional payments are required, the Basins provide Suburban
with the lowest cost of water. The price that Suburban will pay for water that
it produces from the Basins is established each year by the Boards. Current
water levels of the Basins are sufficient to eliminate any drought concerns;
however, there is no assurance that the current allowable pumping levels will
continue in the future.
Suburban also purchases water from two mutual water companies that also
produce their water from the Main San Gabriel Basin. Suburban's ownership of
shares in each of these mutual water companies has allowed it to increase its
water entitlement and maintain a lower cost of water. In addition, Suburban
leases basin pumping rights from other parties, which also helps reduce its cost
of water.
Suburban's water supply is further supplemented by water purchased at a higher
cost from external sources. Suburban has the right to purchase water from the
Metropolitan Water District of Southern
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California. Suburban also has interconnections with other water purveyors that
can be used as supplemental and emergency sources of supply.
Water Quality Regulation
A stated responsibility of the CPUC is to ensure an adequate supply of
healthful, potable water to residents of the state. Accordingly, Suburban's
water quality issues are under the regulatory jurisdiction of the CPUC.
Suburban's water supply is also subject to regulation by the United States
Environmental Protection Agency (the "EPA"), acting pursuant to the 1996 Federal
Safe Drinking Water Act (the "US Act"), and by the Office of Drinking Water of
the California Department of Health Services (the "DOHS"), acting pursuant to
the California Safe Drinking Water Act (the "Cal Act"). The US Act establishes
uniform minimum national water quality standards, as well as specification of
the type of treatment processes to be used for public drinking water. The EPA
has an ongoing directive to issue regulations under the US Act in order to
require disinfection of drinking water, specification of maximum contaminant
levels ("MCLs") and filtration of surface water supplies. The Cal Act and the
mandate of the DOHS are similar to the US Act and the mandate of the EPA. In
many instances the requirements of the DOHS are more restrictive than the EPA.
Both the EPA and the DOHS have put into effect regulations and other
pronouncements that require periodic testing and sampling of water. These
regulations specify permissible levels of radio nuclides (including radon), and
rules governing lead and copper levels. The regulations mandate corrosion
control studies and sampling as well as specifying permissible levels of
volatile organic compounds ("VOCs"), herbicides, pesticides and inorganic
substances.
Suburban's water quality personnel regularly sample and monitor the quality of
water being distributed throughout the system. Testing, sampling and
inspections by Suburban are conducted at the intervals, locations and
frequencies required by EPA and DOHS regulations. Chlorination is currently
performed to provide a chlorine residual required by the DOHS as a safeguard
against bacteriological contamination. In addition to sampling and testing of
water performed by Suburban personnel, independent engineers retained by the
Boards conduct sampling and testing for certain pollutants such as VOCs. Water
samples from throughout Suburban's system are tested regularly by independent,
state-certified laboratories for bacterial contamination, chemical contaminant
content and for the presence of pollutants and contaminants for which MCLs have
been put into effect. The results of the sampling and testing are made
available to all producers, with the cost of such sampling and testing covered
by Board assessments to the producers. Suburban provides its customers with an
annual water quality report, which, among other things, informs Suburban's
customers of the source and quality of the water being provided to them. The
Company believes that future incremental costs of complying with governmental
regulations, including capital expenditures, will be recoverable through
increased rates. However, there is no assurance that recovery of such costs
will be allowed.
In June 1998, Suburban detected a substance called N-nitrosodimethylamine
("NDMA") in one of its wells in excess of the EPA reference dosage for health
risks. Upon detection, the well was immediately removed from service. Suburban
is currently building a treatment facility that will reduce the NDMA to non-
detectable levels. Suburban anticipates completion of this treatment facility
in mid-1999.
In 1997, the San Gabriel Basin Water Quality Authority advised Suburban that
the DOHS had detected the contaminant "perchlorate" in the Main San Gabriel
Basin. The contaminant was later detected in a well that is operated but not
owned by Suburban. For a time, Suburban continued to blend water produced from
this well with other water sources, bringing the concentration of perchlorate
within the DOHS standards. Subsequently, NDMA was detected in this well in
excess of the EPA reference dosage for health risks, at which time, Suburban
removed the well from service.
The potential impact of these contaminants on the results of operations for
Suburban is not fully known at this time. 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
anticipates capital expenditures of approximately $2 million to complete
construction of the treatment plant described above.
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Water supplied by Suburban meets all current requirements of the US Act, the
Cal Act and the regulations put into effect under the related legislation.
Suburban believes that costs associated with the additional monitoring and
testing of its water will be recoverable from ratepayers in future rate
increases. There can be no assurance that water sources currently available to
Suburban will meet future EPA or DOHS requirements, that recovery of additional
costs will be allowed, or that new or revised requirements will not require
additional capital expenditures by Suburban in the future.
Competition and Rate Relief
Suburban operates under a Certificate of Public Convenience and Necessity
granted by the CPUC and is regulated by other state and local governmental
authorities having jurisdiction over water service and other aspects of its
business. Suburban's water business is dependent upon maintaining this
certificate and upon various governmental and court decisions affecting
Suburban's water rights and service area.
Under current CPUC practices, water rates may be increased through general
rate increases or by offsets for certain expense increases. Typically, general
rate increases are for three years and include "step" increases in the second
and third years. General rate increases require formal proceedings with the
CPUC in which overall rate structure, expenses and rate base are examined by
CPUC staff. Public hearings are also held. General rate proceedings require
approximately 12 months from the time an application is filed to the CPUC's
authorization of new rates. The step increases for the second and third years
are intended to compensate for projected expense increases. Prior to their
approval, step increases are subject to verification that earnings levels have
not exceeded the rate of return authorized at the general rate proceeding. Rate
increases to offset increases in certain expenses such as the cost of purchased
water and energy costs to pump water are accomplished through an abbreviated
"offset" proceeding that requires approximately two months from the time of
filing a request to the authorization of new rates.
In 1995, Suburban filed a general rate increase application with the CPUC and
negotiated with the CPUC staff a 4.25% ($1,100,000) rate increase, effective
April 24, 1996. On December 3, 1996, the CPUC approved Suburban's filing for a
2.62% ($705,000) step increase, effective January 1, 1997. On December 30,
1997, the CPUC approved Suburban's filing for another 2.62% ($740,000) step
increase, effective on January 1, 1998. This was the last step increase from
the 1995 general rate application. As of March 1999, Suburban had not filed a
rate request. In recent years, Suburban has succeeded in achieving efficiencies
and cost savings that resulted in the deferral of rate requests.
Suburban has been, and believes that it will continue to be, permitted to
increase its rates as necessary to achieve a reasonable rate of return.
However, the inability to increase rates in the event of increases for certain
expenses could adversely affect Suburban's results of operations. As permitted
by the CPUC, Suburban records the difference between actual and CPUC-adopted
water production costs in balancing accounts in the income statement, with a
corresponding adjustment on the balance sheet. Suburban believes that these
amounts will be recovered from or returned to the ratepayers through future
CPUC-authorized rate adjustments.
Future Development
In recent years, Suburban's growth has been limited to extensions into new
subdivisions along the periphery of its service areas. There is little area
available for new business, industrial construction or residential growth, and
as such, significant increases in the number of customers in Suburban's current
service area are not expected. In 1998, Suburban entered into an exclusive
negotiating agreement with the City of West Covina, California, which is
adjacent to its existing service area. The purpose of the agreement, which was
extended to July 1999, is to enable the city and Suburban to establish a price
that will allow the city to divest itself of its water distribution system and
facilities. Successful negotiations would allow Suburban to either purchase or
lease the city's water system, adding approximately 7,000 connections to
Suburban's customer base.
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The laws of the State of California provide that no public or private agency
can install facilities within the service area of a public utility in order to
compete with it, except upon payment of just compensation for all damages
incurred by the public utility. Under California law, municipalities and
certain other public bodies have the right to acquire private water utility
plants and systems within their territorial limits by condemnation but must pay
fair value for the condemned system. Suburban is not aware of any impending
proceeding in relation to the condemnation of any portion of its facilities.
Water utilities require substantial amounts of capital for the construction,
extension and replacement of water distribution facilities. This capital is
generated from Suburban's operations, from periodic debt financing by Suburban,
from lines of credit of Suburban, from contributions in aid of construction
received from developers, governmental agencies, municipalities or individuals,
and from advances received from developers that are repaid under rules of the
CPUC. During 1998, 1997 and 1996, capital expenditures approximated $5,636,000,
$5,853,000 and $6,124,000, respectively.
New Mexico Utilities, Inc.
Product and Business
NMUI is a regulated public water utility that provides water supply and sewage
collection services for residential, commercial, irrigation, and fire protection
customers under jurisdiction of the New Mexico Public Utility Commission
("NMPUC"). NMUI's service area is located in the northwest part of the City of
Albuquerque and in the northern portion of Bernalillo County, New Mexico. NMUI's
service area contains a population of about 23,000 people and covers
approximately 34 square miles, of which an estimated 28% has been developed.
In 1969, Suburban purchased NMUI. In 1987, NMUI became a wholly owned
subsidiary of the Company after the NMPUC authorized Suburban to transfer by
stock dividend all of the stock of NMUI to Southwest Water Company. Since 1969,
NMUI has grown from approximately 800 customers to over 6,600 customers. Most
of this growth has come from the extension of water services and sewage
collection services into new residential subdivisions and from the development
of commercial property. Continuing economic development in NMUI's service area
is expected to further increase the number of customers.
At December 31, 1998, NMUI provided water service to 6,639 customers including
6,017 residential customers, 548 commercial and industrial customers and 74
other customers. NMUI also provided sewer collection service to 6,224 customers
including 5,889 residential customers and 335 commercial and industrial
customers. During 1998, NMUI's operating revenues were 49% from sales to
residential customers and 51% from sales to commercial and industrial customers.
Seasonal temperature and rainfall variations subject NMUI's business to
significant fluctuations. Since most of NMUI's residential customers use more
water in hot, dry weather, the third quarter of each year is usually the highest
in terms of customer consumption, revenues and profitability. The sewer
operation revenues and profitability remain relatively constant throughout the
year.
Wells and Other Water Sources
NMUI owns five wells and three reservoirs and believes that it has adequate
water capacity to serve its current customer base as well as new customers in
the foreseeable future. NMUI's wells produce water from the Rio Grande
Underground Basin. The water supplied by NMUI to its customers is subject to
regulation by the EPA and by the State of New Mexico Environmental Improvement
Division ("EID"). Samples of water from throughout the system are tested
regularly by independent, state certified laboratories, and the results of the
tests are sent to the EID. Chlorination is performed to provide an allowable
chlorine residual as a safeguard against bacteriological contamination.
Water supplied by NMUI meets all current requirements of the EPA and the EID,
and NMUI anticipates no significant capital expenditures to comply with those
requirements. There can be no assurance, however, that water sources currently
available to NMUI will meet future EPA or EID
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requirements, or that such requirements will not require capital expenditures by
NMUI. If customer growth continues in NMUI's service area as projected, NMUI may
have to increase its water supply capability through additional well
construction. To ensure the availability of an emergency supply of water, NMUI
has one interconnection with another water purveyor.
Competition, Regulation and Future Development
NMUI operates under a Certificate of Public Convenience and Necessity granted
by the NMPUC and is regulated by other state and local governmental authorities
having jurisdiction over water and wastewater service and other aspects of its
business. NMUI's water and sewer business is dependent upon maintaining this
certificate and upon various governmental and court decisions affecting NMUI's
water rights and service area.
Requests for rate increases are submitted to the NMPUC with the test year
typically being the previous year's actual results. NMUI has been, and believes
that it will continue to be, permitted to increase its rates as necessary to
achieve a reasonable rate of return. However, any inability to increase rates
in the event of increased cost of certain expenses would adversely affect NMUI's
results of operations.
The laws of the State of New Mexico provide that no public or private agency
can install facilities within the service area of a public utility in order to
compete with it, except upon payment of just compensation for all damages
incurred by the utility. Under New Mexico law, municipalities and certain other
public bodies have the right to acquire private water utility plants and systems
within their territorial limits by condemnation but must pay fair value for the
condemned system.
In recent years, the City of Albuquerque (the "City") has annexed a
significant portion of NMUI's service area; however, NMUI has continued to serve
the customers located in the annexed areas. Currently, 52% of NMUI's customers
are located within the city limits. As discussed in the Company's 1997 Annual
Report on Form 10-K, and Form 10-Q for the quarters ended March 31, June 30, and
September 30, 1998, the City has 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. Under New Mexico state law, there are procedures which would allow
the City to take possession of NMUI prior to the resolution of the fair market
value issue; however, the Company believes that it has adequate defenses should
the City choose to pursue these procedures. Discussions with the City are
ongoing but there is no assurance that these discussions will lead to a
settlement of the legal action, or that the action will be resolved quickly.
NMUI's operations are capital intensive. Capital is generated from NMUI's
operations; from periodic debt financing by NMUI, from lines of credit of NMUI
and the Company, from contributions in aid of construction received from
developers, and from advances received from developers which are repaid under
rules of the NMPUC. During 1998, 1997 and 1996, capital expenditures
approximated $5,727,000, $8,916,000 and $8,169,000, respectively. The decrease
in capital expenditures in 1998 compared to 1997 was primarily due to the
completion of a new well in 1997.
Item 2. Properties
The Company's corporate offices are located in West Covina, California, where
the parent company leases approximately 7,500 square feet of office space for
its headquarters.
A. Contract Operations
ECO Resources, Inc.
ECO owns 4.3 acres and a 17,000 square-foot building for its fleet and
maintenance operations in the Houston, Texas area, and 10 acres and a 10,000
square-foot building for its office, fleet and maintenance operations in Austin,
Texas. In addition, ECO owns or leases 316 vehicles and other equipment used in
daily operations. ECO leases approximately 30,000 square feet of office,
warehouse and laboratory
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space in eight facilities in the Houston, Texas area; the Rio Grande Valley,
Texas area; Mississippi; New Mexico; and California.
B. Regulated Utility Operations
Suburban leases an office building with approximately 14,600 square feet of
office space for its headquarters in Covina, California. Suburban also owns a
3,550 square foot building in La Puente, California, and a 3,200 square foot
building in La Mirada, California that are used for its district operations.
NMUI leases 4,012 square feet of space in an office building for its
headquarters in Albuquerque, New Mexico and owns a 2,400 square foot warehouse
that is used for its field supplies and equipment.
Suburban Water Systems
Suburban owns and operates water production and distribution systems
consisting of well pumping plants, booster pumping stations, reservoir storage
facilities, transmission and distribution mains, and service connections to
individual customers. Suburban also owns and operates a water treatment
facility, which was placed in service during 1997. Suburban has rights-of-way
and easements in its service area necessary to provide water services. At
December 31, 1998, Suburban owned 704 miles of transmission and distribution
mains and 27 storage reservoirs with a total capacity of 56 million gallons.
Suburban also owns 15 active wells with a total pumping capacity of
approximately 37,000 gallons per minute. These facilities vary as to age and
quality, but each is believed by Suburban to be in good condition and adequate
for current operations. Suburban intends to continue its capital expenditure
program and construct and replace reservoirs, wells and transmission and
distribution lines in future years, as needed and approved by the CPUC. Suburban
employees perform normal maintenance and construction work on these facilities,
and major construction projects are performed by outside contractors chosen
through competitive bidding. Ongoing maintenance and repairs performed by
Suburban were approximately $1,792,000 in 1998 and constituted approximately 11%
of its operating expenses.
Virtually all property of Suburban other than 11.4 acres of vacant land in La
Puente, California is subject to the lien of an Indenture of Mortgage and Deed
of Trust dated October 1, 1986 (the "Suburban Indenture"), as amended February
7, 1990, January 24, 1992 and October 9, 1996, securing Suburban's First
Mortgage Bonds. The Suburban Indenture contains certain restrictions common to
such types of instruments regarding the disposition of property and includes
various covenants and restrictions, including limitations on the amount of cash
dividends that Suburban may pay to the Company. The vacant land in La Puente,
California is neither necessary nor used for utility operations and is currently
in escrow, pending completion of a sale transaction.
New Mexico Utilities, Inc.
NMUI owns and operates a water production and distribution system consisting
of well pumping plants, reservoir storage facilities, booster pumping stations,
transmission and distribution mains, and service connections to individual
customers. NMUI has rights-of-way and easements in its service area necessary
to provide water and sewer services. At December 31, 1998, NMUI owned five
wells, 135 miles of transmission and distribution mains and three storage
reservoirs with a total capacity of eight million gallons. NMUI's wells have a
total pumping capacity of 9,525 gallons per minute. In addition, NMUI owns and
operates a sewer collection system consisting of one lift station and 101 miles
of interceptor and collector lines. Wastewater is treated at a facility owned
by the City of Albuquerque. These facilities vary as to age, and each is
believed by NMUI to be adequate for current and foreseeable operations.
Employees of NMUI or outside contractors perform normal maintenance and
construction work on these facilities. Ongoing maintenance and repair expenses
were approximately $178,000 in 1998 and constituted approximately 21% of NMUI's
operating expenses.
Virtually all of NMUI's property is subject to the lien of an Indenture of
Mortgage and Deed of Trust (the "NMUI Indenture") dated February 14, 1992, as
amended May 15, 1992 and October 21, 1996, securing NMUI's First Mortgage Bonds.
The NMUI Indenture contains certain restrictions common to such types of
instruments regarding the disposition of such property and includes various
covenants and
8
<PAGE>
other restrictions, including limitations on the amount of cash dividends that
NMUI may pay to the Company.
Item 3. Legal Proceedings
As discussed in the Company's 1997 Annual Report on Form 10-K, 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 ("Santamaria"). The
amended complaint lists approximately 350 plaintiffs who contend, in essence,
that they or deceased family members are or were long-time residents of the San
Gabriel Valley ("the Valley") and that, by virtue of their residence in the
Valley, they have suffered long-term exposure to various hazardous substances in
their drinking water resulting in serious illness or, in some cases, wrongful
death. Of that number, 77 contend that they received their water from Suburban.
Suburban and the Company filed demurrers (i.e. motions to dismiss the action)
which alleged that the action must be dismissed because exclusive jurisdiction
of the subject matter rests with the CPUC. On August 27, 1998, the Superior
Court Judge agreed and dismissed the case as to all water utility defendants.
The plaintiffs have appealed that decision.
As discussed in the Company's Form 10-Q Reports for the quarters ended March
31, 1998 (the "March Report"), June 30, 1998 (the "June Report") and September
30, 1998 (the "September Report"), the Company and Suburban were served with a
summons and complaint in a second action entitled Christine Boswell et al vs.
Suburban Water Systems, et al, in the Los Angeles County Superior Court. There
are 14 plaintiffs and the allegations against Suburban are similar to those in
Santamaria. Since the filing of the September Report, the Court of Appeal has
issued an order setting forth a briefing schedule for a review of the
plaintiffs' petition requesting that the trial court be required to terminate a
stay order issued with respect to this action and rule on the demurrers filed by
the defendants. The water utility defendants asked the Court of Appeal to order
the trial court to dismiss these actions based on the exclusive jurisdiction of
the CPUC. The Court of Appeal has now issued an order to show cause why such an
order should not be issued, and this request for dismissal will be argued on
April 19, 1999.
A third action, Anthony Anderson, et al vs. Suburban Water Systems, et al was
filed in the Los Angeles County Superior Court. The allegations of the Anderson
action are virtually identical to the Santamaria action and involve
approximately 180 plaintiffs. Of that number, 57 claim to be customers of
Suburban. By stipulation of the parties, this case is stayed pending the
outcome of the Santamaria appeal.
A fourth action, Demciuc, et al vs. Suburban Water Systems, et al was filed in
the Los Angeles County Superior Court and was served in September 1998. In that
case, 10 consumers are making claims against Suburban. That action is similar to
the Boswell action and involves two other water purveyors and five industrial
defendants. All of the parties to the Demciuc action have agreed to stay that
action pending the outcome of the Boswell petitions.
The Company and Suburban have recently been named as Doe Defendants in the
following cases: Georgiana Dominguez vs. Southern California Water Company, et
al, Jeff Adler vs. Southern California Water Company, et al, Loretta Celi vs.
San Gabriel Valley Water Company, et al, and Shamille A. Criner vs. San Gabriel
Water Company, et al, all pending in the Los Angeles County Superior Court.
These complaints are similar to the complaints in the Boswell and Demciuc cases
discussed above. These complaints allege service of water to the Plaintiffs by
water companies other than Suburban and it is unknown what the charging
allegations would be as to Suburban and the Company. These cases are all stayed
pending resolution of the above referenced writs in the Appellate Court.
The Company and Suburban intend to vigorously defend all pending actions, and
have requested that their liability insurance carriers defend and indemnify the
Company and Suburban. Several of the liability insurance carriers are currently
contributing to the costs of defense of the lawsuits. Based upon information
available at this time, management does not expect that these actions will have
a material effect on the Company's financial position or results of operations.
9
<PAGE>
Suburban has applied for and received CPUC authority to establish and maintain
a memorandum or tracking account to accumulate all costs and fees incurred by
Suburban in defense of these actions and any similar actions which may be filed.
Costs and fees incurred in legal actions against industrial potentially
responsible parties, and costs and fees incurred in seeking recovery against
Suburban's insurance carriers are included in this memorandum account. The
Company and Suburban are unable to estimate or predict whether the CPUC will
ultimately allow Suburban to recover these accumulated costs and fees from
Suburban's customers or, if such recovery is allowed, how much of such costs and
fees will be recoverable.
In March 1998, the CPUC issued an order instituting investigation ("OII")
directed to all Class A and B water utilities in California, including Suburban.
Information about the OII is set forth in the June Report. At this time, the
Company and Suburban are unable to predict what actions, if any, will be taken
by the CPUC and/or the DOHS as the result of this investigation, or their impact
on the operations or financial position of the Company and Suburban.
In October 1998, the Company and ECO were served with a summons and complaint
in an action entitled Patrick K. Accrocco, et al vs. ECO Resources, Inc., et al
in the District Court of Fort Bend County, Texas. The action arises out of a
fatal automobile accident that occurred in September 1998 and involved an ECO
truck. The plaintiffs allege that the accident was caused by the driver's
negligence and that ECO and the Company were negligent in hiring, training,
monitoring, and supervising the driver. The plaintiffs seek damages for
pecuniary loss, loss of companionship and society, loss of consortium, and
mental anguish in an amount to be determined at trial. The Company and ECO
maintain automobile liability insurance and umbrella liability policies in an
aggregate amount that the Company believes to be greater than any award that the
plaintiffs may obtain. The Company believes that its maximum exposure in this
action is limited to the self-insured retention under its umbrella liability
policy. The Company, ECO and the ECO truck driver are being defended in this
action by legal counsel appointed by the Company's automobile liability carrier,
and have answered denying any liability to the plaintiffs. Based on the
information available at this time, management does not expect that this action
will have a material affect on the Company's financial position or results of
operations.
As discussed in the Company's 1997 Annual Report on Form 10-K and in Item 1,
hereof, the City of Albuquerque (the "City") initiated an action in eminent
domain to acquire the operations of NMUI. At present, discussions are ongoing,
and the City desires a rapid resolution to the legal action. The Company is
participating in these discussions. However, there is no assurance that these
discussions will lead to a settlement of the legal action, or that a resolution
will be reached quickly.
As discussed in the Company's 1997 Annual Report on Form 10-K, Suburban and
the Company were served with a complaint in September 1995, wherein the
plaintiff claimed that, while working in the 1950s and 1960s for an independent
contractor hired by Suburban, he was exposed to asbestos fibers and contracted
mesothelioma. Information as to the action is set forth in the March Report.
In January 1999, the case was settled for an amount, which will be funded by the
Company's insurance carriers after general releases are exchanged between the
Company and the claimants.
The Company and its subsidiaries are the subjects 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 position, results of operations or cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4a. Executive Officers of the Registrant
The Board of Directors elects the executive officers of the Company each year at
its first meeting following the Annual Meeting of Stockholders. There are no
family relationships among any of the executive officers of the Company, nor are
there any agreements or understandings between any such officer and another
person pursuant to which he or she was elected an officer. There are no legal
10
<PAGE>
proceedings of the types required to be disclosed pursuant to the instructions
to this item involving any executive officer. Information about the Chairman of
the Board and President of the Company is set forth in Part III, Item 10,
Directors and Executive Officers of the Registrant on page 41. The executive
officers of the Company and its subsidiaries are as follows:
<TABLE>
<CAPTION>
Name Age Position and Offices Currently Held and Business Experience Date Elected
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Peter J. Moerbeek 51 President of ECO Nov-98
Director of Suburban and ECO Oct-95
Secretary of the Company, Suburban and ECO Oct-95
Chief Financial Officer of the Company Aug-95
Previously Executive Vice President Finance and
Operations of Pico Products, Inc. and Pico Macom, Inc.
(1989-1995)
Thomas C. Tekulve 47 Vice President Finance of the Company Jan-99
Previously Vice President, Chief Financial Officer
SafeGuard Health Enterprises Inc. (1995-1999)
Previously (and most recently serving as) Director of Finance,
International Operations Beckman Instruments (1984-1995)
Michael O. Quinn 52 President of Suburban May-96
Director of Suburban May-93
Chief Operating Officer of Suburban Apr-92
Previously President of ECO (1985-1992)
Robert L. Swartwout 57 Director of NMUI May-93
President and General Manager of NMUI Mar-92
Previously Consulting Associate, Robert Witter &
Associates, Inc. (1985-1992)
</TABLE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company is in the process of drafting an S-3 Registration Statement to
register approximately 255,000 shares held by affiliates of the Company. These
shares were issued many years ago and were not registered under the Securities
Act of 1933. The Company anticipates the S-3 filing will be completed by April
30, 1999. There will be no proceeds to the Company related to this filing.
11
<PAGE>
The following table shows the range of market prices of Southwest Water
Company's common shares. The prices shown reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent actual
transactions. The price ranges shown in the table, as well as cash dividends,
have been restated to reflect stock dividends of five percent on January 2,
1998, and 20 percent on January 2, 1997 as well as a 5-for-4 stock split in the
form of a stock dividend on October 1, 1998. The shares are traded on the
Nasdaq Stock Market symbol SWWC. The current quarterly dividend rate is $.08
per common share. At December 31, 1998, there were 2,167 stockholders of
record.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
Market Price Range Market Price Range
-------------------- --------------------
Dividends High Low Dividends High Low
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $0.072 $13.80 $11.70 $0.069 $11.81 $9.14
2nd Quarter $0.072 $14.00 $11.90 $0.069 $10.67 $8.86
3rd Quarter $0.080 $14.60 $10.50 $0.069 $10.86 $7.81
4th Quarter $0.080 $17.00 $12.60 $0.072 $15.05 $10.10
- - ----------------------------------------------------------------------------------
</TABLE>
Item 6. Selected Financial Data
Earnings per common share, cash dividends per common share and basic and
diluted weighted-average outstanding common shares have been adjusted to reflect
a 5-for-4 stock split in the form of a stock dividend on October 1, 1998, and
stock dividends of five percent on January 2, 1998, 20 percent on January 2,
1997, and five percent on January 2, 1996.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996 1994
- - -----------------------------------------------------------------------------------------------------------
(in thousands except per share amounts and numbers of customers)
<S> <C> <C> <C> <C>
Summary of Operations
Operating revenues $ 72,146 $ 71,005 $ 66,145 $50,932
Operating income $ 8,055 $ 7,215 $ 5,734 $ 3,849
Gain on sales of land $ 110 $ -
Net income $ 3,349 $ 2,601 $ 1,923 $ 1,057
Net income available for common shares $ 3,322 $ 2,574 $ 1,896 $ 1,029
- - -----------------------------------------------------------------------------------------------------------
Common Share Data
Earnings per common share:
Basic $ 0.79 $ 0.62 $ 0.46 $ 0.26
Diluted $ 0.77 $ 0.61 $ 0.46 $ 0.25
Cash dividends per common share $ 0.30 $ 0.28 $ 0.26 $ 0.24
Weighted average outstanding common shares:
Basic 4,198 4,135 4,088 3,982
Diluted 4,307 4,224 4,104 4,038
- - -----------------------------------------------------------------------------------------------------------
Statistical Data
Working capital (deficit) $ (2,678) $ 473 $ (4,079) $(1,951)
Capital additions $ 11,921 $ 15,202 $ 15,212 $ 8,684
Property, plant and equipment, net $109,238 $102,136 $ 91,414 $72,136
Total assets $129,927 $123,100 $111,416 $86,834
Long-term debt - First Mortgage Bonds $ 28,900 $ 29,800 $ 30,700 $20,500
Stockholders' equity $ 35,143 $ 32,427 $ 30,400 $28,532
Return on average common equity 10.0% 8.3% 6.5% 3.7%
Number of utility customers 73,482 72,319 70,976 69,012
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Item 7. 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 for the replacement and renovation of
existing water utility facilities and by construction expenditures for new water
and wastewater utility facilities at NMUI. The Company's cash flow may also be
influenced by new business development and acquisition costs.
At December 31, 1998, the Company had cash and cash equivalent balances
totaling $394,000 and unused lines of credit of $10,721,000, with a total line
of credit capacity of $16,000,000. The Company has three lines of credit from
three commercial banks, one of which expires in 1999. The other two lines of
credit were renewed in September 1998 and expire in 2000. The Company expects
to renew its lines of credit in the normal course of business. During 1998, the
Company repaid $1,852,000 on its lines of credit. In addition to its lines of
credit, the Company has existing borrowing capacity under its First Mortgage
Bond Indentures. Under these indentures, the Company has remaining borrowing
capacity of approximately $36,965,000. However, the amount of additional
borrowing available to the Company under its current bank lines of credit is
limited by financial covenants that restricted additional borrowing at December
31, 1998 to the unused credit line amount. As of December 31, 1998, the Company
was in compliance with all applicable financial covenants as required by its
line of credit agreements.
The Company's additions to property, plant and equipment totaled $11,921,000
during 1998 representing a decrease of $3,281,000 when compared to the additions
in 1997. The decrease was attributable to the completion of major projects in
1997. Capital expenditures are estimated to be approximately $10,000,000 in
1999. Developers made contributions in aid of construction ("CIAC"), and
advances totaling $5,169,000, of which $3,394,000 was received in cash. The cost
of Company-financed capital additions was $6,752,000, which was paid for
primarily by cash flow from operations. The Company anticipates that cash flow
from operations will be sufficient to fund Company-financed additions to
property, plant and equipment during the next year. However, short-term
borrowing is available to meet construction requirements not funded by
operations, advances by developers 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 during 1999. If additional cash were needed, 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 or NMUI. If the Company were unable to renew its existing lines of
credit or unable to obtain additional long-term financing, capital spending
would be reduced or delayed until new financing arrangements were secured. Such
financing arrangements could include seeking equity financing through a private
placement or a public offering. Similarly, if the Company were to need
additional cash to fund an acquisition, financing arrangements could include
long-term borrowing or equity financing.
REGULATORY AFFAIRS AND INFLATION:
Regulation:
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with MUDs are short-term contracts and do not generally include
inflation adjustments. ECO's longer-term water and wastewater service contracts,
primarily with cities, typically include inflation adjustments. Changes in
prices are negotiated on a contract-by-contract basis
The CPUC and the NMPUC regulate the rates and operations of Suburban and NMUI,
respectively. The rates allowed are intended to provide the utilities an
opportunity to recover costs and earn a reasonable return on common equity.
Although the Company is not currently seeking any rate increase, future
construction expenditures and increased direct operating expenses may require
periodic requests for rate increases in the future.
13
<PAGE>
Regulatory Developments
Legislative and CPUC developments are closely monitored by the Company and by
the various water industry associations in which the Company actively
participates. Whether 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, if any, 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 passed a constitutional
amendment to combine the NMPUC and the New Mexico Corporation Commission
("NMCC") and create the New Mexico Public Regulatory Commission ("NMPRC"). The
NMPRC became effective under the enacted legislation on January 1, 1999 and
consists of five elected officials. Also, 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.
ENVIRONMENTAL AFFAIRS:
Suburban and NMUI operations fall under the regulatory jurisdiction of the
CPUC and the NMPUC, respectively. The Company's operations are also 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.
YEAR 2000 COMPUTER COMPLIANCE:
The Year 2000 ("Y2K") issue is the result of software applications using a
two-digit code instead of a four-digit code to identify the year. Such
applications may be unable to interpret dates beyond 1999, which could result in
system failure or erroneous data in the year 2000 causing potentially serious
disruptions in operations. The Company began evaluating the Y2K issue in 1997
and has implemented a five-phase plan to assess its exposure from potential Y2K
related failures in its internal systems and those of its significant suppliers,
vendors and customers.
The first phase of the plan is to conduct an inventory of all systems and
programs to determine which might be affected by the Y2K issue. The second
phase involves assessment and determination as to the correction of any Y2K
issues that are identified in the first phase of the Company's plan. The third
phase of the plan involves implementation and testing of the corrective
measures. The fourth phase of the plan is to ensure that all significant Y2K
issues have been properly corrected and all critical internal systems are Y2K
compliant. The final phase of the plan is to assess whether the Company's
principal suppliers, vendors and material customers have Y2K issues that could
adversely affect the Company.
The first phase of the plan, conducting an inventory of systems and programs
that may be affected by Y2K, has been substantially completed. The Company's
billing and general ledger systems are already substantially Y2K compliant. For
those systems that are not compliant, the second phase of the plan, identifying
corrective measures, has been substantially completed with solutions identified
to correct the existing system problems. The third phase of the plan,
implementation and testing of corrective measures was substantially completed in
the first quarter of 1999. Final critical internal systems are expected to be
Y2K compliant without material deviation by July 1999 (phase four). In the
event compliance is not possible, the Company will consider replacing non-
compliant software. Costs to be
14
<PAGE>
incurred in order for the Company to be Y2K compliant are not expected to have a
material effect on the Company's financial position or results of operations.
The fifth phase of the plan involves the Company contacting principal
suppliers and vendors, all single source suppliers and vendors, and material
customers including local governments and municipal utility districts to assess
their readiness for Y2K. The Company is currently making inquiries with respect
to Y2K compliance of these other systems; however; the Company has not received
assurance that those other systems are Y2K compliant. If the systems of
principal suppliers and vendors are found to be non-compliant, the Company will
evaluate and consider appropriate contingency plans. The Company is unable to
predict whether there will be a material adverse effect on the Company's
financial position or results of operations since the final determination of the
Y2K compliance of principal suppliers, vendors, and material customers is not
known at this time.
The Company relies on relatively low technological equipment and processes for
its water and wastewater treatment operations. If necessary, the Company has the
ability to operate its water and wastewater systems manually should internal
computer systems fail. On January 1, 2000, the Company plans to have operations
personnel on site and available to operate the systems manually in the event
that any internal computer systems fail. However, a long-term loss of electrical
power would have a material adverse effect on the operations of the Company, the
Company's financial position and the results of operations.
NEW ACCOUNTING STANDARDS
In 1999, the Company will be required to implement SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
Currently, the Company does not have any derivative instruments which require
disclosure under SFAS No. 133 and it is not expected to have any effect on the
Company's financial position or results of operations.
RISK FACTORS
Certain statements contained in this Annual Report on Form 10-K are "forward-
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to be materially different from any
performance or achievements planned, expressed or implied by such forward-
looking statements. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations.
The forward-looking information referred to above includes but is not limited
to revenue backlog information, expectations regarding sales growth and new
contracts, and potential acquisitions, weather conditions, changes in business
conditions, legal and other contingencies among other matters.
Weather
There is seasonality to the water services industry; thus the results of
operations for one period do not necessarily indicate results to be expected in
another period. Rainfall and weather conditions affect utility operations, with
most water consumption occurring during the second and third quarters of each
year when weather tends to be hot and dry. Drought conditions would have the
effect of lowering revenue due to conservation efforts of the consumer and less
water available to the utilities. The Company's contract operations business
can also be seasonal in nature. Heavy rainfall tends to hamper the Company's
ability to perform billable work such as pipeline maintenance, manhole
rehabilitation and other outdoor services. Moderate rainfall by contrast may
create additional opportunities for additional billable work outside the scope
of existing contracts. Drought conditions would not necessarily affect the
Company's contract operations because of the base fee and fixed fee contracts,
but could affect the Company's opportunities for additional billable work
outside the scope of the contracts.
15
<PAGE>
Contract Operations
The water and wastewater management business is highly competitive. In the
United States, municipal employees perform the majority of water and wastewater
utility operations. As a result, a significant portion of ECO's sales and
marketing efforts require convincing elected officials and city staff persons
that outsourcing of the utility operations is beneficial to the city or the MUD.
There is no assurance that the city will choose to outsource, or will select ECO
as its operator at the end of the sales effort. While industry renewal rates
tend to be high, periodically, cities change operators or terminate outsourcing
at the end of a contract. An inability to renew its existing contracts could
have a material adverse impact on the Company. In addition, a city or MUD could
cancel a long-term contract without notice, and in breach of the contract. This
would not only result in loss of revenue and operating profits, but could
potentially involve the Company in litigation.
Risk of Failure to Manage Growth
The Company continues to expand its business and is actively seeking
acquisitions and joint ventures to improve the Company's position in the
contract water and wastewater business. This kind of growth demands experienced
and qualified personnel to manage the transition as the Company expands. The
success of future business development and growth relies heavily on the
Company's ability to retain qualified personnel to operate and manage its new
business ventures. There can be no assurance that the Company will successfully
manage this growth and failure to do so could have a material adverse effect on
the Company.
Water Quality and Contamination
As previously discussed in Item 1, in June 1998, Suburban detected a substance
called NDMA in one of its wells in excess of the EPA reference dosage for health
risks. Upon detection, the well was immediately removed from service. As set
forth in Item 1, Suburban is building a treatment facility that will reduce the
NDMA to non-detectable levels. In 1997, the San Gabriel Basin Water Quality
Authority advised Suburban that the DOHS had detected the contaminant
"perchlorate" in the Main San Gabriel Basin. The contaminant was later detected
in a well that is operated but not owned by Suburban. Subsequently, NDMA was
detected in this well, at which time, Suburban removed the well from services.
Suburban has instituted corrective measures with respect to these contaminants;
however, the potential impact of these contaminants on the results of operations
for Suburban is not fully known at this time. Costs associated with testing of
Suburban's water supplies have increased and are expected to increase further as
regulatory agencies adopt additional monitoring requirements.
The EPA has conducted numerous studies of underground water in the Main San
Gabriel Basin (the "Main Basin") and in 1984 named the Main Basin as a Super-
fund site. Several large industrial companies were named as potentially
responsible parties ("PRPs") for allegedly causing the contamination.
Suburban's facilities were not named as sources of the contamination in the Main
Basin. However, individual government officials have suggested that, because of
their pumping operations, the Main Basin water producers may have clean-up
liability under certain environmental statutes. The EPA is expected to continue
to identify sources of contamination in order to establish legal responsibility
for clean-up costs. Currently, neither the EPA nor any other governmental
agency has identified Suburban or other water producers as PRPs. However, the
Company currently is involved in litigation concerning the quality of the Main
Basin groundwater as described in Item 3, Legal Proceedings.
In 1979, volatile organic compounds ("VOCs") were discovered in the Main
Basin. While most of the VOC contamination was found outside Suburban's service
areas, subsequent underground water sampling resulted in the discovery of four
large areas of groundwater VOC contamination. One of the areas includes
Suburban's Bartolo Well Field, which contains four of Suburban's producing
wells. Suburban produces approximately 26% of its total water production from
these wells. Currently, the water delivered to Suburban's customers wells does
not contain VOCs in excess of established MCLs. To date, water produced from the
Bartolo Well Field and other wells owned by Suburban in the Main Basin meets all
applicable governmental requirements. Suburban has taken measures to ensure that
it has an adequate supply of potable water
16
<PAGE>
that meets all applicable governmental standards. Technology exists to remove
VOC contaminants from basin water. However, there is no assurance that either
such technology will be adequate in the future to reduce the amounts of VOCs and
other contaminants in the Main Basin to acceptable levels or the costs of such
removal will be fully recoverable from Suburban's customers. To date, Suburban
has been permitted to recover all expenses associated with water quality
maintenance from its ratepayers.
In addition to these matters set forth, there can be no assurance that other
water quality and contamination issues exist but are not known to the Company at
this time. There is no assurance that, in the future, governmental authorities
will not seek to recover clean-up costs from Suburban or that PRPs will not seek
contributions from water producers for clean-up costs. If Suburban were required
to pay clean-up costs, it would seek to recover such costs through increased
rates to its customers. This practice has been permitted by the CPUC in the
past; however, there can be no assurance that Suburban would be allowed to
recover such costs in the future.
RESULTS OF OPERATIONS:
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Diluted earnings per common share (adjusted for a 5-for-4 stock split in the
form of a stock dividend on October 1, 1998 and a 5% stock dividend on January
2, 1998) were $.77 in 1998 compared to $.61 in 1997.
Operating income increased $840,000 or 12%, and, as a percentage of operating
revenues, was 11% in 1998 compared to 10% in 1997. ECO's operating income
increased $615,000 due to increased revenue from new contracts, additional
billable work performed outside the scope of the existing contracts, and
aggressive cost containment measures that reduced operating costs as a
percentage of revenue. Operating income at the utilities increased $87,000.
The increase in operating income was primarily due to the addition of new
customers and increased customer water consumption at NMUI. The increase was
offset by decreased water sales at Suburban because of inclement weather in
California as a result of El Nino-generated storms. Parent company expenses
decreased $138,000, primarily due to decreases in compensation-related expenses.
Operating revenues
Operating revenues increased $1,141,000 or 2%. ECO's revenues increased
$1,859,000, primarily as a result of revenues from new contracts and additional
work performed outside the scope of existing contracts. ECO's net increase in
revenue reflects a loss of approximately $2,400,000 in revenue with respect to
an O&M contract in New Mexico, which was not renewed in 1998. Water utility
revenues decreased $718,000, primarily due to 10% reduction in water consumption
by Suburban's customers due to El-Nino-generated storms. The decrease was
partially offset by the positive effects of a rate increase, and also by the
addition of new customers at NMUI.
Direct operating expenses
Direct operating expenses increased $317,000. As a percentage of operating
revenues, these expenses decreased to 73% in 1998 from 74% in 1997. ECO's
direct operating expenses increased $855,000, due primarily to higher expenses
associated with new contracts and increased billable work. Water utility direct
operating expenses decreased $538,000, due primarily to the decrease in water
consumption by Suburban's customers. The decrease was partially offset by
additional direct operating expenses in NMUI as a result of new customers.
Selling, general and administrative
Selling, general and administrative expenses decreased $16,000. As a
percentage of operating revenues, these expenses were 15% in 1998 and 16% in
1997. ECO's selling, general and administrative expenses increased $389,000,
due primarily to expanded marketing efforts. General and administrative
expenses at the utilities decreased $267,000, primarily due to cost containment
measures
17
<PAGE>
intended to offset the effect of reduction in revenue. Parent company expenses
decreased $138,000, primarily due to decreases in compensation-related expenses.
Other income and expense
Interest expenses decreased $241,000, primarily due to a reduction in the line
of credit balances, and lower interest rates during the year. In October 1998,
Suburban sold two parcels of land not used in or useful to utility operations,
and recorded a gain of $110,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Diluted earnings per common share (adjusted for a 5-for-4 stock split in the
form of a dividend on October 1, 1998 and stock dividends of 5% on January 2,
1998 and 20% on January 2, 1997) were $.61 in 1997 as compared to $.46 in 1996.
Operating income increased $1,481,000 or 26%, and, as a percentage of
operating revenues, increased from 9% in 1996 to 10% in 1997. ECO's operating
results improved $713,000, due to increased revenue from new contracts,
aggressive cost containment measures, and restructuring of marketing
responsibilities. Operating income at the utilities increased $1,311,000, due
primarily to increased water sales at Suburban and the positive effects of a
water rate increase. Parent company expenses increased $543,000, primarily due
to increases in insurance expenses, legal reserves and compensation-related
expenses.
Operating revenues
Operating revenues increased $4,860,000 or 7%. ECO's revenues increased
$2,612,000, primarily as a result of revenue from new contracts and additional
work performed outside the scope of existing contracts. Water utility revenues
increased $2,248,000, primarily due to warmer weather in Southern California
resulting in a 4.6% increase in water consumption by Suburban's customers.
Suburban also benefited from a water rate increase.
Direct operating expenses
Direct operating expenses increased $2,337,000 or 5%. As a percentage of
operating revenues, these expenses decreased from 76% in 1996 to 74% in 1997.
ECO's direct operating expenses increased $1,778,000, resulting primarily from
higher expenses associated with new contracts and increased billable work.
Water utility direct operating expenses increased $559,000, primarily reflecting
the increase in water consumption by Suburban's customers.
Selling, general and administrative
Selling, general and administrative expenses increased $1,042,000 or 10%. As
a percentage of operating revenues, these expenses increased from 15% in 1996 to
16% in 1997. ECO's selling, general and administrative expenses increased
$121,000, due to insurance, legal, compensation-related benefits, consulting
expenses and increased sales and marketing expenses. General and administrative
expenses at the utilities increased $378,000, primarily due to increased legal
reserves, insurance, compensation-related benefits, and outside services.
General and administrative expenses of the parent company increased $543,000,
primarily due to the increases in insurance expenses, legal reserves and
compensation-related expenses.
Other income and expense
Interest expenses increased $376,000, primarily due to increased line of
credit balances during the year.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedule
<TABLE>
<S> <C>
Independent Auditors' Report ............................................................................. 20
Consolidated Statements of Income-Three Years Ended December 31, 1998..................................... 21
Consolidated Balance Sheets-December 31, 1998 and 1997.................................................... 22
Consolidated Statements of Changes in Common Stockholders' Equity-
Three Years Ended December 31, 1998................................................................... 23
Consolidated Statements of Cash Flows-Three Years Ended December 31, 1998................................. 24
Notes to Consolidated Financial Statements................................................................ 25-38
Schedule II- Valuation and Qualifying Accounts-Three Years Ended December 31, 1998........................ 41
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of Southwest Water Company:
We have audited the consolidated financial statements of Southwest Water Company
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
supplementary financial statement schedule II, as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest Water
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Los Angeles, California
January 27, 1999
20
<PAGE>
<TABLE>
<CAPTION>
Southwest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
Operating Revenues (Note 12) $72,146 $71,005 $66,145
Operating Expenses:
Direct operating expenses 53,011 52,694 50,357
Selling, general and administrative 11,080 11,096 10,054
- - ------------------------------------------------------------------------------------------------------------------------
64,091 63,790 60,411
- - ------------------------------------------------------------------------------------------------------------------------
Operating Income (Note 12) 8,055 7,215 5,734
Other Income (Expense):
Interest expense (2,984) (3,225) (2,849)
Interest income 91 94 100
Gain on sale of land 110 0 0
Other 268 367 313
- - ------------------------------------------------------------------------------------------------------------------------
(2,515) (2,764) (2,436)
Income Before Income Taxes 5,540 4,451 3,298
Provision for income taxes (Note 7) 2,191 1,850 1,375
- - ------------------------------------------------------------------------------------------------------------------------
Net Income 3,349 2,601 1,923
Dividends on Preferred Shares (Note 9) 27 27 27
- - ------------------------------------------------------------------------------------------------------------------------
Net Income Available for Common shares $ 3,322 $ 2,574 $ 1,896
- - ------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share (Notes 8 and 9)
Basic $0.79 $0.62 $0.46
Diluted $0.77 $0.61 $0.46
- - ------------------------------------------------------------------------------------------------------------------------
Cash Dividends per Common Share (Note 9) $0.30 $0.28 $0.26
- - ------------------------------------------------------------------------------------------------------------------------
Weighted Average Outstanding Common Shares (Notes 8 and 9):
Basic 4,198 4,135 4,088
Diluted 4,307 4,224 4,104
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
Southwest Water Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
- - ---------------------------------------------------------------------------------------------------
Assets 1998 1997
- - ---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 394 $ 1,237
Customers' accounts receivable, less allowance for doubtful accounts
$895 in 1998 and $711 in 1997) 8,630 7,286
Other current assets 2,586 2,976
- - ----------------------------------------------------------------------------------------------------
11,610 11,499
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost (Note 3) 144,690 133,936
Contract operations property, plant and equipment -- at cost 4,678 4,854
- - ----------------------------------------------------------------------------------------------------
149,368 138,790
Less accumulated depreciation and amortization 40,130 36,654
- - ----------------------------------------------------------------------------------------------------
109,238 102,136
Other Assets (Note 2) 9,079 9,465
- - ----------------------------------------------------------------------------------------------------
$129,927 $123,100
- - ----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- - ----------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 1,679 $ 900
Accounts payable 2,782 1,214
Other current liabilities (Note 5) 9,827 8,912
- - ----------------------------------------------------------------------------------------------------
14,288 11,026
Other Liabilities and Deferred Credits:
Long-term debt (Note 6) 28,900 29,800
Bank notes payable (Note 4) 4,500 7,131
Advances for construction 8,049 7,931
Contributions in aid of construction 31,706 27,822
Deferred income taxes (Note 7) 4,430 4,130
Other liabilities and deferred credits 2,911 2,833
- - ----------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 94,784 90,673
Commitments and Contingencies (Note 13)
Stockholders' Equity (Notes 8, 9 and 10):
Cumulative preferred stock 517 517
Common stock 42 33
Paid-in capital 30,127 29,469
Retained earnings 4,457 2,420
Unamortized value of restricted stock issued 0 (12)
- - ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 35,143 32,427
- - ----------------------------------------------------------------------------------------------------
$129,927 $123,100
- - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Southwest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997 and 1998
- - ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Common Stock
Preferred Number of Paid-in Retained
Stock Shares Amount Capital Earnings
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 517 2,576 $ 26 $ 18,715 $10,045
Dividend reinvestment and
employee stock purchase plans 25 287
Stock options exercised 1 8
20% stock dividend 520 5 7,149 (7,154)
Net income 1,923
Cash dividends declared (1,086)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 517 3,122 31 26,159 3,728
Dividend reinvestment and
employee stock purchase plans 29 383
Stock options exercised 20 194
5% stock dividend 159 2 2,733 (2,735)
Net income 2,601
Cash dividends declared (1,174)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 517 3,330 33 29,469 2,420
Dividend reinvestment and
employee stock purchase plans 28 1 432
Stock options exercised 20 226
5 -for-4 stock split in the form of a stock dividend 843 8 (8)
Net income 3,349
Cash dividends declared (1,304)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 517 4,221 $42 $30,127 $4,457
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Southwest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
- - -------------------------------------------------------------------------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,349 $ 2,601 $ 1,923
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,265 4,162 3,887
Deferred income taxes 300 732 160
Gain on sale of land 110 0 0
Changes in assets and liabilities:
Customers' accounts receivable (1,344) 930 (431)
Other current assets 390 (890) 442
Accounts payable 1,568 (299) (756)
Other current liabilities 916 1,343 550
Other, net 108 (210) 204
- - -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,662 8,369 5,979
- - -------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (10,146) (9,384) (11,775)
Proceeds from sale of land 116 0 0
Investment in Windermere Utility Company (Note 2) 0 0 (3,000)
Other investments, net 120 (338) 0
- - -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,910) (9,722) (14,775)
- - -------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Contributions in aid of construction 2,799 1,501 1,960
Advances for construction 595 447 89
Net proceeds from dividend reinvestment and employee
stock purchase plans 506 370 271
Net borrowings on (repayments of) bank notes payable (1,852) 1,942 (2,986)
Dividends paid (1,266) (1,155) (1,050)
Payments on long-term debt (900) (900) (900)
Payments on advances for construction (477) (405) (582)
Proceeds from issuance of long-term debt 0 0 12,000
- - -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (595) 1,800 8,802
- - -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (843) 447 6
Cash and cash equivalents at beginning of year 1,237 790 784
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 394 $ 1,237 $ 790
- - -------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,029 $ 3,189 $ 2,776
Income taxes $ 1,355 $ 805 $ 1,573
Non-cash contributions in aid of construction and advances
for construction conveyed to Company by developers $ 1,775 $ 5,818 $ 3,437
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Southwest Water Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Southwest Water Company and its subsidiaries ("the
Company") provide water management services through contract and utility
operations.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The principal
subsidiaries are ECO Resources, Inc. ("ECO"), Suburban Water Systems
("Suburban") and New Mexico Utilities, Inc. ("NMUI"). All significant
intercompany transactions have been eliminated.
Regulation: Suburban and NMUI conform to the Uniform System of Accounts
prescribed by the California Public Utilities Commission ("CPUC") and the New
Mexico Public Utility Commission ("NMPUC"), respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. The reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period could
be affected. Actual results may differ from these estimates.
Recognition of Revenues: Revenues from contract operations are recognized as
services are performed. Water utility revenues include amounts billed to
customers and an estimated amount of unbilled revenue for water used to the end
of the accounting period.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Financial Instruments: The carrying value of financial instruments such as cash
and cash equivalents, accounts receivable, accounts payable, and short and long-
term debt approximates fair value. At December 31, 1998, the Company had no
derivative financial instruments, financial instruments with off-balance sheet
risk or financial instruments with concentrations of credit risks requiring
disclosure.
Property, Plant and Equipment: Property, plant and equipment used in contract
operations are depreciated on the straight-line method over estimated useful
lives ranging from five to 30 years. The cost of additions to utility plant
includes labor, material and capitalized interest. Capitalized interest of
$147,000, $63,000 and $141,000 was capitalized in 1998, 1997 and 1996,
respectively. The cost of utility plant retired, including net removal costs,
is charged to accumulated depreciation. Depreciation expense on utility plant
is recorded using the straight-line method. Depreciation expense on average
gross depreciable plant was 3.1% in 1998 and 3.2% in both 1997 and 1996.
Other Assets: Included in other assets is the Company's investment in Windermere
Utility Company ("Windermere") as described in Note 2. Regulatory assets
representing amounts that will be recovered from utility customers through rate
adjustments authorized by the CPUC and NMPUC are also included in other assets
along with land no longer used in utility operations. Additionally, other
assets include deferred debt expenses that are being amortized over the lives of
the related debt issues.
The Company regularly reviews its long-lived assets for impairment. This review
includes regulatory assets and assets excluded from rate base by regulators.
Potential impairment of assets held for use is determined by comparing the
carrying amount of an asset to the future undiscounted cash flows expected to be
generated by that asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
cost to sell.
25
<PAGE>
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. The most significant
items are in the tax effects of accelerated depreciation, advances for
construction and contributions in aid of construction. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that the enactment occurs.
When the Company adopted SFAS No. 109, "Accounting for Income Taxes," Suburban
and NMUI recorded additional deferred income taxes, as well as corresponding
regulatory assets and regulatory liabilities as permitted by the CPUC and NMPUC.
The regulatory assets and regulatory liabilities are expected to be recovered
from, or refunded to utility customers through future authorized rate
adjustments.
Unamortized investment tax credits have been deferred and are amortized over the
estimated productive lives of the related assets as allowed by the CPUC and the
NMPUC.
Production Cost Balancing Accounts: Suburban records the difference between
actual water production costs incurred and CPUC-adopted water production costs
in balancing accounts in the income statement with a corresponding liability or
asset on the balance sheet. Under current regulations, the differences recorded
will be refunded to or recovered from utility customers through future CPUC-
authorized rate adjustments.
Advances For Construction and Contributions In Aid of Construction: Advances for
construction represent amounts advanced by developers primarily for water
pipeline extensions. Advance contracts issued after June 1982 are refundable to
the depositor at a rate of 2.5% each year over a 40-year period. Advance
contracts issued prior to July 1982 are refundable over a 20-year period.
Contributions in aid of construction represent contributions in the form of
cash, services or property received from developers, governmental agencies,
municipalities or individuals for the purpose of constructing utility plant.
Depreciation expense related to utility plant additions from contributions in
aid of construction is charged as a reduction to contributions in aid of
construction instead of depreciation expense.
Other Liabilities and Deferred Credits: Other liabilities and deferred credits
include unamortized investment tax credits recorded by Suburban and NMUI and
authorized by the CPUC and the NMPUC. Also included are regulatory liabilities
representing amounts that will be refunded to utility customers through rate
adjustments authorized by the CPUC and the NMPUC.
New Accounting Standards: In 1999, the Company will be required to implemented
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and for hedging activities. Currently, the Company does not have any derivative
instruments which require disclosure under SFAS No. 133 and it is not expected
to have any effect on the Company's financial position or results of operations.
Reclassifications: Certain reclassifications have been made to the 1997 and 1996
consolidated financial statement presentation to conform to the 1998
presentation.
NOTE 2. INVESTMENTS
In 1996, the Company purchased a 49% interest in Windermere for an investment of
$3,000,000. The agreement, as amended, permits the majority shareholder to
acquire the Company's interest in Windermere at an agreed-upon price. If the
majority shareholder does not exercise his purchase option, then the Company has
the right to acquire 100% of Windermere for an agreed upon price. The Company
also has a consulting agreement with Windermere and an additional agreement by
which the Company
26
<PAGE>
may receive an annual payment based upon Windermere's financial performance. The
amended agreement extends to March 31, 1999 the date by which the majority
shareholder may exercise his purchase option and also increases the agreed-upon
purchase price for the majority shareholder. The majority shareholder has
expressed intention to acquire the Company's interest, however discussions are
ongoing. The investment is carried at cost and is included in Other Assets in
the Company's consolidated balance sheets.
The Company also has an investment of $698,000 in two not-for-profit mutual
water companies ("mutuals"), which entitles the Company to certain water rights.
The Company's investment in one of these mutuals is approximately 32% of the
outstanding stock. However, the Company does not exercise significant operating
and financial control over either of these mutuals. The investments are
recorded at cost and are reflected in the general utility property account (Note
3). The Company purchased water from these mutuals at a cost of approximately
$1,747,000, $1,835,000 and $1,600,000 in 1998, 1997 and 1996, respectively.
NOTE 3. UTILITY PROPERTY, PLANT, AND EQUIPMENT
The components of utility property, plant and equipment at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land and land rights $ 598 $ 598
Source of supply 11,440 11,532
Pumping and purification 14,710 12,806
Transmission and distribution 105,690 98,180
General (including Intangibles) 8,045 7,843
Construction work in progress 4,207 2,977
- - --------------------------------------------------------------------------------
$144,690 $133,936
- - --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, substantially all of the Company's utility plant and
equipment was pledged as collateral for the First Mortgage Bonds issued by the
Company (Note 6).
NOTE 4. LINES OF CREDIT
At December 31, 1998, the Company had three unsecured lines of credit from three
commercial banks with a total borrowing capacity of $16,000,000. The Company
renewed two of the lines of credit in September 1998 and they expire in 2000.
The third line of credit expires in 1999. The Company expects to renew and
update these lines of credit in the normal course of business. Under two of the
lines of credit, interest is charged at the banks' prime rates. These two line
of credit agreements also allow the Company to borrow at an interest rate that
is lower than the banks' prime rate; however, certain minimum borrowing
requirements must be maintained for a fixed period of time. Interest charged
under the third line of credit is lower than the bank's prime rate and contains
no restrictions as to minimum borrowing or borrowing for a fixed period of time.
Two of the line of credit agreements require a commitment fee of 1/2-percent
per year of the unused portion of the available lines of credit, calculated and
payable on a quarterly basis. The third line of credit agreement requires a
$6,000 annual fee. Each of the line of credit agreements contains certain
financial restrictions. The Company was in compliance with all applicable
restrictions at December 31, 1998.
27
<PAGE>
A summary of borrowing on the lines of credit is presented below:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Notes payable to banks at December 31 $5,279 $7,131
Weighted average interest rate at December 31 7.03% 7.40%
Maximum amount of borrowings outstanding at any month end $7,840 $8,340
Average borrowings $6,283 $6,910
Weighted average interest rate 7.11% 7.30%
- - --------------------------------------------------------------------------------------
</TABLE>
NOTE 5. OTHER CURRENT LIABILITIES
Included in other current liabilities at December 31, 1998 and 1997 are the
following:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accrued salaries, wages and benefits $ 2,748 $ 2,567
Purchased water 1,569 1,969
Franchise and other taxes 943 441
Drafts payable 696 315
Accrued interest payable 671 680
Current portion of advances for construction 399 431
Accrued dividends payable 344 307
Accrued income taxes payable 227 0
Other 2,230 2,202
- - --------------------------------------------------------------------------------------
$ 9,827 $ 8,912
- - --------------------------------------------------------------------------------------
</TABLE>
NOTE 6. LONG-TERM DEBT
The long-term debt outstanding at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Suburban First Mortgage Bond, Series A, due 2006, at
8.93% interest rate, with semi-annual interest payments $ 7,800 $ 8,700
Suburban First Mortgage Bond, Series B, due 2022, at
9.09% interest rate, with semi-annual interest payments 8,000 8,000
Suburban First Mortgage Bond, Series C, due 2006, at
7.61% interest rate, with semi-annual interest payments 8,000 8,000
NMUI First Mortgage Bond, Series A, due 2002, at 8.86%
interest rate, with semi-annual interest payments 2,000 2,000
NMUI First Mortgage Bond, Series B, due 2006, at 7.64%
interest rate, with semi-annual interest payments 4,000 4,000
- - --------------------------------------------------------------------------------------
Long-term debt before current maturities 29,800 30,700
Less current maturities (900) (900)
- - --------------------------------------------------------------------------------------
Long-term debt $28,900 $29,800
- - --------------------------------------------------------------------------------------
</TABLE>
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments
of $900,000. The bond is nonrefundable and may not be redeemed prior to October
2, 2000. After October 1, 2000, the bond may be redeemed at the option of the
Company at a price of par plus a call premium. Suburban's First Mortgage Bonds,
Series B and C, and NMUI's First Mortgage Bonds, Series A and B, do not require
annual sinking fund payments. These bonds are nonrefundable and may be redeemed
at any time by the Company at a price of par plus a call premium. Additional
mortgage bonds may be issued subject to the
28
<PAGE>
provisions of the existing indentures. Substantially all of the Company's
utility plant is pledged as collateral for these bonds (Note 3). Each indenture
limits the amount of cash and property dividends that Suburban and NMUI may pay
to the Company. At December 31, 1998 and 1997, the combined indenture limits for
dividends totaled $15,605,000 and $12,946,000, respectively. Aggregate annual
maturity and sinking fund requirements of all long-term debt are $900,000 for
the three years ending December 31, 2001 and for the year ended December 31,
2003. Annual maturity and sinking fund requirements are $2,900,000 for the year
ended December 31, 2002, and include NMUI's Series A Bonds, which mature in
2002.
NOTE 7. INCOME TAXES
The components of the current and deferred income tax provisions are as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 1,683 $ 978 $ 795
State 306 371 509
- - ---------------------------------------------------------------------------------------------
1,989 1,349 1,304
- - ---------------------------------------------------------------------------------------------
Deferred income taxes (benefits):
Depreciation 568 640 713
Contributions in aid of construction and advances for
construction 227 242 (405)
Investment tax credits 25 26 25
Reserves (243) (440) (318)
Pension expense (193) 0 0
Gains on condemnation of land (50) (51) (25)
Production cost balancing accounts (39) 342 185
Deferred debt expenses (7) (7) (6)
Other, net 12 (19) (10)
- - ---------------------------------------------------------------------------------------------
300 733 159
- - ---------------------------------------------------------------------------------------------
Change in regulatory assets and regulatory liabilities, net (49) (183) (39)
Investment tax credit amortization (49) (49) (49)
- - ---------------------------------------------------------------------------------------------
Provision for income taxes $ 2,191 $ 1,850 $ 1,375
- - ---------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Provision computed at statutory rates 34% 34% 34%
Depreciation 1% 1% 2%
Goodwill amortization and other non deductible expenses 2% 3% 4%
State income taxes, net of Federal tax benefit 1% 2% 3%
Investment tax credits (1%) (1%) (1%)
Other, net 3% 3% 0%
- - ---------------------------------------------------------------------------------------------
40% 42% 42%
- - ---------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Net deferred income taxes consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred income tax assets:
Contributions in aid of construction and advances for construction $ 3,329 $ 3,556
Reserves 1,194 951
Investment tax credits 531 556
Production cost balancing accounts (278) (317)
Other 162 232
- - ------------------------------------------------------------------------------------------------------------
4,938 4,978
- - ------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (8,463) (7,895)
Gains on condemnation of land (756) (806)
Deferred debt expenses (105) (112)
Other (44) (295)
- - ------------------------------------------------------------------------------------------------------------
(9,368) (9,108)
- - ------------------------------------------------------------------------------------------------------------
Net deferred income taxes $(4,430) $(4,130)
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
Management regularly reviews the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December 31,
1998 or 1997.
NOTE 8. EARNINGS PER SHARE
The Company records earnings per share ("EPS") in accordance with SFAS No. 128,
"Earnings per Share", which became effective for periods ending after December
15, 1997. SFAS No. 128 requires the computation of basic EPS and diluted EPS.
The objective of basic EPS is to measure the performance of the Company over the
reporting period by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding during the period. The
objective of diluted EPS is to measure the performance of the Company over the
reporting period after giving effect to all dilutive potential common shares
that would have been outstanding if the dilutive common shares had been issued.
All EPS amounts for the periods reported have been restated to conform to SFAS
No. 128. The following table is a reconciliation of the numerators and
denominators used in both basic and diluted EPS calculations.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
Dividends on Effect of
Preferred Dilutive
Net Income Shares Basic EPS Options Diluted EPS
- - ------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
1998
-----
Income (numerator) $ 3,349 $ (27) $3,322 $ 0 $3,322
Shares (denominator) 4,198 109 4,307
Per share amount $ 0.79 $ 0.77
====== ======
1997
----
Income (numerator) $ 2,601 $ (27) $2,574 $ $2,574
Shares (denominator) 4,135 89 4,224
Per share amount $ 0.62 $ 0.61
====== ======
1996
----
Income (numerator) $ 1,923 $ (27) $1,896 $ 0 $1,896
Shares (denominator) 4,088 16 4,104
Per share amount $ 0.46 $ 0.46
====== ======
- - ----------------------------------------------------------------------------
</TABLE>
30
<PAGE>
NOTE 9. STOCKHOLDERS' EQUITY
The Company is currently authorized to issue 25,000,000 common shares and
250,000 preferred shares at a par value of $.01 per share. At December 31, 1998
there were 4,220,743 common shares and 10,359-1/4 preferred shares outstanding,
and at December 31, 1997, there were 3,330,207 common shares and 10,359-1/4
preferred shares outstanding. Series A-preferred stockholders are entitled to
annual dividends of $2.625 per share. Series A-preferred shares may be called by
the Company for a price of $52 per share and have preference in liquidation of
$50 per share.
In September 1998, the Company declared a 5-for-4 stock split (or 842,474
shares), payable in the form of a stock dividend to stockholders of record on
October 1, 1998. In December 1997 and 1996, the Company declared stock
dividends of 5% and 20% (or 158,581 and 520,317 shares), respectively to
stockholders of record on January 2, 1998 and 1997, respectively. At December
31, 1997 and 1996, retained earnings were charged approximately $2,735,000 and
$7,154,000, respectively, which represents the market value of the shares issued
using the closing price of the Company's common stock on January 2, 1998
($14.00) and 1997 ($10.58). Corresponding entries of approximately $2,733,000
and $7,149,000, respectively, were recorded to paid-in-capital.
The weighted-average number of outstanding common shares and dividends per
common share have been restated to reflect the 5-for-4 stock split in the form
of a stock dividend and the 5% and 20% stock dividends.
The Company has a dividend reinvestment and stock purchase plan ("DRIP" plan)
that allows common stockholders the option of receiving their dividends either
in cash or in common stock at a 5% discount from the market value. The DRIP
plan permits optional cash purchases of stock at current market values up to a
maximum of $3,000 per quarter. At December 31, 1998, 269,459 shares were
reserved for issuance under this plan.
NOTE 10. STOCK COMPENSATION PLANS
At December 31, 1998, the Company had three stock-based compensation plans: the
Stock Option Plan, the Director Stock Option Plan, and the Employee Stock
Purchase Plan. The Company accounts for these plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. If
compensation expense for the Company's three stock-based compensation plans had
been determined using the alternative method described under SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and earnings
per share would have been as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net income available for common shares As reported $3,322 $2,574 $1,896
Pro forma $3,233 $2,516 $1,857
- - -------------------------------------------------------------------------------------------
Basic earnings per common share As reported $ 0.79 $ 0.62 $ 0.46
Pro forma $ 0.77 $ 0.61 $ 0.46
- - -------------------------------------------------------------------------------------------
Diluted earnings per common share As reported $ 0.77 $ 0.61 $ 0.46
Pro forma $ 0.75 $ 0.60 $ 0.45
- - -------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
In the table below, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------
1998 1997 1996
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.3% 2.6% 3.3%
Expected volatility 32.4% 33.1% 37.5%
Risk free interest rate 5.5% 6.0% 6.5%
Expected life in years 6 8 8
- - ------------------------------------------------------------------------------------
</TABLE>
Stock Option Plan ("the Plan"): In 1988, the stockholders approved the Plan and
reserved 150,000 shares for issuance under the Plan, and in 1993 approved an
amendment to the Plan which increased the shares reserved for issuance to
250,000. The amendment also extended the future grant date to February 17, 2003
and eliminated any future grants of restricted stock as well as amending certain
provisions for the restricted stock already issued. In 1997, the stockholders
approved another amendment to the plan, which provided for an increase of
200,000 shares reserved for issuance, bringing the total to 675,937 of shares
(adjusted for the stock split and stock dividends) authorized for issuance under
the plan. Of the total shares authorized, 257,831 are available for issuance.
Under the Plan, the Company may grant non-qualified stock options to officers
and employees at an exercise price not less than the fair value of the stock on
the last trading date preceding the date of grant. Prior to the approval of the
Director Option Plan discussed below, the Company granted non-qualified options
to certain non-employee directors of the Company. Options vest equally over a
period of five years and expire 10 years and one day from the date of grant.
Restricted stock was issued under the Plan prior to 1993 and must be held in
escrow until restrictions lapse. The Company released 8,877 shares of
restricted stock from escrow in 1998, with the remainder to be released in 1999,
providing all restrictions have been satisfied. Unearned compensation of
$238,000 resulted from the issuance of 27,755 shares of restricted stock and has
been amortized over the vesting period. Compensation expense recognized was
approximately $12,000 in 1998 and $24,000 in both 1997 and 1996 for the
restricted stock issued under the plan.
A summary of the status of the Plan and changes during the years ended as of
December 31, 1998, 1997, and 1996 is presented below:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 279,592 $ 8.51 259,466 $ 8.10 205,679 $ 8.31
Granted 89,375 12.64 50,662 10.31 55,869 7.25
Exercised (19,511) 9.89 (20,502) 8.74 (882) 5.52
Forfeited 0 0 (10,034) 6.44 (1,200) 7.22
------ ------- -------
Outstanding at end of year 349,456 $ 9.49 279,592 8.51 259,466 8.10
======= ======= =======
Options exercisable at year-end 168,063 8.53 156,493 $ 8.88 147,307 $ 9.31
======= ======= =======
Weighted average fair value of
options granted during the year $ 3.82 $ 3.15 $ 2.32
======= ======= =======
</TABLE>
32
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- - --------------------------------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Life Average Exercisable Average
Exercise Prices at 12/31/98 in Years Exercise Price at 12/31/98 Exercise Price
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6 to $10 172,046 4.5 $ 7.46 120,558 $ 7.46
$10 to $12 94,285 5.3 10.31 47,505 $10.31
$12 to $14 83,125 9.0 12.80 0 $12.80
------- -------
$ 6 to $14 349,456 6.3 $10.19 168,063 $10.19
- - --------------------------------------------------------------------------------------------
</TABLE>
Director Option Plan ("DOP"): In 1996 the stockholders approved the DOP for non-
employee directors and reserved 65,625 shares (after restatement for a stock
dividend and stock splits) for issuance under the DOP. At December 31, 1998,
43,575 shares were available for issuance under the plan. The DOP provides for
an automatic grant of options to purchase 1,575 of the Company's common stock to
eligible non-employee directors of the Company on the date of the Company's
Annual Meeting of Stockholders through 2006. New directors are granted an
initial option to purchase 1,575 shares of the Company's common stock upon
appointment to the Board of Directors. The DOP options become exercisable in
equal installments over two years and expire 10 years and one day after the date
of grant. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the assumptions described
above.
A summary of the status of the Plan and changes during the years ended as of
December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 11,025 9.62 0 $ -
Granted 11,025 12.90 11,025 9.62
Exercised 0 0 0 0
Forfeited 0 0 0 0
------ ------
Outstanding at end of year 22,050 11.26 11,025 9.62
====== ======
Options exercisable at year-end 5,509 9.62 0 $ 0
====== ======
Weighted average fair value of
options granted during the year $ 2.55 $ 1.94
====== ======
</TABLE>
Employee Stock Purchase Plan ("ESPP"): The Company has a stockholder approved
ESPP that allows eligible employees to purchase common stock through payroll
deductions up to 10% of their salary (not to exceed $25,000 per year). The
purchase price of the stock is 90% of the lower of the share price as calculated
at the beginning and end of the three month offering period. Under the ESPP,
the Company issued 5,181 shares, 5,013 shares and 4,877 shares to employees in
1998, 1997 and 1996, respectively. At December 31, 1998, 264,600 shares were
reserved for issuance under the ESPP (after adjustment for stock dividends) and
225,621 were available for issuance. Using the alternative method described
under SFAS No. 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using Black-Scholes option-
pricing model with the assumptions shown in the table on page 32. The weighted-
average value of those purchase rights granted in 1998, 1997 and 1996 was $3.22,
$3.19, and $3.97, respectively, which resulted in compensation expense of
33
<PAGE>
$16,702, $16,016 and $23,240, and is included in the pro forma net income
available for common shares shown in the table on page 32.
NOTE 11. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit Plan: The Company has a non-contributory pension plan ("the
Pension Plan") under which employees of the parent company, Suburban and NMUI
who have one or more years of service and have attained the age of 21 years are
qualified to participate. Each year, the Company funds the minimum required
statutory amount. In 1998, no contribution was required. In 1997 and 1996, the
Company contributed $560,000 and $556,000, respectively to the Pension Plan.
Benefits to employees are based upon their years of service and their average
compensation during the highest five consecutive years of the last ten years
before retirement. Benefits are reduced if a participant retires before a
certain age. Approximately 86% of Pension Plan assets are invested in two
mutual funds consisting of investments in stocks, bonds and money market
investments, in addition to a group retirement policy consisting of a guaranteed
insurance contract. The remaining 14% of Pension Plan assets are invested
primarily in the Company's common stock. The Pension Plan owns 105,945 common
shares of the Company, which had a market value of approximately $1,642,147 and
$1,483,230 at December 31, 1998 and 1997, respectively. The Pension Plan
received dividends on these shares of approximately $32,000 and $30,000 in 1998
and 1997, respectively. The Company adopted SFAS No. 132, "Employer's
Disclosures about Pension and Other Post-retirement Benefits", which was
effective for financial statements issued after December 15, 1997.
The following tables provide the actuarial assumptions used in determining the
Pension Plan Valuation, the reconciliation of the Projected Benefit Obligation
and the reconciliation of Pension Plan assets:
<TABLE>
<CAPTION>
Weighted-Average Assumptions 1998 1997
- - -----------------------------------------------------------------
<S> <C> <C>
Discount rate 6.5% 7.5%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 3.0% 3.5%
- - -----------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits
- - -------------------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 8,422 $ 7,798
Service cost 440 416
Interest cost 632 584
Actuarial gain (loss) 1,058 (81)
Benefits paid (287) (295)
--------------------
Benefit obligation at end of year $10,265 $ 8,422
--------------------
Change in plan assets
Fair value of plan assets at beginning of year 11,414 9,441
Actual return on plan assets 1,905 1,707
Employer contribution 0 561
Benefits paid (287) (295)
--------------------
Fair value of plan assets at end of year $13,032 $11,414
--------------------
Funded status 2,766 2,991
Unrecognized net actuarial gain (1,747) (1,853)
Unrecognized prior service cost (143) (154)
Unrecognized net asset (496) (622)
--------------------
Prepaid benefit cost $ 380 $ 362
====================
Components of net periodic benefits
Service cost $ 440 $ 416
Interest cost 632 584
Expected return on plan assets (915) (756)
Amortization of prior service costs (10) (10)
Recognized actuarial gain (39) 0
Recognized net initial asset (124) (124)
Net periodic benefit cost -------------------
$ (16) $ 110
</TABLE> ====================
Defined Contribution Plans: The Company has established a 401(k) profit sharing
plan (the "ECO Plan") covering employees of its contract operations business.
The ECO Plan provides for monthly enrollment by employees after completion of
three months of service. Participants may elect to contribute up to 15% of
their salary to the ECO Plan. The Company matches a participant's contribution
for an amount up to 50% of the first 4% of the participant's salary. Company
contributions vest immediately. Company contributions to the ECO Plan were
$152,000, $133,000 and $141,000 in 1998, 1997 and 1996, respectively. The
assets of the ECO Plan are invested at the discretion of the individual
employees in mutual funds consisting of stocks, bonds, and money market
investments.
The Company also established a 401(k) plan ("Utility Plan") covering employees
of the parent company, Suburban and NMUI. The Utility Plan provides for monthly
enrollment by employees after completion of three months of service.
Participants may elect to contribute up to 15% of their salary to the Utility
Plan. The Utility Plan does not provide for Company contributions. The assets
of the Utility Plan are invested at the discretion of the individual employees
in mutual funds consisting of stocks, bonds, and money market investments.
35
<PAGE>
NOTE 12. SEGMENT INFORMATION
Under FASB No. 131, Southwest Water Company has two reportable segments: non-
regulated and regulated operations. The utility segment provides water and
wastewater services through regulated water utility operations, and derives
revenue from the sales of these services to the consumer. The contract
operations segment operates and manages water and wastewater treatment
facilities owned by cities, municipalities and private entities. Revenue is
derived through municipal utility district contracts, and operations and
maintenance contracts.
Southwest Water Company`s reportable segments are strategic business units that
offer different services. They are managed separately since each business
requires different operating and marketing strategies. The utility operations
are governed by the regulatory bodies of the respective states and by the
federal government. The service areas in which they operate constitutes a
monopoly with allowable rates of return determined by state agencies. The
contract operations segment, while subject to certain environmental standards,
is not regulated in its pricing or marketing, or rates of return.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1.
The following table presents information about each reported segment profit or
loss and segment assets. These items are the measures reported to the chief
operating decision-maker for purposes of making decisions about allocating
resources to the segment and assessing its performance. In addition to the
segment information, a reconciliation between reported segment information and
consolidated information reported for the Company has been prepared and is
included as part of this disclosure.
36
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Total
Non- Total Segment Consolidated
Regulated Regulated Information Other Information
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1998
- - -----------------------
Revenues from external customers $36,844 $ 35,302 $ 72,146 $ 0 $ 72,146
Interest income 66 8 74 17 91
Interest expense 14 2,742 2,756 228 2,984
Depreciation and amortization 736 3,477 4,213 52 4,265
Segment operating profit 848 10,493 11,341 (3,286) 8,055
Income tax provision (benefit) 192 2,588 2,780 (589) 2,191
All other 15 99 114 264 378
Other significant non-cash items:
Non-cash contributions in aid of construction 0 1,775 1,775 0 1,775
Segment assets 10,157 115,515 125,672 4,255 129,927
Expenditures for segment assets 430 11,363 11,793 128 11,921
As of December 31, 1997
- - -----------------------
Revenues from external customers $34,985 $ 36,020 $ 71,005 $ 0 $ 71,005
Interest income 67 2 69 25 94
Interest expense 7 2,891 2,898 327 3,225
Depreciation and amortization 808 3,311 4,119 43 4,162
Segment operating profit (loss) 147 10,407 10,554 (3,339) 7,215
Income tax provision (benefit) (39) 2,344 2,305 (455) 1,850
All other 4 53 57 310 367
Other significant non-cash items:
Non-cash contributions in aid of construction - 5,818 5,818 0 5,818
Segment assets 9,765 109,167 118,932 4,168 123,100
Expenditures for segment assets 404 14,365 14,769 433 15,202
As of December 31, 1996
- - -----------------------
Revenues from external customers $32,373 $ 33,772 $ 66,145 $ 0 $ 66,145
Interest income 48 21 69 31 100
Interest expense 17 2,231 2,248 601 2,849
Depreciation and amortization 831 3,018 3,849 38 3,887
Segment operating profit (loss) (589) 9,096 8,507 (2,773) 5,734
Income tax provision (benefit) (197) 2,136 1,939 (564) 1,375
All other 153 32 185 128 313
Other significant non-cash items:
Non-cash contributions in aid of construction 0 3,437 3,437 0 3,437
Segment assets 10,725 96,800 107,525 3,891 111,416
Expenditures for segment assets 882 14,293 15,175 37 15,212
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office facilities under operating
leases that expire through 2004. Aggregate rental expense under all operating
leases approximated $2,384,000 in 1998, $2,225,000 in 1997 and $2,220,000 in
1996. At December 31, 1998, the future minimum rental commitments under
existing non-cancelable operating leases are as follows: 1999 - $2,441,000,
2000-$2,030,000, 2001- $1,593,000, 2002- $865,000, 2003 - $247,000, and $87,000
thereafter.
37
<PAGE>
NOTE 14. SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION
The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of utility and contract operations. Earnings per
basic and diluted share have been adjusted to reflect a 5-for-4 stock split in
the form of a stock dividend on October 1, 1998, and stock dividends of five
percent on January 2, 1998 and 20-percent on January 2, 1997. Selected
unaudited quarterly financial information of the Company is presented in the
table below.
<TABLE>
<CAPTION>
1998 Quarters Ended March 31 June 30 September 30 December 31
- - ---------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $15,946 $18,332 $19,960 $17,908
Operating income 1,022 2,184 3,088 1,761
Net income 182 926 1,448 793
Net income available for common shares 175 919 1,441 787
Basic earnings per common share 0.04 0.22 0.34 0.19
Diluted earnings per common share 0.04 0.21 0.34 0.18
<CAPTION>
1997 Quarters Ended March 31 June 30 September 30 December 31
- - ---------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $15,432 $18,469 $19,975 $17,129
Operating income 804 2,104 2,727 1,580
Net income 64 807 1,192 538
Net income available for common shares 57 800 1,186 531
Basic earnings per common share 0.01 0.19 0.29 0.13
Diluted earnings per common share 0.01 0.19 0.28 0.13
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the directors of the Company is set forth in the
Company's definitive Proxy Statement, to be filed with the Securities and
Exchange Commission ("Commission") dated on or about April 15, 1999, under the
caption "Information about the Board of Directors and Committees of the Board,"
and is hereby incorporated by reference. In addition, information appearing
under the heading "Compliance with Section 16(a) of the Securities Exchange Act
of 1934, as Amended" is in the Company's definitive Proxy Statement, dated on or
about April 15, 1999, and is also hereby incorporated by reference.
Item 11. Executive Compensation
Information related to executive compensation is contained in the Company's
definitive Proxy Statement, to be filed with the Commission dated on or about
April 15, 1999, under the captions "Executive Compensation and Other
Information," and "Information About the Board of Directors and Committees of
the Board," and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners
and management of the Company's voting securities is set forth in the Company's
definitive Proxy Statement, to be filed with the Commission dated on or about
April 15, 1999, under the caption "Beneficial Ownership of the Company's
Securities," and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions is
set forth under the captions "Information About the Board of Directors and
Committees of the Board," "Executive Severance Compensation Agreements," and
"Certain Transactions" in the Company's definitive Proxy Statement, to be filed
with the Commission dated on or about April 15, 1999, and is hereby incorporated
by reference.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The financial statements listed below are filed as part of this report:
Independent Auditors' Report
Consolidated Statements of Income Three Years Ended December 31, 1998, 1997
and 1996
Consolidated Balance Sheets December 31, 1998 and 1997
Consolidated Statements of Changes in Common Stockholders' Equity --
Three Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows --
Three Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) The supplementary financial statement schedule required to be filed with
this report is as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts.................... 41
Schedules not listed above are omitted because of the absence
of conditions under which they are required, or because the
information required by such omitted schedules is included
in the consolidated financial statements or notes to consolidated
financial statements thereto.
(a)(3) Exhibit Index....................................................... 42-45
(b) Reports on Form 8-K:
</TABLE>
There were no reports on Form 8-K filed for the three months
ended December 31, 1998.
40
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance at Provision Accounts Balance at
Beginning of Charged to Recoveries Written Off End of Year
---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998
Allowance for Doubtful Accounts $ 711 $ 319 $ 0 $ (135) $ 895
---------------------------------------------------------------------------------
1997
Allowance for Doubtful Accounts $ 512 $ 247 $ 0 $ (48) $ 711
---------------------------------------------------------------------------------
1996
Allowance for Doubtful Accounts $ 192 $ 614 $ 0 $ (294) $ 512
---------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. and Applicable Section of Item 601 of Regulation S-K:
- - -----------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger of Registrant dated May 25, 1988
(incorporated by reference to Exhibit 2 to Registrant's Form 10-K
Report for the year ended December 31, 1988).
3.1 Registrant's Restated Certificate of Incorporation dated April 4,1988
(incorporated by reference to Exhibit 3.1 to Registrant's Form 8-B
Report filed with the Commission on July 5, 1988).
3.1B Certificate of Amendment of Article Four of Articles of Incorporation
dated March 30, 1995 incorporated by reference to Exhibit 3.1B to
Registrant's Form 10-Q Report for the quarter ended March 31, 1995).
3.1C Certificate of Amendment of Restated Certificate of Incorporation
dated June 4, 1998 (incorporated by reference to Appendix A of
Registrant's 1998 Proxy Statement filed with the Commission on April
20, 1998).
3.2 Registrant's Bylaws as amended April 4, 1988 (incorporated by
reference to Exhibit 3.2 to Registrant's Form 8-B Report filed with
the Commission on July 5, 1988).
3.2A Amendment to Registrant's Bylaws dated March 15, 1991 (incorporated by
reference to Exhibit 3.2A to Registrant's Form 10-K Report for the
year ended December 31, 1990).
3.2B Amendment to Registrant's Bylaws dated June 27, 1995 (incorporated by
reference to Exhibit 3.2A to Registrant's Form 10-Q Report for the
quarter ended June 30, 1995).
3.2C Amendment to Registrant's Bylaws dated December 12, 1996 (incorporated
by reference to Exhibit 3.2C to Registrant's Form 10-K Report for the
year ended December 31, 1996).
4.1 Indenture of Mortgage and Deed of Trust between Suburban Water Systems
and U.S. Bank Trust National Association, formerly First Trust of
California, N.A. dated October 1, 1986 (incorporated by reference to
Exhibit 4.3 to Registrant's Form 10-K Report for the year ended
December 31, 1986).
4.1A First Amendment and Supplement to Indenture of Mortgage and Deed of
Trust between Suburban Water Systems and U.S. Bank Trust National
Association, formerly First Trust of California, N.A. dated February
7, 1990 (incorporated by reference to Exhibit 4.2A to Registrant's
Form 10-K Report for the year ended December 31, 1989).
4.1B Second Amendment and Supplement to Indenture of Mortgage and Deed of
Trust between Suburban Water Systems and U.S. Bank Trust National
Association, formerly First Trust of California, N.A. dated January
24, 1992 (incorporated by reference to Exhibit 4.2B to Registrant's
Form 10-K Report for the year ended December 31, 1991).
4.1C Third Amendment and Supplement to Indenture of Mortgage dated October
9, 1996, between Suburban Water Systems and U.S. Bank Trust National
Association, formerly First Trust of California, N.A. (incorporated by
reference to Exhibit 4.7 to Registrant's Form 10-Q Report for the
quarter ended September 30, 1996).
4.2 Bond Purchase Agreement dated October 1, 1986, for Suburban Water
Systems (incorporated by reference to Exhibit 4.4 to Registrant's Form
10-K Report for the year ended December 31, 1986).
4.2A Bond Purchase Agreement dated February 20, 1992, for Suburban Water
Systems (incorporated by reference to Exhibit 4.3A to Registrant's
Form 10-K Report for the year ended December 31, 1991).
</TABLE>
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4.2B Bond Purchase Agreement dated October 21, 1996, for Suburban Water
Systems (incorporated by reference to Exhibit 4.3B to Registrant's
Form 10-K Report for the year ended December 31, 1996).
4.3 Indenture of Mortgage dated February 14, 1992, between New Mexico
Utilities, Inc., and Sunwest Bank of Albuquerque, N.A. (incorporated
by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the
year ended December 31, 1991).
4.3A First Supplement to Indenture of Mortgage dated May 15, 1992, between
New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, N.A.
(incorporated by reference to Exhibit 4.4A to Registrant's Form 10-K
Report for the year ended December 31, 1996).
4.3B Second Amendment and Supplement to Indenture of Mortgage dated October
21, 1996, between New Mexico Utilities, Inc. and Sunwest Bank of
Albuquerque, N.A. (incorporated by reference to Exhibit 4.8 to
Registrant's Form 10-Q Report for the quarter ended September 30,
1996).
4.4 Bond Purchase Agreement dated March 12, 1992, for New Mexico
Utilities, Inc. (incorporated by reference to Exhibit 4.5 to
Registrant's Form 10-K Report for the year ended December 31, 1991).
4.4A Bond Purchase Agreement dated November 8, 1996, for New Mexico
Utilities, Inc. (incorporated by reference to Exhibit 4.5A to
Registrant's Form 10-K Report for the year ended December 31, 1996).
4.5 Article Four of the Restated Certificate of Incorporation of the
Registrant as to the rights, preferences, privileges and restrictions
of all classes of stock (incorporated by reference to Exhibit 3.1 to
Registrant's form 8-B Report filed with the Commission on July 5,
1988).
4.5A 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 October 29, 1997).
4.7 Stockholder's Rights Plan dated April 6, 1998 (incorporated by
reference to the Registrant's Form 8-K Report filed with the
Commission April 23, 1998).
10.1 Fourteenth Amendment to the Utility Employees' Retirement Plan dated
December 12, 1996 (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-K Report for the year ended December 31, 1996).
10.1A Fifteenth Amendment to the Utility Employees' Retirement Plan dated
December 31, 1997 (incorporated by reference to the Registrant's Form
10-Q Report for the quarter ended June 30, 1998).
10.2 Amended and Restated Employee Stock Purchase Plan dated May 28, 1998
(incorporated by reference to Appendix B to Registrant's 1998 Proxy
Statement filed with the Commission on April 20, 1998).
10.3 Dividend Reinvestment and Stock Purchase Plan Dated December 1, 1992
(incorporated by reference to Registrant's Form S-3 Registration
Statement filed with the Commission on December 1, 1992).
10.4 Amended and Restated Stock Option and Restricted Stock Option and
Restricted Stock Plan dated November 11, 1991, and First Amendment to
the Amended and Restated Stock Option and Restricted Stock Plan dated
March 21, 1993 (incorporated by reference to Registrant's Form S-8
Registration Statement filed with the Commission on December 21,
1993).
10.5 Stock Purchase Agreement and First Amendment to Stock Purchase
Agreement dated August 13, 1993, between ECO Resources, Inc., and
Robert E. Hebert (incorporated by reference to Exhibit 10.11 to
Registrant's Form 10-K Report for the year ended December 31, 1993).
</TABLE>
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10.6 Utility Employees' 401(k) Plan dated January 7, 1994 (incorporated by
reference to Exhibit 10.13 to Registrant's Form 10-K Report for the
year ended December 31, 1993).
10.6A First Amendment to Utility Employees' 401(k) Plan (incorporated by
reference to Exhibit 10.8A to Registrant's Form 10-K Report for the
year ended December 31, 1994).
10.8 Comprehensive Amendment to the Profit Sharing 401(k) Plan for the
Southwest Water Company's Related Companies dated March 10, 1994
(incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K
Report for the year ended December 31, 1993).
10.8A First Amendment to the Profit Sharing 401 (k) Plan for the Southwest
Water Company's Related Companies (incorporated by reference to
Exhibit 10.9A to Registrant's Form 10-K Report for the year ended
December 31, 1994).
10.9 Form of Severance Compensation Agreement between Registrant and
certain executive officers approved by the Compensation Committee of
the Board of Directors on February 21, 1995, (incorporated by
reference to Exhibit 10.11 to Registrant's Form 10-Q Report for the
quarter ended March 31, 1995).
10.9A Form of Severance Compensation Agreement between Registrant and certain
executive officers approved by the Compensation Committee of the Board
of Directors on August 5, 1998, filed herewith.
10.10 Equity Investment Agreement dated May 23, 1996, between the Registrant
and RTNT, Inc., covering Windermere Utility Company, together with two
First Refusal Agreements and Call Purchase Agreements between the
Registrant and RTNT, Inc. (incorporated by reference to Exhibit 10.12
to Registrant's Form 10-K Report for the year ended December 31,
1996).
10.10A First Amendment of RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 22,
1998 (incorporated by reference to Exhibit 10.12A to Registrant's Form
10-Q Report for the quarter ended June 30, 1998).
10.10B Second Amendment of RTNT Right of First Refusal Agreement and RTNT
Call Purchase Agreement between the Registrant and RTNT, Inc. dated
January 15, 1999, filed herewith.
10.10C First Amendment of SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 22,
1998 (incorporated by reference to Exhibit 10.12B to Registrant's Form
10-Q Report for the quarter ended June 30, 1998).
10.10D Second Amendment of SWWC Right of First Refusal Agreement and SWWC
Call Purchase Agreement between the Registrant and RTNT, Inc. dated
January 15, 1999, filed herewith.
10.11 Amended and Restated Credit Agreement dated December 23, 1997 between
Registrant and Wells Fargo Bank (incorporated by reference to Exhibit
10.15 to Registrant's Form 10-K Report for the year ended December 31,
1997).
10.11A First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998 between Registrant and Wells Fargo (incorporated by
reference to Exhibit 10.4H to Registrant's Form 10-Q Report for the
quarter ended September 30, 1998).
10.11B Letter of Waiver to the Amended and Restated Credit Agreement dated
September 18, 1998 between Registrant and Wells Fargo Bank
(incorporated by reference to Exhibit 10.4I to Registrant's Form 10-Q
Report for the quarter ended September 30, 1998).
10.12 Amended and Restated Credit Agreement dated December 23, 1997 between
Suburban Water Systems and Wells Fargo Bank (incorporated by reference
to Exhibit 10.16 to Registrant's Form 10-K Report for the year ended
December 31, 1997).
</TABLE>
44
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10.12A First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998 between Suburban Water Systems and Wells Fargo
(incorporated by reference to Exhibit 10.13D to Registrant's Form 10-Q
Report for the quarter ended September 30, 1998).
10.13 Amended and Restated Credit Agreement dated December 23, 1997 between
Registrant and Mellon Bank, N.A. (incorporated by reference to Exhibit
10.17 to Registrant's Form 10-K Report for the year ended December 31,
1997).
10.13A First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998 between Registrant and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.17A to Registrant's Form 10-Q
Report for the quarter ended September 30, 1998).
10.13B Letter of Waiver to the Amended and Restated Credit Agreement dated
September 18, 1998 between Registrant and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.17B to Registrant's Form 10-Q
Report for the quarter ended September 30, 1998).
10.14 Amended and Restated Credit Agreement dated December 23, 1997 between
Suburban Water Systems and Mellon Bank, N.A. (incorporated by
reference to Exhibit 10.18 to Registrant's Form 10-K Report for the
year ended December 31, 1997).
10.14A First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998 between Suburban Water Systems and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.18A to Registrant's Form 10-Q
Report for the quarter ended September 30, 1998).
10.15 Business Loan Agreement dated December 10, 1997 between New Mexico
Utilities, Inc. and First Security Bank of New Mexico, N.A.
(incorporated by reference to Exhibit 10.19 to Registrant's Form 10-Q
Report for the quarter ended March 31, 1998).
21.1 Listing of Registrant's subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
</TABLE>
45
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
SOUTHWEST WATER COMPANY
By: /s/ Anton C. Garnier
--------------------
ANTON C. GARNIER
President and Chief Executive Officer
(Principal Executive Officer)
March 22, 1999
By: /s/ Peter J. Moerbeek
---------------------
PETER J. MOERBEEK
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ H. Frederick Christie /s/ Donovan D. Huennekens
- - ------------------------- -------------------------
H. FREDERICK CHRISTIE DONOVAN D. HUENNEKENS
Director Director
March 22, 1999 March 22, 1999
/s/ Michael J. Fasman /s/ Richard Kelton
- - ------------------------ ---------------------
MICHAEL J. FASMAN RICHARD KELTON
Director Director
March 22, 1999 March 22, 1999
/s/ Anton C. Garnier /s/ Maureen A. Kindel
- - ------------------------ ---------------------
ANTON C. GARNIER MAUREEN A. KINDEL
Director Director
March 22, 1999 March 22, 1999
/s/ Monroe Harris /s/ Richard G. Newman
- - ------------------------ ---------------------
MONROE HARRIS RICHARD G. NEWMAN
Director Director
March 22, 1999 March 22, 1999
46
<PAGE>
EXHIBIT 10.9A
SEVERANCE COMPENSATION
AGREEMENT
---------------------
THIS SEVERANCE COMPENSATION AGREEMENT (the "Agreement") is made and
entered into as of the 5th day of August, 1998 by and between SOUTHWEST WATER
--- ------ -
COMPANY, a Delaware corporation (the "Company"), and
----------------
("Executive"), with respect to the following:
RECITALS
--------
A. The Company, through its subsidiaries Suburban Water Systems
("Suburban"), ECO Resources, Inc. ("ECO") and New Mexico Utilities, Inc.
("NMU"), is engaged in the business of producing and delivering water and
providing water and wastewater services. Executive is employed by Southwest
---------
Water Company as its
- - ------------- -----------------------.
B. The Company's Board of Directors has determined that it is appropriate
to reinforce and encourage the continued attention and dedication of members of
the Company's management, including Executive, to their assigned duties without
distraction in potentially disturbing circumstances arising from the possibility
of a change in control of the Company and/or the subsidiary of the Company which
employs Executive.
C. This Agreement sets forth the severance compensation which the Company
agrees it will pay to Executive if Executive's employment with the Company or,
if applicable, the subsidiary which employs Executive, terminates under one of
the circumstances described herein following a Change in Control, as defined
herein, of the Company or the subsidiary of the Company which employs Executive.
AGREEMENT
---------
IN CONSIDERATION OF the foregoing recitals and the mutual promises and
covenants contained herein, the Company and Executive agree as follows:
1. Term. The term of this Agreement shall commence upon the last
----
execution and delivery of this Agreement by the Company and shall continue until
the first to occur of:
(a) The second anniversary of any Change in Control, as defined
in paragraph 2 below, of the Company or the subsidiary which employs Executive.
For the purposes of this provision, the two year period provided for herein,
whether commenced by a Change in Control of the Company or a change in control
of a subsidiary, shall not be extended by a subsequent Change in Control of
either the Company or, if applicable, the Subsidiary which employs Executive.
(b) The Retirement, as defined in paragraph 2 below, of
Executive.
<PAGE>
(c) The death of Executive.
(d) Termination by the Company (or the subsidiary which employs
Executive, if applicable) of Executive's employment for Cause, as defined in
paragraph 2 below.
(e) Termination by Executive of Executive's employment with
, whether or not for Good Reason, as defined in paragraph 2
- - --------------------
below.
Provided, however, that upon any termination by Executive for Good Reason, or
any termination of Executive by the Company (or the subsidiary which employs
Executive, if applicable) other than for Cause, the obligations of the Company
pursuant to paragraph 4 below shall survive such termination. Provided further,
that the rights of Executive pursuant to paragraph 7 below shall survive any
termination of this Agreement, including termination by Executive of Executive's
employment other than for Good Reason and a termination by the Company (or the
subsidiary which employs Executive, if applicable) of Executive's employment for
Cause.
2. Definitions. As used in this Agreement, the following terms
-----------
shall have the meanings given to them in this paragraph 2:
(a) Cause. The term "Cause" shall mean, and the Company (or the
-----
subsidiary which employs Executive, if applicable) shall be entitled to
terminate the employment of Executive for (i) fraud, misappropriation or
embezzlement of money or property by Executive, (ii willful and continued
failure of Executive to substantially perform Executive's duties with the
Company (or the subsidiary which employs Executive, if applicable) (other than
any such failure resulting from incapacity of Executive due to physical or
mental illness), after a demand for substantial performance is delivered to
Executive by the Chief Executive Officer of the Company or the Compensation
Committee of the Board, which demand specifically identifies the manner in which
Executive has not substantially performed Executive's duties and (ii willful
engagement by Executive in misconduct which is materially injurious to the
Company (or the subsidiary which employs Executive, if applicable), monetarily
or otherwise. For purposes of this subparagraph, no act, or failure to act, on
Executive's part shall be considered "willful" unless done, or omitted to be
done, by Executive not in good faith and without reasonable belief that
Executive's action or omission was in the best interest of the Company (or the
subsidiary which employs Executive, if applicable). Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for the purpose (after reasonable notice to Executive and
an opportunity for Executive, together with Executive's counsel, to be heard
before the Board), finding that in the good faith opinion of the Board Executive
was guilty of conduct set forth in this subparagraph and specifying the
particulars thereof in detail.
2
<PAGE>
(b) Change in Control. The term "Change in Control" shall mean,
-----------------
with respect to the Company or the subsidiary which employs Executive, as
applicable, each of the following:
(i) A change in control of the Company or the subsidiary
which employs Executive, as applicable, of a nature that would be required to be
reported in response to Item 6(e)of Schedule 14A, Regulation 240.14a-101,
promulgated under the Securities Exchange Act of 1934, as amended, as in effect
on the date of this Agreement, or, if Item 6(e) is no longer in effect, any
regulation issued by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 which serves similar purposes (i.e., a change in
the person or persons owning, directly or indirectly, sufficient voting stock to
elect the Board of Directors or to take other significant shareholder actions
for the Company or the subsidiary which employs Executive, as applicable).
Provided that, without limitation, a Change of Control shall be deemed to have
occurred if and when:
(A) Any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934) who is not at
the date hereof a beneficial owner, directly or indirectly, of securities
of the Company (or the subsidiary which employs Executive, if applicable)
representing fifty percent (50%) or more of the combined voting power of
the Company's (or the subsidiary which employs Executive, if applicable)
then outstanding securities becomes such a beneficial owner, or
(B) During any period of two (2) consecutive years,
individuals who were members of the Board of Directors of the Company at
the beginning of such period cease for any reason (other than death or
disability) to constitute at least a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director, was approved by vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period. The
provisions of this clause (B) shall apply only at the Company level and not
at the subsidiary level.
(ii) Consummation of (A) any reorganization, consolidation
or merger of the Company (or of the subsidiary which employs Executive, if
applicable) in which the Company (or of the subsidiary which employs Executive,
if applicable) is not the continuing or surviving corporation or pursuant to
which shares of the Company's (or of the subsidiary which employs Executive, if
applicable) Common Stock would be converted into cash, securities or other
property, other than a merger of the Company (or of the subsidiary which employs
Executive, if applicable) in which the holders of the Company's (or of the
subsidiary which employs Executive, if applicable) common stock immediately
prior to such transaction, immediately following such transaction, own more than
fifty percent (50%) of the combined voting power entitled to vote generally in
the election of directors of the reorganized, merged or consolidated company's
then outstanding, voting securities or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of
3
<PAGE>
all or substantially all of the assets of the Company (or of the subsidiary
which employs Executive, if applicable).
For the purpose of applying the foregoing definition, (x) if Executive is an
employee of the Company, then the term Change in Control shall mean, as to
Executive, only a change in control of the Company and (y) if Executive is an
employee of a subsidiary of the Company, then the term Change in Control shall
mean, as to Executive, either a change in control of the Company or a change in
------ --
control of the subsidiary which employs Executive.
(c) Date of Termination. The term "Date of Termination" shall
-------------------
mean:
(i) If this Agreement is terminated by the death of
Executive, the date of death of Executive; or
(ii) If Executive's employment is terminated by the Company
(or the subsidiary which employs Executive, if applicable) for any reason, the
date on which a Notice of Termination is given; provided that if within thirty
(30) days after any Notice of Termination is given to Executive by the Company
(or the subsidiary which employs Executive, if applicable) Executive notifies
the Company (or the subsidiary which employs Executive, if applicable) that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
(d) Good Reason. The term "Good Reason" shall mean, with respect
-----------
to any termination by Executive of Executive's employment with the Company (or
the subsidiary which employs Executive, if applicable), each of the following
which occurs subsequent to a Change in Control without the express written
consent of Executive:
(i) The assignment to Executive by the Company (or the
subsidiary which employs Executive, if applicable) of duties inconsistent with
Executive's position, duties, responsibilities and status with the Company (or
the subsidiary which employs Executive, if applicable) immediately prior to a
Change in Control of the Company (or the subsidiary which employs Executive, if
applicable), or a change in Executive's title or offices as in effect
immediately prior to a Change in Control of the Company (or the subsidiary which
employs Executive, if applicable), or any removal of Executive from or any
failure to reelect Executive to any of such positions, except in connection with
the termination of Executive's employment for Retirement or Cause or as a result
of Executive's death or by Executive other than for Good Reason;
(ii) A reduction by the Company (or the subsidiary which
employs Executive, if applicable) in Executive's base salary as in effect on the
date hereof or as the same may be increased from time to time during the term of
this Agreement or the
4
<PAGE>
Company's (or the subsidiary which employs Executive, if applicable) failure to
increase (within twelve (12) months after Executive's last increase in base
salary) Executive's base salary after a Change in Control of the Company (or the
subsidiary which employs Executive, if applicable) in an amount which at least
equals, on a percentage basis, the average percentage increase in base salary
for all officers of the Company (or the subsidiary which employs Executive, if
applicable) effected in the preceding twelve (12) months;
(iii) Any failure by the Company (or the subsidiary which
employs Executive, if applicable) to continue in effect any benefit plan or
arrangement in which Executive is participating at the time of a Change in
Control of the Company (or the subsidiary which employs Executive, if
applicable) (or any other plans providing Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking of any
action by the Company (or the subsidiary which employs Executive, if applicable)
which would adversely affect Executive's participation in or reduce Executive's
benefits under any such Benefit Plan, expressed as a percentage of his base
salary, by more than ten (10) percentage points in any fiscal year as compared
to the prior fiscal year or deprive Executive of any material fringe benefit
enjoyed by Executive at the time of a Change in Control of the Company (or the
subsidiary which employs Executive, if applicable);
(iv) Any failure by the Company (or the subsidiary which
employs Executive, if applicable) to continue in effect any bonus or incentive
plan or arrangement in which Executive is participating at the time of a Change
in Control of the Company (or the subsidiary which employs Executive, if
applicable) (or any other plans or arrangements providing him with substantially
similar benefits) (hereinafter referred to as "Incentive Plans") or the taking
of any action by the Company (or the subsidiary which employs Executive, if
applicable) which would adversely affect Executive's participation in any such
Incentive Plan or reduce Executive's benefits under any such Incentive Plan,
expressed as a percentage of his base salary, by more than ten (10) percentage
points in any fiscal year as compared to the immediately preceding fiscal year;
(v) Any failure by the Company (or the subsidiary which
employs Executive, if applicable) to continue in effect any plan or arrangement
to receive securities of the Company in which Executive is participating at the
time of a Change in Control of the Company (or the subsidiary which employs
Executive, if applicable) (or plans or arrangements providing him with
substantially similar benefits) (hereinafter referred to as "Securities Plans")
or the taking of any action by the Company (or the subsidiary which employs
Executive, if applicable) which would adversely affect Executive's participation
in or materially reduce Executive's benefits under any such Securities Plan;
(vi) Any requirement by the Company (or the subsidiary which
employs Executive, if applicable) that Executive be based anywhere other than
within fifty (50) miles of Executive's office location as of the date of a
Change in Control, except for required travel by Executive on the Company's (or
the subsidiary which employs Executive, if applicable) business to an extent
substantially consistent with Executive's business travel
5
<PAGE>
obligations at the time of a Change in Control of the Company (or the subsidiary
which employs Executive, if applicable);
(vii) Any failure by the Company (or the subsidiary which
employs Executive, if applicable) to provide Executive with the number of paid
vacation days to which Executive is entitled at the time of a Change in Control
of the Company (or the subsidiary which employs Executive, if applicable);
(viii) Any material breach by the Company of any provision
of this Agreement;
(ix) Any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(x) Any purported termination by the Company (or the
subsidiary which employs Executive, if applicable) of Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of subparagraph (e) below, and for purposes of this Agreement, no
such purported termination shall be effective.
(e) Notice of Termination. Any termination of Executive's employment
---------------------
by the Company (or the subsidiary which employs Executive, if applicable) for
Retirement or Cause shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific ground for such termination relied upon
and which sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment. For purposes of this
Agreement, no such purported termination by the Company (or the subsidiary which
employs Executive, if applicable) shall be effective without such Notice of
Termination.
(f) Retirement. The term "Retirement" as used in this Agreement shall
----------
mean termination by the Company (or the subsidiary which employs Executive, if
applicable) or Executive of Executive's employment based on Executive's having
reached age sixty-five (65) or such other age as shall have been fixed in any
written agreement between Executive and Executive's employer entity.
(g) Termination of Employment. The term "Termination of Employment"
-------------------------
shall mean any termination of Executive's employment with the Company (or the
subsidiary which employs Executive, if applicable), however effected or caused.
(h) Involuntary Termination of Employment. The term "Involuntary
-------------------------------------
Termination of Employment" shall mean (i) any termination by the Company (or the
subsidiary which employs Executive, if applicable) of Executive's employment
with the Company (or the subsidiary which employs Executive, if applicable)
effected after a Change in Control other than a termination for Retirement,
death or Cause and (ii) any termination of
6
<PAGE>
Executive's employment with the Company (or the subsidiary which employs
Executive, if applicable) by Executive after a Change in Control for Good
Reason.
3. Services by Executive. In consideration for the Company's
---------------------
execution and delivery of this Agreement, Executive agrees that Executive will
render services to the Company (or to any subsidiary thereof or successor
thereto, as applicable) during the period of Executive's employment to the best
of Executive's ability and in a prudent and businesslike manner and that
Executive shall devote substantially the same time, efforts and dedication to
Executive's duties as heretofore devoted.
4. Severance Obligations Upon any Involuntary Termination. Upon any
------------------------------------------------------
Involuntary Termination of Executive's employment with the Company (or the
subsidiary which employs Executive, if applicable) subsequent to a Change in
Control and during the term of this Agreement, Executive shall be entitled to
the benefits provided in this paragraph (subject to any applicable payroll taxes
or other taxes required to be withheld and employee benefit premiums):
(a) The Company shall pay (or shall cause the employer subsidiary
to pay) to Executive Executive's full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is given
plus credit for any vacation earned but not taken and the amount, if any, of any
bonus for a past fiscal year which has been awarded to Executive but not yet
paid to Executive pursuant to any bonus plan of the Company (or the subsidiary
which employs Executive, if applicable). Such payment shall be made within five
(5) days after the Date of Termination.
(b) The Company shall pay (or shall cause the employer subsidiary
to pay) to Executive, as severance pay, an amount equal to two and ninety-nine
one hundredths (2.99) times Executive's annual base compensation, as defined
herein (the "Severance Payment"). As used herein, annual base compensation shall
mean the average aggregate annual amount paid by the Company (or any subsidiary
of or successor to the Company) to Executive for the five (5) full calendar
years preceding the date of Change of Control for salaries, bonuses and
automobile allowances (or the amount reported by Executive as taxable income for
personal use of a car provided by the Company (or the subsidiary which employs
Executive, if applicable) in lieu of an automobile allowance) together with the
amounts, if any, of insurance premiums paid by the Company (or the subsidiary
which employs Executive, if applicable) with respect to Executive and reported
as taxable income by Executive and any other amounts paid or provided by the
Company (or any successor to or subsidiary of the Company and reported as
taxable income by Executive. If Executive has not been employed by the Company
(or the subsidiary which employs Executive, if applicable) for five (5) full
calendar years preceding the date of Change of Control, the Severance Payment
shall be computed based on the average aggregate annual amount paid by the
Company (or the subsidiary which employs Executive, if applicable) to Executive
for the full term of Executive's employment with the Company (or the subsidiary
which employs Executive, if
7
<PAGE>
applicable). The Severance Payment shall be paid in cash in a single lump sum
within five (5) days after the Date of Termination.
(c) The Company shall cause Executive to continue to be covered,
without any cost to Executive in excess of the cost borne by Executive prior to
the Change of Control, under health, medical and dental benefits ("Benefits")
comparable to those in effect immediately prior to the Change of Control,
including, but not limited to, medical, dental, life insurance, accidental death
and dismemberment, and long term disability benefits. Such continuation shall
(i) also apply to Executive's dependents (including Executive's spouse) who were
covered under such Benefits immediately prior to the Change of Control and (ii
apply for twenty-four (24) months after the Date of Termination; provided,
however, that such coverage shall terminate if and to the extent Executive
becomes eligible for Benefits coverage from a subsequent employer; provided
further, however, that if Executive (and/or Executive's spouse) would have been
entitled to retiree Benefits under the Company's benefit plans (or those of the
subsidiary which employs Executive, if applicable) had Executive voluntarily
retired on the Date of Termination, then such coverage shall be continued as
provided under such plans.
(d) Provide a full service outplacement service for Executive as
selected by Executive for a period not exceeding three (3) months and at a cost
not exceeding $15,000 in the aggregate.
Any payment due by the Company pursuant to this paragraph 4 which is
not made as and when due shall bear interest from the date due until date of
payment at the maximum rate which Executive may charge for the loan or
forbearance of money under the then applicable usury law of the State of
California.
5. No Obligation to Mitigate Damages. Executive shall not be
---------------------------------
required to mitigate damages or the amount of any payment provided for under
paragraph 4 of this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by Executive as the result of employment by another
employer after the Date of Termination, or otherwise. Any indebtedness of
Executive to the Company (or to any subsidiary of or successor to the Company)
as of the Date of Termination may be offset against the Company's payment
obligations pursuant to paragraph 4 above.
6. Parachute Payment Limitation. Notwithstanding anything to the
----------------------------
contrary in this Agreement, the payments and benefits otherwise provided in
paragraphs 4(b), (c) and (d) of this Agreement shall be reduced if and to the
extent that such payments and benefits, when added to any payments and benefits
provided by the Company (and the subsidiary which employs Executive, if
applicable) other than under this Agreement, would result in any such payments
being nondeductible to the Company or would subject Employee to an excise tax
pursuant to the golden parachute payment provisions of Section 280G or Section
4999 of the Internal Revenue Code of 1986, as amended. Any reduction of
payments
8
<PAGE>
and benefits under this Agreement resulting from the foregoing limitations shall
be applied to the payments and benefits due to be otherwise provided to
Executive latest in time.
7. Other Benefits. The provisions of this Agreement, and any
--------------
payment provided for in paragraph 4 hereof, shall not reduce any amounts
otherwise payable, or in any way diminish Executive's existing rights, or rights
which would accrue solely as a result of the passage of time, under any Benefit
Plan, Incentive Plan or Securities Plan, employment agreement or other contract,
plan or arrangement. The provisions of this paragraph 7 shall apply to any
Termination of Employment with the Company (or the subsidiary which employs
Executive if applicable), whether or not such Termination of Employment results
in payments due to Executive pursuant to paragraph 4 above.
8. Not a Contract of Employment. This Agreement shall not be deemed
----------------------------
to constitute a contract of employment. Further, no portion of this Agreement
shall affect (a) the right of the Company (or any subsidiary of or successor to
the Company) to discharge Executive at will or (b) the terms and conditions of
any other agreement between the Company (or the subsidiary which employs
Executive, if applicable) and Executive, except as expressly provided herein.
9. Successors to the Company.
-------------------------
(a) The Company shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance reasonably satisfactory to Executive, expressly, absolutely
and unconditionally to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession or assignment had taken place. Any failure of the Company
to obtain such agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement and shall entitle
Executive to terminate Executive's employment for Good Reason. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this paragraph 9 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law. If at any time during the term of this Agreement Executive is employed by
any corporation a majority of the voting securities of which is then owned by
the Company, "Company" as used herein shall include such employer. In such
event, the Company agrees that it shall pay or shall cause such employer to pay
any amounts owed to Executive pursuant to paragraph 4 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts are still payable to Executive hereunder,
all such amounts, unless otherwise provided herein, shall be paid in
9
<PAGE>
accordance with the terms of this Agreement to Executive's devisee, legatee, or
other designee or, if there be no such designee, to Executive's estate.
10. Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be personally delivered or sent by first class mail,
registered or certified with return receipt requested to the parties at their
respective addresses set forth after their signatures to this Agreement. Any
notice which is personally served shall be effective upon delivery; any notice
sent by first class mail, registered or certified, postage prepaid, return
receipt requested and properly addressed shall be effective upon the date of
delivery or refusal indicated on the return receipt. Either party may change
his, her or its address for notices hereunder by written notice to the other
given in the manner specified in this paragraph.
11. General Provisions.
------------------
(a) The Company's obligation to pay (or to cause one of its
subsidiaries to pay) Executive the amounts and to make the arrangements provided
for in paragraph 4 hereof, shall be absolute and unconditional and, except as
provided in paragraphs 5 and 6 hereof, shall not be affected by any
circumstances, including without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company (or any subsidiary of or
successor to the Company) may have against Executive. All amounts payable by
the Company (or any subsidiary of or successor to the Company) shall be paid
without notice or demand.
(b) No provisions of this Agreement may be modified, amended,
waived or discharged unless such waiver, modification or discharge is agreed to
in a writing signed by Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of any similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
(c) This Agreement contains each and every agreement of every
kind and nature whatsoever between the parties hereto concerning the subject
matter hereof, and all preliminary negotiations and agreements of whatsoever
kind with respect to the subject matter hereof are superseded and of no further
force or effect. If Executive is entitled to and receives the benefits provided
in paragraphs 4 and 7 hereof, performance of the obligations of the Company
thereunder shall constitute full settlement of all claims which Executive might
otherwise assert against the Company on account of termination of Executive's
employment.
(d) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(e) This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10
<PAGE>
(f) The invalidity or unenforceability of any provision of this
Agreement as to any jurisdiction, fact or circumstance shall not affect the
validity or enforceability of any other provision of this Agreement or of such
provision as to any other jurisdiction, fact or circumstance, and each provision
of this Agreement shall be enforced and complied with to the maximum extent
possible.
(g) Executive shall not have any right to pledge, hypothecate,
anticipate or assign this Agreement or the rights hereunder, except by last will
and testament.
(h) The obligation to pay amounts under this Agreement is an
unfunded obligation of the Company, and no such obligation shall create a trust
or be deemed to be secured by any pledge or encumbrance on any property of the
Company (or any subsidiary of or successor to the Company).
(i) In the event of any legal action between the Company and
Executive to enforce the provisions of this Agreement, to prevent the breach or
continued breach of this Agreement, to recover damages on account of the breach
or alleged breach of this Agreement, to seek a judicial determination of the
obligations and rights of the parties hereunder or in which this Agreement is
asserted as a defense, the prevailing party shall be entitled to recover from
the other party its attorneys' fees incurred in such amount as the court shall
determine to be reasonable, in addition to its costs and all other relief which
the court determines such prevailing party is entitled to receive. For the
purposes of this provision, the term "legal action" shall exclude an action by
Executive as the result of any termination of Executive's employment. Except as
provided in the immediately preceding sentence, all legal expenses which are
reasonable and necessary and which are associated with any such termination
shall be paid by the Company.
(j) In the event Executive is employed by a subsidiary of the
Company rather than the Company itself, all references herein to the Company
shall, as and when required by the context of this Agreement, be deemed to refer
to such subsidiary employer. The provisions of this subparagraph shall not,
however, be deemed or construed to relieve the Company of any of the Company's
obligations or to deprive the Company of any of its rights pursuant to this
Agreement.
11
<PAGE>
IN WITNESS WHEREOF, Executive and the Company have executed and
delivered this Severance Compensation Agreement as of the day and year first
above written.
SOUTHWEST WATER COMPANY, a Delaware
- - -------------------------------- corporation
"Executive"
Address for Notices: By /s/ MONROE HARRIS
----------------------------------
Monroe Harris
Southwest Water Company Title:
- - ---------------------------------- --------------------------------
225 N. Barranca Avenue - Suite 200 Chairman Compensation Committee
- - ---------------------------------- "Company"
West Covina, CA 91791-1605
- - ---------------------------------- Address for Notices:
Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attn: Corporate Secretary
12
<PAGE>
Exhibit 10.10B
Second Amendment of
RTNT Right of First Refusal Agreement and
RTNT Call Purchase Agreement
This Second Amendment of RTNT Right of First Refusal Agreement and RTNT
Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas
Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation
("SWWC") to be effective the 30th day of December 1998.
RECITALS
WHEREAS, SWWC and RTNT have previously entered into an RTNT Right of
First Refusal Agreement and RTNT Call Purchase Agreement ("RTNT Call Agreement")
which was executed as of May 23, 1996; and
WHEREAS this RTNT Call Agreement placed certain restrictions on stock in
Windermere Utility Co., Inc. ("WUC") held by SWWC; and
WHEREAS SWWC AND RTNT have previously entered into a "First Amendment of
RTNT Right of First Refusal Agreement and RTNT Call purchase Agreement" ("RTNT
First Amendment") which was effective the 22nd of May 1998; and
WHEREAS this RTNT Call Agreement and RTNT First Amendment gave RTNT certain
rights to the WUC stock held by SWWC; and
WHEREAS the RTNT Call Agreement and RTNT First Amendment had certain time
periods in which the rights of RTNT were exercisable; and
WHEREAS SWWC and RTNT also entered into a "SWWC Right of First Refusal and
SWWC Call Purchase Agreement" ("SWWC Call Agreement"); and
WHEREAS SWWC AND RTNT also entered into a "First Amendment of SWWC Right of
First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC First
Amendment"); and
WHEREAS the parties hereto being the parties to the SWWC Call Agreement,
the SWWC First Amendment, the RTNT Call Agreement, and the RTNT First Amendment
for various reasons wish to extend all the time periods for the exercise of the
various rights of RTNT under the RTNT Call Agreement and the RTNT First
Amendment; and
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and ten dollars ($10.00) and other good and valuable consideration
hereinafter set forth and for other good and valuable consideration including
but not limited to the promises of the parties, the parties hereby agree as
follows:
1. (a) The first sentence of Paragraph 1 of the RTNT Call Agreement which is
entitled "Restriction on SWWC Stock" shall be amended to read as follows:
1
<PAGE>
"SWWC shall not sell, transfer, assign, or otherwise dispose of the SWWC
WUC stock or any portion thereof to any person or entity for period ending
on March 31, 1999 plus the period of closing which may be required pursuant
to this RTNT Call Agreement for RTNT to close the purchase of thc SWWC WUC
stock upon which it exercises its right to purchase within said period
ending on March 31. 1999."
(b) The last sentence of Paragraph 1 of the RTNT Call Agreement which Is
entitled "Restriction on SWWC Stock" shall be amended to read as
follows:
"Any pledge of the SWWC WUC stock shall specifically state that it can be
released within the first twelve (12) months for the Three Million Six
Hundred Thousand Dollar ($3,600,000.00) call amount and in the thirteenth
(13th) through the twenty-fourth (24th) month for the Three Million Seven
Hundred Twenty Thousand Dollar ($3,720,000.00) call amount and within the
months June 1998 through March 1999 for a call amount of Three Million Nine
Hundred Thirty Thousand Dollar ($3,930,000.00) "
2. The provisions of Paragraph 2 of the RTNT Call Agreement which is entitled
"Call by RTNT," specifically, the first two sentences of Paragraph 2 of the RTNT
Call Agreement shall be amended to read as follows:
"RTNT shall have, for a period ending on March 31, 1999, the right to
require SWWC to sell all of the SWWC WUC stock to RTNT. The purchase price
for a sale that is initiated (under the closing procedure set out below)
within the first three hundred sixty-five (365) days after the date hereof
shall be Three Million Six Hundred Thousand Dollars ($3,600,000.00) and the
purchase price for a sale that is initiated (under the closing procedures
set out below) within the period beginning on the three hundred sixty-sixth
(366th) day and ending on the seven hundred thirtieth (730th) day after the
date hereof shall be Three Million Seven Hundred Twenty Thousand Dollars
($3,720,000.00) and for an option price after the seven hundred thirtieth
(730th) day and continuing until March 31, 1999, the price shall be as
follows: Three Million Nine Hundred Thirty Thousand Dollars
($3,720,000.00)."
3. The first two sentences of Paragraph 5 of the RTNT Call Agreement which is
entitled "Offer to SWWC" shall be amended to read a follows:
"In the period following the expiration of the RTNT Call Purchase Provision
on March 31, 1999, RTNT shall have a Right of First Refusal as set forth
below. SWVWC shall, after the expiration of such period terminating on
March 31, 1999, not sell, transfer, assign, or otherwise dispose of the
SWWC WUC Stock or any portion thereof to any person and/or entity except as
provided herein."
4. The RTNT Call Agreement, the RTNT Call Agreement, the First Amendment to
SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement, the
First Amendment to RTNT Right of First Refusal Agreement, and the Equity
Agreement and the documents referred to therein, (a) constitute the entire
agreement among the parties and supercede all prior agreements and
understanding, both written and oral, among the parties with respect to the
subject matter hereof, (b) may be executed in several counterparts, each of
which shall constitute one and the same instrument, (c) except as expressly set
forth herein, shall inure to the benefit of, and be binding upon, the
successors, assigns. legal representatives, administrators, and heirs of each
party and are not intended to confer upon any person other
2
<PAGE>
than the parties and their successors assigns, legal representatives,
administrators, and heirs any rights or remedies hereunder, and (d) shall be
governed in all respects, including validity, interpretation, and effect by the
laws of the state of Texas. The captions in this Second Amendment to RTNT Right
of First Refusal Agreement and RTNT Call Purchase Agreement are for convenience
of reference only and shall not affect its interpretation in any respect.
5. Any notice consent or communication required or permitted to be given under
this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement must be in writing and delivered to a person or by confirmed
facsimile or by registered mail, return receipt requested, postage prepaid
addressee restricted as follows:
To: RTNT, Inc.,
P.O. Box 161173
Austin Texas 78716
(tel.) 512-327-0869
(fax) 512-327-0869
To: Southwest Water Company
225 North Barranca Avenue Suite 200
West Covina California 91791-1605
(tel.) 626-915 1551
(fax) 626-915-1558
ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN
DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS
AFTER MAILING.
6. Any provision of this Second Amendment to RTNT Right of First Refusal
Agreement and RTNT Call Purchase Agreement which is prohibited or unenforceable
in any jurisdiction as to such jurisdiction be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Second Amendment to RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
7. This Second Amendment to RTNT Right of First Refusal Agreement and RTNT
Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration
Agreement dated to be effective the 23rd of May 1996.
8. This Second Amendment to RTNT Right of First Refusal Agreement and RTNT
Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC
and RTNT and their respective successors, representatives and assigns.
9. For purposes hereof, a facsimile copy of this Second Amendment of RTNT
Right of First Refusal and RTNT Call Purchase Agreement including the signature
pages hereto shall be deemed to be an original. Notwithstanding the forgoing,
the parties shall deliver original execution copies of this First Amendment of
RTNT Right of First Refusal and RTNT Call Purchase Agreement to one another
immediately after execution.
3
<PAGE>
Executed as of the 15nd day of January 1999, to be effective the 30th day of
December 1998.
RTNT, INC., a Texas Corporation
By: /s/ Thom W. Farrell
--------------------
THOM W. FARRELL, PRESIDENT
SOUTHWEST WATER COMPANY
By: /s/ Anton C. Garnier
---------------------
ANTON C. GARNIER, PRESIDENT
ATTEST:
/s/ Peter J. Moerbeek
- - ---------------------
PETER MOERBEEK, VICE PRESIDENT
AND SECRETARY
4
<PAGE>
Exhibit 10.10D
Second Amendment of
SWWC Right of First Refusal Agreement and
SWWC Call Purchase Agreement
This Second Amendment of SWWC Right of First Refusal Agreement and SWWC
Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas
Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation
("SWWC") to be effective the 30th day of December 1998.
RECITALS
WHEREAS, SWWC and RTNT have previously entered into an SWWC Right of
First Refusal Agreement and SWWC Call Purchase Agreement ("SWWC Call Agreement")
which was executed as of May 23, 1996; and
WHEREAS this SWWC Call Agreement placed certain restrictions on stock in
Windermere Utility Co., Inc. ("WUC") held by RTNT; and
WHEREAS SWWC AND RTNT have previously entered into a "First Amendment of
SWWC Right of First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC
First Amendment") which was effective the 22nd of May 1998; and
WHEREAS this SWWC Call Agreement gave SWWC certain rights to the WUC stock
held by RTNT; and
WHEREAS the SWWC Call Agreement had certain time periods in which the
rights of RTNT were exercisable; and
WHEREAS SWWC and RTNT also entered into a "RTNT Right of First Refusal and
RTNT Call Purchase Agreement" ("SWWC Call Agreement"); and
WHEREAS SWWC AND RTNT also entered into a "First Amendment of RTNT Right of
First Refusal Agreement and SWWC Call purchase Agreement" ("RTNT First
Amendment"); and
WHEREAS the parties hereto being the parties to the SWWC Call Agreement and
the RTNT Call Agreement, for various reasons wish to extend all the time periods
for the exercise of the various rights of SWWC under the SWWC Call Agreement;
and
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and ten dollars ($10.00) and other good and valuable consideration
hereinafter set forth and for other good and valuable consideration including
but not limited to the promises of the parties, the parties hereby agree as
follows:
1. The first sentence of Paragraph 1 of the SWWC RTNT Call Agreement which is
entitled "Restriction on RTNT Stock" shall be amended to read as follows:
1
<PAGE>
"RTNT shall not sell, transfer, assign, or otherwise dispose of the RTNT
WUC stock or any portion thereof to any person or entity for period ending
three hundred (300) days after the third anniversary of the date hereof."
2. The provisions of Paragraph 2 of the SWWC Call Agreement which is entitled
"Call by SWWC," specifically, the first sentence of Paragraph 2 of the SWWC Call
Agreement shall be amended to read as follows:
SWWC shall have, for a period beginning on the day after March 31, 1999 and
ending three hundred (300) days after the third anniversary date of this
SWWC Call Agreement, the right to require RTNT to sell all of the RTNT WUC
stock it owns in WUC at that time."
3. Paragraph 3 of the SWWC Call Agreement which is entitled "Offer to RTNT"
shall be amended by amending the first sentence to read as follows:
"RTNT shall, after such three hundred (300) days following the third
anniversary hereof, not sell, transfer, assign, or otherwise dispose of the
RTNT WUC Stock or any portion thereof to any person and/or entity except as
provided herein."
4. The first sentence of Paragraph 4 of the SWWC Call Agreement entitled "RTNT
Call Agreement: shall be amended as follows:
"The provisions of Paragraphs 1, 2, and 3 above have no further effect if
prior to March 31 1999 exercises its right to call upon SWWC to sell all of
its stock in WUC pursuant to the RTNT Right of First Refusal Agreement and
RTNT Call Purchase Agreement of even date herewith and closes and funds
said purchase."
5. The SWWC Call Agreement, the RTNT Call Agreement, the SWWC First Amendment,
the RTNT First Amendment, the Second Amendment to SWWC Right of First Refusal
Agreement and SWWC Call Purchase Agreement, the Second Amendment to RTNT Right
of first Refusal Agreement and the Equity Agreement and the documents referred
to therein, (a) constitute the entire agreement among the parties and supercede
all prior agreements and understanding, both written and oral, among the parties
with respect to the subject matter hereof, (b) may be executed in several
counterparts, each of which shall constitute one and the same instrument, (c)
except as expressly set forth herein, shall inure to the benefit of, and be
binding upon, the successors, assigns. legal representatives, administrators,
and heirs of each party and are not intended to confer upon any person other
than the parties and their successors assigns, legal representatives,
administrators, and heirs any rights or remedies hereunder, and (d) shall be
governed in all respects. including validity, interpretation, and effect by the
laws of the state of Texas. The captions in this First Amendment to SWWC Right
of First Refusal Agreement and SWWC Call Purchase Agreement are for convenience
of reference only and shall not affect its interpretation in any respect.
6. Any notice consent or communication required or permitted to be given under
this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement must be in writing and delivered to a person or by confirmed
facsimile or by registered mail, return receipt requested, postage prepaid
addressee restricted as follows:
2
<PAGE>
To: RTNT, Inc.,
P.O. Box 161173
Austin Texas 78716
(tel.) 512-327-0869
(fax) 512-327-0869
To: Southwest Water Company
225 North Barranca Avenue Suite 200
West Covina California 91791-1605
(tel.) 626-915 1551
(fax) 626-915-1558
ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN
DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS
AFTER MAILING.
6. Any provision of this Second Amendment to SWWC Right of First Refusal
Agreement and SWWC Call Purchase Agreement which is prohibited or unenforceable
in any jurisdiction as to such jurisdiction be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
7. This Second Amendment to SWWC Right of First Refusal Agreement and SWWC
Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration
Agreement dated to be effective the 23rd of May 1996.
8. This Second Amendment to SWWC Right of First Refusal Agreement and SWWC
Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC
and RTNT and their respective successors, representatives and assigns.
9. For purposes hereof, a facsimile copy of this Second Amendment of SWWC
Right of First Refusal and SWWC Call Purchase Agreement including the signature
pages hereto, shall be deemed to be an original. Notwithstanding the forgoing,
the parties shall deliver original execution copies of this Second Amendment of
SWWC Right of First Refusal and SWWC Call Purchase Agreement to one another
immediately after execution.
Executed as of the 15th day of January 1999, to be effective the 30th day of
December 1998.
RTNT, INC., a Texas Corporation
By: /s/ Thom W. Farrell
-------------------
THOM W. FARRELL, PRESIDENT
SOUTHWEST WATER COMPANY
3
<PAGE>
By: /s/ Anton C. Garnier
----------------------
ANTON C. GARNIER, PRESIDENT
ATTEST:
/s/ Peter J. Moerbeek
- - ---------------------
PETER MOERBEEK, VICE PRESIDENT
AND SECRETARY
4
<PAGE>
Exhibit 21.1
SOUTHWEST WATER COMPANY
SUBSIDIARIES OF THE REGISTRANT
As of March 31, 1999
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation Parent
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Suburban Water Systems California Southwest Water Company
Water Suppliers Mobile
Communication Service California Suburban Water Systems
New Mexico Utilities New Mexico Southwest Water Company
ECO Resources, Inc. Texas Southwest Water Company
Southwest Environmental Labs Texas ECO Resources, Inc.
Wastewater Rehabilitation, Inc. Texas Southwest Water Company
SW Utility Company Texas Southwest Water Company
Southwest Resource Management Delaware Southwest Water Company
SOCI, Inc. (1) Delaware Southwest Water Company
SW Operating Services Co. (1) Delaware Southwest Water Company
</TABLE>
All above listed subsidiaries have been included in the Registrant's
consolidated financial statements.
(1) Inactive
<PAGE>
Exhibit 23.1
KPMG LLP (Company Letterhead)
725 South Figueroa Street
Los Angeles, CA 90017
To the Board of Directors and Stockholders
Southwest Water Company
We consent to incorporation by reference in the registration statement (No. 33-
21154) on Form S-3 and the registration statements (Nos. 33-28918, 33-28919, 33-
73174 and 333-38935) on Form S-8 of Southwest Water Company of our report dated
January 27, 1999, relating to the consolidated balance sheets of Southwest Water
Company and subsidiaries as of December 31,1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows and related schedule for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998 annual report
on Form 10-K of Southwest Water Company.
/s/ KPMG LLP
Los Angeles, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 394,000
<SECURITIES> 0
<RECEIVABLES> 9,525,000
<ALLOWANCES> 895,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,610,000
<PP&E> 149,368,000
<DEPRECIATION> 40,130,000
<TOTAL-ASSETS> 129,927,000
<CURRENT-LIABILITIES> 14,288,000
<BONDS> 28,900,000
0
517,000
<COMMON> 42,000
<OTHER-SE> 34,046,000
<TOTAL-LIABILITY-AND-EQUITY> 34,584,000
<SALES> 0
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<CGS> 0
<TOTAL-COSTS> 64,091,000
<OTHER-EXPENSES> (378,000)
<LOSS-PROVISION> 319,000
<INTEREST-EXPENSE> 2,984,000
<INCOME-PRETAX> 5,540,000
<INCOME-TAX> 2,191,000
<INCOME-CONTINUING> 3,349,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,322,000
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.77
</TABLE>
