-----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, Ia6gVZrGYng/vjucLVDIDMwKaxogf/SIejCyAcPjYPXAyuRrOWM8FMstwPTsy+ED hyFKl0G4cN49bd2uHDDF+g== 0000898430-99-003265.txt : 19990816 0000898430-99-003265.hdr.sgml : 19990816 ACCESSION NUMBER: 0000898430-99-003265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99689235 BUSINESS ADDRESS: STREET 1: 225 N BARRANCA AVE STE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 BUSINESS PHONE: 8189151551 MAIL ADDRESS: STREET 1: 225 N BARRANCA AVENUE STREET 2: SUITE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 FORMER COMPANY: FORMER CONFORMED NAME: SUBURBAN WATER SYSTEMS DATE OF NAME CHANGE: 19751202 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________ to________________ Commission file number: 0-8176 [LOGO] Southwest Water Company (Exact name of registrant as specified in its charter) Delaware 95-1840947 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (Address of principal executive offices) (Zip Code) (626) 915-1551 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On August 12, 1999, there were 4,276,675 common shares outstanding. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
Part I. Financial Information: Page No. - ------- ---------------------- -------- Item 1. Financial Statements: Condensed Consolidated Statements of Income - Three and Six months ended June 30, 1999 and 1998 1 Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 3 Notes to Condensed Consolidated Financial Statements 4 - 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 10 Part II. Other Information: - -------- ------------------ Item 1. Legal Proceedings 11- 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- (in thousands except per share data) Operating Revenues $19,454 $18,332 $36,103 $34,278 Operating Expenses: Direct operating expenses 14,038 13,268 26,574 25,427 Selling, general and administrative 2,845 2,880 5,779 5,645 - ------------------------------------------------------------------------------------------------------------- 16,883 16,148 32,353 31,072 Operating Income 2,571 2,184 3,750 3,206 Other Income (Expense): Interest expense (747) (766) (1,506) (1,584) Interest income 19 21 36 38 Other 100 104 252 187 - ------------------------------------------------------------------------------------------------------------- (628) (641) (1,218) (1,359) Income Before Income Taxes 1,943 1,543 2,532 1,847 Provision for income taxes 778 617 1,013 739 - ------------------------------------------------------------------------------------------------------------- Net Income 1,165 926 1,519 1,108 Dividends on preferred shares 7 7 14 14 - ------------------------------------------------------------------------------------------------------------- Net Income Available for Common Shares $ 1,158 $ 919 $ 1,505 $ 1,094 - ------------------------------------------------------------------------------------------------------------- Earnings per Common Share: Basic $ 0.27 $ 0.22 $ 0.35 $ 0.26 Diluted $ 0.26 $ 0.21 $ 0.34 $ 0.26 - ------------------------------------------------------------------------------------------------------------- Cash Dividends per Common Share $ 0.08 $ 0.072 $ 0.16 $ 0.144 - ------------------------------------------------------------------------------------------------------------- Weighted Average Outstanding Common Shares: Basic 4,277 4,183 4,254 4,178 Diluted 4,401 4,289 4,380 4,278 - -------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 1 Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, - ------------------------------------------------------------------------------------------------------- ASSETS 1999 1998 - ------------------------------------------------------------------------------------------------------- (unaudited) (in thousands) Current Assets: Cash and cash equivalents $ 209 $ 394 Customers' accounts receivable, net 9,008 8,630 Other current assets 2,945 2,586 - ------------------------------------------------------------------------------------------------------- 12,162 11,610 Property, Plant and Equipment: Utility property, plant and equipment -- at cost 148,873 144,690 Contract operations property, plant and equipment -- at cost 5,131 4,678 - ------------------------------------------------------------------------------------------------------- 154,004 149,368 Less accumulated depreciation and amortization 42,192 40,130 - ------------------------------------------------------------------------------------------------------- 111,812 109,238 Other Assets 8,878 9,079 - ------------------------------------------------------------------------------------------------------- $132,852 $129,927 - ------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------- Current Liabilities: Current portion of bank notes payable and long-term debt $ 1,602 $ 1,679 Accounts payable 1,398 2,782 Other current liabilities 11,387 9,827 - ------------------------------------------------------------------------------------------------------- 14,387 14,288 Other Liabilities and Deferred Credits: Long-term debt 28,900 28,900 Bank notes payable 4,260 4,500 Advances for construction 8,472 8,049 Contributions in aid of construction 32,415 31,706 Deferred income taxes 4,767 4,430 Other liabilities and deferred credits 3,139 2,911 - ------------------------------------------------------------------------------------------------------- Total Liabilities and Deferred Credits 96,340 94,784 Stockholders' Equity Cumulative preferred stock 517 517 Common stock 42 42 Paid-in capital 30,673 30,127 Retained earnings 5,280 4,457 - ------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 36,512 35,143 - ------------------------------------------------------------------------------------------------------- $132,852 $129,927 - -------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 2 Southwest Water Company and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, - --------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows From Operating Activities: Net Income $ 1,519 $ 1,108 Adjustments to reconcile net income to net cash provided by operating activities 2,289 $ 1,672 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,808 2,780 - --------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Additions to property, plant and equipment (4,246) (4,072) Other investments, net 125 120 - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (4,121) (3,952) - --------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net proceeds from dividend reinvestment plan, employee stock purchase plan, and stock option plans 557 216 Contributions in aid of construction and advances for construction 704 1,272 Dividends paid (696) (614) Net repayment of bank notes payable (317) (520) Payments on advances for construction (120) (130) - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 128 224 - --------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (185) (948) Cash and cash equivalents at beginning of period 394 1,237 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 209 $ 289 - --------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 1,482 $ 1,556 Income taxes $285 $380 Depreciation and amortization $ 2,244 $ 2,220 Non-cash contributions in aid of construction conveyed to Company by developers $ 934 $ 1,775
See accompanying notes to condensed consolidated financial statements. 3 SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (Unaudited) 1. Southwest Water Company ("the Company" or "Registrant") together with its subsidiaries is engaged in the water management business, providing water and wastewater services to nearly three-quarters of a million people located throughout California, Texas, New Mexico and Mississippi. Through its wholly owned subsidiary, ECO Resources, Inc. ("ECO"), the Company operates and manages water and wastewater treatment facilities owned by cities, municipal utility districts and private entities. The Company conducts regulated water utility operations through two wholly owned subsidiaries, Suburban Water Systems ("Suburban"), and New Mexico Utilities, Inc. ("NMUI"). The unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 1999, and the Company's results of operations for the three and six months ended June 30, 1999. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 ("the 1998 Annual Report"). 3. The water services industry is seasonal and as such, the results of operations for the six months ended June 30, 1999 do not necessarily indicate the results to be expected for the full year. Rainfall and weather conditions affect utility operations, with most water consumption occurring during the second and third quarters of each year when weather tends to be hot and dry. The first and fourth quarters of each year are normally the lowest in terms of average customer water usage for the Company's water utilities. The Company's contract operations business is also seasonal in nature and may be affected by adverse weather conditions. For example, heavy rainfall during a quarter would hamper the Company's ability to perform billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. 4. The Company records earnings per share ("EPS") by computing basic EPS and diluted EPS. Basic EPS measures the performance of the Company over the reporting period by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS measures the performance of the Company over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if such shares had been issued. Common equivalent shares arise from stock options. 5. Beginning in 2000, the Company is subject to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivatives. Currently, the Company does not have any derivative instruments which require disclosure under SFAS No. 133, and SFAS No. 133 is not expected to have any effect on the Company's financial position or results of operations. 6. In August 1999, a 3-for-2 stock split in the form of a stock dividend was declared by the Company's board of directors, payable on October 20, 1999 to stockholders of record as of October 1, 1999. The 1998 earnings per common share, cash dividends per common share and weighted-average outstanding common shares reflect a 5-for-4 stock split, paid in the form of a stock dividend to stockholders of record on October 1, 1998. 4 7. As discussed in the 1998 Annual Report, in 1996 the Company purchased a 49% interest in Windermere Utility Company ("Windermere"), and in May 1999, the Company signed a third amendment to the RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("the Agreements"). The Agreements permit the majority shareholder to acquire the Company's interest in Windermere at an agreed-upon price. If the majority shareholder does not exercise his option, then the Company has the right to acquire 100% of Windermere. The amendment extends to September 30, 1999, the date by which the majority shareholder can exercise this right. 8. As discussed in the 1998 Annual Report, in August 1998, Suburban was granted an Exclusive Negotiation Agreement ("negotiation agreement") with an original term of 120 days by the City of West Covina ("West Covina"). The negotiation agreement was subsequently extended to October 1999. The purpose of the agreement is for Suburban and West Covina to establish a price that will allow West Covina to divest itself of its water distribution system and facilities. Completion of negotiations would allow Suburban to purchase West Covina's water system, adding approximately 7,000 water connections to Suburban's current customer base, an increase of approximately 11 percent. During August 1999, the West Covina City Council voted unanimously to put the proposal through a mail-in ballot process before the customers located within the West Covina city boundaries. Although there is support for this proposal among City Council members and others, there is also local citizen opposition to the sale. While West Covina and the Company are working toward a successful completion of this acquisition, there can be no assurance that the acquisition will occur. 9. As discussed in the 1998 Annual Report, the City of Albuquerque ("Albuquerque") has initiated an action in eminent domain to acquire the operations of NMUI. At present, discussions are ongoing; however, there is no assurance that these discussions will lead to a settlement of the legal action, or that a resolution will be reached quickly. 10. As discussed in the 1998 Annual Report, the Company has two reportable segments as defined under the requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The basis of segmentation and the basis of measurement of the segment profit or loss are the same as the information reported in the 1998 Annual Report. The following table sets forth disclosure about the Company's reportable segments as required by SFAS No. 131.
Total Total Non- Segment Consolidated For the Six Months Ended, Regulated Regulated Information Other Information -------------------------------------------------------------------------------------------------------------- (in thousands) June 30, 1999 - ------------- Revenues from external customers $ 18,831 $ 17,272 $ 36,103 $ 0 $ 36,103 Segment operating profit 501 5,168 5,669 (1,919) 3,750 Segment assets 10,013 118,516 128,529 4,323 132,852 June 30, 1998 - ------------- Revenues from external customers $ 18,605 $ 15,673 $ 34,278 $ 0 $ 34,278 Segment operating profit 414 4,411 4,825 (1,619) 3,206 Segment assets 9,888 112,835 122,723 3,728 126,451
5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: Liquidity and capital resources of the Company are influenced primarily by construction expenditures at Suburban for the replacement and renovation of water utility facilities and by construction expenditures for new water and wastewater utility facilities at NMUI. The Company's cash flow may also be influenced by new business development and acquisition costs. At June 30, 1999, the Company had cash and cash-equivalent balances totaling $209,000. The Company has three separate unsecured lines of credit from three commercial banks, which expire in 2000. The Company expects to renew expiring lines of credit in the normal course of business. At June 30, 1999, outstanding borrowing was $4,962,000 and the unused borrowing capacity was $11,038,000. During the first six months of 1999, the Company repaid $317,000 on its lines of credit. As of June 30, 1999, the Company was in compliance with all applicable financial covenants as required by its line of credit agreements. During July 1999, the Company negotiated and signed a new agreement with a commercial bank and increased its total line of credit capacity by $2,000,000 to $18,000,000. This agreement replaces one of the existing lines of credit. Under the new line of credit agreement, interest is charged at the bank's prime rate less 1/4- percent. The new agreement also allows the Company to borrow at an interest rate that is lower than the bank's prime rate less 1/4-percent; however, certain minimum borrowing requirements must be maintained for a fixed period of time. No commitment fee on the unused line of credit amount is required under the new agreement. In addition to its lines of credit, the Company has existing borrowing capacity under its First Mortgage Bond Indentures. Under these indentures, the Company has remaining borrowing capacity of approximately $38,552,000. However, the amount of additional borrowing available to the Company under its current lines of credit is limited by financial covenants that restricted additional borrowing at June 30, 1999 to the unused credit line amount. During the first six months of 1999, the Company's additions to property, plant and equipment were $5,180,000, representing a decrease of $667,000 from the same period in 1998. Developers made contributions in aid of construction ("CIAC"), and advances totaling $1,638,000 of which $704,000 was received in cash. Company-financed capital additions were $3,542,000, which was paid for primarily by cash flow from operations. For 1999, the Company estimates that its capital additions will be approximately $8,500,000 and that cash flow from operations and CIAC will fund these additions. Line of credit borrowing is also available to meet construction requirements if operations or CIAC do not fund additions. The Company anticipates that its available line of credit borrowing capacity and the cash flow generated from operations will be sufficient to fund its activities over the next 12 months. If additional cash were needed, the Company would consider alternative sources, including long-term financing. The amount and timing of any future long-term financing would depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban or NMUI. If the Company were unable to renew its existing lines of credit or unable to obtain additional long-term financing, capital spending would be reduced or delayed until new financing arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. Similarly, if the Company were to need additional cash to fund an acquisition, financing arrangements could include long-term borrowing or equity financing. REGULATORY AFFAIRS: Regulation: 6 ECO's pricing is not subject to regulation by a public utilities commission. Most contracts with municipal utility districts ("MUDs") are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. ECO's operations and maintenance contracts ("O&Ms") are generally longer-term water and wastewater service contracts, primarily with cities, and typically include inflation adjustments. The California Public Utilities Commission ("CPUC") and the New Mexico Public Regulatory Commission ("NMPRC") (formerly the New Mexico Public Utility Commission), regulate the rates and operations of Suburban and NMUI, respectively. The rates allowed are intended to provide the utilities an opportunity to recover costs and earn a reasonable return on common equity. Although the Company is not currently seeking any rate increase, future construction expenditures and increased direct operating expenses may require periodic requests for rate increases in the future. Regulatory Developments: Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. In New Mexico, a legislative committee continues to review proposed changes to the Public Utilities Act (the "PUA"). Whether legislative, CPUC or PUA changes will be enacted, or, if enacted, what the terms of any changes would be, are not known by the Company. Therefore, management cannot predict the impact, if any, of final legislative changes, CPUC-developments or PUA changes on the Company's financial position or results of operations. ENVIRONMENTAL AFFAIRS: As a contract operator, ECO does not own any of the water sources, water production facilities, or water distribution systems that it operates for its clients, nor does ECO own any of the wastewater collection systems or wastewater treatment facilities that it operates. Although not the owner, ECO is responsible for operating these water and wastewater facilities in compliance with all federal, state and local health standards and regulations. Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC and the NMPRC, respectively. The responsibilities of both regulatory agencies are to ensure an adequate supply of healthful, potable water to residents of their respective states. The Company's operations are also subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the United States Environmental Protection Agency (the "EPA") and various state regulatory agencies. Both the EPA and state regulatory agencies require periodic testing and sampling of water. Costs associated with the testing of the Company's water supplies have increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. YEAR 2000 ISSUE: The Year 2000 ("Y2K") issue is the result of software applications using a two- digit code instead of a four-digit code to identify the year. Such applications may be unable to interpret dates beyond 1999, which could result in system failure or other erroneous data in the year 2000 causing serious disruptions in operations. As discussed in the Company's 1998 Annual Report, the Company began evaluating the Y2K issue in 1998 and has implemented a five-phase plan to assess its exposure from potential Y2K-related failures in its internal systems and those of its significant suppliers, vendors and customers. The first phase of the plan was to conduct an inventory of all systems and programs to determine which might be affected by the Y2K issue. The second phase involved assessment and determination as to 7 how to correct any Y2K issues that were identified in the first phase of the Company's plan. The third phase of the plan involved implementation and testing of the corrective measures. The fourth phase of the plan was to ensure that all significant Y2K issues were properly corrected and all critical internal systems were made Y2K compliant. The final phase of the plan is to assess whether the Company's principal suppliers, vendors and material customers have Y2K issues that could adversely affect the Company. The first four phases of the plan were completed in 1998 and early 1999. The fifth phase of the plan involves the Company contacting principal suppliers and vendors, all single source suppliers and vendors, and material customers including local governments and municipal utility districts to assess their readiness for Y2K. Phase five is ongoing as the Company continues to make inquiries with respect to Y2K compliance of these other systems; however; the Company has not received assurances that all of those other systems are Y2K compliant. If systems of principal suppliers and vendors are found to be non- compliant, the Company has appropriate written contingency plans. However, the Company is unable to predict whether there will be a material adverse effect on the Company's financial position or results of operations since the final determination of the Y2K compliance of principal suppliers, vendors and material customers is not known at this time. The Company does not expect implementation of Y2K compliance measures to exceed $100,000. The Company relies on relatively low technological equipment and processes for its water and wastewater treatment operations. If necessary, the Company has the ability to operate its water and wastewater systems manually should internal computer systems fail. On January 1, 2000, the Company plans to have operations personnel on site and available to operate the systems manually in the event that any internal computer systems fail. However, a long-term loss of electrical or gas power would have a material adverse effect on the operations of the Company, the Company's financial position and the results of operations. RISK FACTORS Certain statements contained in this Form 10-Q Report for the period ending June 30, 1999 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any performance or achievements planned, expressed or implied by such forward-looking statements. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. This Form 10-Q Report for the period ending June 30, 1999 should be read in conjunction with the Company's 1998 Annual Report for more detailed descriptions of the risk factors affecting the Company which include, but are not limited to, expectations regarding new contracts and potential acquisitions, weather conditions, water quality issues, regulatory changes, legal and other contingencies. 8 RESULTS OF OPERATIONS: All earnings per share amounts reflect a 5-for-4 stock split paid in the form of a stock dividend to stockholders of record on October 1, 1998. Three Months Ended June 30, 1999 Compared To Three Months Ended June 30, 1998 Diluted earnings per common share were $.26 in 1999 compared to $.21 during the same period in 1998. Operating income increased $387,000 or 18%, and, as a percentage of operating revenues, was 13% in 1999 compared with 12% in 1998. Contract operating income increased $115,000, due primarily to the addition of new contracts and to an increase in the amount of project work performed outside the scope of existing contracts. Operating income at the utilities increased $348,000, due primarily to a 12% increase in water consumption by Suburban's customers as a result of hot, dry weather during the quarter, as compared with more wet weather in 1998. At NMUI, there was an increase in both water consumption and the number of customers. Parent company expenses increased $76,000 due primarily to compensation-related expenses. Operating revenues Operating revenues increased $1,122,000 or 6% in the second quarter of 1999 compared with the same period in 1998. Contract revenues increased $406,000 or 4%, due to the addition of new contracts and increased project work performed outside the scope of existing contracts. Utility revenues increased $716,000 or 8% due primarily to increased water consumption by Suburban's customers as a result of the hot, dry spring weather. NMUI also experienced warmer than normal weather and an increase in the number of its customers. Direct operating expenses Direct operating expenses increased $770,000 or 6%. As a percentage of operating revenues, these expenses were 72% in both 1999 and 1998. ECO's direct operating expenses increased $235,000 relative to the increase in the number of new contracts and to the increase in project work performed. Utility direct operating expenses increased $535,000, primarily reflecting the increase in customer water consumption and an increase in the number of NMUI's customers. Selling, general and administrative Selling, general and administrative expenses for the second quarter of 1999 decreased $35,000 or 1% as compared with the same period in 1998. As a percentage of operating revenues, these expenses were 15% in 1999 and 16% in 1998. Contract selling, general and administrative expenses increased $48,000, primarily due to increased regional marketing costs associated with new business development opportunities. General and administrative expenses at the utilities decreased $159,000, primarily as a result of decreased compensation-related expenses and legal fees. As discussed above, general and administrative expenses of the parent company increased $76,000. Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998 Diluted earnings per common share were $.34 in 1999 compared to $.26 during the same period in 1998. Operating income increased $544,000 or 17%, and, as a percentage of operating revenues, was 10% in 1999 compared with 9% in 1998. ECO's operating income increased $87,000 due to the addition of new contracts and increases in project work performed outside the scope of existing contracts. Operating income at the utilities increased $757,000, due primarily to a 15% increase in water consumption by Suburban's customers as a result of hot, dry weather during the first six months of 1999 compared to more wet weather in 1998. At NMUI, there was an increase in both water consumption due to warm, dry weather and an increase in the number of customers resulting in a 16% increase in consumption overall. 9 Parent company expenses increased $300,000 due primarily to self-insured retention reserves related to litigation and to compensation-related expenses. Operating revenues Operating revenues increased $1,825,000 or 5% for the first six months of 1999 compared with the same period in 1998. Contract revenues increased $226,000 or 1%, primarily due to the addition of new contracts and to additional project work performed outside the scope of existing contracts. Utility revenues increased $1,599,000 or 10% due primarily to increased water consumption by Suburban's customers as a result of hot, dry spring weather. NMUI also experienced warmer than normal weather, which contributed to a 16% increase in water consumption. Direct operating expenses Direct operating expenses increased $1,147,000 or 5%. As a percentage of operating revenues, these expenses were 74% in both 1999 and 1998. Contract direct operating expenses increased $54,000 relative to the addition of new contracts and to additional project work performed outside the scope of existing contracts. Utility direct operating expenses increased $1,093,000, primarily reflecting the increase in customer water consumption at both Suburban and NMUI, and to the increase in the number of NMUI's customers. Selling, general and administrative Selling, general and administrative expenses for the first six months of 1999 increased $134,000 or 2% as compared with the same period in 1998. As a percentage of operating revenues, these expenses were 16% in both 1999 and 1998. ECO's selling, general and administrative expenses increased $78,000, primarily due to increased regional marketing costs associated with new business development opportunities. General and administrative expenses at the utilities decreased $244,000, primarily as a result of decreased compensation-related expenses and legal fees. As discussed above, general and administrative expenses of the parent company increased $300,000. Interest and other Interest expense decreased $78,000 as the result of decreases in line of credit borrowing and due also to lower interest rates in the first six months of 1999 compared to 1998. Other income increased $65,000 due to a gain recorded by Suburban for the sale of land not used in utility operations. 10 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in the Company's 1998 Annual Report, Suburban and the Company were served with a summons and an amended complaint in the Kristin Santamaria, et al vs. Suburban Water Systems, et al action ("Santamaria"). The amended complaint lists approximately 350 plaintiffs who contend, in essence, that they or deceased family members are or were long-time residents of the San Gabriel Valley ("the Valley") and that, by virtue of their residence in the Valley, they have suffered long-term exposure to various hazardous substances in their drinking water resulting in serious illness or, in some cases, wrongful death. Of that number, 77 contend that they received their water from Suburban. Suburban and the Company filed demurrers (i.e. motions to dismiss the action) which alleged that the action must be dismissed because exclusive jurisdiction of the subject matter rests with the CPUC. On August 27, 1998, the Superior Court Judge agreed and dismissed the case as to all water utility defendants. The plaintiffs have appealed that decision. As discussed in the Company's 1998 Annual Report, the Company and Suburban were served with a summons and complaint in a second action entitled Christine Boswell et al vs. Suburban Water Systems, et al, in the Los Angeles County Superior Court. There are 14 plaintiffs and the allegations against Suburban are similar to those in Santamaria. The plaintiffs filed a petition in the Court of Appeal requesting that the trial court be required to terminate a stay order issued with respect to this action and rule on the demurrers filed by the defendants. The water utility defendants asked the Court of Appeal to order the trial court to dismiss these actions based on the exclusive jurisdiction of the CPUC. This matter has now been consolidated with the Santamaria appeal and a decision is expected in the next several months. A third action, Anthony Anderson, et al vs. Suburban Water Systems, et al was filed in the Los Angeles County Superior Court. The allegations of the Anderson action are virtually identical to the Santamaria action and involve approximately 180 plaintiffs. Of that number, 57 claim to be customers of Suburban. By stipulation of the parties, this case is stayed pending the outcome of the Santamaria appeal. A fourth action, Demciuc, et al vs. Suburban Water Systems, et al was filed in the Los Angeles County Superior Court. In that case, 10 consumers are making claims against Suburban. That action is similar to the Boswell action and involves two other water purveyors and five industrial defendants. All of the parties to the Demciuc action have agreed to stay that action pending the outcome of the Boswell petitions. The Company and Suburban have recently been added as defendants in the following cases: Georgiana Dominguez vs. Southern California Water Company, et al, Jeff Adler vs. Southern California Water Company, et al, Loretta Celi vs. San Gabriel Valley Water Company, et al, and Shamille A. Criner vs. San Gabriel Water Company, et al, all pending in the Los Angeles County Superior Court. These complaints are similar to the complaints in the Boswell and Demciuc cases discussed above. These complaints relate to non-Suburban customers. These cases are all stayed pending resolution of the Boswell petition and other related appellate court proceedings. The Company and Suburban intend to vigorously defend all actions, and have requested defense and indemnification from their liability insurance carriers. Several of the liability insurance carriers are currently contributing to the costs of defense of the lawsuits. Based upon information available at this time, management does not expect that these actions will have a material adverse effect on the Company's financial position or results of operations. Suburban has applied for and received CPUC authority to establish and maintain a memorandum or tracking account to accumulate all costs and fees incurred by Suburban in defense of these actions and any similar actions which may be filed. 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. 11 In March 1998, the CPUC issued an order instituting investigation ("OII") directed to all Class A and B water utilities in California, including Suburban. The purpose of the OII is to address a series of questions dealing with the safety of current drinking water standards and compliance with those standards. Additional information about the OII is set forth in the 1998 Annual Report. While the CPUC is actively investigating the issues concerned with water quality, the Company and Suburban are unable to predict what actions, if any, will be taken by the CPUC and/or the Department of Health Services as the result of this investigation, or their impact on the operations or financial position of the Company and Suburban. As discussed in the 1998 Annual Report, in October 1998, the Company and ECO were served with a summons and complaint in an action entitled Patrick K. Accrocco, et al vs. ECO Resources, Inc., et al in the District Court of Fort Bend County, Texas, arising out of a fatal auto accident. The Company believes that its maximum exposure in this action is limited to the self-insured retention under its umbrella liability policy. Based on the information available at this time, management does not expect that this action will have a material adverse effect on the Company's financial position or results of operations. As discussed in the 1998 Annual Report, the City of Albuquerque ("Albuquerque") 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 Albuquerque's complaint. Under New Mexico state law, there are procedures which would allow Albuquerque to take possession of NMUI prior to the resolution of the fair market issue; however, the Company believes that it has adequate defenses should Albuquerque choose to pursue these procedures. At present, discussions are ongoing; however, there is no assurance that these discussions will lead to a settlement of the legal action. 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 adversely affect its consolidated financial position, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER At the Annual Meeting of Stockholders held on May 27, 1998, Maureen A. Kindel, a member of the Board of Directors was reelected by the following votes: votes for 3,492,301; and votes abstaining 45,245. No broker non-votes were recorded. The selection of KPMG LLP as the Company's independent auditors was ratified by the following vote: votes for 3,485,230; votes against 10,332; and votes abstaining 41,984. No broker non-votes were recorded. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished pursuant to Item 601 of Regulation S-K: 10.10E Third Amendment of SWWC Right of First Refusal and SWWC Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 27, 1999, filed herewith. 10.10F Third Amendment of RTNT Right of First Refusal and RTNT Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 27, 1999, filed herewith. 10.16 Modification Agreement between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N.A. dated April 10, 1999, filed herewith. 27 Financial Data Schedule. (b) Reports on Form 8-K None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. SOUTHWEST WATER COMPANY ----------------------- (Registrant) Dated: August 12, 1999 /s/ Peter J. Moerbeek --------------------------- Peter J. Moerbeek Chief Financial Officer 14 EX-10.10E 2 THIRD AMENDMENT OF SWWC RIGHT OF REFUSAL Exhibit 10.10E Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement This Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation ("SWWC") to be effective the 31st day of March 1999. RECITALS WHEREAS, SWWC and RTNT have previously entered into an SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement ("SWWC Call Agreement") which was executed as of May 23, 1996; and WHEREAS this SWWC Call Agreement placed certain restrictions on stock in Windermere Utility Co., Inc. ("WUC") held by RTNT; and WHEREAS SWWC AND RTNT have previously entered into a "First Amendment of SWWC Right of First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC First Amendment") which was effective the 22nd day of May 1998; and WHEREAS SWWC AND RTNT have previously entered into a "Second Amendment of SWWC Right of First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC Second Amendment") which was effective the 30th day of December 1998; and WHEREAS this SWWC Call Agreement gave SWWC certain rights to the WUC stock held by RTNT; and WHEREAS the SWWC Call Agreement had certain time periods in which the rights of RTNT were exercisable; and WHEREAS SWWC and RTNT also entered into a "RTNT Right of First Refusal and RTNT Call Purchase Agreement" ("SWWC Call Agreement"); and WHEREAS SWWC AND RTNT also entered into a "First Amendment of RTNT Right of First Refusal Agreement and SWWC Call purchase Agreement" ("RTNT First Amendment"); and WHEREAS SWWC AND RTNT also entered into a "Second Amendment of RTNT Right of First Refusal Agreement and SWWC Call purchase Agreement" ("RTNT Second Amendment"); and WHEREAS SWWC and RTNT also entered into a "Third Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("RTNT Third Amendment"); and WHEREAS the parties hereto being the parties to the SWWC Call Agreement, the SWWC First Amendment, the SWWC Second Amendment, the RTNT Call Agreement, the 1 RTNT First Amendment, the RTNT Second Amendment, and the RTNT Third Amendment, for various reasons wish to extend all the time periods for the exercise of the various rights of SWWC under the SWWC Call Agreement; and NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and ten dollars ($10.00) and other good and valuable consideration hereinafter set forth and for other good and valuable consideration including but not limited to the promises of the parties, the parties hereby agree as follows: 1. The first sentence of Paragraph 1 of the SWWC RTNT Call Agreement which is entitled "Restriction on RTNT Stock" shall be amended to read as follows: "RTNT shall not sell, transfer, assign, or otherwise dispose of the RTNT WUC stock or any portion thereof to any person or entity for period ending three hundred sixty (360) days after September 30, 1999." 2. The provisions of Paragraph 2 of the SWWC Call Agreement which is entitled "Call by SWWC," specifically, the first sentence of Paragraph 2 of the SWWC Call Agreement shall be amended to read as follows: SWWC shall have, for a period beginning on the day after March 31, 1999 and ending three hundred sixty (360) days after September 30, 1999, the right to require RTNT to sell all of the RTNT WUC stock it owns in WUC at that time." 3. Paragraph 3 of the SWWC Call Agreement which is entitled "Offer to RTNT" shall be amended by amending the first sentence to read as follows: "RTNT shall, after such three hundred sixty (360) days following the third anniversary hereof, not sell, transfer, assign, or otherwise dispose of the RTNT WUC Stock or any portion thereof to any person and/or entity except as provided herein." 4. The first sentence of Paragraph 4 of the SWWC Call Agreement entitled "RTNT Call Agreement: shall be amended as follows: "The provisions of Paragraphs 1, 2, and 3 above have no further effect if prior to September 30, 1999, exercises its right to call upon SWWC to sell all of its stock in WUC pursuant to the RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement of even date herewith and closes and funds said purchase." 5. The SWWC Call Agreement, the RTNT Call Agreement, the SWWC First Amendment, the SWWC Second Amendment, the RTNT First Amendment, the Second Amendment the Third Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement, the Third Amendment to RTNT Right of first Refusal Agreement and RTNT Call Purchase Agreement, and the Equity Agreement and the documents referred to therein, (a) constitute the entire agreement among the parties and supercede all prior agreements and understanding, both written and oral, among the parties with respect to the subject matter hereof, (b) may be executed in several counterparts, each of which shall constitute one and the same instrument, (c) except as expressly set forth herein, shall inure to the benefit of, and be binding upon, the successors, assigns. legal representatives, administrators, and heirs of each party and are not intended to confer upon any person other than the parties and their successors assigns, legal representatives, administrators, and heirs any rights or remedies 2 hereunder, and (d) shall be governed in all respects. including validity, interpretation, and effect by the laws of the state of Texas. The captions in this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement are for convenience of reference only and shall not affect its interpretation in any respect. 6. Any notice consent or communication required or permitted to be given under this First Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement must be in writing and delivered to a person or by confirmed facsimile or by registered mail, return receipt requested, postage prepaid addressee restricted as follows: To: RTNT, Inc., P.O. Box 161173 Austin Texas 78716 (tel.) 512-327-0869 (fax) 512-327-0869 To: Southwest Water Company 225 North Barranca Avenue Suite 200 West Covina California 91791-1605 (tel.) 626-915 1551 (fax) 626-915-1558 ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS AFTER MAILING. 6. Any provision of this Third Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement which is prohibited or unenforceable in any jurisdiction as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Third Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7. This Third Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration Agreement dated to be effective the 23rd of May 1996. 8. This Third Amendment to SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC and RTNT and their respective successors, representatives and assigns. 9. For purposes hereof, a facsimile copy of this Third Amendment of SWWC Right of First Refusal and SWWC Call Purchase Agreement including the signature pages hereto, shall be deemed to be an original. Notwithstanding the forgoing, the parties shall deliver original execution copies of this Second Amendment of SWWC Right of First Refusal and SWWC Call Purchase Agreement to one another immediately after execution. Executed as of the 30th day of March 1999, to be effective the 31st day of March 1999. 3 RTNT, INC., a Texas Corporation By: /s/ Thom W. Farrell -------------------- THOM W. FARRELL, PRESIDENT SOUTHWEST WATER COMPANY By: /s/ Anton C. Garnier --------------------- ANTON C. GARNIER, PRESIDENT ATTEST: /s/ Peter J. Moerbeek - --------------------- PETER MOERBEEK, VICE PRESIDENT AND SECRETARY 4 EX-10.10F 3 THIRD AMENDMENT OF RTNT RIGHT OF REFUSAL Exhibit 10.10F Third Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement This Thrird Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement is made and entered into by RTNT, Inc., a Texas Corporation ("RTNT') and Southwest Water Company, Inc., a Delaware Corporation ("SWWC") to be effective the 31st day of March 1999. RECITALS WHEREAS, SWWC and RTNT have previously entered into an RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement ("RTNT Call Agreement") which was executed as of May 23, 1996; and WHEREAS this RTNT Call Agreement placed certain restrictions on stock in Windermere Utility Co., Inc. ("WUC") held by SWWC; and WHEREAS SWWC AND RTNT have previously entered into a "First Amendment of RTNT Right of First Refusal Agreement and RTNT Call purchase Agreement" ("RTNT First Amendment") which was effective the 22nd day of May 1998; and WHEREAS SWWC AND RTNT have previously entered into a "Second Amendment of RTNT Right of First Refusal Agreement and RTNT Call purchase Agreement" ("RTNT Second Amendment") which was effective the 30th day of December 1998; and WHEREAS this RTNT Call Agreement, RTNT First Amendment, and RTNT Second Amendment gave RTNT certain rights to the WUC stock held by SWWC; and WHEREAS the RTNT Call Agreement, RTNT First Amendment, and RTNT Second Amendment had certain time periods in which the rights of RTNT were exercisable; and WHEREAS SWWC and RTNT also entered into a "SWWC Right of First Refusal and SWWC Call Purchase Agreement" ("SWWC Call Agreement"); and WHEREAS SWWC AND RTNT also entered into a "First Amendment of SWWC Right of First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC First Amendment"); and WHEREAS SWWC AND RTNT also entered into a "Second Amendment of SWWC Right of First Refusal Agreement and SWWC Call purchase Agreement" ("SWWC Second Amendment"); and WHEREAS SWWC and RTNT are simultaneously herewith entering into the "Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement" ("SWWC Third Amendment"); and WHEREAS the parties hereto being the parties to the SWWC Call Agreement, the SWWC First Amendment, the SWWC Second Amendment, the SWWC third Amendment, the 1 RTNT Call Agreement, the RTNT First Amendment, and the RTNT Second Amendment for various reasons wish to extend all the time periods for the exercise of the various rights of RTNT under the RTNT Call Agreement, the RTNT First Amendment, and the RTNT Second Amendment; and NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and ten dollars ($10.00) and other good and valuable consideration hereinafter set forth and for other good and valuable consideration including but not limited to the promises of the parties, the parties hereby agree as follows: 1. (a) The first sentence of Paragraph 1 of the RTNT Call Agreement which is entitled "Restriction on SWWC Stock" shall be amended to read as follows: "SWWC shall not sell, transfer, assign, or otherwise dispose of the SWWC WUC stock or any portion thereof to any person or entity for period ending on September 30, 1999 plus the period of closing which may be required pursuant to this RTNT Call Agreement for RTNT to close the purchase of thc SWWC WUC stock upon which it exercises its right to purchase within said period ending on September 30,. 1999." (b) The last sentence of Paragraph 1 of the RTNT Call Agreement which Is entitled "Restriction on SWWC Stock" shall be amended to read as follows: "Any pledge of the SWWC WUC stock shall specifically state that it can be released within the first twelve (12) months for the Three Million Six Hundred Thousand Dollar ($3,600,000.00) call amount and in the thirteenth (13th) through the twenty-fourth (24th) month for the Three Million Seven Hundred Twenty Thousand Dollar ($3,720,000.00) call amount and within the months December 1998 through September 1999 for a call amount of Three Million Nine Hundred Thirty Thousand Dollar ($3,930,000.00) " 2. The provisions of Paragraph 2 of the RTNT Call Agreement which is entitled "Call by RTNT," specifically, the first two sentences of Paragraph 2 of the RTNT Call Agreement shall be amended to read as follows: "RTNT shall have, for a period ending on September 30, 1999, the right to require SWWC to sell all of the SWWC WUC stock to RTNT. The purchase price for a sale that is initiated (under the closing procedure set out below) within the first three hundred sixty-five (365) days after the date hereof shall be Three Million Six Hundred Thousand Dollars ($3,600,000.00) and the purchase price for a sale that is initiated (under the closing procedures set out below) within the period beginning on the three hundred sixty-sixth (366th) day and ending on the seven hundred thirtieth (730th) day after the date hereof shall be Three Million Seven Hundred Twenty Thousand Dollars ($3,720,000.00) and for an option price after the seven hundred thirtieth (730th) day and continuing until September 30, 1999, the price shall be as follows: Three Million Nine Hundred Thirty Thousand Dollars ($3,930,000.00)." 3. The first two sentences of Paragraph 5 of the RTNT Call Agreement which is entitled "Offer to SWWC" shall be amended to read a follows: "In the period following the expiration of the RTNT Call Purchase Provision on September 30, 1999, RTNT shall have a Right of First Refusal as set forth below. SWVWC shall, after the expiration of such period terminating on September 30, 1999, 2 not sell, transfer, assign, or otherwise dispose of the SWWC WUC Stock or any portion thereof to any person and/or entity except as provided herein." 4. The RTNT Call Agreement, the SWWC Call Agreement, the First Amendment, the RTNT Second Amendment, the SWWC First Amendment, the SWWC Second Amendment, the Third Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement, the Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement, and the Equity Agreement and the documents referred to therein, (a) constitute the entire agreement among the parties and supercede all prior agreements and understanding, both written and oral, among the parties with respect to the subject matter hereof, (b) may be executed in several counterparts, each of which shall constitute one and the same instrument, (c) except as expressly set forth herein, shall inure to the benefit of, and be binding upon, the successors, assigns. legal representatives, administrators, and heirs of each party and are not intended to confer upon any person other than the parties and their successors assigns, legal representatives, administrators, and heirs any rights or remedies hereunder, and (d) shall be governed in all respects, including validity, interpretation, and effect by the laws of the state of Texas. The captions in this Third Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement are for convenience of reference only and shall not affect its interpretation in any respect. 5. Any notice consent or communication required or permitted to be given under this First Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement must be in writing and delivered to a person or by confirmed facsimile or by registered mail, return receipt requested, postage prepaid addressee restricted as follows: To: RTNT, Inc., P.O. Box 161173 Austin Texas 78716 (tel.) 512-327-0869 (fax) 512-327-0869 To: Southwest Water Company 225 North Barranca Avenue Suite 200 West Covina California 91791-1605 (tel.) 626-915 1551 (fax) 626-915-1558 ANY SUCH NOTICE CONSENT OR OTHER COMMUNICATION SHALL BE DEEMED GIVEN WHEN DELIVERED IN PERSON OR SENT BY CONFIRMED FACSIMILE OR IF MAILED, FIVE (5) DAYS AFTER MAILING. 6. Any provision of this Third Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement which is prohibited or unenforceable in any jurisdiction as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Third Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 3 7. This Third Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement shall be subject to the RTNT and SWWC Arbitration Agreement dated to be effective the 23rd of May 1996. 8. This Third Amendment to RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement shall be binding upon and inure to the benefit of SWWC and RTNT and their respective successors, representatives and assigns. 9. For purposes hereof, a facsimile copy of this Third Amendment of RTNT Right of First Refusal and RTNT Call Purchase Agreement including the signature pages hereto shall be deemed to be an original. Notwithstanding the forgoing, the parties shall deliver original execution copies of this First Amendment of RTNT Right of First Refusal and RTNT Call Purchase Agreement to one another immediately after execution. Executed as of the 30th day of March 1999, to be effective the 31st day of March 1999. RTNT, INC., a Texas Corporation By: /s/ Thom W. Farrell -------------------- THOM W. FARRELL, PRESIDENT SOUTHWEST WATER COMPANY By: /s/ Anton C. Garnier --------------------- ANTON C. GARNIER, PRESIDENT ATTEST: /s/ Peter J. Moerbeek - --------------------- PETER MOERBEEK, VICE PRESIDENT AND SECRETARY 4 EX-10.16 4 MODIFICATION AGREEMENT DATED 04/10/1999 EXHIBIT 10.16 First Security Bank MODIFICATION AGREEMENT Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $4,000,000 04-10-2000 9001 0032687 45917
Borrower: New Mexico Utilities, Inc. Lender: First Security Bank of New Mexico, N.A. 4700 Irving Blvd., Suite 201 Corporate Banking Albuquerque, NM 87114 40 First Plaza Center NW Albuquerque, NM 87102
First Security Bank of New Mexico, N.A. ("Lender") has extended the credit (the "Loan") to New Mexico Utilities, Inc. (individually and collectively "Borrower") pursuant to a promissory note dated December 10, 1997 (the "Note") in the stated principal amount of $4,000,000.00. The Loan is unsecured. The Note and any loan agreements, guaranties, subordinations, Collateral Documents and other instruments and documents executed in connection therewith, together with any previous modifications to any of these instruments or documents shall be referred to as the "Loan Documents". Borrower has requested certain modifications to the Loan Documents and Lender is willing to grant such modifications on the following terms and conditions: 1. Provided that all conditions stated herein are satisfied, the terms of the Loan Documents are hereby modified as follows: Modifications to the Terms of the Note -------------------------------------- The maturity date of the Note is extended to April 10, 2000, This Agreement does not constitute a repayment or extinguishment of the Note, but only a modification thereof. Other Modifications to the Loan Documents: ----------------------------------------- The Loan Documents shall be amended as follows: The following Year 2000 (Y2K) language is made a part of the Loan Documents: Each Borrower shall take all action that may be necessary or desirable, or that Bank may reasonably request, in order to ensure that the Borrower, its affiliates, and all customers, suppliers and vendors that are material to the Borrower's business, become Year 2000 Compliant on or before August 1, 1999. Such acts shall include, without limitation, (I) performing a comprehensive inventory, review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget and timetable, for the remediation, monitoring and testing of such systems, and (ii) making a detailed inquiry of all material customers, suppliers, and vendors to ascertain whether such entities are aware of the need to be Year 2000 Compliant and are taking all appropriate steps to become Year 2000 Compliant on a timely basis. Borrower shall, promptly upon request, provide to bank such certifications or other evidence of Borrower's compliance with the terms of this section as Bank may from time to time reasonably require. "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems used by or material to the business operations or financial condition of such entity will properly perform date sensitive functions before, during and after January 1, 2000. Such date sensitive functions shall include, without limitation, (a) interpretation of years greater than 1999, (b) process date data from, into, and between dates before January 1, 12000 and dates on or after January 1, 2000, (c) recognizing numbers such as 99 as an actual date rather than indefinite or unknown information, (d) recognizing that the year 2000 is a leap year, and (e) transferring data between systems that used different methods to make the system Year 2000 Compliant. 2. As preconditions to the terms of this Agreement, Borrower shall complete or provide the following Borrower shall pay or shall have paid all reasonable fees, costs, and expenses, of whatever kind or nature, incurred by Lender in connection with this Agreement, including but not limited to attorney's fees, lien search fees, title reports and pollicies, and recording and filing fees. 3. It is the intention and agreement of Borrower and Lender that: (I) all collateral security in which Lender has acquired a security interest or other lien pursuant to the Loan Documents shall continue to serve as collateral security for payment and performance of all the obligations of the Borrower under the Loan Documents, and (iii) all agreements, representations, warranties and covenants contained in the Loan Documents are hereby reaffirmed in full by borrower except as specifically modified by this Agreement 4. Borrower hereby acknowledges that: (I) the Loan Documents are in full force and effect, as modified by this Agreement, and (ii) by entering into this Agreement, Lender does not waive any existing default or any default hereafter occurring or become obligated to waive any condition or obligation under the Loan Documents. 5. Borrower hereby acknowledges that Borrower has no claim, demand, lawsuit, cause of action, claim for relief, remedy, or defense against enforcement of the Loan Documents that could be asserted against Lender, its affiliates, directors, officers, employees, or representations, commitments, statements or warranties, including without limitation any such conduct arising out of or in any way connected with the Loan Documents. Notwithstanding the foregoing, Borrower hereby waives, releases and relinquishes any and all claims, demands, lawsuits, causes of action, claims for relief, remedies or defenses against enforcement of the Loan Documents that could be asserted against Lender, its affiliates, directors, officers, employees or agents, whether known or unknown. 6. In addition to this Agreement, the Loan Documents, and any additional documents that this Agreement requires, this finance transaction may include other written closing documentation such as resolutions, waivers, certificates, financing statements, filings, statements closing or escrow instructions, loan purpose statements, and other documents that Lender may customarily use in such transactions. Such documents are incorporated herein by this reference. All the documents to which this paragraph makes reference express, embody and supercede any previous understandings, agreements, or promises (whether oral or written) with respect to this finance transaction, and represent the final expression of the agreement between Lender and Borrower, the terms and conditions of which cannot hereafter by contradicted by any oral understanding (if any) not reduced to writing and identified above. WRITTEN AGREEMENTS. Borrower acknowledges that Borrower is aware of the provisions of Section 58-6-5 NMSA 1978 Comp, which requires a contact, promise or commitment to loan money or to grant, extend, or renew credit or any modification thereof, in an amount greater that twenty-five thousand dollars ($25,000), not primarily for personal, family or household purposes, to be in wiring and signed by the party to be charged or that party's authorized representative. Effective as of April 10, 1999. LENDER: First Security Bank of New Mexico, N.A. By: /s/ J. CHESLEY STEEL --------------------- Authorized Officer BORROWERS: New Mexico Utilities, Inc. By: /s/ ROBERT L. SWARTWOUT By: /s/ WILLIAM C. JASURA ------------------------ ---------------------- Robert L. Swartwout, President William C. Jasura, Secretary AFFIRMATION OF GUARANTORS, GRANTORS, AND SUBORDINATORS Each of the following Guarantors, Grantors, Subordinators, and other parties to the Loan Documents hereby acknowledges and consents to the foregoing Modification Agreement and affirms and restates each of their respective liabilities, obligations, and agreements set forth in the Loan Documents. In addition, the following specifically agree to continuing their respective guaranties and subordinations as to any increase in the principal amount of the Loan and specifically agree that the Collateral Documents secure any increase in the principal amount of the Loan. Each of the following also hereby give the same assurances, representations, waivers, releases, and relinquishments given by Borrower in paragraph 5 of the Modification Agreement as if it were restated as part of this affirmation. GUARANTORS: Southwest Water Company By: /s/PETER J. MOERBEEK ------------------------ Peter J. Moerbeek, Vice President Finance/Chief Financial Officer By: /s/STEPHEN J. MUZI ---------------------- Stephen J. Muzi, Corporate Controller EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 209,000 0 10,135,000 (1,127,000) 0 12,162,000 154,004,000 42,192,000 132,852,000 14,387,000 28,900,000 0 517,000 42,000 35,953,000 132,852,000 36,103,000 36,103,000 26,574,000 32,353,000 (252,000) 66,000 1,506,000 2,532,000 1,013,000 1,519,000 0 0 0 1,519,000 0.35 0.34
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