-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RxbPBOGEkmJ3DSagCDN180MJUoyVivksBrlGEBxsIoxDVMS311PMTBJwvYP6UH4z QLddtvMmqXtmTgzA0k5MdA== 0000898430-95-001522.txt : 19950814 0000898430-95-001522.hdr.sgml : 19950814 ACCESSION NUMBER: 0000898430-95-001522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST WATER CO CENTRAL INDEX KEY: 0000092472 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951840947 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08176 FILM NUMBER: 95561678 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 FOR PERIOD ENDED 06/30/95 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 PERIOD ENDED JUNE 30, 1995 OR _______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number: 0-8176 LOGO OF SOUTHWEST WATER COMPANY SOUTHWEST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WATER COMPANY DELAWARE 95-1840947 (STATE OR JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 225 NORTH BARRANCA AVENUE, SUITE 200 WEST COVINA, CALIFORNIA 91791-1605 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (818) 915-1551 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On July 31, 1995, there were 2,438,297 common shares outstanding. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
Page No. -------- Part I. Financial Information: - ------- Item 1. Financial Statements: Consolidated Condensed Balance Sheets - June 30, 1995 and December 31, 1994 3 - 4 Consolidated Condensed Statements of Operations - Three months ended June 30, 1995 and 1994 5 Consolidated Condensed Statements of Operations - Six months ended June 30, 1995 and 1994 6 Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 1995 and 1994 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 Part II. Other Information: - -------- Item 1. Legal Proceedings 14 - 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS - --------------------------------------------------------------- June 30, December 31, 1995 1994 ----------- ------------ (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $335 $828 Customers' accounts receivable 7,188 6,021 Other current assets 1,871 2,011 ----------- ------------ 9,394 8,860 Property, Plant and Equipment: Utility property, plant and equipment - at cost 99,972 96,179 Non-utility property, plant and equipment - at cost 6,104 5,923 ----------- ------------ 106,076 102,102 Less accumulated depreciation and amortization 30,953 29,966 ----------- ------------ 75,123 72,136 Other Assets 6,244 5,838 ----------- ------------ Total $90,761 $86,834 =========== ============
See accompanying notes. 3 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------- June 30, December 31, 1995 1994 ----------- ------------ (Unaudited) (In thousands) Current Liabilities: Current portion of long-term debt and bank notes payable $6,882 $3,491 Accounts payable 1,200 1,185 Other current liabilities 6,616 6,455 ----------- ------------ 14,698 11,131 Other Liabilities and Deferred Credits: Long-term debt 20,500 20,500 Advances for construction 9,083 9,151 Contributions in aid of construction 11,049 10,683 Deferred income taxes 3,459 3,260 Other liabilities and deferred credits 3,738 3,577 ----------- ------------ Total Liabilities and Deferred Credits 62,527 58,302 Commitments and Contingencies Stockholders' Equity: Cumulative preferred stock 519 530 Common stock 24 24 Paid-in capital 17,361 17,241 Retained earnings 10,398 10,820 Unamortized value of restricted stock issued (68) (83) ----------- ------------ Total Stockholders' Equity 28,234 28,532 ----------- ------------ Total $90,761 $86,834 =========== ============
See accompanying notes. 4 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME For the three months ended June 30, 1995 and 1994 (Unaudited)
June 30, ------------------------------ 1995 1994 -------------- -------------- (In thousands except per share amounts) Operating Revenues $13,329 $12,694 Operating Expenses: Direct operating expenses 10,005 9,642 Selling, general and administrative 2,321 2,127 -------------- -------------- 12,326 11,769 -------------- -------------- Operating Income 1,003 925 Other Income (Expense): Interest expense (597) (569) Interest income 19 23 Other 1 2 -------------- -------------- (577) (544) -------------- -------------- Income Before Income Taxes 426 381 Provision for income taxes 178 140 -------------- -------------- Net Income 248 241 Dividends on preferred shares (7) (7) -------------- -------------- Net Income Available For Common Shares $241 $234 ============== ============== Earnings Per Common Share: Primary $0.10 $0.10 ============== ============== Fully diluted $0.10 $0.10 ============== ============== Cash Dividends Per Common Share $0.10 $0.10 ============== ============== Weighted-Average Outstanding Common And Common Equivalent Shares: Primary 2,431 2,401 ============== ============== Fully diluted 2,483 2,457 ============== ==============
See accompanying notes. 5 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME For the six months ended June 30, 1995 and 1994 (Unaudited)
June 30, --------------------- 1995 1994 -------- -------- (In thousands except per share amounts) Operating Revenues $24,619 $23,796 Operating Expenses: Direct operating expenses 19,025 18,354 Selling, general and administrative 4,440 4,255 -------- -------- 23,465 22,609 -------- -------- Operating Income 1,154 1,187 Other Income (Expense): Interest expense (1,157) (1,093) Interest income 44 42 Gain on sale of land 84 - Other 7 29 -------- -------- (1,022) (1,022) -------- -------- Income Before Income Taxes 132 165 Provision for income taxes 55 55 -------- -------- Net Income 77 110 Dividends on preferred shares (14) (14) -------- -------- Net Income Available For Common Shares $63 $96 ======== ======== Earnings Per Common Share: Primary $0.03 $0.04 ======== ======== Fully diluted $0.03 $0.04 ======== ======== Cash Dividends Per Common Share $0.20 $0.20 ======== ======== Weighted-Average Outstanding Common And Common Equivalent Shares: Primary 2,427 2,396 ======== ======== Fully diluted 2,479 2,453 ======== ========
See accompanying notes. 6 SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1995 and 1994 (Unaudited)
June 30, --------------------- 1995 1994 -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $77 $110 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,874 1,830 Deferred income taxes 199 1,011 Changes in assets and liabilities: Customers' accounts receivable (1,167) (799) Other current assets 140 (288) Accounts payable 15 (2,312) Other current liabilities 161 (659) Other, net (226) 389 -------- -------- Total adjustments 996 (828) -------- -------- Net cash provided by (used in) operating activities 1,073 (718) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (4,918) (3,850) Net redemption in U.S. Government securities - 1,014 -------- -------- Net cash used in investing activities (4,918) (2,836) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings of short-term debt 3,391 2,650 Contributions in aid of construction 366 131 Net proceeds from dividend reinvestment and employee stock purchase plans 161 147 Additions to advances for construction 122 - Dividends paid (498) (491) Payments on advances for construction (190) (534) Decrease in long-term debt - (9) -------- -------- Net cash provided by financing activities 3,352 1,894 -------- -------- Net decrease in cash and cash equivalents (493) (1,660) Cash and cash equivalents at beginning of year 828 2,979 -------- -------- Cash and cash equivalents at end of quarter $335 $1,319 ======== ========
See accompanying notes. 7 SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 1995 (Unaudited) 1. In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Southwest Water Company (hereafter together with its consolidated subsidiaries referred to as "Company" or "Registrant" unless the context otherwise indicates) reflect all adjustments (including adjustments which are of a normal recurring nature) necessary to present fairly the financial position and results of operations. 2. The results of operations for the periods ended June 30, 1995 and 1994 may not necessarily be indicative of the results to be expected for the full year. The second and third quarters normally incur the highest average water usage per customer for the Company's water utilities. The operations of the Company's service business are also seasonal in nature. 3. Primary earnings per share are calculated using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, after recognition of dividend requirements on preferred shares. Common equivalent shares arise from stock options. Fully diluted earnings per share were computed based upon the weighted-average number of common shares and dilutive common equivalent shares outstanding, assuming the 9.5% convertible subordinated debentures were converted at the beginning of the period and the related interest for the period, net of income taxes, was eliminated. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: At June 30, 1995, the Company had cash and cash equivalent balances totaling approximately $335,000 and unused lines of credit from commercial banks of $7,650,000. In 1995, the Company borrowed a net $3,400,000 on its lines of credit to meet construction and operating requirements. Additional borrowing is anticipated during 1995 to meet construction, operating and debt service requirements. The Company has additional borrowing capacity under its First Mortgage Bond Indentures of approximately $22,300,000. The amount of additional borrowings available to the Company under the indentures and lines of credit is limited by certain financial covenants that restrict additional borrowings at June 30, 1995, to a maximum of approximately $8,400,000. The Company's liquidity and capital resources are influenced primarily by construction expenditures at Suburban Water Systems (Suburban) for the replacement and renovation of existing water utility facilities and construction expenditures for new water and wastewater utility facilities at New Mexico Utilities, Inc. (New Mexico). Additionally, liquidity is influenced by the Company's continuing investment in its service business, ECO Resources, Inc. (ECO). The Company's additions to property, plant and equipment approximated $4,918,000 for the six months ended June 30, 1995, representing an increase of $1,068,000 over the same period of 1994. This increase relates primarily to capital expenditures incurred at New Mexico due to residential and commercial construction in New Mexico's service area. Approximately $660,000 of the total additions were received by the Company's utilities through developer contributions. The Company will continue its construction programs, with 1995 capital expenditures estimated at approximately $12,000,000, of which approximately $3,000,000 is estimated to be in the form of developer contributions. Because these estimates are subject to management's ongoing review, actual expenditures may vary. These construction expenditures, as well as the Company's ongoing investment in ECO, affect the Company's liquidity. The amount and timing of future long-term financings will depend on various factors discussed earlier, 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 AFFAIRS AND INFLATION: The rates and operations of the Company's utilities are regulated primarily by the Public Utilities Commission of the State of California (CPUC) and the New Mexico Public Utility Commission (NMPUC). The rates are intended to provide a reasonable return on common equity. The Company's expected future construction expenditures and increased direct operating expenses will require periodic requests for rate increases. Effective January 1, 1995, the CPUC granted Suburban an annual "step" adjustment for its Whittier/La Mirada District customers, yielding additional annual revenues of $286,000. Suburban is currently authorized an 11% return on common equity. This authorized rate of return is moderately favorable in comparison to rates currently granted to other water utilities by the CPUC. 9 Suburban filed a general rate increase application with the CPUC in May 1995. The general rate increase, if approved, would be effective early in 1996. Suburban's general rate application covers both of its service districts based upon recent suggestions by the CPUC. This general rate increase application requests an increase in rates of approximately 11%. New Mexico filed a general sewer rate increase application with the NMPUC in May 1995, requesting a 10% increase in rates. From 1989 through June 1995, the Company recorded pretax gains on five land transactions which aggregated $1,900,000. On January 7, 1994, the CPUC ruled on the 1989 sale and allowed Suburban to retain $210,000 in income, in accordance with CPUC accounting regulations, as opposed to distributing it to ratepayers in the form of water rate reductions. However, a more recent CPUC decision involving an unrelated water company required that its gain on the sale of land be split equally between the ratepayers and the stockholders. Suburban's remaining transactions (with pretax gains of $1,690,000) are subject to CPUC review; however, management believes these gains belong to the stockholders. Accordingly, no provision for any liability has been recorded in the accompanying consolidated condensed financial statements. Both the California Assembly and Senate are reviewing legislation entitled the Water Utility Infrastructure Improvement Act of 1995 (SB1025). This bill, introduced by Senator Peace, would amend existing law to require water utilities which sell property that is no longer necessary or useful, to invest the net proceeds in utility plant. Additionally the bill authorizes the water utility the opportunity to earn a reasonable return on the reinvestment. This bill, if passed, will apply to properties sold in 1996 and later. CPUC review of any such transaction will only be needed to ensure that net sale proceeds are invested in utility plant. The operations of ECO are not regulated. ECO's long-term water and wastewater service contracts typically include annual inflation adjustments that approximate inflation rates. Contracts with municipal utility districts, which are usually shorter term contracts, do not generally include inflation adjustments. ENVIRONMENTAL AFFAIRS: The Company's operations are subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the United States Environmental Protection Agency (EPA) and various state regulatory agencies. The EPA and state regulatory agencies continue to promulgate new regulations mandated by the Federal Water Pollution Control Act, the Safe Drinking Water Act, and the Resource Conservation and Recovery Act. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. Costs associated with the testing of the Company's water supplies have, however, increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, if any, will be recoverable through increased rates and contract revenues. 10 RESULTS OF OPERATIONS: Three Months Ended June 30, 1995 Versus Three Months Ended June 30, 1994 - ------------------------------------------------------------------------ Fully diluted earnings per common share for the three months ended June 30 was $.10 in both 1995 and 1994. Results for the three months ended June 30, 1995 include a net gain of $105,000 resulting from the recovery of prior years' property tax assessments recorded by Suburban. Operating income increased $78,000 in the three months ended June 30, 1995, over the same period in 1994, and, as a percentage of operating revenues, increased from 7% in 1994 to 8% in 1995. Utility operating income increased $350,000 during the three months ended June 30, 1995. Suburban received the benefits of a step revenue rate increase, effective January 1, 1995 and, as noted above, recorded a benefit from recovery of disputed property tax assessments. New Mexico experienced the positive effects of an increase in customer water consumption resulting from the addition of new customers during 1995 as compared with 1994. ECO experienced an increased operating loss of $202,000 during this same period, due primarily to unusually high operating expenses associated with new contracts, lower gross profit margins on billable and project services and high expenses associated with acquiring new business. The results of operations for the three-month period may not necessarily be indicative of the results to be expected for the full year, due to the seasonal nature of the Company's operations. The second and third quarters normally include the highest average water usage per customer for the Company's water utilities. The operations of ECO are also seasonal in nature. Moderate rainfall hampers ECO's performance because less billable work can be performed. Heavy rainfall often has the opposite effect, since it may create opportunities for additional billable work. Operating revenues - ------------------ Operating revenues increased $635,000 or 5% during the three months ended June 30, 1995 over the same period in 1994. Water utility operating revenues increased by $255,000. Southern California experienced unusually heavy rainfall during this period as compared with 1994, leading to a moderate decrease of water consumption by Suburban customers. However, Suburban received the benefits of a step rate increase which resulted in additional revenues of $87,000. New Mexico's customers' water consumption increased by 9% during this period over 1994, representing an increase in water revenues of $63,000. As anticipated, construction has continued in New Mexico's service area with 144 new water customers added during the three months ended June 30, 1995. Higher sewer collection revenues by New Mexico, resulting from higher volume, led to an increase in revenues of $129,000. ECO's revenues increased $380,000 during this period as compared to the same period in 1994 as a result of revenues from new contracts, as well as increases in billable and project revenues in Texas. Direct operating expenses - ------------------------- Direct operating expenses increased $363,000 or 4% in the three months ended June 30, 1995, as compared to the same period of 1994. As a percentage of operating revenues, these expenses decreased from 76% in 1994 to 75% in 1995. 11 Water utility direct operating expenses decreased $172,000 during the three months ended June 30, 1995, as compared to the same period of 1994. The decrease in Suburban's water production resulted in a moderate decrease in water, power and gas expenses. Suburban also recorded a $175,000 benefit from the recovery of disputed property tax assessments as noted above. These decreases in direct operating expenses were partially offset by higher sewer collection expenses in New Mexico, related directly to the corresponding increase in volume, as well as increases in payroll, associated payroll benefits, depreciation, repairs and other expenses at Suburban and New Mexico. ECO's direct operating expenses increased approximately $535,000 during this period as compared with the same period of 1994, resulting in part from unusually high expenses associated with the addition of new contracts in Texas. ECO anticipates performing certain repairs and maintenance services for a new contract customer in the Rio Grande Valley during the third and fourth quarters of 1995. Once these repairs are completed, ECO will reduce the level of operating expenses incurred for this customer because ECO anticipates fewer operating inefficiencies and other system maintenance problems. Additionally, higher expenses associated with increased billable and project revenues in Texas also contributed to the increase in direct operating expenses. Selling, general and administrative - ----------------------------------- Selling, general and administrative expenses increased $194,000 during the three months ended June 30, 1995, as compared to the same period of 1994. As a percentage of operating revenues, these expenses remained constant at 17% in 1995 and 1994. Suburban's legal expenses decreased $64,000 during this period compared with the same period of 1994. This amount was offset by higher payroll, associated payroll benefits and other expenses of $141,000 at Suburban and New Mexico. ECO's selling, general and administrative expenses increased $47,000 during this period due to ECO's expanded sales and marketing activity in the pursuit of new contracts. General and administrative expenses of the parent holding company increased $70,000, primarily due to higher consulting and outside service expenses. Six Months Ended June 30, 1995 Versus Six Months Ended June 30, 1994 - -------------------------------------------------------------------- Fully diluted earnings per common share for the six months ended June 30 decreased from $.04 per share in 1994 to $.03 per share in 1995. Results for the six months ended June 30, 1995 include a net gain of $50,000, or $.02 per fully diluted share, resulting from the sale of land by Suburban, and a net gain of $105,000 due to recovery of disputed property tax assessments as discussed earlier. Operating income decreased $33,000 in the six months ended June 30, 1995 over the same period in 1994, and, as a percentage of operating revenues, remained level at 5% in 1994 and 1995. Utility operating income increased $295,000 during the six months ended June 30, 1995. Suburban experienced the negative effects of a decrease in customer water consumption due to heavy rains and cooler than normal temperatures in Southern California, but operating income increased due to lower expenses and the recovery of disputed property tax assessments. New Mexico experienced the positive effects of increases in customer water consumption resulting from the addition of new customers during this period as compared with the same period of 1994. ECO experienced an increased operating loss of $308,000 during this same period, due primarily to unusually high operating expenses associated with new contracts, lower gross profit margins on billable and project services and higher expenses associated with acquiring new business. The results of operations for the six-month period may not necessarily be indicative of the results to be expected for the full year, due to the seasonal nature of the Company's operations. The second and third quarters normally include the highest average water usage per customer for the Company's water utilities. The operations of ECO are also seasonal in nature. Moderate rainfall hampers ECO's performance because less billable work can be performed. Heavy rainfall often has the opposite effect, since it may create opportunities for additional billable work. 12 Operating revenues - ------------------ Operating revenues increased $823,000 or 3% during the six months ended June 30, 1995 over the same period in 1994. Water utility operating revenues increased by $131,000. Heavy rainfall and cooler temperatures in Southern California caused Suburban's customers to decrease water consumption by approximately 5% during this period as compared with 1994, resulting in a revenue decrease of approximately $394,000. However, Suburban received the benefits of a step rate increase which resulted in additional revenues of $164,000 in 1995. New Mexico's customers' water consumption increased by 11% during this period over 1994, representing an increase in water revenues of $109,000. As anticipated, construction has continued in New Mexico's service area with 274 new water customers added during the six months ended June 30, 1995. Higher sewer collection revenues by New Mexico, resulting primarily from higher volume, led to an increase in revenues of $252,000. ECO's revenues increased $692,000 during this period as compared to the same period in 1994 as a result of revenues from new contracts, as well as increases in billable and project revenues in Texas. Direct operating expenses - ------------------------- Direct operating expenses increased $671,000 or 4% in the six months ended June 30, 1995 as compared to the same period of 1994. As a percentage of operating revenues, these expenses remained constant at 77%. Water utility direct operating expenses decreased $185,000 during the six months ended June 30, 1995 as compared to the same period of 1994. The decrease in Suburban's water production resulted in a decrease in water, power and gas expenses. Suburban also recorded a $175,000 benefit from the recovery of disputed property tax assessments as noted earlier. These decreases in direct operating expenses were partially offset by higher sewer collection expenses in New Mexico related directly to the corresponding increase in volume, as well as increases in payroll, associated payroll benefits, depreciation, repairs and other expenses at Suburban and New Mexico. ECO's direct operating expenses increased approximately $856,000 during 1995 as compared with 1994, resulting in part from unusually high expenses associated with the addition of new contracts in Texas. ECO anticipates performing certain repairs and maintenance services for a new contract customer in the Rio Grande Valley during the third and fourth quarters of 1995. Once these repairs are completed, ECO will reduce the level of operating expenses incurred for this customer because ECO anticipates fewer operating inefficiencies and other system maintenance problems. Higher expenses associated with increased billable and project revenues also contributed to the increase in direct operating expenses. Additionally, the new contracts entered into in 1995 earned lower gross profit margins than similar contracts in 1994 due to competitive pressures and contract start-up costs. Selling, general and administrative - ----------------------------------- Selling, general and administrative expenses increased $185,000 during the six months ended June 30, 1995, as compared to the same period of 1994. As a percentage of operating revenues, these expenses remained constant at 18% in 1995 and 1994. Suburban's legal expenses decreased $138,000 during this period compared with the same period of 1994. This amount was offset by higher payroll, associated payroll benefits and other expenses of $159,000 incurred by Suburban and New Mexico. ECO's selling, general and administrative expenses increased $107,000 during this period, primarily related to ECO's expanded sales and marketing activity in the pursuit of new contracts, as well as higher consulting and insurance expenses. Additionally, ECO settled a lawsuit for $37,000 during the first quarter of 1995. 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- As described in Registrant's Form 10-K Reports for the years ended December 31, 1992, 1993 and 1994, and its Form 10-Q Report for the quarter ended March 31, 1995, Suburban was a defendant in three lawsuits arising from a chlorine gas leak that occurred in October 1990 at a Suburban water distribution facility. In two of the actions, the plaintiffs were, respectively, five employees and 22 employees (and some spouses) of a manufacturing plant located adjacent to a water production facility owned and operated by Suburban. In the third action, the plaintiff was the workers' compensation carrier for the operator of the adjacent manufacturing plant. The plaintiffs in the three actions sought general damages in excess of $3.8 million, and the plaintiffs in the action involving 22 employee plaintiffs sought unspecified punitive damages. As earlier reported, in January 1994 Suburban settled with all of the plaintiffs for aggregate cash payments of approximately $1.5 million. These settlements included releases of all claims against Suburban and dismissals with prejudice of the actions and are the last known claims arising out of this incident. At the time of the chlorine gas incident, Registrant and Suburban maintained liability insurance coverage of $20 million. However, the Registrant's primary and excess liability insurance carrier declined to defend or indemnify Suburban on the basis of allegedly applicable exclusions in the policies. Suburban believes it is entitled to defense and indemnity under these policies and filed a lawsuit against the carrier to obtain reimbursement for the full settlement amounts and all associated defense costs. On May 3, 1994, in the U.S. District Court, Central District of California, the insurance carrier was granted a summary judgment dismissing Suburban's action. On May 31, 1994, Suburban appealed this judgment, and the appeal is pending. Suburban is seeking recovery of a portion of these defense expenses in its current general rate increase application. There is no assurance that recovery of such costs will be allowed. Suburban will not recognize income on these potential recoveries until amounts, if any, are received. Additionally, this litigation will have no future material adverse effect on the Registrant's financial condition or results of operations. As described in the Registrant's Form 10-K Report for the year ended December 31, 1994, and its Form 10-Q Report for the quarter ended March 31, 1995, ECO was named as a defendant in a lawsuit filed on April 15, 1992, in Houston, Texas, by certain homeowners and Pulte Home Corporation of Texas (Pulte). The plaintiffs allege that in 1989 ECO, as an independent contractor for Municipal Utility District #81 (MUD #81) in Houston, Texas, failed to change the treatment of the water supplied to plaintiffs after the plaintiffs made MUD #81 and ECO aware of highly corrosive elements in the water supplied. Plaintiffs allege that this resulted in accelerated corrosion of residential plumbing pipes. The original complaint requested unspecified special damages and reasonable attorneys' fees. On April 24, 1994, the plaintiffs filed an amended complaint which alleges additional causes of action against ECO. The amended complaint alleges that plaintiffs have sustained more than $838,000 in repair damages and will incur future expenses for home repairs in the sum of $1,000,000 if the water remains untreated. Plaintiffs also allege mental pain and anguish as a result of plumbing failures, loss of home values and that ECO's conduct constitutes gross negligence. Plaintiffs are seeking at least $1,000,000 in exemplary damages. Pulte now also claims that defendant MUD #81 failed to require its agent, ECO, to change the treatment of the water to eliminate accelerated corrosion of pipes and has included MUD #81 as a direct defendant in the amended complaint. On June 14, 1995, the court granted ECO's motion for summary judgment on all causes of action and granted MUD #81's motion for summary judgment on sovereign immunity grounds. In July 1995, plaintiffs filed a motion for new trial and a motion to reconsider and to vacate the court's summary judgments. 14 As of the date when damages are first alleged to have occurred (1989) and thereafter, the Registrant and ECO maintained liability insurance coverage of $20 million. ECO's primary liability carrier is providing a defense for the primary cause of action against ECO, but has reserved all rights as to allegations that ECO knowingly committed intentional acts constituting "deceptive trade practices" and "negligence." The Registrant believes the ultimate resolution of this matter will not have a material adverse effect on its consolidated financial condition or results of operations. As described in the Registrant's Form 10-K Report for the year ended December 31, 1994, and its Form 10-Q Report for the quarter ended March 31, 1995, Suburban is a defendant and cross defendant in two actions filed in, respectively, March 1994 and June 1994 in the Superior Court of Los Angeles County and arising out of a slope slide or failure in 1992 in a hilly, residential development in West Covina, California. One of the plaintiffs, Dr. Mendoza, is the owner of a residence located below the failed slope. The other plaintiff, South Hills Home Partnership, is a developer of a tract of lots, including one lot adjacent to the failed slope. Defendants in the actions include the owners of the lot above and containing the failed slope, Suburban and an engineer and contractor who directed and conducted repair work to the slope after a prior failure in 1978. Claims raised by the plaintiffs and certain cross defendants are described in Registrant's 1994 Form 10-K Report as is the consolidation of the two cases. As of the date of the 1992 slope failure, the Registrant and Suburban maintained liability insurance coverage of $20 million. Suburban's primary liability carrier is providing a defense in the consolidated action, and Suburban is vigorously defending all claims. At the initiation of Suburban's defense counsel, Dr. Mendoza dismissed his action against Suburban in March 1995 and defense counsel is discussing with South Hills Home Partnership a similar dismissal as to Suburban. Suburban believes that it has meritorious defenses to all claims in the consolidated action and that if Suburban were determined to have any liability in the action such liability would be fully covered by the liability insurance maintained by Suburban and the Registrant. Accordingly, the Registrant believes that the ultimate resolution of this matter will not have a material adverse effect on its consolidated financial condition or results of operations. As described in Registrant's Form 10-K Report for the year ended December 31, 1994, and its Form 10-Q Report for the quarter ended March 31, 1995, a written request for information was received in June 1994 from the Enforcement Division of the Securities and Exchange Commission (the "Commission") concerning trading in the common stock of the Registrant from July 1993 to August 1993. The Registrant voluntarily responded to such request in July 1994. In October 1994, the Registrant was again contacted by the Commission to arrange for oral depositions of the Registrant's directors, its three officers and one employee of the Registrant. Concurrently, the Commission served subpoenas requesting documents and records of the deponents. The individual deponents responded to such subpoenas, and the depositions were taken in late 1994. Legal counsel for the Registrant was present at all depositions. The Registrant believes that the Commission's inquiry is focused upon several small sales of the Registrant's stock. These sales occurred prior to the public announcement of a dividend reduction on August 13, 1993. The Registrant's management believes that the Commission's inquiry is directed at whether such sales were made on the basis of inside information concerning that dividend reduction. The Registrant has had a written policy for a number of years prohibiting its officers, directors and employees both from trading on the basis of inside information and from providing such information to others. This policy has been communicated to all officers and directors as well as to key employees. The Registrant is not aware of any officer, director or employee who provided any inside information to any person making the sales being examined by the Commission. 15 To date, no formal action has been initiated by the SEC. Moreover, the Registrant is aware of no allegation of any improper conduct by the Registrant, its officers or directors. Because of the written policy of the Registrant on insider trading described above, the absence of facts suggesting improper use of inside information, and the absence of any formal charge to date, the Registrant believes that should the SEC initiate a formal action, the Registrant would have meritorious defenses and ultimately prevail. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits furnished pursuant to Item 601 of Regulation S-K 3.2A Amendment to Registrant's Bylaws dated June 27, 1995. 10.5C Third Amendment to Credit Agreement and Promissory Note dated June 30, 1995, between the Registrant and First Interstate Bank. 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended June 30, 1995. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHWEST WATER COMPANY ----------------------- (Registrant) Dated: August 4, 1995 /s/ ANTON C. GARNIER - ---------------------- ---------------------------------------------- Anton C. Garnier, Director and President (Principal Executive Officer) Dated: August 4, 1995 /s/ DIANE CASTELLO PITTS - ---------------------- ------------------------ Diane Castello Pitts, Corporate Controller and Treasurer (Principal Accounting Officer) 17 EX-3.2A 2 AMENDMENT TO REGISTRANT'S BYLAWS DATED 06/27/95 EXHIBIT 3.2A AMENDMENT TO REGISTRANT'S BYLAWS DATED JUNE 27, 1995 SOUTHWEST WATER COMPANY AMENDMENT TO THE BYLAWS TO INCREASE NUMBER OF DIRECTORS ------------------------------------------------------- WHEREAS, this corporation hereby considers it advisable to increase the authorized number of directors; and WHEREAS, the Board of Directors desire to ratify and confirm the increase in the authorized number of directors as empowered in Article II, Section 1 of the bylaws of the Corporation; THEREFORE, IT IS HEREBY RESOLVED, that Article II, Section 1, of the bylaws of this corporation is hereby amended as follows: "Section 1. Number and Term of Office. The number of directors -------------------------- shall be seven (7), and thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). All directors shall be elected at each annual meeting of stockholders. Each director shall hold office until the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation or removal. EX-10.5C 3 THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE EXHIBIT 10.5c THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE DATED JUNE 30, 1995, BETWEEN THE COMPANY AND FIRST INTERSTATE BANK THIRD AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE This Third Amendment to Credit Agreement and Promissory Note ("Third Amendment") is entered into this 30th day of June, 1995, by and between SOUTHWEST WATER COMPANY, a Delaware corporation (hereinafter referred to as "Borrower") and FIRST INTERSTATE BANK OF CALIFORNIA, a California banking corporation (hereinafter referred to as "Bank"), who for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby agree as follows: This Third Amendment amends that certain Credit Agreement, dated December 22, 1992, as amended by that certain First Amendment to Credit Agreement and Promissory Note, dated July 29, 1993 ("First Amendment"), and that certain Second Amendment to Credit Agreement and Promissory Note, dated June 24, 1994 ("Second Amendment") (said Credit Agreement, as amended, hereinafter referred to as the "Agreement"), each of which were executed by and between Borrower and Bank. This Third Amendment also amends that certain Promissory Note in the original principal amount of $5,000,000, dated December 22, 1992, as later amended by the First Amendment and the Second Amendment (said Promissory Note, as amended, hereinafter referred to as the "Note"). The parties hereto hereby amend the Agreement and the Note, as indicated below: AGREEMENT: 1. Page 4, "Maturity Date": delete "June 30, 1995" and replace ------------- with "June 30, 1996". 2. Page 5, "Revolving Commitment": delete "$5,000,000" and -------------------- replace with "$6,000,000". 3. Page 21, Paragraph 6.02 (f), subpart (v) is deleted in its entirety and replaced with: "(v) Eight Million Five Hundred Thousand Dollars ($8,500,000) in other Debt." NOTE: 1. Page 1, Paragraph 1, Line 11: delete "June 30, 1995" and replace with "June 30, 1996". 2. Page 1, in the upper left hand corner of the page: delete "$5,000,000" and replace with "$6,000,000".
3. Page 1, Paragraph 1, Line 5: delete "Five Million Dollars ($5,000,000)" and replace with " Six Million Dollars ($6,000,000)".
Except as specifically amended in this Third Amendment, or to the extent necessary to be consistent with the provisions of this Third Amendment, the Agreement and Note shall continue in full force and effect and be binding upon Borrower and Bank notwithstanding the execution of and delivery of this Third Amendment. IN WITNESS WHEREOF, the parties hereto have duly executed this Third Amendment as of the day and year first hereinabove written. BORROWER: SOUTHWEST WATER COMPANY BY:/s/ANTON C. GARNIER ITS:DIRECTOR AND PRESIDENT BY:/s/DIANE CASTELLO PITTS ITS:CORPORATE CONTROLLER AND TREASURER BANK: FIRST INTERSTATE BANK OF CALIFORNIA BY:/S/RICHARD MADSEN ITS:VICE PRESIDENT EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 335,000 0 7,307,000 119,000 0 9,394,000 106,076,000 30,953,000 90,761,000 14,698,000 20,500,000 24,000 0 519,000 27,691,000 90,761,000 0 24,619,000 0 19,025,000 4,440,000 114,000 1,157,000 132,000 55,000 77,000 0 0 0 77,000 0.03 0.03
-----END PRIVACY-ENHANCED MESSAGE-----