UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
SOUTHWEST WATER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On August 7, 1998, there
were 3,353,208 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 10 - 12
Item 4. Submission of Matters to a Vote of Security Holders 12-13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
- ---------------------------------------------------------------------------------------
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------
(unaudited)
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 289 $ 1,237
Customers' accounts receivable, net 8,787 7,286
Other current assets 2,781 2,976
- ---------------------------------------------------------------------------------------
11,857 11,499
PROPERTY, PLANT AND EQUIPMENT:
Utility property, plant and equipment -- at cost 139,430 133,936
Contract operations property, plant and equipment -- at cost 4,868 4,854
- ---------------------------------------------------------------------------------------
144,298 138,790
Less accumulated depreciation and amortization 38,792 36,654
- ---------------------------------------------------------------------------------------
105,506 102,136
OTHER ASSETS 9,088 9,465
- ---------------------------------------------------------------------------------------
$126,451 $123,100
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of bank notes payable and long-term debt $ 1,712 $ 900
Accounts payable 1,513 1,214
Other current liabilities 8,948 8,912
- ---------------------------------------------------------------------------------------
12,173 11,026
OTHER LIABILITIES AND DEFERRED CREDITS:
Bank notes payable 5,799 7,131
Long-term debt 29,800 29,800
Advances for construction 7,799 7,931
Contributions in aid of construction 30,580 27,822
Deferred income taxes 4,482 4,130
Other liabilities and deferred credits 2,651 2,833
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFERRED CREDITS 93,284 90,673
STOCKHOLDERS' EQUITY
Cumulative preferred stock 517 517
Common stock 33 33
Paid-in capital 29,710 29,469
Retained earnings 2,913 2,420
Unamortized value of restricted stock issued (6) (12)
- ---------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 33,167 32,427
- ---------------------------------------------------------------------------------------
$126,451 $123,100
=======================================================================================
See accompanying notes to condensed consolidated financial statements.
2
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
OPERATING REVENUES $ 18,332 $ 18,469 $ 34,278 $ 33,901
OPERATING EXPENSES:
Direct operating expenses 13,268 13,480 25,427 25,430
Selling, general and administrative 2,880 2,885 5,645 5,563
- ---------------------------------------------------------------------------------------------------------------
16,148 16,365 31,072 30,993
OPERATING INCOME 2,184 2,104 3,206 2,908
OTHER INCOME (EXPENSE):
Interest expense (766) (808) (1,584) (1,590)
Interest income 21 30 38 63
Other 104 66 187 121
- ---------------------------------------------------------------------------------------------------------------
(641) (712) (1,359) (1,406)
INCOME BEFORE INCOME TAXES 1,543 1,392 1,847 1,502
Provision for income taxes 617 585 739 631
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 926 807 1,108 871
Dividends on preferred shares 7 7 14 14
- ---------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON SHARES $ 919 $ 800 $ 1,094 $ 857
===============================================================================================================
EARNINGS PER COMMON SHARE:
Basic $ 0.27 $ 0.24 $ 0.33 $ 0.26
Diluted $ 0.27 $ 0.24 $ 0.32 $ 0.26
===============================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.09 $ 0.086 $ 0.18 $ 0.172
===============================================================================================================
WEIGHTED AVERAGE OUTSTANDING COMMON SHARES:
Basic 3,347 3,295 3,342 3,290
Diluted 3,431 3,337 3,422 3,332
===============================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 2,780 $ 3,171
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,072) (4,624)
Other investments, net 120 0
- -------------------------------------------------------------------------------
Net cash used in investing activities (3,952) (4,624)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions in aid of construction 1,272 693
Net proceeds from dividend reinvestment and
employee stock purchase plans 216 184
Dividends paid (614) (576)
Net borrowings (repayment) of bank notes payable (520) 1,031
Payments on advances for construction (130) (164)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 224 1,168
- -------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (948) (285)
Cash and cash equivalents at beginning of period 1,237 790
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 289 $ 505
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,556 $ 1,555
Income taxes $ 380 $ 284
Depreciation and amortization $ 2,220 $ 2,089
Non-cash contributions in aid of construction
conveyed to Company by developers $ 1,775 $ 3,966
See accompanying notes to condensed consolidated financial statements.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") and its
subsidiaries provide water management services through contract and utility
operations. The unaudited condensed consolidated financial statements
reflect all adjustments, which, in the opinion of management, are necessary
to present fairly the financial position of the Company as of June 30,
1998, and the Company's results of operations for the three and six months
ended June 30, 1998. All such adjustments are of a normal recurring
nature. Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
3. There is seasonality to the water management services industry; thus, the
results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year. The
first and fourth quarters of each year are normally the lowest in terms of
average customer water usage for the Company's water utilities. Rainfall
and weather conditions affect utility operations, and utility revenues
usually peak during the third quarter of each year. The Company's contract
operations business can also be seasonal in nature. Heavy rainfall during a
quarter hampers the Company's ability to perform billable work such as
pipeline maintenance, manhole rehabilitation and other outdoor services.
Moderate rainfall may create opportunities for additional billable work
outside the scope of existing contracts.
4. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" which is required for interim and annual
financial statements issued after December 15, 1997. Under SFAS No. 128,
basic earnings per share ("EPS") replaced the presentation of primary EPS,
and diluted EPS replaced fully diluted EPS. For the three and six months
ended June 30, 1998 and 1997, basic EPS was calculated using the weighted
average number of common shares outstanding during the period. Diluted EPS
was calculated using the weighted average number of common shares and
dilutive common stock equivalents. Common equivalent shares arise from
stock options, and reflect the potential dilution that could occur if
common stock equivalents were exercised or converted into common stock that
could share in the earnings of the Company.
5. The Company has implemented SFAS No. 130 "Reporting Comprehensive Income"
which is required for interim and annual financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components. The implementation of SFAS No. 130 did not have any effect on
the Company's financial position or results of operations.
6. Starting in 1998, the Company is subject to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" for annual
financial statements. The disclosure requirements of SFAS No. 131 are not
required in interim financial statements in the initial year of
application. SFAS No. 131 establishes standards for reporting financial and
descriptive information regarding an enterprise's operating segments. SFAS
No. 131 will require additional financial disclosure by the Company but
will not have any effect on the Company's financial position or results of
operations.
5
7. Starting in 1998, the Company is subject to SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits," for annual
financial statements. SFAS No. 132 requires certain changes in the
financial disclosure by the Company, but will not have any effect on the
Company's financial position or results of operations.
8. The 1997 earnings per common share, cash dividends per common share and
weighted average outstanding common shares have been restated to reflect a
5% stock dividend granted to stockholders of record on January 2, 1998.
9. During May 1998, the Company signed an amendment to the RTNT Right of First
Refusal Agreement and RTNT Call Purchase Agreement ("the Agreements"). As
discussed in the Company's 1997 Annual Report on Form 10-K, in 1996, the
Company purchased a 49% interest in Windermere Utility Company
("Windermere"). The Agreements permit the majority shareholder to acquire
the Company's interest at an agreed-upon price. If the majority shareholder
does not exercise his option, then the Company has the right to acquire
100% of Windermere for an agreed-upon price. The amendment extends the date
by which the majority shareholder may exercise this right to December 31,
1998 and increases the agreed-upon purchase price for the majority
shareholder.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban Water Systems ("Suburban") for the
replacement and renovation of existing water utility facilities and by
construction expenditures for new water and wastewater utility facilities at New
Mexico Utilities, Inc. ("NMUI"). The operations of ECO Resources, Inc. ("ECO")
are currently generating positive cash flow for the Company; however, cash flow
may be influenced from time to time by ECO's investments in operating and
computer equipment, as well as new business development and acquisition costs.
At June 30, 1998, the Company had cash and cash-equivalent balances totaling
$289,000 and unused lines of credit of $9,389,000, with a total line of credit
capacity of $16,000,000. The Company has three lines of credit from three
commercial banks, all of which expire in 1999. The Company expects to renew its
lines of credit in the normal course of business. During the first six months
of 1998, the Company repaid $520,000 on its lines of credit.
The Company has remaining borrowing capacity under its First Mortgage Bond
Indentures of approximately $33,439,000. However, the amount of additional
borrowing available to the Company under its current lines of credit is limited
by financial covenants that restricted additional borrowing at June 30, 1998 to
the unused lines of credit amount.
During the first six months of 1998, the Company's additions to property,
plant and equipment were $5,847,000, representing a decrease of $2,743,000 over
the same period in 1997. Developers made contributions in aid of construction
("CIAC"), and advances totaling $3,047,000, of which $1,272,000 was received in
cash. The cost of Company-financed capital additions was $2,800,000, which was
paid for primarily by cash flow from operations. Capital expenditures are
expected to decrease from $15,202,000 in 1997 to approximately $13,400,000 in
1998. This decrease is primarily due to the completion of certain major capital
projects in 1997. The Company anticipates borrowing approximately $6,000,000
under its lines of credit during the remainder of 1998 to meet construction
requirements not funded by operations or CIAC.
The Company anticipates that its available short-term borrowing capacity and
its cash flow generated from operations will be sufficient to fund its
activities over the next twelve months. If additional cash were
6
needed, the Company would consider alternative sources, including long-term
financing. The amount and timing of any future long-term financing would depend
on various factors, including the timeliness and adequacy of rate increases, the
availability of capital, and the Company's ability to meet interest and fixed
charge coverage requirements. Regulatory approval is required for any long-term
financing by Suburban and NMUI.
If the Company were unable to renew its existing lines of credit or obtain
additional long-term financing, capital spending would be reduced or delayed
until new financing arrangements were secured. Such financing arrangements
could include seeking equity financing through a private placement or a public
offering. Similarly, if the Company were to need additional cash to fund an
acquisition, financing arrangements could include long-term borrowing or equity
financing.
REGULATORY AFFAIRS:
Regulation:
The California Public Utilities Commission ("CPUC") and the New Mexico Public
Utility Commission ("NMPUC") regulate the rates and operations of Suburban and
NMUI, respectively. The rates allowed are intended to provide the utilities an
opportunity to recover costs and earn a reasonable return on common equity. The
Company anticipates that future construction expenditures and increased direct
operating expenses will require periodic requests for rate increases.
Suburban received CPUC approval for a 2.62% ($705,000) step rate increase
effective January 1, 1997 and a 2.62% ($740,000) step rate increase effective
January 1, 1998. There is no step rate increase that will be effective January
1, 1999.
Regulatory Developments:
The California legislature ("the legislature") has held hearings discussing
the CPUC's organization and operation. Among other options, the CPUC has
proposed consideration of changes to implement the requirements of SB1268 ("the
bill"), a bill passed by the legislature in September 1997. The bill requires
the CPUC to use the standard of fair market value when establishing the rate
base of acquired water systems. The CPUC has also proposed consideration of
changes that would provide rules and appropriate guidelines for regulated water
utilities and staff governing the proper accounting and rate-making for
privatization and the use of underutilized capacity. Legislative and CPUC
developments are closely monitored by the Company and by the various water
industry associations in which the Company actively participates. Whether such
legislative or CPUC changes will be enacted, or, if enacted, what the terms of
such changes would be, are not known by the Company. Therefore, management
cannot predict the impact, if any, of final legislative or CPUC developments on
the Company's financial condition or results of operations.
In 1996, the residents of the state of New Mexico approved a constitutional
amendment to combine the NMPUC and the New Mexico Corporation Commission
("NMCC") and create the New Mexico Public Regulatory Commission ("NMPRC").
Presently, the NMPUC consists of three appointed officials and the NMCC consists
of three elected officials. Under the newly enacted legislation, the NMPRC will
consist of five elected officials who will be elected in November 1998, and take
office on January 1, 1999. A legislative committee is currently reviewing
proposed changes to the Public Utilities Act (the "PUA"). The Company cannot
predict if or when changes to the PUA will ultimately occur; or, if changes are
enacted, the impact, if any, on NMUI's financial position or results of
operations.
Contract Operations:
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with municipal utility districts are short-term contracts and do
not generally include inflation adjustments.
7
Changes in prices are negotiated on a contract-by-contract basis. ECO's long-
term water and wastewater service contracts typically include annual inflation
adjustments.
In the United States, the majority of water and wastewater utility operations
are performed by municipal employees. As a result, a significant portion of
ECO's sales and marketing efforts require convincing elected officials and city
staff persons that outsourcing of the utility operations is of benefit to the
city. Typical sales efforts have an 18- to 36-month lead-time with no assurance
that the city will select outsourcing or select ECO at the end of the sales
effort. While industry renewal rates tend to be high, periodically cities
change operators or terminate outsourcing at the end of a contract.
In 1998, the City of Rio Rancho, New Mexico ("Rio Rancho") notified ECO that
Rio Rancho would not renew ECO's $4 million annual operations and maintenance
("O&M") contract to operate Rio Rancho's water and wastewater facilities. This
contract expired June 30, 1998 and is expected to result in reduced revenues of
approximately $2 million in 1998. ECO has negotiated several new contracts in
1998, which should offset the impact on earnings of the loss of the Rio Rancho
contract, although not necessarily the impact on revenues. Additionally, the
Company is aggressively pursuing additional operating contracts as well as
acquisition and joint venture opportunities which would offset the effect of the
loss of earnings in the event other contracts were not renewed.
ENVIRONMENTAL AFFAIRS:
The Company's operations are subject to water and wastewater pollution
prevention standards and water and wastewater quality regulations of the United
States Environmental Protection Agency (the "EPA") and various state regulatory
agencies. The EPA and state regulatory agencies continue to promulgate new
regulations mandated by the Federal Water Pollution Control Act, the Safe
Drinking Water Act (as reenacted in 1996), and the Resource Conservation and
Recovery Act. Both the EPA and state regulatory agencies require periodic
testing and sampling of water. To date, the Company has not experienced any
material adverse effects upon its operations resulting from compliance with
governmental regulations. In June 1998, the Company became aware that a
substance called N-nitrosodimethylamine ("NDMA") had been detected in excess of
the EPA reference dosage for health risks in one of its wells. Upon detection,
the well was immediately removed from service. The Company believes that future
incremental costs of complying with governmental regulations, including capital
expenditures, will be recoverable through increased rates and contract
operations revenues. However, there is no assurance that recovery of such costs
will be allowed.
YEAR 2000 COMPUTER COMPLIANCE:
The Company has completed a review of all computer systems and software
currently in use to determine whether it is year 2000 compliant. Most of the
Company's computer systems and software is already year 2000 compliant. For
those systems and software not yet fully compliant, the Company is working with
outside vendors to ensure compliance prior to July 1999. In the event such
compliance is not possible, the Company will consider replacing non-compliant
software. Costs to be incurred in order for the Company to be year 2000
compliant are not expected to have a material effect on the Company's financial
position or results of operations.
FORWARD LOOKING STATEMENTS:
Certain statements in this Form 10-Q are forward looking and, as such, involve
risk and uncertainty. Uncertainties arise from weather, environmental issues,
legal contingencies and other matters which management cannot predict. Actual
results may vary from those projected or implied. This Form 10-Q should be read
in conjunction with the Company's 1997 Annual Report on Form 10-K which
includes: consolidated financial statements and footnote disclosures prepared in
accordance with generally accepted accounting principles; management's
discussion and analysis of financial condition and results of operations; and a
detailed description of the Company's business.
8
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Diluted earnings per common share were $.27 in 1998, compared to $.24
(adjusted for a stock dividend of 5% on January 2, 1998) during the same period
in 1997.
Operating income increased $80,000 or 4%, and, as a percentage of operating
revenues, was 12% in 1998 compared with 11% in 1997. Operating income at the
utilities decreased $167,000, due primarily to decreased water sales at Suburban
because of inclement weather in California as a result of El Nino-generated
storms. The decrease in operating income was partially offset by the positive
effects of a step rate increase. ECO's operating results improved $172,000, due
to increased revenue from new contracts, additional work performed outside the
scope of existing contracts, aggressive cost containment measures, and
restructuring of marketing responsibilities. Parent company expenses decreased
$75,000, due primarily to decreases in compensation-related expenses and
reserves for litigation.
Operating revenues
Operating revenues decreased $137,000 or 1%. Water utility revenues decreased
$1,033,000 or 11%, due primarily to a 24% decrease in water consumption by
Suburban's customers, which was partially offset by a step rate increase.
Revenues increased at NMUI by 17% due to an increase in the number of customers
and higher consumption by NMUI's customers. ECO's revenues increased $896,000
or 10%, primarily as a result of new contracts and additional work performed
outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses decreased $212,000 or 2%. As a percentage of
operating revenues, these expenses were 72% in 1998 and 73% in 1997. Water
utility direct operating expenses decreased $879,000, primarily reflecting a
decrease in the cost of water produced because of the lower level of water
consumption by Suburban's customers. ECO's direct operating expenses increased
$667,000 primarily from higher expenses associated with new contracts and
additional work performed outside the scope of existing contracts.
Selling, general and administrative
Selling, general and administrative expenses for the second quarter of 1998
decreased $5,000 as compared with the same period in 1997. As a percentage of
operating revenues, these expenses were 16% in 1998 and 1997. General and
administrative expenses at the utilities increased $14,000. ECO's selling,
general and administrative expenses increased $56,000, primarily due to
increased regional marketing costs associated with new business development
opportunities. As discussed above, general and administrative expenses of the
parent company decreased $75,000.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Diluted earnings per common share were $.32 in 1998, compared to $.26
(adjusted for a stock dividend of 5% on January 2, 1998) during the same period
in 1997.
Operating income increased $298,000 or 10%, and, as a percentage of operating
revenues, was 9% in 1998 and 1997. Operating income at the utilities decreased
$387,000, due primarily to decreased water sales at Suburban because of
inclement weather in California as a result of El Nino-generated storms. The
decrease in operating income was partially offset by the positive effects of a
step rate increase. The impact of the El Nino-generated storms on water utility
revenue and operating income during 1998 may reduce the Company's earnings
growth rate from the growth rate of the last few years.
9
ECO's operating results improved $567,000, due to increased revenue from new
contracts, additional work performed outside the scope of existing contracts,
aggressive cost containment measures, and restructuring of marketing
responsibilities. Parent company expenses decreased $118,000 due primarily to
decreases in compensation-related expenses and reserves for litigation.
Operating revenues
Operating revenues increased $377,000 or 1%. Water utility revenues decreased
$1,451,000 or 8%, due primarily to a 21% decrease in water consumption by
Suburban's customers, which was partially offset by a step rate increase.
Revenues increased at NMUI by 12% due to an increase in the number of NMUI's
customers. ECO's revenues increased $1,828,000 or 11%, primarily as a result of
new contracts and additional work performed outside the scope of existing
contracts.
Direct operating expenses
Direct operating expenses for the first six months of 1998 decreased $3,000 as
compared with the same period in 1997. As a percentage of operating revenues,
these expenses were 74% in 1998 and 75% in 1997. Water utility direct operating
expenses decreased $1,084,000, primarily reflecting a decrease in the cost of
water produced because of the lower level of water consumption by Suburban's
customers. ECO's direct operating expenses increased $1,081,000, resulting
primarily from higher expenses associated with the effects of new contracts and
additional work performed outside the scope of existing contracts.
Selling, general and administrative
Selling, general and administrative expenses for the first six months of 1998
increased $82,000 as compared with the same period in 1997. As a percentage of
operating revenues, these expenses were 16% in 1998 and 1997. General and
administrative expenses at the utilities increased $21,000. ECO's selling,
general and administrative expenses increased $179,000, primarily due to
increased regional marketing costs associated with new business. As discussed
above, general and administrative expenses of the parent company decreased
$118,000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's 1997 Annual Report on Form 10-K, Suburban and
the Company were served with a summons and an amended complaint in the Kristin
Santamaria, et al vs. Suburban Water Systems, et al action. The amended
complaint lists approximately 350 plaintiffs who contend, in essence, that they
or deceased family members are or were long-time residents of the San Gabriel
Valley ("the Valley") and that, by virtue of their residence in the Valley, they
have suffered long-term exposure to various hazardous substances in their
drinking water, and, in some cases, wrongful deaths.
Subsequent to service of the Santamaria action, the defendants successfully
moved for a change of venue from Los Angeles County to Ventura County on the
ground, among others, that the defendants could not obtain an impartial jury
trial in Los Angeles County. Presently, the action is pending in the Ventura
County Superior Court, and the judge assigned to the action is considering two
matters. First, the judge is considering whether the action will remain in
Ventura County or be transferred to another Southern California county. Second,
the judge has agreed to rule on a series of demurrers (i.e. motions to dismiss
the action) filed by the defendants alleging that the action must be dismissed
and/or stayed because exclusive jurisdiction of the subject matter rests with
the CPUC. The Company does not know when the court will rule on the matters.
As discussed in the Company's Form 10-Q Report for the quarter ended March 31,
1998 (the "March Report"), the Company and Suburban were served with a summons
and complaint in a second action entitled Christine Boswell et al vs. Suburban
Water Systems etc., et al, No. KC027318 in the Los Angeles
10
County Superior Court. Since the filing of the March Report, the plaintiffs
added as defendants in the Boswell action two additional water purveyors and six
industrial defendants. All defendants demurred on the ground of exclusive CPUC
jurisdiction. The court declined to rule on the demurrers and instead stayed
further proceedings in the action pending action by the CPUC with respect to the
OII described below. The plaintiffs moved for reconsideration with respect to
the issuance of the stay and also filed a petition in the court of appeal
requesting that the trial court be required to terminate the stay and rule on
the demurrers. The motion for reconsideration has been denied but the court of
appeal has taken no action to date. The Company does not know when the court of
appeal will act or what action the court will take.
Since the filing of the March Report, a third action, Anthony Anderson et al
vs. Suburban Water Systems et al has also been filed in the Los Angeles County
Superior Court. The action has not been served, although a copy of the
complaint has been furnished to the Company. In the action, the approximately
180 plaintiffs allege that they or their deceased family members are or were
long-time residents of the Valley. The plaintiffs contend that there is a long
history of chemical contamination in the groundwater in the Valley, that the
defendants were aware of the contamination or caused it and that the defendant
water purveyors knowingly provided contaminated water to the plaintiffs and
others while intentionally withholding from the plaintiffs alleged knowledge of
the contamination. The defendants in the action include essentially the same
water purveyors and industrial defendants as in the Santamaria action, and the
causes of action alleged are similar to those alleged in Santamaria and Boswell,
with several additional causes of action alleging violation of the Business and
Professions Code and battery. The plaintiffs seek damages according to proof
for alleged physical injury, damage to property, loss of earnings, loss of
consortium, burial and other wrongful death losses and punitive damages. The
Company and Suburban have not yet been required to respond in the Anderson
action. The Company and Suburban believe that their defense to this action will
be similar to the defense of the Santamaria and Boswell actions and believe that
they are not liable for any damage to the plaintiffs.
The Company and Suburban intend to vigorously defend all three actions and
have requested that their liability insurance carriers defend and indemnify the
Company and Suburban. Certain of the liability insurance carriers are now
contributing to the costs of defense of such actions. Based upon information
available at this time, management does not expect that these actions will have
a material effect on the Company's financial position or results of operations.
As described in the March Report, Suburban has applied for and received CPUC
authority to establish and maintain a memorandum or tracking account to
accumulate all costs and fees incurred by Suburban in defense of these actions
and any similar actions which may be filed, costs and fees incurred in legal
actions against industrial potentially responsible parties ("PRPs"), and costs
and fees incurred in seeking recovery against Suburban's insurance carriers of
costs, and fees incurred with respect to the underlying actions and those
against PRPs. The Company and Suburban are unable to estimate or predict
whether the CPUC will ultimately allow Suburban to recover these accumulated
costs and fees from Suburban's customers or, if such recovery is allowed, how
much of such costs and fees will be recoverable.
As described in the March Report, the CPUC in March 1998 issued an order
instituting investigation ("OII") directed to all Class A and B water utilities
in California, including Suburban. The OII requires that all Class A and B
water utilities file compliance reports with the CPUC in September 1998. The
Water Division of the CPUC will then submit a report of its findings to the CPUC
in January 1999. A final determination is expected from the CPUC in May 1999.
The purpose of the OII is to address a series of questions dealing with the
safety of current drinking water standards, compliance by water utilities with
the standards, appropriate remedies for failure to comply with safe drinking
water standards and whether stricter or additional safe drinking water standards
are required. At this time, the Company and Suburban are unable to predict what
actions, if any, will be taken by the CPUC and/or the DOHS as the result of this
investigation, or their impact on the operations or financial position of the
Company and Suburban.
The recent OII does not, by its terms, prevent the filing of Santamaria,
Boswell, Anderson or similar actions. While both the CPUC and one commissioner
individually have commented upon the broad
11
jurisdiction of the CPUC and the California Department of Health Services
(`DOHS") with respect to water quality and the potential impact of these actions
upon such jurisdiction, the water purveyors, and their customers, the CPUC has
not intervened in these actions nor asserted dispute resolution authority with
respect to them. The defendants in the Santamaria and Boswell actions have
raised the issue of exclusivity of CPUC and DOHS jurisdiction in this area and
at least one court, in Boswell, has decided to defer further proceedings pending
action by the CPUC. At this time, it is uncertain whether the CPUC and/or DOHS
will ultimately attempt to intervene in these actions or assert exclusive
jurisdiction or the likely results of any such actions.
As discussed in the Company's 1997 Annual Report on Form 10-K and in the March
Report, Suburban and the Company were served with a complaint in September 1995,
wherein the plaintiff claimed that, while working in the 1950s and 1960s for an
independent contractor hired by Suburban, he was exposed to asbestos fibers and
contracted mesothelioma. Information as to the action is set forth in the March
Report. In June 1998, the plaintiffs filed a Case Report demanding $850,000 for
damages suffered. A mandatory settlement conference has been set for January
1999, with a trial date set for March 1999. Suburban and the Company maintain
that they have no responsibility for the death of the decedent and intend to
contest these claims vigorously. Insurance carriers are currently paying all
defense costs associated with this case and it is expected that they will pay
for damages or settlement, if any.
As discussed in the Company's 1997 Annual Report on Form 10-K and the March
Report, the City of Albuquerque (the "City") initiated an action in eminent
domain to acquire the operations of NMUI. Information as to the action and
defenses of NMUI thereto is set forth in the March Report. There has been no
change in the status of this action since the March Report.
The Company and its subsidiaries are the subjects of certain litigation
arising from the ordinary course of operations. The Company believes the
ultimate resolution of such matters will not materially effect its consolidated
financial condition, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 28, 1998, all of the
members of the Board of Directors were elected by the following votes:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
H. Frederick Christie... 2,552,543 191,263
Michael J. Fasman....... 2,536,511 207,295
Anton C. Garnier........ 2,553,315 190,491
Monroe Harris........... 2,541,840 201,966
Donovan D. Huennekens... 2,540,435 203,371
Richard Kelton.......... 2,554,059 189,747
Maureen A. Kindel....... 2,548,299 195,507
Richard G. Newman....... 2,554,229 189,577
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The proposal to increase the number of common shares authorized for issuance
to 25,000,000 shares was approved by the following vote: votes for - 2,271,273;
votes against - 409,895; and votes abstaining - 62,638. No broker non-votes
were recorded.
The proposal to stagger the Board of Directors with three year terms was
approved by the following vote: votes for - 1,714,363; votes against - 400,620;
votes abstaining - 33,068; and broker non-votes - 595,755.
The second amendment to the Southwest Water Company Employee Stock Purchase
Plan, now called the "1998 Amended and Restated Employee Stock Purchase Plan",
was approved with the following vote: votes for - 1,982,019; votes against -
111,393; votes abstaining - 54,639; and broker non-votes - 595,755.
The selection of KPMG Peat Marwick LLP as the Company's independent auditors
was ratified by the following vote: votes for - 2,708,647; votes against -
16,804; and votes abstaining - 18,355. No broker non-votes were recorded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
3.1C Certificate of Amendment of Restated Certificate of Incorporation
dated June 4, 1998 (incorporated by reference to Appendix A of
Registrant `s 1998 Proxy Statement filed with the Commission on April
20, 1998).
4.7 Stockholders' Rights Plan dated April 6, 1998 (incorporated by
reference to the Registrant's Form 8-K Report filed with the
Commission on April 23, 1998).
10.1A Fifteenth Amendment to the Utility Employees' Retirement Plan, dated
December 31, 1997, filed herewith.
10.2 Amended and Restated 1998 Employee Stock Purchase Plan, dated May 28,
1998 (incorporated by reference to Appendix B of Registrant's 1998
Proxy Statement filed with the Commission on April 20, 1998).
10.12A First Amendment of RTNT Right of First Refusal Agreement and RTNT
Call Purchase Agreement between the Registrant and RTNT, Inc, dated
May 22, 1998, filed herewith.
10.12B First Amendment of SWWC Right of First Refusal Agreement and SWWC
Call Purchase Agreement between the Registrant and RTNT, Inc, dated
May 22, 1998, filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A Report on Form 8-K was filed with the Securities and Exchange Commission
on April 23, 1998 regarding the Company's Stockholders' Rights Plan which was
adopted by the Board of Directors on April 6, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: August 7, 1998 /s/ Peter J. Moerbeek
- --------------------- ---------------------
PETER J. MOERBEEK
Vice President Finance
and Chief Financial Officer
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