-----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, N1IHdTzc0Mfq200S7GJWk31UdsSaoh2qr22/JAv23S1L9MnvuS06XJm4ttppQJnt JxHopzr9Zh0Pijoq4isD0g== 0000898430-98-001791.txt : 19980511 0000898430-98-001791.hdr.sgml : 19980511 ACCESSION NUMBER: 0000898430-98-001791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980508 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: 98614316 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 QUARTERLY REPORT FOR PERIOD ENDED 03/31/1998 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, 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 [LOGO OF SOUTHWEST WATER COMPANY APPEARS HERE] 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 8, 1998, there were 3,345,764 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, 1998 and December 31, 1997 2 Condensed Consolidated Statements of Income - Three months ended March 31, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 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 - 9 Part II. Other Information: - -------- ------------------ Item 1. Legal Proceedings 9 - 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 1998 1997 - --------------------------------------------------------------------------------------- (unaudited) (in thousands) Current Assets: Cash and cash equivalents $ 693 $ 1,237 Customers' accounts receivable, net 7,731 7,286 Other current assets 3,345 2,976 - --------------------------------------------------------------------------------------- 11,769 11,499 Property, Plant and Equipment: Utility property, plant and equipment -- at cost 136,121 133,936 Contract operations property, plant and equipment -- at cost 4,962 4,854 - --------------------------------------------------------------------------------------- 141,083 138,790 Less accumulated depreciation and amortization 37,885 36,654 - --------------------------------------------------------------------------------------- 103,198 102,136 Other Assets 9,103 9,465 - --------------------------------------------------------------------------------------- $124,070 $123,100 - --------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------- Current Liabilities: Current portion of long-term debt $ 900 $ 900 Accounts payable 1,712 1,214 Other current liabilities 8,573 8,912 - --------------------------------------------------------------------------------------- 11,185 11,026 Other Liabilities and Deferred Credits: Bank notes payable 6,940 7,131 Long-term debt 29,800 29,800 Advances for construction 7,889 7,931 Contributions in aid of construction 28,707 27,822 Deferred income taxes 4,283 4,130 Other liabilities and deferred credits 2,833 2,833 - --------------------------------------------------------------------------------------- Total Liabilities and Deferred Credits 91,637 90,673 Stockholders' Equity Cumulative preferred stock 517 517 Common stock 33 33 Paid-in capital 29,597 29,469 Retained earnings 2,295 2,420 Unamortized value of restricted stock issued (9) (12) - --------------------------------------------------------------------------------------- Total Stockholders' Equity 32,433 32,427 - --------------------------------------------------------------------------------------- $124,070 $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 March 31, - -------------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------- (in thousands except per share data) Operating Revenues $15,946 $15,432 Operating Expenses: Direct operating expenses 12,159 11,950 Selling, general and administrative 2,765 2,678 - -------------------------------------------------------------------------------------------------- 14,924 14,628 Operating Income 1,022 804 Other Income (Expense): Interest expense (818) (782) Interest income 17 33 Other 83 55 - -------------------------------------------------------------------------------------------------- (718) (694) Income Before Income Taxes 304 110 Provision for income taxes 122 46 - -------------------------------------------------------------------------------------------------- Net Income 182 64 Dividends on preferred shares 7 7 - -------------------------------------------------------------------------------------------------- Net Income Available for Common Shares $ 175 $ 57 - -------------------------------------------------------------------------------------------------- Earnings per Common Share: Basic $ 0.05 $ 0.02 Diluted $ 0.05 $ 0.01 - -------------------------------------------------------------------------------------------------- Cash Dividends per Common Share $ 0.09 $ 0.086 - -------------------------------------------------------------------------------------------------- Weighted-Average Outstanding Common Shares: Basic 3,337 3,284 Diluted 3,412 3,327 - --------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 3 Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, - ------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------ (in thousands) Cash Flows from Operating Activities, Net $ 1,071 $ 843 Cash Flows from Investing Activities: Additions to property, plant and equipment (2,340) (2,411) Other investments, net 120 0 - ------------------------------------------------------------------------------ Net cash used in investing activities (2,220) (2,411) - ------------------------------------------------------------------------------ Cash Flows from Financing Activities: Contributions in aid of construction 1,027 822 Net proceeds from dividend reinvestment and employee stock purchase plans 118 93 Dividends paid (307) (287) Net borrowings (repayment) of bank notes payable (191) 791 Payments on advances for construction (42) (4) - ------------------------------------------------------------------------------ Net cash provided by financing activities 605 1,415 - ------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (544) (153) Cash and cash equivalents at beginning of period 1,237 790 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 693 $ 637 - ------------------------------------------------------------------------------ Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 553 $ 538 Income taxes $ 350 $ 263 Depreciation and amortization $ 1,080 $ 1,047
See accompanying notes to condensed consolidated financial statements. 4 SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (Unaudited) 1. Southwest Water Company ("the Company") 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 March 31, 1998, and the Company's results of operations for the three months ended March 31, 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 three months ended March 31, 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 second and third quarters of each year. The Company's contract operations business can also be seasonal in nature. Heavy rainfall during a quarter hampers the Company's ability to perform billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. 4. 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 months ended March 31, 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. 7. The Company is subject to SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for annual financial statements issued for periods beginning after December 15, 1997. 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 8. The Company is subject to SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," for annual financial statements issued for periods beginning after December 15, 1997. 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. 9. 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. 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 March 31, 1998, the Company had cash and cash equivalent balances totaling $693,000 and unused lines of credit of $9,060,000, 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 quarter of 1998, the Company repaid $191,000 on its lines of credit. The Company has remaining borrowing capacity under its First Mortgage Bond Indentures of approximately $31,816,000. However, the amount of additional borrowing available to the Company under its current lines of credit is limited by financial covenants and available lines of credit that restricted additional borrowing at March 31, 1998 to the unused credit line amount. During the first quarter of 1998, the Company's additions to property, plant and equipment were $2,340,000, representing a decrease of $71,000 over the same period in 1997. Developers made contributions in aid of construction ("CIAC") and advances totaling $1,027,000, all of which was received in cash. The Company-financed capital additions amount was $1,313,000 which was generated primarily by cash flow from operations. Capital expenditures are expected to decrease to approximately $13,000,000 in 1998 due to the completion of major construction projects in 1997. The Company anticipates borrowing approximately $3,000,000 under its lines of credit 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 during 1998. 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 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. 6 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. Regulatory Developments: The California legislature has held hearings discussing the CPUC's organization and operation. Among other options, the CPUC has proposed consideration of performance-based rate making, which would provide incentives for utilities to operate more efficiently and improve productivity. If enacted, these changes are expected to reduce regulatory burden and promote efficiency among utilities which, if accomplished, would likely benefit both ratepayers and stockholders. 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 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 on NMUI's financial position or results of operations. Contract Operations: ECO's pricing is not subject to regulation by a public utilities commission. ECO's long-term water and wastewater service contracts typically include annual inflation adjustments. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. 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, there have been instances of cities changing operators at the end of a contract and instances of cities ending outsourcing at the end of a contract. During 1998, Operations and Maintenance ("O&M") contracts with annual revenues of approximately $5,000,000 will be expiring. If ECO were not able to renew these contracts, revenues and profitability could be adversely affected. 7 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. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, if any, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. YEAR 2000 COMPUTER COMPLIANCE: The Company has completed a review of all computer systems and related software currently in use to determine whether they are year 2000 compliant. Most of the Company's computer systems and related software in use are already year 2000 compliant, and compliance of remaining computer systems and related software is expected to be completed in the coming months. 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. Information and footnote disclosures included in the Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles and should be read in conjunction with the Company's description of its business and management's discussion and analysis of financial condition. Actual results may vary from those projected or implied. RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Diluted earnings per common share were $.05 in 1998, compared to $.01 (adjusted for a stock dividend of 5% on January 2, 1998) during the same period in 1997. Operating income increased $218,000 or 27%, and, as a percentage of operating revenues, was 6% in 1998 compared with 5% in 1997. Operating income at the utilities decreased $220,000, 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 as a result of decreased consumption was partially offset by the positive effects of a step rate increase. ECO's operating results improved $395,000, due to increased revenue from new contracts entered into in 1997, additional work performed outside the scope of existing contracts, aggressive cost containment measures, and restructuring of marketing responsibilities. Parent company expenses decreased $43,000, due primarily to decreases in compensation-related expenses and legal reserves. Operating revenues Operating revenues increased $514,000 or 3%. Water utility revenues decreased $418,000 due primarily to a 17% decrease in water consumption by Suburban's customers, offset by a step rate increase. Revenues increased at NMUI by 6% due to an increase in the number of NMUI's customers. 8 ECO's revenues increased $932,000, primarily as a result of new contracts entered into in 1997 and additional work performed outside the scope of existing contracts. Direct operating expenses Direct operating expenses increased $209,000 or 2%. As a percentage of operating revenues, these expenses were 76% in 1998 and 77% in 1997. Water utility direct operating expenses decreased $205,000, primarily reflecting a decrease in the cost of water produced because of the lower level of water consumption by customers. ECO's direct operating expenses increased $414,000, 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 increased $87,000 or 3%. As a percentage of operating revenues, these expenses were 17% in 1998 and 1997. General and administrative expenses at the utilities increased $7,000. ECO's selling, general and administrative expenses increased $123,000, primarily due to additional legal reserves and higher compensation-related costs. As discussed above, general and administrative expenses of the parent company decreased $43,000. 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 plaintiffs 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. Suburban annually takes over 4,000 water samples from reservoirs, wells and residences, which are then tested by independent, state-certified laboratories. Water tested by these laboratories has continued to comply with all state and federal drinking water standards. Southwest Water Company is a holding company and not a water purveyor. The Company and Suburban will vigorously defend against all claims made by the plaintiffs and believe they are not liable for any damages to the plaintiffs. In addition, the Company and Suburban have requested that their liability carriers provide defense and indemnity with respect to this action. In February 1998, a primary liability insurance carrier for the Company and Suburban agreed to contribute to the costs of defense of this action, subject to a reservation of rights and defenses. Based on information available at this time, management does not expect that this matter will have a material effect on the Company's financial position or results of operations. In February 1998, 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 County Superior Court. In this action, the 14 plaintiffs contend that they or deceased family members are or were long-time residents of the San Gabriel Valley. The plaintiffs contend that there is a long history of chemical contamination of the groundwater in the San Gabriel Valley, that the Company and Suburban were aware of such contamination, that the Company and Suburban knowingly provided contaminated water to the plaintiffs and others and that the Company and Suburban intentionally withheld from plaintiffs the alleged knowledge that water supplied to them was contaminated. The plaintiffs allege, on the basis of these factual allegations, 12 causes of action including negligence, negligence per se, trespass, nuisance, wrongful death, strict liability, absolute liability and fraudulent concealment. 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. 9 The Company and Suburban believe that their defense to this action will be similar to the defense of the first action and believe that they are not liable for any damages to the plaintiffs. The Company and Suburban intend to vigorously defend this action and have requested that their liability insurance carriers defend and indemnify the Company and Suburban. Based upon 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. In accordance with a resolution of the CPUC, 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 the Santamaria, Boswell 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. Under the CPUC resolution, Suburban may, at some point in the future, seek CPUC authority to recover these costs and fees from Suburban's customers. 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. In response to the Santamaria and Boswell actions, and similar actions against other water purveyors in California, 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 notes the constitutional and statutory jurisdiction of the CPUC and the California Department of Health Services (the "DOHS") to establish water quality standards for water delivered to utility customers, to enforce adherence to such standards and, in the case of the CPUC, to establish rates which permit water utilities to furnish safe water which meets the established quality standards at prices which are affordable to consumers while permitting the water utilities to realize a reasonable profit. The OII requires that all Class A and B water utilities file compliance reports with the CPUC in July 1998. The Water Division of the CPUC will then submit a report of its findings to the CPUC in November 1998. 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, at this time, directly impact the Santamaria or Boswell actions. The CPUC did, however, in the OII set out at considerable length the jurisdiction of the CPUC and the DOHS on water quality and water safety issues and noted the "potentially enormous" implications to the water utilities, their customers and the jurisdiction of the CPUC if the plaintiffs in the several pending lawsuits prevail. One commissioner, in his published remarks concerning the OII, expressly noted that these lawsuits "directly affect" the ability of the CPUC to perform its statutory obligations and noted both potential water supply problems if the plaintiffs in these actions prevail and the cost to all water utility customers from mere prosecution of these actions. At this time, the CPUC has not intervened in these actions nor asserted dispute resolution authority with respect to them. It is uncertain whether the CPUC and/or the DOHS will attempt such intervention or assert such jurisdiction or the likely results of such action. As discussed in the Company's 1997 Annual Report on Form 10-K, Suburban, the Company, and several unrelated parties 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. The plaintiff died in 1995, and in 1996 the plaintiff's widow and children filed a wrongful death action against Suburban and the Company. Suburban and the Company denied all allegations in their response to the complaint. To date, there has been no specific claim for damages by the plaintiffs, and discovery is moving slowly. Suburban and the Company maintain that they have no responsibility for the death of the original plaintiff and intend to contest these claims vigorously. 10 As discussed in the Company's 1997 Annual Report on Form 10-K, 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 and that there is significant doubt whether the City will proceed with the action. Under New Mexico state law, there are procedures which would allow the City to take possession prior to a resolution of the fair market value issue; however, the Company believes that it has adequate defenses should the City choose to pursue these procedures. If the City pursues a final determination of fair market value and possession of NMUI through a court trial, the Company does not anticipate resolution of these matters in the near future. 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 condition, 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: 10.19 Business Loan Agreement dated December 10, 1997 between New Mexico Utilities, Inc. and First Security Bank of New Mexico, NA, filed herewith. 27 Financial Data Schedule. (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended March 31, 1998. 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 8, 1998 /s/ Peter J. Moerbeek - ------------------ --------------------- PETER J. MOERBEEK, Vice President Finance and Chief Financial Officer 12 EX-10.19 2 BUSINESS LOAN AGREEMENT DATED DECEMBER 10, 1997 EXHIBIT 10.19 BUSINESS LOAN AGREEMENT ================================================================================ BORROWER: NEW MEXICO UTILITIES, INC. LENDER: FIRST SECURITY BANK OF NEW 4700 IRVING BLVD., SUITE #201 MEXICO, NA ALBUQUERQUE, NEW MEXICO 87114 EAST CENTRAL BFC 5301 CENTRAL NE, SUITE #101 ALBUQUERQUE, NEW MEXICO 87108 THIS BUSINESS LOAN AGREEMENT BETWEEN NEW MEXICO UTILITIES ("BORROWER") AND FIRST SECURITY BANK OF NEW MEXICO, N.A. ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of DECEMBER 10, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. BORROWER. The word "Borrower" means New Mexico Utilities, Inc.. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1989, as amended. COLLATERAL: The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" means and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR: The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS: The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidate or unliquidate; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means First Security Bank of New Mexico, N.A., its successors and assigns. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" means: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel, including without limitation any guaranties described below. BORROWER'S AUTHORIZATION. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. REPRESENTATION AND WARRANTIES. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. NO EVENT OF DEFAULT. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of New Mexico and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision or its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by an person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall sue, generate, manufacture, store, treat, dispose of , or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower'' due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. 2 BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 4700 Irving Blvd., Suite 201, Albuquerque, NM 87114. Unless Borrower has designated otherwise in writing this location is also the offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORD. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantor named below, on Lender's forms, and in the amount and under the conditions spelled out in those guaranties. Guarantor AMOUNT --------- ------ SOUTHWEST WATER COMPANY $4,100,000.00 OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN FEES AND CHARGES. In addition to all other agreed upon fees and charges, pay the following: $100.00 MONTHLY SWEEP FEE CHARGED ON DEPOSIT SYSTEM; $400.00 MONTHLY SWEEP FEE CHARGED ON LOAN SYSTEM. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience s the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. 3 INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender. INDEBTEDNESS AND LIEN. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even through no Event of Default shall have occurred. LOAN COVENANTS FOR NEW MEXICO UTILITIES, INC. Annual CPA audited financial statements for New Mexico Utilities, Inc. shall be submitted to Lender within 120 days of Borrower's fiscal year end. Quarterly company prepared financial statements for New Mexico Utilities, Inc. shall be submitted to Lender within 45 days of company's quarter end. New Mexico Utilities, Inc. shall maintain a Debt to Tangible Net Worth Ratio of 4.0 to 1.0. The Debt to Net Worth Ratio will be calculated excluding accounts on the Borrower's Balance Sheet entitled "Contributions in Aid of Construction", and "Deferred Revenue" regardless of how such amounts may be titled on future Balance Sheets. New Mexico Utilities, Inc. shall maintain a minimum EBITDA Coverage Ratio of 1.25 to 1.00 on a fiscal year-end basis, with "EBITDA" defined as net profit before tax, plus interest expense, depreciation expense, and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior year current maturity of each long-term debt, subordinated debt, and advances for construction, plus dividends. New Mexico Utilities, Inc. will not, unless approved in writing by the Bank, pay any dividend which would cause the company's EBITDA Coverage Ratio to fall below 1.25 to 1.00 on a fiscal year end basis. New Mexico Utility Company will not further encumber any of it's property, real or personal, without prior written approval of the Bank. LOAN COVENANTS FOR SOUTHWEST WATER COMPANY. Annual CPA audited, consolidated financial statements and annual internally prepared consolidating financial statements for Southwest Water Company shall by submitted to Lender within 120 days of company's fiscal year end. Quarterly company prepared consolidating financial statements for Southwest Water Company and subsidiaries shall be submitted to Lender within 45 days of company's quarter end. Annual 10K and quarterly 10Q reports for Southwest Water Company shall be submitted to Lender within 120 days and 60 days of period end, respectively. Southwest Water Company to maintain a minimum Tangible Net Worth of $27,000,000.00 on a consolidated basis. 4 Southwest Water Company to maintain a maximum Debt to Tangible Net Worth Ratio of 2.30 to 1.00 on a consolidated basis. Debt is defined as total liabilities, less deferred taxes, contributions in aid of construction, and unamortized investment tax credit. Southwest Water Company to maintain a minimum EBITDA Coverage Ratio of 1.25 to 1.00 on a consolidated fiscal year end basis, with "EBITDA" defined as net profit before tax, plus interest expense (net of capitalized interest expense), depreciation expense, and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense, plus the prior period current maturity of each of long-term debt, subordinated debt, and advances for construction, plus dividends. Southwest Water Company to remain profitable on a fiscal year end, consolidated basis. Southwest Water Company not have any unsecured debt outstanding in excess of $16,000,000.00 on a consolidated basis. Southwest Water Company (and any subsidiary) will not further encumber any of it's property, real or personal, without prior written approval of the Bank. Maximum aggregate acquisitions by Southwest Water Company of $5,000,000.00, on a consolidated basis without prior Bank approval. Cross Default to all other indebtedness of Southwest Water Company. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement. DEFAULT OF INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceedings, self-help, repossession or any other method, by an creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within twenty (20) days; or (b) if the cure requires more than twenty (20) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF NEW MEXICO. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF BERNALILLO COUNTY, THE STATE OF NEW MEXICO. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW MEXICO. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. 5 CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgement collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interests therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, not any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF DECEMBER 18, 1997. BORROWER: NEW MEXICO UTILITIES, INC. SOUTHWEST WATER COMPANY BY: /s/ ROBERT L. SWARTWOUT BY: /s/ PETER J. MOERBEEK ------------------------- ----------------------- ROBERT L. SWARTWOUT, PRESIDENT PETER J. MOERBEEK, VICE PRESIDENT LENDER: FIRST SECURITY BANK OF NEW MEXICO, N.A. BY: /s/ MICHAEL R. HARTMAN ------------------------ AUTHORIZED OFFICER MICHAEL R. HARTMAN, VICE PRESIDENT 6 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 693,000 0 8,436,000 705,000 0 11,769,000 141,083,000 37,885,000 124,070,000 11,185,000 29,800,000 0 517,000 33,000 31,883,000 124,070,000 0 15,946,000 0 14,924,000 (83,000) 49,000 818,000 304,000 122,000 182,000 0 0 0 182,000 0.05 0.05
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