-----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, CmlJI5ZzL4+pSgchcJ+LgHVJHIij+FbYKq7wTYzkIVP9QTzguY47SBSwtxZViltG oe0dwTDmcZXrTHZ6fAkmyw== 0000898430-99-002015.txt : 19990628 0000898430-99-002015.hdr.sgml : 19990628 ACCESSION NUMBER: 0000898430-99-002015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST WATER CO CENTRAL INDEX KEY: 0000092472 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99618087 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 March 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the transition period from________________ to________________ Commission file number: 0-8176 [LOGO OF] Southwest Water Company (Exact name of registrant as specified in its charter) Delaware 95-1840947 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (Address of principal executive offices) (Zip Code) (626) 915-1551 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 7, 1999, there were 4,264,619 common shares outstanding. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information: Page No. - - ------- ---------------------- ------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 2 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 3 Notes to Condensed Consolidated Financial Statements 4 - 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 9 Part II. Other Information: - - ------- ----------------- Item 1. Legal Proceedings 10- 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, - - --------------------------------------------------------------------------------------------------------------- ASSETS 1999 1998 - - --------------------------------------------------------------------------------------------------------------- (unaudited) (in thousands) Current Assets: Cash and cash equivalents $ 260 $ 394 Customers' accounts receivable, net 7,824 8,630 Other current assets 2,815 2,586 - - --------------------------------------------------------------------------------------------------------------- 10,899 11,610 Property, Plant and Equipment: Utility property, plant and equipment -- at cost 146,741 144,690 Contract operations property, plant and equipment -- at cost 4,991 4,678 - - --------------------------------------------------------------------------------------------------------------- 151,732 149,368 Less accumulated depreciation and amortization 41,219 40,130 - - --------------------------------------------------------------------------------------------------------------- 110,513 109,238 Other Assets 8,915 9,079 - - --------------------------------------------------------------------------------------------------------------- $ 130,327 $ 129,927 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - - --------------------------------------------------------------------------------------------------------------- Current Liabilities: Current portion of bank notes payable and long-term debt $ 2,154 $ 1,679 Accounts payable 1,632 2,782 Other current liabilities 10,364 9,827 - - --------------------------------------------------------------------------------------------------------------- 14,150 14,288 Other Liabilities and Deferred Credits: Long-term debt 28,900 28,900 Bank notes payable 3,922 4,500 Advances for construction 8,328 8,049 Contributions in aid of construction 31,886 31,706 Deferred income taxes 4,570 4,430 Other liabilities and deferred credits 3,025 2,911 - - --------------------------------------------------------------------------------------------------------------- Total Liabilities and Deferred Credits 94,781 94,784 Stockholders' Equity Cumulative preferred stock 517 517 Common stock 42 42 Paid-in capital 30,524 30,127 Retained earnings 4,463 4,457 - - --------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 35,546 35,143 - - --------------------------------------------------------------------------------------------------------------- $ 130,327 $ 129,927 =============================================================================================================== See accompanying notes to condensed consolidated financial statements.
1 Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, - - ------------------------------------------------------------------------------------ 1999 1998 - - ------------------------------------------------------------------------------------ (in thousands except per share data) Operating Revenues $ 16,649 $ 15,946 Operating Expenses: Direct operating expenses 12,536 12,159 Selling, general and administrative 2,934 2,765 15,470 14,924 - - ------------------------------------------------------------------------------------ Operating Income 1,179 1,022 Other Income (Expense): Interest expense (759) (818) Interest income 17 17 Other 152 83 - - ------------------------------------------------------------------------------------ (590) (718) Income Before Income Taxes 589 304 Provision for income taxes 235 122 - - ------------------------------------------------------------------------------------ Net Income 354 182 Dividends on preferred shares 7 7 - - ------------------------------------------------------------------------------------ Net Income Available for Common Shares $ 347 $ 175 ==================================================================================== Earnings per Common Share: Basic $ 0.08 $ 0.04 Diluted $ 0.08 $ 0.04 ==================================================================================== Cash Dividends per Common Share $ 0.08 $ 0.072 ==================================================================================== Weighted Average Outstanding Common Shares: Basic 4,246 4,171 Diluted 4,371 4,265 ====================================================================================
See accompanying notes to condensed consolidated financial statements. Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, - - ---------------------------------------------------------------------------------- 1999 1998 - - ---------------------------------------------------------------------------------- (in thousands) Cash Flows From Operating Activities: Net Income $ 354 $ 182 Adjustments to reconcile net income to net cash provided by operating activities 1,438 $ 889 - - ---------------------------------------------------------------------------------- Net cash provided by operating activities 1,792 1,071 - - ---------------------------------------------------------------------------------- Cash Flows From Investing Activities: Additions to property, plant and equipment (2,217) (2,340) Other investments, net 125 120 Net cash used in investing activities (2,092) (2,220) - - ---------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net proceeds from dividend reinvestment plan, employee stock purchase plan, and stock option plans 397 118 Contributions in aid of construction 262 1,027 Dividends paid (348) (307) Net repayment of bank notes payable (103) (191) Payments on advances for construction, net of additions (42) (42) - - ---------------------------------------------------------------------------------- Net cash provided by financing activities 166 605 - - ---------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (134) (544) Cash and cash equivalents at beginning of period 394 1,237 - - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 260 $ 693 - - ---------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 557 $ 553 Income taxes $ 275 $ 350 Depreciation and amortization $ 1,123 $ 1,080 Non-cash contributions in aid of construction conveyed to Company by developers $ 328 $ 0 See accompanying notes to condensed consolidated financial statements.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (Unaudited) 1. Southwest Water Company ("the Company" or "Registrant") together with its subsidiaries is engaged in the water management business, providing water and wastewater services to nearly three-quarters of a million people located throughout California, Texas, New Mexico and Mississippi. Through its wholly owned subsidiary, ECO Resources, Inc. ("ECO"), the Company operates and manages water and wastewater treatment facilities owned by cities, municipal utility districts and private entities. The Company conducts regulated water utility operations through two wholly owned subsidiaries, Suburban Water Systems ("Suburban"), and New Mexico Utilities, Inc. ("NMUI"). The unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary to present fairly the financial position of the Company as of March 31, 1999, and the Company's results of operations for the three months ended March 31, 1999. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 ("the 1998 Annual Report"). 3. The water services industry is seasonal and as such, the results of operations for the three months ended March 31, 1999 do not necessarily indicate the results to be expected for the full year. The first and fourth quarters of each year are normally the lowest in terms of average customer water usage for the Company's water utilities. Rainfall and weather conditions affect utility operations, with most water consumption occurring during the second and third quarters of each year when weather tends to be hot and dry. The Company's contract operations business is also seasonal in nature. For example, heavy rainfall during a quarter would hamper the Company's ability to perform billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. 4. The Company records earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 requires the computation of basic EPS and diluted EPS. Basic EPS is used to measure the performance of the Company over the reporting period by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is used to measure the performance of the Company over the reporting period after giving effect to all dilutive potential common shares that would have been outstanding if the dilutive common shares had been issued. Common equivalent shares arise from stock options. 5. Beginning in 1999, the Company is subject to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivatives. Currently, the Company does not have any derivative instruments which require disclosure under SFAS No. 133, and SFAS No. 133 is not expected to have any effect on the Company's financial position or results of operations. 6. The 1998 earnings per common share, cash dividends per common share and weighted average outstanding common shares reflect a 5-for-4 stock split paid in the form of a stock dividend to stockholders of record on October 1, 1998. 4 7. As discussed in the 1998 Annual Report, in 1996, the Company purchased a 49% interest in Windermere Utility Company ("Windermere") and in May 1999, the Company signed a third amendment to the RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("the Agreements"). The Agreements permit the majority shareholder to acquire the Company's interest in Windermere at an agreed-upon price. If the majority shareholder does not exercise his option, then the Company has the right to acquire 100% of Windermere. The amendment extends to September 30, 1999 the date by which the majority shareholder could exercise this right. 8. As discussed in the 1998 Annual Report, in August 1998, Suburban was granted an Exclusive Negotiation Agreement ("negotiation agreement") with a term of 120 days by the City of West Covina ("West Covina"), and the negotiation agreement was extended to July 1999. The purpose of the agreement is for Suburban and West Covina to establish a price that will allow West Covina to divest itself of its water distribution system and facilities. Completion of negotiations would allow Suburban to either purchase or lease West Covina's water system, adding approximately 7,000 water connections to Suburban's current customer base. 9. As discussed in the 1998 Annual Report, the City of Albuquerque ("the City") has initiated an action in eminent domain to acquire the operations of NMUI. At present, discussions are ongoing, and the City desires a rapid resolution to the legal action. The Company is participating in these discussions; however, there is no assurance that these discussions will lead to a settlement of the legal action, or that a resolution will be reached quickly. This matter is more fully discussed in Part II, Item I, Legal Proceedings. 10. As discussed in the 1998 Annual Report, the Company has two reportable segments as defined under the requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". There is no difference in the basis of segmentation or in the basis of measurement of segment profit or loss from the information reported in the 1998 Annual Report. The following table sets forth disclosure about the Company's reportable segments as required by SFAS No. 131.
Total Total Non- Segment Consolidated Regulated Regulated Information Other Information --------- --------- -------------- ------------- ----------- (in thousands) As of March 31, 1999 -------------------- Revenues from external customers $8,852 $ 7,797 $ 16,649 $ 0 $ 16,649 Segment operating profit 171 2,021 2,192 (1,013) 1,179 Segment assets 9,506 116,501 126,007 4,320 130,327 As of March 31, 1998 -------------------- Revenues from external customers $9,032 $ 6,914 $ 15,946 $ 0 $ 15,946 Segment operating profit 199 1,607 1,806 (784) 1,022 Segment assets 9,357 110,108 119,465 4,605 124,070
5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: Liquidity and capital resources of the Company are influenced primarily by construction expenditures at Suburban for the replacement and renovation of water utility facilities and by construction expenditures for new water and wastewater utility facilities at NMUI. The Company's cash flow may also be influenced by new business development and acquisition costs. At March 31, 1999, the Company had cash and cash-equivalent balances totaling $260,000. The Company has three separate lines of credit from three commercial banks, which expire in 2000 and which the Company expects to renew in the normal course of business. The total credit capacity of the three lines is $16,000,000. At March 31, 1999, outstanding borrowing was $5,176,000 and the unused borrowing capacity was $10,824,000. During the first three months of 1999, the Company repaid $103,000 on its lines of credit. As of March 31, 1999, the Company was in compliance with all applicable financial covenants as required by its line of credit agreements. In addition to its lines of credit, the Company has existing borrowing capacity under its First Mortgage Bond Indentures. Under these indentures, the Company has remaining borrowing capacity of approximately $37,705,000. However, the amount of additional borrowing available to the Company under its current lines of credit is limited by financial covenants that restricted additional borrowing at March 31, 1999 to the unused credit line amount. During the first three months of 1999, the Company's additions to property, plant and equipment were $2,545,000, representing an increase of $205,000 over the same period in 1998. Developers made contributions in aid of construction ("CIAC"), and advances totaling $590,000 of which $262,000 was received in cash. Company-financed capital additions were $1,955,000, which was paid for primarily by cash flow from operations. In 1999, the Company estimates that its capital additions will be approximately $8,000,000 and that cash flow from operations will fund these additions. However, short-term borrowing is available to meet construction requirements not funded by operations or CIAC. The Company anticipates that its available short-term borrowing capacity and its cash flow generated from operations will be sufficient to fund its activities over the next 12 months. If additional cash were needed, the Company would consider alternative sources, including long-term financing. The amount and timing of any future long-term financing would depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban or NMUI. If the Company were unable to renew its existing lines of credit or unable to obtain additional long-term financing, capital spending would be reduced or delayed until new financing arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. Similarly, if the Company were to need additional cash to fund an acquisition, financing arrangements could include long-term borrowing or equity financing. REGULATORY AFFAIRS: Regulation: ECO's pricing is not subject to regulation by a public utilities commission. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. ECO's longer-term water and wastewater service contracts, primarily with cities, typically include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. The California Public Utilities Commission ("CPUC") and the New Mexico Public Regulatory Commission ("NMPRC") (formerly the New Mexico Public Utility Commission), regulate the rates and operations of 6 Suburban and NMUI, respectively. The rates allowed are intended to provide the utilities an opportunity to recover costs and earn a reasonable return on common equity. Although the Company is not currently seeking any rate increase, future construction expenditures and increased direct operating expenses may require periodic requests for rate increases in the future. Regulatory Developments: Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. In New Mexico, a legislative committee continues to review proposed changes to the Public Utilities Act (the "PUA"). Whether legislative, CPUC or PUA changes will be enacted, or, if enacted, what the terms of any changes would be, are not known by the Company. Therefore, management cannot predict the impact, if any, of final legislative changes, CPUC-developments or PUA changes on the Company's financial position or results of operations. ENVIRONMENTAL AFFAIRS: As a contract operator, ECO does not own any of the water sources, water production facilities, or water distribution systems that it operates for its clients, nor does ECO own any of the wastewater collection systems or wastewater treatment facilities that it operates. Although not the owner, ECO is responsible for operating these water and wastewater facilities in compliance with all federal, state and local health standards and regulations. Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC and the NMPRC, respectively. The responsibilities of both regulatory agencies are to ensure an adequate supply of healthful, potable water to residents of their respective states. The Company's operations are also subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the United States Environmental Protection Agency (the "EPA") and various state regulatory agencies. Both the EPA and state regulatory agencies require periodic testing and sampling of water. Costs associated with the testing of the Company's water supplies have increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. YEAR 2000 ISSUE: As discussed in the Company's 1998 Annual Report, the Year 2000 ("Y2K") issue is the result of software applications using a two-digit code instead of a four- digit code to identify the year. Such applications may be unable to interpret dates beyond 1999, which could result in system failure or other erroneous data in the year 2000 causing serious disruptions in operations. The Company began evaluating the Y2K issue in 1998 and has implemented a five-phase plan to assess its exposure from potential Y2K-related failures in its internal systems and those of its significant suppliers, vendors and customers. The first phase of the plan is to conduct an inventory of all systems and programs to determine which might be affected by the Y2K issue. The second phase involves assessment and determination as to how to correct any Y2K issues that are identified in the first phase of the Company's plan. The third phase of the plan involves implementation and testing of the corrective measures. The fourth phase of the plan is to ensure that all significant Y2K issues have been properly corrected and all critical internal systems are Y2K compliant. The final phase of the plan is to assess whether the Company's principal suppliers, vendors and material customers have Y2K issues that could adversely affect the Company. The first phase of the plan, conducting an inventory of systems and programs that may be affected by Y2K has been substantially completed. The Company's billing and general ledger systems are already 7 substantially Y2K compliant. For those systems that are not compliant, the second phase of the plan, identifying corrective measures, has been substantially completed with solutions identified to correct the existing system problems. The third phase of the plan, implementation and testing of corrective measures, is currently in progress and is expected to be completed by the second quarter of 1999, with final critical internal systems Y2K compliant without material deviation by July 1999 (phase four). In the event compliance is not possible, the Company will consider replacing non-compliant software. Costs to be incurred in order for the Company to be Y2K compliant are estimated to be less than $100,000 and are not expected to have a material effect on the Company's financial position or results of operations. The fifth phase of the plan involves the Company contacting principal suppliers and vendors, all single source suppliers and vendors, and material customers including local governments and municipal utility districts to assess their readiness for Y2K. The Company is currently making inquiries with respect to Y2K compliance of these other systems; however; the Company has not received assurances that those other systems are Y2K compliant. If the systems of principal suppliers and vendors are found to be non-compliant, the Company will evaluate and consider appropriate contingency plans. The Company is unable to predict whether there will be a material adverse effect on the Company's financial position or results of operations since the final determination of the Y2K compliance of principal suppliers, vendors and material customers is not known at this time. The Company relies on relatively low technological equipment and processes for its water and wastewater treatment operations. If necessary, the Company has the ability to operate its water and wastewater systems manually should internal computer systems fail. On January 1, 2000, the Company plans to have operations personnel on site and available to operate the systems manually in the event that any internal computer systems fail. However, a long-term loss of electrical power would have a material adverse effect on the operations of the Company, the Company's financial position and the results of operations. RISK FACTORS Certain statements contained in this Form 10-Q Report for the period ending March 31, 1999 ("the March Report") are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward- looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any performance or achievements planned, expressed or implied by such forward-looking statements. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. The March Report should be read in conjunction with the Company's 1998 Annual Report for more detailed descriptions of the risk factors affecting the Company which include, but are not limited to, revenue backlog information, expectations regarding sales growth and new contracts and potential acquisitions, weather conditions, changes in business conditions, legal and other contingencies. 8 RESULTS OF OPERATIONS: All earnings per share amounts reflect a 5-for-4 stock split paid in the form of a stock dividend to stockholders of record on October 1, 1998, and a 5-percent stock dividend granted to stockholders of record on January 2, 1998. Three Months Ended March 31, 1999 Compared To Three Months Ended March 31, 1998 Diluted earnings per common share were $.08 in 1999 compared to $.04 during the same period in 1998. Operating income increased $157,000 or 15%, and, as a percentage of operating revenues, was 7% in 1999 compared with 6% in 1998. ECO's operating income decreased $28,000, due primarily to the loss of an operations and maintenance ("O&M") contract in New Mexico in 1998, and also due to a decrease in the amount of project work performed outside the scope of existing contracts in the central Texas region. Operating income at the utilities increased $409,000, due primarily to a 21% increase in water consumption by Suburban's customers as a result of dry weather during the quarter, as compared with wet weather in 1998 due to the effects of El Nino-generated storms. At NMUI, there was an increase in both water consumption and the number of customers. Parent company expenses increased $224,000, due primarily to self-insured retention reserves related to litigation. Operating revenues Operating revenues increased $703,000 or 4% in the first quarter of 1999 compared with the same period in 1998. ECO's revenues decreased $180,000 or 2%, primarily due to the loss of an O&M contract in New Mexico in July 1998. Suburban's revenues increased $657,000 or 11% due primarily to increased water consumption by Suburban's customers which increased as a result of mild, dry winter weather. NMUI also experienced a mild winter, which contributed to a 27% increase in water consumption. An increase in the number of customers at NMUI also contributed to higher revenues. Direct operating expenses Direct operating expenses increased $377,000 or 3%. As a percentage of operating revenues, these expenses were 75% in 1999 and 76% in 1998. ECO's direct operating expenses decreased $182,000 primarily as a result of the loss of an O&M contract in New Mexico in 1998 and also due to lower expenses associated with reduced billable work performed in the central Texas region. Suburban's direct operating expenses increased $415,000, primarily reflecting the increase in customer water consumption. NMUI's direct operating expenses increased $144,000 as a result of the increase in NMUI's customer water consumption. Selling, general and administrative Selling, general and administrative expenses for the first quarter of 1999 increased $169,000 or 6% as compared with the same period in 1998. As a percentage of operating revenues, these expenses were 18% in 1999 and 17% in 1998. ECO's selling, general and administrative expenses increased $30,000, primarily due to increased regional marketing costs associated with new business development opportunities. General and administrative expenses at the utilities decreased $85,000, primarily as a result of decreased compensation-related expenses and legal fees. As discussed above, general and administrative expenses of the parent company increased $224,000 due primarily to self-insured retention reserves related to litigation. 9 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in the Company's 1998 Annual Report, Suburban and the Company were served with a summons and an amended complaint in the Kristin Santamaria, et al vs. Suburban Water Systems, et al action ("Santamaria"). The amended complaint lists approximately 350 plaintiffs who contend, in essence, that they or deceased family members are or were long-time residents of the San Gabriel Valley ("the Valley") and that, by virtue of their residence in the Valley, they have suffered long-term exposure to various hazardous substances in their drinking water resulting in serious illness or, in some cases, wrongful death. Of that number, 77 contend that they received their water from Suburban. Suburban and the Company filed demurrers (i.e. motions to dismiss the action) which alleged that the action must be dismissed because exclusive jurisdiction of the subject matter rests with the CPUC. On August 27, 1998, the Superior Court Judge agreed and dismissed the case as to all water utility defendants. The plaintiffs have appealed that decision and have filed their opening brief in the First Appellate District, Division 5. As discussed in the Company's 1998 Annual Report, the Company and Suburban were served with a summons and complaint in a second action entitled Christine Boswell et al vs. Suburban Water Systems, et al, in the Los Angeles County Superior Court. There are 14 plaintiffs and the allegations against Suburban are similar to those in Santamaria. The plaintiffs filed a petition in the Court of Appeal requesting that the trial court be required to terminate a stay order issued with respect to this action and rule on the demurrers filed by the defendants. The water utility defendants asked the Court of Appeal to order the trial court to dismiss these actions based on the exclusive jurisdiction of the CPUC. The issues have been fully briefed and oral argument was held on April 19, 1999 before the Court of Appeal. A decision is expected within the next three months. A third action, Anthony Anderson, et al vs. Suburban Water Systems, et al was filed in the Los Angeles County Superior Court. The allegations of the Anderson action are virtually identical to the Santamaria action and involve approximately 180 plaintiffs. Of that number, 57 claim to be customers of Suburban. By stipulation of the parties, this case is stayed pending the outcome of the Santamaria appeal. A fourth action, Demciuc, et al vs. Suburban Water Systems, et al was filed in the Los Angeles County Superior Court. In that case, 10 consumers are making claims against Suburban. That action is similar to the Boswell action and involves two other water purveyors and five industrial defendants. All of the parties to the Demciuc action have agreed to stay that action pending the outcome of the Boswell petitions. The Company and Suburban have recently been added as defendants in the following cases: Georgiana Dominguez vs. Southern California Water Company, et al, Jeff Adler vs. Southern California Water Company, et al, Loretta Celi vs. San Gabriel Valley Water Company, et al, and Shamille A. Criner vs. San Gabriel Water Company, et al, all pending in the Los Angeles County Superior Court. These complaints are similar to the complaints in the Boswell and Demciuc cases discussed above. These complaints allege service of water to the plaintiffs by water companies other than Suburban and it is unknown what the charging allegations would be as to Suburban and the Company. These cases are all stayed pending resolution of the Boswell writ and other related writs. The Company and Suburban intend to vigorously defend all pending actions, and have requested that their liability insurance carriers defend and indemnify the Company and Suburban. Several of the liability insurance carriers are currently contributing to the costs of defense of the lawsuits. Based upon information available at this time, management does not expect that these actions will have a material effect on the Company's financial position or results of operations. Suburban has applied for and received CPUC authority to establish and maintain a memorandum or tracking account to accumulate all costs and fees incurred by Suburban in defense of these actions and any similar actions which may be filed. Costs and fees incurred in legal actions against industrial potentially responsible parties, and costs and fees incurred in seeking recovery against Suburban's insurance carriers are included in this memorandum account. The Company and Suburban are unable to 10 estimate or predict whether the CPUC will ultimately allow Suburban to recover these accumulated costs and fees from Suburban's customers or, if such recovery is allowed, how much of such costs and fees will be recoverable. In March 1998, the CPUC issued an order instituting investigation ("OII") directed to all Class A and B water utilities in California, including Suburban. Information about the OII is set forth in the 1998 Annual Report. While the CPUC is actively investigating the issues concerned with water quality, the Company and Suburban are unable to predict what actions, if any, will be taken by the CPUC and/or the Department of Health Services as the result of this investigation, or their impact on the operations or financial position of the Company and Suburban. As discussed in the 1998 Annual Report, in October 1998, the Company and ECO were served with a summons and complaint in an action entitled Patrick K. Accrocco, et al vs. ECO Resources, Inc., et al in the District Court of Fort Bend County, Texas, arising out of a fatal auto accident. The Company believes that its maximum exposure in this action is limited to the self-insured retention under its umbrella liability policy. Based on the information available at this time, management does not expect that this action will have a material effect on the Company's financial position or results of operations. As discussed in the 1998 Annual Report , the City of Albuquerque (the "City") initiated an action in eminent domain to acquire the operations of NMUI. The Company believes that the fair market value of NMUI is substantially in excess of the amount offered in the City's complaint. Under New Mexico state law, there are procedures which would allow the City to take possession of NMUI prior to the resolution of the fair market issue; however, the Company believes that it has adequate defenses should the City choose to pursue these procedures. At present, discussions are ongoing, and the City desires a rapid resolution to the legal action. The Company is participating in these discussions. However, there is no assurance that these discussions will lead to a settlement of the legal action, or that a resolution will be reached quickly. The Company and its subsidiaries are the subjects of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its consolidated financial position, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished pursuant to Item 601 of Regulation S-K: 27 Financial Data Schedule. (b) Reports on Form 8-K None. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. SOUTHWEST WATER COMPANY ----------------------- (Registrant) Dated: May 12, 1999 /s/ PETER J. MOERBEEK - - ------------------- --------------------- Peter J. Moerbeek Chief Financial Officer 12 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 260,000 0 8,940,000 (1,116,000) 0 10,899,000 151,732,000 41,219,000 130,327,000 14,150,000 28,900,000 0 517,000 42,000 34,987,000 130,327,000 16,649,000 16,649,000 12,536,000 15,470,000 (152,000) 35,000 759,000 589,000 235,000 354,000 0 0 0 354,000 0.08 0.08
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