-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, So9wraq7hNZ4poygRroPvKKUB59SIEKU4D3sR+cvyszafjXyqhczDlWLP9V0+uNV YoK8+rkmFqbbZNnqGlyS2Q== 0000950109-96-003419.txt : 19960529 0000950109-96-003419.hdr.sgml : 19960529 ACCESSION NUMBER: 0000950109-96-003419 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTESIAN RESOURCES CORP CENTRAL INDEX KEY: 0000863110 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510002090 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02776 FILM NUMBER: 96572839 BUSINESS ADDRESS: STREET 1: 664 CHURCHMANS RD CITY: NEWARK STATE: DE ZIP: 19702 BUSINESS PHONE: 3024536900 MAIL ADDRESS: STREET 1: 664 CHURCHMANS RD CITY: NEWARK STATE: DE ZIP: 19702 424B1 1 FINAL PROSPECTUS Filed under Rule 424(b)(1) and (3) Registration Statement No. 333-2776 PROSPECTUS 675,000 SHARES [LOGO OF ARTESIAN RESOURCES] CLASS A NON-VOTING COMMON STOCK ---------------- All of the 675,000 shares of Class A Non-Voting Common Stock, par value $1 per share ("Class A Non-Voting Common Stock"), offered hereby are being sold by Artesian Resources Corporation ("Artesian Resources"). Artesian Resources is a holding company whose principal subsidiary, Artesian Water Company, Inc. ("Artesian Water" or the "Company"), is a regulated public water utility. Artesian Resources' Class A Non-Voting Common Stock is traded in the over-the- counter market under the symbol "ARTNA" and quoted on the OTC Bulletin Board, an inter-dealer automated quotation system sponsored and operated by the National Association of Securities Dealers, Inc. Artesian Resources' Class A Non-Voting Common Stock has been approved for inclusion in the Nasdaq National Market under the symbol "ARTNA." On May 23, 1996, the high bid price for the Class A Non-Voting Common Stock, as reported on the OTC Bulletin Board, was $14.00. See "Price Range of Common Stock." See "Underwriting" for information relating to the determination of the public offering price in this offering. ---------------- FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY POTENTIAL INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 6. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------- Per Share....................... $15.00 $0.80 $14.20 Total(3)........................ $10,125,000 $540,000 $9,585,000 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) See "Underwriting" for a description of indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by Artesian Resources estimated at $300,000. (3) Artesian Resources has granted the Underwriters an option exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 101,250 additional shares of Class A Non-Voting Common Stock solely to cover over-allotments, if any, on the same terms and conditions as the shares offered hereby. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $11,643,750, $621,000 and $11,022,750, respectively. See "Underwriting." ---------------- The shares of Class A Non-Voting Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by the Underwriters and to certain other conditions, including the Underwriters' right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Class A Non-Voting Common Stock will be made on or about May 30, 1996, at the offices of Janney Montgomery Scott Inc., 1801 Market Street, Philadelphia, Pennsylvania. ---------------- Janney Montgomery Scott Inc. The date of this Prospectus is May 23, 1996. [MAP OF NEW CASTLE COUNTY DELAWARE APPEARS HERE] ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A NON- VOTING COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A NON-VOTING COMMON STOCK IN THE OVER- THE-COUNTER MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the over-allotment option granted to the Underwriters is not exercised. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Artesian Water is the oldest and largest public water utility in the State of Delaware and has been providing water within the state since 1905. The Company distributes and sells water to residential, commercial and industrial customers and to utilities and municipalities, primarily in New Castle County, Delaware. As of March 31, 1996, the Company had approximately 56,900 metered customers and served a population of approximately 200,000, constituting 28% of Delaware's total population. The Company operates two distinct water systems within New Castle County: 101 square miles north of the Chesapeake and Delaware Canal (the "C&D Canal") (the "northern system") and 15 square miles south of the C&D Canal (the "southern system"). The number of customers in the northern system has grown at an average rate of 2.9% per year for the last five years. While substantially all of the available service territory in this area has been allocated by the state, a significant portion of the Company's service territory is still available for development, representing an opportunity for growth as population and infrastructure expansion in this area continues. The Company began acquiring service territory south of the C&D Canal in 1993, and, to date, has been granted 24 Certificates of Public Convenience and Necessity ("CPCNs") by the state for new territory, including the right to serve one municipality. This growth represents 15% of the Company's total service territory. Similar to the northern system, there is an opportunity for further penetration of this territory as development continues. In addition, substantial portions of New Castle County south of the C&D Canal are not yet covered by CPCNs or served by public water utilities, presenting opportunities to expand the Company's territory through development or acquisition. The Company's northern system is supplied by 43 Company-owned wells and through 12 interconnections with neighboring utilities; its southern system is supplied by 5 Company-owned wells. In 1995, the Company's wells supplied 72% of the 6.6 billion gallons of water distributed in its northern system, with the balance supplied through its interconnections, and the Company's wells supplied 100% of the 1.1 million gallons of water distributed in its southern system. While the Company is currently capable of meeting average water service demand from its own wells, it is implementing a seven-year capital investment plan designed to reduce or eliminate its reliance on outside sources for water supply. Purchased water generally costs 50% more than self-supply and the Company believes that the reduction or elimination of its reliance on purchased water will allow it to increase sales of excess supplies to neighboring utilities at bulk rates. The Company's objective is to maintain and strengthen its position as a leading industry innovator and provider of high quality water in the State of Delaware. The Company believes that it has a reputation for providing water of superior quality to its customers, and maintains drilling, pumping, treatment and distribution standards which ensure such quality. To support its growth and service objectives, the Company actively sponsors direct-mail marketing campaigns, community outreach and conservation education programs and various community events, and develops relationships with developers, landowners and state, county and municipal government officials in political, educational and legislative forums. Capital expenditures for the three-year period ending December 31, 1998 are estimated to be approximately $28.2 million, of which $19.1 million is for the construction, upgrading and maintenance of transmission and distribution facilities, $3.7 million is for the construction, upgrading and maintenance of pumping and treatment facilities, $3.4 million is for new sources of supply and $2.0 million is for general plant, such as fleet vehicles, computer systems and office/warehouse equipment. 3 The executive offices of Artesian Resources and Artesian Water are located at 664 Churchmans Road, Newark, Delaware 19702, and their telephone number is (302) 453-6900. THE OFFERING Class A Non-Voting Common Stock Offered by Artesian Resources...... 675,000 shares Common Stock Outstanding after the Offering: Class A Non-Voting Common Stock (1).............................. 1,218,028 shares Class B Voting Common Stock....... 499,720 shares Use of Proceeds..................... For the repayment of certain short-term borrowings of Artesian Water. See "Use of Proceeds." Dividends (2)....................... Increased, on April 30, 1996, to an annual rate of $0.92 per share of Class A Non- Voting Common Stock and Class B Voting Common Stock, paid quarterly. See "Price Range of Common Stock and Dividends." Nasdaq National Market Symbol for Class A Non-Voting Common Stock.... "ARTNA"
- -------- (1) As of April 29, 1996. Excludes an aggregate of 25,560 shares of Class A Non-Voting Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $12.45 per share, of which 24,270 were fully vested and exercisable. (2) Purchasers in this offering will first be eligible to receive dividends in the third quarter of 1996. 4 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------- --------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA(1): Water sales............. $ 4,932 $ 4,641 $20,526 $18,720 $18,361 $16,780 $16,133 Total operating reve- nues................... 5,070 5,150 22,631 21,012 20,340 18,216 17,684 Total operating ex- penses................. 3,967 4,259 18,698(2) 17,198 16,517 15,127 14,960 Operating income........ 1,103 890 3,933 3,814 3,823 3,089 2,724 Total interest charges.. 725 633 2,758 2,334 2,434 2,233 2,394 Net income applicable to common stock........... 354 230 1,088 1,355 1,490(3) 625 245 Net income per share of common stock........... $ .33 $ .22 $ 1.06 $ 1.34 $ 1.50(3) $ .63 $ .27 Weighted average shares. 1,041 1,021 1,031 1,010 995 987 918 Cash dividends per share of common stock........ $ .21 $ .15 $ .63 $ .60 $ .30 $ .05 $ .22 OPERATING DATA: Water pumped (millions of gallons)...... 6,561 6,506 6,409 6,208 6,043 Average water sales per customer........ $ 365 $ 344 $ 347 $ 326 $ 321 Number of metered customers at end of period................................. 56,672 55,097 53,599 52,014 50,865 Customer's average billed consumption (gallons per day)...................... 276 283 283 283 289 Miles of water main at end of period.... 763 746 728 718 705
AT MARCH 31, 1996 ---------------------- ACTUAL AS ADJUSTED(4) ------- -------------- (UNAUDITED) BALANCE SHEET DATA: Utility plant, at original cost less accumulated depreciation........................................... $83,797 $83,797 Total assets............................................ 95,100 95,100 Notes payable and current portion of long-term debt..... 15,825 6,540 Long-term obligations and redeemable preferred stock.... 18,567 18,567 Common stockholders' equity............................. 15,581 24,866
The notes and schedules to Artesian Resources' Consolidated Financial Statements included elsewhere in this Prospectus are an integral part of the summary financial information set forth above. - ------- (1) Balances with respect to Statement of Operations Data for years prior to 1995 have been reclassified to conform with the presentation for 1995. (2) Includes a write-down of $783,600 in connection with the sale of an office building and a $128,000 loss on the anticipated disposal of Artesian Laboratories, Inc., both occurring in the second half of 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." (3) For the year ended December 31, 1993, includes cumulative effect of changes in accounting principles of $251,000, or $.25 per share of common stock. (4) Adjusted to reflect the sale by Artesian Resources of 675,000 shares of Class A Non-Voting Common Stock offered hereby at an offering price of $15.00 per share and the application of the net proceeds therefrom. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. ARTESIAN RESOURCES' ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS." 5 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully by potential purchasers in evaluating an investment in the Class A Non-Voting Common Stock offered hereby. Non-Voting Common Stock. Purchasers of the 675,000 shares of Class A Non- Voting Common Stock offered hereby will not be entitled to vote such shares with respect to the election of directors and other matters affecting Artesian Resources except in statutory proceedings as to which the vote of holders of Class A Non-Voting Common Stock may be required by applicable law and with respect to the issuance by Artesian Resources of certain series of preferred stock. See "Description of Capital Stock." Concentration of Share Ownership. Upon completion of the offering, members of the Taylor family, including, among others, Dian C. Taylor, Chair, Chief Executive Officer and President of Artesian Resources, Ellis D. Taylor, Chairman Emeritus and a director of Artesian Resources, and John R. Eisenbrey, Jr., a director of Artesian Resources, will beneficially own approximately 9.4% of the outstanding Class A Non-Voting Common Stock and approximately 75.3% of the outstanding Class B Voting Common Stock, par value $1 per share ("Class B Voting Common Stock"). The Taylor family's ownership of 75.3% of the Class B Voting Common Stock could enable them to control the outcome of corporate actions requiring stockholder approval, including the election of the entire Board of Directors and changes in management. There are no provisions for cumulative voting by stockholders and, accordingly, holders of a plurality of the outstanding shares of Class B Voting Common Stock can elect all of Artesian Resources' directors. See "Principal Stockholders." The members of the Taylor family have no agreements regarding the voting of their shares with respect to any election of directors or any other corporate action requiring stockholder approval. Dependence on Rate Increase Approvals. Although Artesian Resources is not regulated by the Delaware Public Service Commission, Artesian Water is regulated by that Commission with respect to the issuance and sale of securities of Artesian Water, rates and service, classification of accounts, mergers, acquisitions and other matters. Artesian Water periodically seeks rate increases to cover the cost of increases in operating expenses, increases in financing expenses due to additional investments in utility plant and other costs of doing business. Artesian Water petitioned for, and obtained, rate increases in 1992 and 1995. Pursuant to a settlement agreement with the Office of the Public Advocate of the State of Delaware entered into in connection with the 1995 rate increase, the Company agreed not to file a petition for a rate increase using a test period earlier than the test period ending June 30, 1998, unless circumstances beyond the control of the Company prevent it from earning its authorized rate of return. Artesian Water may seek a rate increase earlier, if such circumstances arise. Artesian Water cannot predict the timing or ultimate outcome of any rate proceeding. See "Business--Regulation--Rates." Risk of Continued Dividends. The ability of Artesian Resources to pay dividends on the Class A Non-Voting Common Stock and the Class B Voting Common Stock is subject to certain provisions in its Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), which provide that no dividends may be paid on the common stock unless all accrued dividends and sinking fund payments payable on any outstanding preferred stock have been paid or set aside for payment, as well as certain restrictions contained in bond covenants. See "Description of Capital Stock--Preferred Stock." Artesian Resources currently anticipates paying dividends for each quarter of 1996. Payment of future dividends will depend primarily upon Artesian Resources' earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases granted to Artesian Water. Additionally, Artesian Resources has increased its dividend rate over the past three quarters to bring its dividend rate in line with other public water utilities. There can be no assurance that Artesian Resources will maintain its current dividend rate, increase its dividend rate or continue to pay dividends on its common stock in the future. See "Price Range of Common Stock and Dividends." Availability of Capital for Expansion and Construction Program. Artesian Water's ability to continue its expansion efforts and fund its construction program is dependent on the availability of adequate sources of financing. After the receipt of the proceeds from this offering, Artesian Water believes that it will have sufficient sources of funds available, together with funds from anticipated bond issuances and existing bank credit lines, to 6 continue its planned expansion efforts and fund its construction program through 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." There can be no assurance, however, that Artesian Resources will have sufficient funds available to fund its expansion efforts or meet its future construction budget. Government Regulation and Competition. Artesian Water is subject to regulation by federal, state and local agencies with respect to, among other things, rates charged for water service, awards of new service territory, water allocation rights, water quality and environmental matters. Artesian Resources and Artesian Water believe that Artesian Water is in material compliance with all applicable regulations. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. There can be no assurance that Artesian Water will be able to comply with changes in applicable laws or regulations. Noncompliance with respect to such changes could have a material adverse effect on Artesian Resources' results of operations. See "Business-- Regulation." Additionally, while the water utility industry is largely non- competitive once service territories have been awarded, the pursuit of additional service territory in Delaware is competitive. Several of Artesian Water's applications for new service territory in southern New Castle County were unsuccessfully challenged by another water utility. There can be no assurance that Artesian Water's future applications for new service territory will not be challenged by third parties. See "Business--Regulation-- Certificates of Public Convenience and Necessity." Water Supply. Artesian Water is dependent on an adequate water supply to meet the present demands of its customers and to continue its expansion efforts. Artesian Water is seeking to increase its self-supply of water to meet present and future demand and to decrease its reliance on purchases of water, through its interconnections, from neighboring water utilities and municipalities adjacent to its service territory. An increase in Artesian Water's self-supply of water is expected to reduce costs to customers and enable it to increase its sales of water to neighboring water utilities and municipalities. Artesian Water's goal is to become self-sufficient for water supply within seven years. However, there can be no assurance that Artesian Water will achieve this goal within such seven-year period, if at all, or that the water supply obtained from other sources will be sufficient to meet the demands of Artesian Water's customers. See "Business--Strategic Initiatives." Anti-Takeover Measures. Artesian Resources is subject to Section 203 of the Delaware General Corporation Law which contains certain anti-takeover provisions which prohibit a "business combination" between a corporation and an "interested stockholder" within three years of the stockholder becoming an "interested stockholder." The business combination provisions of Section 203 of the Delaware General Corporation Law may have the effect of deterring merger proposals, tender offers or other attempts to affect changes in control of Artesian Resources that are not negotiated and approved by the Board of Directors. In addition, Artesian Resources has adopted certain provisions in its Certificate of Incorporation and by-laws which may have anti-takeover implications, including certain supermajority voting requirements and a classified board of directors. The Certificate of Incorporation provides that, without the affirmative vote of at least 75% of the voting power of all of the then outstanding shares entitled to vote generally in the election of directors, voting together as a class, the by-laws and the provisions of the Certificate of Incorporation establishing a classified board of directors may not be altered, amended or repealed. Additionally, the Board of Directors has the ability, subject to the consent of the holders of Class A Non-Voting Common Stock, to establish by resolution one or more series of preferred stock having such number of shares, designation, preferences, voting rights, limitations and other rights as the Board of Directors may fix. The rights granted to holders of Artesian Resources' voting stock pursuant to the Certificate of Incorporation or an additional series of preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Artesian Resources which may be at a premium above the prevailing market price. See "Description of Capital Stock." Dependence on Key Personnel. Artesian Resources is highly dependent on the principal members of the management and technical staff of Artesian Resources and Artesian Water, particularly their executive officers. See "Management." Artesian Water's Chief Operating Officer is expected to retire on May 31, 1996, and 7 Artesian Water has implemented a succession plan to replace him. There can be no assurance that the succession plan will be fully effective. Any unanticipated loss of an executive officer could have a material adverse effect on Artesian Resources and Artesian Water. Absence of Active Trading Market. Prior to this offering there has been a limited public trading market for the Class A Non-Voting Common Stock and the Class B Voting Common Stock, although both classes of common stock are traded sporadically in the over-the-counter market. See "Price Range of Common Stock and Dividends." Although the Class A Non-Voting Common Stock has been approved for inclusion in the Nasdaq National Market, there can be no assurance that an active trading market for the Class A Non-Voting Common Stock will develop or be sustained in the future. Janney Montgomery Scott Inc., the representative of the Underwriters (the "Representative"), has advised Artesian Resources that it intends to make a market in the Class A Non-Voting Common Stock. However, the Representative has no obligation to do so and may discontinue such activities at any time. Making a market will involve maintaining bid and asked quotations for the Class A Non-Voting Common Stock and being available as a principal to effect transactions in reasonable quantities at those quoted prices, subject to certain securities laws and other regulatory requirements. Determination of Offering Price. The public offering price of the Class A Non-Voting Common Stock in this offering was determined by negotiations between Artesian Resources and the Representative and may not be indicative of the market price of the Class A Non-Voting Common Stock after this offering. See "Underwriting." The market price of the Class A Non-Voting Common Stock could be subject to significant fluctuations in response to variations in the operating results of Artesian Resources and Artesian Water, industry trends, governmental regulatory action and general market conditions. Shares Eligible for Future Sale. Upon the completion of this offering, and based on shares outstanding at April 29, 1996, Artesian Resources will have 1,218,028 (1,319,278 if the over-allotment option is exercised) shares of Class A Non-Voting Common Stock outstanding. Of these shares, all of the 675,000 (776,250 if the over-allotment option is exercised) shares of Class A Non-Voting Common Stock sold in this offering will generally be freely transferable by persons other than affiliates of Artesian Resources without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 543,028 shares of Class A Non- Voting Common Stock (the "Prior Shares") outstanding after the completion of this offering were sold by Artesian Resources in reliance on exemptions from the registration requirements of the Securities Act. Approximately 475,000 of the Prior Shares are presently eligible for sale in the public market in reliance on Rule 144(k) under the Securities Act ("Rule 144"). An additional 42,572 of the Prior Shares, held by affiliates of Artesian Resources, are presently eligible for immediate sale, subject to the volume and other resale conditions imposed by Rule 144. Approximately 26,000 of the remaining Prior Shares, which were issued upon either exercise of options or as stock bonuses within the last three years, will be eligible for sale subject to the holding period and other conditions imposed by Rule 144. In addition, as of April 29, 1996, there were outstanding options to purchase 25,560 shares of Class A Non- Voting Common Stock. The directors, officers and certain stockholders of Artesian Resources have agreed that, for a period of 120 days after completion of this offering, they will not offer, sell, grant any option to purchase or otherwise dispose of Class A Non-Voting Common Stock and Class B Common Stock without the prior written consent of the Representative. The sale of a substantial number of shares could adversely affect the market price of the Class A Non-Voting Common Stock. No prediction can be made as to the effect, if any, that future sales of Class A Non-Voting Common Stock or the availability of Class A Non-Voting Common Stock for sale, or the perception that such sales could occur, will have on the market price of the Class A Non-Voting Common Stock in the public market following this offering. 8 USE OF PROCEEDS Artesian Resources will receive approximately $9,285,000 ($10,722,750 if the Underwriters' over-allotment option is exercised in full) from the sale of Class A Non-Voting Common Stock pursuant to the offering, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by Artesian Resources. Artesian Resources will use the entire net proceeds to fund an equity contribution in the same amount to Artesian Water. Artesian Water will use 100% of the contribution to repay a portion of its short-term borrowings incurred to finance expenses associated with its recent construction program, primarily investment in utility plant. See "Business." At April 30, 1996, Artesian Water had short-term borrowings outstanding of $7.9 million and $3.0 million under lines of credit with two separate financial institutions at interest rates approximating 6.9%, which lines of credit mature in June 1997, unless extended or renegotiated. This use of proceeds will reduce Artesian Water's current debt capitalization ratio, which Artesian Water believes will improve its capacity to issue additional long- term debt to finance future capital investments, water system acquisitions and expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 9 PRICE RANGE OF COMMON STOCK AND DIVIDENDS Artesian Resources' Class A Non-Voting Common Stock and Class B Voting Common Stock are each quoted on the OTC Bulletin Board under the symbols "ARTNA" and "ARTN," respectively. The Class A Non-Voting Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ARTNA." In addition, upon the effectiveness of this offering, the Class B Voting Common Stock will be traded on the OTC Bulletin Board under the symbol "ARTNB." Prior to this offering, there has been a limited public trading market for the Class A Non-Voting Common Stock and the Class B Voting Common Stock, although both classes of common stock are traded sporadically in the over-the-counter market. The following table sets forth the high and low closing bid quotations on the OTC Bulletin Board for the Class A Non-Voting Common Stock and the Class B Voting Common Stock and the cash dividends declared per share for the periods indicated.
CLASS A NON-VOTING CLASS B VOTING COMMON STOCK COMMON STOCK ------------------------ ------------------------ DIVIDEND DIVIDEND HIGH LOW PER SHARE HIGH LOW PER SHARE ---- --- --------- ---- --- --------- 1994 First Quarter............. 14 9 1/2 $0.15 13 1/2 9 1/2 $0.15 Second Quarter............ 12 1/4 9 1/2 $0.15 15 9 1/2 $0.15 Third Quarter............. 12 1/2 9 3/4 $0.15 15 1/2 14 $0.15 Fourth Quarter............ 13 1/2 9 3/4 $0.15 16 14 $0.15 1995 First Quarter............. 13 1/4 9 3/4 $0.15 16 1/2 14 $0.15 Second Quarter............ 13 1/4 9 3/4 $0.15 16 1/4 14 $0.15 Third Quarter............. 13 1/4 13 $0.15 16 1/4 14 $0.15 Fourth Quarter............ 13 1/4 13 $0.18 16 1/4 15 $0.18 1996 First Quarter............. 13 7/8 13 $0.21 16 1/4 15 $0.21 Second Quarter (through May 23, 1996)............ 14 13 3/4 $0.23 16 1/4 16 1/4 $0.23
The above quotations reflect prices between dealers and do not include retail markups or markdowns or commissions and may not necessarily represent actual transactions. A recent closing bid price per share of Class A Non-Voting Common Stock is set forth on the cover page of this Prospectus. As of April 29, 1996, there were 506 stockholders of record of the Class A Non-Voting Common Stock and 255 stockholders of record of the Class B Voting Common Stock. On April 30, 1996, Artesian Resources declared a $0.23 dividend on shares of Class A Non-Voting Common Stock and Class B Voting Common Stock payable to stockholders of record as of May 14, 1996. Consequently, purchasers of Class A Non-Voting Common Stock in this offering will not be entitled to such second quarter dividend. Artesian Resources currently anticipates paying dividends for the last two quarters of 1996 at a rate of $0.23 per share on Class A Non- Voting Common Stock and Class B Voting Common Stock. Artesian Resources has increased its dividend rate over the past three quarters to bring its dividend rate in line with other public water utilities. There can be no assurance that Artesian Resources will maintain its current dividend rate, increase its dividend rate or continue to pay dividends on its common stock in the future. Payment of future dividends will depend primarily upon Artesian Resources' earnings, financial condition, capital requirements, provisions in debt instruments limiting dividends, applicable regulations and other factors, including the timeliness and adequacy of rate increases granted to Artesian Water. No dividends may be paid on the common stock unless all accrued dividends and sinking fund payments payable on any outstanding preferred stock have been paid or set aside for payment. See "Description of Capital Stock-- Preferred Stock." 10 CAPITALIZATION The following table sets forth the unaudited consolidated capitalization of Artesian Resources as of March 31, 1996, and as adjusted to give effect to the sale of the 675,000 shares of Class A Non-Voting Common Stock offered hereby (assuming that the Underwriters' over-allotment option is not exercised). See "Use of Proceeds." The table should be read in conjunction with the Consolidated Financial Statements of Artesian Resources and related notes thereto. See "Index to Consolidated Financial Statements."
AT MARCH 31, 1996 ------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term debt, net of current portion.................... $17,471 $17,471 ------- ------- Cumulative Prior Preferred Stock--mandatorily redeemable, $25 par value; 80,000 shares authorized; 33,000 shares outstanding.............................................. 825 825 ------- ------- 7% Prior Preferred Stock, $25 par value; 10,868 shares authorized and outstanding............................... 272 272 ------- ------- Common Stockholders' equity: Class A Non-Voting Common Stock, $1 par value; 3,500,000 shares authorized; 543,028 shares outstanding; 1,218,028 shares as adjusted(1)........................ 543 1,218 Class B Voting Common Stock, $1 par value; 1,040,000 shares authorized; 499,720 shares outstanding.......... 500 500 Additional paid-in capital................................ 8,110 16,720 Retained earnings......................................... 6,428 6,428 ------- ------- Total common stockholders' equity....................... 15,581 24,866 ------- ------- Total capitalization.................................. $34,149 $43,434 ======= =======
- -------- (1) Excludes 25,560 shares of Class A Non-Voting Common Stock issuable upon the exercise of options at a weighted average exercise price of $12.45 per share, of which 24,270 were fully vested and exercisable. 11 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain historical financial data with respect to Artesian Resources on a consolidated basis as of and for the three months ended March 31, 1996 and 1995 and each year in the five-year period ended December 31, 1995. The unaudited data as of and for the three months ended March 31, 1996 and 1995 have been prepared on the same basis as the other consolidated financial information of the Company set forth below and, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the unaudited periods have been made. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of future results that may be expected for any other period. This table should be read in conjunction with the consolidated financial statements, related notes and other financial information included in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA(1): Operating revenues Water sales........... $ 4,932 $ 4,641 $20,526 $18,720 $18,361 $16,780 $16,133 Other utility operating revenue.... 58 45 194 217 171 (36) 62 Non-utility operating revenue.............. 80 464 1,911 2,075 1,808 1,472 1,489 ------- ------- ------- ------- ------- ------- ------- Total operating revenues........... 5,070 5,150 22,631 21,012 20,340 18,216 17,684 ------- ------- ------- ------- ------- ------- ------- Operating expenses Utility operating expenses............. 2,740 2,781 11,527 11,165 10,672 10,133 9,738 Non-utility operating expenses............. 52 366 1,614 1,606 1,503 1,291 1,903 Related party expenses............. 61 61 244 243 243 263 257 Depreciation and amortization......... 528 536 2,240 1,986 1,955 1,941 1,794 Taxes State and federal income.............. 253 176 791 963 914 402 264 Property and other... 331 339 1,370 1,235 1,230 1,097 1,004 Write-down on rental office building...... 2 -- 784 -- -- -- -- Loss on disposal of Artesian Laboratories......... -- -- 128 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses........... 3,967 4,259 18,698 17,198 16,517 15,127 14,960 ------- ------- ------- ------- ------- ------- ------- Operating income....... 1,103 891 3,933 3,814 3,823 3,089 2,724 ------- ------- ------- ------- ------- ------- ------- Other (expense) income--net Allowance for funds used during construction......... 35 30 232 56 14 15 81 Fixed asset write- down................. -- -- -- -- -- (82) -- Miscellaneous......... (30) (25) (200) (50) (28) (23) (20) ------- ------- ------- ------- ------- ------- ------- Total other (expense) income-- net................ 5 5 32 6 (14) (90) 61 ------- ------- ------- ------- ------- ------- ------- Total income before interest charges...... 1,108 896 3,965 3,820 3,809 2,999 2,785 ------- ------- ------- ------- ------- ------- ------- Interest charges Long-term debt........ 539 564 2,250 2,252 2,286 1,820 1,875 Short-term debt....... 172 58 463 28 56 372 443 Amortization of debt expense.............. 7 7 26 27 68 26 26 Other................. 7 4 19 27 24 15 50 ------- ------- ------- ------- ------- ------- ------- Total interest charges............ 725 633 2,758 2,334 2,434 2,233 2,394 ------- ------- ------- ------- ------- ------- ------- Income before cumulative effect of changes in accounting principles............ 383 263 1,207 1,486 1,375 766 391 ------- ------- ------- ------- ------- ------- ------- Cumulative effect of changes in accounting principles............ -- -- -- -- 251 -- -- ------- ------- ------- ------- ------- ------- ------- Net income............. 383 263 1,207 1,486 1,626 766 391 Dividends on preferred stock................. 29 33 119 131 136 141 146 ------- ------- ------- ------- ------- ------- ------- Net income applicable to common stock....... $ 354 $ 230 $ 1,088 $ 1,355 $ 1,490 $ 625 $ 245 ======= ======= ======= ======= ======= ======= =======
12
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------- ---------------------------------- 1996 1995 1995 1994 1993 1992 1991 ----- ----- ------ ------ ------ ------ ------ PER SHARE DATA (COMMON STOCK): Income before cumulative effect of changes in accounting principles......... $ .33 $ .22 $ 1.06 $ 1.34 $ 1.25 $ .63 $ .27 Cumulative effect of changes in accounting principles......... -- -- -- -- .25 -- -- ----- ----- ------ ------ ------ ------ ------ Net income..................... $ .33 $ .22 $ 1.06 $ 1.34 $ 1.50 $ .63 $ .27 ===== ===== ====== ====== ====== ====== ====== Weighted average shares (in thousands).................... 1,041 1,021 1,031 1,010 995 987 918 Cash dividends................. $ .21 $ .15 $ .63 $ .60 $ .30 $ .05 $ .22 ===== ===== ====== ====== ====== ====== ====== OPERATING DATA: Water pumped (millions of gallons)......... 6,561 6,506 6,409 6,208 6,043 Average water sales per customer........... $ 365 $ 344 $ 347 $ 326 $ 321 Number of metered customers served at end of period................................. 56,672 55,097 53,599 52,014 50,865 Customer's average billed consumption (gallons per day)......................... 276 283 283 283 289 Miles of water main at end of period....... 763 746 728 718 705
AT DECEMBER 31, AT MARCH 31, --------------------------------------- 1996 1995 1994 1993 1992 1991 ------------ ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Utility plant, at original cost less accumulated depreciation. $83,797 $83,160 $73,238 $66,787 $64,518 $63,373 Total assets............. 95,100 96,841 87,453 81,927 76,482 73,470 Notes payable and current portion of long-term debt.......... 15,825 16,570 1,879 326 6,312 5,580 Long-term obligations and redeemable preferred stock......... 18,567 18,803 26,045 25,845 19,026 19,439 Common stockholders' equity.................. 15,581 15,396 14,728 13,801 12,469 11,870
- -------- (1) Balances with respect to Statement of Operations Data for years prior to 1995 have been reclassified to conform with the presentation for 1995. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview For the year ended December 31, 1995, Artesian Resources realized 90.7% of its total revenue from the sale of water by its water utility subsidiary, Artesian Water, and 8.4% from services performed by its non-regulated subsidiaries, Artesian Laboratories, Inc. ("Artesian Laboratories") and Artesian Development Corporation ("Artesian Development"). In late 1995, the Board of Directors of Artesian Resources decided to focus on the water utility business and authorized the sale of Artesian Laboratories and the office building owned by Artesian Development. Artesian Resources recorded net income of $1,207,428 for the year ended December 31, 1995, compared to net income of $1,485,778 for 1994. While Artesian Water had a 26.2% increase in net income in 1995, the decrease in Artesian Resources' consolidated net income is attributable to the recognition of losses related to the planned disposition of the assets of its non- regulated subsidiaries. Artesian Resources recognized a loss in the second half of 1995 of $783,600 before taxes related to the sale of the commercial office building owned by Artesian Development. Such sale was consummated on March 13, 1996. As a condition of the sale of the building, Artesian Water and Artesian Laboratories entered into a ten-year lease extension with the new owner at rental rates which escalate with changes in the consumer price index. See Note 14 to Notes to Consolidated Financial Statements. In addition, in late 1995, the Board of Directors authorized management to undertake the disposition of the net assets of Artesian Laboratories, resulting in an estimated loss on disposal, before tax, of approximately $128,000 in the second half of 1995. For the quarter ended March 31, 1996, Artesian Resources recorded net income of $383,075, compared to net income of $262,574 for the quarter ended March 31, 1995. The increase was primarily due to increased water sales revenue attributable to increased rates and an increase in the number of customers served by Artesian Water, combined with Artesian Water's ability to reduce utility operating expenses by approximately $40,000. Artesian Water recorded a $413,000, or 26.2%, increase in its net income in 1995 compared to 1994, primarily due to its ability to control operating and maintenance expenses. These expenses declined as a percent of total sales from 60.5% in 1994 to 57.0% in 1995 due in part to Artesian Water's cost reduction programs. A reduction of water purchased from neighboring utilities, and a 7.49% increase in rates also contributed to the increase in net income. For the third consecutive year, Artesian Resources has been able to reduce its rate of increase in operating expenses, which increase amounted to 2.8% in 1995, down from 4.8% in 1994 and from 6.2% in 1993. 14 The following table sets forth certain information with respect to Artesian Resources' consolidated statement of operations as a percentage of revenue:
QUARTER ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------- ------------------- 1996 1995 1995 1994 1993 ------ ------ ----- ----- ----- Operating revenues Water sales.............................. 97.3% 90.1% 90.7% 89.1% 90.3% Other utility operating revenue.......... 1.2 0.9 0.9 1.0 0.8 Non-utility operating revenue............ 1.5 9.0 8.4 9.9 8.9 ------ ------ ----- ----- ----- Total operating revenues................ 100.0 100.0 100.0 100.0 100.0 Operating expenses Utility operating expenses............... 54.1 54.0 50.9 53.1 52.5 Non-utility operating expenses........... 1.0 7.1 7.1 7.6 7.4 Related party expenses................... 1.2 1.2 1.1 1.2 1.2 Depreciation............................. 10.4 10.6 9.9 9.5 9.4 State and federal taxes.................. 5.0 3.2 3.5 4.6 4.7 Property and other....................... 6.5 6.6 6.1 5.9 6.0 Write-down on rental office building..... -- -- 3.5 -- -- Loss on disposal of Artesian Laboratories............................ -- -- 0.6 -- -- ------ ------ ----- ----- ----- Total operating expenses................ 78.2 82.7 82.7 81.9 81.2 Operating income.......................... 21.8 17.3 17.3 18.1 18.8 Interest charges.......................... 14.3 12.3 12.2 11.0 12.0 Net income applicable to common stock..... 7.0 4.5 4.7 6.6 7.3
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995 Utility Revenues. Revenues from the sale of water increased approximately $290,000, or 6.3%, resulting from an increase in rates and the number of customers served. Utility Operating Expenses. Utility operating expenses decreased by approximately $40,000, or 2.0%, primarily due to an approximate $68,000 reduction in purchased water which resulted from investments made in 1995 for a new iron removal facility and the addition of a new well. See "Business-- Water Supply." Interest Charges. Interest expense increased $91,378, or 14.4%, primarily due to Artesian Water's increased usage of its $15.0 million lines of credit. 1995 Compared to 1994 Utility Revenues. Revenue from the sale of water increased $1,805,293, or 9.2%, primarily as a result of a 7.49% increase in rates approved May 9, 1995 by the Delaware Public Service Commission and a 2.8% increase in the number of customers from 55,097 in 1994 to 56,672 in 1995, offset in part by a 1.1% decrease in customer consumption. The rate increase of 7.49% provided approximately $1.4 million in total additional revenue for 1995. Customer's average billed consumption decreased slightly to 276 gallons per day in 1995 compared to the 283 gallons per day reported for 1994. This decrease was due primarily to mandatory water use restrictions ordered by the State of Delaware due to drought conditions experienced by water utilities in northern New Castle 15 County which rely on surface sources of supply, as well as the continuing effects of Artesian Water's conservation education efforts. Artesian Water's water supplies were not significantly affected by the drought, and it was able to supplement the water supplies of neighboring utilities during this period. The approximate $23,000, or 10.4%, decrease in other utility revenues was attributable to a reduction in miscellaneous fees, including late payment charges, frozen meter repairs, flow tests and charges to developers. Utility Operating Expenses. The expense for water purchased from neighboring utilities decreased approximately $225,000, or 8.3%. The decrease in purchased water expense was due to the 22% decrease in water purchased in 1995 from neighboring utilities. In 1995, Artesian Water constructed and put into production in the third quarter three new wells producing a combined 3.0 million gallons per day of self-supply. The new facilities allowed Artesian Water to decrease its need for purchased supplies to the minimum level required under its contract arrangements with certain neighboring utilities. However, this expense reduction was partially offset by an October 1994 increase in the minimum monthly purchase requirements from the Chester Water Authority ("Chester Water") from 75.0 million gallons to 91.6 million gallons. Effective October 1995, the minimum monthly purchase requirements under this agreement again increased to 108.3 million gallons and will increase to 121.6 million gallons per month in October 1996, continuing at that level until the present agreement expires in 2002. In addition, the City of Wilmington, with which Artesian Water also has a take-or-pay arrangement totaling 300 million gallons per year, increased its rate for bulk water sales by nearly 33%, from $0.87 per thousand gallons in 1994 to $1.16 per thousand gallons in 1995. Repair and maintenance expenses decreased approximately $69,000 in 1995 due to the postponement, as a result of drought conditions, of the painting of certain water tanks which are now scheduled for painting in the spring of 1996, and a reduction in the use of outside vendors for repairing pumping equipment. Administrative Expenses. Administrative expenses increased approximately $85,000, or 4.3%. Expenses associated with professional services required by Artesian Resources increased due to the recognition in 1995 of amortization related to an environmental impact study for Artesian Water for the location of a new reservoir, and expenses related to the Class A Non-Voting Common Stock proxy solicitation and banking services. The environmental impact study was jointly financed by several utilities, New Castle County and the State of Delaware and the amortization of the expense has been allowed in rates by the Delaware Public Service Commission. These increases were partially offset by a reduction in Artesian Water's regulatory expenses related to the amortization of rate case expenses. Payroll and Related Expenses. Payroll and related expenses for Artesian Resources and its subsidiaries increased approximately $480,000, or 8.1%, primarily due to wage rate increases of approximately 5.2%, related to annual salary adjustments, promotions and bonuses paid during 1995. The pension expense for Artesian Resources increased $13,000, or 5.8%, reflecting the increase in Artesian Resources' matching contribution for employee participation in the 401(k) plan. In addition, Artesian Water recorded a $162,000 increase in expenses related to the recognition of a full year of expense under a supplemental retirement plan which was implemented on October 1, 1994. Depreciation and Amortization. Depreciation and amortization increased approximately $254,000, or 12.8%. The increase was due to the overall increase in utility plant assets in service at December 31, 1995. Taxes. Income tax expense decreased approximately $210,000, or 21.0%, reflecting the loss associated with the disposition of non-utility assets discussed above in "Overview." See Notes 1 and 3 to Notes to Consolidated Financial Statements and Schedule of Income Tax Expense. Property and other taxes rose approximately $140,000 due to a $68,000 increase in local real estate property taxes and an increase in the total property on which Artesian Resources was assessed. Payroll taxes increased approximately $72,000 as a result of the overall increase in Artesian Resources' payroll expense. The total income tax effective rate for 1995 was 39.7% as compared to 39.3% for 1994. 16 Other Operating Income. Allowance for funds used during construction ("AFUDC") increased approximately $176,000, primarily due to two construction projects commenced and completed in 1995 at a cost of approximately $5 million. See Note 1 to Notes to Consolidated Financial Statements for a discussion relating to the calculation of AFUDC. Partially offsetting the increase in other operating income was the increase in other miscellaneous expenses of approximately $150,000, primarily attributable to the settlement of an employee litigation matter in 1995. Interest Charges. The increase in interest expense of $424,000, or 18.2%, was primarily due to increased usage of Artesian Water's short-term lines of credit primarily to finance capital investments. At December 31, 1995, there was approximately $9.2 million outstanding on Artesian Water's $15.0 million lines of credit. See Note 7 to Notes to Consolidated Financial Statements. 1994 Compared to 1993 Utility Revenues. Revenue from the sale of water increased $359,000 or 2.0%, primarily as a result of a 2.8% increase in the number of customers from 53,599 in 1993 to 55,097 in 1994. Customer's average billed consumption remained constant for 1994, as compared to 1993, at 283 gallons per day. The increase in other utility revenue from $171,112 in 1993 to $217,132 in 1994 was primarily attributable to purchase discounts for the early payment of invoices associated with purchases of water from Chester Water. Utility Operating Expenses. The expense for water purchased from neighboring utilities increased approximately $227,000, or 9.1%. The increase was due to an October 1993 increase in minimum monthly purchase requirements from Chester Water from 58.3 million gallons to 75.0 million gallons. Effective October 1994, these minimum monthly purchase requirements increased to 91.6 million gallons. Chester Water also increased its rate for water 21.7% effective October 1993. Administrative Expenses. Administrative expenses increased approximately $216,000, or 12.1%, due to an increase in legal expenses of $26,000 related to the efforts of Artesian Water to expand its service territory and the settlement of litigation involving a former employee of Artesian Water, and general corporate matters. Other general administrative expenses increased approximately $143,000 due to increased employee recruitment expenses, leasing expenses for new software and certain regulatory expenses. Payroll and Related Expenses. Payroll and related benefit expenses increased approximately $204,000, or 3.6%, primarily due to wage rate increases of approximately 2.5%. In addition, Artesian Water implemented its supplemental retirement plan in 1994, and supplemental plan expenses for that year were approximately $59,000. See Note 11 to Notes to Consolidated Financial Statements. Depreciation and Amortization. Depreciation and amortization expenses increased $31,000, or 1.6%, due to the overall increase in utility plant assets in service at December 31, 1994. Taxes. Income tax expense increased approximately $48,000, or 5.1%, reflecting an increase in income before tax. See Notes 1 and 3 to Notes to Consolidated Financial Statements and Schedule of Income Tax Expense. The total income tax effective rate for 1994 was 39.3% as compared to 40.0% for 1993. Interest Charges. The decrease in interest expense of approximately $100,000, or 4.1%, was due primarily to a $65,420 early redemption premium which was recorded on certain debt retired in 1993. Amortization of debt expense also decreased approximately $42,000 primarily due to the write-off of unamortized issuance expenses related to debt retired in 1993. There were no similar expenses recorded in 1994. 17 NON-UTILITY REVENUES AND EXPENSES For the quarter ended March 31, 1996, non-utility revenues and expenses decreased by nearly $384,000 and $315,000, respectively, due to the exclusion in the quarter of the financial results of Artesian Laboratories. Non-utility revenues, primarily from Artesian Laboratories and Artesian Development, totaled $1,911,219, $2,074,868 and $1,807,994 in 1995, 1994 and 1993, respectively. The decrease in non-utility revenues in 1995 was primarily attributable to a decline in sales revenues from Artesian Laboratories. Sales revenue for Artesian Laboratories decreased approximately $170,000, or 9.5%, in 1995 as a result of decreased contract work from existing customers. In 1994, Artesian Laboratories had experienced an increase in contract work and recorded a $257,000, or 16.8%, gain in sales revenue compared to 1993. Non-utility expenses, primarily from Artesian Laboratories and Artesian Development, totaled $1,613,865, $1,605,578 and $1,502,832 in 1995, 1994 and 1993, respectively. These expenses were primarily administrative and payroll and related expenses. LIQUIDITY AND CAPITAL RESOURCES Overview Artesian Resources' sources of liquidity consist of cash flow from operations, funds from Artesian Water's lines of credit and other external sources of funding discussed below. Cash flow from operating activities is primarily provided by the operations of Artesian Water and is impacted by operating and maintenance expenses, the timeliness and adequacy of rate increases, and weather conditions, such as the 1995 drought. Artesian Resources relies on its sources of liquidity in order to make investments in its facilities and to meet its various payment obligations. The total amount of such obligations for 1996 is approximately $12.2 million and consists of payments related to dividend and sinking fund payments on preferred stock, principal and interest payments on indebtedness, rental payments and payments under water service interconnection agreements. In addition, Artesian Water currently estimates that its aggregate capital investments in its facilities in 1996 will be approximately $11.7 million. Investment in Facilities Utility plant financed by Artesian Water rose sharply from approximately $6.7 million in 1994 to approximately $9.8 million in 1995. In addition, the installation of water mains and hydrants financed by developers under agreements with Artesian Water totaled approximately $2.4 million. Artesian Water continued significant efforts to locate and develop additional sources of supply in its current service territory, investing nearly $3.3 million in 1995 in a new treatment station and two new wells and by drilling another well in an existing well field. Approximately $1.9 million was invested in a new 2.0 million gallon elevated storage facility and related water main in a developing area of Artesian Water's northern system service territory. To maintain pressures and flow, Artesian Water previously had relied on nearby pumping stations and interconnections with neighboring utilities. This new facility allows Artesian Water to reduce significantly the need for the interconnections and to rely less on the peak pumping capabilities of the pumping stations. Artesian Water invested approximately $1.1 million in 1994 and 1995 in test wells and treatment facilities for future sources of supply in the southern system where Artesian Water either has been granted service territory or for which Artesian Water holds a landowner/developer contract for rights to serve the property. Artesian Water intends to continue its attempts to increase self-supply and system reliability in 1996, and expects to invest approximately $11.7 million in new plant and equipment. The most significant efforts to attain new self- supply will occur in Artesian Water's southern system, where new residential developments require water service. Four new residential developments, requiring four separate water supply systems at a total cost of approximately $1.6 million, are scheduled for construction in 1996 in Artesian Water's southern system. 18 Approximately $2.3 million projected for investment in 1996 is for the relocation of water mains as a result of plans by the Delaware Department of Transportation to widen or relocate several roads within Artesian Water's service territory. The largest of these plans proposed by the state for 1996 will require Artesian Water to relocate a segment of its water main at a cost of $1.5 million. This project is expected to commence in April 1996 and is projected to be completed by year-end. Six other highway relocation projects are scheduled for 1996 totaling $767,000. Nearly $2.3 million has been budgeted to install new transmission and distribution mains in 1996. Of the $2.3 million, approximately $400,000 is budgeted for a transmission main to be installed in Artesian Water's southern system service territory in an effort to utilize current water supply and begin to interconnect a larger regional system in southern New Castle County. Replacement and renewal of older mains which require higher levels of maintenance are expected to total nearly $1.5 million in 1996. The two largest of these projects are expected to last three years at annual costs of $505,000 and $664,000. Finally, Artesian Water anticipates capital expenditures for other general facilities, such as fleet vehicles, data processing equipment, safety equipment, security, communications equipment and leasehold improvements, which will total approximately $825,000 in 1996. With the exception of the state highway relocation projects, Artesian Water may exercise some discretion in the exact timing of a significant portion of these expenditures. Financing Activities Artesian Resources utilizes several sources of liquidity to finance its investment in utility plant and other fixed assets. Developer advances and contributions in aid of construction are used for the installation by Artesian Water of mains and hydrants in new developments. As discussed below, capital expenditures in 1996 will require Artesian Resources to utilize other sources of liquidity beyond those provided by developers and by the operations of Artesian Water. For the three-year period ending December 31, 1998, Artesian Resources estimates that approximately 75% of the capital expenditures of Artesian Water will be financed by the operations of Artesian Water and external sources, including a combination of the proceeds of this offering, proceeds from the sale by Artesian Water of long-term debentures and from anticipated tax-exempt Delaware Economic Development Authority bonds, and short-term borrowings by Artesian Water under its revolving credit agreements discussed below. The balance is expected to be obtained from developer advances and contributions in aid of construction. At March 31, 1996, Artesian Resources had a working capital deficit of approximately $15.6 million. This deficit resulted primarily from an increase in net borrowings under Artesian Water's lines of credit totaling approximately $10.5 million. To meet its temporary cash requirements, Artesian Water has two lines of credit totaling $15.0 million. These revolving credit facilities are unsecured and carry no operating restrictions or financial covenants. As of April 30, 1996, Artesian Water had $4.1 million of available unused funds under these lines. The interest rate on these lines is tied either to the London Interbank Offering Rate (LIBOR) plus 1.5% or the banks' National Credit Rates (NCR), at Artesian Water's discretion. Both facilities are reviewed annually by the respective banks for renewal. The proceeds from this offering will be used to repay a portion of the short-term borrowings under these credit lines. In addition, Artesian Water anticipates that when its $5.0 million 9.55% Series J First Mortgage Bond matures on December 1, 1996, it will refinance this $5.0 million long-term debt facility and issue an additional $5.0 million in First Mortgage Bond debt. Artesian Water believes it will continue to have available its two lines of credit totaling $15.0 million to support future investment in its facilities. Artesian Resources anticipates that cash flow from operations, together with the net proceeds of this offering, Artesian Water's available lines of credit and the funds received from the long-term debt refinancing discussed above, will be sufficient to fund its projected capital expenditures through 1998. Artesian Development utilized the net proceeds of approximately $1,900,000 from the sale of its office building to repay the mortgage on that property and related closing costs. Proceeds from the sale of the assets of Artesian Laboratories will be reinvested in the water utility operations. 19 BUSINESS INTRODUCTION The Company is the oldest and largest public water utility in the State of Delaware and has been providing water within the state since 1905. The Company distributes and sells water to residential, commercial and industrial customers and to utilities and municipalities, primarily in New Castle County, Delaware. Approximately 61% of the Company's gross water sales revenue for the year ended December 31, 1995 was derived from residential customers. As of March 31, 1996, the Company had approximately 56,900 metered customers and served a population of approximately 200,000, constituting 28% of Delaware's total population. The Company believes that it has a reputation for providing water and service of superior quality to its customers. The Company is subject to regulation by the Delaware Public Service Commission with respect to rates and service and periodically seeks rate increases to cover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant and other costs of doing business. Water service territory in the State of Delaware is granted to water utilities by means of CPCNs which are issued by the Delaware Department of Natural Resources and Environmental Control ("DNREC"). MARKET AND SERVICE AREA The State of Delaware is made up of three counties: New Castle County in the northern portion of the state; Kent County in the central portion; and Sussex County in the southern portion. According to the Delaware Economic Development Office, New Castle County is the most populous, with a population of approximately 464,000, or 65% of the total state population of approximately 709,000 at July 1, 1994. New Castle County experienced a 5.0% increase in population over the four years ended July 1, 1994. The Company believes a portion of this growth is attributable to the favorable business environment in Delaware. New Castle County is divided approximately in half by the C&D Canal which runs east and west through the state. Most of Delaware's population is concentrated in the portion of New Castle County north of the C&D Canal, which includes the cities of Wilmington and Newark. The Company operates two distinct water systems within New Castle County, comprising service territories north of the C&D Canal covering approximately 101 square miles (the northern system) and south of the C&D Canal covering approximately 15 square miles (the southern system). The southern system also includes a small tract of service territory in northern Kent County. The northern system and southern system are independent water supply systems and are not connected by water transmission lines. The Company believes there are substantial water resources in each system sufficient to handle its water supply needs for the foreseeable future. The number of customers in the northern system has grown at an average rate of approximately 2.9% per year for the last five years. Of the 101 square miles of service territory in the Company's northern system, a significant portion remains underpopulated relative to the rest of the county and is available for development. In particular, an area along the Route 40 corridor in the western portion of New Castle County north of the C&D Canal is experiencing significant growth in population and infrastructure. The Company expects continued expansion of its utility plant and customer base in its northern system service territory as this development continues. One other investor-owned water utility and four municipal water systems also serve northern New Castle County. Substantially all of the available service territory in northern New Castle County has been allocated by the state. Thus, growth in this area will result primarily from further penetration in existing service territory. In 1993, the Company began acquiring service territory south of the C&D Canal. The Company's southern system has continued to expand and presently comprises 15 square miles, accounting for a 15% increase in the Company's total service territory since it entered this market. This area has experienced substantial residential development in the past five years. In addition, the state is constructing a new limited access highway running north and south through southern New Castle County, portions of which are open to traffic. Two other investor- 20 owned water utilities and one municipal water system also serve southern New Castle County. One of the water utilities is a subsidiary of an out-of-state water utility. A substantial portion of southern New Castle County remains to be developed and is not presently covered by CPCNs or served by public water systems, presenting expansion opportunities for the Company as development continues. The pursuit of additional service territory in the State of Delaware south of the C&D Canal is competitive. Kent and Sussex Counties currently are served primarily by private wells, and numerous small investor-owned water utilities and municipal water systems. According to the U.S. Census Bureau, these counties have experienced population growth of 8.1% and 10.5%, respectively, over the four years ended July 1, 1994. The Company's activities in Kent and Sussex Counties presently are not significant. STRATEGIC INITIATIVES The Company's objective is to maintain and strengthen its position as a leading industry innovator and provider of high quality water in the State of Delaware. To achieve this goal, the Company is focusing on the following strategic initiatives: Penetrate Existing Service Territories. Northern system. The Company intends to increase its customer base and revenues in the northern system by providing water service to new residential, commercial and industrial customers as previously undeveloped areas within the Company's existing service territory grow. The Company also intends to increase water sales to other water utilities and municipalities. The Company has had discussions with several neighboring water utility companies and municipalities to provide water to such entities for emergency purposes or on a contractual basis. The Company believes that development within its northern system service territory should continue at a rate approximating historical rates for the foreseeable future. The Company believes that it has in place the capability to provide water service for the foreseeable future to all new residential, commercial or industrial customers which may locate within the Company's service territory in northern New Castle County. Southern system. The southern system represents a substantial growth opportunity for the Company as real estate development continues in southern New Castle County. Since 1993, the Company has been granted 24 CPCNs for service territory totaling approximately 15 square miles, including the recent addition of the right to serve one municipality, representing a 15% growth in the Company's total service territory since it entered this market. The Company presently has a substantially larger supply of water than is necessary to service the existing customer base in its southern system service territory and, therefore, the Company expects to be able to provide water service to new customers as residential and commercial developments are constructed. Expand Service Area through Acquisition of New Territories. The Company believes that it has significant opportunities to acquire additional service territory in southern New Castle County because substantial portions of this area remain undeveloped and are not presently served by a municipal water system or covered by a CPCN. The Company intends to continue its expansion in southern New Castle County by applying for additional CPCNs as land development progresses. The Company also believes that it is positioned to be able to expand its service area into Kent and Sussex Counties as development warrants, including expansion through acquisitions of existing water utilities. Achieve Water Supply Self-Sufficiency. While the Company is currently capable of meeting average water service demand from its own sources of water supply, it is continuing the implementation of a plan to reduce or eliminate, within seven years, its reliance on outside sources, including the ability to meet peak demand from self-supply. The amount of water purchased from outside sources has declined from a peak of 37% in 1992 to 21% at the end of 1995. In early 1995, the Company provided approximately 10.8 million gallons per day ("MGD") on average from its own sources of supply, and as of March 20, 1996, provided approximately 14.0 MGD on average. The cost of self-supplied water is generally 50% less than purchased water. The Company also believes a greater self-supply of water will allow it to increase sales of excess supplies to neighboring 21 utilities at bulk rates. Despite increased self-sufficiency, the Company intends to maintain its agreements with neighboring utilities, some of which include "take or pay" clauses, to assure uninterrupted service to present and future customers, for emergencies and to maintain maximum operating flexibility. Promote Quality of Water. The Company believes that it has a reputation for providing water of superior quality to its customers. The Company's wells are drilled into aquifers accessing groundwater, which generally has a higher quality than that of surface water sources such as river and creek basins. In addition, the Company's wells generally access deeper aquifers which may provide better water quality than wells accessing more shallow aquifers due to the possibility of land use contamination at these shallow levels. The Company's maintenance program for transmission and distribution lines and the construction of new lines also focuses on water quality. Because the Company believes the longevity and ability of ductile iron to withstand wear and tear is superior to plastic pipe, the Company generally uses ductile iron pipe to ensure that the water transmission process maintains the quality of water pumped from its wells. Manage Water Demand. The Company actively promotes measures which will encourage its customers to conserve water. The Company introduced an inclining rate structure in 1992 which is designed to reward customers for using less water and assigns the cost of providing increasing supplies to those customers who use comparatively higher volumes of water. In addition, the Company has established a comprehensive water conservation education program which offers educational programs for elementary school children, conservation devices for homeowners at reasonable prices and a rate structure allowing customers to control their expenses for water service. The Company's conservation efforts have been recognized by industry peer groups and emulated by other water utilities. The Company is conducting, in conjunction with the University of Delaware and DNREC, a five-year study of the impact of its conservation programs and rate structure on customer consumption. CUSTOMERS At December 31, 1995, the Company provided water service on a retail basis to residential, governmental, commercial and industrial customers through 56,672 meters throughout its service territory serving a population of approximately 200,000. In addition, the Company furnished, on a wholesale basis, a portion of the emergency water requirements of one municipality and one investor-owned water utility. The Company also provides water for public and private fire protection to all of its customers in its service territories. Approximately 61% of the Company's gross water sales revenue for the year ended December 31, 1995 was derived from residential customers. The Company's operating revenues by major customer classifications for the years in the three-year period ended December 31, 1995 are set forth below:
1995 1994 1993 ----------- ----------- ----------- Residential.......................... $12,510,577 $11,451,568 $11,322,694 Commercial........................... 5,236,344 4,659,968 4,512,395 Governmental......................... 546,324 480,564 441,716 Industrial........................... 116,493 125,057 133,782 Fire protection...................... 1,979,613 1,938,349 1,912,103 Utilities and municipalities......... 136,234 64,786 38,450 ----------- ----------- ----------- $20,525,585 $18,720,292 $18,361,140 =========== =========== ===========
Revenues from residential customers represent sales to single-family homes and multiple-occupancy dwellings containing four or less units. Revenues from commercial customers represent sales to apartment buildings and trailer parks and businesses such as motels, hotels, shopping malls, office buildings and hospitals. Revenues from government represent sales to entities such as schools, armed forces reserve centers and Veterans Administration hospitals. Revenues from industrial customers represent sales to large process-oriented manufacturers. Revenues from fire protection represent sales to all customers who are within 600 curb feet of a public fire hydrant or have installed private sprinklers or private hydrants. Revenues from utilities and municipalities represent bulk sales to 22 such entities, which have increased substantially over the three-year period ended December 31, 1995. The services are all metered except for fire protection service. MARKETING AND CUSTOMER RELATIONS The Company has established corporate-wide marketing and customer relations programs to support its efforts to expand its operations and provide superior service to its existing customer base. The Company's marketing efforts include, among other things, advertising, direct-mail marketing campaigns, community outreach and conservation education programs, sponsoring community events and developing relationships with developers, landowners and state, county and municipal government officials in political, educational and legislative forums. Currently, the Company has a marketing and community relations department with four employees who are dedicated to supporting these activities, including a Director of External Affairs who has daily responsibility for overseeing and implementing the Company's governmental and legislative outreach program. The Company has established a customer relations structure which it believes differs from traditional industry approaches. The Company trains all employees who have ongoing customer contact, including meter readers and meter installation personnel, in areas which traditionally are handled by customer service representatives. With this approach, the Company augments its customer relations department with field representatives who are knowledgeable about matters which are of concern to customers. WATER SUPPLY The Company's sources of water in the northern system are self-supply from wells that pump groundwater from aquifers and other formations, and through interconnections with neighboring utilities which supply mostly surface water from river basins. The southern system's water supply is entirely self- supplied from wells that pump groundwater. The table below sets forth the water supply peak capacity for the year ended December 31, 1995 and the average water production rates for the year ended December 31, 1995 and the year ending December 31, 1996 (projected) for the northern and southern systems.
1995 1996 ----------------------------- ----------------- PROJECTED AVERAGE WATER SUPPLY AVERAGE WATER WATER PEAK CAPACITY PRODUCTION RATE PRODUCTION RATE (IN MGD) (IN MGD) (IN MGD) ------------- --------------- ----------------- Self-supply wells Northern system........... 20.3 12.9 14.0 Southern system........... 1.5 0.1 0.1 Total self-supply....... 21.8 13.0 14.1 Interconnections (northern system only)............... 17.8 5.1 4.6 Total water supply.......... 39.6 18.1 18.7
Self-Supply Northern system. The Company supplied 72% of its overall 6.6 billion gallons of water distributed in its northern system from its own sources of supply for the year ended December 31, 1995. The Company's self-generated sources of supply in the northern system are derived entirely from groundwater pumped from wells. The Company has 43 operating wells in the northern system which produce on average 12.9 MGD with peak capabilities of 20.3 MGD. The Company's primary source of groundwater supply in the northern system is the Potomac aquifer, which covers a large area in the Coastal Plain beneath northern Delaware and neighboring Maryland. The remaining 28% of the Company's source of supply in the northern system was obtained through 12 interconnections with neighboring utilities, 96% of which supply was derived from surface water sources. Many of these interconnections were installed with the capabilities of providing water flow either to or from these neighboring utilities. 23 In August 1995, the Company commenced operating a new well field and a 2.0 MGD state-of-the-art iron removal facility in the northern system capable of expansion to up to 3.0 MGD. In addition, the Company increased its production by 1.0 MGD at an existing well field in the northern system by drilling an additional well at a sufficient distance from existing wells to allow greater and more efficient use of the aquifer. The investment of approximately $3.5 million in these self-supply projects was the first of $6.5 million of capital investment planned for 10 projects over the next seven years with the objective of eliminating the Company's dependence on the water supplies of neighboring utilities. The Company also completed, for $1.9 million, the construction of a new 2.0 million gallon elevated storage tank in December 1995 in an expanding portion of its service territory in the northern system, the first of two tanks scheduled for completion in this area. This tank provides significant storage for fire protection and water pressure in periods of peak demand. Prior to its completion, the Company relied in part on purchases from neighboring utilities to maintain required water pressures and fire protection reserves. The new storage tank should reduce the Company's dependence on neighboring utilities and consequently reduce the long-term cost of water to customers. The Company's northern system is an integrated system that is divided into eight distinct hydraulic service levels defined by elevation changes. Twelve booster pumping stations and thirteen pressure reducing valves provide pressure gradients to customers located at ground elevations ranging from sea level to an elevation of 420 feet. Southern system. The Company supplied 100% of its overall 1.1 million gallons of water distributed in its southern system from its own sources of supply for the year ended December 31, 1995. The Company currently has five operating wells presently producing an average of 0.1 MGD with peak capabilities of 1.5 MGD. The Company's self-generated source of supply in the southern system is derived entirely from groundwater pumped from wells. The Company has developed a greater supply than is currently necessary to service existing customers within its service territory in the southern system. Prior to a state regulatory change, initial CPCN applications required a public utility to demonstrate it had sufficient water supplies to serve the area for which a CPCN application was submitted. In light of this requirement, the Company drilled a series of wells to obtain adequate supplies and reserves to serve, on a cost effective basis, a larger regional system. Moreover, the Company believes the system it is developing will ensure that it can cost effectively meet the commitments it has made to provide service within its territory and provide fire protection. Because development in the southern system has been generally non-contiguous to currently developed property within the Company's service territory, it has been more cost effective to obtain sources of supply closer to the developed areas, while maintaining the Company's overall objective of drilling fewer wells to serve an expanding population. The Company's primary source of groundwater supply in its southern system is the Potomac aquifer. Although the Mt. Laurel and water table aquifers, which are located closer to the ground surface, could provide ample supply, the Company has chosen, consistent with its focus on water quality, to utilize the deeper formation of the Potomac aquifer. Pumpage from the deeper formation does not interfere with other residential and agricultural uses currently found in the upper formations and potential land use contamination will be less likely to affect the deeper formation. To date, the Company has obtained, on a cost effective basis, commercially acceptable quantities of water from these deeper formations. The Company's southern system is made up of several satellite systems which have not yet been connected by transmission and distribution facilities to form an integrated system. These systems are at the same gradient level to enable elevated storage facilities to control water pressure and flow to an integrated system in the future. The Company intends to consolidate these systems into a larger satellite regional system through the construction of a transmission and distribution network in the southern system as development continues and the Company's expansion efforts provide it with contiguous service territory. 24 Interconnections The Company has 12 interconnections with two neighboring water utilities and three municipalities in its northern system which provide the Company with the capability of purchasing or selling water supply. At December 31, 1995, the interconnection agreements with Chester Water and one municipality have "take or pay" clauses requiring minimum draws to be taken by the Company totaling 1.6 billion gallons on an annual basis. The Company presently utilizes the minimum draws under these agreements. The current Chester Water interconnection agreement is scheduled to expire, unless extended or renegotiated, in December 2002. The two municipality interconnection agreements have automatic five-year renewals upon the end of the agreements' terms in 1996 and 1997, respectively. To provide maximum operating flexibility to service the demands of its customers, the Company is negotiating the extension of these agreements. The Company cannot predict if such negotiations will be successful or agreements will be reached on terms acceptable to the Company. The other nine interconnections are available for emergency purposes as needed by the Company or as sources of supply for the Company for sales to other utilities. All of the interconnections provide the Company the capability of selling water to neighboring water utilities or municipalities. The Chester Water interconnection is substantially different from the other agreements. This interconnection involves the transfer of water from one river basin (the Susquehanna River Basin) in Pennsylvania to another (the Delaware River Basin) in Delaware, which requires the approval of regulatory commissions with authority over both river basins. The ability to transfer water between the river basins through the interconnection enables the Company to mitigate water supply restrictions during periods of drought for the Delaware River Basin. The transfer of water from Chester Water to the Company has been approved by both river basin commissions; however, the Susquehanna River Basin Commission imposed several conditions for the continued access by the State of Delaware and the Company to the Susquehanna River Basin as a source of supply, primarily including, among others, conditions with respect to conservation and the development of increased sources of supply within the State of Delaware. The State of Delaware and the Company are actively considering and pursuing new sources of supply, including, among other sources, a major reservoir impoundment, and have evaluated active demand management through conservation measures. Recently, the Susquehanna River Basin Commission expressed its willingness to extend and potentially increase the availability of water to Delaware and negotiations between the Company and Chester Water are underway. Water Allocation Under state laws and regulations, the Company is required to file applications with DNREC for water allocation permits for each of its 48 production wells. There are currently permits issued for 42 of the Company's wells, permit applications pending for five wells and one well that is currently pumping amounts of water that do not require a permit. Access to the aquifers by the Company within its service territory is not exclusive. Individual landowners can utilize the aquifers as a source of water through private wells; however, any significant withdrawals from the aquifers must be made pursuant to a water allocation permit granted by the state. Water allocation permits control the amount of water which can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. The Company's ability to supply the demands of its customers has not been affected by private usage of the aquifers by landowners or the limits imposed by DNREC. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, the Company believes that third party usage of the aquifers within its service territory will not interfere with its ability to meet the present and future demands of its customers. TRANSMISSION AND DISTRIBUTION FACILITIES As of December 31, 1995, the Company was serving customers through 763 miles of transmission and distribution mains. Mains range in diameter from two inches to twenty-four inches, substantially all of which are made of ductile iron, cast iron or transite pipe. The Company believes that ductile iron is more durable than plastic and installs ductile iron pipes exclusively. The Company also supplies public fire protection service through 3,000 hydrants installed throughout its service territories. 25 The Company has 21 storage tanks in its northern system, with a total system storage of 35.3 million gallons. Approximately 22.0 million of these gallons are available for use, while the remainder are used to maintain a regulatory minimum of 25 pounds of water pressure per square inch. The Company has additional pressure and volume requirements for public fire protection service. In addition, the state fire marshall requires certain fire flows for private sprinkler protection. The Company's storage tank system has been designed to satisfy all such requirements. The Company does not have any large storage tanks in its southern system, but relies currently on hydro-pneumatic tanks to maintain adequate system pressures. The Company anticipates construction of a 400,000 gallon elevated tank and a 150,000 gallon elevated tank to serve its southern system within the next three years to accommodate increased customer demands. The Company assesses the capacity of its systems on an ongoing basis, utilizing computerized demand modeling to determine adequate pressures under all load conditions. The Company initiates plans to construct pumping, transmission and storage facilities as identified by the model. The Company pumps all of its water with electric power purchased from a major electric utility. The Company also has diesel powered pumping, and diesel and propane powered generating equipment at selected treatment facilities in addition to elevated storage facilities for the provision of basic service during possible electrical outages. WATER TREATMENT The Company believes that it has a reputation for providing water of superior quality to its customers. As part of its long-range planning, the Company evaluates potential sources of supply and invests in new utility plant, including water treatment facilities, with a focus on water quality. The water treatment process employed by the Company is designed to ensure the quality of water supplied to its customers. The Company derives about 89% of its water supply in the northern system from wells located in the Coastal Plain. The remaining 11% is derived from wells in the Piedmont area. The water supply from the Coastal Plain typically has low pH, high carbon dioxide content and is generally characterized as a soft water. The water supply from the Piedmont area has relatively high pH, low carbon dioxide content and is generally considered to be a hard water. The Company employs a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation and iron removal, to meet state and federal water quality standards. Additionally, a corrosion inhibitor is added to all of the Company's self-supply and most of the supply from interconnections. The Company's water supply in the northern system is treated at 18 different water treatment facilities. The Company derives all of its water supply in the southern system from wells located in the Coastal Plain. Water supply in this system is generally characterized as a soft water. Additionally, because there is a high iron content in all the groundwater derived from the wells in the southern system, iron removal is a normal form of treatment for these wells. UTILITY PLANT CONSTRUCTION PROGRAM Capital expenditures, primarily for transmission and distribution facilities, were approximately $9.8 million for 1995 and approximately $17.5 million for the three-year period ended December 31, 1995. Capital expenditures for the three-year period ending December 31, 1998 are estimated to be approximately $28.2 million, of which $19.1 million is for the construction, upgrading and maintenance of transmission and distribution facilities, $3.7 million is for the construction, upgrading and maintenance of pumping and treatment facilities, $3.4 million is for new sources of supply and $2.0 million is for general plant, such as fleet vehicles, computer systems and office/warehouse equipment. The description of the Company's utility plant construction program contains forward-looking statements which involve risks and uncertainties. Such factors may include, among others, non- controllable investments associated with state highway relocations, the pace of development 26 within the Company's service territory and the pace of the Company's expansion efforts. The outcome of the Company's planned program of utility plant construction may differ significantly from the investments discussed below. The following table provides projected expenditures (in thousands) by major category for the years in the three-year period ending December 31, 1998:
1996 1997 1998 TOTAL ------- ------- ------ ------- Transmission and distribution facilities. $ 8,471 $ 7,008 $3,626 $19,105 Pumping and treatment facilities......... 1,078 1,775 900 3,753 New sources of supply.................... 1,315 965 1,140 3,420 General plant............................ 825 982 148 1,955 ------- ------- ------ ------- Total.................................. $11,689 $10,730 $5,814 $28,233 ======= ======= ====== =======
Transmission and Distribution Facilities Of the $19.1 million budgeted for the three years ending December 31, 1998, approximately $8.5 million has been budgeted for transmission and distribution facilities in 1996, of which nearly $2.3 million relates to non-controllable investments. The non-controllable investments involve the relocation of mains, services and hydrants which, due to state highway relocations, must be relocated. The State of Delaware has begun construction of the largest of these relocation projects scheduled for 1996. Of the approximately $2.3 million budgeted by the Company for 1996 for state highway relocation projects, nearly $1.5 million is budgeted for this single project. Approximately $1.3 million is budgeted for 1997 and 1998 for the relocation of mains, services and hydrants due to highway relocations. In addition to budgeting for mandatory replacements, the Company also has budgeted $1.5 million for 1996 for the replacement or renewal of older and less reliable distribution mains. The investment in new facilities is necessary to improve water quality and to reduce expenses related to maintenance and repairs for older mains. One of the most extensive replacement projects includes a residential development in the northern system, which began in 1995 and is expected to last an additional two years, at an average annual capital expenditure of $505,000. Another large project involves the replacement of mains and hydrants over a three-year period beginning in 1996 which is expected to cost approximately $664,000 for each of the first two years and $312,000 for the third year. Replacements and renewals for 1997 and 1998 are expected to total $3.0 million which includes portions of the two projects discussed above. Another major component of capital expenditures is approximately $2.2 million for the installation of new transmission mains which are necessary to deliver supply, allow for the more efficient use of supplies and improve general hydraulics. Several additional water main projects included in the 1996 budget totaling $1.4 million will allow the Company to transfer water from its higher service elevations to lower service elevations, thereby allowing the Company to accept increased supplies from its interconnection with Chester Water or from new well fields scheduled for construction. Another budgeted installation is the retrofit of a residential development within the Company's service territory which previously had been serviced by individual private wells. The Company expects to utilize $400,000 in 1996 of the $2.2 million budgeted for the three year period to install transmission mains from its first operating water treatment facility in the southern system to a new residential development scheduled for construction in 1996. For 1997 and 1998, the Company has budgeted an aggregate of $1.0 million primarily for the installation of a new transmission and distribution network and $500,000 for a new storage tank to serve the southern system. The network is projected to become the backbone for a larger regional system which joins together some of the satellite facilities currently serving smaller developments. Finally, the Company plans to install elevated storage facilities in its southern system to aid in the provision of public fire protection and to allow the new network to operate more efficiently. Approximately $500,000 is budgeted to be expended in 1997 for the installation of a tank near the midpoint of the new service territory acquired in the southern system. 27 Source of Supply Northern system. The Company intends to continue its focus on achieving and maintaining self reliance for water supply and has budgeted $1.8 million over the next three years in the northern system. Included within the Company's construction program is $290,000 budgeted for 1997 in connection with the augmentation of an existing well field at Llangollen in its northern system, through the acquisition of a commercial well located in an adjacent industrial site. The Company has been operating wells at Llangollen since 1959, and the well field is believed to be the largest production well field in Delaware. The average capacity of the well field had been estimated at 5.0 MGD, and the Company at one time pumped up to 5.3 MGD from the well field. DNREC directed the Company in 1973 to curtail pumping from the Llangollen well field to a maximum of 2.0 MGD because of a leachate pollution problem at an adjacent landfill, which New Castle County has subsequently contained. The Company presently operates its existing wells under this constraint in order to avoid any potential contamination, resulting in the underutilization of a treatment facility constructed by the Company prior to 1973 capable of producing over 5.0 MGD. The acquisition of the new well and the rehabilitation of the existing well, both of which are located away from the contaminated area, will provide the Company the opportunity to more fully utilize the existing treatment facility and produce a lower cost source of supply. The new wells are expected to produce 1.0 MGD, a 7% increase in the current self-supply in the northern system. The Company has budgeted $410,000 for 1997 to construct a new well and treatment facility at one of the highest elevations in the northern system. Initial analysis of the test well drilled at this site indicates a high quality water which will require little treatment. The Company has projected a capital investment of approximately $450,000 for 1998 for the development of a third new well at an existing well field and to increase the capacity of the iron removal facility at that site. The Company plans to construct wells and treatment stations at an additional site in the northern system in 1998 for a projected cost of $300,000. This well will be located in the same aquifer as the new 1997 site and, therefore, water quality is expected to be similar. The Company's capital budget for source of supply also includes $300,000 for 1996 to 1998 for the continuation of the Company's replacement program in the northern system for well pumps, monitoring equipment and the renovation of existing pumping and treatment facilities. Since the implementation of a new computerized system inventory and work order system in January 1996, the Company has begun a standard preventative maintenance program designed to avoid unanticipated failures by replacing or maintaining equipment on a routine basis. The replacements projected for the next three years are part of that program. Further capital budget allowances have been made to replace or repair unanticipated system failures. Southern system. The Company's capital program includes the construction of several new well fields and water treatment facilities in its southern system. Approximately $1.6 million of capital expenditures are budgeted for 1996 for the development of well fields and four treatment facilities in the southern system. The total production capabilities of the wells is 3.0 MGD and the wells are expected to be able to provide service to 10,000 future customers. The treatment facilities will have a combined total production of 0.26 MGD. The exact timing of the construction is closely tied to the initial development of specific tracts of land for which the Company has been granted a CPCN. The Company has projected, however, that such facilities will be needed during 1996 because of development plans approved by the New Castle County Planning Department. Two of the sites, including one in Kent County and one in New Castle County, were installed in early 1996 to accommodate new development and construction near the well sites. The other two facilities are projected to be completed by the third quarter of 1996 to accommodate a new development and a new toll plaza servicing a newly-constructed limited access highway. These systems, combined with the other two systems constructed in 1995, will become the hub for a network of transmission mains which will eventually consolidate the entire southern system. REGULATION The Company is subject to regulation by federal, state and local agencies with respect to, among other things, water quality, environmental matters, water allocation rights, rates charged for water service and awards 28 of new service territory. Artesian Resources and Artesian Water believe that Artesian Water is in material compliance with all applicable regulations. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. There can be no assurance that Artesian Water will be able to comply with changes in applicable laws or regulations. Noncompliance with respect to such changes could have a material adverse effect on Artesian Resources' results of operations. Water Quality The United States Environmental Protection Agency (the "EPA"), DNREC and the Division of Public Health of the State of Delaware (the "Division of Public Health") regulate the operation of the Company's water treatment and distribution systems and the quality of the water the Company delivers to its customers. The Company believes it is in material compliance with all current federal and state water quality standards, including all regulations promulgated to date by the EPA pursuant to the federal Safe Drinking Water Act. All purchased supplies from neighboring utilities are potable water, and the water companies and municipalities in Delaware providing supply also are regulated by these agencies. Chester Water is regulated by the Pennsylvania Department of Environmental Protection as well as the EPA. As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water. The Division of Public Health has set maximum contaminant levels for certain substances which are more restrictive than the maximum contaminant levels set by the EPA. The Division of Public Health is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of the Company and reviews the results of water quality tests performed by the Company for adherence to applicable regulations. Regulations promulgated by the EPA generally applicable to water utilities, including the Company, include the Lead and Copper Rule, the maximum contaminant levels established for various volatile organic compounds and the Surface Water Treatment Rule. Because the Company has no surface water sources of supplies which it treats for consumption, the Surface Water Treatment Rule generally is not applicable to the Company. Lead and Copper Rule. The Lead and Copper Rule requires the Company to test the quantity of lead and copper in drinking water at the taps of randomly selected customers and, if certain contaminant levels (action levels) are exceeded, to notify customers and initiate a public information campaign advising customers how to minimize exposure to lead and copper. The Lead and Copper Rule also requires the Company to add corrosion inhibitors to water to minimize leaching of lead from piping, faucets and soldered joints into water consumed at the tap. Results from two separate tests completed during 1992 within the Company's system did not indicate lead and copper concentrations above the action levels. Consequently, public notification and a public information campaign have not been required. The Company instituted a corrosion control treatment program in 1992, prior to the effective date of the Lead and Copper Rule, and the associated costs currently are being recovered in rates. Volatile Organic Compounds. Volatile organic compounds include various substances (primarily synthetic organic solvents). Such compounds may migrate into groundwater aquifers from unknown sources. The Company has found volatile organic compounds in excess of the applicable maximum contaminant levels in two of its wells and has either suspended the use of such wells or constructed stripping towers which remove such contaminants from the water. Because underground water flows are difficult to map, it is difficult to predict when and where contamination will occur in the future. To the extent that contamination in excess of applicable maximum contaminant levels occurs at wells lacking stripping towers, the Company will consider building such facilities if feasible and cost effective, or closing such wells, thereby relying on other well supplies or interconnections with neighboring utilities. Currently, the Company has not identified any well fields which will require additional treatment for volatile organic compounds. Consequently, no amounts have been budgeted for 1996 with respect to such treatment. 29 In connection with the Company's acquisition in 1995 of an easement to property for the construction of a new well field, the Company commissioned an environmental study because of the property's location in the vicinity of a federally-listed superfund site. The study identified the presence of certain volatile organic compounds and heavy metals at the superfund site. The Company believes that the likelihood of any migration of volatile organic compounds or heavy metals toward its well field from the adjacent superfund site is minimal. Environmental The Company is subject to regulation by the EPA and DNREC with respect to the operation of public water supply systems and with respect to the quality of any waste water and similar effluent from treatment plants. As a normal byproduct of iron removal, the Company's new iron removal facility generates iron removed from untreated ground water plus residue from chemicals used in the treatment process. The Company has contracted with a licensed third party vendor to dispose of the solids produced at the facility. The Company's other iron removal facilities rely on disposal through county approved wastewater facilities. The Company has no underground storage tanks. All underground fuel tanks were removed in 1992. Caustic soda storage tanks were removed in 1994 through 1995 and replaced with lined "cellars" at the four stations where caustic soda is used for pH control. An environmental study at the locations of the former underground storage tanks has determined that no contamination exists at the locations. Water Allocation Pursuant to state laws and regulations, the Company is required to file applications with DNREC for water allocation permits for each of its 48 production wells. There are currently permits issued for 42 of the Company's wells, permit applications pending for five wells and one well that is currently pumping amounts of water that do not require a permit. Water allocation rights are granted with specific restrictions with respect to water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. The Company files monthly and annual pumpage reports with DNREC and must report violations of draw down or pumpage limits separately. Fines can be imposed for each infraction under state law. The Company has been in material compliance with the established limits and has not incurred any fines. Rates Artesian Water, as a public utility, is regulated by the Delaware Public Service Commission with respect to the issuance and sale of its securities, rates and service, classification of accounts, mergers, acquisitions and other matters. The Company periodically seeks rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. The Company's 1995 rate proceeding resulted in an increase in overall revenues of 7.49% and an authorized 11.50% rate of return on equity. An order issued by the Delaware Public Service Commission dated May 9, 1995 in that proceeding approved a settlement agreement between the Company and the Office of the Public Advocate of the State of Delaware. Under the settlement agreement, the Company agreed that it would not file a rate case using a test period earlier than the test period ending June 30, 1998 unless circumstances beyond the control of the Company arose which would either prevent it from the opportunity to earn its authorized rate of return, or would likely result in the Company earning greater than its authorized rate of return. However, the Company may petition the Delaware Public Service Commission earlier to recover investment in transmission and distribution mains as a result of highway relocations mandated by the state, and to recover purchased water cost increases associated with the Company's agreements with two neighboring utilities, which were not anticipated at the time the rate proceeding was settled in 1995. The Company believes that any such petition for a rate increase would relate to circumstances beyond its control. However, the Company cannot predict the timing or the outcome of any resulting rate proceeding. 30 Certificates of Public Convenience and Necessity In order to begin or expand its business or operations in Delaware, a public water utility must first obtain a CPCN. The Secretary of DNREC shall grant a CPCN where it has been ascertained that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Board of Health for human consumption, where the supply is insufficient to meet the projected demand or where the applicant is in possession of one of the following: (i) a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government; (ii) a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or (iii) a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served. The Company believes that it has met one or more of these conditions when filing for CPCNs. The Company's expansion effort in the southern system was challenged by a competing water company which contested many of the Company's CPCN applications in southern New Castle County, generally where the application to provide service did not include a duly approved subdivision development plan or where there was not a request for imminent water service. The competing water company took the position that the Company had not met the requirements for a CPCN and that any CPCN granted in such circumstances should be conditional and expressly subject to another water company later having the right to provide water service in the territory covered by such a CPCN. DNREC considered and rejected the competing water company's position and issued CPCNs in their traditional form to the Company for all of the contested applications. The issuance of such CPCNs was appealed by the competing water utility to the Environmental Appeals Board (the "EAB"), which is a quasi- judicial review board constituted by statute in order to hear appeals of decisions of the Secretary of DNREC. In a ruling dated March 1, 1996 applying to a number of the Company's CPCN applications (EAB Nos. 95-03 and 95-04), the EAB determined that the CPCNs were properly granted and affirmed the Secretary's grant of these CPCNs. In its ruling, the EAB stated that the "traditional nature of CPCN[s] is that they are exclusive unless or until the water utility holding them is unable or unwilling to provide adequate water service." Although rulings of the EAB are subject to appeal, the competing water company did not appeal the decision. CPCNs are not transferable. In order to abandon service to an area, a water utility must obtain the approval of the Delaware Public Service Commission. PROPERTIES The corporate headquarters of the Company is located at 664 Churchmans Road, Newark, Delaware. In addition, corporate headquarters for Artesian Resources also is located at the above address. The property is leased by the Company from a related party through March 1, 1997. The lease may be extended at the Company's option for three successive five-year renewal terms subject to the terms set forth in the lease. See "Management--Certain Transactions." The Company owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities within New Castle County. The acreage owned by the Company, not including rights-of-way and easements, totals approximately 630. Of this amount, approximately 500 acres are located directly adjacent to the corporate headquarters of the Company. This area is the subject of an Environmental Impact Study being performed by the United States Army Corps of Engineers, one of the first steps toward identifying the site for a reservoir and the environmental impact to the natural area at the prospective reservoir site. Several other locations also are being evaluated for the site of a new reservoir in New Castle County. The Company believes the reservoir can be built in stages over the next twenty years in a cost efficient manner as demand for water increases and has expressed an interest in owning and operating the facility. The Company also owns approximately 52 acres of land which will be the site of a future well field and iron removal facility in its northern system. The field is expected to produce approximately 3.0 MGD, but it is presently unclear whether all the land will be needed for future production. 31 Artesian Resources owns some small parcels of land totaling approximately 3.0 acres, all of which are located in New Castle County. As of December 31, 1995, Artesian Development owned property on which one office building had been constructed at 630 Churchmans Road, Newark, Delaware, and in which space was leased to various tenants. On March 13, 1996, Artesian Development sold the office building and approximately 4.27 acres on which the building was located to a third party. The transaction resulted in a $783,600 loss which was recorded in the year ended December 31, 1995. Artesian Development retains ownership of approximately 12 acres zoned for light manufacturing at the above site. The sale agreement for the office building granted the purchaser of the office building a right of first refusal for a period of seven years should Artesian Development decide to sell the remaining acres in whole or in part. Artesian Development has no present plans to purchase any new land or develop the acres it retained. EMPLOYEES As of April 29, 1996, Artesian Water employed 128 full-time and 6 part-time employees, all of whom were non-unionized. Of this number, 13 were officers and managers; 79 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 34 were employed in the accounting, budgeting, information systems, human resources, customer service, public relations and conservation departments. The remaining 8 employees were administrative personnel. The Company believes that its employee relations are good. 32 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Artesian Resources' executive officers and directors are as follows.
NAME AGE POSITION ---- --- -------- Dian C. Taylor(1).............. 50 Director, Chair of the Board, Chief Executive Officer and President of Artesian Resources and Subsidiaries Ellis D. Taylor(4)............. 79 Director, Chairman Emeritus Kenneth R. Biederman(1)(2)(3)(4)......... 52 Director William C. Wyer(1)(2)(3)(4).... 49 Director John R. Eisenbrey, Jr.(2)(3)... 40 Director Peter N. Johnson............... 66 Senior Vice President and Chief Operating Officer of Artesian Water David B. Spacht................ 36 Vice President, Chief Financial Officer and Treasurer of Artesian Resources and Subsidiaries Joseph A. DiNunzio............. 33 Vice President and Secretary of Artesian Resources and Subsidiaries Bruce P. Kraeuter.............. 46 Vice President and Chief Engineer of Artesian Water
- -------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Budget Committee. (4) Member of the Personnel, Compensation and Benefits Committee. Dian C. Taylor has served as Chair of the Board since July 1993, and as President and Chief Executive Officer of Artesian Resources and its subsidiaries since September 1992. Ms. Taylor served as Vice President of Corporate Development of Artesian Resources from August 1991 through April 1992, and Executive Vice President from April 1992 through September 1992. She was formerly a consultant to the Small Business Development Center at the University of Delaware from February 1991 to August 1991 and owner and President of Achievement Resources, Inc., a consulting firm specializing in strategic planning, marketing, entrepreneurial and human resources development, from 1977 to 1991. Ms. Taylor was a marketing director for SMI, Inc. from 1982 to 1985. Ms. Taylor is the niece of Ellis D. Taylor and the aunt of John R. Eisenbrey, Jr. Ellis D. Taylor has served as Chairman Emeritus of Artesian Resources since August 1991, and has served as a Director since 1948. He served as President from 1958 until November 1990 and as Chief Executive Officer from November 1990 until August 1991. He is presently a Trustee of The Medical Center of Delaware--Christiana Hospital. Mr. Taylor is the uncle of Dian C. Taylor. Kenneth R. Biederman has served as a Director since July 1991. Mr. Biederman has served as Dean of the College of Business and Economics of the University of Delaware since 1990, and has served as a Director of Chase Manhattan Bank USA since November 1993. He was formerly a financial and banking consultant from 1989 to 1990, and served as President of Gibraltar Bank from 1987 to 1989. William C. Wyer has served as a Director since July 1991. Mr. Wyer has served as President of AllNation Life Insurance and as Senior Vice President of Blue Cross/Blue Shield of Delaware since September 1995. Mr. Wyer was Managing Director of Wilmington 2000, a private organization seeking to revitalize the City of Wilmington, Delaware, from May 1993 to September 1995. He was President of Wyer Group, Inc. from 1991 to 1993 and he was President of Commerce Enterprise Group from 1989 to 1991, both of which were management consulting firms specializing in operations reviews designed to increase productivity, cut overhead and increase competitiveness. Mr. Wyer served as President of the Delaware State Chamber of Commerce from 1978 to 1989. 33 John R. Eisenbrey, Jr. has served as a Director since July 1993. He has been the owner and President of Bear Industries, Inc., a privately held mechanical contracting firm specializing in fire protection, for over ten years. Mr. Eisenbrey is the nephew of Dian C. Taylor. Peter N. Johnson has served as Senior Vice President and Chief Operating Officer of Artesian Water since August 1991. Mr. Johnson served as Senior Vice President and General Manager of Artesian Water from 1979 to 1991. Mr. Johnson intends to retire on May 31, 1996. David B. Spacht was appointed Vice President, Treasurer and Chief Financial Officer of Artesian Resources and its subsidiaries in January 1995. In his positions, Mr. Spacht has primary responsibility for accounting, financial reporting, purchasing, rate-making and information systems. Mr. Spacht served as Treasurer and Chief Financial Officer of Artesian Resources and its subsidiaries from July 1992 to January 1995. Mr. Spacht formerly held the positions of Assistant Secretary, Assistant Treasurer and Controller of Artesian Resources and its subsidiaries and has been employed by Artesian Resources for fifteen years. Joseph A. DiNunzio was appointed Vice President and Secretary of Artesian Resources and its subsidiaries in January 1995. In his positions, Mr. DiNunzio has primary responsibility for administration, planning and budgeting, customer relations and billing. Mr. DiNunzio has served as Secretary of Artesian Resources and its subsidiaries since July 1992. Mr. DiNunzio formerly held the positions of Assistant Secretary and Manager of Budgeting and Financial Planning. Prior to joining Artesian Resources in 1989, Mr. DiNunzio was employed by Price Waterhouse for five years. Bruce P. Kraeuter was appointed Vice President and Chief Engineer of Artesian Water in January 1995. Mr. Kraeuter held the position of Manager of Engineering from March 1994 to January 1995 and has been employed by Artesian Water as an engineer since July 1989. Prior to joining Artesian Water, Mr. Kraeuter served as Senior Engineer with the Water Resources Agency for New Castle County, Delaware for fifteen years. Artesian Resources' Board of Directors is divided into three classes. Members of one class are elected each year to serve a three-year term and until their successors shall have been elected and qualified or until earlier resignation or removal. The terms of Dian C. Taylor and John R. Eisenbrey, Jr. expired at the 1996 annual meeting of stockholders and they were subsequently reelected to a three-year term. The term of Kenneth R. Biederman will expire at the 1997 annual meeting, and the terms of Ellis D. Taylor and William C. Wyer will expire at the 1998 annual meeting. The Board of Directors has various committees, including the Executive Committee, the Audit Committee, the Budget Committee and the Personnel, Compensation and Benefits Committee. The Executive Committee reviews the implementation of Artesian Resources' strategic vision and provides guidance to management and may exercise all the powers and authority of the Board of Directors except as specifically limited by the by-laws. The Audit Committee reviews the procedures and policies relating to the internal accounting procedures and controls of Artesian Resources, and provides general oversight with respect to the accounting principles employed in Artesian Resources' financial reporting. As part of its activities, the Audit Committee meets with representatives of Artesian Resources' management and independent accountants. The Audit Committee makes a recommendation each year to the Board of Directors concerning the choice of Artesian Resources' independent accountants. The Budget Committee reviews the annual operating and capital budgets prepared by management and monitors actual results in comparison to those projected. The Personnel, Compensation and Benefits Committee reviews the compensation and benefits for all employees and makes recommendations regarding employee compensation and benefits, officers' salaries and Board of Directors' fees. Officers are currently elected annually by the Board of Directors and hold office until their successors have been chosen and qualified, or until death, resignation or removal by the Board of Directors. 34 BOARD OF DIRECTORS COMPENSATION Outside directors receive an annual retainer fee of $3,200 paid in advance. Each director receives $800 for each board meeting attended, $350 for each committee meeting attended on the day of a regular board meeting and $700 for each committee meeting attended on any day other than the day of a board meeting. The Chair of each Committee, if a non-employee director, receives an annual retainer of $500. EXECUTIVE COMPENSATION The following table provides information concerning the annual and long-term compensation of the Chief Executive Officer and each executive officer of Artesian Resources earning in excess of $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------- --------------- NUMBER OF SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS AWARDED COMPENSATION($)(2) ------------------ ---- --------- -------- -------------- --------------- ------------------ Dian C. Taylor.......... 1995 116,359 7,500 21,620(1) 3,000 8,368 Chair, Chief Executive 1994 110,160 -- 16,338(1) 3,000 5,204 Officer and President 1993 80,350 44,366 15,863(1) 3,000 4,810 Peter N. Johnson........ 1995 109,244 9,528 2,219 3,000 5,408 Senior Vice President 1994 108,360 -- 2,619 -- 4,414 and Chief Operating Officer 1993 105,648 9,317 2,168 -- 5,465 David B. Spacht......... 1995 89,128 11,572 1,979 3,000 8,270 Vice President, Treasurer 1994 80,160 -- 1,189 3,000 3,877 and Chief Financial Officer 1993 75,340 7,986 1,069 -- 2,606 Joseph A. DiNunzio...... 1995 89,128 13,886 706 -- 6,234 Vice President and 1994 80,160 -- 169 -- 4,431 Secretary 1993 67,340 7,986 1,547 -- 3,360
- -------- (1) Includes $17,900 in 1995, $13,200 in 1994 and $15,650 in 1993 received as compensation for services on Artesian Resources' Board of Directors and its committees. (2) Artesian Resources contributes 2% of an eligible employee's gross earnings to its 401(k) Deferred Compensation Retirement Plan (the "401(k) Plan"). In addition, employees can contribute up to 12%, and Artesian Resources will match 50% of the first 6% of the employee's gross earnings. Ms. Taylor received $6,042, $4,612 and $4,810 in contributions by Artesian Resources to the 401(k) Plan in 1995, 1994 and 1993, respectively. Mr. Johnson received $5,408, $4,414 and $5,465 in contributions by Artesian Resources to the 401(k) Plan in 1995, 1994 and 1993, respectively. Mr. Spacht received $3,817, $2,800 and $2,606 in contributions by Artesian Resources to the 401(k) Plan in 1995, 1994 and 1993, respectively. Mr. DiNunzio received $4,453, $4,000 and $3,360 in contributions by Artesian Resources to the 401(k) Plan in 1995, 1994 and 1993, respectively. In addition, effective October 1, 1994, Artesian Water established a supplemental 401(k) retirement plan (the "Supplemental 401(k) Plan"). All employees hired before April 26, 1994 and under the age of sixty are eligible for the Supplemental 401(k) Plan. Employees over the age of sixty waived participation in the plan in order to receive medical, dental and life insurance benefits upon retirement to be paid by Artesian Water. Such benefits will not be provided by Artesian Water to any other current or future employees. Contributions are made by Artesian Water to the Supplemental 401(k) Plan based upon an eligible employee's years of service. Ms. Taylor received $2,326 and $592 in contributions by Artesian Water to the Supplemental 401(k) Plan in 1995 and 1994, respectively. Mr. Spacht received $4,453 and $1,077 in contributions by Artesian Water to the Supplemental 401(k) Plan in 1995 and 1994, respectively. Mr. DiNunzio received $1,781 and $431 in contributions by Artesian Water to the Supplemental 401(k) Plan in 1995 and 1994, respectively. 35 The following table provides, as to the persons named in the Summary Compensation Table, information concerning stock options granted during the fiscal year ended December 31, 1995.
Option/SAR Grants in Last Fiscal Year POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM ------------------------------------------------- ------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS EXERCISE UNDERLYING GRANTED TO OR BASE OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% ---- ------------ ------------ --------- ------------- --------- --------- Dian C. Taylor.......... 3,000(1) 11.8% $12.49 June 10, 1996 $6,236.25 $8,317.50 Peter N. Johnson........ 3,000(1) 11.8% $12.49 June 10, 1996 $6,236.25 $8,317.50 David B. Spacht......... 3,000(1) 11.8% $12.49 June 10, 1996 $6,236.25 $8,317.50 Joseph A. DiNunzio...... -- -- -- -- -- --
- -------- (1) Shares of Class A Non-Voting Common Stock. The following table provides, as to the persons named in the Summary Compensation Table, option exercises during the fiscal year ended December 31, 1995 and year-end option values. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN- OPTIONS/SARS AT THE-MONEY SHARE(S) FISCAL OPTIONS/SARS AT ACQUIRED VALUE YEAR END FISCAL YEAR END NAME ON EXERCISE REALIZED -ALL EXERCISABLE- -ALL EXERCISABLE- ---- ----------- -------- ----------------- ----------------- Dian C. Taylor........ 3,000(1) $2,850 3,000(1) $2,280 Peter N. Johnson...... -- -- 3,000(1) $2,280 David B. Spacht....... -- -- 3,000(1) $2,280 Joseph A. DiNunzio.... -- -- -- --
- -------- (1) Shares of Class A Non-Voting Common Stock. STOCK OPTION AND STOCK BONUS PLANS Artesian Resources maintains two employee stock option programs, a nonqualified plan and an incentive plan. The 1992 Non-Qualified Stock Option Plan (the "NQSO Plan") is administered by a committee of the Board of Directors of Artesian Resources. The NQSO Plan allows employees and directors of Artesian Resources and its subsidiaries to apply for and the committee to grant nonqualified options to purchase shares of Class A Non-Voting Common Stock. The exercise price for option grants to employees other than directors or executive officers is determined by the committee on the date of grant and may not be less than 85% of the fair market value of the underlying Class A Non-Voting Common Stock on the date of grant. The exercise price for option grants to directors and executive officers is 90% of the fair market value on the date of grant. The NQSO Plan authorizes up to 100,000 shares of Class A Non-Voting Common Stock for issuance pursuant to the terms of the NQSO Plan, subject to adjustment in certain circumstances. During the term of the NQSO Plan, no individual may receive grants of stock options for more than 50% of the aggregate number of shares of Class A Non-Voting Common Stock authorized under the NQSO Plan. In addition, the maximum number of shares which may be granted, other than to directors and executive officers, is 1,000 shares per grant. Under the NQSO Plan, stock options to purchase 3,000 shares of Class A Non-Voting Common Stock are granted annually to directors and 36 executive officers. Options granted to participants other than directors and executive officers are exercisable for one year. The Incentive Stock Option Plan (the "ISO Plan") is administered by a committee of the Board of Directors of Artesian Resources. The ISO Plan allows the committee to grant incentive stock options to purchase Class A Non-Voting Common Stock to designated officers (including officers who are also directors) and other key employees of Artesian Resources and its subsidiaries. The exercise price of options granted under the ISO Plan is the fair market value of the underlying shares. Options may be exercised for a period of up to ten years from the date of grant. The ISO Plan authorizes up to 100,000 shares of Class A Non-Voting Common Stock for issuance pursuant to the terms of the ISO Plan, subject to adjustment in certain circumstances. During the term of the ISO Plan, no individual may receive grants of stock options for more than 50% of the aggregate number of shares of Class A Non-Voting Common Stock authorized under the ISO Plan. At April 29, 1996, there were options outstanding under the NQSO Plan to purchase 25,560 shares of Class A Non-Voting Common Stock. Of such options, 24,270 were exercisable at a weighted average exercise price of $12.45 per share. Artesian Resources has a Cash and Stock Bonus Compensation Plan (the "Bonus Plan") for officers of Artesian Resources and Artesian Water. The purpose of the Bonus Plan is to compensate officers for their contributions to the long- term growth and prosperity of Artesian Resources and Artesian Water in the form of cash or shares of Class A Non-Voting Common Stock. A maximum of 25,000 shares of Class A Non-Voting Common Stock are authorized for issuance under the Bonus Plan, subject to adjustment in certain circumstances. CERTAIN TRANSACTIONS The office building and shop complex utilized by Artesian Water are leased at an annual rental of approximately $204,000 from White Clay Realty Co., a partnership which includes Ellis D. Taylor, Chairman Emeritus and a director and significant stockholder of Artesian Resources, Patia Ziegler (daughter of Mr. Taylor), Dian C. Taylor, Chair of the Board of Directors, Chief Executive Officer, President and a significant stockholder of Artesian Resources and its subsidiaries, Louisa Welcher (sister of Ms. Taylor), a significant stockholder of Artesian Resources, and a trust in which John R. Eisenbrey, Jr., a director and stockholder of Artesian Resources, and Virginia Rettig (sister of Mr. Eisenbrey) are trustees and in which they have a beneficial interest. The initial term of the lease expires in 1997 with provisions for renewals by Artesian Water for three five-year periods thereafter. The lease may be terminated at any time by Artesian Water through the purchase by Artesian Water (with the consent of the Delaware Public Service Commission) of the leased facilities for an amount calculated in accordance with the lease which shall not be less than the fair market value of the facilities. The Company believes that the terms of the lease, including the annual rental, are on terms no less favorable than those which could be obtained from an unrelated third party. Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, at an annual rental of approximately $40,000. The initial term of the lease was for ten years ending September 30, 1995 and, thereafter, renewal is automatic from year to year unless 60 days written notice is given by either party before the end of the year's lease term. The annual rental is adjusted each year by the consumer price index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by giving 60 days written notice to Glendale Enterprises Limited should water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely effect its interest in the lease. The Company believes that the terms of the lease, including the annual rental, are on terms no less favorable than those which could be obtained from an unrelated third party. 37 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the equity securities of Artesian Resources for each director, each executive officer of Artesian Resources earning in excess of $100,000, each beneficial owner of more than 5% of the outstanding shares of any class of stock, and all directors and officers as a group as of April 29, 1996, based in each case on information furnished to Artesian Resources.
AFTER BEFORE OFFERING (1) OFFERING(1) ------------------------------------ ----------------- CLASS A CLASS B NON-VOTING VOTING 7% PRIOR CLASS A COMMON COMMON PREFERRED NON-VOTING NAME STOCK(2) STOCK(2) STOCK(2) COMMON STOCK(2) ---- ----------- ------------ --------- ----------------- Ellis D. Taylor(3)...... 36,186 6.6% 127,157 25.4% 898 8.3% 36,186 3.0% 212 Washington Avenue Newport, Delaware 19804 Dian C. Taylor.......... 10,671 2.0% 44,474 8.9% -- -- 10,671 * 664 Churchmans Road Newark, Delaware 19702 John R. Eisenbrey, Jr(4).................. 15,124 2.8% 15,981 3.2% -- -- 15,124 1.2% P.O. Box 9174 Newark, Delaware 19711 Kenneth R. Biederman.... 7,500 1.4% -- -- -- -- 7,500 * 14 Hayden Way Newark, Delaware 19711 William C. Wyer......... 6,000 1.1% -- -- -- -- 6,000 * 1980 Superfine Lane Apt. 501 Wilmington, Delaware 19802 Peter N. Johnson(5)..... 3,400 * 284 * -- -- 3,400 * 664 Churchmans Road Newark, Delaware 19702 David B. Spacht(6)...... 3,537 * 68 * -- -- 3,537 * 664 Churchmans Road Newark, Delaware 19702 Joseph A. DiNunzio...... 663 * 20 * -- -- 663 * 664 Churchmans Road Newark, Delaware 19702 Norman H. Taylor, Jr.(7)................. 2,664 * 96,394 19.3% -- -- 2,664 * 1597 Porter Road Bear, Delaware 19701 Louisa Taylor Welcher(8)............. 7,169 1.3% 38,470 7.7% 150 1.4% 7,169 * 219 Laurel Avenue Newark, Delaware 19711 Hilda Taylor............ 32,377 6.0% 40,783 8.2% 41 * 32,377 2.6% 4 East Green Valley Circle Newark, Delaware 19711 Directors and Executive Officers as a Group (8 individuals)........ 83,081 14.7% 187,984 37.6% 898 8.3% 83,081 6.8%
- -------- * Indicates less than 1% of class 38 (1) The nature of ownership consists of sole voting and investment power unless otherwise indicated. The amount also includes all shares issuable to such person or group upon the exercise of options held by such person or group to the extent such options are exercisable within 60 days of April 29, 1996. At April 29, 1996, Ms. Taylor and Messrs. Taylor, Eisenbrey, Biederman, Wyer, Johnson and Spacht each held options for 3,000 shares of Class A Non-Voting Common Stock. (2) Percentages for each person or group are based on the aggregate number of shares of the applicable class outstanding as of April 29, 1996, and all shares issuable to such person or group upon the exercise of options held by such person or group, to the extent such options are exercisable within 60 days of that date. (3) Includes 12,380 shares of Class A Non-Voting Common Stock, 690 shares of Class B Voting Common Stock and 898 shares of 7% Prior Preferred Stock owned by a trust of which Mr. Taylor is a trustee and in which he has a beneficial interest, and 2,500 shares of Class B Voting Common Stock held by a company wholly owned by Mr. Taylor. (4) Includes 312 shares of Class B Voting Common Stock owned by a trust of which Mr. Eisenbrey is a trustee and in which he has a beneficial interest. (5) Includes 284 shares of Class B Voting Common Stock held by the trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer. (6) Includes 48 shares of Class B Voting Common Stock held by the trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer. (7) Includes 305 shares of Class B Voting Common Stock held by the trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer and 347 shares of Class B Voting Common Stock owned by Mr. Taylor's wife to which Mr. Taylor disclaims beneficial ownership. (8) Includes 53 shares of Class B Voting Common Stock held jointly by Ms. Welcher's husband and son, 103 shares of Class A Non-Voting Common Stock owned by Ms. Welcher's husband and 103 shares of Class A Non-Voting Common Stock owned by Ms. Welcher's son to which Ms. Welcher disclaims beneficial ownership. 39 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Artesian Resources consists of 4,730,868 shares, comprised of 3,500,000 shares of Class A Non-Voting Common Stock, par value $1 per share, 1,040,000 shares of Class B Voting Common Stock, par value $1 per share, 10,868 shares of 7% Prior Preferred Stock, par value $25 per share ("7% Prior Preferred Stock"), 80,000 shares of Cumulative Prior Preferred Stock, par value $25 per share ("Cumulative Prior Preferred Stock"), and 100,000 shares of Series Preferred Stock, par value $1 per share ("Series Preferred Stock"). Immediately after the sale of the 675,000 shares of Class A Non-Voting Common Stock offered hereby, there will be issued and outstanding 1,218,028 shares of Class A Non-Voting Common Stock, 499,720 shares of Class B Voting Common Stock, 10,868 shares of 7% Prior Preferred Stock and 33,000 shares of Cumulative Prior Preferred Stock. There are no shares of Series Preferred Stock outstanding. CLASS A NON-VOTING COMMON STOCK Holders of shares of Class A Non-Voting Common Stock do not have voting rights with respect to the election of directors and other matters voted upon by stockholders of Artesian Resources except as may be required by applicable law in statutory proceedings and with respect to the issuance by Artesian Resources of Series Preferred Stock. No shares of Series Preferred Stock may be issued by Artesian Resources without the prior consent of the holders of a majority of the shares of Class A Non-Voting Common Stock voted with respect to such issuance. In the event of a liquidation, dissolution or winding up of Artesian Resources, the holders of Class A Non-Voting Common Stock are entitled to share ratably with the holders of Class B Voting Common Stock in all assets and funds of Artesian Resources remaining after payment of liabilities, subject to prior distribution rights of the 7% Prior Preferred Stock, Cumulative Prior Preferred Stock and Series Preferred Stock (collectively, "Preferred Stock") then outstanding. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Class A Non-Voting Common Stock are entitled to receive, ratably, dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor, provided that the same dividend per share is declared and paid on the Class B Voting Common Stock. Holders of Class A Non- Voting Common Stock have no preemptive or conversion rights or other subscription rights, except that holders of Class A Non-Voting Common Stock participating in Artesian Resources' Dividend Reinvestment Plan may automatically reinvest cash dividends declared on all or a portion of their shares of Class A Non-Voting Common Stock in additional shares of Class A Non- Voting Common Stock. There are no redemption or sinking fund provisions available to the Class A Non-Voting Common Stock. All outstanding shares of Class A Non-Voting Common Stock are fully paid and non-assessable. As of April 29, 1996, there were 506 record holders of Artesian Resources' Class A Non- Voting Common Stock. CLASS B VOTING COMMON STOCK Except as otherwise described herein with respect to other classes of stock of Artesian Resources and as may be required by applicable law in statutory proceedings, the right to vote is exercised exclusively by the holders of Class B Voting Common Stock. Holders of Class B Voting Common Stock are entitled to one vote per share on all matters voted upon by stockholders. Holders of shares of Class B Voting Common Stock do not have cumulative voting rights. In the event of a liquidation, dissolution or winding up of Artesian Resources, the holders of Class B Voting Common Stock are entitled to share ratably with the holders of Class A Non-Voting Common Stock in all assets and funds of Artesian Resources remaining after payment of liabilities, subject to prior distribution rights of the Preferred Stock then outstanding. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Class B Voting Common Stock are entitled to receive, ratably, dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor, provided that the same dividend per share is declared and paid on the Class A Non-Voting Common Stock. Holders of Class B Voting Common Stock have no preemptive or conversion rights or other subscription rights, except that holders of Class B Voting Common Stock participating in Artesian Resources' Dividend Reinvestment Plan may automatically reinvest cash dividends declared on all or a portion of their shares of Class B Voting Common Stock in additional shares of Class B Voting Common Stock. There are no redemption or 40 sinking fund provisions available to the Class B Voting Common Stock. All outstanding shares of Class B Voting Common Stock are fully paid and non- assessable. As of April 29, 1996, there were 255 record holders of Artesian Resources' Class B Voting Common Stock. PREFERRED STOCK 7% Prior Preferred Stock Except as may be required by applicable law in statutory proceedings, the holders of 7% Prior Preferred Stock have no voting rights. The 7% Prior Preferred Stock is redeemable at Artesian Resources' option in whole or in part from time to time at $30 per share plus accrued but unpaid dividends, provided that if dividends payable or sinking fund payments are in default on any series of Cumulative Prior Preferred Stock, Artesian Resources may not redeem any shares of 7% Prior Preferred Stock or any series of Cumulative Prior Preferred Stock other than redemption through a fixed sinking fund. The 7% Prior Preferred Stock is entitled to cumulative dividends at a rate of 7% per year out of funds legally available therefor payable quarterly. The 7% Prior Preferred Stock and the Cumulative Prior Preferred Stock rank equally with respect to the payment of cash dividends. No dividends may be declared and paid on the Series Preferred Stock, Class A Non-Voting Common Stock or Class B Voting Common Stock (collectively, "Junior Stock") unless the full cash dividends on the 7% Prior Preferred Stock then outstanding have been paid or set apart for payment. In the event of a liquidation, dissolution or winding-up of Artesian Resources or the sale by Artesian Resources of all of its assets, the holders of 7% Prior Preferred Stock are entitled, after payment of all liabilities, to be paid in cash the par value of their shares and any accrued but unpaid dividends before any amounts are paid to the holders of Junior Stock. The 7% Prior Preferred Stock and the Cumulative Prior Preferred Stock rank equally with respect to payments upon a liquidation, dissolution or winding up, except that a sale of all of the assets of Artesian Resources will not be deemed a liquidation, dissolution or winding up of Artesian Resources with respect to the Cumulative Prior Preferred Stock. As of April 29, 1996, there were 108 record holders of Artesian Resources' 7% Prior Preferred Stock. Cumulative Prior Preferred Stock Artesian Resources' Certificate of Incorporation designates two series of Cumulative Prior Preferred Stock totaling 50,000 shares out of 80,000 authorized shares of Cumulative Prior Preferred Stock, comprising 10,000 authorized shares of 8 1/2% Cumulative Prior Preferred Stock and 40,000 authorized shares of 9.96% Cumulative Prior Preferred Stock. As of April 29, 1996, there were outstanding 1,000 shares of 8 1/2% Cumulative Prior Preferred Stock and 32,000 shares of 9.96% Cumulative Prior Preferred Stock. The Certificate of Incorporation also authorizes 12,000 shares of 9 5/8% Cumulative Prior Preferred Stock and 16,000 shares of 11 1/8% Cumulative Prior Preferred Stock, all of which have been issued and subsequently redeemed. The Certificate of Incorporation fixes the designations, preferences and other rights, limitations and restrictions of the 8 1/2% Cumulative Prior Preferred Stock and 9.96% Cumulative Prior Preferred Stock. The Board of Directors may fix the designations, preferences and other rights, limitations or restrictions of authorized and unissued Cumulative Prior Preferred Stock in a resolution providing for the initial issuance of any additional series of Cumulative Prior Preferred Stock, provided that, except as applicable law may grant such authority solely to the Board of Directors, the consent of a majority in interest in the total number of shares of Series Preferred Stock and Class B Voting Common Stock then outstanding is required for, among other things, an increase in the authorized amount of any series of Cumulative Prior Preferred Stock and the creation of one or more additional series of Cumulative Prior Preferred Stock. All series of Cumulative Prior Preferred Stock are of equal rank. Artesian Resources has no present plans to designate an additional series of Cumulative Prior Preferred Stock, increase the authorized shares for any previously designated series or issue any additional shares of any previously designated series. As of April 29, 1996, there was one record holder of the 8 1/2% Cumulative Prior Preferred Stock and one record holder of the 9.96% Cumulative Prior Preferred Stock. Except as described below and as may be required by applicable law in statutory proceedings, the holders of Cumulative Prior Preferred Stock have no voting rights. If dividends payable or sinking fund payments are in 41 default on any series of Cumulative Prior Preferred Stock for specified periods of time, the holders of Cumulative Prior Preferred Stock are entitled to vote as a class for not less than one-third (if the default continues for certain shorter periods) or a majority (if the default continues for certain longer periods), as the case may be, of the members of the Board of Directors. Upon cure of such defaults, voting rights revert to the Class B Voting Common Stock. All dividends and sinking fund payments on the Cumulative Prior Preferred Stock are current. The consent of at least three-fourths of the total number of shares of Cumulative Prior Preferred Stock then outstanding is required for Artesian Resources to: (i) incur any long-term indebtedness that would result in total long-term indebtedness exceeding 65% of capitalization; (ii) create or authorize any class of stock or any obligation or security convertible into shares of stock unless such stock ranks junior to the Cumulative Prior Preferred Stock with respect both to the payment of dividends and distributions upon liquidation, dissolution or winding up of Artesian Resources; (iii) amend, alter, change or repeal any of the provisions of the Certificate of Incorporation with respect to the purposes of Artesian Resources so as to substantially change such purposes or amend, alter, change or repeal any of the express terms of the Cumulative Prior Preferred Stock then outstanding in a manner prejudicial to the holders thereof; (iv) merge or consolidate if, among other things, the purposes of the resulting corporation would be substantially different from those of Artesian Resources or if any adverse change in the terms and provisions of the Cumulative Prior Preferred Stock would result; (v) reissue any previously purchased, redeemed or retired shares of Cumulative Prior Preferred Stock; or (vi) issue any shares of Cumulative Prior Preferred Stock or any stock senior to the Cumulative Prior Preferred Stock unless certain financial tests are met. Artesian Resources may not, without the consent of a majority in interest of the holders of the total number of shares of Cumulative Prior Preferred Stock of all series then outstanding, increase the total number of authorized shares of Cumulative Prior Preferred Stock of all series so that such authorized number exceeds 80,000 shares. The outstanding Cumulative Prior Preferred Stock has no preemptive, conversion or other subscription rights. The Cumulative Prior Preferred Stock has annual mandatory redemption requirements and is redeemable at Artesian Resources' option at various declining prices. Under mandatory sinking fund provisions, redemptions will aggregate $147,500 (5,900 shares) in 1996; $112,500 (4,500 shares) in 1997 and 1998; and $100,000 (4,000 shares) in 1999 and 2000. The outstanding shares of 8 1/2% Cumulative Prior Preferred Stock are redeemable at Artesian Resources' option in whole or in part from time to time for the period from February 1, 1996 to January 31, 1997 at a redemption price of $25.089 per share, and for the period from February 1, 1997 to January 31, 1998 at a redemption price of $25.00 per share, plus accrued but unpaid dividends, and at a price equal to the par value thereof plus accrued and unpaid dividends in certain circumstances. The outstanding shares of 9.96% Cumulative Prior Preferred Stock are not callable by Artesian Resources prior to February 1, 1999, at which time the shares become redeemable at Artesian Resources' option in whole or in part from time to time at prices beginning at 103% of par value and declining thereafter to 100% of par value for the period after February 1, 2003, plus accrued but unpaid dividends. The outstanding shares of 9.96% Cumulative Prior Preferred Stock are mandatorily redeemable in certain circumstances at a price equal to par value plus accrued and unpaid dividends. If dividends payable or sinking fund payments are in default on any series of Cumulative Prior Preferred Stock, Artesian Resources may not redeem any shares of 7% Prior Preferred Stock or any series of Cumulative Prior Preferred Stock other than redemption through a fixed sinking fund. The 8 1/2% Cumulative Prior Preferred Stock and 9.96% Cumulative Prior Preferred Stock are entitled to cumulative dividends out of funds legally available therefor payable quarterly at rates per annum upon the par values thereof of 8 1/2% and 9.96%, respectively. The Cumulative Prior Preferred Stock and the 7% Prior Preferred Stock rank equally with respect to the payment of cash dividends. No dividends may be declared and paid on the Junior Stock unless the full cash dividends on the Cumulative Prior Preferred Stock then outstanding have been paid or set apart for payment. In the event of a liquidation, dissolution or winding-up of Artesian Resources or the sale by Artesian Resources of all of its assets, the holders of the outstanding series of Cumulative Prior Preferred Stock are entitled, after payment of all liabilities, to be paid in cash the par value of their shares and any accrued but unpaid dividends before any amounts are paid to the holders of Junior Stock. The Cumulative Prior Preferred Stock and the 7% Prior Preferred Stock rank equally with respect to payments upon a liquidation, dissolution or winding up, except that a sale of all of the assets of Artesian Resources will 42 not be deemed a liquidation, dissolution or winding up of Artesian Resources with respect to the Cumulative Prior Preferred Stock. Series Preferred Stock With the prior consent of the holders of a majority of the shares of Class A Non-Voting Common Stock voting with respect thereto, the Board of Directors may issue Series Preferred Stock from time to time in one or more series. The Board of Directors has the power to fix, subject to preferences that may be applicable to the 7% Prior Preferred Stock or Cumulative Prior Preferred Stock, the full, limited or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof of any such series of Series Preferred Stock. Issuance of the Series Preferred Stock, while providing Artesian Resources flexibility in connection with acquisitions and other corporate purposes, may be used, in certain circumstances, to create voting impediments to extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise gain control of Artesian Resources. Artesian Resources has no present plans to designate any series or issue any shares of Series Preferred Stock. LIMITATION OF LIABILITY Artesian Resources' Certificate of Incorporation provides that a director of Artesian Resources shall not be personally liable to Artesian Resources or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability (i) for any breach of such person's duty of loyalty, (ii) for acts and omissions not in good faith or involving intentional misconduct or a knowing violation of law, (iii) for the payment of unlawful dividends and certain other actions prohibited by Delaware corporate law and (iv) for any transaction resulting in receipt by such person of an improper personal benefit. Artesian Resources has a directors' and officers' liability insurance policy which affords directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts. At present, there is no pending litigation or proceeding, and Artesian Resources is not aware of any threatened litigation or proceeding, involving any director, officer, employee or agent where indemnification will be required or permitted under Artesian Resources' Certificate of Incorporation or by-laws. PROVISIONS WITH POSSIBLE ANTI-TAKEOVER EFFECTS The Certificate of Incorporation provides that Artesian Resources shall be governed by Section 203 of the Delaware General Corporation Law which prohibits a "business combination" between a corporation and an "interested stockholder" within three years of the stockholder becoming an "interested stockholder." An "interested stockholder" is one who, directly or indirectly, owns 15% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, consolidation, sale or other disposition of assets having an aggregate value in excess of 10% of either the aggregate fair market value of the consolidated assets of the corporation or the aggregate market value of all the outstanding stock of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation or which provide the interested stockholder with a financial benefit. These restrictions do not apply where (i) the business combination or the transaction in which the stockholder becomes interested is approved by the corporation's board of directors prior to the time the interested stockholder acquired its shares; (ii) the interested stockholder acquired at least 85% of the outstanding voting stock of the corporation in the transaction in which the stockholder became an interested stockholder excluding, for determining the number of shares outstanding, shares owned by persons who are directors as well as officers and by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) the business combination is approved by the board of directors and the affirmative vote of two-thirds of the outstanding voting stock not owned by the interested stockholder at an 43 annual or special meeting. The business combinations provisions of Section 203 of the Delaware General Corporation Law may have the effect of deterring merger proposals, tender offers or other attempts to affect changes in control of Artesian Resources that are not negotiated and approved by the Board of Directors. Artesian Resources has adopted certain provisions in its Certificate of Incorporation and by-laws which may have anti-takeover implications. The rights granted to holders of Artesian Resources' Preferred Stock pursuant to the Certificate of Incorporation or an additional series of Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Artesian Resources. Additionally, the Certificate of Incorporation provides that, without the affirmative vote of at least 75% of the voting power of all of the then outstanding shares entitled to vote generally in the election of directors, voting together as a class, the by-laws and the provisions of the Certificate of Incorporation establishing a classified board of directors may not be altered, amended or repealed. These supermajority voting provisions, along with various supermajority voting provisions for certain classes of stock required for certain business combinations and other corporate actions described above, may have an effect of discouraging, delaying or preventing a change of control of Artesian Resources which may be at a premium above the prevailing market price. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Class A Non-Voting Common Stock is Chemical Mellon Shareholder Services, L.L.C., Ridgefield Park, New Jersey. 44 UNDERWRITING The Underwriters named below, acting through the Representative, Janney Montgomery Scott Inc., have severally agreed, subject to the terms and conditions set forth in an underwriting agreement by and among Artesian Resources and the Underwriters (the "Underwriting Agreement"), to purchase from Artesian Resources and Artesian Resources has agreed to sell to the Underwriters the number of shares of Class A Non-Voting Common Stock set forth opposite their respective names below. The Underwriting Agreement provides that obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters will purchase all of such shares if any are purchased. Under certain circumstances the commitments of non-defaulting Underwriters may be increased. The names of the several Underwriters and the respective number of shares to be purchased by each of them are as follows:
NUMBER OF UNDERWRITER SHARES ----------- ------- Janney Montgomery Scott Inc....................................... 395,000 Advest, Inc. ..................................................... 40,000 Friedman, Billings, Ramsey & Co., Inc. ........................... 40,000 Legg Mason Wood Walker, Incorporated.............................. 40,000 Parker/Hunter Incorporated........................................ 40,000 Tucker Anthony Incorporated....................................... 40,000 H.C. Wainwright & Co., Inc. ...................................... 40,000 Wheat First Butcher Singer........................................ 40,000 ------- Total........................................................... 675,000 =======
The Underwriters propose to offer the shares of Class A Non-Voting Common Stock to the public initially at the offering price per share set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $0.45 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per share to certain other dealers. After the public offering of the Class A Non-Voting Common Stock, the public offering price and the concessions may be changed by the Representative. Artesian Resources has agreed to indemnify the several Underwriters against, or contribute to losses arising out of, certain liabilities in connection with this offering, including liabilities under the Securities Act. In addition to the discounts and commissions that appear on the cover page of this Prospectus, Artesian Resources will pay to the Representative a non- accountable expense allowance of $75,000, a portion of which has been paid prior to the closing of this offering. Artesian Resources has granted the Underwriters an over-allotment option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of 101,250 additional shares of Class A Non-Voting Common Stock at the same price per share as the public offering price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over- allotments in the sale of the shares of Class A Non-Voting Common Stock offered hereby. To the extent the Underwriters exercise this option, each of the Underwriters has a firm commitment, subject to certain conditions, to purchase a number of the additional shares of Class A Non-Voting Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. Artesian Resources' directors and executive officers and certain other holders of the Class A Non-Voting Common Stock and the Class B Voting Common Stock have agreed that they will not, directly or indirectly, sell or otherwise dispose of any Class A Non-Voting Common Stock or Class B Voting Common Stock (including 45 any shares issued upon exercise of options) for a period of 120 days after completion of this offering, without the Representative's prior written consent. Together, this group owns approximately 19.3% of the outstanding shares of Class A Non-Voting Common Stock and approximately 95.8% of the outstanding options to purchase Class A Non-Voting Common Stock prior to the offering, and approximately 72.8% of the outstanding shares of Class B Voting Common Stock prior to the offering. The Underwriters do not intend to confirm sales of the Class A Non-Voting Common Stock to any accounts over which they exercise discretionary authority. The public offering price of the Class A Non-Voting Common Stock offered hereby was determined by negotiation between Artesian Resources and the Representative. Among the factors considered in determining the public offering price, in addition to sporadic transactions in the Class A Non-Voting Common Stock in the over-the-counter market, are certain financial information of Artesian Resources, an assessment of Artesian Resources' prospects and the prospects of the regulated water utility industry in general and the above factors in relation to market values and various valuation measures of other entities engaged in activities similar to those of Artesian Resources. In connection with this offering, certain Underwriters and selling group members (if any) who are qualifying registered market makers on the Nasdaq National Market may engage in passive market making transactions in the Class A Non-Voting Common Stock in the over-the-counter market in accordance with Rule 10b-6A under the Exchange Act during the two business day period before commencement of sales in the offering. The passive market making transactions must comply with applicable price and volume limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market making average daily trading volume in the Class A Non-Voting Common Stock during a reference period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Class A Non-Voting Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. The Underwriters will not engage in passive market making transactions in or effect transactions which stabilize or maintain the market price of the Class B Voting Common Stock. LEGAL MATTERS The validity of the shares of Class A Non-Voting Common Stock being offered by this Prospectus will be passed upon for Artesian Resources by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Ballard Spahr Andrews & Ingersoll, Philadelphia, Pennsylvania. EXPERTS The consolidated financial statements and schedule of Artesian Resources Corporation as of December 31, 1995 and 1994 and for each of the years then ended included and incorporated by reference in this Prospectus have been so included in reliance on the report of KPMG Peat Marwick LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Artesian Resources Corporation for the year ended December 31, 1993 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. 46 AVAILABLE INFORMATION Artesian Resources is subject to the reporting requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. A Registration Statement on Form S-2, including amendments thereto, relating to the Class A Non-Voting Common Stock offered hereby has been filed by Artesian Resources with the Commission. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which were omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to Artesian Resources and the Class A Non-Voting Common Stock offered hereby, reference is hereby made to the Registration Statement, exhibits and schedules. The Registration Statement, including any amendments, exhibits and schedules thereto, is available for inspection and copying as set forth above. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The Annual Report on Form 10-K of Artesian Resources for the fiscal year ended December 31, 1995 and the Quarterly Report on Form 10-Q for the period ended March 31, 1996 filed by Artesian Resources (File No. 0-18516) with the Commission are incorporated by reference into this Prospectus. Any statement contained in a document, all or a portion of which is incorporated or deemed to be incorporated by reference in this Prospectus, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Neither Artesian Resources nor the Underwriters will update this Prospectus for events occurring subsequent to the date of closing of the purchase by the Underwriters of the shares of Class A Non-Voting Common Stock offered hereby. Artesian Resources will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of the foregoing documents incorporated by reference herein, except for the exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Such requests should be directed to Artesian Resources Corporation, 664 Churchmans Road, Newark, Delaware 19702, Attention: Corporate Secretary (telephone (302) 453-6900). 47 ARTESIAN RESOURCES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Interim Consolidated Financial Statements (Unaudited): Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995............................................................... F-2 Consolidated Statements of Operations for the quarters ended March 31, 1996 and 1995.................................................. F-3 Consolidated Statements of Retained Earnings for the quarters ended March 31, 1996 and 1995............................................ F-4 Consolidated Statements of Cash Flows for the quarters ended March 31, 1996 and 1995.................................................. F-5 Notes to Consolidated Financial Statements.......................... F-6 Reports of Independent Accountants ................................... F-8, F-9 Year-End Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1995 and 1994........ F-10 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993............................................ F-11 Consolidated Statements of Retained Earnings for the years ended December 31, 1995, 1994 and 1993................................... F-12 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993............................................ F-13 Schedule of Capital Stock and Dividends............................. F-14 Schedule of Income Tax Expense...................................... F-15 Notes to Consolidated Financial Statements.......................... F-16
F-1 ARTESIAN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31, 1996 1995 ----------- ------------ (UNAUDITED) ASSETS Utility plant, at original cost less accumulated depreciation......................................... $83,797,312 $83,160,422 ----------- ----------- Current assets Cash and cash equivalents............................ 158,138 149,704 Accounts receivable.................................. 1,789,289 2,133,217 Unbilled operating revenues.......................... 1,429,000 1,332,000 Materials & supplies--FIFO basis..................... 643,085 606,674 Prepaid property taxes............................... 224,233 462,451 Prepaid expenses and other........................... 315,714 236,860 ----------- ----------- 4,559,459 4,920,906 ----------- ----------- Other Assets Non-utility property (less accumulated depreciation 1996--$1,335,950; 1995--$2,108,835)................. 1,034,920 2,952,676 Deferred income taxes................................ 1,765,515 1,764,231 Other deferred assets................................ 1,264,218 1,328,218 ----------- ----------- 4,064,653 6,045,125 ----------- ----------- Regulatory assets..................................... 2,678,156 2,714,713 ----------- ----------- $95,099,580 $96,841,166 =========== =========== LIABILITIES AND CAPITAL Capitalization Common stock......................................... $ 1,042,750 $ 1,037,494 Additional paid-in capital........................... 8,110,481 8,041,183 Retained earnings.................................... 6,427,854 6,317,222 ----------- ----------- Total common stockholders' equity.................... 15,581,085 15,395,899 ----------- ----------- Preferred stock-mandatorily redeemable............... 825,000 972,500 Preferred stock...................................... 271,700 271,700 ----------- ----------- Total preferred stock................................ 1,096,700 1,244,200 ----------- ----------- Long-term debt, net of current portion............... 17,470,601 17,558,300 ----------- ----------- 34,148,386 34,198,399 ----------- ----------- Current liabilities Notes payable........................................ 10,490,000 9,225,000 Current portion of long-term debt.................... 5,334,556 7,345,154 Accounts payable..................................... 1,546,650 2,735,119 Dividends payable.................................... 25,206 Overdraft payable.................................... 1,005,099 669,023 State and federal income taxes....................... 301,540 139,702 Deferred income taxes................................ 166,241 166,241 Interest accrued..................................... 390,037 667,157 Customer deposits.................................... 324,393 321,811 Other................................................ 590,074 577,298 ----------- ----------- 20,173,796 21,846,505 ----------- ----------- Deferred credits and other liabilities Net advances for construction........................ 21,381,993 21,492,568 Postretirement benefit obligation.................... 1,766,435 1,772,960 Deferred investment tax credits...................... 1,050,903 1,060,636 ----------- ----------- 24,199,331 24,326,164 ----------- ----------- Net contributions in aid of construction.............. 16,578,067 16,470,098 ----------- ----------- $95,099,580 $96,841,166 =========== ===========
See Notes to the Consolidated Financial Statements. F-2 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS UNAUDITED
FOR THE QUARTER ENDED MARCH 31, ---------------------- 1996 1995 ---------- ---------- Operating revenues Water sales........................................... $4,931,593 $4,641,471 Other utility operating revenue....................... 58,317 44,903 Non-utility operating revenue (Note 3)................ 79,948 463,585 ---------- ---------- 5,069,858 5,149,959 ---------- ---------- Operating expenses Utility operating expenses............................ 2,740,265 2,780,748 Non-utility operating expenses (Note 3)............... 51,695 366,386 Related party expenses (Note 4)....................... 61,360 61,021 Depreciation and amortization......................... 528,010 536,402 Income taxes.......................................... 253,266 176,200 Taxes other than income............................... 330,834 338,747 Write-down on rental office building.................. 1,633 ---------- ---------- 3,967,063 4,259,504 ---------- ---------- Operating income........................................ 1,102,795 890,455 ---------- ---------- Allowance for funds used during construction............ 35,228 30,338 Other expense........................................... (30,316) (24,965) ---------- ---------- Income before interest charges.......................... 1,107,707 895,828 ---------- ---------- Interest charges Long-term debt........................................ 539,295 564,582 Short-term debt....................................... 171,894 58,154 Amortization of debt expense.......................... 6,571 6,607 Other................................................. 6,872 3,911 ---------- ---------- 724,632 633,254 ---------- ---------- Net income.............................................. 383,075 262,574 Dividends on preferred stock............................ 28,879 32,552 ---------- ---------- Net income applicable to common stock................... $ 354,196 $ 230,022 ========== ========== Per share of common stock: Net income............................................ $ .33 $ 0.22 ========== ========== Cash dividends........................................ $ .21 $ 0.15 ========== ==========
See Notes to the Consolidated Financial Statements. F-3 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF RETAINED EARNINGS UNAUDITED
FOR THE QUARTER ENDED MARCH 31, --------------------- 1996 1995 ---------- ---------- Balance, beginning of period............................. $6,317,222 $5,877,661 Net income............................................... 383,075 262,574 ---------- ---------- 6,700,297 6,140,235 Dividends................................................ 272,443 213,828 ---------- ---------- Balance, end of period................................... $6,427,854 $5,926,407 ========== ==========
See Notes to the Consolidated Financial Statements. F-4 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED
FOR THE QUARTER ENDED MARCH 31, ---------------------- 1996 1995 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME............................................ $ 383,075 $ 262,574 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization......................... 490,789 508,387 Allowance for funds used during construction.......... (35,228) (30,338) Write-down on rental office building.................. 1,633 Changes in Assets and Liabilities: Accounts receivable................................... 343,928 227,859 Unbilled operating revenue............................ (97,000) (64,000) Materials and supplies................................ (36,411) (9,627) State and federal income taxes........................ 161,838 232,878 Prepaid property taxes................................ 238,218 215,123 Prepaid expenses and other............................ (78,854) (113,419) Deferred income taxes, net............................ (11,017) (71,160) Other deferred assets................................. 64,000 87,144 Regulatory assets..................................... 36,557 (10,159) Postretirement benefit obligation..................... (6,525) (18,898) Accounts payable...................................... (1,188,469) (2,094,683) Interest accrued...................................... (277,120) 82,586 Customer deposits and other, net...................... 98,501 97,429 ---------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES....... 87,915 (698,304) ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES Capital expenditures (net of AFUDC)................... (1,281,030) (1,817,971) Proceeds from sale of assets.......................... 1,915,289 ---------- ---------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES....... 634,259 (1,817,971) ---------- ---------- CASH FLOW FROM FINANCING ACTIVITIES Net borrowings under line of credit agreement......... 1,265,000 2,200,000 Overdraft payable..................................... 336,076 184,497 Net advances and contributions in aid of construction. 128,873 319,966 Proceeds from issuance of long-term debt.............. 151,072 Repayment on long-term note........................... (2,005,540) Proceeds from issuance of Common Stock................ 74,554 125,125 Dividends............................................. (272,443) (184,949) Principal payments under capital lease obligations.... (81,647) (108,028) Principle payments under long-term debt obligations... (11,113) (16,668) Retirement of preferred stock......................... (147,500) (147,500) ---------- ---------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....... (713,740) 2,523,515 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 8,434 7,240 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 149,704 229,673 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 158,138 $ 236,913 ========== ========== Supplemental Disclosures of Cash Flow Information: Interest paid......................................... $ 995,181 $ 544,061 Income taxes paid..................................... $ 98,037 $ 5,000
See Notes to the Consolidated Financial Statements. F-5 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED NOTE 1--GENERAL The unaudited consolidated financial statements of Artesian Resources Corporation and its wholly-owned subsidiaries (the "Company" or "Artesian Resources"), including its principle operating company, Artesian Water Company, Inc. ("Artesian Water"), presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 1995 included in this Prospectus. The accompanying financial statements have not been examined by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly summarize the Company's financial position and results of operations. The results of operations for the quarter ended March 31, 1996 may not be indicative of the results that may be expected for the year ending December 31, 1996. NOTE 2--REGULATORY ASSETS Certain expenses, which are recoverable through rates as permitted by the State of Delaware Public Service Commission ("PSC") are deferred and amortized during future periods using various methods. Expenses related to rate proceedings are amortized on a straight-line basis over three years. The post retirement benefit obligation, which is being amortized over twenty years is adjusted for the difference between the net periodic post retirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customer reverse. Regulatory assets, net of amortization, comprise:
MARCH 31, DECEMBER 31, 1996 1995 ---------- ------------ Postretirement benefit obligation.................... $1,766,435 $1,772,960 Deferred income taxes recoverable in future rates.... 736,493 740,267 Expense of rate proceedings.......................... 175,228 201,486 ---------- ---------- $2,678,156 $2,714,713 ========== ==========
NOTE 3--NON-UTILITY OPERATING REVENUE AND EXPENSES Non-utility operating revenue consists of environmental testing revenue received by Artesian Laboratories, Inc. ("Artesian Laboratories") and rental income received by Artesian Development, Corporation ("Artesian Development") as follows:
FOR THE QUARTER ENDED MARCH 31, ---------------- 1996 1995 ------- -------- Artesian Laboratories...................................... $ 0 $385,861 Artesian Development....................................... 79,948 77,724 ------- -------- Total.................................................... $79,948 $463,585 ======= ======== Non-utility operating expenses are as follows: Artesian Laboratories.................................... $ 0 $320,341 Artesian Development..................................... 51,695 46,045 ------- -------- Total.................................................. $51,695 $366,386 ======= ========
See Notes 5 and 6 for additional discussion of the non-utility activities. F-6 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) UNAUDITED NOTE 4--RELATED PARTY TRANSACTIONS The office building and shop complex utilized by Artesian Water are leased at an aggregate annual rental of $204,052 from a partnership, White Clay Realty, in which certain of the Company's officers and directors are partners. The lease expires in 1997, with provisions for renewals for three five year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building are generally comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities. Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly owned by Ellis D. Taylor, Director and Chairman Emeritus of Artesian Resources, at an annual rental of approximately $40,000. The initial term of the lease was for the ten years ended September 30, 1995, and thereafter, renewal is automatic from year to year unless 60 days written notice is given by either party before the end of the year's lease. The annual rental is adjusted each year by the consumer price index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by giving 60 days written notice should the water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely affect its interest in the lease. Expenses associated with related party transactions are as follows:
FOR THE QUARTER ENDED MARCH 31, --------------- 1996 1995 ------- ------- White Clay Realty............................................ $51,013 $51,013 Glendale Enterprises......................................... 10,347 10,008 ------- ------- $61,360 $61,021 ======= =======
NOTE 5--DISPOSAL OF NON-UTILITY ASSETS In March 1996, the Company sold, to an unrelated third party, Artesian Development's rental office building and 4.27 acres of land with a net book value at December 31, 1995 of $2,658,000 for net proceeds of approximately $1,900,000. The sale resulted in a loss of $784,000, which was recognized in the second half of 1995. The proceeds from the sale were used to repay the mortgage on the property and related closing costs. NOTE 6--DISPOSAL OF NON-UTILITY BUSINESS In December 1995, the Board of Directors of Artesian Resources authorized the disposal of substantially all of the net assets of Artesian Laboratories, resulting in an estimated pre-tax loss of $128,000 recorded as an operating expense in 1995. The loss reflects the difference between the projected sales price and the net book value of substantially all the assets and liabilities of the business, and also includes estimated operating losses of $137,000 through the anticipated disposal date and estimated additional expenses associated with completing the sale. F-7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Artesian Resources Corporation: We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, retained earnings, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1995 and 1994 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Artesian Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Wilmington, DE February 15, 1996 F-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Artesian Resources Corporation In our opinion, the accompanying consolidated statements of operations, of retained earnings and of cash flows present fairly, in all material respects, the results of operations and cash flows of Artesian Resources Corporation and its subsidiaries for the year ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Artesian Resources Corporation and its subsidiaries for any period subsequent to December 31, 1993. As discussed in Notes 3 and 11 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes, contributions in aid of construction and post retirement benefits other than pensions. PRICE WATERHOUSE LLP Philadelphia, PA February 15, 1994 F-9 ARTESIAN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEET
DECEMBER 31, ------------------------ 1995 1994 ------------ ----------- ASSETS Utility plant, at original cost less accumulated depreciation........................................ $ 83,160,422 $73,237,887 ------------ ----------- Current assets Cash and cash equivalents........................... 149,704 229,673 Accounts receivable................................. 2,133,217 1,916,760 Unbilled operating revenues......................... 1,332,000 1,070,000 Materials and supplies--at cost on first-in, first- out basis.......................................... 606,674 602,136 State and federal income taxes receivable........... 20,974 Prepaid property taxes.............................. 462,451 430,307 Prepaid expenses and other.......................... 236,860 49,744 ------------ ----------- 4,920,906 4,319,594 ------------ ----------- Other assets Non-utility property (less accumulated depreciation 1995--$2,108,835; 1994--$1,821,430)................ 2,952,676 3,788,205 Deferred income taxes............................... 1,764,231 1,897,853 Other deferred assets............................... 1,328,218 1,553,874 ------------ ----------- 6,045,125 7,239,932 ------------ ----------- Regulatory assets.................................... 2,714,713 2,655,823 ------------ ----------- $96,841,166 $87,453,236 ============ =========== LIABILITIES AND CAPITAL Capitalization Common stock........................................ $ 1,037,494 $ 4,135,610 Additional paid-in capital.......................... 8,041,183 4,714,532 Retained earnings................................... 6,317,222 5,877,661 ------------ ----------- Total common stockholders' equity................... 15,395,899 14,727,803 ------------ ----------- Preferred stock--mandatorily redeemable............. 972,500 1,120,000 Preferred stock..................................... 271,700 271,700 ------------ ----------- 1,244,200 1,391,700 ------------ ----------- Long-term debt, net of current portion.............. 17,558,300 24,653,228 ------------ ----------- 34,198,399 40,772,731 ------------ ----------- Current liabilities Notes payable....................................... 9,225,000 1,525,000 Current portion of long-term debt................... 7,345,154 353,722 Accounts payable.................................... 2,735,119 3,570,646 Overdraft payable................................... 669,023 504,493 State and federal income taxes...................... 139,702 Deferred income taxes............................... 166,241 154,864 Interest accrued.................................... 667,157 628,987 Customer deposits................................... 321,811 316,956 Other............................................... 577,298 280,774 ------------ ----------- 21,846,505 7,335,442 ------------ ----------- Deferred credits and other liabilities Net advances for construction....................... 21,492,568 22,122,733 Postretirement benefit obligation................... 1,772,960 1,797,079 Deferred investment tax credits..................... 1,060,636 1,097,261 Commitments and contingencies (Note 14) 24,326,164 25,017,073 ------------ ----------- Net contributions in aid of construction............. 16,470,098 14,327,990 ------------ ----------- $ 96,841,166 $87,453,236 ============ ===========
The notes and schedules are an integral part of the consolidated financial statements. F-10 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994* 1993* ----------- ----------- ----------- Operating revenues Water sales........................... $20,525,585 $18,720,292 $18,361,140 Other utility operating revenue....... 194,479 217,132 171,112 Non-utility operating revenue (Note 8)................................... 1,911,219 2,074,868 1,807,994 ----------- ----------- ----------- 22,631,283 21,012,292 20,340,246 ----------- ----------- ----------- Operating expenses Utility operating expenses ........... 11,526,523 11,164,912 10,672,362 Non-utility operating expenses (Note 8)................................... 1,613,865 1,605,578 1,502,832 Related party expenses (Note 9)....... 244,424 243,524 242,529 Depreciation and amortization......... 2,239,909 1,985,783 1,955,249 Taxes State and federal income Currently payable................. 668,007 1,169,438 1,074,245 Deferred.......................... 123,431 (205,924) (160,148) Property and other.................... 1,370,395 1,234,821 1,229,882 Write-down on rental office building.. 783,600 Loss on disposal of Artesian Laboratories......................... 127,771 ----------- ----------- ----------- 18,697,925 17,198,132 16,516,951 ----------- ----------- ----------- Operating income........................ 3,933,358 3,814,160 3,823,295 ----------- ----------- ----------- Other (expense) income--net Allowance for funds used during construction......................... 232,096 55,695 13,839 Miscellaneous......................... (199,531) (49,799) (28,171) ----------- ----------- ----------- 32,565 5,896 (14,332) ----------- ----------- ----------- Income before interest charges.......... 3,965,923 3,820,056 3,808,963 ----------- ----------- ----------- Interest charges Long-term debt........................ 2,249,907 2,252,449 2,286,235 Short-term debt....................... 462,626 28,396 55,543 Amortization of debt expense.......... 26,428 26,493 68,436 Other................................. 19,534 26,940 23,835 ----------- ----------- ----------- 2,758,495 2,334,278 2,434,049 ----------- ----------- ----------- Income before cumulative effect of changes in accounting principles....... 1,207,428 1,485,778 1,374,914 Cumulative effect of changes in accounting principles.................. 250,901 ----------- ----------- ----------- Net income.............................. 1,207,428 1,485,778 1,625,815 Dividends on preferred stock............ 119,189 131,391 136,101 ----------- ----------- ----------- Net income applicable to common stock... $ 1,088,239 $ 1,354,387 $ 1,489,714 =========== =========== =========== Per share of common stock: Income before cumulative effect of changes in accounting principles..... $ 1.06 $ 1.34 $ 1.25 Cumulative effect of changes in accounting principles................ .25 ----------- ----------- ----------- Net income............................ $ 1.06 $ 1.34 $ 1.50 =========== =========== =========== Cash dividends........................ $ 0.63 $ 0.60 $ 0.30 =========== =========== ===========
The notes and schedules are an integral part of the consolidated financial statements. *Prior year balances have been reclassified to conform with current year presentation. F-11 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ---------- ---------- ---------- Balance, beginning of year.................... $5,877,661 $5,128,450 $3,937,772 Net income.................................... 1,207,428 1,485,778 1,625,815 ---------- ---------- ---------- 7,085,089 6,614,228 5,563,587 Dividends..................................... 767,867 736,567 435,137 ---------- ---------- ---------- Balance, end of year.......................... $6,317,222 $5,877,661 $5,128,450 ========== ========== ==========
The notes and schedules are an integral part of the consolidated financial statements. F-12 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1994* 1993* ----------- ---------- ---------- Cash flows from operating activities Net income.............................. $ 1,207,428 $1,485,778 $1,625,815 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 2,082,309 1,835,570 1,806,233 Allowance for funds used during construction......................... (232,096) (55,695) (13,839) Write-down on rental office building.. 783,600 Loss on disposal of Artesian Laboratories......................... 127,771 Tax gross-up component of CIAC........ (137,668) Changes in assets and liabilities: Accounts receivable................... (216,457) (247,727) (246,535) Unbilled operating revenues........... (262,000) 131,000 (109,300) Materials and supplies................ (4,538) (91,183) (75,634) State and federal income taxes........ 160,676 274,199 (371,052) Prepaid property taxes................ (32,144) (25,265) (44,729) Prepaid expenses and other............ (187,116) 42,759 56,714 Deferred income taxes, net............ 108,374 (439,146) 828,644 Other deferred assets................. 225,656 140,791 172,795 Regulatory assets..................... (58,890) 159,607 (2,409,376) Postretirement benefit obligation..... (24,119) 195,808 1,601,271 Accounts payable...................... (835,527) 1,291,450 246,322 Interest accrued...................... 38,170 2,112 263,038 Customer deposits and other, net...... 175,511 (104,512) 178,696 ----------- ---------- ---------- Net cash provided by operating activities. 3,056,608 4,595,546 3,371,395 ----------- ---------- ---------- Cash flows used in investing activities Capital expenditures (net of AFUDC)..... (11,992,730) (8,290,309) (3,908,085) Proceeds from sale of assets............ 22,809 9,240 23,272 ----------- ---------- ---------- Net cash used in investing activities..... (11,969,921) (8,281,069) (3,884,813) ----------- ---------- ---------- Cash flows from financing activities Net borrowings (repayments) under line of credit agreement.................... 7,700,000 1,475,000 (5,550,000) Overdraft payable....................... 164,530 504,493 (353,651) Net advances and contributions in aid of construction........................... 1,873,547 1,677,974 1,746,647 Proceeds from issuance of long-term debt................................... 146,206 53,238 12,000,000 Retirement of long-term debt............ (5,277,389) Repayments on term note................. (300,000) Proceeds from issuance of common stock.. 228,535 177,730 141,474 Dividends............................... (767,867) (736,567) (435,137) Principal payments under capital lease obligations............................ (292,435) (234,738) (236,117) Principal payments under long-term debt obligations............................ (71,672) (66,672) (98,448) Redemption of preferred stock........... (147,500) (47,500) (46,500) ----------- ---------- ---------- Net cash provided by financing activities. 8,833,344 2,802,958 1,590,879 ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents.............................. (79,969) (882,565) 1,077,461 Cash and cash equivalents at beginning of year..................................... 229,673 1,112,238 34,777 ----------- ---------- ---------- Cash and cash equivalents at end of year.. $ 149,704 $ 229,673 $1,112,238 =========== ========== ========== Supplemental Disclosures of Cash Flow Information: Interest paid........................... $ 2,693,897 $2,305,673 $2,102,575 Income taxes paid....................... $ 555,000 $ 895,000 $1,445,000 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred...... $ 114,405 $ 301,786 $ 339,239
The notes and schedules are an integral part of the consolidated financial statements. *Prior year balances have been reclassified to conform with current year presentation. F-13 ARTESIAN RESOURCES CORPORATION SCHEDULE OF CAPITAL STOCK AND DIVIDENDS
PAR VALUE OF SHARES CASH SHARES OUTSTANDING DIVIDENDS --------- ----------- --------- PREFERRED STOCK 7% Prior Preferred--$25 Par Value Authorized and Outstanding- at December 31, 1995, 1994, & 1993.......... 10,868 $ 271,700 $ 19,030 MANDATORILY REDEEMABLE Cumulative Prior Preferred Authorized................................... 80,000 Outstanding at December 31: 9 5/8% Series 1995....................................... 600 $ 15,000 $ 1,805 1994....................................... 1,200 30,000 3,248 1993....................................... 1,800 45,000 4,692 8 1/2% Series 1995....................................... 1,500 $ 37,500 $ 3,453 1994....................................... 2,000 50,000 4,516 1993....................................... 2,500 62,500 5,557 11 1/8% Series 1995....................................... 800 $ 20,000 $ 2,781 1994....................................... 1,600 40,000 5,006 1993....................................... 2,400 60,000 7,232 9.96% Series 1995....................................... 36,000 $ 900,000 $ 92,130 1994....................................... 40,000 1,000,000 99,600 1993....................................... 40,000 1,000,000 99,600 COMMON STOCK Class A Non-Voting--$1 Par Value (No Par Value at December 31, 1994 & 1993), Authorized 1995 (1,000,000 authorized in 1994 and 1993)...... 3,500,000 Outstanding at December 31: 1995....................................... 538,559 $ 538,559 $334,573 1994....................................... 519,613 3,637,826 307,835 1993....................................... 507,925 3,517,129 151,229 Class B Voting--$1 Par Value Authorized 1995, (520,000 authorized in 1994, and 1993) 1,040,000 Outstanding at December 31: 1995....................................... 498,935 $ 498,935 $314,285 1994....................................... 497,784 497,784 297,342 1993....................................... 493,831 493,831 147,808
F-14 ARTESIAN RESOURCES CORPORATION SCHEDULE OF INCOME TAX EXPENSE
FOR THE YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- State Income Taxes Current........................................ $140,716 $235,103 $259,730 Deferred--current Property taxes............................... 3,116 2,078 3,601 Deferred--non-current Accelerated depreciation..................... 223,781 135,072 151,316 Rate case expenses........................... 8,268 (13,152) (15,702) Taxable contractor advances and contributions in aid of construction...................... (119,793) (134,007) (163,935) Other........................................ 10,153 3,933 (3,650) -------- -------- -------- Total State Income Tax Expense............. $266,241 $229,027 $231,360 ======== ======== ======== Federal Income Taxes Current........................................ $527,291 $934,335 $814,515 Deferred--current Property taxes............................... 9,870 7,884 13,984 Deferred non-current Alternative minimum tax...................... (130,417) Accelerated depreciation..................... 681,145 470,797 541,008 Rate case expenses........................... 29,501 (46,928) (56,025) Taxable contractor advances and contributions in aid of construction...................... (427,426) (478,141) (584,929) Amortization of investment tax credits....... (36,455) (37,257) (38,040) Write-down on rental building and Artesian Laboratories................................ (309,882) Amortization of regulatory asset for deferred taxes....................................... 15,096 Other........................................ 36,057 14,214 (7,776) -------- -------- -------- Total Federal Income Tax Expense........... $525,197 $734,487 $682,737 ======== ======== ========
1995 1994 1993 ----------------- ----------------- ----------------- AMOUNT % AMOUNT % AMOUNT % ---------- ----- ---------- ----- ---------- ----- Reconciliation of Effective Tax Rate Income before federal and state income taxes and cumulative effect of changes in accounting principles; less amortization of deferred investment tax credits......... $1,998,866 100.0 $2,449,292 100.0 $2,289,011 100.0 ========== ===== ========== ===== ========== ===== Amount computed at statutory rate...... $ 679,615 34.0 $ 832,759 34.0 $ 778,264 34.0 Reconciling items State income tax-- net of federal tax benefit........... 175,719 8.8 151,158 6.2 152,698 6.7 Allowance for funds used during construction not treated as income for tax purposes.... (78,913) (3.9) (18,936) (0.8) (4,705) (0.2) Other................ 15,017 0.8 (1,467) (0.1) (12,160) (0.5) ---------- ----- ---------- ----- ---------- ----- Total Income Tax Expense and Effective Rate.... $ 791,438 39.7 $ 963,514 39.3 $ 914,097 40.0 ========== ===== ========== ===== ========== =====
F-15 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation--The consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly-owned subsidiaries (Artesian Resources), including its principal operating company, Artesian Water Company, Inc. (Artesian Water). Appropriate eliminations have been made of all material intercompany transactions and account balances. Utility subsidiary accounting--The accounting records of Artesian Water are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission (PSC). Artesian Water follows the provisions of Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation," which provides guidance for companies in regulated industries. Utility plant and capitalized leases--All additions to plant are recorded at cost. Cost includes direct labor, materials, and indirect charges for such items as transportation, supervision, pension and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the cost of retired property, together with any cost associated with retirement and less any salvage value or proceeds received, is charged to accumulated depreciation. Maintenance, repairs and replacement of minor items of plant are charged to expense. In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction (AFUDC). AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's weighted average cost of debt and the rate of return on equity authorized by the PSC. Plant comprises:
DECEMBER 31, ------------------------ 1995 1994 ------------ ----------- Utility plant, at original cost Utility plant in service Intangible plant.................................. $ 100,536 $ 100,536 Source of supply plant............................ 3,121,095 2,365,510 Pumping and water treatment plant................. 8,338,940 4,573,706 Transmission and distribution plant............... 81,412,640 74,614,620 General plant....................................... 8,701,957 8,290,307 Property held for future use........................ 1,200,402 588,564 Construction work in progress....................... 1,558,691 2,150,995 ------------ ----------- 104,434,261 92,684,238 Less--accumulated depreciation...................... 21,273,839 19,446,351 ------------ ----------- $ 83,160,422 $73,237,887 ============ ===========
Non-utility property primarily comprises an office building, laboratory equipment, and furniture and equipment of the non-utility subsidiaries. Depreciation and amortization expense of this property aggregated approximately $294,300, $348,900, and $297,200 in 1995, 1994, and 1993, respectively. Depreciation and amortization--For financial reporting purposes, depreciation is provided using the straight-line method at rates based on estimated economic useful lives which range from 3 to 80 years. Composite depreciation rates for utility plant were 2.12%, 2.25%, and 2.16% as of December 31, 1995, 1994, F-16 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and 1993, respectively. In rate orders issued by the PSC, Artesian Water was directed effective May 28, 1991 and August 25, 1992 to offset depreciation on utility property funded by Contributions in Aid of Construction (CIAC) and Advances for Construction (Advances), respectively, against CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives which range from 2 to 10 years. The expense which would result from depreciating Artesian Water's leased office building and shop complex on a straight-line basis over the lease term is not an allowable cost of service. Thus, depreciation of the leased property has been modified so that the total interest on the lease obligation and depreciation of the leased property is equal to the rental expense that is allowed for rate making purposes. Regulatory assets--Certain expenses, which are recoverable through rates as permitted by the PSC, are deferred and amortized during future periods using various methods. Expenses related to rate proceedings are amortized on a straight-line basis over 3 years. The post retirement benefit obligation, which is being amortized over 20 years is adjusted for the difference between the net periodic post retirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customer reverse. Regulatory assets at December 31, net of amortization, comprise:
1995 1994 ---------- ---------- Post retirement benefit obligation..................... $1,772,960 $1,797,079 Deferred income taxes recoverable in future rates...... 740,267 755,363 Expense of rate proceedings............................ 201,486 103,381 ---------- ---------- $2,714,713 $2,655,823 ========== ==========
Income taxes--Beginning in 1993, deferred income taxes are provided in accordance with the provisions of Statement of Financial Accounting Standards No. 109, (Accounting for Income Taxes) (SFAS 109) on all differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The effects of adopting SFAS 109 are explained in more detail in Note 3. The difference between state income tax at the statutory rate of 8.7% and the effective rate of 13.3%, 9.2%, and 10.2% in 1995, 1994, and 1993, respectively, is primarily attributable to Artesian Resources filing a separate state tax return for each of its subsidiaries as required, whereby current year losses of certain subsidiaries can not be offset against taxable income of others. The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income to Artesian Water. For Advances, Artesian Water was directed by the PSC to pay the related taxes and collect amounts equal to the taxes paid from the developer. For CIAC, Artesian Water was directed to pay the taxes instead of the developer contributing the taxes. Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets. Earnings per share--Per share earnings applicable to common stock are calculated on the basis of weighted average number of shares outstanding as follows: 1995--1,030,559; 1994--1,010,351; 1993--994,766. Revenue recognition and unbilled revenues--Water service revenue for financial statement purposes includes amounts billed to customers on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period. The accrual for unbilled revenue is reduced by the unearned portion of charges for water service billed in advance. F-17 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cash and cash equivalents--For purposes of the Statement of Cash Flows, Artesian Resources considers all temporary cash investments with a maturity of three months or less to be cash equivalents. Artesian Water utilizes its bank's controlled disbursement product to reduce the use of its line of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding but not yet funded exceed the cash balance on Artesian Water's books, the net liability is recorded as a current liability on the balance sheet in the "overdraft payable" account. Use of estimates in the preparation of consolidated financial statements-- The consolidated financial statements were prepared in conformity with generally accepted accounting principles, which require management to make estimates that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimate. NOTE 2. SFAS 107 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Current assets and liabilities--For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments. Long term financial liabilities--The fair value of Artesian Resources' long term debt and mandatorily redeemable preferred stock as of December 31, 1995, determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities, are as follows:
CARRYING AMOUNT ESTIMATED FAIR VALUE --------------- -------------------- Long term debt.......... $17,558,000 $20,168,000 Mandatorily redeemable preferred stock......... $ 972,500 $ 629,000
The fair value of advances for construction cannot be reasonably estimated due to the inability to accurately estimate future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. Future refunds expected to be paid would have to be estimated on a per contract basis using the past history of refund payments. The fair value of advances for construction would be less than the carrying amount because these financial instruments are non-interest bearing. NOTE 3. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1993, Artesian Resources adopted the provisions of SFAS 109, "Accounting for Income Taxes," on a prospective basis. The Statement requires deferred income taxes to be provided on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. SFAS 109 requires rate regulated enterprises to provide deferred taxes on all temporary differences including those not previously recognized when the tax effects of the difference are, at the discretion of the regulator, flowed through to customers. Regulated enterprises are also required to recognize regulatory assets and liabilities for the effect on revenue expected to be realized as the tax effects of temporary differences previously flowed through to the customer reverse. In 1993, Artesian Resources recognized a one-time benefit of approximately $113,000 associated with the effects of adopting SFAS 109, related to its non-regulated subsidiaries. F-18 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective January 1, 1993, Artesian Water changed its method of accounting to recognize amounts received from the tax gross-up on CIAC in 1987 and 1988 as income. Artesian Water received a tax gross-up from developers on CIAC contracts in 1987 and 1988 only. Prior to this change in its method of accounting, the tax gross-up remained in CIAC even though it was not a reduction in rate base for regulatory purposes. The cumulative effect of this change in accounting policy was a $138,000 increase to net income for the year ended December 31, 1993. NOTE 4. INCOME TAXES Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Property, plant and equipment basis differences..... $1,477,858 $1,962,855 State operating loss and federal tax credit carry forwards........................................... 1,154,485 824,027 ---------- ---------- Gross deferred tax assets........................... 2,632,343 2,786,882 Valuation allowance................................. (802,316) (598,505) ---------- ---------- 1,830,027 2,188,377 Taxes recoverable in future rates................... (197,458) (197,458) Expenses of rate proceedings........................ (67,336) (29,567) Other............................................... 198,998 (63,499) ---------- ---------- Deferred tax liabilities............................ (65,796) (290,524) ---------- ---------- Net noncurrent deferred tax asset................... $1,764,231 $1,897,853 ========== ========== Current deferred tax liability--property taxes...... $ (166,241) $ (154,864) ========== ==========
For state income tax purposes, net operating losses generated by the non- regulated subsidiaries can be carried forward through the year ending December 31, 2009. Artesian Resources has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of the state net operating loss carry forwards. The valuation allowance increased from $598,505 in 1994 to $802,313 in 1995 as a result of increased state net operating loss carry forwards. See the Schedule of Income Tax Expense. NOTE 5. PREFERRED STOCK Artesian Resources has two classes of preferred stock outstanding. The 7% Prior Preferred stock (on which dividends are cumulative) is redeemable at Artesian Resources' option at $30 per share plus accrued dividends. The Cumulative Prior Preferred stock has annual mandatory redemption requirements and is redeemable at Artesian Resources' option at various declining prices ranging from $25.18 through January 31, 1996, to $25.00 after February 1, 2003. Under mandatory sinking fund provisions, redemptions will aggregate $147,500 (5,900 shares) in 1996; $112,500 (4,500 shares) in 1997 and 1998; and $100,000 (4,000 shares) in 1999 and 2000. The Company also has 100,000 shares of $1 par value Series Preferred stock authorized but unissued. See the Schedule of Capital Stock and Dividends. F-19 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL On May 23, 1995, $3,215,718 was reclassified on the balance sheet between common stock and additional paid in capital, including $97,505 for stock options exercised and dividends reinvested in the first quarter of 1995. The reclassification was the result of shareholder approval of changing the Class A Stock from no par stock to stock with a par value of $1.00 per share. As part of Artesian Water's 1992 rate increase settlement agreement, Artesian Resources' cash dividends were limited to 50% of earnings per share until May 9, 1995 when the 1994 rate increase application was approved by the PSC. Contributions to the Tax Reduction Act Employees' Stock Ownership Plan (PAYSOP) by Artesian Resources for the purchase of its Class B Common stock on behalf of employees were limited to dividend reinvestments in 1995, 1994, and 1993. Under Artesian Resources' dividend reinvestment plan, stockholders were issued 9,863, 10,552 and 5,938 shares at fair market value for the reinvestment of $145,076, $128,342 and $60,406 of their cash dividends for the years 1995, 1994 and 1993, respectively. Additional paid-in capital was increased by the excess of the market value, or exercise price in the case of stock options, over the par value of the Class B Common and Class A Non-Voting Common Stock issued as follows:
1995 1994 1993 ---------- ---------- ---------- Balance at beginning of year.............. $4,714,532 $4,661,452 $4,630,022 Par value adjustment on Class A Non- Voting Common Stock.................... 3,118,213 Stock options exercised................. 109,837 2,505 14,704 Dividend reinvestment................... 135,213 50,575 16,726 Treasury Stock purchased................ (36,612) ---------- ---------- ---------- Balance at end of year.................... $8,041,183 $4,714,532 $4,661,452 ========== ========== ==========
See the Schedule of Capital Stock and Dividends. NOTE 7. DEBT Artesian Water has available unsecured lines of credit, with no financial covenant restrictions, totaling $15,000,000 at December 31, 1995 which are renewable annually at the bank's discretion. Borrowings under the lines of credit bear interest based on the London Interbank Offering Rate (LIBOR) plus 1.5% for 30, 60, 90, or 180 days or the bank's National Credit Rate (NCR) at the option of Artesian Water. Artesian Water had $9,200,000 and $1,500,000 outstanding under these lines at December 31, 1995 and 1994, respectively. Artesian Water had no outstanding borrowings under these lines at December 31, 1993. The maximum amount outstanding was $9,500,000, $1,700,000 and $5,350,000 in 1995, 1994, and 1993, respectively. The average amount outstanding was approximately $5,350,000, $750,000, and $2,763,000, at weighted average annual interest rates of 7.8%, 7.4%, and 6.0% in 1995, 1994, and 1993, respectively. Artesian Laboratories has a line of credit with a bank totaling $75,000 at December 31, 1995, secured by equipment and accounts receivable, and guaranteed by Artesian Resources and its subsidiaries other than Artesian Water. Artesian Laboratories had $25,000 outstanding under this line at December 31, 1995 and 1994, and $50,000 outstanding at December 31, 1993. Borrowings under this line of credit bear interest at the bank's NCR plus 0.50%. F-20 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On February 16, 1993 and with approval of the PSC, Artesian Water issued $10 million of 8.03% Series L First Mortgage Bonds. The funds were used to retire Artesian Water's outstanding Series E, F, G, and H First Mortgage Bonds (Bonds) totaling $3,311,000 with higher interest rates ranging from 8-1/2% to 10-7/8%. In addition, the funds were used to repay Artesian Water's borrowings outstanding under its line of credit totaling $5,400,000. The remaining funds were used to finance capital expenditures. Since the Bonds listed above were all retired prior to their stated maturity, Artesian Water was required to pay a call premium ranging from 1.417% to 2.566% of the outstanding principal amount. The total premium paid was $65,420. With the issuance of the Series L First Mortgage Bonds and the retirement of the Series E, F, G, and H First Mortgage Bonds, required principal repayments over the next five years consist of a $5,000,000 payment in December 1996 for the retirement of the Series J First Mortgage Bonds. No other repayments or sinking fund deposits are required during this period. As of December 31, 1995 and 1994 substantially all of Artesian Water's utility plant was pledged as security for the First Mortgage Bonds. In addition, the trust indentures contain covenants which limit long-term debt, including the current portion thereof, to 66 2/3% of total capitalization including the current portion of the long-term debt, and which, in certain circumstances, could restrict the payment of cash dividends. As of December 31, 1995, however, no dividend restrictions were imposed under these covenants. On April 13, 1993, Artesian Development refinanced the 10.1% Economic Development Bond and the 10% Building Mortgage Bond which were originally used to finance the construction of the County Commerce Office Park (CCOP). Payments on this $2,000,000, 7.9% mortgage bond are based on a 30-year amortization period with level principal payments of $5,556 for 36 months beginning May 15, 1993, with a balloon payment of approximately $1,800,000 due April 15, 1996. Artesian Development's annual principal and interest payments for this mortgage will total approximately $1,867,000 for 1996. Beginning in November 1994, Artesian Development financed heating and air conditioning improvements at the CCOP with a $200,000 second mortgage. Payments on the $200,000, 8.3% mortgage, are based on a 30-year amortization period with level principal payments of $556 for 16 months beginning December 15, 1994, with a balloon payment of approximately $191,111 due April 15, 1996. Artesian Development's building mortgages, with a principal balance of $2,017,000 at December 31, 1995, are secured by a building with a net book value, after the loss write-down, of approximately $1,874,000 at December 31, 1995, as well as by an option by the Bank to have a blanket assignment of all leases and rents entered into at the CCOP and a third lien assignment of any dividends payable from Artesian Water to Artesian Development. Both of Artesian Development's building mortgages will be paid in full in March 1996 when the rental office building will be sold (see Note 12.) Long-term debt consists of:
DECEMBER 31, ----------------------- 1995 1994 ----------- ----------- First mortgage bonds Series J, 9.55% due December 1, 1996............................................... Series J, 9.55% due December 1, 1996.............. $ 5,000,000 $ 5,000,000 Series K, 10.17% due March 1, 2009................ 7,000,000 7,000,000 Series L, 8.03% due February 1, 2003.............. 10,000,000 10,000,000 ----------- ----------- 22,000,000 22,000,000 Capitalized lease obligations....................... 886,803 1,064,832 Building mortgage on non-utility property 7.90% due April 15, 1996..................................... 1,823,873 1,888,880 Building mortgage on non-utility property 8.30% due April 15, 1996..................................... 192,778 53,238 ----------- ----------- 24,903,454 25,006,950 Less current maturities........................... 7,345,154 353,722 ----------- ----------- $17,558,300 $24,653,228 =========== ===========
F-21 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8. NON-UTILITY OPERATING REVENUE AND EXPENSES Non-utility operating revenue consists of environmental testing revenue received by Artesian Laboratories and rental income received by Artesian Resources and Artesian Development as follows:
1995 1994 1993 ---------- ---------- ---------- Artesian Laboratories(1).................. $1,616,074 $1,785,891 $1,528,892 Artesian Development(2)................... 295,145 288,132 218,801 Artesian Resources........................ 845 60,301 ---------- ---------- ---------- Total................................... $1,911,219 $2,074,868 $1,807,994 ========== ========== ========== Non-utility operating expenses are as follows: 1995 1994 1993 ---------- ---------- ---------- Artesian Laboratories(1).................. $1,365,842 $1,338,838 $1,229,048 Artesian Development(2)................... 241,649 266,541 215,797 Artesian Resources........................ 6,374 199 57,987 ---------- ---------- ---------- Total................................... $1,613,865 $1,605,578 $1,502,832 ========== ========== ==========
(1) See discussion in footnote 13. (2) See discussion in footnote 12. Effective April 1, 1993, the rental operations for the CCOP, previously conducted under Artesian Resources, were reorganized and are conducted under Artesian Development. All operating revenues and expenses associated with the CCOP are reflected under Artesian Development for the nine months ended December 31, 1993 and for the years ended December 31, 1994 and 1995. This reorganization occurred in conjunction with the refinancing of the mortgage bonds, discussed in Note 7, which were originally used to finance the construction of CCOP. NOTE 9. RELATED PARTY TRANSACTIONS The office building and shop complex utilized by Artesian Water are leased at an aggregate annual rental of $204,052 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The lease expires in 1997, with provisions for renewals for three five year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building are generally comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities. (See Note 14). Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly owned by Ellis D. Taylor, Director and Chairman Emeritus of Artesian Resources, at an annual rental of approximately $40,000. The initial term of the lease was for ten years ending September 30, 1995 and, thereafter, renewal is automatic from year to year unless 60 days written notice was given by either party before the end of the year's lease. The annual rental is adjusted each year by the consumer price index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by giving 60 days written notice should the water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely affect its interest in the lease. Expenses associated with related party transactions are as follows:
1995 1994 1993 -------- -------- -------- White Clay Realty................................. $204,052 $204,052 $204,052 Glendale Enterprises.............................. 40,372 39,472 38,477 -------- -------- -------- Total........................................... $244,424 $243,524 $242,529 ======== ======== ========
F-22 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10. STOCK OPTION PLANS Artesian Resources has a stock option plan under which options to purchase shares of Class B Common Stock may be granted to directors, officers, and employees of Artesian Resources at prices not less than 85% of the estimated fair market value at the date of the grant. Options so granted extend for a period of five years, are exercisable after six months of service from date of initial grant and after one year of service to Artesian Resources, and are adjusted for stock dividends and splits. At December 31, 1995 and 1994, no shares of Class B Common Stock were available for future grants. On February 26, 1992, the Board of Directors adopted the 1992 Non-qualified Stock Option Plan (the Plan), under which options may be granted to purchase up to 50,000 shares, subject to certain adjustments, of Artesian Resources' Class A Non-Voting Common Stock. Options to purchase shares of Class A Non- Voting Common Stock may be granted to employees at prices not less than 85% of the fair market value on the date of grant. Employees who participate and who are not executive officers or directors of Artesian Resources may receive options to purchase up to 1,000 shares. Each director or officer who participates in any year receives an option to purchase 3,000 shares of stock. The option price for directors and officers of Artesian Resources is 90% of the fair market value on the date of grant. Options granted under this plan extend for a period of one year, are exercisable after six months of service from the date of initial grant, after one year of service to Artesian Resources, and are adjusted for stock dividends and splits. No more than 34 Directors, officers and employees are permitted to participate in the Plan each year. The following summary reflects changes in shares under option:
CLASS B OPTION SHARES ------------------------ 1995 1994 1993 ------- ------ ------- Options outstanding at beginning of year (1995 & 1994--$12.75; 1993--$13.88 to $12.75).......................... 620 792 3,574 Exercised (1995 & 1994--$12.75; 1993--$13.88 to $12.75).......................................... (179) (172) (1,013) Options reverting back to the plan during the year............................................. (441) (1,769) ------- ------ ------- Options outstanding and exercisable at end of year (1994 & 1993--$12.75)............................ 0 620 792 ======= ====== ======= CLASS A OPTION SHARES ------------------------ 1995 1994 1993 ------- ------ ------- Options outstanding at beginning of year (1995, 1994 & 1993--$8.55 to $8.08)..................... 18,231 12,648 24,710 Granted (1995--$11.26 to $12.49, 1994 & 1993-- $8.55 to $8.08).................................. 25,450 18,200 12,790 Exercised (1995--$8.08 to $11.26, 1994--$8.55 to $8.08)........................................... (12,467) (4,917) (6,849) Options reverting back to plan during the year.... (6,151) (7,700) (18,003) ------- ------ ------- Options outstanding and exercisable at end of year (1995--$11.26 to $12.49, 1994 & 1993--$8.55 to $8.08)........................................... 25,063 18,231 12,648 ======= ====== =======
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which requires disclosure regarding the fair value based method of accounting for stock-based employee compensation arrangements, and encourages the use of the fair value based method to determine compensation expense. SFAS 123 allows for continued use of the intrinsic value based method of Opinion 25. The disclosure requirements of SFAS 123 are effective for financial statements for fiscal years beginning after December 15, 1995. Artesian Resources will adopt SFAS 123 in 1996, and estimates that SFAS 123 will not have a material effect on Artesian Resources' financial position or results of operation. F-23 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11. EMPLOYEE BENEFIT PLANS 401(k) Plan--Artesian Resources has a defined contribution 401(k) Salary Reduction Plan which covers substantially all employees. Under the terms of the Plan, Artesian Resources contributes 2% of eligible salaries and wages and matches employee contributions up to 6% of gross pay at a rate of 50%. Artesian Resources may, at its option, make additional contributions of up to 3% of eligible salaries and wages. For 1993, Resources contributed an additional $45,069 representing 1% of eligible salaries and wages. No such additional contributions were made in 1995 and 1994. Plan expenses, which include company contributions and administrative fees, for the years 1995, 1994, and 1993 (including the additional 1% discussed above), were approximately $239,000, $260,000, and $283,000, respectively. Postretirement Benefit Plan--Artesian Resources provides medical and life insurance benefits to certain retired employees. Prior to the amendment of the plan, as described below, substantially all employees could become eligible for these benefits if they reached retirement age while still working for Artesian Resources. In the first quarter of 1993, Artesian Resources adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). The Statement requires Artesian Water to accrue the expected cost of providing postretirement health care and life insurance benefits as employees render the services necessary to earn the benefits. Artesian Water elected to defer recognition and amortize its approximately $3,080,000 transition obligation over twenty years, of which $154,000 was recognized at December 31, 1993. In February of 1994, Artesian Water amended its Plan effective January 1, 1993 to reduce eligibility under the Plan. As a result of the amendment, only current retirees and certain "grandfathered" active employees are eligible for benefits. The amendment had the effect of reducing the unrecognized obligation by approximately $1,460,000 to $1,620,000, and eligible participants by 108 to 23. The amendment also had the effect of curtailing the Plan. This curtailment resulted in a curtailment loss of approximately $1,450,000. This loss, when added to the 1993 amortization of $154,000 increased the Company's recorded liability with respect to FAS 106 to approximately $1,600,000. At December 31, 1993, 1994, and 1995 Artesian Water recognized an offsetting regulatory asset with respect to the FAS 106 liability. This asset is recorded based on the PSC order which permits Artesian Water to continue recovery of postretirement health care and life insurance expense on a pay-as-you-go basis for the remaining eligible employees. Artesian Water anticipates liquidating its FAS 106 obligation and substantially recovering the expenses in rates over a period of approximately 20 years (based on the age and life expectancy of the remaining eligible participants). Further, expense recovery as a percentage of rates is expected to remain constant over the initial years, and then decline until the obligation is liquidated. Amounts charged to expense were $105,300, $107,500, and $99,100, for 1995, 1994 and 1993 respectively. F-24 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the amount recognized in Artesian Resources' balance sheet for the Plan:
1995 1994 Status of the Plan as of December 31, ----------- ----------- Accumulated Postretirement Benefit Obligation Retirees............................................ $(1,175,129) $(1,040,262) Actives fully eligible.............................. (228,980) (238,509) ----------- ----------- Total Accumulated Postretirement Benefit Obligation....................................... (1,404,109) (1,278,771) Unrecognized: Transition obligation............................... 153,000 161,500 Net gain from changes in assumptions................ (521,851) (679,808) ----------- ----------- Postretirement benefit obligation..................... $(1,772,960) $(1,797,079) =========== =========== 1995 1994 Net Periodic Postretirement Benefit Cost for: ----------- ----------- Interest cost......................................... $ 103,643 $ 120,403 Amortization of transition obligation................. 8,500 8,500 ----------- ----------- Total Net Periodic Postretirement Benefit Cost.... 112,143 128,903 Amounts charged to expense............................ 105,300 107,500 ----------- ----------- Increase in Regulatory Asset.......................... $ 6,843 $ 21,403 =========== ===========
For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 5% through the year 2006 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase in the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $115,552 and the interest cost component of net periodic postretirement benefit cost for the year then ended by $7,560. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 8.5% for the years ended December 31, 1995 and 1994, respectively. Supplemental Pension Plan--Effective October 1, 1994, Artesian Water established a Supplemental Pension Plan to provide additional retirement benefits to full time employees hired prior to April 26, 1994. The purpose of the Supplemental Plan is to help employees save for future retiree medical costs, which will be paid by employees. The Supplemental Plan accomplishes this objective by providing additional cash resources to employees upon a termination of employment or retirement, to meet the cost of future medical expenses. Artesian Water has established a contribution based upon each employee's years of service ranging from 2% to 6% of eligible salaries and wages. Artesian Water also provides additional benefits to individuals who were over age 50 as of January 1, 1994. These individuals are referred to as the "Transition Group". Effective November 1, 1994, individuals eligible for the Transition Group had the opportunity to defer compensation to the Supplemental Plan, and to receive a Transition Matching Contribution for 5 years. Each $1 of eligible salaries and wages deferred by the Transition Group is matched with $3, $4, or $5 by Artesian Water based on the employee's years of service subject to certain limitations under the federal tax rules. Plan expenses for 1995 and 1994 were approximately $221,000 and $59,000, respectively. NOTE 12. DISPOSAL OF NON-UTILITY ASSETS In October 1995, Artesian Development entered into an agreement with an unrelated third party for the sale of its rental office building and 4.27 acres of land with a net book value of $2,658,000 at December 31, 1995 for $2,050,000, resulting in a loss of $784,000. The loss reflects the difference between the net book value and the F-25 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) selling price, and also includes $176,000 in expenses associated with completing the sale. The loss on disposal of this building, net of tax benefit, reduced earnings per share by $0.50 for the year ended December 31, 1995. The sale of this rental office building is expected to be complete in March 1996. NOTE 13. DISPOSAL OF NON-UTILITY BUSINESS In December 1995, the Board of Directors of Artesian Resources authorized the disposal of substantially all of the net assets of Artesian Laboratories, resulting in an estimated pre-tax loss of $128,000 recorded as an operating expense in 1995. The loss reflects the difference between the projected sales price and the net book value of substantially all the assets and liabilities of the business, and also includes estimated operating losses through the anticipated disposal date of $137,000 and estimated additional expenses associated with completing the sale. The estimated loss, net of tax benefit, associated with the disposal of Artesian Laboratories, reduced earnings per share by $0.08 for the year ended December 31, 1995. NOTE 14. COMMITMENTS The office building and shop complex are leased at an aggregate annual rental of $204,052 from a partnership, White Clay Realty (See Note 9). Artesian Water may terminate the lease at any time by purchasing the leased facilities for (1) an amount equal to the sum of any mortgage on such facilities and any accrued rental to date or (2) its fair market value, whichever is higher. This lease is accounted for as a capital lease; accordingly, the present value of all future payments for the leased property at the inception of the lease ($1,870,000) was recorded in General Plant and in Capitalized Lease Obligations. Artesian Water and Artesian Laboratories have entered into several three-year and five-year leases for computer and laboratory equipment which have also been recorded as capital leases. Future minimum annual rental payments under these capitalized lease obligations for the five years subsequent to 1995 and the present value of the minimum lease payments as of December 31, 1995, are as follows:
ARTESIAN ARTESIAN WATER ARTESIAN LABORATORIES WATER COMPUTER LABORATORY OFFICE BUILDING EQUIPMENT EQUIPMENT(1) --------------- -------------- --------------------- 1996.................... $204,052 $ 57,770 $165,502 1997.................... 204,052 57,770 146,313 1998.................... 57,770 67,407 1999.................... 48,474 23,845 2000.................... 16,654 9,871 -------- -------- -------- Minimum lease payments.. 408,104 238,438 412,938 Less amount representing interest............... 43,549 60,188 68,138 -------- -------- -------- Present value of minimum lease payments......... $364,555 $178,250 $344,800 ======== ======== ========
(1) See discussion in footnote 13. Artesian Water entered an agreement for a water service interconnection with the Chester Water Authority (Chester Water) which provides an average daily supply of four million gallons. Construction of the interconnection was completed during September 1992. Artesian Water paid Chester 50% of the shared costs of the interconnection, as defined in the agreement. Artesian Water's total cost incurred for this project was $1,527,416. Chester Water will annually refund 10% of the actual purchased water charges paid by Artesian Water during the first five years the interconnection is in operation, not to exceed the total shared costs of the work actually paid by Artesian Water. The agreement also requires that Artesian Water make specified minimum F-26 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) annual purchases during an initial ten-year term. Subject to extension of the supply permits by the appropriate regulatory authorities, and Chester Water's right to terminate the agreement at the end of each renewal period beyond December 31, 2002 by giving sixty days notice, the agreement is renewable for successive one-year terms beyond December 31, 2002. Artesian Water also has two other water service interconnection agreements with a neighboring utility which require minimum annual purchases. Rates charged under all agreements are subject to change. The minimum annual purchase commitments for all interconnection agreements for 1996 through 2000 and the aggregate total for the two years 2001 through 2002, at current rates, are as follows: 1996.......................................................... $ 2,357,357 1997.......................................................... 2,306,051 1998.......................................................... 2,433,946 1999.......................................................... 2,433,946 2000.......................................................... 2,433,946 2001 & thereafter............................................. 4,259,405 ----------- $16,224,651 ===========
Payments for purchased water made under all interconnection agreements were $2,491,433, $2,716,188 and $2,489,039 for the years ended December 31, 1995, 1994, and 1993, respectively. Budgeted mandatory utility plant expenditures expected to be incurred in 1996 through 2000, due to planned state highway projects which require the relocation of Artesian Water's water service mains are as follows: 1996........................................................... $2,300,000 1997........................................................... 1,100,000 1998........................................................... 250,000 1999........................................................... 1,500,000 2000........................................................... 2,000,000 ---------- $7,150,000 ==========
The exact timing and extent of these relocation projects is controlled by the Delaware Department of Transportation. Following the sale of Artesian Development's County Commerce Office Park rental office building in March 1996, Artesian Water and Artesian Laboratories will have ten year lease commitments. The minimum lease commitments for 1996 through 2000 and the aggregate total for the five years 2001 through 2006, at current rates, are as follows:
ARTESIAN WATER ALI -------- ---------- 1996.................................................. $ 50,762 $ 92,667 1997.................................................. 62,315 113,755 1998.................................................. 63,995 116,820 1999.................................................. 65,676 119,884 2000.................................................. 67,356 122,949 2001 & thereafter..................................... 374,659 683,843 -------- ---------- $684,763 $1,249,918 ======== ==========
F-27 ARTESIAN RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15. GEOGRAPHIC CONCENTRATION OF CUSTOMERS Artesian Water provides water utility service to customers within its established service territory in portions of New Castle County, Delaware, pursuant to rates filed with and approved by the Delaware Public Service Commission. As of December 31, 1995, Artesian Water is serving 56,672 customers. Artesian Laboratories provides environmental testing services of water, waste water and solids principally to third parties as well as to Artesian Water. Artesian Laboratories is permitted to conduct business in the states of Delaware, Maryland, Pennsylvania and New Jersey and is serving approximately 286 customers as of December 31, 1995. The customer breakdown by state is approximately 174 in Delaware, 83 in Maryland, 24 in Pennsylvania, and 5 in New Jersey. F-28 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING OF SHARES OF CLASS A NON-VOTING COMMON STOCK COV- ERED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ARTESIAN RESOURCES OR ANY OF THE UN- DERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICI- TATION OF AN OFFER TO BUY, ANY SHARES OF CLASS A NON-VOTING COMMON STOCK OF- FERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAW- FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC- TUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IM- PLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB- SEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 9 Price Range of Common Stock and Dividends................................. 10 Capitalization............................................................ 11 Selected Consolidated Financial Data...................................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 14 Business.................................................................. 20 Management................................................................ 33 Principal Stockholders.................................................... 38 Description of Capital Stock.............................................. 40 Underwriting.............................................................. 45 Legal Matters............................................................. 46 Experts................................................................... 46 Available Information..................................................... 47 Incorporation of Certain Information by Reference......................... 47 Index to Consolidated Financial Statements................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 675,000 SHARES [LOGO OF ARTESIAN RESOURCES APPEARS HERE] CLASS A NON-VOTING COMMON STOCK --------------- PROSPECTUS --------------- Janney Montgomery Scott Inc. MAY 23, 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----