-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MOg+1utzZYokdnG6hKeISgcoxf0VDP/bX1LDXEdhmT6A3N6kN9OVg5QYacz8f0F6 8WGya9ysUhhygVQRcc4VUw== 0000898430-96-001143.txt : 19960402 0000898430-96-001143.hdr.sgml : 19960402 ACCESSION NUMBER: 0000898430-96-001143 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST WATER CO CENTRAL INDEX KEY: 0000092472 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951840947 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08176 FILM NUMBER: 96542332 BUSINESS ADDRESS: STREET 1: 225 N BARRANCA AVE STE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 BUSINESS PHONE: 8189151551 MAIL ADDRESS: STREET 1: 225 N BARRANCA AVENUE STREET 2: SUITE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 FORMER COMPANY: FORMER CONFORMED NAME: SUBURBAN WATER SYSTEMS DATE OF NAME CHANGE: 19751202 10-K 1 FORM 10-K FOR PERIOD ENDED 12/31/95 UNITED STATES 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, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ________________ Commission file number 0-8176 [LOGO OF SOUTHWEST WATER COMPANY] SOUTHWEST 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 91791-1605 WEST COVINA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 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 (2) SERIES A, 5-1/4% PREFERRED SHARES, CUMULATIVE, $.01 PAR VALUE (TITLE OF CLASSES) 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 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 of this Form 10-K or any amendment to this Form 10-K. [_] On March 29, 1996, there were 2,583,254 common shares outstanding. The aggregate market value of the Registrant's common shares held by non-affiliates of Registrant (2,349,898 shares) was approximately $27,611,000 based upon the average of the high and low stock prices as of March 15, 1996. Registrant is unable to estimate the aggregate market value of its preferred shares held by non-affiliates of Registrant because there is no public market for such shares. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENTS FORM 10-K REFERENCE --------- ------------------- Portions of Registrant's 1995 Annual Report to Stockholders Parts II and IV Proxy Statement dated April 10, 1996, for Annual Meeting of Stockholders on Tuesday, May 21, 1996 Part III SEE PAGES 19 TO 21 FOR EXHIBIT INDEX FILED WITH THIS REPORT. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
PART I. PAGE NO. -------- Item 1: Business.................................................... 1 - 9 Item 2: Properties.................................................. 9 - 10 Item 3: Legal Proceedings........................................... 10 - 11 Item 4: Submission of Matters to a Vote of Security Holders......... 11 Item 4A: Executive Officers of the Registrant........................ 12 PART II. Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters........................................ 13 Item 6: Selected Financial Data..................................... 13 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 13 Item 8: Financial Statements and Supplementary Data................. 13 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 13 PART III. Item 10: Directors and Executive Officers of the Registrant.......... 14 Item 11: Executive Compensation...................................... 14 Item 12: Security Ownership of Certain Beneficial Owners and Management................................................. 14 Item 13: Certain Relationships and Related Transactions.............. 14 PART IV. Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 15 - 18 Exhibit Index............................................... 19 - 21 Signatures.................................................. 22
SOUTHWEST WATER COMPANY AND SUBSIDIARIES 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 over half a million people located throughout California, New Mexico, Texas, and Mississippi. All regulated water utility operations of the Company are conducted through two wholly-owned subsidiaries, Suburban Water Systems ("Suburban") and New Mexico Utilities, Inc. ("NMUI"). The Company's wholly-owned subsidiary, ECO Resources, Inc. ("ECO"), operates and manages water and wastewater treatment facilities owned by cities, municipalities and private entities. General Information There have been no significant changes in the way the Company does business during the year. The focus of the water management industry is customer service, not technology or manufacturing processes; therefore, the Company conducts no significant research or development activities and the Company has no patents, trademarks or licenses. The Company does use certain commodities in its daily operations, such as chemicals and supplies, which are readily available from a number of different suppliers. 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. 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, 1995, the Company employed 512 persons, none of whom are represented by an employee union. A. REGULATED UTILITY OPERATIONS SUBURBAN WATER SYSTEMS Product and Business Suburban is a public utility water company which produces and supplies water for residential, business, industrial and public authority use, and for private and public fire protection service under the regulation of the California Public Utilities Commission (the "CPUC"). Suburban's service areas are located within Los Angeles and Orange Counties, California. Suburban or its predecessor entities have been engaged in supplying 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. Suburban has experienced moderate customer growth since the late 1960s, primarily due to the population saturation of its existing service areas. 1 At December 31, 1995, Suburban served 66,019 customers, including 62,319 residential customers, 2,645 business and industrial customers, 264 public authority customers and 791 fire protection service customers. During 1995, Suburban's operating revenues were 75% from sales to residential customers, 18% from sales to business and industrial customers, and 7% from sales to other customers. Suburban's business is subject to material fluctuations resulting, in large measure, from seasonal temperature and rainfall variations. Since most of Suburban's residential customers use more water in hot, dry weather conditions, the first quarter of each year is usually the lowest in terms of customer consumption, revenues and profitability. Wells and Other Water Sources Suburban owns 14 wells which 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 "Main Basin"). The Main Basin is the source of approximately 70% of Suburban's total water production. The rights to pump water from these 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 which manage the basins. As the water levels in the Main Basin increase or decrease, the Watermaster Board adjusts the amount of water Suburban and other producers may pump from this basin without paying an additional charge. When Suburban produces water from either basin in excess of prescribed levels, an additional payment is required to provide for the replenishment of the water supply. Current levels of these basins are sufficient to eliminate any drought concerns; however, there is no assurance that the current allowable pumping levels will continue in the future. These two basins provide the lowest cost of water for Suburban. Since 1984, Suburban has voluntarily chosen to stop pumping water from several older, shallower and/or less efficient wells because of the presence of nitrates and certain contaminants. These wells have been replaced by new, deeper and more efficient wells. In the past, Suburban has been successful in replacing lost production capacity by shutting down certain old wells, by introducing new, deeper wells and by blending water produced from different wells. However, no assurance can be given that Suburban will be able to do so in the future. Suburban also purchases water from two mutual water companies. Suburban's ownership of shares in each of these mutual water companies has allowed Suburban 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 Suburban's cost of water. Supplementing this water supply is water occasionally purchased from external sources, which is at a higher cost for Suburban. Suburban has a connection to the "Lower Feeder" of the Metropolitan Water District of Southern California ("MWD") through which it purchases water to supplement the supply to its Whittier/La Mirada Service Area. Additionally, Suburban has access to another MWD connection which serves to supplement the supply of water in its San Jose Hills Service Area. Suburban also has interconnections with other water purveyors which can be used as supplemental and emergency sources of supply. 2 Water Quality Regulation Water supplied by Suburban is subject to regulation by the United States Environmental Protection Agency (the "EPA") acting pursuant to the Federal Safe Drinking Water Act (the "US Act") and by the Office of Drinking Water of the California Department of Health Services (the "Health Department") acting pursuant to the California Safe Drinking Water Act (the "Cal Act"). The US Act provides for establishment of uniform minimum national water quality standards, as well as governmental authority to specify 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 and 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 Health Department are similar to the US Act and the mandate of the EPA, and in many instances MCLs and other requirements of the Health Department are more restrictive than those of the EPA. Both the EPA and the Health Department have promulgated regulations and other pronouncements which require periodic testing and sampling of water, and which set MCLs for numerous contaminants. These regulations include permissible levels of radio nuclides (including radon), regulations governing lead and copper and mandating corrosion control studies and sampling, as well as permissible levels of volatile organic compounds ("VOCs"), herbicides, pesticides, and inorganic substances. Suburban's water quality assurance department regularly monitors and samples the quality of water being distributed. Samples of water 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 promulgated. In addition, sampling and testing for certain pollutants such as VOCs is conducted by independent engineers retained by the Boards of the Central Basin and the Main Basin. The results of such sampling and testing are made available to all producers, with the cost of such sampling and testing covered by Board assessments to the producers. Testing, sampling and inspections are conducted at the intervals, locations and frequencies required by EPA and Health Department regulations. In addition, chlorination is currently performed only to provide a chlorine residual required by the Health Department. Water supplied by Suburban meets all current requirements of the US Act, the Cal Act and the regulations promulgated under such legislation, and Suburban anticipates no significant capital expenditures to comply with current requirements. There can be no assurance, however, that water supplied by Suburban would meet future EPA or Health Department requirements or that such requirements will not require capital expenditures by Suburban. Main San Gabriel Basin Contamination In 1979, VOCs were discovered in the Main Basin. Most of the contamination located in the Main Basin was found in areas not within Suburban's service areas. Subsequently, underground water sampling resulted in the discovery of four large areas of groundwater VOC contamination. The areas include Suburban's Bartolo Well Field, which contains four of Suburban's producing wells and from which Suburban produces approximately 25% of its total water production. Currently, however, Suburban's wells do not contain VOCs in excess of MCLs. The EPA has conducted numerous studies of underground water in the Main Basin (including the Bartolo Well Field). In 1984, the EPA named the Main Basin as a Superfund site and named as potentially 3 responsible parties ("PRPs") several large industrial companies that allegedly caused the contamination. Suburban's facilities were not named as sources of VOCs or other contamination in any portion of the Main Basin (i.e., Suburban's operations do not discharge VOCs into the ground or groundwater). However, some officials have suggested that the Main Basin water producers may have clean-up liability with respect to contaminants in the Main Basin under applicable environmental statutes on various theories by virtue of their pumping operations. It is expected that the EPA will continue to identify sources of contamination in order to establish legal responsibility for clean-up costs. Currently, neither the EPA nor any governmental agency has targeted Suburban or other water producers as PRPs. Certain industrial companies identified as PRPs are working with their water producers to build a $55 million water treatment facility in Baldwin Park, California. An environmental impact report is currently being reviewed for this project and, once clearance has been obtained, construction of the treatment unit may begin. The treatment plant, if constructed, would treat 19 million gallons per day of contaminated groundwater. Currently, funding for this treatment facility would not be provided directly by Suburban. To date, water produced from the Bartolo Well Field and other wells maintained by Suburban in the Main Basin meets all applicable governmental requirements. The treatment proposed by the EPA, and other measures taken by or available to Suburban, are intended to ensure that Suburban continues to have an adequate supply of potable water which meets all applicable governmental standards. While technology exists to remove VOC contaminants from basin water, there can be no assurance that either (i) such technology will in the future be adequate to reduce the amounts of VOCs and other contaminants in water produced by Suburban in the Main Basin to acceptable levels or (ii) the costs of such removal will be fully recoverable from Suburban's customers. To date, Suburban has been permitted to recover from its ratepayers all expenses associated with water quality maintenance. During 1992, a statute was passed by the State of California establishing a Water Quality Authority (the "WQA") to oversee clean-up of water in the Main Basin. Assessments for this purpose are levied against those who own prescriptive pumping rights in the Main Basin, including Suburban. The amount of Suburban's annual assessment is approximately $348,000. Pursuant to a contract with the WQA, Suburban will operate a WQA-constructed water treatment facility (Big Dalton Treatment Facility) and the third-party well to which the facility is connected. This facility will treat approximately 1.3 billion gallons of water annually which will be distributed to Suburban's customers. Full operation by Suburban is expected to occur in 1996. There can be no assurance that governmental authorities will not seek in the future to recover clean-up costs from Suburban or that source polluters will not seek contribution from water producers for clean-up costs which they may be required to pay. If Suburban were required to pay any such clean-up costs, Suburban would seek to recover such costs, and costs incurred in removing contaminants from water produced, through increased rates to its customers as has been permitted by the CPUC in the past. Moreover, there are over 100 water producers in the Main Basin, and the Company believes that Suburban's share of any clean-up costs assessed against the producers would only be a small a fraction of the total. Due to the potential recovery of the clean-up costs through higher rates, such costs are not expected to have a material impact on Suburban's financial condition or results of operation. 4 Competition and Rate Relief Suburban operates under long-term franchises and certificates of indefinite duration granted by the CPUC and other governmental authorities having jurisdiction over water service. The success of Suburban's water service business is dependent upon maintaining these franchises and certificates and upon various contracts and governmental and court decisions affecting Suburban's water rights and service areas. Under current CPUC practices, water rates may be increased by two methods: general rate increases and offsets for certain expense increases. General rate increases typically are for three years and include "step" increases in rates for the second and third years. General rate increases are authorized after formal proceedings with the CPUC in which the overall rate structure, expenses and rate base are examined by CPUC staff, and public hearings are held. Formal general rate proceedings require approximately 12 months from the filing of an application to the authorization of new rates by the CPUC. Rates are based on estimated expenses and capital costs for a forecasted two-year period and are established for each of the two years based on these estimates, as approved by the CPUC. Rates for the third year of the three-year rate period are set by assuming that costs and expenses will increase in the same proportion over the second year as the increase projected for the second year over the first. The step rate increases for the second and third years are allowed to compensate for projected cost increases, but are subject to later demonstration that earnings levels in the service area do not exceed the rate of return authorized at the general rate proceeding. 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, which is expected to be effective in the second quarter of 1996. Step increases for inflation will occur in 1997 and 1998 after CPUC approval is obtained. Rate increases to offset increases in certain expenses such as 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 for rate increases to the authorization of new rates. 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, any inability to increase rates would adversely affect Suburban's results of operations. On occasion, Suburban has filed for a rate decrease when actual water production costs incurred were less than CPUC-adopted water production costs. 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. Future Development In recent years, Suburban's growth has been limited to minor extensions into new subdivisions along the periphery of its service areas. Because there is little area available for new business or industrial construction and because of recent low levels of residential growth, no significant increases in customers are projected for the near future. The laws of the State of California provide that no public 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 after proof of necessity is shown. Suburban is not aware of any impending proceeding relating to the condemnation of any portion of its facilities. 5 The water utility business requires 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 financings by Suburban; from lines of credit of the Company; from contributions in aid of construction received from developers, governmental agencies, municipalities or individuals; and from advances received by developers which are repaid under rules of the CPUC. During 1995 and 1994, capital expenditures approximated $4,095,000 and $3,647,000, respectively. NEW MEXICO UTILITIES, INC. Product and Business In 1969, Suburban purchased NMUI. On June 1, 1987, the New Mexico Public Utility Commission ("NMPUC") authorized Suburban to transfer by stock dividend all of the stock of NMUI to Southwest Water Company which caused NMUI to become a wholly-owned subsidiary of Southwest Water Company. NMUI is a New Mexico regulated public water utility which provides water supply and sewage collection services for residential, commercial, irrigation, and fire protection customers under jurisdiction of the 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 approximately 14,000 persons and covers approximately 17 square miles, of which approximately 20% has been developed. Since 1969, NMUI has grown from approximately 800 customers to over 4,000 customers. Most of this growth has come from 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 lead to increases in the number of customers in the near future. NMUI believes that it has an adequate water capacity to serve its current customer base as well as new customers in the foreseeable future. At December 31, 1995, NMUI provided water service to 4,004 customers including 3,620 residential customers, 358 commercial and industrial customers, one golf course with five service connections, and 21 private fire protection customers. NMUI also provided sewer collection service to 3,701 customers including 3,502 residential customers and 199 commercial and industrial customers. During 1995, NMUI's operating revenues were 41% from sales to residential customers and 59% from sales to commercial and industrial customers. NMUI's business is subject to material fluctuations resulting, in large measure, from seasonal temperature and rainfall variations. Since most of NMUI's residential customers use more water in hot, dry weather conditions, the first quarter of each year is usually the lowest in terms of customer consumption, revenues and profitability. The sewer operation revenues remain relatively constant throughout the year. Wells and Other Water Sources NMUI supplies its customers from four wells it owns; one of the wells was constructed and placed in service in 1995. Construction of a new, two-million gallon water storage reservoir is expected to be completed early in 1996. 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. 6 NMUI's wells produce water from the Rio Grande Underground Water Basin. Well water produced by NMUI is of good quality. Chlorination is performed by NMUI to provide an allowable chlorine residual as a safeguard against bacteriological contamination. Samples of water from throughout the system are tested regularly by independent, state-certified laboratories, and the results are sent to the State of New Mexico Environmental Improvement Division. To date, NMUI has experienced no material effects upon its operations or capital expenditures resulting from compliance with governmental regulations relating to protection of the environment. Competition, Regulation and Future Development NMUI operates under a long-term franchise and 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. Requests for rate increases are submitted to the NMPUC with the test year typically being the previous year's actual results. In December 1995, NMUI was granted an 8% general sewer rate increase by the NMPUC, effective January 1996. 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 would adversely affect NMUI's results of operations. As the City of Albuquerque (the "City") has expanded its jurisdiction, it has annexed to the City most of NMUI's service area; however, NMUI has continued to serve the customers located in the annexed areas. Occasionally, representatives of the City have indicated that the City may have an interest in acquiring NMUI's assets and merging them with water and sewer systems currently operated by the City. To date, no formal action has commenced or been approved by the City, and NMUI does not know when, or if, such action will be taken by the City. 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. The laws of the State of New Mexico also provide that no public 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. NMUI is not aware of any impending proceeding relating to the condemnation of any portion of NMUI's facilities. NMUI's operations are capital intensive. This capital is generated from NMUI's operations; from periodic debt financings by NMUI; from lines of credit of NMUI and the Company; from contributions in aid of construction received from developers; and from advances received by developers which are repaid under rules of the NMPUC. During 1995 and 1994, capital expenditures approximated $7,275,000 and $4,295,000, respectively. 7 B. CONTRACT OPERATIONS ECO RESOURCES, INC. Product, Business, and Regulation In 1985, Southwest Water Company purchased all of the outstanding common shares of ECO thereby diversifying into the management and operation of water and wastewater systems owned by others. In addition to managing and operating water and wastewater systems, ECO also performs associated specialized services, such as equipment maintenance and repair, sewer pipeline cleaning, billing and collection, and state-certified laboratory analysis. ECO has two distinctive types of contractual relationships: municipal utility district contracts and operations and maintenance contracts with cities and municipalities. Municipal Utility Districts (MUDs) Contracts ECO has 121 contracts with MUDs in Houston and Austin, Texas. A MUD is a utility district created by the Texas Natural Resource Conservation Commission with an objective of providing water, wastewater and drainage services to areas where municipal services are not available. ECO negotiates operating contracts with each MUD's respective Board of Directors. At December 31, 1995, ECO served 58,262 water service connections and 60,863 wastewater service connections through MUD contracts. Most MUD contracts are short-term contracts and are cancelable on 30 or 60 days' notice by either party. Twelve of the MUD contracts have been converted to longer term, three or five-year contracts. In a typical MUD contract, a monthly base fee is charged for which ECO provides the MUD with certain maintenance and operations services, as well as billing, collection and customer services. Additional services beyond those covered by the base fee typically generate revenues on a time and material basis. As the large Texas cities, such as Houston and Austin, expand their territory, they periodically condemn the MUD-owned facilities and annex them to the city- owned facilities. In 1995, four MUD contracts were canceled due to annexation, three MUD contracts were canceled for competitive reasons, and three new MUD contracts were added. Operations and Maintenance (O&M) Contracts ECO has 20 O&M contracts with cities, municipalities, or private entities located in Texas, Mississippi, New Mexico and California. At December 31, 1995, ECO served 59,342 water service connections and 63,882 wastewater service connections through O&M contracts. A typical O&M contract tends to average three to five years in duration and is generally cancelable only upon a specific breach of the contract by either party. Typical O&M contracts provide for a specified level of services with additional billings allowed if the owner of the facilities requires special services. In 1995, four new O&M contracts were added. 8 Competition and Future Development ECO is operating in an industry undergoing significant and rapid changes. Competition is based on both lowest cost and technical expertise. ECO's competition in the O&M portion of its business includes four significantly larger companies which provide O&M services on a national basis, as well as several regional competitors, both smaller and larger than ECO. In the MUD portion of the business, competitors include one large national company and at least five smaller, local companies. ECO intends to expand its current base business in Texas, Mississippi, New Mexico and California. This expansion will require aggressive sales and marketing efforts which may affect ECO's liquidity and results of operations. ITEM 2. PROPERTIES The Company leases approximately 5,500 square feet of office space for its Corporate headquarters in West Covina, California. A. REGULATED UTILITY OPERATIONS The Company's regulated utility operations lease two office buildings for their headquarters in Covina, California, and Albuquerque, New Mexico, respectively. In addition, Suburban owns two buildings which house its district operations, and NMUI owns a warehouse building that houses 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 has rights-of-way and easements necessary to provide its water services. At December 31, 1995, Suburban owned approximately 704 miles of transmission and distribution mains, 26 storage reservoirs with a total capacity of approximately 53 million gallons and 14 wells with a total pumping capacity of approximately 30,000 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 has a master plan which provides for periodic evaluation of the adequacy of system operations. In accordance with this master plan, Suburban will continue its capital expenditure program and construct and replace reservoirs, wells, and transmission and distribution lines in future years, as needed. Normal maintenance and construction work on these facilities is performed by employees of Suburban, and major construction projects are performed by outside contractors chosen through competitive bidding. Ongoing maintenance and repair is performed by Suburban and constitutes a significant portion of its expenses ($1,630,000 in 1995). 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 "Indenture"), as amended February 7, 1990, and January 24, 1992, securing Suburban's first mortgage bonds. The Indenture contains certain restrictions regarding the disposition of property and includes various covenants and restrictions common to such types of instruments, including limitations on the amount of cash dividends which Suburban may pay to the Company. 9 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. At December 31, 1995, NMUI owned approximately 93 miles of transmission and distribution mains and two storage reservoirs with a total capacity in excess of five million gallons. The four wells operated by NMUI have a total pumping capacity in excess of 7,425 gallons per minute. In addition, NMUI owns and operates a sewer collection system consisting of one lift station and approximately 71 miles of interceptor and collector lines. These facilities vary as to age, and each is believed by NMUI to be adequate for current and foreseeable operations. Normal maintenance and construction work on these facilities is performed by employees of NMUI or outside contractors. Maintenance and repair expenses of $143,000 were incurred in 1995. NMUI also holds rights-of-way or easements in its service area necessary for its water and sewer services. Virtually all of NMUI's property is subject to the lien of an Indenture of Mortgage dated February 14, 1992, securing NMUI's first mortgage bonds. The bonds are subject to certain restrictions regarding the disposition of such property, and include various covenants and other restrictions, including limitations on the amount of cash dividends that NMUI may pay to the Company. B. CONTRACT OPERATIONS ECO RESOURCES, INC. ECO owns 4.3 acres and a 17,000 square foot building that house fleet and maintenance operations in the Houston, Texas, area. ECO also owns 10 acres and a 10,000 square foot building in Austin, Texas that house office, fleet and maintenance operations. In addition, ECO owns or leases 298 vehicles, and other equipment used in daily operations. ECO leases approximately 34,000 square feet of office, warehouse and lab space in nine facilities in the Houston, Texas area; the Rio Grande Valley, Texas area; Mississippi; New Mexico; and California. ITEM 3. LEGAL PROCEEDINGS As described previously in the Company's Form 10-K Reports for the years ended December 31, 1992, 1993, and 1994, its Form 8-K Report filed in January 1994, and its Form 10-Q Reports for the quarters ended March 31, 1995, June 30, 1995, and September 30, 1995, Suburban was a defendant in three lawsuits arising from a chlorine gas leak that occurred in October 1990 at a Suburban water distribution facility. In January 1994, Suburban settled with all of the plaintiffs for aggregate cash payments of approximately $1.5 million. These settlements included releases of all claims against Suburban. At the time of the chlorine gas incident, the Company and Suburban maintained liability insurance coverage; however, the Company's primary and excess liability insurance carrier declined to defend or indemnify Suburban on the basis of applicable exclusions in the policies. In May 1994, the insurance carrier was granted a summary judgment dismissing Suburban's action. Suburban appealed the summary judgment and its appeal was denied by the court in 1995. Suburban and the Company do not intend to pursue this matter any further. As described in the Company's 1994 Form 10-K Report and Form 10-Q Reports for the quarters ended March 31, 1995, June 30, 1995, and September 30, 1995, ECO was named as a defendant in a lawsuit by certain homeowners and Pulte Home Corporation of Texas. The plaintiffs allege that in 1989, ECO, as an 10 independent contractor for Municipal Utility District #81 ("MUD #8l") in Houston, Texas, failed to change the treatment of the water supplied to plaintiffs after the plaintiffs made MUD #8l and ECO aware of highly corrosive elements in the water supplied. On June 14, 1995, the court granted ECO's motion for summary judgment on all causes of action and granted MUD #8l's motion for summary judgment on sovereign immunity grounds. On July 13, 1995, plaintiffs filed a motion for new trial and a motion to reconsider and to vacate the court's summary judgments. A date has not been set to hear the motion. As of the date when damages are first alleged to have occurred (1989) and thereafter, the Company and ECO maintained liability insurance coverage of $20 million. ECO's primary liability carrier is providing a defense for the primary cause of action against ECO, but has reserved all rights as to allegations that ECO knowingly committed intentional acts constituting "deceptive trade practices" and "negligence." The Company believes the ultimate resolution of this matter will not have a material adverse effect on its consolidated financial condition or results of operations. As described in the Company's 1994 Form 10-K Report, and Form 10-Q Reports for the quarters ended March 31, 1995, June 30, 1995, and September 30, 1995, Suburban is a defendant and cross-defendant in two actions filed in March 1994 and June 1994 in the Superior Court of Los Angeles County and arising out of a slope slide or failure in 1992 in a hilly, residential development in West Covina, California. In addition to Suburban, defendants in the actions include the owners of the lot above and containing the failed slope, and an engineer and a contractor who directed and conducted repair work to the slope after a prior failure in 1978. Claims raised by the plaintiffs and certain cross-defendants are described in the Company's 1994 Form 10-K Report, as is the consolidation of the two cases. At the initiation of Suburban's defense counsel, one of the plaintiffs dismissed his action against Suburban in March 1995, and defense counsel is discussing a similar dismissal with the other plaintiff. Mediation was held for both actions on November 6, 1995. A tentative settlement of $31,000 was reached as to both actions. The settlement process is continuing and the Company expects this settlement to be completed in 1996 with Suburban's insurance carrier to fund any payment in excess of Suburban's deductible. Accordingly, the Company believes this matter will not have a material adverse effect on its consolidated financial condition or results of operations. As described in the Company's 1994 Form 10-K Report and Form 10-Q Report for the quarter ended March 31, 1995, ECO and Southbend Municipal Utility District ("Southbend") were named as defendants in two lawsuits filed in February and March 1993, in Harris County, Texas, by homeowner customers. The plaintiffs alleged that ECO, as an independent contractor for Southbend in Houston, Texas, failed to adequately test the water delivered to residents to detect contaminants that would cause harm to persons in the Southbend subdivision. In early 1995, the plaintiffs filed motions requesting dismissal of these actions against ECO. Such motion was granted without prejudice as to all plaintiffs during 1995. As a result, the Company believes these matters will not have a material adverse effect on its consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Stockholders. There are no family relationships between 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 was elected an officer. There are no legal proceedings of the types required to be disclosed pursuant to the instructions to this item involving any executive officer. The executive officers of the Company and its subsidiaries are as follows:
POSITIONS AND OFFICES CURRENTLY HELD NAME AGE AND BUSINESS EXPERIENCE DATE ELECTED ---- --- -------------------------------------------- ------------ Anton C. Garnier 55 Chief Executive Officer and President of the Company and Suburban November 1968 Peter J. Moerbeek 48 Vice President Finance and CFO August 1995 Director of Suburban and ECO October 1995 Secretary of Company, Suburban and ECO October 1995 Previously Executive Vice President Finance and Operations of Pico Products, Inc. and Pico Macom, Inc. (1989 - 1995) James E. Furman 58 President and Chief Executive Officer of ECO April 1992 Director of ECO May 1993 Previously President of various operating units of Baker-Hughes, Inc. (1977 - 1992) Michael O. Quinn 49 Chief Operating Officer of Suburban April 1992 Director of Suburban May 1993 Previously President of ECO (October 1985 - April 1992) Robert L. Swartwout 54 President and General Manager of NMUI March 1992 Director of NMUI May 1993 Previously Consulting Associate, Robert Witter & Associates, Inc. (1985 - 1992)
12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information with respect to the market for and number of holders of the Company's common shares as well as quarterly market and dividend information is set forth under the caption "Market and Dividend Information" in the Company's 1995 Annual Report to Stockholders and is hereby incorporated by reference. The number of holders of the Company's common shares was computed based on a count of record holders as of December 31, 1995. ITEM 6. SELECTED FINANCIAL DATA The information included under the caption "Selected Financial Data" in the Company's 1995 Annual Report to Stockholders is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 Annual Report to Stockholders is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated balance sheets indicating the financial position of the Company at December 31, 1995 and 1994, consolidated financial statements reflecting the results of its operations, and changes in its cash flows for the three-year period ended December 31, 1995, together with the notes thereto and the report thereon of KPMG Peat Marwick LLP, independent auditors, as well as selected quarterly financial information under the caption "Unaudited Quarterly Financial Information," are contained in the Company's 1995 Annual Report to Stockholders, and are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 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, dated April 10, 1996, and to be filed with the Commission, under the caption "Information Regarding the Board of Directors," 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 April 10, 1996, and is also hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is contained in the Company's definitive Proxy Statement, dated April 10, 1996, and to be filed with the Commission, under the captions "Executive Compensation and Other Information," "Information Regarding the Board of Directors," and "Proposal 2: Adoption of a Non-Employee Director Stock Option Plan," 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, dated April 10, 1996, and to be filed with the Commission, 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 in the Company's definitive Proxy Statement, dated April 10, 1996, and to be filed with the Commission, and is hereby incorporated by reference. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The financial statements listed below are incorporated from the Company's 1995 Annual Report to Stockholders included as Exhibit 13.1 to this filing: Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheets at December 31, 1995 and 1994 Consolidated Statements of Changes in Common Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) The supplementary financial statement schedules required to be filed with this report are as follows: Page ---- Independent Auditors' Report on Supplementary Note to Consolidated Financial Statements and supporting schedule................................................ 16 Supplementary Note to Consolidated Financial Statements... 17 Schedule II - Valuation and Qualifying Accounts........... 18 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 financial statements or notes thereto. (a)(3) Exhibit Index............................................... 19 - 21 (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended December 31, 1995. 15 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Southwest Water Company: Under date of January 23, 1996, we reported on the consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related supplementary note and financial statement schedule as listed in the accompanying index. The supplementary note and financial statement schedule is the responsibility of the Registrant's management. Our responsibility is to express an opinion on the supplementary note and financial statement schedule based on our audits. In our opinion, such supplementary note and financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Los Angeles, California January 23, 1996 16 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SUPPLEMENTARY NOTE TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 NOTE 14. OPERATING REVENUES AND DIRECT OPERATING EXPENSES Included in operating revenues and direct operating expenses are the following:
1995 1994 1993 ----------- ----------- ----------- Utility operating revenues $31,089,000 $30,112,000 $29,304,000 Other operating revenues 25,718,000 20,820,000 18,914,000 ----------- ----------- ----------- Total operating revenues $56,807,000 $50,932,000 $48,218,000 =========== =========== =========== Utility direct operating expenses $18,865,000 $18,687,000 $18,224,000 Other direct operating expenses 24,506,000 20,131,000 17,737,000 ----------- ----------- ----------- Total direct operating expenses $43,371,000 $38,818,000 $35,961,000 =========== =========== ===========
17 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
BALANCE PROVISION DEDUCTIONS - BALANCE AT BEGINNING CHARGED ACCOUNTS AT END OF YEAR TO WRITTEN OFF OF INCOME YEAR ------------ ---------- ------------- ---------- 1995 Allowance for doubtful accounts $141,000 $245,000 $(194,000) $192,000 ======== ======== ========= ======== 1994 Allowance for doubtful accounts $110,000 $207,000 $(176,000) $141,000 ======== ======== ========= ======== 1993 Allowance for doubtful accounts $116,000 $208,000 $(214,000) $110,000 ======== ======== ========= ======== Other reserves $358,000 $250,000 $(608,000) $ -- ======== ======== ========= ========
18 SOUTHWEST WATER COMPANY AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 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 Fourth 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). 3.2 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). 4.1 Indenture dated as of August 15, 1975, between Registrant and Bank of America, formerly Security Pacific National Bank (incorporated by reference to Exhibit 6(g) to Registrant's Form S-14 Registration Statement filed with the Commission on June 19, 1975). 4.2 Indenture of Mortgage and Deed of Trust dated October 1, 1986, between Suburban Water Systems and Bank of America, formerly Security Pacific National Bank (incorporated by reference to Exhibit 4.3 to Registrant's Form 10-K Report for the year ended December 31, 1986). 4.2A First Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and Bank of America, formerly Security Pacific National Bank, 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). 4.2B Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and Bank of America, formerly Security Pacific National Bank, 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). 4.3 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).
19
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 4.3A 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). 4.4 Indenture of Mortgage dated February 14, 1992, between New Mexico Utilities, Inc., and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.5 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). 4.6 Article Fourth 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.) 10.1 Thirteenth Amendment to the Utility Employees' Retirement Plan dated December 31, 1989 (incorporated by reference to Exhibit 10.16 to Registrant's Form 10-K Report for the year ended December 31, 1990). 10.2 Amended and Restated Employee Qualified Stock Purchase Plan dated November 11, 1991 (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-Q Report for the quarter ended September 30, 1991). 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 Line of Credit Agreement dated December 2, 1992, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.6 to Registrant's Form 10-K Report for the year ended December 31, 1992). 10.4A First Amendment to Credit Agreement dated December 1, 1993, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.4B Second Amendment to Credit Agreement dated December 1, 1994, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.4B to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.4C Third Amendment to Credit Agreement dated December 1, 1995, between Registrant and Wells Fargo Bank, filed herewith. 10.5 Line of Credit Agreement dated December 2, 1992, between Registrant and First Interstate Bank of California (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-K Report for the year ended December 31, 1992). 10.5A First Amendment to Credit Agreement and Promissory Note dated July 29, 1993, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year ended December 31, 1993).
20
EXHIBIT NO. AND APPLICABLE SECTION OF ITEM 601 OF REGULATION S-K - ------------------ 10.5B Second Amendment to Credit Agreement and Promissory Note dated June 24, 1994, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.16 to Registrant's Form 10-Q Report for the quarter ended June 30, 1994). 10.5C Third Amendment to Credit Agreement and Promissory Note dated June 30, 1995, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.5C to Registrant's Form 10-Q Report for the quarter ended June 30, 1995). 10.6 Amended and Restated 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). 10.7 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). 10.8 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). 10.8A Amendment One 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). 10.9 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). 10.9A Amendment One 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). 10.10 Line of Credit Agreement dated January 25, 1995, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.11 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). 13.1 Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1995. 21.1 Listing of Registrant's subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule.
21 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, thereunto duly authorized. SOUTHWEST WATER COMPANY By: /s/ ANTON C. GARNIER -------------------- Anton C. Garnier President and Chief Executive Officer (Principal Executive Officer) March 27, 1996 By: /s/ PETER J. MOERBEEK --------------------- Peter J. Moerbeek Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) March 27, 1996 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 27, 1996 March 27, 1996 /s/ MICHAEL J. FASMAN /s/ RICHARD KELTON - --------------------- ------------------ Michael J. Fasman Richard Kelton Director Director March 27, 1996 March 27, 1996 /s/ ANTON C. GARNIER /s/ RICHARD NEWMAN - -------------------- ------------------ Anton C. Garnier Richard Newman Director Director March 27, 1996 March 27, 1996 /s/ MONROE HARRIS - ----------------- Monroe Harris Director March 27, 1996 22 EX-10.4C 2 3 AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.4C THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of December 1, 1995, by and between SOUTHWEST WATER COMPANY, a Delaware corprotion ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS -------- WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 2, 1992, as amended December 1, 1993 and December 1, 1994 ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 1.1.(a) is hereby amended (a) by deleting "December 1, 1995" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "December 1, 1996," and (b) by deleting "Five Million Dollars ($5,000,000.00)" as the maximum principal amount available under the Line of Credit, and by substituting for said amount "Six Million Dollars ($6,000,000.00)," with such changes to be effective upon the execution and delivery to Bank of a promissory note substantially in the form of Exhibit A attached hereto (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change. 2. Section 1.1.(b) second paragraph is hereby deleted in its entirety, without substitution. 3. Section 1.2.(c) is hereby deleted in its entirety, and the following substituted therefor: "(c) Commitment Fee. Borrower shall pay to Bank a non-refundable fee -------------- for the Line of Credit equal to one percent (1%) per annum of the daily unused balance of the Line of Credit, calculated on a calendar quarter basis, which fee shall be due and debited to Borrower's account not later than ten days after billing is sent by Bank." 4. Section 2.5. is hereby deleted in its entirety, and the following substituted therefor: "SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated September 30, 1995, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing." 5. Section 4.9.(a) and (b) are hereby deleted in their entirety, and the following substituted therefor: "(a) Tangible Net Worth (defined as the aggregate of total stockholders' equity less the aggregate of any treasury stock, any intangible assets and any obligations due from stockholders, employees and/or affiliates) not at any time less than $25,500,000.00. (b) Ratio of Total Debt (defined as "Consolidated Liabilities": At any ------------------------ date of determination, the total liabilities of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP (including, without limitation, (1) any balance sheet liability with respect to a Pension Plan recognized pursuant to Financial Accounting Standards Board Statements 87 or 88 and (2) any withdrawal liability under Section 4201 of ERISA with respect to a withdrawal from a Multiemployer Plan, as such liability may be set forth in a notice of withdrawal liability under Section 4219 (and as adjusted from time to time subsequent to the date of such notice), excluding, --------- however, deferred taxes and contributions in aid of construction and ------- Unamortized Investment Tax Credit) to Tangible Net Worth (as defined above) not at any time less than 2.25 to 1.0." 6. Section 5.8. is hereby deleted in its entirety, and the following substituted therefor: "SECTION 5.8. OTHER INDEBTEDNESS FOR BORROWINGS. Create, incur, assume or permit to exist, or permit any Subsidiary to create, incur, assume or permit to -2- exist, any indebtedness or liabilities resulting from borrowings, loans or advances, whether matured or unmatured, liquidated or unliquidated, joint or several, secured or unsecured, except for (a) the liabilities of Borrower to Bank hereunder, (b) liabilities of Borrower existing as of, and disclosed to Bank prior to the date of this Agreement, (c) additional indebtedness for unsecured borrowings which do not exceed $15,000,000.00 in the aggregate at any time for Suburban Water Systems and New Mexico Utilities, Inc. (d) secured indebtedness for purchase money financing of equipment which is permitted under Section 5.5. and (e) Lines of Credit not to exceed an aggregate of $16,000,000.00." 7. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 8. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, SOUTHWEST WATER COMPANY NATIONAL ASSOCIATION By /s/ Anton C. Garnier By /s/ Catherine M. Wallace Title: President Vice President By /s/ Peter J. Moerbeek Title: Vice President Finance Chief Financial Officer -3- EX-13.1 3 PORTIONS OF REGISTRANT'S ANNUAL REPORT Southwest Water Company and Subsidiaries EXHIBIT 13.1 selected financial data
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Not covered by Independent Auditors' Report) - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Summary Of Operations Operating revenues $ 56,807,000 $ 50,932,000 $48,218,000 $ 44,482,000 $38,802,000 Operating income $ 4,432,000 $ 3,849,000 $ 3,421,000 $ 5,305,000 $ 996,000 Gain on condemnation and sale of land $ 84,000 $ -- $ 67,000 $ -- $ 274,000 Litigation settlements $ -- $ -- $(1,437,000) $ -- $ -- Gain on settlement of estate with related party $ -- $ -- $ -- $ -- $ 450,000 Net income $ 1,439,000 $ 1,057,000 $ 127,000 $ 2,300,000 $ 206,000 Net income available for common shares $ 1,412,000 $ 1,029,000 $ 99,000 $ 2,271,000 $ 176,000 - ----------------------------------------------------------------------------------------------------------------------------------- Common Share Data(1) Primary earnings per share $ .55 $ .41 $ .04 $ .93 $ .07 Fully diluted earnings per share $ .55 $ .40 $ .04 $ .91 $ .07 Cash dividends per share $ .38 $ .38 $ .63 $ .88 $ .87 Weighted-average outstanding shares and equivalent shares: Primary 2,561,000 2,524,000 2,490,000 2,448,000 2,414,000 Fully diluted 2,562,000 2,581,000 2,490,000 2,515,000 2,414,000 - ----------------------------------------------------------------------------------------------------------------------------------- Statistical Data Working capital (deficit) $ (7,266,000) $ (1,951,000) $ 1,161,000 $ 6,765,000 $(1,549,000) Capital additions $ 11,866,000 $ 8,684,000 $ 7,133,000 $ 4,914,000 $ 4,485,000 Property, plant and equipment, net $ 80,267,000 $ 72,136,000 $67,076,000 $ 63,506,000 $61,574,000 Total assets $ 97,456,000 $ 86,834,000 $85,848,000 $ 83,672,000 $75,924,000 Long-term debt $ 19,600,000 $ 20,500,000 $21,550,000 $ 22,455,000 $13,375,000 Stockholders' equity $ 29,246,000 $ 28,532,000 $28,176,000 $ 29,153,000 $28,558,000 Return on average common equity 5.0% 3.7% .4% 8.0% .6% Number of customers 194,800 174,500 171,600 161,100 167,300 ====================================================================================================================================
(1) Primary and fully diluted earnings per share, cash dividends per share and weighted-average outstanding shares have been restated to reflect a 5% stock dividend on January 2, 1996. 8 Southwest Water Company and Subsidiaries management's discussion and analysis of financial condition and results of operations liquidity and capital resources Liquidity and capital resources of Southwest Water Company (the Company) are influenced primarily by construction expenditures at Suburban Water Systems (Suburban) for the replacement and renovation of existing water utility facilities and by construction expenditures for new water and wastewater utility facilities at New Mexico Utilities, Inc. (NMUI). To a lesser extent, liquidity is influenced by the Company's continuing investment in ECO Resources, Inc. (ECO). At December 31, 1995, the Company had cash and cash equivalent balances totaling approximately $784,000 and unused lines of credit from three commercial banks of $6,325,000. During 1995, the Company increased its lines of credit capacity by $4,000,000 to a total of $14,500,000, and borrowed a net $5,725,000 on its lines of credit primarily to meet construction requirements. Additional short-term borrowing is anticipated during 1996 to meet construction requirements. The three lines of credit expire at various dates in 1996, and the Company anticipates renewing these lines in the normal course of business. Accounts receivable of the Company increased by $1,764,000 in 1995, primarily due to higher operating revenues at ECO. In addition, accounts payable increased by $1,084,000, which reflects higher operating cost levels at ECO, as well as ongoing construction projects at Suburban and NMUI. The Company's additions to property, plant and equipment were $11,866,000 during 1995, representing an increase of $3,182,000 over the same period in 1994. This increase relates primarily to utility plant additions at NMUI due to increased residential and commercial construction in NMUI's service area. Of the total additions, $2,395,000 was received by the Company's utilities through developer contributions in aid of construction. The Company anticipates continuing its construction programs at the current level during the next year. The Company has initiated negotiations with investment bankers and anticipates obtaining long-term financing during 1996. Proceeds from this financing would be used to repay short-term debt and fund ongoing construction requirements. The Company has remaining borrowing capacity under its First Mortgage Bond Indentures of $26,592,000. The amount of additional borrowings available to the Company under the indentures and lines of credit is limited by certain financial covenants that restrict additional borrowings at December 31, 1995 to a maximum of $13,323,000. The amount and timing of future long-term financings will depend on various factors including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing agreement. If the Company were unable to renew its existing lines of credit or obtain additional long-term financing, capital spending would be reduced or delayed until new financing arrangements were secured. regulatory affairs and inflation The rates and operations of the Company's utilities are regulated by the California Public Utilities Commission (CPUC) and the New Mexico Public Utility Commission (NMPUC). The rates are intended to provide a reasonable return on common equity. The Company's expected future construction expenditures and increased direct operating expenses will require periodic requests for rate increases. 9 Southwest Water Company and Subsidiaries management's discussion and analysis of financial condition and results of operations In January 1996, Suburban and the CPUC staff negotiated a proposed rate increase of 4.25% ($1.1 million), effective in the second quarter of 1996, with two additional increases for inflation in 1997 and 1998. Upon final CPUC approval, Suburban would be authorized to earn a 10% return on common equity. In December 1995, NMUI was granted an 8% general sewer rate increase by the NMPUC, effective January 1996, which will result in additional annual revenues of $124,000. Effective January 1, 1995, the CPUC granted Suburban a step rate increase for its Whittier/La Mirada District customers, yielding additional authorized annual revenues of $286,000. From 1989 through 1995, Suburban recorded pretax gains on five land transactions which aggregated $1,900,000. In 1994, the CPUC ruled on the 1989 sale and allowed Suburban to retain $210,000 in income, in accordance with CPUC accounting regulations, as opposed to distributing it to ratepayers in the form of water rate reductions. The Water Utility Infrastructure Improvement Act of 1995 was passed by the California Assembly and Senate and signed by the governor on August 10, 1995. This law provides that water utilities selling real property that is no longer necessary or useful may invest the net proceeds in utility plant. Any net proceeds (and the interest thereon) not invested in an eight-year period shall be allocated to ratepayers. While Suburban's remaining transactions from the 1989-1995 period are subject to CPUC review, the proceeds were invested in utility plant, and, therefore, management believes these gains should not affect water rates. No regulatory liability has been recorded in the accompanying consolidated financial statements. The California legislature has held hearings discussing the CPUC's organization and operation. Among other options, the CPUC has proposed consideration of performance-based ratemaking, which provides incentives for utilities to operate more efficiently and improve productivity, and is intended to reduce regulatory burden and promote efficiency among utilities. Both ratepayers and stockholders would likely benefit from improved productivity as applications for rate case increases would be conducted less frequently. Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. Whether such legislative or CPUC developments will be enacted, or, if enacted, what the terms of such developments would be, is not known by the Company. Therefore, management cannot predict the impact of final legislative or CPUC developments on the Company's financial condition or results of operations. The operations of ECO are not regulated. ECO's long-term water and wastewater service contracts typically include annual inflation adjustments. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. environmental affairs The Company's operations are subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the United States Environmental Protection Agency (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, 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. 10 results of operations Year Ended December 31, 1995, Versus Year Ended December 31, 1994 Fully diluted earnings per common share (adjusted for the 5% stock dividend on January 2, 1996) were $.55 in 1995 compared to $.40 in 1994. Results for 1995 include a net gain of $50,000, or $.02 per fully diluted share, from the sale of surplus land. Operating income increased $583,000, and, as a percentage of operating revenues, was 8% in 1995 and 1994. Utility operating income increased $484,000, due primarily to a significant increase in NMUI's customer base. ECO experienced a decreased operating loss of $236,000, due primarily to improved gross profit margins on billable and project services and operating profits recorded on new contracts. Parent company expenses increased $137,000, primarily due to higher consulting and outside services expenses. Operating revenues increased $5,875,000 or 12%. Water utility operating revenues increased $978,000. Water consumption by Suburban customers decreased slightly, resulting in decreased revenues of $79,000. This decrease was offset by the benefits of a step rate increase which resulted in additional revenues of $328,000. NMUI added 624 new water customers in 1995, which resulted in a 19% increase in water consumption, representing an increase in water revenues of $350,000. Higher sewer collection volume at NMUI led to an increase in revenues of $379,000. ECO's revenues increased $4,897,000, primarily as a result of revenues from new contracts and increased billable work in Texas. Direct operating expenses increased $4,553,000 or 12%. As a percentage of operating revenues, these expenses were 76% in 1995 and 1994. Water utility direct operating expenses increased $178,000. NMUI recorded higher sewer collection expenses, primarily related to the increase in sewer collection volume. ECO's direct operating expenses increased $4,375,000, resulting primarily from the addition of new contracts in Texas, New Mexico and California, and higher expenses associated with increased billable work in Texas. Selling, general and administrative expenses increased $739,000. As a percentage of operating revenues, these expenses remained constant at 16% in 1995 and 1994. Water utility general and administrative expenses increased $316,000, primarily due to higher payroll and associated payroll benefits. ECO's selling, general and administrative expenses increased $286,000, primarily due to expanded sales and marketing activity. As discussed above, general and administrative expenses of the parent company increased $137,000. Year Ended December 31, 1994, Versus Year Ended December 31, 1993 Fully diluted earnings per common share (adjusted for the 5% stock dividend on January 2, 1996) were $.40 in 1994 compared to $.04 in 1993. Results for 1993 include nonrecurring, pretax charges of $2,259,000, or $.54 per fully diluted share, resulting from settlement and defense costs of litigation associated with a 1990 chlorine gas leak, and $250,000, or $.06 per fully diluted share, related to a loss on the liquidation of certain collateral associated with a note receivable from a former subsidiary. 11 Southwest Water Company and Subsidiaries management's discussion and analysis of financial condition and results of operations Operating income increased $428,000 in 1994, and, as a percentage of operating revenues, increased from 7% in 1993 to 8% in 1994. Water utility operating income increased $1,162,000 due to decreased expenses related to litigation defense costs. Additionally, NMUI experienced an increase in the number of water and sewer customers. ECO experienced an increased operating loss due to higher contract operating costs, lower gross profit margins on Texas contracts, and expanded sales and marketing expenses. Operating revenues increased $2,714,000 or 6%. Water utility operating revenues increased by $808,000. A moderate increase of water consumption by Suburban customers resulted in increased revenues of $642,000. Suburban also experienced the effects of two step rate increases and one offset rate reduction, resulting in a net $315,000 decrease in revenues. Higher sewer collection volume at NMUI, as well as a 6% increase in customer water consumption related to new customers, led to an increase in revenues of $481,000. ECO's revenues increased $1,906,000, primarily as the result of a greater volume of billable service revenue, including approximately $1,000,000 of revenues for amounts billed to customers for the purchase of materials used at the customers' facilities. Direct operating expenses increased $2,857,000 or 8%. As a percentage of operating revenues, these expenses increased from 75% in 1993 to 76% in 1994. Water utility direct operating expenses increased $463,000. NMUI recorded higher sewer collection expenses related directly to the corresponding increase in volume. Additionally, increases in payroll and associated benefits, water treatment and lab services, and depreciation were incurred at Suburban and NMUI. ECO's direct operating expenses increased $2,394,000, resulting primarily from a greater volume of billable service revenues and direct purchase of materials. Payroll and associated benefits increased in anticipation of revenue growth in Texas. In addition, new contracts entered into in 1994 earned lower gross profit margins than similar contracts in 1993 due to competitive pressures and contract start-up costs. Selling, general and administrative expenses decreased $571,000 or 6%. As a percentage of operating revenues, these expenses decreased from 18% in 1993 to 16% in 1994. Water utility general and administrative expenses decreased $817,000, due primarily to decreases in litigation defense expenses of $695,000. ECO's selling, general and administrative expenses increased $264,000 due to expanded sales and marketing activity in Texas and California. As mentioned above, the parent company recorded a $250,000 loss in 1993 on the liquidation of certain collateral associated with a note receivable. In 1994 no similar loss was recorded; however, higher payroll, legal and insurance expenses were incurred. 12 Southwest Water Company and Subsidiaries consolidated statements of income
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Revenues $ 56,807,000 $ 50,932,000 $48,218,000 Operating Expenses: Direct operating expenses 43,371,000 38,818,000 35,961,000 Selling, general and administrative 9,004,000 8,265,000 8,836,000 - ----------------------------------------------------------------------------------------------------------------------------------- 52,375,000 47,083,000 44,797,000 Operating Income 4,432,000 3,849,000 3,421,000 Other Income (Expense): Interest expense (2,308,000) (2,220,000) (2,111,000) Interest income 76,000 81,000 182,000 Gain on sale of land (Note 13) 84,000 -- 67,000 Litigation settlements (Note 12) -- -- (1,437,000) Other 76,000 62,000 5,000 - ----------------------------------------------------------------------------------------------------------------------------------- (2,072,000) (2,077,000) (3,294,000) Income Before Income Taxes 2,360,000 1,772,000 127,000 Provision for income taxes (Note 7) 921,000 715,000 -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income 1,439,000 1,057,000 127,000 Dividends on Preferred Shares (Note 9) 27,000 28,000 28,000 ------------ ------------ ----------- Net Income Available for Common Shares $ 1,412,000 $ 1,029,000 $ 99,000 - -------------------------------------------------------------------------========================================================== Earnings per Common Share (Notes 8 and 9): Primary $ .55 $ .41 $ .04 - ----------------------------------------------------------------------------------------------------------------------------------- Fully diluted $ .55 $ .40 $ .04 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Dividends per Common Share (Note 9) $ .38 $ .38 $ .63 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted-Average Outstanding Common and Common Equivalent Shares (Notes 8 and 9): Primary 2,561,000 2,524,000 2,490,000 - ------------------------------------------------------------------------------------------------------------------------------------ Fully diluted 2,562,000 2,581,000 2,490,000 - -------------------------------------------------------------------------===========================================================
See accompanying notes to consolidated financial statements. 13 Southwest Water Company and Subsidiaries consolidated balance sheets
December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ assets Current Assets: Cash and cash equivalents $ 784,000 $ 828,000 Customers' accounts receivable 7,785,000 6,021,000 Other current assets 2,528,000 2,011,000 - --------------------------------------------------------------------------------------------------------------------------------- 11,097,000 8,860,000 Property, Plant and Equipment: Utility property, plant and equipment-- at cost (Note 3) 106,280,000 96,179,000 Contract operations property, plant and equipment-- at cost 6,273,000 5,923,000 - --------------------------------------------------------------------------------------------------------------------------------- 112,553,000 102,102,000 Less accumulated depreciation and amortization 32,286,000 29,966,000 - --------------------------------------------------------------------------------------------------------------------------------- 80,267,000 72,136,000 Other Assets 6,092,000 5,838,000 - --------------------------------------------------------------------------------------------------------------------------------- $ 97,456,000 $ 86,834,000 - ------------------------------------------------------------------------------------------------================================= liabilities and stockholders' equity Current Liabilities: Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 9,075,000 $ 3,491,000 Accounts payable 2,269,000 1,185,000 Other current liabilities (Note 5) 7,019,000 6,135,000 - --------------------------------------------------------------------------------------------------------------------------------- 18,363,000 10,811,000 Other Liabilities and Deferred Credits: Long-term debt (Note 6) 19,600,000 20,500,000 Advances for construction 8,200,000 8,804,000 Contributions in aid of construction 16,380,000 12,282,000 Deferred income taxes (Note 7) 3,238,000 3,260,000 Other liabilities and deferred credits 2,429,000 2,645,000 ================================================================================================================================= Total Liabilities and Deferred Credits 68,210,000 58,302,000 Commitments and Contingencies (Note 13) Stockholders' Equity (Notes 8, 9 and 10): Cumulative preferred stock 519,000 530,000 Common stock 26,000 24,000 Paid-in capital 18,715,000 17,241,000 Retained earnings 10,045,000 10,820,000 Unamortized value of restricted stock issued (59,000) (83,000) - --------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 29,246,000 28,532,000 - --------------------------------------------------------------------------------------------------------------------------------- $ 97,456,000 $ 86,834,000 - ------------------------------------------------------------------------------------------------=================================
See accompanying notes to consolidated financial statements. 14 Southwest Water Company and Subsidiaries consolidated statements of changes in common stockholders' equity
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1993, 1994 and 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock ------------------------------- Number Paid-in Retained of Shares Amount Capital Earnings - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1992 2,349,000 $ 23,000 $ 16,502,000 $ 12,228,000 Dividend reinvestment and employee stock purchase plans 31,000 1,000 474,000 Conversion of $5,000 face amount of 91/2% convertible subordinated debentures 2,000 5,000 Net income 127,000 Cash dividends declared (1,602,000) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 2,382,000 24,000 16,981,000 10,753,000 Dividend reinvestment and employee stock purchase plans 30,000 279,000 Conversion of $9,000 face amount of 91/2% convertible subordinated debentures 4,000 9,000 Restricted stock cancellation (2,000) (28,000) Net income 1,057,000 Cash dividends declared (990,000) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 2,414,000 24,000 17,241,000 10,820,000 Dividend reinvestment and employee stock purchase plans 27,000 1,000 234,000 Conversion of $30,000 face amount of 91/2% convertible subordinated debentures 12,000 30,000 5% stock dividend 123,000 1,000 1,210,000 (1,211,000) Net income 1,439,000 Cash dividends declared (1,003,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 2,576,000 $ 26,000 $ 18,715,000 $ 10,045,000 - ----------------------------------------------------================================================================================
See accompanying notes to consolidated financial statements. 15 Southwest Water Company and Subsidiaries consolidated statements of cash flows
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ cash flows from operating activities: Net income $ 1,439,000 $ 1,057,000 $ 127,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,701,000 3,605,000 3,586,000 Deferred income taxes (22,000) 268,000 110,000 Gain on sale of land (84,000) -- (67,000) Changes in assets and liabilities: Customers' accounts receivable (1,764,000) (199,000) (292,000) Other current assets (517,000) 112,000 (817,000) Accounts payable 1,084,000 (2,294,000) 1,859,000 Other current liabilities 884,000 168,000 1,153,000 Other, net (209,000) 176,000 (1,079,000) - ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments 3,073,000 1,836,000 4,453,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,512,000 2,893,000 4,580,000 - ----------------------------------------------------------------------------------------------------------------------------------- cash flows from investing activities: Additions to property, plant and equipment (9,858,000) (6,312,000) (5,777,000) Proceeds from sale of land 94,000 -- 70,000 Net redemption of U.S. Government securities -- 1,503,000 3,959,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (9,764,000) (4,809,000) (1,748,000) - ----------------------------------------------------------------------------------------------------------------------------------- cash flows from financing activities: Net borrowings of short-term debt 5,725,000 1,850,000 600,000 Contributions in aid of construction 1,619,000 225,000 121,000 Net proceeds from dividend reinvestment and employee stock purchase plans 231,000 274,000 465,000 Dividends paid (999,000) (986,000) (1,981,000) Payments on long-term debt (900,000) (900,000) (900,000) Payments on advances for construction (468,000) (698,000) (658,000) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 5,208,000 (235,000) (2,353,000) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (44,000) (2,151,000) 479,000 Cash and cash equivalents at beginning of year 828,000 2,979,000 2,500,000 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 784,000 $ 828,000 $ 2,979,000 - --------------------------------------------------------------------------========================================================= supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 2,310,000 $ 2,200,000 $ 2,148,000 Income taxes $ 1,092,000 $ 725,000 $ 799,000 Non-cash contributions in aid of construction and advances for construction conveyed to Company by developers $ 2,008,000 $ 2,372,000 $ 1,356,000 - --------------------------------------------------------------------------==========================================================
See accompanying notes to consolidated financial statements. 16 Southwest Water Company and Subsidiaries notes to consolidated financial statements note 1. significant accounting policies Description of Business: Southwest Water Company (the Company) and its subsidiaries 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 Suburban Water Systems (Suburban), New Mexico Utilities, Inc. (NMUI) and ECO Resources, Inc. (ECO). 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. This affects 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. Recognition of Revenues: 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. Revenues from contract operations are recognized as services are performed. Cash and Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standard No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." At December 31, 1995, the Company had no derivative financial instruments, financial instruments with off-balance sheet risk or financial instruments with concentrations of credit risk. Property, Plant and Equipment: The cost of additions to utility plant includes labor, material and interest. Interest of $122,000, $56,000 and $86,000 was capitalized in 1995, 1994 and 1993, 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 of 3.2%, 3.3% and 3.4% of average gross depreciable plant was incurred during 1995, 1994 and 1993, respectively. Property, plant and equipment used in contract operations is depreciated on the straight-line method over estimated useful lives ranging from five to 30 years. Other Assets: Included in other assets are regulatory assets representing amounts that will be recovered from utility customers through rate adjustments which have been authorized by the CPUC and NMPUC. Also included is land and associated costs 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. Effective January 1, 1996, the Company will be required to adopt Statement of Financial Accounting Standard No. 121 (SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS No. 121, the Company will be required to review for impairment long-lived assets, including regulatory assets, as well as costs excluded from rate base by regulators. The Company anticipates that SFAS No. 121 will not have a material impact on the Company's results of operations or financial condition. Income Taxes: Deferred income taxes have been provided for the effects of differences between financial reporting and income tax reporting. The most significant items are the tax effects of accelerated depreciation and advances for construction and contributions in aid of construction. The Company has adopted Statement of Financial Accounting Standard 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 will be recovered from or refunded to utility customers through future 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 as 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. Reclassifications: Certain reclassifications have been made to the 1994 and 1993 consolidated financial statements to conform with the 1995 presentation. 17 Southwest Water Company and Subsidiaries notes to consolidated financial statements note 2. acquisition and disposition of businesses In 1993, ECO purchased from an unrelated party all of the common stock of Southern Municipal Services, Inc. (SMS) for $275,000. SMS provided contract operations and maintenance services for municipal utility districts. The transaction was accounted for under the purchase method. Goodwill of $275,000 was recorded on the transaction and is being amortized over 10 years on a straight-line basis. The operations of SMS have been included in the Company's consolidated financial statements since September 1993. In 1993, the Company recorded a nonrecurring, pretax charge of $250,000, related to a loss on the liquidation of certain collateral associated with a note receivable from a former subsidiary. note 3. utility property, plant and equipment The components of utility property, plant and equipment at December 31, 1995 and 1994, are as follows: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Land and land rights $ 522,000 $ 494,000 Source of supply 9,976,000 9,330,000 Pumping and purification 8,191,000 7,797,000 Transmission and distribution 77,794,000 70,553,000 General (including intangibles) 6,900,000 6,556,000 Construction work in progress 2,897,000 1,449,000 - -------------------------------------------------------------------------------- $ 106,280,000 $ 96,179,000 - ----------------------------------============================================== At December 31, 1995, substantially all of the Company's utility plant is pledged as collateral for the First Mortgage Bonds issued by the Company (Note 6). Included in the general utility plant amounts in 1995 and 1994 is $698,000 for investments in two not-for-profit mutual water companies. The investments are recorded at cost and entitle the Company to certain water rights. The Company's investment in one of these mutual water companies is approximately 32%; however, the Company does not exercise significant operating and financial control over this mutual water company. The Company purchased water from these mutual water companies at a cost of approximately $1,511,000, $1,050,000 and $1,515,000 in 1995, 1994 and 1993, respectively. note 4. lines of credit At December 31, 1995, the Company had three revolving lines of credit totaling $14,500,000 that expire on various dates through 1996. During 1995, the Company increased its short-term borrowing capacity by $4,000,000. All borrowings are unsecured. Interest charged on borrowings under the lines of credit is at the banks' prime rates. Two of the lines of credit permit borrowing a minimum amount of $500,000 for a fixed period of time at an interest rate that is lower than the banks' existing prime rates. All of the lines of credit contain certain financial restrictions, and one of the lines of credit requires a commitment fee of 1% per year of the unused portion of the available line of credit, calculated and payable on a quarterly basis. The Company expects to renew and update these lines of credit in the normal course of business. A summary of borrowings on the lines of credit is presented below: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Notes payable to banks at December 31 $8,175,000 $2,450,000 Weighted-average interest rate at December 31 7.6% 7.6% Maximum amount of borrowings outstanding at any month-end $8,175,000 $3,750,000 Average borrowings $5,270,000 $2,758,000 Weighted-average interest rate 7.8% 6.1% - -------------------------------------------------------------------------------- note 5. other current liabilities Included in other current liabilities at December 31, 1995 and 1994, are the following: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Accrued salaries, wages and benefits $ 1,682,000 $ 1,425,000 Purchased water 985,000 1,093,000 Current portion of advances for construction 570,000 449,000 Accrued interest payable 565,000 570,000 Franchise and other taxes 555,000 650,000 Production cost balancing accounts 529,000 731,000 Accrued income taxes payable 313,000 -- Accrued dividends payable 252,000 249,000 Other 1,568,000 968,000 - -------------------------------------------------------------------------------- $ 7,019,000 $ 6,135,000 - ------------------------------------------====================================== note 6. long-term debt The long-term debt outstanding at December 31, 1995 and 1994, is summarized as follows: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Suburban First Mortgage Bond, Series A, due 2006, at 8.93% interest rate, with semiannual interest payments $ 10,500,000 $ 11,400,000 Suburban First Mortgage Bond, Series B, due 2022, at 9.09% interest rate, with semiannual interest payments 8,000,000 8,000,000 NMUI First Mortgage Bond, Series A, due 2002, at 8.86% interest rate, with semiannual interest payments 2,000,000 2,000,000 Convertible subordinated debentures, due August 1995, at 9.50% interest rate -- 141,000 - -------------------------------------------------------------------------------- 20,500,000 21,541,000 Less current maturities 900,000 1,041,000 - -------------------------------------------------------------------------------- Long-term debt $ 19,600,000 $ 20,500,000 - ------------------------------------============================================ 18 Southwest Water Company and Subsidiaries notes to consolidated financial statements 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. On October 2, 2000 and thereafter, the bond may be redeemed at the option of the Company at a price of par plus a call premium. Suburban's First Mortgage Bond, Series B, and NMUI's First Mortgage Bond, Series A, 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 provisions of the 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, 1995 and 1994, the combined indenture limits totaled $7,964,000 and $6,100,000, respectively. The 9.50% convertible subordinated debentures matured and were retired on August 15, 1995. Prior to their redemption, the debentures were convertible into common stock at the rate of one share for each $2.55 of principal. At December 31, 1994, there were 55,000 common shares reserved for the conversion. Aggregate annual maturities and sinking fund requirements of all long-term debt for the five years ending December 31, 2000, are $900,000 each year. note 7. income taxes The components of the current and deferred income tax provisions are as follows: - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Current tax expense: Federal $ 803,000 $ 395,000 $ 278,000 State 356,000 73,000 252,000 - -------------------------------------------------------------------------------- 1,159,000 468,000 530,000 - -------------------------------------------------------------------------------- Deferred income taxes (benefits): Depreciation 965,000 261,000 1,606,000 Production cost balancing accounts 80,000 89,000 (379,000) Investment tax credits 26,000 (37,000) (596,000) Contributions in aid of construction and advances for construction (1,148,000) (539,000) (40,000) Gains on condemnation of land (56,000) (65,000) (18,000) Reserves (56,000) (42,000) 165,000 Deferred debt expenses (6,000) (9,000) (62,000) Litigation settlements -- 570,000 (570,000) Other, net 173,000 40,000 4,000 (22,000) 268,000 110,000 Change in regulatory assets and regulatory liabilities, net (167,000) 28,000 (591,000) Investment tax credit amortization (49,000) (49,000) (49,000) - -------------------------------------------------------------------------------- $ 921,000 $ 715,000 $ -- - ---------------------------------=============================================== A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows: - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Provision computed at statutory rates 34 % 34% 34 % Depreciation 3 % 4% 60 % Amortization of goodwill 1 % 2% 20 % State income taxes, net of federal tax benefit 2 % 2% (64)% Investment tax credits (2)% (3)% (38)% Other, net 1 % 1% (12)% - -------------------------------------------------------------------------------- 39 % 40% -- % - ---------------------------------=============================================== Net deferred income taxes consist of the following at December 31, 1995 and 1994: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Deferred income tax assets: Contributions in aid of construction and advances for construction $ 3,393,000 $ 2,245,000 Investment tax credits 607,000 633,000 Production cost balancing accounts 210,000 290,000 Reserves 193,000 137,000 Other 192,000 278,000 - -------------------------------------------------------------------------------- 4,595,000 3,583,000 - -------------------------------------------------------------------------------- Deferred income tax liabilities: Depreciation (6,542,000) (5,577,000) Gains on condemnation of land (882,000) (938,000) Deferred debt expenses (125,000) (131,000) Other (284,000) (197,000) - -------------------------------------------------------------------------------- (7,833,000) (6,843,000) - -------------------------------------------------------------------------------- Net deferred income taxes $ (3,238,000) $ (3,260,000) - ---------------------------------=============================================== Management regularly reviews the recoverability of deferred income tax assets and has determined that no valuation allowances were necessary at December 31, 1995 or 1994. 19 Southwest Water Company and Subsidiaries notes to consolidated financial statements note 8. earnings per share Primary earnings per share are calculated using the weighted-average number of shares and dilutive common equivalent shares outstanding during each year after recognition of dividend requirements on preferred shares. Common equivalent shares arise from stock options. In 1994 and 1993, fully diluted earnings per share were computed based upon the average number of common shares and dilutive common equivalent shares outstanding, assuming the 9.50% convertible subordinated debentures were converted at the beginning of the year and the related interest for the year, net of income taxes, was eliminated. In 1995, the 9.50% convertible debentures were retired. note 9. stockholders' equity The Company is currently authorized to issue 10,000,000 common shares at a par value of $.01 per share. There were 2,453,386 and 2,414,061 shares outstanding at December 31, 1995 and 1994, respectively. The Company is also currently authorized to issue 250,000 preferred shares at a par value of $.01 per share. There were 10,3731/4 Series A preferred shares outstanding at both December 31, 1995 and 1994. The holders of Series A shares are entitled to annual dividends of $2.625 per share. Series A shares are callable by the Company at a price equal to $52 per share and have a preference in liquidation of $50. There were 220 Series D preferred shares outstanding at December 31, 1994. The holders of Series D shares were entitled to annual dividends of $2.75 per share. The Company fully redeemed the Series D shares in January 1995. In December 1995, the Company declared a 5% stock dividend of 122,669 shares to stockholders of record on January 2, 1996. At December 31, 1995, retained earnings were charged approximately $1,211,000, which represents the market value of the shares issued using the closing price of the Company's common stock on January 2, 1996 ($97/8). A corresponding entry of approximately $1,210,000 was recorded to paid-in capital. The weighted-average outstanding common shares, the primary and fully diluted earnings per share, as well as cash dividends per common share, shown in the Company's Consolidated Statements of Income, have been restated to reflect the 5% stock dividend. The Company has a dividend reinvestment and stock purchase plan that allows common stockholders the option of receiving their dividends in cash or common stock at a 5% discount from the market value. The plan permits optional cash purchases of stock at current market values to a maximum of $3,000 per quarter. At December 31, 1995, 159,638 common shares were reserved for issuance under this plan. note 10. stock compensation plans At December 31, 1995, the Company has two stock-based compensation plans: a Stock Option Plan and an Employee Stock Purchase Plan. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related Interpretations in accounting for these plans. For the restricted stock issued under the Stock Option Plan, compensation expense of $24,000, $13,000 and $29,000 was recorded in 1995, 1994 and 1993, respectively. Compensation expense of approximately $3,300, $5,400 and $9,500 was recorded in 1995, 1994 and 1993, respectively, for the Company's Employee Stock Purchase Plan. If compensation cost for the Company's two stock-based compensation plans had been determined consistent with FASB Statement No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been as follows: - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- Net income available for As reported $ 1,412,000 common shares Pro forma $ 1,403,000 - -------------------------------------------------------------------------------- Primary earnings per share As reported $ 0.55 Pro forma $ 0.55 - -------------------------------------------------------------------------------- Fully diluted earnings per share As reported $ 0.55 Pro forma $ 0.55 - -------------------------------------------------------------------------------- Stock Option Plan (the Plan): In 1988, the stockholders approved the Plan and reserved 150,000 shares for issuance under the Plan. In 1993, the stockholders approved an amendment to the Plan (the Amendment), which provided for an increase of 100,000 shares reserved for issuance under the Plan, and extended the grant dates to February 17, 2003. In addition, the Amendment eliminated any future grants of restricted stock and amended certain provisions with respect to the outstanding restricted stock issued. A total of 262,500 shares are authorized for issuance under the Plan, including adjustment for the 5% stock dividend on January 2, 1996. The Plan allows the Company to grant nonqualified stock options to officers, certain directors and employees at exercise prices not less than the fair market value of the Company's common stock on the last trading date preceding the date of grant. Generally, options vest over a period of five years and expire 10 years from the date of grant. Restricted stock issued to officers is held in escrow until the restrictions lapse. Restricted stock issued prior to October 22, 1991, vests 10 years after grant. Restricted stock issued after October 22, 1991, was subject to repurchase by the Company. Unearned compensation of $238,000 related to the issuance of 15,488 shares (adjusted for the 5% stock dividend on January 2, 1996) of restricted stock is being amortized over the vesting period. During 1994, 2,000 shares were repurchased and cancelled by the Company after the resignation of an officer. During 1993, 3,285 shares of restricted stock were released from escrow to a former officer of Suburban. In the table on page 21, 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 1995 and 1994: dividend yield of 4.6%; expected volatility of 34%; risk-free interest rate of 6.6%; and an expected life of eight years. 20 A summary of the status of the Company's Plan as of December 31, 1995, 1994 and 1993, and changes during the years ended on those dates is presented below:
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 117,224 $ 14.08 124,268 $ 14.74 124,583 $ 14.74 Granted 33,900 8.44 23,630 9.29 -- -- Forfeited (12,548) 13.98 (30,674) 13.05 (315) 14.76 ------- -------- -------- Outstanding at end of year 138,576 12.71 117,224 14.08 124,268 14.74 - ------------------------------------------======== ======== ======== Options exercisable at year-end 80,852 72,629 64,218 - ------------------------------------------======== ======== ======== Weighted-average fair value of options granted during the year $ 2.44 $ 2.69 $ -- - ------------------------------------------======== ======== ========
- -------------------------------------------------------------------------------- The following table summarizes information about fixed stock options outstanding at December 31, 1995: - ------------------------------------------------------------------------------------------ ---------------------------------- Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------ ---------------------------------- Number Weighted-Average Number Outstanding Remaining Contract- Weighted-Average Exercisable Weighted-Average Range of Exercise Prices at 12/31/95 ual Life in Years Exercise Price at 12/31/95 Exercise Price - ------------------------------------------------------------------------------------------ ---------------------------------- $8 to $10 50,370 9.0 $ 8.74 3,651 $ 9.29 12 to 15 48,201 4.9 14.03 39,716 14.17 15 to 17 40,005 4.6 16.10 37,485 16.13 - ------------------------------------------------------------------------------------------ ---------------------------------- $8 to $17 138,576 6.3 $12.71 80,852 $ 14.86 - ----------------------------------------------------------------------------------------- ----------------------------------
Employee Stock Purchase Plan (ESPP): The Company has an ESPP, approved by the stockholders, that allows eligible employees to purchase common stock through payroll deductions in an amount 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 beginning of period or end of period stock price. Under the ESPP, the Company issued 3,277 shares, 5,851 shares and 3,584 shares to employees in 1995, 1994 and 1993, respectively. At December 31, 1995, 186,092 common shares were reserved for issuance under the ESPP. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1995: dividend yield of 4.6%; an expected life of one year; expected volatility of 34%; and risk-free interest rate of 6.6%. The weighted-average fair value of those purchase rights granted in 1995 was $1.72, which resulted in compensation expense of $5,640 and is included in the pro forma net income available for common shares amount shown in the table on page 20. note 11. employee benefit plans Defined Benefit Plan: The Company has a noncontributory 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. The Company funds annually the minimum required statutory amount. In January 1995 and 1994, the Company contributed $531,000 and $516,000, respectively, to the pension plan. No contributions were required in 1993. The benefits are based on employees' years of service and their average compensation during the highest five consecutive years of the last 10 years before retirement. Benefits are reduced if a participant retires early. - -------------------------------------------------------------------------------- Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 406,000 $ 548,000 $ 357,000 Interest cost on projected benefit obligation 556,000 555,000 484,000 Actual return on plan assets (912,000) 303,000 (750,000) Net amortization and deferral 243,000 (961,000) 126,000 - -------------------------------------------------------------------------------- Net pension expense $ 293,000 $ 445,000 $ 217,000 - -----------------------------------============================================= 21 Southwest Water Company and Subsidiaries notes to consolidated financial statements The funded status at December 31, 1995 and 1994, is reconciled to accrued expense as follows: - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation $ (5,699,000) $(4,687,000) Effect of increase in compensation levels (1,935,000) (1,855,000) - -------------------------------------------------------------------------------- Projected benefit obligation for service rendered through December 31 (7,634,000) (6,542,000) Plan assets at fair value 8,288,000 7,121,000 - -------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 654,000 579,000 Unrecognized net asset at transition date (872,000) (997,000) Unrecognized prior service cost (174,000) (185,000) Unrecognized net gain from past experience, different from that assumed and effects of changes in assumptions (40,000) (67,000) - -------------------------------------------------------------------------------- Accrued expense $ (432,000) $ ( 670,000) - --------------------------------------------------============================== Included in the accumulated benefit obligation are vested benefits of $5,634,000 and $4,583,000 at December 31, 1995 and 1994, respectively. Approximately 90% of pension plan assets are invested in two mutual funds consisting of investments in stocks, bonds and money market investments, and a group retirement policy consisting of a guaranteed insurance contract. The remaining 10% of pension plan assets are invested primarily in the Company's common stock. The pension plan owns 67,267 common shares of the Company (after adjusting for the 5% stock dividend on January 2, 1996), which had a market value of approximately $647,000 and $545,000 at December 31, 1995 and 1994, respectively. The pension plan received dividends on these shares of approximately $26,000 in 1995 and 1994, and $53,000 in 1993. The following represent actuarial assumptions used at December 31, 1995, 1994 and 1993: - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Discount rate 7.5% 8.5% 7.25% Compensation level increase 4.5% 5.5% 6.0 % Expected long-term rate of return on assets 8.0% 7.5% 7.5 % - -------------------------------------------------------------------------------- Defined Contribution Plans: The Company has established a 401(k) profit-sharing plan (ECO 401(k) Plan) covering employees of its contract operations business. The ECO 401(k) Plan provides for monthly enrollment by employees after the completion of three months of service. Participants may elect to contribute up to 15% of their salary to the ECO 401(k) 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 401(k) Plan were $104,000, $91,000 and $77,000 in 1995, 1994 and 1993, respectively. The assets of the ECO 401(k) Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds and money market investments. The Company also has established a 401(k) plan (the Utility 401(k) Plan) covering employees of the parent company, Suburban and NMUI. The Utility 401(k) Plan provides for monthly enrollment after the completion of three months of service and allows participants to contribute up to 15% of their salary. The Utility 401(k) Plan does not provide for Company contributions. The assets of the Utility 401(k) Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds and money market investments. note 12. litigation settlements In January 1994, Suburban reached out-of-court settlements of two lawsuits arising from a chlorine gas leak that occurred in October 1990 at a water distribution facility, and made an aggregate cash payment of approximately $1,437,000. In 1993, the Company recorded a nonrecurring charge of $.35 (after adjusting for the 5% stock dividend on January 2, 1996) per fully diluted share related to the cash payment; however, the full impact on 1993 earnings was $.54 (after adjusting for the 5% stock dividend on January 2, 1996) per fully diluted share, including the impact of $822,000 in defense costs. At the date of the chlorine gas incident, the Company and Suburban maintained liability insurance coverage; however, the primary and excess liability insurance carrier declined to defend or indemnify Suburban on the basis of applicable exclusions in the policies. note 13. commitments and contingencies The Company leases certain equipment and office facilities under operating leases that expire through 2003. Aggregate rental expense under all operating leases approximated $1,989,000 in 1995, $1,724,000 in 1994 and $1,244,000 in 1993. At December 31, 1995, the minimum rental commitments under existing noncancelable operating leases are as follows: 1996 - $2,029,000; 1997 - $1,735,000; 1998 - $1,183,000; 1999 - $767,000; 2000 - $445,000; and thereafter - - $725,000. The Company is the subject of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its consolidated financial condition, results of operations or cash flow. From 1989 through 1995, Suburban recorded pretax gains on five land transactions which aggregated $1,900,000. In 1994, the CPUC ruled on the 1989 sale and allowed Suburban to retain $210,000 in income, in accordance with CPUC accounting regulations, as opposed to distributing it to ratepayers in the form of water rate reductions. The Water Utility Infrastructure Improvement Act of 1995 provides that water utilities selling real property that is no longer necessary or useful may invest the net proceeds in utility plant. Any net proceeds (and the interest thereon) not invested in an eight-year period shall be allocated to ratepayers. While Suburban's remaining transactions from the 1989-1995 period are subject to CPUC review, the proceeds were invested in utility plant, and, therefore, management believes these gains should not affect water rates. No regulatory liability has been recorded in the accompanying consolidated financial statements. 22 Southwest Water Company and Subsidiaries independent auditors' report To the Board of Directors and Stockholders of Southwest Water Company: We have audited the accompanying consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in common stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Los Angeles, California January 23, 1996 report of management The consolidated financial statements and other financial information contained in this report have been prepared by the management of Southwest Water Company, which has directed considerable effort to ensure the integrity and objectivity of such information. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles deemed appropriate under the circumstances and include amounts based on the best estimates and judgments of management. All of the financial information in this report is consistent with that in the consolidated financial statements. The Company maintains a system of internal accounting control designed to provide reasonable assurance that assets are protected from improper use and to produce records sufficient to prepare reliable financial information. The system is augmented by careful selection and training of qualified personnel, division of responsibilities, delegation of authority and communication programs for the entire organization that demand high standards of professional and financial integrity from management. The Company's independent auditors are responsible, under generally accepted auditing standards, to perform a review of the system of internal accounting control in sufficient detail to design their audit tests and to express their opinion on the consolidated financial statements in accordance with such standards. The Board of Directors, through its Audit Committee consisting solely of outside directors, oversees management's responsibilities in the preparation of financial statements and selects the independent auditors, subject to stockholder ratification. The Audit Committee meets regularly with management and the independent auditors. The Company's independent auditors have full and free access to the Audit Committee. /s/ Anton C. Garner /s/ Peter J. Moerbeek Anton C. Garnier Peter J. Moerbeek President and Vice President Finance and Chief Executive Officer Chief Financial Officer 23 Southwest Water Company and Subsidiaries unaudited quarterly financial information
- ------------------------------------------------------------------------------------------------------------------------------------ (in thousands except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ 1995 Quarter Ended(1) March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 11,290 $ 13,329 $ 16,848 $15,340 Operating income 151 1,003 1,943 1,335 Net income (loss) (171) 248 806 556 Net income (loss) available for common shares (178) 241 799 550 Primary earnings (loss) per common share (0.07) .09 .31 .21 Fully diluted earnings (loss) per common share (0.07) .09 .31 .21 - ------------------------------------------------------------------------------------------------------------------------------------ 1994 Quarter Ended(1) March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 11,102 $ 12,694 $ 14,533 $12,603 Operating income 262 925 1,623 1,039 Net income (loss) (131) 241 650 297 Net income (loss) available for common shares (138) 234 643 290 Primary earnings (loss) per common share (.06) .09 .25 .11 Fully diluted earnings (loss) per common share (.06) .09 .25 .11 - ------------------------------------------------------------------------------------------------------------------------------------
(1) The fluctuations in operating revenues and operating income between quarters reflect the seasonal nature of the water utility and contract operations. Primary and fully diluted earnings (loss) per common share have been restated to reflect the 5% stock dividend on January 2, 1996. market and dividend information The following table sets forth the range of market prices of Southwest Water Company's common shares. Such prices reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions. High and low market price ranges shown below, as well as cash dividends, have been restated to reflect the 5% stock dividend on January 2, 1996. The shares are traded on the Nasdaq Stock Market -- symbol SWWC. The current quarterly dividend rate is $.10 per share. At December 31, 1995, there were 2,029 stockholders of record.
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Market Price Range Market Price Range Dividends High Low Dividends High Low - ------------------------------------------------------------------------------------------------------------------------------------ 1st Quarter $.095 $8 37/64 $7 9/64 $ .095 $10 23/32 $8 21/64 2nd Quarter .095 9 3/64 7 3/8 .095 11 43/64 8 3/32 3rd Quarter .095 9 3/64 7 5/8 .095 10 15/32 7 55/64 4th Quarter .095 9 17/32 7 55/64 .095 9 9/32 7 9/64 - ------------------------------------------------------------------------------------------------------------------------------------
24 EX-21.1 4 LIST OF REGISTRANT'S SUBSIDIARIES EXHIBIT 21.1 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT (1)
Jurisdiction of Name of Subsidiary Incorporation Parent - ----------------------------- ------------- ----------------------- Suburban Water Systems California Southwest Water Company New Mexico Utilities, Inc. New Mexico Southwest Water Company ECO Resources, Inc. Texas Southwest Water Company Water Suppliers Mobile Communication Service California Suburban Water Systems SW Resource Management Company Delaware Southwest Water Company SOCI, Inc. (2) Delaware Southwest Water Company SW Operating Services Co. (2) Delaware Southwest Water Company Southwest Environmental Laboratories, Inc. (2) Texas ECO Resources, Inc. Southern Municipal Services, Inc. (2) Texas ECO Resources, Inc.
All above listed subsidiaries have been consolidated in the Registrant's financial statements. (1) As of March 29, 1995 (2) Inactive EX-23.1 5 CONSENT OF KPMG PEAT MARWICK [LETTERHEAD OF KPMG PEAT MARWICK LLP] EXHIBIT 23.1 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 and 33-73174) on Form S-8 of Southwest Water Company of our reports dated January 23, 1996 relating to the consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in common stockholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1995, which reports appear in the December 31, 1995 annual report on Form 10-K of Southwest Water Company. KPMG Peat Marwick LLP Los Angeles, California March 29, 1996 EX-27 6 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 784,000 0 7,977,000 192,000 0 11,097,000 112,553,000 32,286,000 97,456,000 18,363,000 19,600,000 0 519,000 26,000 28,701,000 97,456,000 0 56,807,000 0 43,371,000 9,004,000 245,000 2,308,000 2,360,000 921,000 1,439,000 0 0 0 1,439,000 0.55 0.55
-----END PRIVACY-ENHANCED MESSAGE-----