<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
[LOGO OF] Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 7, 1999, there were
4,264,619 common shares outstanding.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- - ------- ---------------------- -------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 9
Part II. Other Information:
- - ------- -----------------
Item 1. Legal Proceedings 10- 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
- - ---------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
- - ---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
(in thousands)
Current Assets:
Cash and cash equivalents $ 260 $ 394
Customers' accounts receivable, net 7,824 8,630
Other current assets 2,815 2,586
- - ---------------------------------------------------------------------------------------------------------------
10,899 11,610
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost 146,741 144,690
Contract operations property, plant and equipment -- at cost 4,991 4,678
- - ---------------------------------------------------------------------------------------------------------------
151,732 149,368
Less accumulated depreciation and amortization 41,219 40,130
- - ---------------------------------------------------------------------------------------------------------------
110,513 109,238
Other Assets 8,915 9,079
- - ---------------------------------------------------------------------------------------------------------------
$ 130,327 $ 129,927
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of bank notes payable and long-term debt $ 2,154 $ 1,679
Accounts payable 1,632 2,782
Other current liabilities 10,364 9,827
- - ---------------------------------------------------------------------------------------------------------------
14,150 14,288
Other Liabilities and Deferred Credits:
Long-term debt 28,900 28,900
Bank notes payable 3,922 4,500
Advances for construction 8,328 8,049
Contributions in aid of construction 31,886 31,706
Deferred income taxes 4,570 4,430
Other liabilities and deferred credits 3,025 2,911
- - ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 94,781 94,784
Stockholders' Equity
Cumulative preferred stock 517 517
Common stock 42 42
Paid-in capital 30,524 30,127
Retained earnings 4,463 4,457
- - ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 35,546 35,143
- - ---------------------------------------------------------------------------------------------------------------
$ 130,327 $ 129,927
===============================================================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
1
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- - ------------------------------------------------------------------------------------
1999 1998
- - ------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands except per share data)
Operating Revenues $ 16,649 $ 15,946
Operating Expenses:
Direct operating expenses 12,536 12,159
Selling, general and administrative 2,934 2,765
15,470 14,924
- - ------------------------------------------------------------------------------------
Operating Income 1,179 1,022
Other Income (Expense):
Interest expense (759) (818)
Interest income 17 17
Other 152 83
- - ------------------------------------------------------------------------------------
(590) (718)
Income Before Income Taxes 589 304
Provision for income taxes 235 122
- - ------------------------------------------------------------------------------------
Net Income 354 182
Dividends on preferred shares 7 7
- - ------------------------------------------------------------------------------------
Net Income Available for Common Shares $ 347 $ 175
====================================================================================
Earnings per Common Share:
Basic $ 0.08 $ 0.04
Diluted $ 0.08 $ 0.04
====================================================================================
Cash Dividends per Common Share $ 0.08 $ 0.072
====================================================================================
Weighted Average Outstanding Common Shares:
Basic 4,246 4,171
Diluted 4,371 4,265
====================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- - ----------------------------------------------------------------------------------
1999 1998
- - ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 354 $ 182
Adjustments to reconcile net income to
net cash provided by operating activities 1,438 $ 889
- - ----------------------------------------------------------------------------------
Net cash provided by operating activities 1,792 1,071
- - ----------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (2,217) (2,340)
Other investments, net 125 120
Net cash used in investing activities (2,092) (2,220)
- - ----------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from dividend reinvestment plan,
employee stock purchase plan, and stock option plans 397 118
Contributions in aid of construction 262 1,027
Dividends paid (348) (307)
Net repayment of bank notes payable (103) (191)
Payments on advances for construction, net of additions (42) (42)
- - ----------------------------------------------------------------------------------
Net cash provided by financing activities 166 605
- - ----------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (134) (544)
Cash and cash equivalents at beginning of period 394 1,237
- - ----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 260 $ 693
- - ----------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 557 $ 553
Income taxes $ 275 $ 350
Depreciation and amortization $ 1,123 $ 1,080
Non-cash contributions in aid of construction
conveyed to Company by developers $ 328 $ 0
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") together with its
subsidiaries is engaged in the water management business, providing water
and wastewater services to nearly three-quarters of a million people
located throughout California, Texas, New Mexico 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 unaudited condensed consolidated financial
statements reflect all adjustments, which, in the opinion of management,
are necessary to present fairly the financial position of the Company as of
March 31, 1999, and the Company's results of operations for the three
months ended March 31, 1999. All such adjustments are of a normal recurring
nature. Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 ("the 1998 Annual
Report").
3. The water services industry is seasonal and as such, the results of
operations for the three months ended March 31, 1999 do not necessarily
indicate the results to be expected for the full year. The first and fourth
quarters of each year are normally the lowest in terms of average customer
water usage for the Company's water utilities. Rainfall and weather
conditions affect utility operations, with most water consumption occurring
during the second and third quarters of each year when weather tends to be
hot and dry. The Company's contract operations business is also seasonal in
nature. For example, heavy rainfall during a quarter would hamper the
Company's ability to perform billable work such as pipeline maintenance,
manhole rehabilitation and other outdoor services.
4. The Company records earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires the computation of basic EPS and diluted EPS. Basic
EPS is used 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.
Diluted EPS is used 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. Common equivalent shares arise from stock options.
5. Beginning in 1999, the Company is subject to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivatives. Currently, the Company
does not have any derivative instruments which require disclosure under
SFAS No. 133, and SFAS No. 133 is not expected to have any effect on the
Company's financial position or results of operations.
6. The 1998 earnings per common share, cash dividends per common share and
weighted average outstanding common shares reflect a 5-for-4 stock split
paid in the form of a stock dividend to stockholders of record on October
1, 1998.
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7. As discussed in the 1998 Annual Report, in 1996, the Company purchased a
49% interest in Windermere Utility Company ("Windermere") and in May 1999,
the Company signed a third amendment to the RTNT Right of First Refusal
Agreement and RTNT Call Purchase Agreement ("the Agreements"). The
Agreements permit the majority shareholder to acquire the Company's
interest in Windermere at an agreed-upon price. If the majority shareholder
does not exercise his option, then the Company has the right to acquire
100% of Windermere. The amendment extends to September 30, 1999 the date by
which the majority shareholder could exercise this right.
8. As discussed in the 1998 Annual Report, in August 1998, Suburban was
granted an Exclusive Negotiation Agreement ("negotiation agreement") with a
term of 120 days by the City of West Covina ("West Covina"), and the
negotiation agreement was extended to July 1999. The purpose of the
agreement is for Suburban and West Covina to establish a price that will
allow West Covina to divest itself of its water distribution system and
facilities. Completion of negotiations would allow Suburban to either
purchase or lease West Covina's water system, adding approximately 7,000
water connections to Suburban's current customer base.
9. As discussed in the 1998 Annual Report, the City of Albuquerque ("the
City") has 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. This matter is more fully discussed in Part II, Item I,
Legal Proceedings.
10. As discussed in the 1998 Annual Report, the Company has two reportable
segments as defined under the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". There is no
difference in the basis of segmentation or in the basis of measurement of
segment profit or loss from the information reported in the 1998 Annual
Report. The following table sets forth disclosure about the Company's
reportable segments as required by SFAS No. 131.
<TABLE>
<CAPTION>
Total Total
Non- Segment Consolidated
Regulated Regulated Information Other Information
--------- --------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands)
As of March 31, 1999
--------------------
Revenues from external customers $8,852 $ 7,797 $ 16,649 $ 0 $ 16,649
Segment operating profit 171 2,021 2,192 (1,013) 1,179
Segment assets 9,506 116,501 126,007 4,320 130,327
As of March 31, 1998
--------------------
Revenues from external customers $9,032 $ 6,914 $ 15,946 $ 0 $ 15,946
Segment operating profit 199 1,607 1,806 (784) 1,022
Segment assets 9,357 110,108 119,465 4,605 124,070
</TABLE>
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban for the replacement and renovation of
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 March 31, 1999, the Company had cash and cash-equivalent balances totaling
$260,000. The Company has three separate lines of credit from three commercial
banks, which expire in 2000 and which the Company expects to renew in the normal
course of business. The total credit capacity of the three lines is
$16,000,000. At March 31, 1999, outstanding borrowing was $5,176,000 and the
unused borrowing capacity was $10,824,000. During the first three months of
1999, the Company repaid $103,000 on its lines of credit. As of March 31, 1999,
the Company was in compliance with all applicable financial covenants as
required by its line of credit agreements.
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 $37,705,000. However, the
amount of additional borrowing available to the Company under its current lines
of credit is limited by financial covenants that restricted additional borrowing
at March 31, 1999 to the unused credit line amount.
During the first three months of 1999, the Company's additions to property,
plant and equipment were $2,545,000, representing an increase of $205,000 over
the same period in 1998. Developers made contributions in aid of construction
("CIAC"), and advances totaling $590,000 of which $262,000 was received in cash.
Company-financed capital additions were $1,955,000, which was paid for primarily
by cash flow from operations. In 1999, the Company estimates that its capital
additions will be approximately $8,000,000 and that cash flow from operations
will fund these additions. However, short-term borrowing is available to meet
construction requirements not funded by operations or CIAC.
The Company anticipates that its available short-term borrowing capacity and its
cash flow generated from operations will be sufficient to fund its activities
over the next 12 months. 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:
Regulation:
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with municipal utility districts are short-term contracts and do
not generally include inflation adjustments. Changes in prices are negotiated
on a contract-by-contract basis. 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 California Public Utilities Commission ("CPUC") and the New Mexico Public
Regulatory Commission ("NMPRC") (formerly the New Mexico Public Utility
Commission), regulate the rates and operations of
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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.
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. In New Mexico, a legislative committee continues to review
proposed changes to the Public Utilities Act (the "PUA"). Whether legislative,
CPUC or PUA changes will be enacted, or, if enacted, what the terms of any
changes would be, are not known by the Company. Therefore, management cannot
predict the impact, if any, of final legislative changes, CPUC-developments or
PUA changes on the Company's financial position or results of operations.
ENVIRONMENTAL AFFAIRS:
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. Although not the owner, ECO is
responsible for operating these water and wastewater facilities in compliance
with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC
and the NMPRC, respectively. The responsibilities of both regulatory agencies
are to ensure an adequate supply of healthful, potable water to residents of
their respective states. The Company's operations are also subject to water and
wastewater pollution prevention standards and water and wastewater quality
regulations of the United States Environmental Protection Agency (the "EPA") and
various state regulatory agencies. Both the EPA and state regulatory agencies
require periodic testing and sampling of water. Costs associated with the
testing of the Company's water supplies have 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, will be
recoverable through increased rates and contract operations revenues. However,
there is no assurance that recovery of such costs will be allowed. To date, the
Company has not experienced any material adverse effects upon its operations
resulting from compliance with governmental regulations.
YEAR 2000 ISSUE:
As discussed in the Company's 1998 Annual Report, 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 other erroneous data
in the year 2000 causing serious disruptions in operations. The Company began
evaluating the Y2K issue in 1998 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 how to correct 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
7
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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, is currently in progress and is expected to be completed by the second
quarter of 1999, with final critical internal systems 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 incurred in order for the Company to be Y2K compliant are estimated to be
less than $100,000 and 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
assurances 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.
RISK FACTORS
Certain statements contained in this Form 10-Q Report for the period ending
March 31, 1999 ("the March Report") 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 March Report should be read in conjunction with the Company's 1998 Annual
Report for more detailed descriptions of the risk factors affecting the Company
which include, but are 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.
8
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RESULTS OF OPERATIONS:
All earnings per share amounts reflect a 5-for-4 stock split paid in the form of
a stock dividend to stockholders of record on October 1, 1998, and a 5-percent
stock dividend granted to stockholders of record on January 2, 1998.
Three Months Ended March 31, 1999 Compared To Three Months Ended March 31, 1998
Diluted earnings per common share were $.08 in 1999 compared to $.04 during the
same period in 1998.
Operating income increased $157,000 or 15%, and, as a percentage of operating
revenues, was 7% in 1999 compared with 6% in 1998. ECO's operating income
decreased $28,000, due primarily to the loss of an operations and maintenance
("O&M") contract in New Mexico in 1998, and also due to a decrease in the amount
of project work performed outside the scope of existing contracts in the central
Texas region. Operating income at the utilities increased $409,000, due
primarily to a 21% increase in water consumption by Suburban's customers as a
result of dry weather during the quarter, as compared with wet weather in 1998
due to the effects of El Nino-generated storms. At NMUI, there was an increase
in both water consumption and the number of customers. Parent company expenses
increased $224,000, due primarily to self-insured retention reserves related to
litigation.
Operating revenues
Operating revenues increased $703,000 or 4% in the first quarter of 1999
compared with the same period in 1998. ECO's revenues decreased $180,000 or 2%,
primarily due to the loss of an O&M contract in New Mexico in July 1998.
Suburban's revenues increased $657,000 or 11% due primarily to increased water
consumption by Suburban's customers which increased as a result of mild, dry
winter weather. NMUI also experienced a mild winter, which contributed to a 27%
increase in water consumption. An increase in the number of customers at NMUI
also contributed to higher revenues.
Direct operating expenses
Direct operating expenses increased $377,000 or 3%. As a percentage of
operating revenues, these expenses were 75% in 1999 and 76% in 1998. ECO's
direct operating expenses decreased $182,000 primarily as a result of the loss
of an O&M contract in New Mexico in 1998 and also due to lower expenses
associated with reduced billable work performed in the central Texas region.
Suburban's direct operating expenses increased $415,000, primarily reflecting
the increase in customer water consumption. NMUI's direct operating expenses
increased $144,000 as a result of the increase in NMUI's customer water
consumption.
Selling, general and administrative
Selling, general and administrative expenses for the first quarter of 1999
increased $169,000 or 6% as compared with the same period in 1998. As a
percentage of operating revenues, these expenses were 18% in 1999 and 17% in
1998. ECO's selling, general and administrative expenses increased $30,000,
primarily due to increased regional marketing costs associated with new business
development opportunities. General and administrative expenses at the utilities
decreased $85,000, primarily as a result of decreased compensation-related
expenses and legal fees. As discussed above, general and administrative
expenses of the parent company increased $224,000 due primarily to self-insured
retention reserves related to litigation.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's 1998 Annual Report, 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 and have filed their opening brief in
the First Appellate District, Division 5.
As discussed in the Company's 1998 Annual 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. The plaintiffs filed a petition in the Court of
Appeal 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 issues have been fully briefed and oral argument was held on April
19, 1999 before the Court of Appeal. A decision is expected within the next
three months.
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. 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 added as 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 Boswell writ and other related writs.
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.
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
10
<PAGE>
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 1998 Annual Report. While the
CPUC is actively investigating the issues concerned with water quality, the
Company and Suburban are unable to predict what actions, if any, will be taken
by the CPUC and/or the Department of Health Services as the result of this
investigation, or their impact on the operations or financial position of the
Company and Suburban.
As discussed in the 1998 Annual Report, 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, arising out of a fatal auto accident. The Company believes
that its maximum exposure in this action is limited to the self-insured
retention under its umbrella liability policy. Based on the information
available at this time, management does not expect that this action will have a
material effect on the Company's financial position or results of operations.
As discussed in the 1998 Annual Report , the City of Albuquerque (the "City")
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 issue; however, the Company believes that
it has adequate defenses should the City choose to pursue these procedures. 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: May 12, 1999 /s/ PETER J. MOERBEEK
- - ------------------- ---------------------
Peter J. Moerbeek
Chief Financial Officer
12
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