-----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, VEU6kK46moJ0Go1NM0tl8uFYiObgBz9R18+uMx5Psw+wzusD4Ll/WcxUCXn+Qqnv vDaErkS08Cx26echp3sC8g== 0000898430-98-002778.txt : 19980810 0000898430-98-002778.hdr.sgml : 19980810 ACCESSION NUMBER: 0000898430-98-002778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 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: SEC FILE NUMBER: 000-08176 FILM NUMBER: 98678834 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 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 June 30, 1998 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 (Exact name of registrant as specified in its charter) Delaware 95-1840947 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (Address of principal executive offices) (Zip Code) (626) 915-1551 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ - Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On August 7, 1998, there were 3,353,208 common shares outstanding. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
Part I. Financial Information: Page No. - ------- ---------------------- -------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 2 Condensed Consolidated Statements of Income - Three and six months ended June 30, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 10 Part II. Other Information: - -------- ------------------ Item 1. Legal Proceedings 10 - 12 Item 4. Submission of Matters to a Vote of Security Holders 12-13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, - --------------------------------------------------------------------------------------- ASSETS 1998 1997 - --------------------------------------------------------------------------------------- (unaudited) (in thousands) CURRENT ASSETS: Cash and cash equivalents $ 289 $ 1,237 Customers' accounts receivable, net 8,787 7,286 Other current assets 2,781 2,976 - --------------------------------------------------------------------------------------- 11,857 11,499 PROPERTY, PLANT AND EQUIPMENT: Utility property, plant and equipment -- at cost 139,430 133,936 Contract operations property, plant and equipment -- at cost 4,868 4,854 - --------------------------------------------------------------------------------------- 144,298 138,790 Less accumulated depreciation and amortization 38,792 36,654 - --------------------------------------------------------------------------------------- 105,506 102,136 OTHER ASSETS 9,088 9,465 - --------------------------------------------------------------------------------------- $126,451 $123,100 ======================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------- CURRENT LIABILITIES: Current portion of bank notes payable and long-term debt $ 1,712 $ 900 Accounts payable 1,513 1,214 Other current liabilities 8,948 8,912 - --------------------------------------------------------------------------------------- 12,173 11,026 OTHER LIABILITIES AND DEFERRED CREDITS: Bank notes payable 5,799 7,131 Long-term debt 29,800 29,800 Advances for construction 7,799 7,931 Contributions in aid of construction 30,580 27,822 Deferred income taxes 4,482 4,130 Other liabilities and deferred credits 2,651 2,833 - --------------------------------------------------------------------------------------- TOTAL LIABILITIES AND DEFERRED CREDITS 93,284 90,673 STOCKHOLDERS' EQUITY Cumulative preferred stock 517 517 Common stock 33 33 Paid-in capital 29,710 29,469 Retained earnings 2,913 2,420 Unamortized value of restricted stock issued (6) (12) - --------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 33,167 32,427 - --------------------------------------------------------------------------------------- $126,451 $123,100 =======================================================================================
See accompanying notes to condensed consolidated financial statements. 2 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, - --------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------- (in thousands except per share data) OPERATING REVENUES $ 18,332 $ 18,469 $ 34,278 $ 33,901 OPERATING EXPENSES: Direct operating expenses 13,268 13,480 25,427 25,430 Selling, general and administrative 2,880 2,885 5,645 5,563 - --------------------------------------------------------------------------------------------------------------- 16,148 16,365 31,072 30,993 OPERATING INCOME 2,184 2,104 3,206 2,908 OTHER INCOME (EXPENSE): Interest expense (766) (808) (1,584) (1,590) Interest income 21 30 38 63 Other 104 66 187 121 - --------------------------------------------------------------------------------------------------------------- (641) (712) (1,359) (1,406) INCOME BEFORE INCOME TAXES 1,543 1,392 1,847 1,502 Provision for income taxes 617 585 739 631 - --------------------------------------------------------------------------------------------------------------- NET INCOME 926 807 1,108 871 Dividends on preferred shares 7 7 14 14 - --------------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE FOR COMMON SHARES $ 919 $ 800 $ 1,094 $ 857 =============================================================================================================== EARNINGS PER COMMON SHARE: Basic $ 0.27 $ 0.24 $ 0.33 $ 0.26 Diluted $ 0.27 $ 0.24 $ 0.32 $ 0.26 =============================================================================================================== CASH DIVIDENDS PER COMMON SHARE $ 0.09 $ 0.086 $ 0.18 $ 0.172 =============================================================================================================== WEIGHTED AVERAGE OUTSTANDING COMMON SHARES: Basic 3,347 3,295 3,342 3,290 Diluted 3,431 3,337 3,422 3,332 ===============================================================================================================
See accompanying notes to condensed consolidated financial statements. 3 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 2,780 $ 3,171 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (4,072) (4,624) Other investments, net 120 0 - ------------------------------------------------------------------------------- Net cash used in investing activities (3,952) (4,624) - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributions in aid of construction 1,272 693 Net proceeds from dividend reinvestment and employee stock purchase plans 216 184 Dividends paid (614) (576) Net borrowings (repayment) of bank notes payable (520) 1,031 Payments on advances for construction (130) (164) - ------------------------------------------------------------------------------- Net cash provided by financing activities 224 1,168 - ------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (948) (285) Cash and cash equivalents at beginning of period 1,237 790 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 289 $ 505 - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,556 $ 1,555 Income taxes $ 380 $ 284 Depreciation and amortization $ 2,220 $ 2,089 Non-cash contributions in aid of construction conveyed to Company by developers $ 1,775 $ 3,966
See accompanying notes to condensed consolidated financial statements. SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (Unaudited) 1. Southwest Water Company ("the Company" or "Registrant") and its subsidiaries provide water management services through contract and utility operations. The unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 1998, and the Company's results of operations for the three and six months ended June 30, 1998. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the 1997 financial statements to conform to the 1998 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, 1997. 3. There is seasonality to the water management services industry; thus, the results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The first and fourth quarters of each year are normally the lowest in terms of average customer water usage for the Company's water utilities. Rainfall and weather conditions affect utility operations, and utility revenues usually peak during the third quarter 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. Moderate rainfall may create opportunities for additional billable work outside the scope of existing contracts. 4. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which is required for interim and annual financial statements issued after December 15, 1997. Under SFAS No. 128, basic earnings per share ("EPS") replaced the presentation of primary EPS, and diluted EPS replaced fully diluted EPS. For the three and six months ended June 30, 1998 and 1997, basic EPS was calculated using the weighted average number of common shares outstanding during the period. Diluted EPS was calculated using the weighted average number of common shares and dilutive common stock equivalents. Common equivalent shares arise from stock options, and reflect the potential dilution that could occur if common stock equivalents were exercised or converted into common stock that could share in the earnings of the Company. 5. The Company has implemented SFAS No. 130 "Reporting Comprehensive Income" which is required for interim and annual financial statements issued for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. The implementation of SFAS No. 130 did not have any effect on the Company's financial position or results of operations. 6. Starting in 1998, the Company is subject to SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for annual financial statements. The disclosure requirements of SFAS No. 131 are not required in interim financial statements in the initial year of application. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. SFAS No. 131 will require additional financial disclosure by the Company but will not have any effect on the Company's financial position or results of operations. 5 7. Starting in 1998, the Company is subject to SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," for annual financial statements. SFAS No. 132 requires certain changes in the financial disclosure by the Company, but will not have any effect on the Company's financial position or results of operations. 8. The 1997 earnings per common share, cash dividends per common share and weighted average outstanding common shares have been restated to reflect a 5% stock dividend granted to stockholders of record on January 2, 1998. 9. During May 1998, the Company signed an amendment to the RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("the Agreements"). As discussed in the Company's 1997 Annual Report on Form 10-K, in 1996, the Company purchased a 49% interest in Windermere Utility Company ("Windermere"). The Agreements permit the majority shareholder to acquire the Company's interest at an agreed-upon price. If the majority shareholder does not exercise his option, then the Company has the right to acquire 100% of Windermere for an agreed-upon price. The amendment extends the date by which the majority shareholder may exercise this right to December 31, 1998 and increases the agreed-upon purchase price for the majority shareholder. 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 New Mexico Utilities, Inc. ("NMUI"). The operations of ECO Resources, Inc. ("ECO") are currently generating positive cash flow for the Company; however, cash flow may be influenced from time to time by ECO's investments in operating and computer equipment, as well as new business development and acquisition costs. At June 30, 1998, the Company had cash and cash-equivalent balances totaling $289,000 and unused lines of credit of $9,389,000, with a total line of credit capacity of $16,000,000. The Company has three lines of credit from three commercial banks, all of which expire in 1999. The Company expects to renew its lines of credit in the normal course of business. During the first six months of 1998, the Company repaid $520,000 on its lines of credit. The Company has remaining borrowing capacity under its First Mortgage Bond Indentures of approximately $33,439,000. However, the amount of additional borrowing available to the Company under its current lines of credit is limited by financial covenants that restricted additional borrowing at June 30, 1998 to the unused lines of credit amount. During the first six months of 1998, the Company's additions to property, plant and equipment were $5,847,000, representing a decrease of $2,743,000 over the same period in 1997. Developers made contributions in aid of construction ("CIAC"), and advances totaling $3,047,000, of which $1,272,000 was received in cash. The cost of Company-financed capital additions was $2,800,000, which was paid for primarily by cash flow from operations. Capital expenditures are expected to decrease from $15,202,000 in 1997 to approximately $13,400,000 in 1998. This decrease is primarily due to the completion of certain major capital projects in 1997. The Company anticipates borrowing approximately $6,000,000 under its lines of credit during the remainder of 1998 to meet construction requirements not funded by operations or CIAC. The Company anticipates that its available short-term borrowing capacity and its cash flow generated from operations will be sufficient to fund its activities over the next twelve months. If additional cash were 6 needed, the Company would consider alternative sources, including long-term financing. The amount and timing of any future long-term financing would depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban 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 financing arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. Similarly, if the Company were to need additional cash to fund an acquisition, financing arrangements could include long-term borrowing or equity financing. REGULATORY AFFAIRS: Regulation: The California Public Utilities Commission ("CPUC") and the New Mexico Public Utility Commission ("NMPUC") regulate the rates and operations of Suburban and NMUI, respectively. The rates allowed are intended to provide the utilities an opportunity to recover costs and earn a reasonable return on common equity. 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 2.62% ($705,000) step rate increase effective January 1, 1997 and a 2.62% ($740,000) step rate increase effective January 1, 1998. There is no step rate increase that will be effective January 1, 1999. Regulatory Developments: The California legislature ("the legislature") has held hearings discussing the CPUC's organization and operation. Among other options, the CPUC has proposed consideration of changes to implement the requirements of SB1268 ("the bill"), a bill passed by the legislature in September 1997. The bill requires the CPUC to use the standard of fair market value when establishing the rate base of acquired water systems. The CPUC has also proposed consideration of changes that would provide rules and appropriate guidelines for regulated water utilities and staff governing the proper accounting and rate-making for privatization and the use of underutilized capacity. Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. Whether such legislative or CPUC changes will be enacted, or, if enacted, what the terms of such changes would be, are not known by the Company. Therefore, management cannot predict the impact, if any, of final legislative or CPUC developments on the Company's financial condition or results of operations. In 1996, the residents of the state of New Mexico approved a constitutional amendment to combine the NMPUC and the New Mexico Corporation Commission ("NMCC") and create the New Mexico Public Regulatory Commission ("NMPRC"). Presently, the NMPUC consists of three appointed officials and the NMCC consists of three elected officials. Under the newly enacted legislation, the NMPRC will consist of five elected officials who will be elected in November 1998, and take office on January 1, 1999. A legislative committee is currently reviewing proposed changes to the Public Utilities Act (the "PUA"). The Company cannot predict if or when changes to the PUA will ultimately occur; or, if changes are enacted, the impact, if any, on NMUI's financial position or results of operations. Contract Operations: ECO's pricing is not subject to regulation by a public utilities commission. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. 7 Changes in prices are negotiated on a contract-by-contract basis. ECO's long- term water and wastewater service contracts typically include annual inflation adjustments. In the United States, the majority of water and wastewater utility operations are performed by municipal employees. As a result, a significant portion of ECO's sales and marketing efforts require convincing elected officials and city staff persons that outsourcing of the utility operations is of benefit to the city. Typical sales efforts have an 18- to 36-month lead-time with no assurance that the city will select outsourcing or select ECO at the end of the sales effort. While industry renewal rates tend to be high, periodically cities change operators or terminate outsourcing at the end of a contract. In 1998, the City of Rio Rancho, New Mexico ("Rio Rancho") notified ECO that Rio Rancho would not renew ECO's $4 million annual operations and maintenance ("O&M") contract to operate Rio Rancho's water and wastewater facilities. This contract expired June 30, 1998 and is expected to result in reduced revenues of approximately $2 million in 1998. ECO has negotiated several new contracts in 1998, which should offset the impact on earnings of the loss of the Rio Rancho contract, although not necessarily the impact on revenues. Additionally, the Company is aggressively pursuing additional operating contracts as well as acquisition and joint venture opportunities which would offset the effect of the loss of earnings in the event other contracts were not renewed. ENVIRONMENTAL AFFAIRS: The Company's operations are subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the United States Environmental Protection Agency (the "EPA") and various state regulatory agencies. The EPA and state regulatory agencies continue to promulgate new regulations mandated by the Federal Water Pollution Control Act, the Safe Drinking Water Act (as reenacted in 1996), and the Resource Conservation and Recovery Act. Both the EPA and state regulatory agencies require periodic testing and sampling of water. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. In June 1998, the Company became aware that a substance called N-nitrosodimethylamine ("NDMA") had been detected in excess of the EPA reference dosage for health risks in one of its wells. Upon detection, the well was immediately removed from service. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. YEAR 2000 COMPUTER COMPLIANCE: The Company has completed a review of all computer systems and software currently in use to determine whether it is year 2000 compliant. Most of the Company's computer systems and software is already year 2000 compliant. For those systems and software not yet fully compliant, the Company is working with outside vendors to ensure compliance prior to July 1999. In the event such compliance is not possible, the Company will consider replacing non-compliant software. Costs to be incurred in order for the Company to be year 2000 compliant are not expected to have a material effect on the Company's financial position or results of operations. FORWARD LOOKING STATEMENTS: Certain statements in this Form 10-Q are forward looking and, as such, involve risk and uncertainty. Uncertainties arise from weather, environmental issues, legal contingencies and other matters which management cannot predict. Actual results may vary from those projected or implied. This Form 10-Q should be read in conjunction with the Company's 1997 Annual Report on Form 10-K which includes: consolidated financial statements and footnote disclosures prepared in accordance with generally accepted accounting principles; management's discussion and analysis of financial condition and results of operations; and a detailed description of the Company's business. 8 RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Diluted earnings per common share were $.27 in 1998, compared to $.24 (adjusted for a stock dividend of 5% on January 2, 1998) during the same period in 1997. Operating income increased $80,000 or 4%, and, as a percentage of operating revenues, was 12% in 1998 compared with 11% in 1997. Operating income at the utilities decreased $167,000, due primarily to decreased water sales at Suburban because of inclement weather in California as a result of El Nino-generated storms. The decrease in operating income was partially offset by the positive effects of a step rate increase. ECO's operating results improved $172,000, due to increased revenue from new contracts, additional work performed outside the scope of existing contracts, aggressive cost containment measures, and restructuring of marketing responsibilities. Parent company expenses decreased $75,000, due primarily to decreases in compensation-related expenses and reserves for litigation. Operating revenues Operating revenues decreased $137,000 or 1%. Water utility revenues decreased $1,033,000 or 11%, due primarily to a 24% decrease in water consumption by Suburban's customers, which was partially offset by a step rate increase. Revenues increased at NMUI by 17% due to an increase in the number of customers and higher consumption by NMUI's customers. ECO's revenues increased $896,000 or 10%, primarily as a result of new contracts and additional work performed outside the scope of existing contracts. Direct operating expenses Direct operating expenses decreased $212,000 or 2%. As a percentage of operating revenues, these expenses were 72% in 1998 and 73% in 1997. Water utility direct operating expenses decreased $879,000, primarily reflecting a decrease in the cost of water produced because of the lower level of water consumption by Suburban's customers. ECO's direct operating expenses increased $667,000 primarily from higher expenses associated with new contracts and additional work performed outside the scope of existing contracts. Selling, general and administrative Selling, general and administrative expenses for the second quarter of 1998 decreased $5,000 as compared with the same period in 1997. As a percentage of operating revenues, these expenses were 16% in 1998 and 1997. General and administrative expenses at the utilities increased $14,000. ECO's selling, general and administrative expenses increased $56,000, primarily due to increased regional marketing costs associated with new business development opportunities. As discussed above, general and administrative expenses of the parent company decreased $75,000. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Diluted earnings per common share were $.32 in 1998, compared to $.26 (adjusted for a stock dividend of 5% on January 2, 1998) during the same period in 1997. Operating income increased $298,000 or 10%, and, as a percentage of operating revenues, was 9% in 1998 and 1997. Operating income at the utilities decreased $387,000, due primarily to decreased water sales at Suburban because of inclement weather in California as a result of El Nino-generated storms. The decrease in operating income was partially offset by the positive effects of a step rate increase. The impact of the El Nino-generated storms on water utility revenue and operating income during 1998 may reduce the Company's earnings growth rate from the growth rate of the last few years. 9 ECO's operating results improved $567,000, due to increased revenue from new contracts, additional work performed outside the scope of existing contracts, aggressive cost containment measures, and restructuring of marketing responsibilities. Parent company expenses decreased $118,000 due primarily to decreases in compensation-related expenses and reserves for litigation. Operating revenues Operating revenues increased $377,000 or 1%. Water utility revenues decreased $1,451,000 or 8%, due primarily to a 21% decrease in water consumption by Suburban's customers, which was partially offset by a step rate increase. Revenues increased at NMUI by 12% due to an increase in the number of NMUI's customers. ECO's revenues increased $1,828,000 or 11%, primarily as a result of new contracts and additional work performed outside the scope of existing contracts. Direct operating expenses Direct operating expenses for the first six months of 1998 decreased $3,000 as compared with the same period in 1997. As a percentage of operating revenues, these expenses were 74% in 1998 and 75% in 1997. Water utility direct operating expenses decreased $1,084,000, primarily reflecting a decrease in the cost of water produced because of the lower level of water consumption by Suburban's customers. ECO's direct operating expenses increased $1,081,000, resulting primarily from higher expenses associated with the effects of new contracts and additional work performed outside the scope of existing contracts. Selling, general and administrative Selling, general and administrative expenses for the first six months of 1998 increased $82,000 as compared with the same period in 1997. As a percentage of operating revenues, these expenses were 16% in 1998 and 1997. General and administrative expenses at the utilities increased $21,000. ECO's selling, general and administrative expenses increased $179,000, primarily due to increased regional marketing costs associated with new business. As discussed above, general and administrative expenses of the parent company decreased $118,000. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in the Company's 1997 Annual Report on Form 10-K, Suburban and the Company were served with a summons and an amended complaint in the Kristin Santamaria, et al vs. Suburban Water Systems, et al action. The amended complaint lists approximately 350 plaintiffs who contend, in essence, that they or deceased family members are or were long-time residents of the San Gabriel Valley ("the Valley") and that, by virtue of their residence in the Valley, they have suffered long-term exposure to various hazardous substances in their drinking water, and, in some cases, wrongful deaths. Subsequent to service of the Santamaria action, the defendants successfully moved for a change of venue from Los Angeles County to Ventura County on the ground, among others, that the defendants could not obtain an impartial jury trial in Los Angeles County. Presently, the action is pending in the Ventura County Superior Court, and the judge assigned to the action is considering two matters. First, the judge is considering whether the action will remain in Ventura County or be transferred to another Southern California county. Second, the judge has agreed to rule on a series of demurrers (i.e. motions to dismiss the action) filed by the defendants alleging that the action must be dismissed and/or stayed because exclusive jurisdiction of the subject matter rests with the CPUC. The Company does not know when the court will rule on the matters. As discussed in the Company's Form 10-Q Report for the quarter ended March 31, 1998 (the "March Report"), the Company and Suburban were served with a summons and complaint in a second action entitled Christine Boswell et al vs. Suburban Water Systems etc., et al, No. KC027318 in the Los Angeles 10 County Superior Court. Since the filing of the March Report, the plaintiffs added as defendants in the Boswell action two additional water purveyors and six industrial defendants. All defendants demurred on the ground of exclusive CPUC jurisdiction. The court declined to rule on the demurrers and instead stayed further proceedings in the action pending action by the CPUC with respect to the OII described below. The plaintiffs moved for reconsideration with respect to the issuance of the stay and also filed a petition in the court of appeal requesting that the trial court be required to terminate the stay and rule on the demurrers. The motion for reconsideration has been denied but the court of appeal has taken no action to date. The Company does not know when the court of appeal will act or what action the court will take. Since the filing of the March Report, a third action, Anthony Anderson et al vs. Suburban Water Systems et al has also been filed in the Los Angeles County Superior Court. The action has not been served, although a copy of the complaint has been furnished to the Company. In the action, the approximately 180 plaintiffs allege that they or their deceased family members are or were long-time residents of the Valley. The plaintiffs contend that there is a long history of chemical contamination in the groundwater in the Valley, that the defendants were aware of the contamination or caused it and that the defendant water purveyors knowingly provided contaminated water to the plaintiffs and others while intentionally withholding from the plaintiffs alleged knowledge of the contamination. The defendants in the action include essentially the same water purveyors and industrial defendants as in the Santamaria action, and the causes of action alleged are similar to those alleged in Santamaria and Boswell, with several additional causes of action alleging violation of the Business and Professions Code and battery. The plaintiffs seek damages according to proof for alleged physical injury, damage to property, loss of earnings, loss of consortium, burial and other wrongful death losses and punitive damages. The Company and Suburban have not yet been required to respond in the Anderson action. The Company and Suburban believe that their defense to this action will be similar to the defense of the Santamaria and Boswell actions and believe that they are not liable for any damage to the plaintiffs. The Company and Suburban intend to vigorously defend all three actions and have requested that their liability insurance carriers defend and indemnify the Company and Suburban. Certain of the liability insurance carriers are now contributing to the costs of defense of such actions. Based upon information available at this time, management does not expect that these actions will have a material effect on the Company's financial position or results of operations. As described in the March Report, Suburban has applied for and received CPUC authority to establish and maintain a memorandum or tracking account to accumulate all costs and fees incurred by Suburban in defense of these actions and any similar actions which may be filed, costs and fees incurred in legal actions against industrial potentially responsible parties ("PRPs"), and costs and fees incurred in seeking recovery against Suburban's insurance carriers of costs, and fees incurred with respect to the underlying actions and those against PRPs. The Company and Suburban are unable to estimate or predict whether the CPUC will ultimately allow Suburban to recover these accumulated costs and fees from Suburban's customers or, if such recovery is allowed, how much of such costs and fees will be recoverable. As described in the March Report, the CPUC in March 1998 issued an order instituting investigation ("OII") directed to all Class A and B water utilities in California, including Suburban. The OII requires that all Class A and B water utilities file compliance reports with the CPUC in September 1998. The Water Division of the CPUC will then submit a report of its findings to the CPUC in January 1999. A final determination is expected from the CPUC in May 1999. The purpose of the OII is to address a series of questions dealing with the safety of current drinking water standards, compliance by water utilities with the standards, appropriate remedies for failure to comply with safe drinking water standards and whether stricter or additional safe drinking water standards are required. At this time, the Company and Suburban are unable to predict what actions, if any, will be taken by the CPUC and/or the DOHS as the result of this investigation, or their impact on the operations or financial position of the Company and Suburban. The recent OII does not, by its terms, prevent the filing of Santamaria, Boswell, Anderson or similar actions. While both the CPUC and one commissioner individually have commented upon the broad 11 jurisdiction of the CPUC and the California Department of Health Services (`DOHS") with respect to water quality and the potential impact of these actions upon such jurisdiction, the water purveyors, and their customers, the CPUC has not intervened in these actions nor asserted dispute resolution authority with respect to them. The defendants in the Santamaria and Boswell actions have raised the issue of exclusivity of CPUC and DOHS jurisdiction in this area and at least one court, in Boswell, has decided to defer further proceedings pending action by the CPUC. At this time, it is uncertain whether the CPUC and/or DOHS will ultimately attempt to intervene in these actions or assert exclusive jurisdiction or the likely results of any such actions. As discussed in the Company's 1997 Annual Report on Form 10-K and in the March Report, Suburban and the Company were served with a complaint in September 1995, wherein the plaintiff claimed that, while working in the 1950s and 1960s for an independent contractor hired by Suburban, he was exposed to asbestos fibers and contracted mesothelioma. Information as to the action is set forth in the March Report. In June 1998, the plaintiffs filed a Case Report demanding $850,000 for damages suffered. A mandatory settlement conference has been set for January 1999, with a trial date set for March 1999. Suburban and the Company maintain that they have no responsibility for the death of the decedent and intend to contest these claims vigorously. Insurance carriers are currently paying all defense costs associated with this case and it is expected that they will pay for damages or settlement, if any. As discussed in the Company's 1997 Annual Report on Form 10-K and the March Report, the City of Albuquerque (the "City") initiated an action in eminent domain to acquire the operations of NMUI. Information as to the action and defenses of NMUI thereto is set forth in the March Report. There has been no change in the status of this action since the March Report. The Company and its subsidiaries are the subjects of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially effect its consolidated financial condition, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on May 28, 1998, all of the members of the Board of Directors were elected by the following votes:
Name of Director Votes For Votes Withheld ---------------- --------- -------------- H. Frederick Christie... 2,552,543 191,263 Michael J. Fasman....... 2,536,511 207,295 Anton C. Garnier........ 2,553,315 190,491 Monroe Harris........... 2,541,840 201,966 Donovan D. Huennekens... 2,540,435 203,371 Richard Kelton.......... 2,554,059 189,747 Maureen A. Kindel....... 2,548,299 195,507 Richard G. Newman....... 2,554,229 189,577
12 The proposal to increase the number of common shares authorized for issuance to 25,000,000 shares was approved by the following vote: votes for - 2,271,273; votes against - 409,895; and votes abstaining - 62,638. No broker non-votes were recorded. The proposal to stagger the Board of Directors with three year terms was approved by the following vote: votes for - 1,714,363; votes against - 400,620; votes abstaining - 33,068; and broker non-votes - 595,755. The second amendment to the Southwest Water Company Employee Stock Purchase Plan, now called the "1998 Amended and Restated Employee Stock Purchase Plan", was approved with the following vote: votes for - 1,982,019; votes against - 111,393; votes abstaining - 54,639; and broker non-votes - 595,755. The selection of KPMG Peat Marwick LLP as the Company's independent auditors was ratified by the following vote: votes for - 2,708,647; votes against - 16,804; and votes abstaining - 18,355. No broker non-votes were recorded. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished pursuant to Item 601 of Regulation S-K: 3.1C Certificate of Amendment of Restated Certificate of Incorporation dated June 4, 1998 (incorporated by reference to Appendix A of Registrant `s 1998 Proxy Statement filed with the Commission on April 20, 1998). 4.7 Stockholders' Rights Plan dated April 6, 1998 (incorporated by reference to the Registrant's Form 8-K Report filed with the Commission on April 23, 1998). 10.1A Fifteenth Amendment to the Utility Employees' Retirement Plan, dated December 31, 1997, filed herewith. 10.2 Amended and Restated 1998 Employee Stock Purchase Plan, dated May 28, 1998 (incorporated by reference to Appendix B of Registrant's 1998 Proxy Statement filed with the Commission on April 20, 1998). 10.12A First Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement between the Registrant and RTNT, Inc, dated May 22, 1998, filed herewith. 10.12B First Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement between the Registrant and RTNT, Inc, dated May 22, 1998, filed herewith. 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 April 23, 1998 regarding the Company's Stockholders' Rights Plan which was adopted by the Board of Directors on April 6, 1998. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. SOUTHWEST WATER COMPANY ----------------------- (Registrant) Dated: August 7, 1998 /s/ Peter J. Moerbeek - --------------------- --------------------- PETER J. MOERBEEK Vice President Finance and Chief Financial Officer 14 EX-10.1A 2 UTILITY EMPLOYEES' RETIREMENT PLAN EXHIBIT 10.1A FIFTEENTH AMENDMENT TO THE UTILITY EMPLOYEES' RETIREMENT PLAN The Utility Employees' Retirement Plan (the "Plan") was established on December 30, 1957, effective as of December 31, 1957, by Suburban Water Systems, a California corporation, as a mandatory contributory money purchase plan and trust for the exclusive benefit of participating employees of Suburban Water Systems. It was amended on November 12, 1958, December 21, 1959, April 20, 1960, April 26, 1968 and October 10, 1968. The Sixth Amendment to the Plan, effective December 31, 1972, restated the Plan and converted it into a non- contributory defined benefit pension plan. The Plan has since been amended on December 22, 1976, June 10, 1978, June 25, 1979, twice on March 26, 1986, by a "model amendment" adopted on October 20, 1989, December 11, 1990, and December 12, 1996. The Plan has been adopted by Southwest Water Company, Suburban Water Systems, New Mexico Utilities, Inc. and East Pasadena Water Company. In order to amend the Plan to increase the dollar limitation on mandatory lump sum distributions, this fifteenth Amendment to the Plan has been adopted at the October 30, 1997 meeting of the Board of Directors of Southwest Water Company, effective as of December 31, 1997. 1. Paragraph 4.7(a)(iii) of the Plan is hereby amended to read in its entirety, as follows: (iii) the then present value of such Benefit as determined under Section 1.3(a)(i) b or c is more than $5,000, - - and 2. Subsection 4.9(d) of the Plan is hereby amended to read in its entirety as follows: (d) If the Actuarial Equivalent of a Survivor Annuity, otherwise payable, determined as of the date of distribution does not exceed $5,000, or if spousal Consent is obtained, said Actuarial Equivalent shall be promptly distributed to the Surviving Spouse in case in a lump sum. 3. Subsection 4.13(a) of the Plan is hereby amended to read in its entirety as follows: (a) Notwithstanding any other provision of the Plan to the contrary, upon a Participant's Separation from the Service, the Administrator shall cause payment to him or on his account the Actuarial Equivalent in cash of his Vested, Normal or Early Retirement benefit if it is not more than 45,000 (and at no time exceeded such amount at the time of a prior distribution under Section 4.15(a)). 4. Paragraph 7.3(c)(ii) of the Plan is hereby amended to read in its entirety as follows: (ii) the value of the Benefits payable to the Participant or Former Participant is less than a 1% of the value of the current liabilities (as determined - as provided in paragraph (i)) of the Plan before distribution, or b $5,000. - EX-10.12A 3 RTNT RIGHT OF FIRST REFUSAL AGREEMENT EXHIBIT 10.12A FIRST AMENDMENT OF RTNT RIGHT OF FIRST REFUSAL AGREEMENT AND RTNT CALL PURCHASE AGREEMENT This First Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation ("SWWC") to be effective the 22nd day of May 1998. RECITALS WHEREAS, SWWC and RTNT have previously entered into an RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("RTNT Call Agreement") which was executed as of May 23, 1996; and WHEREAS this RTNT Call Agreement placed certain restrictions on stock in Windermere Utility Co., Inc. ("WUC") held by SWWC; and WHEREAS this RTNT Call Agreement gave RTNT certain rights to the WUC stock held by SWWC; and WHEREAS the RTNT Call Agreement had certain time periods in which the rights of RTNT were operative; and WHEREAS SWWC and RTNT also entered into a "SWWC Right of First Refusal and SWWC Call Purchase Agreement" ("SWWC Call Agreement"); and WHEREAS the parties hereto being the parties to the SWWC Call Agreement and the RTNT Call Agreement, for various reasons wish to extend all the time periods for the exercise of the various rights of RTNT under the RTNT Call Agreement; and NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and ten dollars ($10.00) and other good and valuable consideration hereinafter set forth and for other good and valuable consideration including but not limited to the promises of the parties, the parties hereby agree as follows: 1. (a) The first sentence of Paragraph 1 of the RTNT Call Agreement which is entitled "Restriction on SWWC Stock" shall be amended to read as follows: "SWWC shall not sell, transfer, assign, or otherwise dispose of the SWWC WUC stock or any portion thereof to any person or entity for period ending on December 31, 1998 plus the period of closing which may be required pursuant to this RTNT Call Agreement for RTNT to close the purchase of thc SWWC WUC stock upon which it exercises its right to purchase within said period ending on December 31. 1998." (b) The last sentence of Paragraph 1 of the RTNT Call Agreement which Is entitled "Restriction on SWWC Stock" shall be amended to read as follows: 1 "Any pledge of the SWWC WUC stock shall specifically state that it can be released within the first twelve (12) months for the Three Million Six Hundred Thousand Dollar ($3,600,000.00) call amount and in the thirteenth (13th) through the twenty-fourth (24th) month for the Three Million Seven Hundred Twenty Thousand Dollar ($3,720,000.00) call amount and within the months June 1998 through December 1998 for the Three Million Seven Hundred Twenty Thousand Dollar ($3,720,000.00) call amount plus Thirty Thousand Dollars ($30,000.00) for each month that has. elapsed before the exercise of the option as set forth herein (i.e. $3,720,000.00 plus $30,000.00 if the option is exercised in June 1998; $3,720,000.00 plus $60,000.00 if the option is exercised in July 1998, etc.) in Paragraph 2 below. 2. The provisions of Paragraph 2 of the RTNT Call Agreement which is entitled "Call by RTNT," specifically, the first two sentences of Paragraph 2 of the RTNT Call Agreement shall be amended to read as follows: "RTNT shall have, for a period ending on December 31, 1998, the right to require SWWC to sell all of the SWWC WUC stock to RTNT. The purchase price for a sale that is initiated (under the closing procedure set out below) within the first three hundred sixty-five (365) days after the date hereof shall be Three Million Six Hundred Thousand Dollars ($3,600,000.00) and the purchase price for a sale that is initiated (under the closing procedures set out below) within the period beginning on the three hundred sixty-sixth (366th) day and ending on the seven hundred thirtieth (730th) day after the date hereof shall be Three Million Seven Hundred Twenty Thousand Dollars ($3,720,000.00) and for an option price after the seven hundred thirtieth (730th) day and continuing until December 31, 1998, the price shall be as follows: Three Million Seven Hundred Twenty Thousand Dollars ($3,720,000.00) plus Thirty Thousand Dollars ($30,000.00) per each month following May 1998 for each month which passes before the exercise of the option by RTNT (i.e. $3,720,000 00 plus $30,000.00 if the option exercise Is in June 1998; $3,720,000.00 plus $60,000.00 if the option exercise is in July 1998, etc.)." 3. The first two sentences of Paragraph 5 of the RTNT Call Agreement which is entitled "Offer to SWWC" shall be amended to read a follows: "In the period following the expiration of the RTNT Call Purchase Provision on December 31, 1998, RTNT shall have a Right of First Refusal as set forth below. SWVWC shall, after thc expiration of such period terminating on December 31, 1998, not sell, transfer, assign, or otherwise dispose of the SWWC WUC Stock or any portion thereof to any person and/or entity except as provided herein." 4. The RTNT Call Agreement, the RTNT Call Agreement, the First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement, the First Amendment to RTNT Right of First Refusal Agreement, and the Equity Agreement and the documents referred to therein, (a) constitute the entire agreement among the parties and supercede all prior agreements and understanding, both written and oral, among the parties with respect to the subject matter hereof, (b) may be executed in several counterparts, each of which shall constitute one and the same instrument, (c) except as expressly set forth herein, shall inure to the benefit of, and be binding upon, the successors, assigns. legal representatives, administrators, and heirs of each party and are not intended to confer upon any person other than the parties and their successors assigns, legal representatives, administrators, and heirs any rights or remedies hereunder, and (d) shall be governed in all respects. including validity, 2 interpretation, and effect by the laws of the state of Texas. The captions in this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement are for convenience of reference only and shall not affect its interpretation in any respect. 5. Any notice consent or communication required or permitted to be given under this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement must be in writing and delivered to a person or by confirmed facsimile or by registered mail, return receipt requested. postage prepaid addressee restricted as follows: To: RTNT, Inc., P.O. Box 161173 Austin Texas 78716 (tel.) 512-327-0869 (fax) 512-327-0869 To: Southwest Water Company 225 North Barranca Avenue Suite 200 West Covina California 91791-1605 (tel.) 626-915 1551 (fax) 626-915-1558 ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS AFTER MAILING. 6. Any provision of this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement which is prohibited or unenforceable in any jurisdiction as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7. This First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration Agreement dated to be effective the 23rd of May 1996. 8. This First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC and RTNT and their respective successors, representatives and assigns. 9. For purposes hereof, a facsimile copy of this First Amendment of RTNT Right of First Refusal and RTNT Call Purchase Agreement including the signature pages hereto shall be deemed to be an original. Notwithstanding the forgoing, the parties shall deliver original execution copies of this First Amendment of RTNT Right of First Refusal and RTNT Call Purchase Agreement to one another immediately after execution. 3 Executed as of the 22nd day of May 1998. RTNT, INC., a Texas Corporation By: /s/ Thom W. Farrell ------------------- THOM W. FARRELL, PRESIDENT SOUTHWEST WATER COMPANY By: /s/ Anton C. Garnier -------------------- ANTON C. GARNIER, PRESIDENT ATTEST: /s/ Peter J. Moerbeek - --------------------- PETER MOERBEEK, VICE PRESIDENT AND SECRETARY 4 EX-10.12B 4 SWWC RIGHT OF FIRST REFUSAL AGREEMENT EXHIBIT 10.12B FIRST AMENDMENT OF SWWC RIGHT OF FIRST REFUSAL AGREEMENT AND SWWC CALL PURCHASE AGREEMENT This First Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation ("SWWC") to be effective the 22nd day of May 1998. RECITALS WHEREAS, SWWC and RTNT have previously entered into an SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement ("SWWC Call Agreement") which was executed as of May 23, 1996; and WHEREAS this SWWC Call Agreement placed certain restrictions on stock in Windermere Utility Co., Inc. ("WUC") held by RTNT; and WHEREAS this SWWC Call Agreement gave SWWC certain rights to the WUC stock held by RTNT; and WHEREAS the SWWC Call Agreement had certain time periods in which the rights of RTNT were operative; and WHEREAS SWWC and RTNT also entered into a "RTNT Right of First Refusal and RTNT Call Purchase Agreement" ("SWWC Call Agreement"); and WHEREAS the parties hereto being the parties to the SWWC Call Agreement and the RTNT Call Agreement, for various reasons wish to extend all the time periods for the exercise of the various rights of SWWC under the SWWC Call Agreement; and NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and ten dollars ($10.00) and other good and valuable consideration hereinafter set forth and for other good and valuable consideration including but not limited to the promises of the parties, the parties hereby agree as follows: 1. The first sentence of Paragraph 1 of the SWWC RTNT Call Agreement which is entitled "Restriction on RTNT Stock" shall be amended to read as follows: "RTNT shall not sell, transfer, assign, or otherwise dispose of the RTNT WUC stock or any portion thereof to any person or entity for period ending two hundred ten (210) days after the third anniversary of the date hereof." 2. The provisions of Paragraph 2 of the SWWC Call Agreement which is entitled "Call by SWWC," specifically, the first sentence of Paragraph 2 of the SWWC Call Agreement shall be amended to read as follows: 1 SWWC shall have, for a period beginning on the day after December 31, 1998 and ending two hundred ten (210) days after the third anniversary date of this SWWC Call Agreement, the right to require RTNT to sell all of the RTNT WUC stock it owns in WUC at that time." 3. Paragraph 3 of the SWWC Call Agreement which is entitled "Offer to RTNT" shall be amended by amending the first sentence to read as follows: "RTNT shall, after such two hundred ten (210) days following the third anniversary hereof, not sell, transfer, assign, or otherwise dispose of the RTNT WUC Stock or any portion thereof to any person and/or entity except as provided herein." 4. The first sentence of Paragraph 4 of the SWWC Call Agreement entitled "RTNT Call Agreement: shall be amended as follows: "The provisions of Paragraphs 1, 2, and 3 above have no further effect if prior to December 31, 1998 exercises its right to call upon SWWC to sell all of its stock in WUC pursuant to the RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement of even date herewith and closes and funds said purchase." 5. The SWWC Call Agreement, the RTNT Call Agreement, the First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement, and the Equity Agreement and the documents referred to therein, (a) constitute the entire agreement among the parties and supercede all prior agreements and understanding, both written and oral, among the parties with respect to the subject matter hereof, (b) may be executed in several counterparts, each of which shall constitute one and the same instrument, (c) except as expressly set forth herein, shall inure to the benefit of, and be binding upon, the successors, assigns. legal representatives, administrators, and heirs of each party and are not intended to confer upon any person other than the parties and their successors assigns, legal representatives, administrators, and heirs any rights or remedies hereunder, and (d) shall be governed in all respects. including validity, interpretation, and effect by the laws of the state of Texas. The captions in this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement are for convenience of reference only and shall not affect its interpretation in any respect. 6. Any notice consent or communication required or permitted to be given under this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement must be in writing and delivered to a person or by confirmed facsimile or by registered mail, return receipt requested, postage prepaid addressee restricted as follows: To: RTNT, Inc., P.O. Box 161173 Austin Texas 78716 (tel.) 512-327-0869 (fax) 512-327-0869 To: Southwest Water Company 225 North Barranca Avenue Suite 200 West Covina California 91791-1605 (tel.) 626-915 1551 (fax) 626-915-1558 2 ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS AFTER MAILING. 6. Any provision of this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement which is prohibited or unenforceable in any jurisdiction as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7. This First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration Agreement dated to be effective the 23rd of May 1996. 8. This First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC and RTNT and their respective successors, representatives and assigns. 9. For purposes hereof, a facsimile copy of this First Amendment of SWWC Right of First Refusal and SWWC Call Purchase Agreement including the signature pages hereto, shall be deemed to be an original. Notwithstanding the forgoing, the parties shall deliver original execution copies of this First Amendment of SWWC Right of First Refusal and SWWC Call Purchase Agreement to one another immediately after execution. Executed as of the 22nd day of May 1998. RTNT, INC., a Texas Corporation By: /s/ Thom W. Farrell ------------------- THOM W. FARRELL, PRESIDENT SOUTHWEST WATER COMPANY By: /s/ Anton C. Garnier -------------------- ANTON C. GARNIER, PRESIDENT ATTEST: /s/ Peter J. Moerbeek - --------------------- PETER MOERBEEK, VICE PRESIDENT AND SECRETARY 3 EX-27 5 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 289,000 0 9,492,000 705,000 0 11,857,000 144,298,000 38,792,000 126,451,000 12,173,000 29,800,000 0 517,000 33,000 32,617,000 126,451,000 0 34,278,000 0 31,072,000 (187,000) 95,000 1,584,000 1,847,000 739,000 1,108,000 0 0 0 1,108,000 0.33 0.32
-----END PRIVACY-ENHANCED MESSAGE-----