-----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, Ha0cwTgzaOXyj1GBLvxvv4T09sCp93ETSfvM1ZXh/abyPajNRVKBnR0gaE2ZhajR AgD4DUzTt5FntFcFLTdHwQ== 0000898430-97-001877.txt : 19970506 0000898430-97-001877.hdr.sgml : 19970506 ACCESSION NUMBER: 0000898430-97-001877 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970505 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08176 FILM NUMBER: 97595307 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-Q 1 FORM 10-Q DATED 3-31-1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ------- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ------- EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission file number: 0-8176 SOUTHWEST WATER COMPANY [LOGO] (Exact name of registrant as specified in its charter) Delaware 95-1840947 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (Address of principal executive offices) (Zip Code) (818) 915-1551 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 2, 1997, there were 3,137,538 common shares outstanding. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
Part I. Financial Information: Page No. - ------- ---------------------- -------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Income - Three months ended March 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 Part II. Other Information: - -------- ------------------ Item 1. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1997 1996 ----------------- ---------------- (Unaudited) (In thousands) ASSETS Current Assets: Cash and cash equivalents $ 637 $ 790 Customers' accounts receivable, net 8,874 8,216 Other current assets 2,127 2,086 --------- --------- 11,638 11,092 Property, Plant and Equipment: Utility property, plant and equipment - at cost 121,978 119,731 Contract operations property, plant and equipment - at cost 6,510 6,448 --------- --------- 128,488 126,179 Less accumulated depreciation and amortization 35,786 34,765 --------- --------- 92,702 91,414 Other Assets 8,749 8,910 --------- --------- $ 113,089 $ 111,416 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and bank notes payable $ 6,880 $ 6,089 Accounts payable 1,715 1,513 Other current liabilities 7,639 7,569 --------- --------- 16,234 15,171 Other Liabilities and Deferred Credits: Long-term debt 30,700 30,700 Advances for construction 7,692 7,719 Contributions in aid of construction 21,924 21,556 Deferred income taxes 3,779 3,398 Other liabilities and deferred credits 2,475 2,472 Total Liabilities and Deferred Credits 82,804 81,016 Stockholders' Equity: Cumulative preferred stock 517 517 Common stock 31 31 Paid-in capital 26,263 26,159 Retained earnings 3,504 3,728 Unamortized value of restricted stock issued (30) (35) --------- --------- Total Stockholders' Equity 30,285 30,400 --------- --------- $ 113,089 $ 111,416 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, ---------------------------- 1997 1996 ---------- ---------- (In thousands except per share amounts) Operating Revenues $ 15,432 $ 13,989 Operating Expenses: Direct operating expenses 11,950 11,275 Selling, general and administrative 2,678 2,311 -------- --------- 14,628 13,586 -------- --------- Operating Income 804 403 Other Income (Expense): Interest expense (782) (659) Interest income 33 31 Other 55 10 -------- -------- (694) (618) -------- -------- Income (Loss) Before Income Taxes 110 (215) Income tax provision (benefit) 46 (90) -------- -------- Net Income (Loss) 64 (125) Dividends on preferred shares (7) (7) -------- -------- Net Income (Loss) Available for (Applicable to) Common Shares $ 57 ($ 132) ======== ======== Earnings (Loss) Per Common Share (Note 6) $ 0.02 ($ 0.04) ======== ======== Cash Dividends Per Common Share (Note 6) $ 0.090 $ 0.083 ======== ======== Weighted Average Outstanding Common Shares (Note 6) 3,128 3,098 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------------------------- 1997 1996 --------------- ---------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 843 $( 202) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (2,411) (2,662) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributions in aid of construction 822 288 Net borrowings of short-term debt 791 2,745 Net proceeds from dividend reinvestment and employee stock purchase plans 93 64 Dividends paid (287) (254) Payments on advances for construction (4) (43) ------- ------- Net cash provided by financing activities 1,415 2,800 ------- ------- Net decrease in cash and cash equivalents (153) (64) Cash and cash equivalents at beginning of year 790 784 ------- ------- Cash and cash equivalents at end of period $ 637 $ 720 ======= ======= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 538 $ 605 Income taxes $ 263 $ 454 Depreciation and amortization $ 1,047 $ 978 Non-cash contributions in aid of construction conveyed to Company by developers -- $ 56
See accompanying notes to condensed consolidated financial statements. 5 SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) 1. Southwest Water Company ("the Company") and its subsidiaries provide water management services through contract and utility operations. The unaudited consolidated condensed financial statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of the Company as of March 31, 1997, and the Company's results of operations for the three months ended March 31, 1997. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the 1996 financial statements to conform to the 1997 presentation. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3. There is seasonality to the water management services industry so that the results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year. The first quarter of each year is normally the lowest in terms of average customer water usage for the Company's water utilities. Rainfall and weather conditions affect utility operations, and utility revenues usually peak during the second and third quarters of each year. The Company's contract operations business can also be seasonal in nature. Heavy rainfall during a quarter hampers the Company's ability to perform billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. 4. For the three months ended March 31, 1997 and 1996, earnings (loss) per common share were calculated using the weighted average number of common shares and dilutive common equivalent shares outstanding during the period after recognition of dividend requirements on preferred shares. Common equivalent shares arise from stock options, but since common stock equivalents do not exceed 3% of weighted average common shares outstanding, primary and fully diluted earnings are not reported separately. 5. The Company will be subject to Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), for interim and annual financial statements issued after December 15, 1997. SFAS No. 128 simplifies the standards for computing earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. Diluted EPS replaces fully diluted EPS and reflects the potential dilution that could occur if common stock equivalents were exercised or converted into common stock that could share in the earnings of the entity. SFAS No. 128 requires a dual presentation of basic and diluted EPS by entities with complex capital structures. 6. The 1996 first quarter loss per common share, cash dividends per common share and weighted average outstanding common shares, as previously reported, have been restated to reflect a 20% stock dividend granted to stockholders of record on January 2, 1997. 7. As discussed in the Company's 1996 Annual Report on Form 10-K, the Company was approached by the City of Albuquerque ("the City") during the first quarter of 1997 concerning the potential sale of New Mexico Utilities, Inc.'s ("NMUI") assets to the City. Under New Mexico state law, municipalities have the right to acquire private water utility plants and systems within their territorial limits by condemnation, but must pay fair value if the election to proceed with a condemnation is made. The current expression of interest by the City is a continuation of intermittent discussions 6 held over a number of years as the City has expanded its borders. Discussions with the City are continuing; however, at this time, management cannot predict whether an agreement for the sale of NMUI's assets is likely or whether the City would make an election to proceed with condemnation if an agreement were not reached. Therefore, management cannot predict any price the City would pay for the assets if it maintains its interest in concluding a transaction. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: Liquidity and capital resources of the Company are influenced primarily by construction expenditures at Suburban Water Systems ("Suburban") for the replacement and renovation of existing water utility facilities and by construction expenditures for new water and wastewater utility facilities at NMUI. To a lesser extent, liquidity may also be influenced by the Company's continuing investment in ECO Resources, Inc. ("ECO"). At March 31, 1997, the Company had cash and cash equivalent balances totaling $637,000. The Company has three separate lines of credit from different commercial banks. As of March 31, 1997, the Company had a total line of credit capacity of $16,000,000, and unused lines of credit of $10,020,000. The amount of additional borrowing capacity available under current short-term lines of credit is limited by financial covenants that restricted additional borrowing at March 31, 1997 to a maximum of $7,532,000. Each of the lines of credit expires during 1997, and each is expected to be renewed in the normal course of business. During the first quarter of 1997, the Company borrowed a net amount of $791,000 on its lines of credit primarily to fund construction expenditures at its utility operations. In 1996, the Company completed a long-term First Mortgage Bond financing for $12,000,000. The portion of proceeds not used to repay the Company's short-term debt will be used to fund ongoing construction projects at the utilities. Among other financial covenants, the First Mortgage Bond Indentures limit the amount of utility property that may be pledged for additional secured borrowings. At March 31, 1997, the additional secured borrowing capacity under these indentures was approximately $23,610,000. During the first quarter of 1997, the Company's additions to property, plant and equipment were $2,411,000, representing a decrease of $307,000 over the same period in 1996. Developers made cash contributions in aid of construction ("CIAC") totaling $822,000. The remaining $1,589,000 was funded by cash flow from operations and short-term borrowing. Short-term borrowing is anticipated to continue throughout 1997 in order to meet construction requirements not funded by bond proceeds, operations or CIAC. The Company anticipates that its available short-term borrowing capacity and its cash flow generated from operations will be sufficient to fund its activities for the next year. If additional cash were needed to fund improvements or to acquire additional assets, the Company would consider alternative sources, including long-term financing. The amount and timing of any future long-term financing will depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban and NMUI. If the Company were unable to renew its existing lines of credit or obtain additional long-term financing, capital spending would be reduced or delayed until new arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. 7 REGULATORY AFFAIRS AND INFLATION: Regulation: The rates and operations of the Company's utilities are regulated by the California Public Utilities Commission ("CPUC") and the New Mexico Public Utility Commission ("NMPUC"). The rates allowed are intended to provide the utilities an opportunity to earn a reasonable return on common equity. The Company anticipates that future construction expenditures and increased direct operating expenses will require periodic requests for rate increases. Suburban received CPUC approval for a 4.25% ($1,100,000) general rate increase effective April 24, 1996, as well as a 2.62% ($705,000) step increase effective January 1, 1997. Suburban is entitled to file for an additional step increase which, if approved, would become effective January 1, 1998. Tax Legislation: In 1996, the California legislature enacted Senate Bill 1099, which became effective January 1, 1997. This legislation provides that water utilities which sold excess property and reinvested the sale proceeds within eight years in the utility's plant do not need to allocate any portion of the gain on sale to the ratepayers. From 1990 through 1995, Suburban recorded pretax gains on land sales of four parcels of excess real property totaling $1,690,000. Since the proceeds of the four land sales were reinvested in utility plant, the gains should not be subject to allocation to the ratepayers. In 1996, legislation was enacted that changed the federal tax treatment of CIAC. This legislation repealed the requirement to include CIAC as a component of taxable income, eliminating the requirement for the Company to pay taxes on CIAC as it is received. The new legislation also eliminates the depreciation deduction for CIAC, and sets forth new requirements for the depreciation method and useful life to be used for most non-CIAC water utility property. The law was effective for CIAC received after June 12, 1996. The net impact of the repeal of the income tax on CIAC, combined with the changes in depreciation calculations, is expected to favorably impact NMUI's cash flow, since significant amounts of CIAC are expected in its fast-growing service area. The effect on Suburban's earnings is not expected to be significant; however, future cash flow could be negatively affected by the change in depreciation methods since Suburban does not anticipate high levels of CIAC. Until the Internal Revenue Service completes final regulations, and until California and New Mexico complete changes, if any, to their tax regulations, the full impact of this tax change cannot be determined. The Company does not believe that these tax law changes will have a material adverse impact on its ability to fund ongoing operations and capital needs. Regulatory Developments: The California legislature has held hearings discussing the CPUC's organization and operation. Among other options, the CPUC has proposed consideration of performance-based rate making, which provides incentives for utilities to operate more efficiently and improve productivity, and is intended to reduce regulatory burden and promote efficiency among utilities. Ratepayers and stockholders would both likely benefit from improved productivity. Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. Whether such legislative or CPUC developments will be enacted, or, if enacted, what the terms of such developments would be, are not known by the Company. Therefore, management cannot predict the impact of final legislative or CPUC developments on the Company's financial condition or results of operations. 8 Contract Operations: The operations of ECO are not subject to regulation by a public utilities commission. ECO's long-term water and wastewater service contracts typically include annual inflation adjustments. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. ENVIRONMENTAL AFFAIRS: The Company's operations are subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the EPA and various state regulatory agencies. The EPA and state regulatory agencies continue to promulgate new regulations mandated by the Federal Water Pollution Control Act, the Safe Drinking Water Act (as reenacted in 1996), and the Resource Conservation and Recovery Act. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. Costs associated with the testing of the Company's water supplies have, however, increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, if any, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. RESULTS OF OPERATIONS: Three Months Ended March 31, 1997 Compared To Three Months Ended March 31, 1996 Earnings per common share were $.02 in 1997, compared to a loss per common share of $.04 (adjusted for a stock dividend of 20% on January 2, 1997) during the same period in 1996. Operating income increased $401,000 or 100%, and, as a percentage of operating revenues, increased from 3% in 1996 to 5% in 1997. Operating income at the utilities increased $546,000 due primarily to increased water consumption and Suburban's rate increases. ECO's operating loss decreased by $41,000 due primarily to new contracts and additional work outside the scope of existing contracts. Parent company expenses increased $186,000 primarily due to increased corporate reserves. Operating revenues Operating revenues increased $1,443,000 or 10%. Water utility revenues increased $833,000 due to warmer weather in Southern California and rate increases. ECO's revenues increased $610,000, primarily as a result of revenues from new contracts and additional work outside the scope of existing contracts. Direct operating expenses Direct operating expenses increased $675,000 or 6%. As a percentage of operating revenues, these expenses decreased from 81% in 1996 to 77% in 1997. Water utility direct operating expenses increased $251,000 primarily reflecting the increase in water costs experienced to meet increased consumption by Suburban's customers and higher maintenance and repair expenses. ECO's direct operating expenses increased $424,000, resulting primarily from higher expenses associated with new contracts and additional work outside the scope of existing contracts. Selling, general and administrative Selling, general and administrative expenses increased $367,000 or 16%. As a percentage of operating revenues, these expenses were 17% in 1997 and 1996. General and administrative expenses at the utilities 9 increased $36,000. ECO's selling, general and administrative expenses increased $145,000 due to higher insurance, legal and consulting expenses. As discussed above, general and administrative expenses of the parent company increased $186,000. Other income and expense Interest expense increased $123,000 primarily due to higher short-term and long-term credit balances in 1997 as compared with 1996. Other income increased $45,000 primarily due to consulting fees received as a result of an investment in Windermere Utility Company. PART II - OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Suburban, the Company, and several unrelated parties were served with a complaint in September 1995 by a former employee of Suburban. The plaintiff claimed that, while he worked for an independent contractor hired by Suburban and during his subsequent employment with Suburban, he was exposed to asbestos fibers. As a result of such exposure, he contracted mesothelioma. Suburban and the Company denied all allegations in their response to the complaint. In 1995, the former employee died and in 1996, the former employee's widow and children filed a wrongful death action against Suburban and the Company. This complaint alleges the same facts as the first complaint, plus the death of the former employee. The two actions have been consolidated. The plaintiffs claim the defendants are responsible on the basis of negligence, breach of warranty and strict liability. Both actions seek unspecified general damages and burial expenses. The Company has made written demands for defense and indemnity against all general liability and workers' compensation carriers who provided coverage during the last 30 years. Three general liability carriers have agreed, on a very limited basis, to accept defense obligations under liability policies issued by them. However, they have reserved their rights with respect to indemnification. Suburban and the Company are continuing discussions with other general liability carriers concerning their acceptance of defense and indemnity obligations. The plaintiffs' claims for damages appear to fall under Suburban's and the Company's general liability coverage, since the plaintiffs' claims arise from employment of the decedent while working for an independent contractor hired by Suburban. Certain defendants who were alleged to be suppliers of asbestos cement pipe to Suburban have been dismissed on the basis that they were not suppliers to Suburban. The alleged manufacturer defendant may not be reachable in these actions due to certain rulings made in a bankruptcy proceeding. As a result, Suburban and the Company may be the only remaining defendants in the actions. The plaintiffs have initiated discovery, and negotiations were successful in limiting the scope of this discovery. To date, there has been no specific claim for damages by the plaintiffs. Suburban and the Company maintain that they have no responsibility for the death of the former employee and intend to contest these claims vigorously. The Company and its subsidiaries are the subject of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its consolidated financial condition, results of operations or cash flow. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. 10 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits furnished pursuant to Item 601 of Regulation S-K: 27 Financial Data Schedule. (b) Reports on Form 8-K: A Report on Form 8-K was filed with the Securities and Exchange Commission on February 24, 1997, regarding discussions concerning the potential sale of the assets of NMUI to the City of Albuquerque. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHWEST WATER COMPANY ----------------------- (Registrant) Dated: May 2, 1997 /s/ Peter J. Moerbeek - ------------------ --------------------- PETER J. MOERBEEK, Vice President Finance and Chief Financial Officer 12 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-1-1997 MAR-31-1997 637,000 0 9,412,000 538,000 0 11,638,000 128,488,000 35,786,000 113,089,000 16,234,000 30,700,000 0 517,000 31,000 29,737,000 113,089,000 0 15,432,000 0 14,628,000 (55,000) 59,000 782,000 110,000 46,000 64,000 0 0 0 64,000 0.02 0.02
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