SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
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[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SOUTHWEST WATER COMPANY
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(Name of Registrant as Specified In Its Charter)
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SOUTHWEST WATER COMPANY
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DATE AND TIME..................... Monday, May 13, 2002, at 10:00 a.m.,
Pacific Time
PLACE............................. Omni Los Angeles Hotel at California Plaza
251 South Olive Street, Los Angeles,
California
ITEMS OF BUSINESS................. 1. Elect two members of the Board of
Directors for three-year terms.
2. Transact other business as may
properly come before the Annual
Meeting and any adjournment or
postponement.
RECORD DATE....................... You may vote if you owned Southwest Water
Company stock on March 29, 2002.
ANNUAL REPORT AND FORM 10-K....... Our 2001 Annual Report and Form 10-K,
which are not part of the proxy soliciting
material, are enclosed.
PROXY VOTING...................... It is important that your shares be
represented and voted at the meeting.
Depending on how your shares are held,
please vote in one of the following ways:
1. If your shares are held for you by a
bank, broker or other agency, follow
the voting instructions provided with
your proxy materials, or
2. If your shares are registered in your
name with our transfer agent, use the
toll-free number shown on the enclosed
proxy card or mark, sign, date and
promptly return the enclosed proxy
card in the postage-paid envelope, or
3. Attend the meeting and vote in person.
YOUR PROXY MAY BE REVOKED OR CHANGED AT
ANY TIME PRIOR TO THE ANNUAL MEETING BY
SUBMITTING A NEW, LATER-DATED PROXY.
April 9, 2002 Peter J. Moerbeek,
Secretary
TABLE OF CONTENTS
PAGE
----
PROXY STATEMENT 1
Proxy Delivery 1
Annual Meeting Admission 1
Stockholders Entitled to Vote 1
Proxies and Voting Procedures 1
Cost of Proxy Distribution and Solicitations 2
Eliminate Duplicate Mailings 2
Section 16(a) Beneficial Ownership Reporting Compliance 2
Relationship with Independent Public Accountants 2
ELECTION OF DIRECTORS 3
Nominees for Directors Standing for Election in 2002 3
Directors Whose Terms Expire in 2003 3
Directors Whose Terms Expire in 2004 4
Officers Who are Not Directors 4
BENEFICIAL OWNERSHIP OF THE COMPANY'S SECURITIES 5
GOVERNANCE OF THE COMPANY 6
Committees of the Board of Directors 7
Director Compensation 8
Report of the Audit Committee 8
Independent Public Accountant Fees 9
Related Party Transactions 9
PERFORMANCE GRAPH 10
EXECUTIVE COMPENSATION 11
Report of the Compensation Committee 11
Summary Compensation Table 13
Executive Officers' Change of Control Compensation Agreements 14
Non-Employee Director Stock Options Granted in 2001 15
Non-Employee Director Options Exercised in 2001 and Year-End Option Values 15
Option Grants to Named Executive Officers in 2001 16
Options Exercised in 2001 and Year-End Option Values 17
Supplemental Executive Retirement Plan 18
OTHER MATTERS 19
PROXY STATEMENT
PROXY DELIVERY
We are providing these proxy materials in connection with the solicitation
by the Board of Directors of Southwest Water Company, a Delaware corporation
("Southwest Water," the "Company," "we" or "us,") of proxies to be voted at our
2002 Annual Meeting of Stockholders and at any adjournment or postponement of
that meeting. This Proxy Statement, form of proxy and voting instructions are
being mailed on or about April 9, 2002.
You are invited to attend our Annual Meeting of Stockholders on May 13,
2002, at 10:00 a.m., Pacific Time. The Annual Meeting will be held at the Omni
Los Angeles Hotel at California Plaza, 251 South Olive Street, Los Angeles,
California. A map showing directions to the hotel is included on the back cover
of this Proxy Statement.
ANNUAL MEETING ADMISSION
Admission to the Annual Meeting depends on your proof of share ownership.
If your shares are held in the name of a bank, broker or other holder of record
and you plan to attend the Annual Meeting, please obtain proof of ownership,
such as a current brokerage account statement or certification from your broker.
If your shares are registered with our transfer agent, no other proof of
ownership is needed.
STOCKHOLDERS ENTITLED TO VOTE
Owners of Southwest Water Company common or preferred Series "A" stock at
the close of business on March 29, 2002, are entitled to receive this notice and
to vote their shares at the Annual Meeting. As of that date, there were
9,201,412 shares of common stock outstanding and 10,247 shares of preferred
Series "A" stock outstanding. Common shares are entitled to one vote per share,
and preferred Series "A" shares are entitled to five votes per share on matters
properly brought before the Annual Meeting. The combined total number of
eligible votes is 9,252,647.
PROXIES AND VOTING PROCEDURES
Your vote is important. The proxy card that accompanies this proxy
statement gives you voting instructions. Please review the enclosed proxy
materials and vote as soon as possible.
If your shares are registered in your name with Mellon Investor Services
LLC, our transfer agent, you can vote your shares by telephone by calling the
toll-free telephone number on your proxy card. Telephone voting is available 24
hours a day. If your shares are held for you by a bank, please follow their
instructions.
If you choose to vote by mail, simply mark your proxy card, date and sign
it, and return it in the postage-paid envelope provided. The method by which you
vote a proxy will not limit your right to vote at the Annual Meeting if you
decide to attend in person.
All shares that have been properly voted, and not revoked, whether by
telephone or mail, will be voted at the Annual Meeting in accordance with your
instructions. If you sign your proxy card but do not give voting instructions,
the shares represented by your proxy will be voted as recommended by the Board
of Directors.
1
If any other matters are properly presented for consideration at the Annual
Meeting, the persons named in the enclosed form of proxy will have the
discretion to vote on those matters for you. At the date of this proxy
statement, we do not know of any other matters to be raised at the Annual
Meeting.
A listing of stockholders who have shares registered in their own name and
are entitled to vote will be available at the Annual Meeting.
Proxies may be changed or revoked at any time before the Annual Meeting by
written notice to the Secretary of the Company, timely delivery of a later-dated
proxy, or voting in person by ballot at the Annual Meeting.
In order to conduct the business of the Annual Meeting, there must be a
quorum. This means at least a majority of the outstanding shares entitled to
vote must be represented at the Annual Meeting, either by proxy or in person.
Abstentions and broker "non-votes" will be counted as present and entitled to
vote for purposes of determining a quorum. Broker "non-votes" are shares held by
a broker, which are "represented" at the meeting for purposes of a quorum, but
as to which the broker is not empowered to vote on any proposals.
Pursuant to Delaware law, Directors are elected by a plurality vote which
means that the two nominees receiving the most votes will be elected as
Directors. Abstentions and broker "non-votes" are not counted for purposes of
the election of Directors.
COST OF PROXY DISTRIBUTION AND SOLICITATION
We will pay the expenses of distributing the proxy materials and
soliciting proxies. Proxies may be solicited on our behalf by Directors,
officers or employees, in person or by telephone, electronic transmission or by
facsimile transmission. Mellon Investor Services LLC will distribute the proxy
materials to our registered stockholders and, through a search process, obtain
information to distribute these materials to our stockholders whose shares are
held by a bank, broker or other agency.
ELIMINATE DUPLICATE MAILINGS
Eligible stockholders who have more than one account in their name or the
same address as the other shareholders may authorize us to discontinue mailing
of duplicate annual reports and proxy statements. See your proxy card for more
information.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our Directors
and executive officers to file reports of holdings and transactions in Southwest
Water common stock with the Securities and Exchange Commission. Based on our
records and other information, we believe that in 2001, all of our Directors and
executive officers met all applicable SEC Section 16(a) filing requirements.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP as the Company's independent
auditors for the year ending December 31, 2002. Representatives of KPMG LLP are
expected to be present at the Annual Meeting. They have the opportunity to make
a statement if they so desire and will be available to respond to appropriate
questions.
2
ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS
The Board of Directors is divided into three classes with terms that
expire at successive annual meetings. Two Directors will be elected at the 2002
Annual Meeting to serve for a the three-year term expiring at the Company's
Annual Meeting in 2005, or until their successors have been elected and
qualified, or until the earliest of their death, resignation or retirement. The
Class I Directors nominated for election at our 2002 Annual Meeting are James C.
Castle and Maureen A. Kindel.
NOMINEES FOR DIRECTORS STANDING FOR
ELECTION IN 2002
(CLASS I)
JAMES C. CASTLE, PH.D., 65, is president and chief executive officer of
Castle Information Technologies LLC, an information technology consulting firm.
He serves on the boards of DST Systems of California, Inc., PMI Group, Inc. and
ADC Telecommunications Inc. Mr. Castle was first appointed a Director in
February 2002.
MAUREEN A. KINDEL, 64, is president of Rose & Kindel, a public affairs
firm. Ms. Kindel is past president of the City of Los Angeles Board of Public
Works, a founding and current member of the Pacific Council on International
Policy, and a board member of the International Women's Forum, the Los Angeles
Urban League, the Board of Governors of Town Hall of Los Angeles and the Los
Angeles Amateur Athletic Foundation. Ms. Kindel was first elected a Director in
1997.
The two nominees receiving the most votes will be elected as Directors.
Abstentions and broker "non-votes" are not counted for purposes of the election
of Directors. The persons named in the enclosed proxy intend to vote the proxy
for the election of the two nominees, unless you indicate on the proxy card that
your vote should be withheld from one or both of the named nominees. If you are
voting by telephone, you will be instructed how to withhold your vote from a
nominee or nominees.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE ELECTION OF THESE NOMINEES.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
(CLASS II)
LINDA GRIEGO, 53, is president of Zapgo Entertainment Group, a developer
and producer of television programming aimed at the young Latino market. She
serves on the boards of United California Bank, Blockbuster, Inc., and Granite
Construction, Inc. She is also a Los Angeles Director of the Federal Reserve
Bank of San Francisco. Ms. Griego was first appointed a Director in October
2001.
DONOVAN D. HUENNEKENS, 65, is a partner of HQT Homes, a real estate
development company and a director of Bixby Ranch Company. Mr. Huennekens was
first elected a Director in 1969.
RICHARD G. NEWMAN, 67, is chairman, chief executive officer and a director
of AECOM Technology Corporation, the parent of several subsidiaries that provide
architectural, engineering, construction, operations and maintenance services on
an international basis. He also serves on the boards of 13 mutual funds managed
by the Capital Research and Management Company. Mr. Newman was first elected a
Director in 1991.
3
DIRECTORS WHOSE TERMS EXPIRE IN 2004
(CLASS III)
H. FREDERICK CHRISTIE, 68, is an independent consultant. He retired in
1990 as president and chief executive officer of the Mission Group, a subsidiary
of SCEcorp (now Edison International), which oversaw SCEcorp's non-utility
businesses. From 1984 to 1987, he served as president of Southern California
Edison Company, a subsidiary of SCEcorp. Mr. Christie is a director of Ultramar
Diamond Shamrock, IHOP Corporation and Ducommun Incorporated and also serves on
the boards of 19 mutual funds managed by the Capital Research and Management
Company. Mr. Christie was first elected a Director in 1996.
ANTON C. GARNIER, 61, has been president and chief executive officer of
the Company since 1968, when he was first elected a Director. Mr. Garnier was
elected Chairman of the Board in 1996.
PETER J. MOERBEEK, CPA, 54, is the Company's chief financial officer and
secretary, and is also president of ECO Resources, Inc., a subsidiary of the
Company. Mr. Moerbeek joined the Company in 1995 as vice president of finance,
chief financial officer and secretary. Mr. Moerbeek was first elected a Director
in April 2001.
OFFICERS WHO ARE NOT DIRECTORS
MAURICE W. GALLARDA, P.E., 48, joined the Company and was appointed vice
president of new business development in August 1999. He has more than 20 years
of experience in corporate development and marketing and leads the Company's
efforts to expand into new markets and services.
ROBERT W. MONETTE, P.E., 53, was elected a vice president of the Company
in November 2001. He is the president and a Director of Operations Technologies,
Inc. (OpTech), a subsidiary of the Company, which he founded and has led since
1994.
THOMAS C. TEKULVE, CPA, 50, joined us in February 1999 as vice president
of finance. He oversees finance, accounting and information systems and provides
guidance in strategic planning for the Company and its subsidiaries. Mr. Tekulve
has 25 years of experience in finance.
SHELLEY A. FARNHAM, 46, joined the Company in July 1998 as vice president
of human resources. She has more than 20 years of experience in the human
resources field. Ms. Farnham oversees organizational planning and development,
employee relations, training, compensation and benefits administration for the
Company and its subsidiaries.
MICHAEL O. QUINN, 55, is president of Suburban Water Systems (Suburban), a
subsidiary of the Company. Mr. Quinn has been with the Company for over 28
years, serving as treasurer of Suburban prior to his move to ECO as president
between 1985 and 1992. He rejoined Suburban and was promoted to president in
1996.
4
BENEFICIAL OWNERSHIP OF THE COMPANY'S SECURITIES
BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 29, 2002, the number of shares
of each class of equity securities of the Company beneficially owned by each
Director and executive officer of the Company and its subsidiaries, and by all
Directors and executive officers as a group. All securities are common stock
and, except as otherwise indicated, each individual named has sole investment
and voting power with respect to the securities shown.
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NUMBER OF EXERCISABLE TOTAL NUMBER OF
NAME OF SHARES OPTIONS SHARES AND
BENEFICIAL OWNER AND BENEFICIALLY BENEFICIALLY EXERCISABLE OPTIONS PERCENTAGE
CAPACITY WITH COMPANY OWNED OWNED(a) BENEFICIALLY OWNED OF CLASS
- --------------------- ------------ ------------ ------------------- ----------
James C. Castle 0 0 0 *
H. Frederick Christie 13,022 21,731 34,753 *
Linda Griego 0 0 0 *
Donovan D. Huennekens 47,659(b) 20,341 68,000 *
Maureen A. Kindel 4,428 16,515 20,943 *
Richard G. Newman 26,932(c) 25,791 52,723 *
Anton C. Garnier 221,074(d) 230,666 451,740 4.6%
Peter J. Moerbeek 19,797(e) 187,596 207,393 2.2%
Michael O. Quinn 17,816(f) 25,577 43,393 *
Robert W. Monette 27,995 0 27,995 *
Maurice W. Gallarda 6 14,764 14,770 *
All Directors and Executive
Officers as a Group(11) 378,729 542,981 921,710 9.6%
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* Indicates less than one percent of class of stock.
(a) Includes options that become exercisable on or before May 31, 2002.
(b) Mr. and Mrs. Huennekens hold all the 47,659 shares of common stock as
trustees of a revocable trust for their benefit. Mr. Huennekens is a
trustee of the trust and has shared voting and investment power with
respect to the shares.
(c) Mr. and Mrs. Newman hold all 26,932 shares of common stock as trustees of a
revocable trust for their benefit. Mr. Newman is a trustee of the trust and
has shared voting and investment power with respect to the shares.
(d) Included in the table are 148,348 common shares owned by Mr. and Mrs.
Garnier as trustees of a revocable trust for their benefit. Mr. Garnier is
a trustee of the trust and has shared voting and investment power with
respect to the shares. Also included in the table are 15,750 common shares
representing Mr. Garnier's proportionate interest in a corporation of which
Mr. Garnier is president, a director and a stockholder. Mr. Garnier has
sole voting and investment power with respect to these shares.
(e) Mr. and Mrs. Moerbeek hold all the 19,797 shares of common stock as
trustees of a revocable trust for their benefit. Mr. Moerbeek is a trustee
of the trust and has shared voting and investment power with respect to the
shares.
(f) Excludes 3,888 shares of common stock held by Mr. Quinn's wife over which
Mr. Quinn has no voting or investment control, and Mr. Quinn disclaims
beneficial ownership of these shares.
5
BY OTHERS
The following table identifies others who own more than five percent of
any class or series of the Company's outstanding voting securities as of the
Record Date:
Number of
Shares Percentage
Class of Name and Address Beneficially Percentage of Voting
Stock Of Beneficial Owner Owned Of Class Power
----- ------------------- ----- -------- -----
Series "A" Lincoln National Life Insurance Co. 3,607 35% 0.2%
Preferred C/O Banker's Trust
P.O. Box 704, Church Street Station
New York, NY 10008
Common David L. Babson & Company, Inc. 674,245(1) 7.3% 7.3%
One Memorial Drive
Cambridge, MA 02142
(1) Based on a Schedule 13G dated January 28, 2002, filed with the Securities
and Exchange Commission.
GOVERNANCE OF THE COMPANY
The Board of Directors, which is elected by the stockholders, is the
ultimate decision-making body of the Company, except with respect to those
matters reserved to the stockholders. The Board selects the executive management
team, which is charged with the conduct of the Company's business. Having
selected the executive management team, the Board acts as an advisor to senior
management and monitors its performance.
It is a policy of the Company that the Board consist of a majority of
outside Directors and that the number of Directors not exceed a number that can
function efficiently as a body. The Nominating Committee, in consultation with
the Chairman and CEO, considers and makes recommendations to the Board
concerning the appropriate size and needs of the Board. The Nominating Committee
considers candidates to fill new positions created by expansion and vacancies
that occur by resignation, retirement or any other reason. Candidates are
selected for their character, judgment, business experience and acumen. Final
approval of a candidate is determined by the full Board. All Directors are
expected to be stockholders.
Monroe Harris, who served as a Director for 17 years, stepped down in
January 2002. In October 2001, Linda Griego was appointed to fill his position.
6
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. As set forth in a written charter adopted in 2001, the
Audit Committee is charged with assisting the Board in monitoring the integrity
of the Company's internal controls and financial reporting process, the
independence and performance of the Company's external independent auditors,
compliance with legal and regulatory requirements and review of areas of
significant financial risk to the Company. Current members of the Audit
Committee are Mr. Huennekens (chair), Mr. Christie and Ms. Kindel. During 2001,
the Audit Committee met five times.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
reviewing the Company's general compensation strategy, establishing salaries and
reviewing benefit programs, including pensions, for all executive officers, and
reviewing, approving and overseeing the Company's incentive compensation and
stock option plans. Current members of the Compensation Committee are Mr.
Christie (chair), Mr. Huennekens and Mr. Newman. The Compensation Committee met
five times during 2001.
NOMINATING COMMITTEE. The Nominating Committee is charged with
establishing criteria for the selection of nominees for election of Directors,
reviewing the qualifications of potential nominees, making recommendations to
the Board with respect to nominees for election and reviewing, on a long-term
basis, the size and composition of the Board. Current members of the Nominating
Committee are Ms. Kindel (chair), Mr. Christie, Mr. Newman and Mr. Garnier.
During 2001, this Committee held no separate meetings. Qualifications of
potential directors were reviewed during meetings of the full Board.
INVESTMENT/ACQUISITION COMMITTEE. The Investment/Acquisition Committee
provides direction to the Board in the areas of long-term planning, new business
development, acquisitions and mergers and overall investment policy. Current
members of the Investment/Acquisition Committee include Mr. Newman (chair), Mr.
Christie and Mr. Moerbeek. During 2001, this committee held no separate
meetings. Investment/acquisition matters were discussed as part of regularly
scheduled Board meetings.
During 2001, the Board of Directors held 7 meetings and Board Committees
met a total of 11 times. In 2001, all of our Directors attended more than 88%
of the meetings of the Board and Board Committees on which they served.
7
DIRECTOR COMPENSATION
BASE COMPENSATION. Each non-employee Director receives an annual retainer
of $12,000. In addition, the chair of each Board committee receives $1,200 per
year. Non-employee Directors also receive a fee of $1,000 for attending each
Board meeting, committee meeting and long-range planning meeting. When a
committee meeting is held on the same day as a Board meeting, the committee fee
is $500. Directors who are also employees of the Company receive no additional
compensation for service as Directors.
OPTIONS. Non-employee Directors receive an initial grant of 5,000 shares
of the Company's stock when he or she becomes a Director. In addition, each
Director receives an automatic award of 5,000 shares at each subsequent Annual
Meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. No member of
the Company's Compensation Committee is a current or a former officer or
employee of the Company or any of its subsidiaries. No executive officer of the
Company served on the board of directors or compensation committee of any entity
which has one or more executive officers serving as members of the Company's
Board of Directors or Compensation Committee.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised of three
independent directors and operates under a written charter adopted by the Board
of Directors. Each member of the Audit Committee meets the independence
requirements set by the National Association of Securities Dealers.
The Board of Directors has adopted a written charter setting forth the
audit-related functions the Audit Committee is to perform. The Audit Committee
reviewed this charter in March 2002. A copy of the charter was attached to last
year's proxy statement.
Management is responsible for Southwest Water's internal controls,
financial reporting process and compliance with laws and regulations and ethical
business standards. The independent auditors are responsible for performing an
audit of the Company's consolidated financial statements in accordance with
generally accepted auditing standards and issuing a report thereon. The Audit
Committee's responsibility is to monitor and oversee this process.
In the context stated above, the Audit Committee has met and held
discussions with management and with our independent auditors, KPMG LLP.
Management has represented to the Audit Committee that the Company's
consolidated financial statements were prepared in accordance with generally
accepted accounting principles, and the Audit Committee has reviewed and
discussed the consolidated financial statements with management and the
independent auditors. The Audit Committee also discussed with the independent
auditors matters required to be discussed by Statement on Auditing Standards No.
61 "Communication with Audit Committees".
Southwest Water's independent auditors also provided to the Audit
Committee the written disclosures and the letter required by Independence
Standards Board Standard No. 1 "Independence Discussions with Audit Committees,"
and the Audit Committee discussed with the independent auditors that firm's
independence.
8
Based upon the Audit Committee's review and discussions referred to above,
the Audit Committee has recommended to the Board of Directors that the audited
financial statements be included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, for filing with the Securities and Exchange
Commission.
AUDIT COMMITTEE
Donovan D. Huennekens, Chair
H. Frederick Christie
Maureen A. Kindel
March 25, 2002
INDEPENDENT PUBLIC ACCOUNTANT FEES
The following table sets forth the aggregate fees billed to the Company by KPMG
LLP for the fiscal year ended December 31, 2001:
Audit Fees............................................................... $146,000
--------
Financial Information Systems Design and Implementation.................. $ 0
--------
All Other Fees:
Review of SEC Form S-3 Filings.............................. $54,400
Audit of Employee Retirement and Profit Sharing Plans....... 22,800
Review of Corporate Income Tax Returns and
Other Income Tax Matters................................ 9,700
Other Fees.................................................. 14,100
-------
Total All Other Fees..................................................... $101,000
--------
RELATED PARTY TRANSACTIONS
In 2001, Suburban made lease payments of $52,958 for the use of water
rights owned by a family trust of Mr. Garnier. The payments made to the family
trust were at the same rate and terms as payments made to non-related parties.
The foregoing transactions were reviewed and approved by the non-employee
Directors of the Company. Mr. Garnier did not participate in the Board's
consideration of these transactions.
9
PERFORMANCE GRAPH
The following graph compares the cumulative total return to holders of the
Company's common stock during the most recent five fiscal years versus the
average return to investors during the same period achieved by 12 publicly held
water utilities listed in the Edward Jones Water Utility Index and that achieved
by the Standard and Poor's Index of 500 Companies. The comparison assumes that
$1,000 was invested on December 31, 1996, and the cumulative total return
assumes the reinvestment of dividends. The historical stock performance shown on
the graph is not necessarily indicative of future stock performance.
[PERFORMANCE GRAPH]
1996 1997 1998 1999 2000 2001
---- ------ ------ ------ ------ ------
SWWC 1000.00 1358.50 1550.40 2273.60 2300.70 2913.60
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WATER UTILITY 1000.00 1379.30 1716.30 1519.20 1924.00 2482.60
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S&P 500 1000.00 1333.50 1714.60 2075.30 1884.00 1662.30
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10
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
Executive Officer Compensation Philosophy
The compensation philosophy for executive officers is to ensure that
compensation be directly linked to continuous improvements in the Company's
financial performance and stockholder value. To implement this philosophy, the
Compensation Committee is guided by the following objectives: (1) enable the
Company to attract and retain highly qualified executives, (2) focus executives'
efforts on the fulfillment of Company annual and long-term business objectives
and strategies, and (3) ensure that a portion of executive compensation is tied
to specific performance measures. The Committee has retained outside consultants
and executive compensation specialists in evaluating and modifying the current
executive compensation plan.
Executive Compensation
In determining the base salary of executives, the Compensation Committee
considers individual performance, the performance of the operations directed by
the executive, and the competitive salary levels of executives in companies of
similar size and complexity. Competitive salary information, obtained primarily
through published compensation surveys, is used to determine the reasonableness
of total compensation, which includes base salary and incentive compensation.
For executives other than the Chief Executive Officer, the Compensation
Committee also considers the recommendations of the Chief Executive Officer.
Annual Incentive Compensation
The Compensation Committee believes that the Company's short-term
objectives are enhanced with annual performance-based incentive compensation for
its executives. Annual incentive awards are based on meeting certain financial
objectives for the Company and on an executive's achievement of goals in his or
her area of responsibility. Executive performance objectives include both
quantitative and qualitative criteria. As an executive's level of responsibility
increases, a greater portion of potential total cash compensation is at risk in
the form of annual performance-based incentives.
Financial goals and performance-based measures are established by the
Compensation Committee at the beginning of each year. Awards are made at the end
of the year based on actual performance. Each year, the Compensation Committee
establishes a performance threshold. No awards are made if the performance
threshold is not met. In 2001, the results for the year exceeded the threshold
set by the Compensation Committee, and incentive compensation awards were
approved for the Company's executives.
Long-term Incentive Compensation
The purpose of long-term incentives is to encourage and facilitate
long-term Company performance by greater personal stock ownership by the
executive officers and thus strengthen both their personal commitments to the
Company and a longer-term perspective in their managerial responsibilities. This
component of an executive officer's compensation links the officer's interests
with the Company's long-term goals and with the interests of the Company's
stockholders. Currently, the primary form of long-term incentive compensation is
non-qualified stock options. The Compensation Committee approves stock options
for all executives and managers.
11
In determining the number of stock options awarded, the Compensation
Committee considers a number of factors including the executive's pay level,
responsibilities in the organization and ability to significantly improve future
financial results. In addition, the Compensation Committee compares the
Company's option grant levels with similar industry practices.
Chief Executive Officer Compensation
Anton C. Garnier has been President and Chief Executive Officer of the
Company since November 1968 and Chairman of the Board since August 1996. The
Compensation Committee reviewed Mr. Garnier's 2001 performance based on the
performance of the Company as a whole and his performance with respect to
quantitative and qualitative objectives approved at the start of the year by the
Compensation Committee. The Compensation Committee carefully considered the
Company's continuing improvements in short-term and long-term financial results,
including earnings improvement, new business development, return on equity and
the creation of stockholder value. The Compensation Committee also evaluated Mr.
Garnier's progress in attaining qualitative objectives in areas such as investor
relations, planning for the company's long-term future, setting strategic
objectives, and communications. The Compensation Committee did not use specific
weighting factors with respect to quantitative and qualitative performance
measures.
In determining Mr. Garnier's performance for 2001, the Compensation
Committee gave particular emphasis to the Company's consistent earnings while
continuing to provide attractive shareholder returns during a challenging year,
as well as positioning the Company for the future. After the Compensation
Committee's deliberations, the Compensation Committee increased Mr. Garnier's
annual salary to $320,000, effective January 1, 2002, and awarded him an
incentive compensation amount of $160,000 for 2001. In addition, on February 7,
2002, the Compensation Committee awarded Mr. Garnier a stock option grant of
55,000 shares of the Company's common stock in recognition of the Company's
5-year performance.
COMPENSATION COMMITTEE
H. Frederick Christie (Chair)
Donovan D. Huennekens
Richard G. Newman
February 7, 2002
12
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
STOCK
NAME AND SALARY BONUS OPTIONS
PRINCIPAL POSITION YEAR ($)(1)(2) ($) (#)(3)
Anton C. Garnier 2001 290,000 160,000 52,500
Chairman, Chief Executive 2000 255,000 175,000 59,062
Officer and President 1999 240,000 160,000 59,062
Peter J. Moerbeek 2001 210,000 54,600 45,150
Chief Financial Officer and 2000 200,000 116,620 44,625
Secretary of the Company; 1999 190,000 123,709 88,594
President, ECO Resources, Inc.
Michael O. Quinn 2001 170,498 44,465 5,250
President, 2000 163,000 42,030 3,937
Suburban Water Systems 1999 157,040 32,562 6,890
Robert W. Monette 2001 200,000 35,000 26,250
Vice President of the Company 2000 -- -- --
President, 1999 -- -- --
Operations Technologies, Inc.
Maurice W. Gallarda 2001 167,680 107,140 15,750
Vice President, Business 2000 160,000 128,680 9,844
Development 1999 155,000 38,750 15,749
- ---------------------------------------------------------------------------------------
(1) The salary shown in 1999 for Mr. Gallarda, who joined the Company in August
1999, is annualized based upon a full year of employment. Mr. Gallarda's
actual salary for 1999 was $64,580.
(2) The salary shown in 2001 for Mr. Monette, who joined the Company in August
2001, is annualized based upon a full year of employment. Mr. Monette's
actual salary for 2001 was $66,667.
(3) Stock Options have been adjusted to reflect all stock dividends/splits and
were granted at fair market value on the date of grant.
13
EXECUTIVE OFFICERS' CHANGE OF CONTROL COMPENSATION AGREEMENTS
In 1998, Messrs. Garnier and Moerbeek entered into change of control
compensation agreements with the Company and in 2001 Mr. Monette entered into a
similar change of control agreement. The Company has agreed to provide benefits
and payments to Messrs. Garnier, Moerbeek and Monette based on 2.99 times their
respective average five-year compensation if certain conditions are met.
In 1995, Mr. Quinn entered into a change of control compensation agreement
with the Company. In 1999, Mr. Gallarda entered into a similar agreement. Under
these agreements, the Company has agreed to provide severance benefits and
payments to Messrs. Quinn and Gallarda based on 1.5 times their respective
average five-year compensation if certain conditions are met.
For the purpose of these agreements, a "change in control" is generally
defined as a change in the person or persons owning, directly or indirectly,
sufficient voting stock to elect the Board of Directors for the entity that
employs an executive. These compensation agreements are in addition to the plans
described under the heading "Supplemental Executive Retirement Plan."
The agreements for Messrs. Garnier, Moerbeek, Quinn, Monette, and Gallarda
will be triggered if one of the following conditions is met: (1) termination of
the executive's employment by his employer prior to the second anniversary of a
change in control, other than termination by retirement or for death, disability
or cause; or (2) termination of executive's employment by the executive within
two years after a change in control for "good reason" (including assignment of
executive to duties inconsistent with executive's position, duties,
responsibilities and status prior to the change in control or, alternatively, a
reduction in salary, a significant reduction in benefits, an elimination of
stock plans or a relocation of employment greater than 50 miles). Under these
agreements, cash severance payments are based upon base salary, auto benefits,
bonuses and certain life insurance premium amounts paid by the employer. Cash
severance payments are payable within five days after termination of employment.
Cash severance amounts as of December 31, 2001, assuming termination met the
requirements for a severance payment are as follows: Mr. Garnier - $1,131,628;
Mr. Moerbeek - $938,688; Mr. Quinn - $287,537; Mr. Monette - approximately
$470,000, and Mr. Gallarda - $303,908. In addition to the cash payment, each
executive is entitled to certain health insurance benefits with a value of
approximately $25,000, and outplacement services with a maximum benefit of
$15,000 each for Messrs. Garnier, Moerbeek and Monette, and $4,000 each for
Messrs. Quinn and Gallarda.
14
NON-EMPLOYEE DIRECTOR STOCK OPTIONS GRANTED IN 2001
- -------------------------------------------------------------------------
INDIVIDUAL GRANTS
EXERCISE
OPTIONS BASE PRICE EXPIRATION
ELIGIBLE DIRECTORS (#)(1)(2) ($/SH.) DATE
James C. Castle 0 0 --
H. Frederick Christie 5,250 $12.48 5/23/08
Linda Griego 5,000 $14.23 11/30/08
Donovan D. Huennekens 5,250 $12.48 5/23/08
Maureen A. Kindel 5,250 $12.48 5/23/08
Richard G. Newman 5,250 $12.48 5/23/08
- -------------------------------------------------------------------------
(1) Options vest 50% per year for two years.
(2) All options and option exercise prices reflect a 5% stock dividend on
October 1, 2001.
NON-EMPLOYEE DIRECTOR OPTION EXERCISES IN 2001 AND YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF VALUE OF UNEXERCISED IN
ACQUIRED UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
ON VALUE AT DECEMBER 31, 2001 DECEMBER 31, 2001
NON-EMPLOYEE EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
DIRECTOR NAME (#)(1) ($) ($)(2)
----- ------ ------------ --------------
James C. Castle 0 0 0/ 0 0/ 0
H. Frederick Christie 0 0 15,987/8,531 123,136/23,710
Linda Griego 0 0 0/5,250 0/ 0
Donovan D. Huennekens 4,066 26,336 14,527/8,531 109,181/23,710
Maureen A. Kindel 0 0 10,609/8,531 68,790/23,710
Richard G. Newman 0 0 19,885/8,531 167,246/23,710
- -------------------------------------------------------------------------------------------------------------
(1) Shares acquired on exercise reflect restatement for a 5% stock dividend on
October 1, 2001.
(2) Difference between fair market value at fiscal year-end of $14.12 and
option exercise price.
At December 31, 2001, the Non-Employee Director Group had a total of
110,490 stock options outstanding with weighted average exercise price of $9.37
per share. The stock options shown in the above table include stock options
granted under the current Director Option Plan and those granted previously
under the Company's Stock Option Plan.
15
OPTION GRANTS TO NAMED EXECUTIVE OFFICERS IN 2001
The following table provides a summary of information on the potential
realizable value of stock options granted in 2001. Exercise prices and numbers
of options reflect a 5% stock dividend, on October 1, 2001.
- ---------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR 10-YEAR OPTION TERM
% OF TOTAL
OPTIONS EXERCISE
GRANTED TO OR
EMPLOYEES BASE AT 0% AT 5% AT 10%
OPTIONS IN PRICE ANNUAL ANNUAL ANNUAL
GRANTED FISCAL ($/SH.) EXPIRATION GROWTH GROWTH GROWTH
EXECUTIVE (#)(1) YEAR (2) DATE RATE($) RATE($)(4) RATE($)(4)
Anton C. Garnier 52,500 20% 10.71 2008 0 353,612 896,122
Peter J. Moerbeek 45,150 17% 10.71 2008 0 304,106 770,665
Michael O. Quinn 5,250 2% 10.71 2008 0 35,361 89,612
Robert W. Monette 26,250 10% 12.10 2008 0 140,318 411,573
Maurice W. Gallarda 15,750 6% 10.71 2008 0 106,084 268,836
All Stockholders(3) N/A N/A N/A N/A N/A 81,545,918 206,653,366
All Optionees 26,105 100% 11.06 2008 0 1,858,100 4,708,791
All Optionees' Gain
As % of Total
Stockholders' Gain N/A N/A N/A N/A N/A 2.3% 2.3%
- ---------------------------------------------------------------------------------------------------------------
(1) Options vested 20 percent per year until fully vested. The options were
granted for a term of seven years and one day, subject to earlier
cancellation upon certain events related to termination of employment. The
exercise price and tax withholding obligations related to exercise may be
paid by delivery of already owned shares, or by offset of the underlying
shares, subject to certain conditions.
(2) All exercise prices represent fair market value on the date of grant and
reflect a 5% stock dividend on October 1, 2001.
(3) Based on total number of shares outstanding at December 31, 2001.
(4) Potential realizable values are based on assumed annual rates of return
specified by the Securities and Exchange Commission. Southwest Water
Company's management has consistently cautioned stockholders and option
holders that such increases in values are based on speculative assumptions
and should not inflate expectations of the future value of their holdings.
16
OPTIONS EXERCISED IN 2001 AND YEAR-END OPTION VALUES
The following table shows information on exercised and unexercised stock
options, value realized and the value of unexercised options during the
Company's most recent fiscal year for the chief executive officer of the Company
and the other named executive officers.
- ----------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS IN-THE-MONEY OPTIONS AT
ON VALUE AT DECEMBER 31, 2001 DECEMBER 31, 2001
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXECUTIVE (#)(1) ($) (#) ($)
Anton C. Garnier 39,068 285,757 178,035/165,999 1,576,717/793,309
Peter J. Moerbeek 0 0 144,507/157,829 1,239,999/783,054
Michael O. Quinn 6,933 62,297 19,840/ 16,286 172,457/ 84,400
Robert W. Monette 0 0 0/ 26,250 0/ 53,025
Maurice W. Gallarda 0 0 8,267/ 33,074 47,402/139,703
- ----------------------------------------------------------------------------------------------------------------------------
(1) Shares acquired on exercise reflect restatement for the 5% dividend on
October 1, 2001.
17
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Southwest Water Company Supplemental Executive Retirement Plan (the
"SERP") was adopted by Southwest Water Company effective May 8, 2000. An
employee must be selected by the Compensation Committee of the Board of
Directors to participate in the SERP. Two executive officers of the Company are
participants in the SERP, Messrs. Garnier and Moerbeek. Under the SERP, in most
cases, a vested participant with five to ten years of service will be eligible
for a yearly benefit for his or her lifetime beginning at age 65 equal to: (1)
the participant's average annual compensation multiplied by (2) the applicable
compensation percentage as defined by the SERP less (3) the Social Security
benefit for the most recent five years of employment and less (4) benefits
received under the Company-sponsored Noncontributory Defined Benefit Pension
Plan (the "Pension Plan"). The Pension Plan was terminated December 30, 1999.
The following table shows the estimated annual benefits that would be
payable to participants in the SERP at age 65.
-----------------------------------------------------------------------
ESTIMATED ANNUAL BENEFIT
5-YEAR AVERAGE FOR YEARS OF SERVICE
ANNUAL COMPENSATION INDICATED
$ $
15 YEARS 25 YEARS 35 YEARS
200,000 24,100 18,200 27,400
240,000 36,100 38,200 55,400
280,000 48,100 58,200 83,400
320,000 60,100 78,200 111,400
-----------------------------------------------------------------------
The compensation used in determining final average compensation under the
SERP is the participant's base salary and excludes bonuses and other forms of
compensation.
On December 31, 2001, the base compensation for the participating officers
was: Anton C. Garnier - $290,000 and Peter J. Moerbeek - $210,000. Their years
of credited service were 32 and 7, respectively. The SERP is currently funded
through corporate-owned life insurance.
18
REQUIREMENTS, INCLUDING DEADLINES, FOR SUBMISSION OF PROXY
PROPOSALS, NOMINATION OF DIRECTORS AND OTHER BUSINESS OF
STOCKHOLDERS
Stockholder proposals (including nomination of a person for election to
the Board of Directors) to be included in the proxy statement for the 2003
Annual Meeting must be received by the Company's Secretary not later than
December 9, 2002. In order for proposals to be included, you must comply with
the rules of the Securities and Exchange Commission governing the submission of
stockholder proposals.
Under our bylaws, no business may be brought before an annual meeting
unless it is specified in the notice of the meeting or is otherwise brought
before the meeting by or at the meeting of the Board of by a shareholder
entitled to vote who has delivered notice to the Company (containing certain
information specified in the bylaws) not less than 90 days prior to the first
anniversary of the preceding year's annual meeting. These requirements are
separate from and in addition to the Securities and Exchange Commission's
requirements that the shareholder must meet in order to have a shareholder
proposal included in the Company's proxy statement.
All proposals should be submitted in writing to the Company's Secretary at
225 North Barranca Avenue, Suite 200, West Covina, California 91791-1605.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE VOTE BY
TELEPHONE OR MARK, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED.
BY ORDER OF THE BOARD OF DIRECTORS,
PETER J. MOERBEEK
SECRETARY
APRIL 9, 2002
19
DIRECTIONS TO
SOUTHWEST WATER COMPANY
ANNUAL MEETING OF STOCKHOLDERS
MAY 13, 2002 AT 10:00 A.M. (Pacific Time)
[MAP]
SUGGESTED ROUTE:
EXIT THE HARBOR FREEWAY (110) AT 4TH STREET. TAKE 4TH STREET EAST TO OLIVE
STREET, TURN LEFT.
HOTEL IS ABOUT 100 YARDS ON THE LEFT SIDE OF THE STREET. CIRCULAR DRIVE IN
FRONT.
PARKING:
TO RECEIVE COMPLIMENTARY PARKING, PLEASE TELL THE ATTENDANT THAT YOU ARE
ATTENDING SOUTHWEST WATER COMPANY'S ANNUAL MEETING.
OMNI LOS ANGELES HOTEL
LOCATED ON BUNKER HILL AT CALIFORNIA PLAZA
251 SOUTH OLIVE STREET
LOS ANGELES
(213) 617-3300
SOUTHWEST WATER COMPANY
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 2002
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Anton C. Garnier and Peter J. Moerbeek, each with the power of
substitution, are hereby appointed by the stockholder(s) named on the reverse
side of this Proxy to vote all eligible shares of common or preferred stock of
Southwest Water Company at the Annual Meeting of Stockholders to be held on May
13, 2002, or any adjournments thereof, on the matters set forth on the reverse
side in accordance with any directions given by the stockholder(s) and, in the
discretion of the Proxy holders, on all other matters that may properly come
before the Annual Meeting or any adjournments thereof.
IMPORTANT - PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY
OR VOTE BY TELEPHONE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
ON THE REVERSE SIDE. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
BOTH DIRECTOR NOMINEES.
* FOLD AND DETACH HERE *
SOUTHWEST WATER COMPANY
YOUR VOTE IS IMPORTANT
You can vote in one of two ways:
1. Mark, date, sign and return your Proxy by detaching the top portion of
this sheet and returning it in the enclosed envelope.
OR
2. Call toll-free 1-800-435-6710 on a touch-tone telephone and follow the
instructions on the reverse side of this card. There is NO CHARGE to you
for this call.
PLEASE MARK
YOUR VOTES AS [X]
INDICATED IN
THIS EXAMPLE
1. Election as director of the nominees listed in the accompanying Proxy
Statement.
<Table>
WITHHOLD AUTHORITY
FOR the nominees to vote for the 01 James C. Castle
listed at right nominees listed at right 02 Maureen A. Kindel
[ ] [ ]
</Table>
(INSTRUCTION: To withhold authority to vote for either individual nominee, write
that nominee's name on the space provided below.)
- -------------------------------------------------------------------------------
2. Transact other business as may properly come before the Annual Meeting and
any adjournment or postponement.
I/WE PLAN TO ATTEND THE MEETING [ ]
Signature Signature Date
------------------------ --------------------- -------------
NOTE: Please sign as name appears hereon. Joint owners should both sign. When
signing as attorney, administrator, trustee or guardian, please give full title
as such.
* FOLD AND DETACH HERE *
VOTE BY TELEPHONE OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
TELEPHONE VOTING IS AVAILABLE THROUGH 4PM EASTERN TIME
THE BUSINESS DAY PRIOR TO ANNUAL MEETING DAY
YOUR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME
MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
TELEPHONE
1-800-435-6710
Use any touch-tone telephone to vote your proxy. Have your proxy card in hand
when you call. You will be prompted to enter your control number, located in the
box below, and then follow the directions given.
OR
MAIL
Mark, sign and date your proxy card and return it in the enclosed postage-paid
envelope.
IF YOU VOTE YOUR PROXY BY TELEPHONE,
YOU DO NOT NEED TO MAIL BACK YOUR PROXY CARD.