CALIFORNIA WATER SERVICE CO, PREM14A, 1997-03-04

CALIFORNIA WATER SERVICE CO
PREM14A, 1997-03-04
WATER SUPPLY

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

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<S> <C>
[X] Preliminary Proxy Statement [X] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

California Water Service Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

California Water Service Company Common Stock, no par value
California Water Service Company Preferred Stock, par value $25.00

(2) Aggregate number of securities to which transaction applies:

6,500,000 shares of California Water Service Company Common Stock
139,000 shares of California Water Service Company Preferred Stock

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

$42.0625 per share of California Water Service Company Common Stock
$25.00 per share of California Water Service Company Preferred Stock

(4) Proposed maximum aggregate value of transaction:

$276,881,250

(5) Total fee paid:

$55,377.00

(a) Based on 6,500,000 shares of California Water Service Company
Common Stock (of which 6,309,570 were outstanding as of February
18, 1997) and 139,000 shares of California Water Service Company
Preferred Stock outstanding as of February 18, 1997.

(b) Calculated pursuant to Exchange Act Rules 0-11(a)4 and 0-11(c)(1),
based upon the $42.0625 average of the high and low sales price
for California Water Service Company Common Stock on February 28,
1997 and the book value of California Water Service Company
Preferred Stock as of February 28, 1997.

(c) Pursuant to Exchange Act Rules 14a-6(i)(4) and 0-11, the filing
fee represents 1/50th of one percent of the value of the
securities to be transferred to security holders in the
transaction.

[ ] Fee paid previously with preliminary materials.
<PAGE> 2

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
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(CALIFORNIA WATER SERVICE COMPANY LOGO)

MARCH , 1997

Dear California Water Service Company Shareholder:

You are cordially invited to attend the annual meeting of shareholders of
California Water Service Company on Wednesday, April 16, 1997, at 10:00 a.m. The
annual meeting will be held at the executive office of California Water Service
Company, 1720 North First Street, San Jose, California.

AT THE ANNUAL MEETING, COMPANY SHAREHOLDERS WILL BE ASKED TO CONSIDER AND
VOTE ON A PROPOSAL TO FORM A HOLDING COMPANY STRUCTURE FOR THE COMPANY. The
holding company's name will be California Water Service Group. The Board of
Directors and management of the Company believe that a holding company structure
will be in the best interests of the Company and its shareholders. This
structure will help the Company respond more effectively and efficiently to
competitive changes occurring in the water industry and to new business
opportunities that may arise from these changes. It will enhance the separation
of the Company's regulated water business from non-regulated businesses, and
will provide greater financing flexibility for the non-regulated businesses.

THE QUESTIONS AND ANSWERS ON THE FOLLOWING PAGES PROVIDE INFORMATION ON THE
PROPOSED HOLDING COMPANY STRUCTURE AND WHAT IT MEANS TO YOU AS A SHAREHOLDER.
You should also read the enclosed Proxy Statement/Prospectus which contains a
more extensive discussion of the proposal, including a description of the
formation of a holding company structure and the conversion of Company common
and preferred stock into common and preferred stock of California Water Service
Group. Briefly, in connection with the formation of the new corporate structure,
Company common stock shareholders would be issued two shares of California Water
Service Group common stock for each share of Company common stock and Company
preferred stock shareholders would be issued one share of California Water
Service Group preferred stock for each share of Company preferred stock.
Although the number of shares of preferred stock would not be doubled, the
voting rights of the California Water Service Group preferred stock shareholders
will be doubled in comparison to the existing voting rights of the holders of
Company preferred stock in order to maintain the same relative voting power as
such persons now have as shareholders of Company preferred stock. As a result,
the Company's common and preferred stock will be effectively split two-for-one
in connection with the formation of the holding company.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS APPROVAL OF THE HOLDING
COMPANY STRUCTURE AND URGES EACH SHAREHOLDER TO VOTE FOR THE NEW CORPORATE
STRUCTURE.

At the annual meeting, Company shareholders also will be asked to vote on
the election of directors and ratification of KPMG Peat Marwick, LLP as the
selection of independent auditors for 1997. During the annual meeting,
management of the Company will report on operations and other matters affecting
the Company, and will respond to shareholders' questions.

Your vote on the matters presented at the annual meeting is important,
regardless of the number or class of shares you own. WHETHER OR NOT YOU PLAN TO
ATTEND, PLEASE SIGN, DATE, AND RETURN YOUR PROXY AS SOON AS POSSIBLE IN THE
ENVELOPE PROVIDED SO THAT YOUR SHARES CAN BE VOTED IN ACCORDANCE WITH YOUR
INSTRUCTIONS.

Sincerely,

/s/ Robert W. Foy
Chairman of the Board

/s/ Peter C. Nelson
President and Chief Executive Officer
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QUESTIONS AND ANSWERS ABOUT THE PROPOSED HOLDING COMPANY

You may notice that this year's proxy materials look different. This is
because they include an extensive discussion of the Board's proposal to form a
holding company for California Water Service Company (the "Company"). This
proposal is briefly discussed below. For detailed information on this proposal,
shareholders are urged to read the accompanying Proxy Statement/Prospectus in
its entirety. For your convenience, however, the answers below are
cross-referenced in many cases to the page or pages of the Proxy
Statement/Prospectus in which the topic is discussed in more detail.

WHAT IS BEING PROPOSED?

The Board of Directors proposes to form a holding company, a structure
which is commonly used throughout the utility industry, including water
utilities. The Company would become a subsidiary of the holding company. The
Company's current shareholders would own the common and preferred stock of the
holding company rather than common and preferred stock of the Company. (Please
see pages 11 and 12 of the Proxy Statement/Prospectus.)

WHAT WOULD THE NEW HOLDING COMPANY BE CALLED?

The holding company will be named California Water Service Group.

WHY IS A HOLDING COMPANY BEING FORMED?

The Board of Directors believes that this structure will help the Company
to respond more effectively and efficiently to competitive changes occurring in
the water industry and to new non-regulated business opportunities that may
arise from these changes. It will enhance the separation of the Company's
regulated water business from its non-regulated businesses (which will be
undertaken by a new, non-regulated subsidiary of California Water Service Group
to be called CWS Utility Services) and will provide greater financing
flexibility for the non-regulated businesses. (Please see pages 6 and 12.)

HOW SOON WOULD THE HOLDING COMPANY STRUCTURE BE FORMED, IF IT IS APPROVED BY
SHAREHOLDERS?

Management intends to form the holding company structure as soon as
practical and hopes this will occur at the latest by the end of 1997. However,
since approval from the California Public Utilities Commission is required, the
exact timing is not known and delays could occur. (Please see pages 13 and 14.)

HOW WOULD MY OWNERSHIP OF CAL WATER STOCK BE AFFECTED BY THE NEW STRUCTURE?

When the new structure is formed, owners of Company common stock
automatically would become owners of the California Water Service Group common
stock on a two-for-one basis. In addition, owners of Company preferred stock
automatically would become owners of California Water Service Group preferred
stock on a one-for-one basis. The voting rights of the holders of the California
Water Service Group preferred stock would be doubled to maintain their current
relative voting power. California Water Service Group common stock would be
traded on the New York Stock Exchange just like the Company's common stock is
currently traded. The trading symbol would remain CWT. (Please see page 13.)

WOULD SHAREHOLDERS HAVE TO TURN IN THEIR CURRENT STOCK CERTIFICATES?

No. Existing Company stock certificates automatically would represent the
same number of shares and class of stock of California Water Service Group.
California Water Service Group will issue additional certificates of its common
stock to the common shareholders so that you have certificates representing the
extra shares of California Water Service Group common stock you are entitled to
as a result of the holding company formation. IT WOULD NOT BE NECESSARY FOR
HOLDERS OF THE HOLDING COMPANY STOCK TO EXCHANGE THEIR STOCK CERTIFICATES. If
you wish, you may

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exchange your Company certificates for those of California Water Service Group
by requesting that new certificates be issued. (Please see page 13.)

HOW WOULD A HOLDING COMPANY STRUCTURE AFFECT DIVIDENDS?

Instead of the dividends being paid by the Company, they would be paid by
California Water Service Group. When the restructuring takes effect, we expect
the holding company dividends to be no less than the dividends the Company is
paying on its stock at that time, adjusted for the effective two-for-one stock
split. Subsequently, the dividend would depend on the financial performance of
the Company and CWS Utility Services (the non-regulated subsidiary), and on
other factors. We expect the California Water Service Group dividends to be paid
on approximately the same dates in each year as the Company dividends are paid
now.

WOULD THE DIVIDEND REINVESTMENT PLAN REMAIN UNDER A HOLDING COMPANY STRUCTURE?

Yes. This plan would be assumed by the California Water Service Group to
enable you to reinvest your common stock dividends in the California Water
Service Group common stock. No further action would be required to continue your
participation in the dividend reinvestment plan.

HOW WOULD FORMATION OF A HOLDING COMPANY AFFECT PERSONAL FEDERAL INCOME TAXES?

It wouldn't. There will be no federal income tax consequences to you when
your Company shares are converted to the California Water Service Group shares.
For capital gain purposes, the tax basis and holding period of the California
Water Service Group shares would be the same as those for Company shares.
(Please see pages 14 and 15.)

THE ENCLOSED PROXY STATEMENT/PROSPECTUS PRESENTS A THOROUGH AND DETAILED
DISCUSSION OF THE BOARD'S PROPOSAL TO FORM A HOLDING COMPANY STRUCTURE.
SHAREHOLDERS ARE URGED TO REVIEW THE PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY.

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<PAGE> 6

CALIFORNIA WATER SERVICE COMPANY

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS -- APRIL 16, 1997

To the Shareholders:

The annual meeting of the shareholders of California Water Service Company,
a California corporation (the "Company"), will be held, as provided in the
Bylaws, on Wednesday, April 16, 1997, at 10 o'clock in the morning at the
principal executive offices of the Company, 1720 North First Street, San Jose,
California, for the following purposes:

1. To approve the formation of a holding company pursuant to an
Agreement of Merger dated as of March , 1997 (the "Merger Agreement"), by
and between California Water Service Group ("Holding Co."), CWSG Merger
Company ("Merger Co.") and the Company, pursuant to which Merger Co. would
merge with and into the Company and the Company would become a wholly-owned
subsidiary of Holding Co. (the "Merger");

2. To elect the Board of Directors consisting of nine directors to
serve until the next annual meeting in 1998;

3. To consider and act upon ratification of the appointment of KPMG
Peat Marwick, LLP as independent auditors; and

4. To act upon such other matters as may properly come before such
meeting or any adjournment thereof.

In accordance with the Bylaws of the Company, only shareholders of record
at the close of business on Tuesday, February 18, 1997, will be entitled to vote
at this meeting.

WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE SIGN, DATE, AND RETURN YOUR PROXY
AS SOON AS POSSIBLE IN THE ENVELOPE PROVIDED SO THAT YOUR SHARES CAN BE VOTED IN
ACCORDANCE WITH YOUR INSTRUCTIONS.

BY ORDER OF THE BOARD OF DIRECTORS

PAUL G. EKSTROM, Corporate Secretary

San Jose, California
March 12, 1997
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PROXY STATEMENT AND PROSPECTUS OF

CALIFORNIA WATER SERVICE COMPANY

This Proxy Statement/Prospectus is being furnished to the shareholders of
California Water Service Company, a California corporation (the "Company") in
connection with the solicitation of proxies by the Board of Directors of the
Company to be used in voting at the annual meeting of shareholders of the
Company to be held on April 16, 1997 (the "Meeting"). This Proxy
Statement/Prospectus is first being mailed to holders of the Company's common
and preferred stock on or about March 12, 1997.

The Meeting has been called to consider and vote upon proposals:

1. To approve the formation of a holding company structure pursuant to
an Agreement of Merger dated as of March , 1997 (the "Merger Agreement"),
by and between California Water Service Group ("Holding Co."), CWSG Merger
Company ("Merger Co.") and the Company, pursuant to which Merger Co. would
merge with and into the Company and the Company would become a wholly-owned
subsidiary of Holding Co. (the "Merger");

2. To elect the Board of Directors consisting of nine directors to
serve until the next annual meeting in 1998;

3. To consider and act upon ratification of the appointment of KPMG
Peat Marwick, LLP as independent auditors; and

4. To act upon such other matters as may properly come before such
meeting or any adjournment thereof.

If the Merger is approved, and subject to the satisfaction or waiver of the
other conditions in the Merger Agreement, Merger Co. shall be merged with and
into the Company which shall continue without change as the surviving
corporation, and the Company shall become a wholly-owned subsidiary of Holding
Co. Pursuant to the Merger Agreement, each share of Company Common Stock issued
and outstanding at the time of the Merger will be converted into two shares of
Holding Co. Common Stock and each share of existing Company Cumulative Preferred
Stock, Series C ("Company Preferred Stock") shall be converted into one share of
Cumulative Preferred Stock, Series C of Holding Co. ("Holding Co. Preferred
Stock"). The voting rights of the holders of Holding Co. Preferred Stock will be
doubled in comparison to the existing voting rights of the holders of Company
Preferred Stock. As a result, the Company's common and preferred stock will be
effectively split two-for-one in connection with the formation of the holding
company. The specific details of the plan of merger are more fully discussed
under the heading "ITEM NO. 1 -- THE FORMATION OF A HOLDING COMPANY" in this
Proxy Statement/Prospectus, and the Merger Agreement is set forth in full in
Exhibit A to this Proxy Statement/Prospectus.

Each share of Company Common Stock is entitled to one vote and each share
of Company Preferred Stock is entitled to eight votes. The Merger requires both
the affirmative vote by the holders of a majority of the shares of the Company
Common Stock and the affirmative vote by the holders of a majority of the shares
of Company Preferred Stock.

This Proxy Statement/Prospectus also constitutes the Prospectus of Holding
Co. under the Securities Act of 1933, as amended (the "1933 Act"), for the
issuance of up to 13,000,000 shares of Holding Co. Common Stock, without par
value, and 139,000 shares Cumulative Preferred Stock, Series C, par value of
$25.00, to be issued in exchange for Company Common Stock and Company Preferred
Stock in the Merger. This Proxy Statement/Prospectus does not cover any resales
of Holding Co. common or preferred stock to be received by the shareholders of
the Company in the Merger, and no person is authorized to make any use of this
Proxy Statement/Prospectus in connection with any such resale.

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 PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Proxy Statement/Prospectus is March 12, 1997.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OR THE SOLICITATION OF A PROXY OR AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES HEREOF OR
THEREOF.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "SEC"). Such reports, proxy and
information statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
may be available at the following Regional Offices of the SEC: Chicago Regional
Office, Northwest Atrium, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and the New York Regional Office, Seven World Trade Center, 13th
Floor, New York, New York, 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W. Washington D.C. 20549. The Company is also
required to file electronic versions of these documents with the SEC through the
SEC's Electronic Data Gathering Analysis and Retrieval (EDGAR) system. The SEC
maintains a world wide web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. In addition, reports, proxy and
information statements and other information concerning the Company can be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, on which Company Common Stock is listed.

Following completion of the Merger described in this Proxy
Statement/Prospectus, Holding Co. will file such reports and other information
under the Exchange Act, and Holding Co. will send its shareholders annual
reports containing financial information which has been examined and reported
upon, with an opinion expressed by, independent auditors. Following completion
of the Merger, the Company will no longer remain a reporting company under the
Exchange Act.

Holding Co. has filed with the SEC a Registration Statement on Form S-4
(No. 333- ) under the 1933 Act relating to the shares of Holding Co. common
and preferred stock to be issued in connection with the Merger (the
"Registration Statement"). This Proxy Statement/Prospectus also constitutes the
Prospectus of Holding Co. filed as part of the Registration Statement and does
not contain all the information set forth in the Registration Statement and
Exhibits thereto. The Registration Statement and the Exhibits thereto may be
inspected and copied, at prescribed rates, at the public reference facilities
maintained by the SEC at the addresses set forth above.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herein or delivered herewith. These documents are available
upon request from California Water Service Company, Attn.: Shareholders'
Relations, 1720 North First Street, San Jose, CA 95112-4598 (telephone
408-451-8200). In order to ensure timely delivery of the documents, any request
should be made by April 9, 1997.

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The following documents filed by the Company with the SEC are incorporated
in this Proxy Statement/Prospectus by reference:

1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.

2. The Company's Quarterly Reports on Form 10-Q for the quarters
ending March 31, 1996, June 30, 1996 and September 30, 1996.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the termination of the offering covered by
this Proxy Statement/Prospectus shall be deemed incorporated by reference and to
be part of this Proxy Statement/Prospectus from the date of filing of such
documents. Any statement contained herein or in a document all or a portion of
which is incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.

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TABLE OF CONTENTS

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SUMMARY............................................................................. 5
GENERAL INFORMATION................................................................. 8
ITEM NO. 1 -- THE FORMATION OF A HOLDING COMPANY.................................... 11
ITEM NO. 2 -- ELECTION OF DIRECTORS................................................. 16
ITEM NO. 3 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................... 18
EXECUTIVE COMPENSATION.............................................................. 20
EXHIBIT A -- AGREEMENT OF MERGER
EXHIBIT B -- RESTATED ARTICLES OF INCORPORATION OF CALIFORNIA WATER SERVICE GROUP
EXHIBIT C -- BYLAWS OF CALIFORNIA WATER SERVICE GROUP
</TABLE>

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SUMMARY

The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. This summary does not contain a complete
statement of all material features of the Merger and is qualified in its
entirety by reference to the full text of this Proxy Statement/Prospectus and
the Exhibits hereto. California Water Service Company (the "Company")
shareholders are urged to read this Proxy Statement/Prospectus and the
accompanying Exhibits in their entirety.

ITEM NO. 1: THE FORMATION OF A HOLDING COMPANY

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE FOR APPROVAL OF THE FORMATION OF A HOLDING COMPANY

AGREEMENT OF MERGER

Pursuant to the Agreement of Merger, a copy of which is attached as Exhibit
A (the "Merger Agreement"), the corporate structure of the Company will be
reorganized into a holding company structure in which California Water Service
Group is the parent holding company. Pursuant to the Merger Agreement, CWSG
Merger Company ("Merger Co."), a subsidiary of California Water Service Group
("Holding Co.") and specifically formed to be the catalyst for the corporate
reorganization, shall be merged with and into the Company which shall continue
without change as the surviving corporation (such merger being referred to
herein as the "Merger"). Following the Merger, Holding Co. shall be the sole
shareholder of the Company. Following the Merger, Holding Co. will form a second
subsidiary (CWS Utility Services) to engage in utility services which are not
subject to regulation by the California Public Utilities Commission ("CPUC").

Pursuant to the Merger Agreement, each share of Company Common Stock issued
and outstanding immediately prior to the Merger shall be automatically changed
and converted into two shares of Holding Co. Common Stock, which shall thereupon
be issued and fully-paid and non-assessable. In addition, each share of Company
Cumulative Preferred Stock, Series C ("Company Preferred Stock") issued and
outstanding immediately prior to the Merger shall be automatically changed and
converted into one share of Holding Co. Cumulative Preferred Stock, Series C
("Holding Co. Preferred Stock") which shall thereupon be issued and fully-paid
and non-assessable, and shall have rights, preferences, privileges and
restrictions substantially similar to those of Company preferred stock being
converted, except that the voting rights of the holders of Holding Co. Preferred
Stock will be doubled (from the current number of eight to sixteen) so that each
holder of shares of Holding Co. Preferred Stock maintains the same relative
voting power as such person had as a holder of Company Preferred Stock. In
addition, the authorized number of shares of Holding Co. common stock will be
increased to 25,000,000. As a result of the Merger, the Company's common and
preferred stock will be effectively split two-for-one in connection with the
formation of the holding company. The shares of Holding Company Stock which were
in existence prior to the Merger will be canceled in the Merger.

Following the Merger, the Company shall continue to conduct its operations
without change from the way it currently conducts such operations. The Company's
Board of Directors, officers and employees will not be affected by the Merger;
the Board of Directors of California Water Service Group will be identical to
the Company's Board. In addition, the Company will continue to own and control
its assets and operations just as it did prior to the Merger. There will be no
sale, conveyance or transfer of any Company assets or utility properties as a
result of the Merger. The Company's first mortgage bonds and senior notes will
remain as obligations of the Company and will not be assumed by the Holding Co.

Upon consummation of the Merger, Holding Co. shall deliver to The First
National Bank of Boston, P.O. Box 644, Boston, Massachusetts 02102-0644, as
transfer agent (the "Transfer Agent"), certificates representing the number of
shares of Holding Co. Common Stock equal to the difference between the number of
shares of Holding Co. Common Stock outstanding after the Merger and the number
of shares of Company Common Stock outstanding immediately prior to the Merger
and the Transfer Agent shall deliver to each record holder of Holding Co. Common
Stock a certificate or certificates representing the number of additional shares
of Holding Co. Common Stock to which such record holder is entitled. Until
surrendered or presented

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for transfer, each outstanding stock certificate which, prior to the Effective
Time represented Company Common Stock or Company Preferred Stock, as the case
may be, shall be deemed and treated for all corporate purposes to represent the
ownership of the same number of shares of Holding Co. Common Stock or Holding
Co. Preferred Stock, as the case may be, as though such surrender or transfer
and exchange had taken place. Accordingly, shareholders are not required to
exchange such stock certificates.

NO APPRAISAL RIGHTS

Approval of the outstanding shares of Company stock is not required under
Sections 1201(a), (b), (e) or (f) of the California Corporations Code.
Therefore, holders of Company stock will not, under California law, be entitled
to any appraisal rights as a result of the Merger.

REASONS FOR THE REORGANIZATION

The water industry is experiencing competitive changes and the potential
exists for new growth. The Company has in the past participated in
public/private partnerships, such as a lease of a water system, a management
contract for a water system or a billing services contract, and anticipates
opportunities for further participation and development. The formation of the
holding company structure will provide a corporate structure with a clear
separation between the regulated water business and other utility businesses
that are not subject to regulation by the CPUC. It will also provide a framework
that can better accommodate future growth. Finally, the holding company
structure, which is utilized by many other water companies, will facilitate the
financing of, and accounting for, new non-regulated business activities.

VOTE REQUIRED

Under the Merger Agreement and California law, the Merger requires both the
affirmative vote by the holders of a majority of the shares of the Company
Common Stock and the affirmative vote by the holders of a majority of the shares
of Company Preferred Stock.

In the election of directors, the nine directors collecting the most votes
will be elected. Ratification of the selection of KPMG Peat Marwick, LLP as the
Company's independent auditors by a majority of the votes of the holders of the
outstanding shares of Company stock is also required. See "VOTING AND PROXIES --
Record Date and Voting Rights."

Each of the Company's directors and executive officers and their affiliates
own less than one percent (1%) of the voting securities of the Company. After
the Merger, they will continue to own less than one percent (1%) of the voting
securities of Holding Co.

CONDITIONS AND REGULATORY APPROVALS

Consummation of the Merger is subject to the satisfaction of various
conditions, including approval of the Merger by the CPUC and approval for
listing of Holding Co. common stock on the New York Stock Exchange, receipt of
an opinion as to the qualification of the Merger as a tax-free reorganization
and various other conditions. See "ITEM NO. 1: THE FORMATION OF A HOLDING
COMPANY -- Conditions to the Merger."

TERMINATION

The Merger Agreement may be terminated at any time prior to consummation of
the Merger by action of the Board of Directors of the Company.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Merger is intended to be a tax-free reorganization for federal income
tax purposes. As a condition to the consummation of the Merger, the Company will
receive an opinion from McCutchen, Doyle, Brown & Enersen, LLP to the effect
that the Merger will constitute a tax-free reorganization for federal income tax
purposes. Consequently, Company shareholders who will receive only Holding Co.
stock pursuant to the

6
<PAGE> 13

Merger will not recognize gain or loss for federal income tax purposes. The
Company's shareholders are urged to consult their own tax advisors regarding the
federal (and any applicable foreign, state and local) income tax consequences of
the Merger. See "ITEM NO. 1: THE FORMATION OF A HOLDING COMPANY -- Certain
Federal Income Tax Consequences."

EFFECTIVE TIME OF THE MERGER

Pursuant to the Merger Agreement, the Merger will become effective at 11:59
p.m. on the last day of the calendar month after all conditions to the Merger
have been satisfied or waived and during which the requisite officers'
certificates and a copy of the Merger Agreement are filed with the Secretary of
State of the State of California (the "Effective Time").

RECOMMENDATIONS OF THE BOARD OF DIRECTORS

For the reasons stated herein, the Board of Directors of the Company
believes that the Merger is in the best interests of the Company and the holders
of the Company stock. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE
SHAREHOLDERS OF THE COMPANY VOTE FOR APPROVAL OF THE FORMATION OF THE HOLDING
COMPANY. See "ITEM NO. 1: THE FORMATION OF A HOLDING COMPANY -- Recommendation."

ITEM NO. 2: ELECTION OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE FOR ELECTION OF ALL BOARD NOMINEES FOR DIRECTOR

Nine persons have been nominated for election as directors of the Company.
If the Merger is approved, the persons elected to be the directors of the
Company will become the directors of Holding Co. upon consummation of the
Merger. See "ITEM NO. 2: ELECTION OF DIRECTORS".

ITEM NO. 3: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE FOR RATIFICATION OF KPMG PEAT MARWICK, LLP
AS THE COMPANY'S INDEPENDENT AUDITORS FOR 1997

The Board of Directors has selected KPMG Peat Marwick, LLP as the
independent auditors to examine the financial statements of the Company for the
year 1997. KPMG Peat Marwick, LLP has acted as auditors since 1939. If the
shareholders do not ratify the appointment of KPMG Peat Marwick, LLP, the
selection of independent auditors will be reconsidered by the Board. If the
Merger is approved, the independent auditors of the Company will become the
independent auditors of Holding Co. and its subsidiaries.

DATE, TIME AND PLACE OF THE MEETING

The Meeting will be held on April 16, 1997, at 10 a.m. local time at the
principal executive offices of the Company at 1720 North First Street, San Jose,
California.

PERSONS ENTITLED TO VOTE

The Company has fixed the close of business on February 18, 1997 as the
record date for determining persons entitled to notice of and to vote at the
Meeting. At the close of business on February 18, 1997, there were outstanding
and entitled to vote 6,309,570 shares of Company Common Stock and 139,000 shares
of Company Preferred Stock. Each share of Company Common Stock is entitled to
one vote and each share of Company Preferred Stock is entitled to eight votes.
See "GENERAL INFORMATION: SOLICITATION OF PROXY AND REVOCABILITY; VOTING
SECURITIES: Record Date and Voting Rights."

7
<PAGE> 14

GENERAL INFORMATION

INTRODUCTION

This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of California Water Service Company (the
"Company") of proxies to be voted at the Annual Meeting of Shareholders of the
Company (the "Meeting") and any adjournments or postponements thereof. This
Proxy Statement/ Prospectus also serves as the Prospectus of Holding Co. with
regard to the offering of shares of Holding Co. stock to shareholders of the
Company.

At the Meeting, shareholders will be asked to consider and vote upon the
Merger described in the Merger Agreement. A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as Exhibit A and is incorporated
herein by reference. Under the terms of the Merger Agreement, CWSG Merger
Company, a wholly-owned subsidiary of Holding Co., will be merged with and into
the Company. The Company will be the surviving corporation in the Merger and
will become a wholly-owned subsidiary of Holding Co. Upon consummation of the
Merger, each share of Company Common Stock shall be converted into two shares of
Holding Co. Common Stock and each share of Company Cumulative Preferred Stock,
Series C ("Company Preferred Stock") shall be converted into one share of
Holding Co. Cumulative Preferred Stock, Series C ("Holding Co. Preferred
Stock"). The voting rights of the holders of Holding Co. Preferred Stock will be
doubled in comparison to the existing voting rights of the holders of Company
Preferred Stock and the authorized number of shares of Holding Co. Common Stock
will be increased to 25,000,000. The rights, preferences, privileges and
restrictions of the Holding Co. Common and Preferred Stock will otherwise be
substantially the same as those of the Company Common and Preferred Stock being
converted. As a result of the Merger, the Company's common and preferred stock
will be effectively split two-for-one in connection with the formation of the
holding company.

Shareholders will also be asked to vote to elect nine directors to serve
until the next annual meeting in 1998, and to ratify the appointment of
independent auditors selected by the Board.

SOLICITATION OF PROXY AND REVOCABILITY; VOTING SECURITIES

DATE, TIME AND PLACE OF ANNUAL MEETING

The Meeting will be held on April 16, 1997 at 10:00 a.m. local time at the
executive office of the Company, 1720 North First Street, San Jose, California.

RECORD DATE AND VOTING RIGHTS

Only holders of record of Company stock at the close of business on
February 18, 1997 (the "Record Date") are entitled to notice of and to vote at
the Meeting. At the Record Date, there were approximately 6,000 shareholders of
record and 6,309,570 shares of Company Common Stock outstanding and entitled to
vote and 139,000 shares of Company Preferred Stock outstanding and entitled to
vote.

Each share of Company Common Stock is entitled to one vote and each share
of Company Preferred Stock is entitled to eight votes, except that in the
election of directors shareholders may cumulate their votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which their shares are entitled, or
distribute their votes on the same principle among as may candidates as they
think fit. No shareholder or proxy, however will be entitled to cumulate their
votes unless such candidate or candidates have been placed in nomination prior
to the voting and the shareholder has given notice at the Meeting prior to the
voting of the shareholder's intention to cumulate the shareholder's votes. If
any one shareholder has given such notice, all shareholders may cumulate votes
for candidates in nomination. The Board of Directors is soliciting discretionary
authority to cumulate votes if cumulative voting rights are exercised. The nine
nominees receiving the highest number of votes at the Meeting will be elected as
director.

8
<PAGE> 15

All other matters to come before the Meeting (other than approval of the
formation of a holding company) to come before the Meeting shall be determined,
assuming a quorum is present, by a vote of a majority of the votes entitled to
be cast by shares represented at the Meeting and entitled to vote on such
matters. A quorum for the purpose of conducting business at the Meeting exists
when there are present in person or by proxy at the Meeting persons entitled to
cast a majority of the votes entitled to be cast at the Meeting by the holders
of the outstanding voting shares of the Company. Broker non-votes and
abstentions will not be counted except for quorum purposes, and will have no
effect on the election of the directors. In determining whether the requisite
shareholder approval has been received on the other matters to come before the
Meeting, broker non-votes will not be counted while abstentions will be counted
and will therefore have the same effect as a vote against the matter.

SHAREHOLDER APPROVAL OF THE FORMATION OF A HOLDING COMPANY STRUCTURE IS A
CONDITION TO THE MERGER. BECAUSE SUCH SHAREHOLDER APPROVAL REQUIRES THE
AFFIRMATIVE VOTE BY THE HOLDERS OF A MAJORITY OF THE SHARES OF THE COMPANY
COMMON STOCK AND THE AFFIRMATIVE VOTE BY THE HOLDERS OF A MAJORITY OF THE SHARES
OF COMPANY PREFERRED STOCK, BROKER NON-VOTES WILL NOT BE COUNTED WHILE
ABSTENTIONS WILL BE COUNTED AND WILL HAVE THE SAME EFFECT AS A NEGATIVE VOTE.
ACCORDINGLY, THE BOARD OF DIRECTORS OF THE COMPANY URGES EVERY SHAREHOLDER OF
THE COMPANY TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN
THE ENCLOSED PREPAID ENVELOPE.

VOTING BY PROXY

Regardless of whether or not shareholders plan to attend the meeting in
person, all shareholders of the Company are urged to use the enclosed proxy card
to vote their shares. All proxies that are properly executed and returned,
unless revoked, will be voted at the Meeting in accordance with the instructions
indicated thereon or, if no direction is indicated, (i) FOR the formation of the
holding company structure, (ii) FOR the election of the Board's nominees as
directors, and (iii) FOR ratification of KPMG Peat Marwick, LLP as the Company's
independent auditors. The execution of a proxy will not affect the right to
attend the Meeting and vote in person. A person who has given a proxy may revoke
it any time before it is exercised at the Meeting by filing with the Corporate
Secretary of the Company, a written notice of revocation of a proxy bearing a
later date or by attendance at the Meeting and voting in person. Attendance at
such Meeting will not, by itself, revoke a proxy. If, for any unforeseen reason,
any nominee should not be available as a candidate for director, the proxies
will be voted for substitute nominees selected by the Board. Shares for which
duly executed proxies are received will be voted according to the Board's best
judgment upon such other matters as may properly come before the Meeting or any
adjournment thereof.

ADJOURNMENTS

The Meeting may be adjourned, even if a quorum is not present, by a
majority of the votes of shareholders represented at the Meeting in person or by
proxy. In the absence of a quorum at a Meeting, no other business may be
transacted at that Meeting.

Notice of the adjournment of a Meeting need not be given if the time and
place thereof are announced at the Meeting at which the adjournment is taken,
provided that if the adjournment is for more than 45 days, or if after the
adjournment a new record date is fixed for the adjourned Meeting, a notice of
the adjourned Meeting shall be given to each shareholder of record entitled to
vote at the Meeting. At adjourned Meetings, any business may be transacted which
might have been transacted at the original Meeting.

SOLICITATION OF PROXIES

The accompanying proxy relating to the Meeting is being solicited by the
Board of Directors of the Company for use at the annual meeting. This statement
and the accompanying proxy are being sent to shareholders on or about March 12,
1997.

9
<PAGE> 16

The Company will bear the entire cost of preparing, assembling, printing
and mailing these proxy statements, the proxies and any additional materials
which may be furnished by the Board to shareholders. The solicitation of proxies
will be made by the use of the U.S. postal service and may also be made by
telephone, telegraph, or personally, by directors, officers and regular
employees of the Company who will receive no extra compensation for such
services. In addition, the Company has retained Morrow & Co., a proxy
distribution and solicitation firm, to assist in the distribution and
solicitation of proxies for shares held in the names of brokers, banks and other
nominees, for a fee of $6,000 plus reimbursement of reasonable out-of-pocket
expenses.

10
<PAGE> 17

ITEM NO. 1: THE FORMATION OF A HOLDING COMPANY

SUMMARY OF THE FORMATION OF A HOLDING COMPANY

The Board of Directors believes that it is in the best interest of the
Company and its shareholders to reorganize the corporate structure of the
Company by creating a new holding company. To implement this reorganization, the
Board of Directors has approved the Agreement of Merger (the "Merger Agreement")
between the Company, California Water Service Group ("Holding Co.") and CWSG
Merger Company, a wholly owned subsidiary of Holding Co. ("Merger Co."). A copy
of the Merger Agreement is attached hereto as Exhibit A. Pursuant to the Merger
Agreement, the corporate structure of the Company will be reorganized into a
holding company. Merger Co., a subsidiary of Holding Co., will be merged with
and into the Company which will continue, without change, as the surviving
corporation (such merger is referred to herein as the "Merger").

Following the Merger, Holding Co. will be the publicly-held parent
corporation and sole shareholder of the Company. In addition, following the
Merger, Holding Co. will form a second subsidiary (CWS Utility Services) to
engage in utility services which are not subject to regulation by the California
Public Utilities Commission ("CPUC"). A diagram illustrating the structure of
the new holding company organization is set forth below.

[STRUCTURE DIAGRAM]

Following the Merger, the Company will continue to conduct its operations
without change from the way it currently conducts such operations. While the
immediate control of the Company will change from the Company's present
shareholders to Holding Co., the ultimate control will remain unchanged, as the
Company's present shareholders will, upon completion of the Merger, become
shareholders of Holding Co., owning the same interest in Holding Co. as they now
own in the Company. Holding Co.'s common shares will be listed on the New York
Stock Exchange, just as the Company's common shares are currently listed, and
Holding Co.'s common shares will be registered with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934. The
directors of Holding Co. will initially be the same as the directors of the
Company.

Pursuant to the Merger Agreement each share of Company Common Stock issued
and outstanding immediately prior to the Merger shall be automatically changed
and converted into two shares of Holding Co. Common Stock and each share of
Company Cumulative Preferred Stock, Series C ("Company Preferred

11
<PAGE> 18

Stock") issued and outstanding immediately prior to the Merger shall be
automatically changed and converted into one share of Holding Co. Cumulative
Preferred Stock, Series C ("Holding Co. Preferred Stock"). The voting rights of
the holders of Holding Co. Preferred Stock will be doubled in comparison to the
existing voting rights of the holders of Company Preferred Stock and the
authorized number of shares of Holding Co. Common Stock will be increased to
25,000,000. The rights, preferences, privileges and restrictions of the Holding
Co. Common Stock and Preferred Stock will otherwise be substantially the same as
those of the Company Common Stock and Preferred Stock being converted. As a
result, the Company's common and preferred stock will be effectively split
two-for-one in connection with the formation of the holding company.

Approval of the formation of the holding company requires the affirmative
vote of the majority of votes of the holders of the outstanding shares of
Company Common Stock and the affirmative vote of the majority of votes of the
holders of the outstanding shares of Company Preferred Stock. If the Merger is
approved, it will become effective at 11:59 p.m. on the last day of the calendar
month during which the requisite officers' certificates and a copy of the Merger
Agreement are filed with the Secretary of State of California (the "Effective
Time").

BUSINESS OF THE COMPANY

The Company is a public utility providing water service to 376,100
customers in 56 California communities through 21 separate water systems or
districts. In the Company's 20 regulated systems serving 370,100 customers,
rates and operations are subject to the jurisdiction of the CPUC. An additional
6,000 customers receive service through a long-term lease of the City of
Hawthorne water system, which is not subject to CPUC regulation. The Company
also has contracts with various municipalities to operate water systems and
provide billing services to 27,500 other customers.

RECOMMENDATION

The water industry is experiencing competitive changes and the potential
exists for new growth. The Company has in the past participated in
public/private partnerships, such as a lease of a water system, a management
contract for a water system or a billing services contract, and anticipates
opportunities for further participation and development. The formation of the
holding company structure will provide a corporate structure with a clear
separation between the water business and other innovative utility businesses
that are not subject to regulation by the CPUC. It will also provide a framework
that can better accommodate future growth. Finally, the holding company
structure, which is utilized by many other water companies, will facilitate the
financing of, and accounting for, new non-regulated business activities.

ACCORDINGLY, THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE
FORMATION OF HOLDING COMPANY BE APPROVED BY THE HOLDERS OF COMPANY COMMON AND
PREFERRED STOCK.

PRINCIPAL TERMS OF THE MERGER

General. The following description of the principal terms of the Merger is
subject to and qualified in its entirety by reference to the terms of the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Exhibit A. The consummation of the Merger is subject to the condition, among
others, that the Merger Agreement and the Merger are approved by the
shareholders of the Company.

12
<PAGE> 19

Effective Time of Merger. The Merger Agreement provides that the Merger
will become effective at 11:59 p.m. on the last day of the calendar month during
which the requisite officers' certificates and a copy of the Merger Agreement
are filed with the Secretary of State of the State of California (the "Effective
Time"). Such filing will not occur until all the conditions to the Merger have
been satisfied or waived. See "Conditions to the Merger."

Conversion of Shares of Company Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any capital
stock of the Company, each share of Company Common Stock shall be converted into
two shares of Holding Co. Common Stock and each share of Company Preferred Stock
shall be converted into one share of Holding Co. Preferred Stock. (See
"Post-Merger Rights of Holders")

Optional Exchange of Company Stock Certificates. After the Effective Time,
each holder of a certificate or certificates representing shares of Company
Common Stock or Company Preferred Stock, as applicable, immediately prior to the
Merger may, but shall not be required to, surrender the same to the Transfer
Agent, and thereupon each holder or transferee shall be entitled to receive a
certificate or certificates representing the number of shares of Holding Co.
Common Stock or Preferred Stock, as applicable, equal to the number of shares of
Company Common Stock or Preferred Stock surrendered.

Outstanding Certificates. Until surrendered or presented for transfer,
each outstanding stock certificate which, prior to the Effective Time
represented Company Common Stock or Company Preferred Stock, as the case may be,
shall be deemed and treated for all corporate purposes to represent the
ownership of the same number of shares of Holding Co. Common Stock or Holding
Co. Preferred Stock, as the case may be, as though such surrender or transfer
and exchange had taken place. Accordingly, shareholders are not required to
exchange such stock certificates.

Issuance of Additional Shares. On or prior to the Effective Time, Holding
Co. shall deliver to First National Bank of Boston, P.O. Box 644, Boston MA
02102-0644, as transfer agent (the "Transfer Agent"), certificates representing
the number of shares of Holding Co. Common Stock equal to the difference between
the number of shares of Holding Co. Common Stock outstanding pursuant to the
Merger Agreement and the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time. Promptly after the Effective Time, the
Transfer Agent shall deliver to each record holder of Holding Co. Common Stock,
as of the Effective Time, a certificate or certificates representing the number
of additional shares of Holding Co. Common Stock to which such record holder is
entitled pursuant to the Merger Agreement.

Company Stock Transfer Books. The stock transfer books for Company Common
Stock and Company Preferred Stock shall be deemed to be closed at the Effective
Time such that no transfer of shares of Company Common Stock and Company
Preferred Stock outstanding prior to the Effective Time shall thereafter be made
on such books.

Post-Merger Rights of Holders. Following the Effective Time, the holders
of certificates representing Company Common Stock and Company Preferred Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to stock of Company and their sole rights shall be with
respect to the Holding Co. Common Stock or Holding Co. Preferred Stock,
respectively, into which their shares of Company Common Stock or Company
Preferred Stock shall have been converted in connection with the Merger. The
voting rights of the holders of Holding Co. Preferred Stock will be doubled in
comparison to the existing voting rights of the holders of Company Preferred
Stock and the authorized number of shares of Holding Co. Common Stock will be
increased to 25,000,000. The rights, preferences, privileges and restrictions of
the Holding Co. Common and Preferred Stock will otherwise be substantially
similar to those of the Company Common and Preferred Stock being converted.

CONDITIONS TO THE MERGER

The Merger will occur only if the Merger is approved by the requisite
majority votes of the Company's common and preferred shareholders. In addition,
consummation of the Merger is subject to satisfaction or waiver of certain other
conditions. Such conditions include, but are not limited to, the following: (i)
all

13
<PAGE> 20

necessary regulatory approvals, including CPUC approval, shall have been
received; (ii) the Registration Statement shall have been declared effective by
the SEC and there shall be no stop order suspending its effectiveness; (iii) the
Holding Co. Common Stock shall have been approved for listing upon official
notice of issuance by the New York Stock Exchange, and (iv) the Merger shall not
be illegal or violate any order, decree or judgment of any court or governmental
body. The Board of Directors of each party may waive any conditions to that
party's performance of the Merger Agreement unless doing so would violate
applicable law.

REQUIRED REGULATORY APPROVALS

The Merger is subject to approval by the CPUC and to the approval by the
Company's Board of Directors of any conditions to the CPUC approval. The Board
anticipates that CPUC approval may include conditions relating to, among other
things, transactions between the Company and its non-regulated affiliates. The
Board anticipates that there may be reporting requirements with respect to
affiliate transactions and requirements that ensure that ratepayers do not
subsidize non-regulated operations and receive fair compensation for the use of
utility assets and personnel in non-regulated activities. If the CPUC conditions
are deemed by the Board to be materially burdensome for the Company, the Board
may elect to terminate the Merger Agreement and not proceed with the Merger.

NO APPRAISAL RIGHTS

DIRECTORS AND OFFICERS OF THE COMPANY AND HOLDING COMPANY

Prior to the Effective Time, the persons who are the Directors of the
Company will be appointed to be the Directors of Holding Co. This will occur
because those persons who are elected Directors of the Company at the Meeting
will also be appointed Directors of Holding Co. See "ITEM NO. 2: Election of
Directors."

Following the Meeting, the Directors of the Company and Holding Co.,
respectively, will elect officers of the Company and Holding Co., respectively,
to serve until their successors are elected and qualified. Such additional
officers of Holding Co. and the Company as the Board of Directors considers
advisable may be elected or appointed from time to time.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following discussion generally summarizes certain of the federal income
tax consequences of the Merger under the Internal Revenue Code, as set forth in
the tax opinion obtained from McCutchen, Doyle, Brown & Enersen, LLP, counsel to
the Company. This discussion does not deal with all possible tax consequences
relating to the Merger and does not address the tax consequences under state or
local law, or special tax consequences to particular shareholders having special
situations. Accordingly, shareholders are urged to consult with their own tax
advisors regarding the effect of the Merger on them personally.

Subject to the foregoing limitations and based on certain representations
made by the Company, the Company has been informed that, for federal income tax
purposes:

(a) The merger of Merger Co. into the Company and the issuance of
Holding Co. stock in connection therewith as described herein will
constitute a tax-free reorganization under Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code;

(b) No gain or loss will be recognized by holders of Company stock who
receive Holding Co. stock in exchange for the shares of Company stock which
they hold;

14
<PAGE> 21

(c) The holding period of Holding Co. stock received in exchange for
Company stock will include the holding period of the Company stock for
which it is exchanged, assuming that the shares of Company stock are
capital assets in the hands of the holder thereof at the time of the
Merger; and

(d) The tax basis of Holding Co. stock received by shareholders of the
Company pursuant to the Merger will be the same as the tax basis of the
shares of Company stock exchanged therefor.

SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT
TO ALL TAX CONSEQUENCES OF THE MERGER. Expenses incurred by any shareholder
arising from disputes with the IRS or any state or any foreign tax agency over
the tax consequences of the Merger will not be borne by the Company or Holding
Co.

ARTICLES OF INCORPORATION, BYLAWS AND RIGHTS OF SHAREHOLDERS

The Articles of Incorporation and Bylaws of Holding Co. are substantially
identical to the Amended and Restated Articles of Incorporation and Bylaws of
the Company, except that the number of authorized shares of Holding Co. Common
Stock will be increased to 25,000,000 and except for the change in preferred
voting rights described below. Holders of Holding Co. Preferred Stock
immediately after the Merger will have essentially the same rights as holders of
Company Preferred Stock immediately before the Merger; except that the voting
rights of the holders of Holding Co. Preferred Stock will be doubled in
comparison to the existing voting rights of the holders of Company Preferred
Stock. See "EXHIBIT B -- Articles of Incorporation of Holding Co.", and "EXHIBIT
C -- Bylaws of Holding Co."

EXCHANGE ACT FILINGS

Following the Effective Time, Holding Co. will be a reporting company under
the Securities Exchange Act of 1934, as amended, and the Company will not remain
a reporting company.

TERMINATION AND AMENDMENT OF MERGER AGREEMENT

The Merger Agreement may be terminated any time prior to the Effective Time
by action of the Board of Directors of the Company. Subject to applicable law,
the Merger Agreement may be amended, modified or supplemented at any time prior
to the Effective Time by mutual consent of the Boards of Directors of the
Company, Holding Co. and Merger Co.

CONDUCT OF BUSINESS OF HOLDING COMPANY FOLLOWING THE MERGER

Initially, Holding Co. is not expected to be an operating company and its
assets will consist principally of the capital stock of its subsidiaries,
including the Company. It will derive its income principally from dividends from
and fees for any services rendered to its subsidiaries and from any interest on
any loans to subsidiaries. Following the consummation of the Merger, Holding Co.
will create a new wholly-owned subsidiary (CWS Utility Services) which will not
be regulated by the CPUC and which will engage in non-regulated business
activities. After creation of the non-regulated subsidiary, the Company may
sell, assign or otherwise transfer certain non-utility assets (such as existing
billing contracts, Operations and Maintenance contracts, non-utility leases
and/or property that is no longer necessary or useful for utility purposes) to
the non-regulated subsidiary. Alternatively, the non-utility company might not
assume existing contracts but rather engage only in business opportunities
arising after the Merger is effected.

LEGAL OPINION

McCutchen, Doyle, Brown & Enersen, LLP, as counsel for the Company and
Holding Co., has rendered an opinion to the effect that the Holding Co. stock
offered in this Proxy Statement and Prospectus will be validly issued, fully
paid, and nonassessable.

15
<PAGE> 22

ITEM 2: ELECTION OF DIRECTORS

The Directors of the Company are elected annually. The following table sets
forth the name of each of the nominees for Director, his/her age, the year in
which he/she was first elected a Director, the number of shares of the Company's
Common Stock and Preferred Stock beneficially owned by him/her on January 1,
1997, a brief description of his/her principal occupation and business
experience during the last five years, all directorships of publicly held
companies presently held by each nominee, and certain other information. All
nominees are presently Directors of the Company. The term of office for all
Directors elected at the 1997 annual meeting will expire at the time of the 1998
annual meeting. No nominee has any family relationship with any other nominee or
with any executive officer.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE
SERVICE AS OF
INFORMATION DIRECTOR BENEFICIAL PERCENT OF
NOMINEE AGE ABOUT NOMINEE(1) SINCE OWNERSHIP(2) CLASS
- ---------------------------------- --- -------------------------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert W. Foy(5).................. 60 Chairman of the Board since 1977 2,064 Less than 1%
January 1, 1996. Formerly
President and Chief Executive
Officer, Pacific Storage
Company, Stockton, Modesto,
Sacramento, and San Jose,
California (a diversified
transportation and warehousing
company).
Edward D. Harris Jr., 59 George DeForest Barnett. 1993 468 Less than 1%
M.D.(4)(5)...................... Professor of Medicine. Director,
Center for Musculoskeletal
Diseases at Stanford University
Medical Center.
Robert K. Jaedicke(3)(4).......... 68 Professor (Emeritus) of 1974 984 Less than 1%
Accounting and Former Dean,
Stanford University Graduate
School of Business. Also a
Director of Boise Cascade
Corporation, Enron Corp.,
Homestake Mining Company,
GenCorp., Inc., Wells Fargo Bank
and State Farm Insurance
Companies.
Richard P. Magnuson(6)............ 41 General Partner of Menlo 1996 1,000 Less than 1%
Ventures (1984-1996). Since
1/1/97 a private venture capital
investor. Also a Director of
Orcad Inc. and Rogue Wave
Software, Inc.
Linda R. Meier(3)................. 56 Chairperson, Stanford University 1994 1,500 Less than 1%
Hospital Board of Directors
(1992-present). Also a Director
of Comerica-California Bank
(1995 to present), University
Bank & Trust Co. (1980-1996),
Peninsula Community Foundation
(commencing 1997), Haas Public
Service Center, National
Advisory Board (1996 to
present). Member, California
Academy of Sciences Board of
Trustees (1996 to present).
Formerly Vice President,
Stanford University Board of
Trustees (1988-1994).
Peter C. Nelson(5)................ 49 President and Chief Executive 1996 1,088 Less than 1%
Officer since February 1, 1996.
Formerly Vice President,
Division Operations (1994-1995)
and Region Vice President
(1989-1994), Pacific Gas &
Electric Company (gas and
electric public utility).
</TABLE>

16
<PAGE> 23

- ---------------
(1) No corporation or other organization by which any nominee is employed is a
parent, subsidiary or other affiliate of the Company.

(2) Except for Mr. Stump, no nominee or officer owns any shares of the Company's
Preferred Stock. Directors Foy, Harris, Nelson, Jaedicke, Magnuson, Meier,
Stump and van Bronkhorst have sole voting and sole investment power with
respect to the shares owned by them (or share such powers with their
spouses).

(3) Member of Compensation Committee.

(4) Member of Audit Committee.

(5) Member of Executive Committee.

(6) Director Magnuson was elected effective October 1, 1996, replacing former
Director William E. Ayer who retired as a Director on November 30, 1996.

(7) Preferred Stock, Series C.

(8) Does not include 549,976 shares beneficially owned by SJW Corp., of which
Mr. Weinhardt is Chairman of the Board and Chief Executive Officer. Mr.
Weinhardt disclaims beneficial ownership of all the shares owned by SJW
Corp.

(9) Common Stock. Includes 10,260 shares held in the Savings Plan for the
benefit of executive officers who are not directors and 1,398 other shares
owned beneficially but not of record by such executive officers.

In 1996, Directors Harris, Jaedicke, Stump, Meier, van Bronkhorst and
Weinhardt were paid an annual retainer of $13,200. Director Magnuson was paid a
retainer for the final three months of 1996 of $2,250. The current annual
retainer fee for directors (other than Chairman Foy and Director Nelson) is
$15,000. Effective January 1, 1996, Director Stump is paid an annual consulting
fee of $30,000 in addition to the annual retainer. Effective January 1, 1997,
Chairman Foy receives an annual retainer of $25,000. Director Nelson receives no
annual retainer. Effective March 1, 1996, Directors are paid $750 for each Board
or Committee meeting attended (which was an increase from the previous amount of
$650), except that (i) Committee Chairmen are paid $1,500 for each Committee
meeting attended, and (ii) Chairman Foy and Director Nelson are paid $750 for
each Board meeting attended and are not paid for attending any Committee
meeting.

The Company established, effective January 1, 1988, a Directors Deferred
Compensation Plan which is an unfunded deferred compensation program for certain
directors. Each member of the Board who is not an employee of the Company is
eligible to participate. Each participant may elect to defer annually at least
$5,000 of the director's monthly retainer fees. The maximum amount which may be
deferred is 100% of the

17
<PAGE> 24

director's monthly retainer fees. Amounts deferred are fully vested, recorded by
the Company and adjusted as if invested in an investment selected by the
participant. Distribution is made at the earlier of (1) the time selected by the
participant (subject to a minimum length of deferral), or (2) when the
participant ceases to be a director (unless he/she then becomes an employee of
the Company, in which case, distribution will be made upon termination of
employment). Distributions are also available upon a showing of hardship.
Amounts remaining undistributed at death are distributed to a designated
beneficiary or beneficiaries. The Company is under no obligation to make any
investment or otherwise fund the Plan. Participants are general, unsecured
creditors of the Company.

The Company's directors are covered by a retirement plan. Any director who
retires after having served on the Board for five or more years will receive a
benefit equal to the annual retainer paid to the Company's non-employee
directors at the time of his/her retirement. This benefit will be paid annually
for the number of years the director served on the Board up to a maximum of ten
years.

The Board has established Audit, Compensation and Executive Committees. The
full Board generally acts as the Nominating Committee. The Nominating Committee
will consider nominees recommended by shareholders if the name and
qualifications of each nominee are submitted to the Company in a letter
addressed to the Corporate Secretary of the Company by November 12, 1997. The
Audit Committee reviews with the auditors the scope and results of the audit,
the Company financial statements and internal accounting control procedures. It
also recommends the selection of auditors to the Company's Board. The
Compensation Committee makes recommendations to the Board with respect to
officer compensation.

During 1996, there were 12 regular meetings of the Board, three meetings of
the Compensation Committee and two meetings of the Audit Committee. All
directors attended an average of 89% of all of the Board and applicable
Committee meetings and each director attended at least 75% of these meetings.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file certain reports
regarding ownership of, and transactions in, the Company's securities with the
Securities and Exchange Commission (the "SEC") and with the New York Stock
Exchange ("NYSE"). Such officers, directors and ten percent stockholders are
also required by SEC rules to furnish the Company with copies of all Section
16(a) forms that they file.

Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that for the year ended December 31, 1996, its officers, directors and ten
percent stockholders complied with all Section 16(a) filing requirements.

ITEM 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

Shareholders will also vote on ratification of the selection of KPMG Peat
Marwick, LLP, certified public accountants, to audit the books, records and
accounts of the Company for the year ending December 31, 1997. KPMG Peat Marwick
has acted as auditors for the Company since 1939 and the Board, pursuant to the
recommendation of the Audit Committee, recommends their services be continued.
Representatives of KPMG Peat Marwick, LLP are expected to be present at the
Meeting to respond to appropriate questions and to make a statement if they
desire to do so. The Board recommends a vote FOR adoption of this proposal. If
the shareholders do not ratify the appointment of KPMG Peat Marwick, LLP, the
selection of the auditors will be reconsidered by the Board. If shareholders
ratify the appointment of KPMG Peat Marwick, LLP, and if the holding company
formation is consummated, KPMG Peat Marwick, LLP will be appointed as
independent auditors for Holding Co. for the year ending December 31, 1997.

18
<PAGE> 25

COMPENSATION OF EXECUTIVE OFFICERS

The following table discloses compensation received by the Company's recent
past and present Presidents and Chief Executive Officers and the other four most
highly paid executive officers of the Company for the three fiscal years ended
December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
- -------------------------------------------------------------- ---- -------- ---------------
<S> <C> <C> <C>
Peter C. Nelson(2)............................................ 1996 $252,787 $12,486
President and CEO
Donald L. Houck(2)............................................ 1996 $100,459 $ 4,551
President and CEO 1995 262,066 12,636
1994 250,057 12,538
Gerald F. Feeney.............................................. 1996 $149,759 $ 5,086
Vice President, Chief Financial Officer 1995 139,612 4,631
and Treasurer 1994 120,213 4,016
Francis S. Ferraro............................................ 1996 $142,621 $ 5,086
Vice President, Regulatory Matters 1995 135,650 4,836
1994 130,291 4,838
Raymond H. Taylor............................................. 1996 $144,113 $ 5,086
Vice President, Operations 1995 131,052 4,346
1994 112,039 3,808
Robert E. Foy(3).............................................. 1996 $151,154 $13,886
Chairman of the Board
</TABLE>

- ---------------
(1) The amounts listed in the column entitled "All Other Compensation" include
the following amounts for 1996: (a) Company 401(k) contributions of $3,845
for Mr. Houck, and $4,750 for each of Mr. Nelson, Mr. Feeney, Mr. Ferraro,
Mr. Taylor and Mr. Foy, and (b) annual life insurance premiums paid by the
Company of $56 for Mr. Houck and $336 for other officers, and (c) director
fees for Mr. Nelson, Mr. Houck and Mr. Foy of $7,400, $650 and $8,800,
respectively.

(2) Effective February 1, 1996, Mr. Houck retired as President and CEO. He was
succeeded by Peter C. Nelson. Mr. Houck's 1996 salary included wages through
February 1996 and the value of severance payments.

(3) Effective January 1, 1996, Mr. Foy was elected Chairman of the Board.

PENSION PLANS

The table that follows shows the estimated annual benefits payable upon
retirement to Company employees under the California Water Service Company
Pension Plan and the California Water Service Company Supplemental Executive
Retirement Plan.

<TABLE>
<CAPTION>
YEARS OF SERVICE
THREE HIGHEST ----------------------------------------------
CONSECUTIVE 30 OR
YEARS AVERAGE 15 MORE
COMPENSATION YEARS 20 YEARS 25 YEARS YEARS
- ------------------------------------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
$100,000......................................... $30,000 $ 40,000 $ 45,000 $ 50,000
$125,000......................................... 37,500 50,000 56,250 62,500
$150,000......................................... 45,000 60,000 67,500 75,000
$175,000......................................... 52,500 70,000 78,750 87,500
$200,000......................................... 60,000 80,000 90,000 100,000
$225,000......................................... 67,500 90,000 101,250 112,500
$250,000......................................... 75,000 100,000 112,500 125,000
$275,000......................................... 82,500 110,000 123,750 137,500
</TABLE>

19
<PAGE> 26

The compensation covered by the above plans is the annual earnings reported
on an employee's W-2 form, including amounts deferred under the Savings Plan, a
401(k) plan, and compensation associated with the non-business use of a Company
automobile. The compensation reported in the "Salary" column of the Summary
Compensation Table is the amount of an employee's annual salary, including
amounts deferred under the Savings Plan. The pension table above sets forth
estimated annual retirement benefits, payable as a straight life annuity,
assuming retirement at age 60, using the normal form of benefit under the above
plans; the benefits listed are not subject to any deduction for social security
or other offset amounts.

The number of years of credited service at December 31, 1996 for officers
named in the Summary Compensation Table is as follows: Mr. Nelson(1); Mr.
Houck(2); Mr. Ferraro, 7; Mr. Feeney, 20; Mr. Taylor, 14; and Mr. Foy, 1.

NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT
OF 1934 THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT,
IN WHOLE OR IN PART, THE FOLLOWING REPORT AND PERFORMANCE GRAPH SHALL NOT BE
INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.

REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION

The Compensation Committee consists of directors who are not currently
employees of the Company. In 1996, the Committee was composed of Mr. Ayer, Mr.
Jaedicke, Ms. Meier and Mr. Stump. Mr. Ayer retired from the Committee in
November 1996, when he retired from the Board. The Committee is currently
composed of Mr. Jaedicke, Ms. Meier and Mr. Stump. The Committee is responsible
for establishing and implementing policies and programs to compensate the
Company's executives. In December 1995, the Committee set the 1996 compensation
for Mr. Peter C. Nelson. In February and July, 1996, the Committee reviewed and
set the compensation for all other executive officers and then submitted its
recommendation for approval by the entire Board of Directors. In February and
July, 1996, the Board of Directors adopted the Committee's recommendations
without modification.

The primary objectives of the Committee are to establish policies and
implement a compensation program which will (i) attract, retain and motivate
talented and experienced executives, (ii) reward excellent job performance and
ability and (iii) provide fair and reasonable compensation. The Committee
believes that compensating executives on this basis leads to excellence in
performance which benefits shareholders and ratepayers alike. In making its
recommendations, the Committee takes into account the fact that the Company's
compensation decisions are regularly reviewed for reasonableness by the
California Public Utilities Commission. Further, in light of the fact that the
Company is a regulated utility whose financial performance is to large extent
dependent upon and constrained by the ratemaking decisions of the California
Public Utilities Commission and other factors beyond the Company's control (such
as weather), the Committee's decisions are largely determined by factors other
than the Company's recent financial performance. The principal vehicle for
compensating the Company's officers has been salary. This is a flexible
compensation vehicle that allows for annual adjustment and is not likely to
result in wide fluctuations in compensation from year to year.

In making individual compensation decisions, the Committee considers each
officer's duties, the quality of his or her performance of those duties and the
contribution the officer has made to the Company's overall

- ---------------

1Effective February 1, 1996, Mr. Nelson, when he became President and CEO, was
awarded the right to receive credit for an additional ten years of service,
providing he is employed with the Company a minimum of ten years. The award of
the additional ten years of service will not be prorated if Mr. Nelson should
not be employed by the Company for ten years and will not increase should he
remain employed by the Company beyond age 65.

2Effective February 1, 1996, Mr. Houck retired as President and CEO with 30
years of credited service at which time his rights under the above plans became
fixed.

20
<PAGE> 27

performance and positioning the Company for the future. The Committee also
considers whether an officer's duties have expanded from the previous year, the
officer's experience and value to the Company, and the extent and frequency of
prior salary adjustments for each officer. In addition, the Committee evaluates
the range of all the officers salaries by comparing the salary of each officer
with the salaries of the other officers, taking into account the number of years
each officer has been employed by the Company. In order to set salaries for the
Company's officers at competitive and reasonable levels, the Committee annually
reviews the salaries for the Company's officers, the salaries of officers of
other major water companies located throughout the United States and other local
utility companies, as well as the rate of inflation. In viewing the salaries of
other companies, the Committee takes into account the Company's small number of
officers compared to many other companies of comparable size and the Company's
limited forms of compensating officers.

The Committee has reviewed the Company's compensation structure in light of
Section 162(m) of the Internal Revenue Code, which limits the amount of
compensation that the Company may deduct from its taxable income for any year to
$1,000,000 for any of its five most highly compensated executive officers. In
1996, no executive officer's compensation exceeded the limitation set by Section
162(m).

In December, 1995, the Committee reviewed the compensation for Mr. Peter C.
Nelson as President and Chief Executive Officer. The Committee set Mr. Nelson's
compensation by using the same basis and considering the same factors it used in
setting the compensation levels for the Company's other executive officers. The
Committee also took into account how the compensation of the President and Chief
Executive Officer compared with the salaries and benefits of chief executive
officers at other major water companies and local utility companies as well as
the salaries of the Company's other officers.

THE COMPENSATION COMMITTEE

ROBERT K. JAEDICKE
LINDA R. MEIER
C.H. STUMP

21
<PAGE> 28

PERFORMANCE GRAPH

The following graph shows a five-year comparison of cumulative total
returns for the Company, the S&P 500 Index and the Edward Jones Water Utility
Average of 14 companies.

<TABLE>
<CAPTION>
CALIFORNIA EDWARD JONES
MEASUREMENT PERIOD WATER WATER S&P 500
(FISCAL YEAR COVERED) SERVICE CO. UTILITY INDEX
<S> <C> <C> <C>
1991 100 100 100
1992 125 111 108
1993 159 126 118
1994 135 118 120
1995 147 148 165
1996 200 181 203
</TABLE>

NOTE: The stock performance shown on the graph above is not necessarily
indicative of future price performance.

22
<PAGE> 29

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table shows the beneficial owners of more than five percent
of any class of the Company's voting securities on January 1, 1997:

<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------- ------------------------------- -------------------- --------
<S> <C> <C> <C>
Common......................... SJW Corp.(1) 549,976 Shares 8.7%
374 W. Santa Clara St.,
San Jose, CA 95196
California Water Service 318,520 Shares 5.1%
Company
Savings Plan
(Company Sponsored 401(k) Plan)
1720 N. First St.
San Jose, CA 95112
Preferred (Series C)........... First Colony Life 36,610 Shares 26.3%
Insurance Company(2)
700 Main Street
Lynchburg, VA 24504
</TABLE>

- ---------------
(1) SJW Corp. has sole voting and investment power with respect to these shares.
Director J.W. Weinhardt is Chairman of the Board and Chief Executive
Officer, as well as a director, of SJW Corp. Mr. Weinhardt disclaims
beneficial ownership of all the shares owned by SJW Corp.

(2) First Colony Life Insurance Company has sole voting and investment power
with respect to these shares.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information concerning beneficial ownership
of shares of the Company's equity securities by Messrs. Feeney, Ferraro and
Taylor on January 1, 1997:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS
- --------------------- ------------------- ----------------- -------------
<S> <C> <C> <C>
Common............... Gerald F. Feeney 3,245 Shares(3) Less than 1%
1720 N. First St.,
San Jose, CA 95112
Common............... Francis S. Ferraro 352 Shares(4) Less than 1%
1720 N. First St.,
San Jose, CA 95112
Common............... Raymond H. Taylor 1,242 Shares(4) Less than 1%
1720 N. First St.,
San Jose, CA 95112
</TABLE>

- ---------------
(1) For the directors of the Company and all of the directors and executive
officers of the Company as a group, refer to the table in Election of
Directors for information as to their beneficial ownership of shares of the
Company.

(2) Messrs. Feeney, Ferraro and Taylor have sole voting and sole investment
power with respect to the shares owned by them (or share such powers with
their spouses).

(3) Includes 1,847 shares held in the Savings Plan.

(4) All of these shares are held in the Savings Plan.

GENERAL INFORMATION

The Board is not aware of any matters to come before the Meeting other than
the proposals for the approval of a holding company, the election of directors
and the ratification of the selection of independent

23
<PAGE> 30

auditors. If any other matters should be brought before the Meeting, or any
adjournment thereof, upon which a vote properly may be taken, the shares
represented by the proxies in the accompanying form will be voted with respect
thereto in accordance with the discretion of the proxy holders insofar as such
proxies are not limited to the contrary.

SHAREHOLDER PROPOSALS

Proposals of shareholders intended to be presented at the next annual
meeting of the Company must be received by the Company by November 12, 1997, for
inclusion in the next proxy statement and form of proxy relating to that
meeting. Submission of a proposal does not guarantee its inclusion in a proxy
statement or its presentation at a shareholder meeting. Shareholder proposals
are subject to regulation under federal securities laws.

BY ORDER OF THE BOARD OF DIRECTORS

PAUL G. EKSTROM, Corporate Secretary

San Jose, California
March 12, 1997

24
<PAGE> 31

EXHIBIT A

AGREEMENT OF MERGER

THIS AGREEMENT OF MERGER (this "Agreement") is made as of March , 1997,
by and among CALIFORNIA WATER SERVICE COMPANY, a California corporation (the
"Company"), CWSG MERGER COMPANY, a California corporation ("Merger Co."), and
CALIFORNIA WATER SERVICE GROUP, a California corporation ("Holding Co."), with
reference to the following facts:

A. The Company has authorized capital consisting of (i) 8,000,000
shares of Common Stock, with no par value ("Company Common Stock"), of
which 6,309,570 shares are issued and outstanding; (ii) 380,000 shares of
Preferred Stock, with par value of $25.00 per share ("Company Preferred
Stock"), of which 139,000 shares of "Series C" are issued and outstanding.

B. Merger Co. has authorized capital consisting of 1,000 shares of
Common Stock ("Merger Co. Common Stock") and 1,000 shares of Preferred
Stock ("Merger Co. Preferred Stock"), of which 100 and 100 shares,
respectively, are issued and outstanding and owned beneficially and of
record by Holding Co.

C. Holding Co. has authorized capital consisting of 25,000,000 shares
of Common Stock ("Holding Co. Common Stock"), of which 100 shares are
issued and outstanding and owned beneficially and of record by the Company,
and 380,000 shares of Preferred Stock ("Holding Co. Preferred Stock"), of
which no shares are issued and outstanding and owned beneficially and of
record by the Company.

D. The Boards of Directors of the respective parties hereto deem it
advisable to merge Merger Co. with and into the Company in accordance with
the California General Corporation Law ("California GCL") and this
Agreement for the purpose of establishing Holding Co. as the parent
corporation for the Company in a transaction intended to qualify for
tax-free treatment.

NOW, THEREFORE, in consideration of the premises and agreements contained
herein, the parties agree that (i) Merger Co. shall be merged with and into the
Company, (ii) the Company shall be the corporation surviving such merger, and
(iii) the terms and conditions of such merger, the mode of carrying it into
effect, and the manner of converting and exchanging shares of capital stock
shall be as follows:

ARTICLE 1

THE MERGER

1.1 The Merger. At the Effective Time as defined in Section 1.2 below,
Merger Co. shall be merged with and into the Company (such merger shall be
referred to hereinafter as the "Merger"), which shall continue its corporate
existence as the surviving corporation (the Company and Merger Co. being
sometimes referred to herein as the "Constituent Corporations" and the Company,
as the surviving corporation, being sometimes referred to herein as the
"Surviving Corporation"). The Merger shall have the effects set forth in Section
1107 of the California GCL and such other effects, if any, as are prescribed by
law.

1.2 Effective Time. The Merger shall become effective at 11:59 p.m. on the
last day of the calendar month during which the requisite officers' certificates
and a copy of this Agreement are filed with the Secretary of State of California
as contemplated hereby (the "Effective Time"). Following the satisfaction or
waiver of all conditions set forth herein and subject to the rights of
termination set forth herein, a copy of this Agreement, together with the
requisite officers' certificates, shall be delivered as soon as practicable by
the Company to the office of the Secretary of State of California for filing, as
provided in Section 1103 of the California GCL.

1.3 Appropriate Actions. Prior to and after the Effective Time, Holding
Co., the Company and Merger Co., respectively, shall take all such actions as
may be necessary or appropriate in order to effectuate the Merger. In case at
any time after the Effective Time any further action is necessary or desirable
to carry out
<PAGE> 32

the purposes of this Agreement and to vest the Surviving Corporation with full
title to all properties, assets, privileges, rights, immunities and franchises
of either of the Constituent Corporations, the officers and directors of each of
the Constituent Corporations as of the Effective Time shall take all such
further action.

ARTICLE 2

TERMS OF CONVERSION AND EXCHANGE OF SHARES

At the Effective Time:

2.1 Company Common Stock. Each share of Company Common Stock issued and
outstanding immediately prior to the Merger shall be automatically changed and
converted into two shares of Holding Co. Common Stock, which shall thereupon be
issued and fully-paid and non-assessable.

2.2 Company Preferred Stock. Each share of the Company Preferred Stock
("Series C") issued and outstanding immediately prior to the Merger shall be
automatically changed and converted into one share of Holding Co. Preferred
Stock ("Series C") which shall thereupon be issued and fully-paid and
non-assessable.

2.3 Merger Co. Shares. The shares of Merger Co. Common Stock and Merger
Co. Preferred Stock issued and outstanding immediately prior to the Merger shall
be automatically changed and converted, respectively, into all of the issued and
outstanding shares of Common Stock and Preferred Stock ("Series C") of the
Surviving Corporation, which shall thereupon be issued and fully-paid and
non-assessable, with the effect that the number of issued and outstanding shares
of Common Stock and Preferred Stock of the Surviving Corporation shall be the
same as the number of issued and outstanding shares of Company Common Stock and
Company Preferred Stock ("Series C"), respectively, immediately prior to the
Effective Time.

2.4 Holding Co. Shares. Each share of Holding Co. Common Stock issued and
outstanding immediately prior to the Merger shall be canceled.

ARTICLE 3

ARTICLES OF INCORPORATION AND BYLAWS

3.1 The Company's Restated Articles. From and after the Effective Time,
and until thereafter amended as provided by law, the Restated Articles of
Incorporation of the Company as in effect immediately prior to the Merger shall
be and continue to be the Restated Articles of Incorporation of the Surviving
Corporation.

3.2 The Company's Bylaws. From and after the Effective Time, and until
thereafter amended as provided by law, the Bylaws of the Company as in effect
immediately prior to the Merger shall be and continue to be the Bylaws of the
Surviving Corporation.

ARTICLE 4

DIRECTORS AND OFFICERS

The persons who are directors and officers of the Company immediately prior
to the Merger shall continue as directors and officers, respectively, of the
Surviving Corporation and shall continue to hold office as provided in the
Bylaws of the Surviving Corporation. If, at or following the Effective Time, a
vacancy shall exist in the Board of Directors or in the position of any officer
of the Surviving Corporation, such vacancy may be filled in the manner provided
in the Bylaws of the Surviving Corporation.

2
<PAGE> 33

ARTICLE 5

STOCK CERTIFICATES

5.1 Pre-Merger Company Common Stock Certificates and Company Preferred
Stock Certificates. Following the Effective Time, each holder of an outstanding
certificate or certificates theretofore representing shares of Company Common
Stock or Company Preferred Stock, as the case may be, may, but shall not be
required to, surrender the same to Holding Co. for cancellation or transfer, and
thereupon each such holder or transferee will be entitled to receive a
certificate or certificates representing the same number of shares of Holding
Co. Common Stock or Holding Co. Preferred Stock, as the case may be, as the
shares of Company Common Stock or Company Preferred Stock previously represented
by the stock certificate(s) so surrendered.

5.2 Outstanding Certificates. Until surrendered or presented for transfer
in accordance with Section 5.1 above, each outstanding stock certificate which,
prior to the Effective Time, represented Company Common Stock or Company
Preferred Stock, as the case may be, shall be deemed and treated for all
corporate purposes to represent the ownership of the same number of shares of
Holding Co. Common Stock or Holding Co. Preferred Stock, as the case may be, as
though such surrender or transfer and exchange had taken place.

5.3 Company Stock Transfer Books. The stock transfer books for Company
Common Stock and Company Preferred Stock shall be deemed to be closed at the
Effective Time such that no transfer of shares of Company Common Stock and
Company Preferred Stock outstanding prior to the Effective Time shall thereafter
be made on such books.

5.4 Post-Merger Rights of Holders. Following the Effective Time, the
holders of certificates representing Company Common Stock and Company Preferred
Stock outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to stock of the Surviving Corporation and their sole
rights shall be with respect to the Holding Co. Common Stock or Holding Co.
Preferred Stock, respectively, into which their shares of Company Common Stock
or Company Preferred Stock shall have been converted in connection with the
Merger.

5.5 Holding Co. Shares Issued in connection with the Merger. On or prior
to the Effective Time, Holding Co. shall deliver to First National Bank of
Boston as transfer agent (the "Transfer Agent") two or more certificates
representing a number of shares of Holding Co. Common Stock equal to the
difference between the number of shares of Holding Co. Common Stock outstanding
pursuant to Section 2.1 of this Agreement and the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time. Promptly after
the Effective Time, the Transfer Agent shall deliver to each record holder, as
of the Effective Time, of Holding Co. Common Stock, a certificate or
certificates representing the number of additional shares of Holding Co. Common
Stock, to which such record holder is entitled to pursuant to Section 2.1 of
this Agreement. Such new certificates shall bear such restrictive legends, if
any, as are required to assure compliance with all applicable securities laws
and the transfer of the shares represented thereby shall be restricted
accordingly.

ARTICLE 6

CONDITIONS OF THE MERGER

Completion of the Merger is subject to the satisfaction of the following
conditions:

6.1 Shareholder Approval. The principal terms of this Agreement shall have
been approved by the affirmative vote by the holders of a majority of the shares
of the Company Common Stock and the affirmative vote by the holders of a
majority of the shares of Company Preferred Stock.

6.2 Holding Co. Common Stock Listed. The Holding Co. Common Stock to be
issued and to be reserved for issuance pursuant to the Merger shall have been
approved for listing, upon official notice of issuance, by the New York Stock
Exchange.

3
<PAGE> 34

6.3 CPUC Approval. The California Public Utilities Commission shall have
approved the formation of a holding company structure for the Company pursuant
to an agreement of merger in a form substantially similar to the Agreement.

ARTICLE 7

AMENDMENT AND TERMINATION

7.1 Amendment. Subject to applicable law, the parties to this Agreement,
by mutual consent of their respective boards of directors, may amend, modify or
supplement this Agreement in such manner as may be agreed upon by them in
writing at any time before or after approval of this Agreement by the pre-Merger
shareholders of the Company (as provided in Section 6.1 above).

7.2 Termination. This Agreement may be terminated and the Merger and other
transactions provided for by this Agreement may be abandoned at any time,
whether before or after approval of this Agreement by the pre-Merger
shareholders of the Company, by action of the board of directors of the Company
if such board of directors determines for any reason that the completion of the
transactions provided for herein would for any reason be inadvisable or not in
the best interests of the Company or its shareholders.

ARTICLE 8

MISCELLANEOUS

8.1 Approval of Holding Co. Shares. By its execution and delivery of this
Agreement, the Company, as the sole pre-Merger shareholder of Holding Co.,
consents to, approves and adopts this Agreement and approves the Merger, subject
to approval of this Agreement by the pre-Merger shareholders of the Company (as
provided in Section 6.1 above).

8.2 Approval of Merger Co. Shares. By its execution and delivery of this
Agreement, Holding Co., as the sole pre-Merger shareholder of Merger Co.,
consents to, approves and adopts this Agreement and approves the Merger, subject
to approval of this Agreement by the pre-Merger shareholders of the Company (as
provided in Section 6.1 above).

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<PAGE> 35

IN WITNESS WHEREOF, the Company, Holding Co. and Merger Co., pursuant to
approval and authorization duly given by resolutions adopted by their respective
boards of directors, have each caused this Agreement to be executed by its
chairman of the board or its president or one of its vice presidents and by its
secretary or one of its assistant secretaries.

CALIFORNIA WATER SERVICE COMPANY,
a California corporation

By:
- ----------------------------------------------------
Its:
- ---------------------------------------------------

CWSG MERGER COMPANY,
a California corporation

By:
- ----------------------------------------------------
Its:
- ---------------------------------------------------

CALIFORNIA WATER SERVICE GROUP,
a California corporation

By:
- ----------------------------------------------------
Its:
- ---------------------------------------------------

5
<PAGE> 36

EXHIBIT B

RESTATED ARTICLES OF INCORPORATION
OF
CALIFORNIA WATER SERVICE GROUP

ARTICLE I

SECTION 1.1 The name of the corporation is CALIFORNIA WATER SERVICE GROUP
(the "Corporation").

ARTICLE II

SECTION 2.1 The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust company
business or the practice of a profession permitted to be incorporated by the
California Corporations Code.

ARTICLE III

SECTION 3.1 The name and address of the Corporation's initial agent for
service of process is Paul Ekstrom, 1720 North First Street, San Jose, CA 95112.

ARTICLE IV

SECTION 4.1 The Corporation is authorized to issue more than one class of
shares, namely two classes consisting of one class of preferred shares and one
class of common shares. The total number of shares which the Corporation is
authorized to issue is 25,380,000 and the aggregate par value of all of said
shares that are to have a par value, namely all 380,000 of said preferred shares
is $9,500,000. Of said 25,380,00 shares, 380,000 shall be and are preferred
shares of the par value of $25.00 per share and 25,000,000 shall be and are
common shares without par value. Of said 380,000 preferred shares, 139,000 shall
be and are "Series C" preferred shares, 241,000 of said preferred shares shall
be and are "Series D", "Series E", "Series F", "Series G", "Series H", "Series
I", and "Series J" (there being no preferred shares of "Series A" or "Series
B"), the number of shares constituting each such series to be determined by the
Board of Directors of the Corporation pursuant to the authority contained in
these Articles. The preferred shares may at the election of the Board of
Directors be issued in fractional shares if required in connection with any
stock split or otherwise. All of said 25,000,000 common shares shall be of one
and the same series, namely common shares without par value.

ARTICLE V

SECTION 5.1 The said shares which the Corporation shall have authority to
issue are to be classified as preferred shares of eight series and common shares
of one series as provided in Article IV above and that the nature and extent of
the preferences, privileges and restrictions granted or imposed upon the holders
of the respective classes or series of shares and the number of shares
constituting each series of preferred shares shall be as follow:

(a) The holders of the "Series C" preferred shares shall be entitled
to and the Corporation shall be bound to pay thereon as and when declared
by the Board of Directors out of the surplus or net profits, dividends at
the rate of but not exceeding four and four-tenths percent (4.4%) per
annum, cumulative from the date of issuance and payable quarterly on the
fifteenth (15th) day of February, May, August and November in each year. If
the Corporation shall fail to pay such dividends quarterly upon all the
issued and outstanding preferred shares of "Series C", the deficiency in
dividends shall be fully paid but without interest before any dividends
shall be set apart or paid on the common shares.
<PAGE> 37

(b) The holders of preferred shares of each series other than "Series
C" shall be entitled to, and the Corporation shall be bound to pay thereon
as and when declared by the Board of Directors out of the surplus or net
profits, dividends at such rate as shall hereafter be fixed by the Board of
Directors as hereinafter provided. Such dividends shall be payable upon the
same date and in the same manner as dividends upon "Series C" preferred
shares. Dividends upon preferred shares of any series shall be cumulative
from the date of issuance in the same manner as dividends upon "Series C"
preferred shares.

(c) After all cumulative dividends are declared and paid or set apart
on the preferred shares of "Series C" and on any other series of preferred
shares which may be outstanding, the Board of Directors may declare such
additional dividends on the common shares out of the surplus or net profits
as in their discretion may seem proper.

(d) The preferred shares of "Series C" shall be subject to redemption
on any dividend date at the option of the Corporation in whole or in part
upon at least thirty (30) days notice mailed to the holders of record
thereof at $26.75 per share together with accrued dividends, and any such
partial redemption shall be made by lot or pro rata or by such other method
as shall be provided from time to time by resolution of the Board of
Directors or by the By-Laws. If notice of redemption shall have been duly
given as hereinabove provided and if on or before the redemption date named
in said notice, the funds necessary for such redemption shall have been set
aside by the Corporation and shall be and continue to be available
therefor, then, notwithstanding that any certificate or certificates for
preferred shares of "Series C" called for redemption shall not have been
surrendered for cancellation, all rights of the holder or holders of such
shares so called for redemption to receive dividends thereon shall cease
and such shares shall not be transferable on the books of the Corporation
and thereafter the holder or holders of such shares shall have no right to
or in respect to the Corporation or its earnings, property and assets other
than the right to receive the redemption price and all dividends accrued to
the date fixed for such redemption without interest upon the surrender of
the certificate or certificates for such shares duly endorsed. All
preferred shares of "Series C" redeemed as hereinbefore provided shall be
forthwith canceled and shall not be reissued and no shares shall be issued
in lieu thereof nor in exchange therefor.

(e) Preferred shares of each series other than "Series C" shall be
subject to redemption on any dividend date at the option of the Corporation
in whole or in part, at such redemption price as may hereafter be fixed by
the Board of Directors as hereinafter provided. Any such redemption shall
be upon at least thirty (30) days notice to the holders of record thereof
which notice shall be given in the same manner as in the case of redemption
of "Series C" preferred shares and all provisions herein contained with
respect to the redemption of "Series C" preferred shares, except provisions
as to redemption price, shall be applicable to the redemption of preferred
shares of any other series with appropriate changes in series designations.

(f) Upon any voluntary dissolution of liquidation of the Corporation
the holder of the "Series C" preferred shares shall be entitled to receive
from capital or earnings an amount equal to $26.75 per share, and all
dividends accrued thereon to the date of payment, and upon any involuntary
dissolution or liquidation or the Corporation the holders of the "Series C"
preferred shares shall be entitled to receive, whether from capital or from
earnings, an amount equal to the par value thereof and all dividends
accrued thereon to the date of payment, but no more before any payment
shall be made to the holders of the common shares. After such payments to
the holders of the "Series C" preferred shares and after the holders of any
other series of preferred shares which may be outstanding have received the
payments to which their respective preferences entitle them, the aggregate
amount of any assets and funds of the Corporation then remaining shall be
distributed among the holders of the common shares.

(g) The preferred shares of "Series C" shall be and are hereby
declared to be forever nonassessable.

(h) The Board of Directors is hereby authorized to fix or alter from
time to time the number of share constituting any wholly unissued shares of
preferred stock and to fix or alter from time to time the dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of
redemption, redemption price or prices or the liquidation preferences
(including the absence or limited grant of any such rights or preferences)
of any wholly unissued series of preferred shares. Except in so far as the
Board of Directors

2
<PAGE> 38

shall provide hereinafter in respect of any series, all preferred shares
shall be of equal rank, and any series of preferred shares shall have the
same rights and preferences as those herein granted to "Series C" preferred
shares.

(i) The common shares of the Corporation shall be subject and
subordinate to any rights and preferences granted herein and any rights and
preferences which may be granted to any series of preferred shares by the
Board of Directors pursuant to the authority herein conferred upon said
Board of Directors.

(j) The holders of common shares shall be entitled to vote at all
elections and to vote or consent on all questions at the rate of one vote
for each such share held by such holder. The holders of preferred shares of
"Series C" shall be entitled to vote at all elections and to vote or
consent on all questions at the rate of sixteen votes for each share held
by such holder.

(k) The preferred shares of "Series C" shall be entitled to no
conversion rights whatsoever.

(l) Except for any conversion rights which may be granted to any
series of preferred shares pursuant to the authority herein conferred upon
the Board of Directors, no one or more holders of shares of the capital
stock of the Corporation shall be entitled to purchase or otherwise
participate in any new or additional issue of stock by the Corporation, and
every stockholder hereby and by the acceptance of the certificate or
certificates for such stockholder's stock irrevocably for said stockholder
and said stockholder's heirs, executors, administrators, successors and
assigns, waives all rights to purchase or otherwise participate in such new
or additional issue or any part thereof except for said conversion rights.

ARTICLE VI

SECTION 6.1 The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.

SECTION 6.2 The Corporation shall indemnify any person who is or was a
party or is threatened to be made a party to any proceeding (as defined in
Section 317 of the Corporations Code) by reason of the fact that such person is
or was an agent (as defined in Section 317 of the Corporations Code) of the
Corporation, to the fullest extent permitted by Section 317 of the Corporations
Code. The Corporation is authorized to provide indemnification of agents for
breach of duty to the Corporation and its stockholders through bylaw provisions
or through agreements with the agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the
Corporations Code.

3
<PAGE> 39

EXHIBIT C

BYLAWS
OF
CALIFORNIA WATER SERVICE GROUP
(A CALIFORNIA CORPORATION)

ARTICLE I

OFFICES

Section 1.1 Principal Office. The principal office for the transaction of
the business of the corporation shall be located at 1720 North First Street, San
Jose, in the County of Santa Clara, State of California. The Board of Directors
is hereby granted full power and authority to change said principal office to
another location in said county.

Section 1.2 Other Offices. One or more branch or other subordinate offices
may at any time be fixed and located by the Board of Directors at such place or
places within or without the State of California as its deems appropriate.

ARTICLE II

DIRECTORS

Section 2.1 Exercise of Corporate Powers. Except as otherwise provided by
the Articles of Incorporation of the corporation or by the laws of the State of
California now or hereafter in force, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation as
permitted by law provided that the business and affairs of the corporation shall
be managed and all corporate powers shall be exercised under the ultimate
direction of the Board.

Section 2.2 Number. The number of the corporation's directors shall be not
less than nine nor more than eleven, the exact number of which shall be fixed by
a resolution approved by the shareholders or by the Board of Directors.

Section 2.3 Need Not Be Shareholders. The directors of the corporation
need not be shareholders of the corporation.

Section 2.4 Compensation. Directors shall receive such compensation for
their services as directors and such reimbursement for their expenses of
attendance at meetings as may be determined from time to time by resolution of
the Board. Nothing herein contained shall be construed to preclude any director
from serving the corporation in any other capacity and receiving compensation
therefore.

Section 2.5 Election and Term of Office. At each annual meeting of
shareholders, directors shall be elected to hold office until the next annual
meeting, provided, that if for any reason, said annual meeting or an adjournment
thereof is not held or the directors are not elected thereat, then the directors
may be elected at any special meeting of the shareholders called and held for
that purpose. The term of office of the directors shall begin immediately after
their election and shall continue until the expiration of the term for which
elected and until their respective successors have been elected and qualified.

Section 2.6 Vacancies. A vacancy or vacancies in the Board of Directors
shall exist when any authorized position of directors is not then filled by a
duly elected director, whether caused by death, resignation, removal, change in
the authorized number of directors (by the Board or the shareholders) or
otherwise. The Board of Directors may declare vacant the office of a director
who has been declare of unsound mind by an order of court or convicted of a
felony. Except for a vacancy created by the removal of a director, vacancies on
the Board may be filled by a majority of the directors then in office, whether
or not less than a quorum, or by a sole remaining director. A vacancy created by
the removal of a director may be filled only by the approval of the
shareholders. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors, but any such election by written consent
requires the consent of the holders of shares entitled to cast a majority of the
votes entitled to be cast by the outstanding voting shares. Any director may
<PAGE> 40

resign effective upon giving written notice to the Chairman of the Board, the
President and Chief Executive Officer, the Secretary or the Board of Directors
of the corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the resignation is effective at a future
time, a successor may be elected to take office when the resignation become
effective.

Section 2.7 Removal.

(a) Any and all the directors may be removed without cause if such removal
is approved by the affirmative vote of a majority of the votes entitled to be
cast by the outstanding voting shares at an election of directors, subject to
the following:

(1) No director may be removed (unless the entire Board is removed)
when the votes cast against removal, or not consenting in writing to such
removal, would be sufficient to elect such director if voted cumulatively
at an election at which the same total number of votes were cast (or, if
such action is taken by written consent, all shares entitled to vote were
voted) and the entire number of directors authorized at the time of the
director's most recent election were then being elected; and

(2) When by the provisions of the Articles the holders of the shares
of any class or series, voting as a class or series, are entitled to elect
one or more directors, any director so elected may be removed only by the
applicable vote of the holders of the shares of that class or series.

(b) Any reduction of the authorized number of directors does not remove any
director prior to the expiration of such director's term of office.

ARTICLE III

OFFICERS

Section 3.1 Election and Qualifications. The Officers of this corporation
shall consist of a President and Chief Executive Officer, one or more Vice
Presidents, a Corporate Secretary, one or more Assistant Secretaries, a Chief
Financial Officer and Treasurer, one or more Assistant Treasurers and a
Controller who shall be chosen by the Board of Directors and such other
officers, including a Chairman of the Board, as the Board of Directors shall
deem expedient, who shall be chosen in such manner and hold their offices for
such terms as the Board of Directors may prescribe. Any two or more of such
offices may be held by the same person. Any Vice President, Assistant Treasurer
or Assistant Secretary, respectively, may exercise any of the powers of the
President and Chief Executive Officer, Chief Financial Officer and Treasurer, or
the Secretary, respectively, as directed by the Board of Directors and shall
perform such other duties as are imposed upon such officer by the Bylaws or the
Board of Directors. The Chairman of the Board of Directors, if there be one,
shall be chosen from the directors, and may or may not be an officer of the
corporation. Officers, other than the Chairman of the Board, may or may not be
directors. The Board of Directors shall designate the chief executive officer of
the corporation.

Section 3.2 Term of Office and Compensation. The term of office and salary
of each of said officers and the manner and time of the payment of such salaries
shall be fixed and determined by the Board of Directors and may be altered by
said Board of Directors from time to time at its pleasure, subject to the
rights, if any, of said officers under any contract of employment.

Section 3.3 Removal and Vacancies. Any officer of the corporation may be
removed at the pleasure of the Board of Directors at any meeting or by vote of
shareholders entitled to exercise a majority of the voting power of the
corporation at any meeting or at the pleasure of any officer who may be granted
such power by a resolution of the Board of Directors. Any officer may resign at
any time upon written notice to the corporation without prejudice to the rights,
if any, of the corporation under any contract to which the officer is a party.
If any vacancy occurs in any office of the corporation, the Board of Directors
may elect a successor to fill such vacancy for the remainder of the unexpired
term and until a successor is duly chosen and qualified.

2
<PAGE> 41

ARTICLE IV

CHAIRMAN OF THE BOARD

Section 4.1 Powers and Duties. If there be one, the Chairman of the Board
of Directors shall preside at meetings of the shareholders and of the Board of
Directors and shall do and perform such other duties as may from time to time be
assigned to him by the Board of Directors. The Chairman of the Board, if
designated by the Board of Directors as an officer of the corporation, shall
have the power and authority to affix the signature of the corporation to all
deeds, conveyances, mortgages, leases, obligations, bonds, contracts,
certificates and other papers and instruments in writing which have been
authorized or directed by the Board of Directors or which, in his judgment,
should be executed on behalf of the corporation.

ARTICLE V

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Section 5.1 Powers and Duties. The President and Chief Executive Officer
shall do and perform such duties as may from time to time be assigned to him by
the Board of Directors. He shall have the power and authority to affix the
signature of the corporation to all deeds, conveyances, mortgages, leases,
obligations, bonds, contracts, certificates and other papers and instruments in
writing which have been authorized or directed by the Board of Directors or
which, in his judgment, should be executed on behalf of the corporation, and to
sign certificates for shares of stock of the corporation. In the event of the
absence or disability of the Chairman of the Board of Directors, the President
and Chief Executive Officer shall exercise the power and perform the duties of
the Chairman of the Board of Directors. If there be no Chairman of the Board of
Directors, the powers and duties of the President and Chief Executive Officer
shall include those assigned to the Chairman of the Board of Directors by
Article IV, as well as those assigned to the President and Chief Executive
Officer by this Article.

Section 5.2 President pro tem. If neither the Chairman of the Board, the
President and Chief Executive Officer, nor any Vice President is present at any
meeting of the Board of Directors, a President pro tem may be chosen to preside
and act at such meeting. If neither the President and Chief Executive Officer
nor any Vice President is present at any meeting of the shareholders, a
President pro tem may be chosen to preside at such meeting.

ARTICLE VI

VICE PRESIDENTS

Section 6.1 Powers and Duties. In case of the absence, disability or death
of the President and Chief Executive Officer, a Vice President shall exercise
all the powers and perform all the duties of the President and Chief Executive
Officer. The Vice Presidents shall have such powers and perform such duties as
may be granted or prescribed by the Board of Directors.

ARTICLE VII

CORPORATE SECRETARY

Section 7.1 Powers and Duties. The powers and duties of the Corporate
Secretary are:

(a) To keep a book of minutes at the principal office of the corporation,
or such other place as the Board of Directors may order, of all meetings of its
directors and shareholders with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' meetings, the number of shares present or
represented at shareholders' meetings and the proceedings thereof.

(b) To keep the seal of the corporation and to affix the same to all
instruments which may require it.

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<PAGE> 42

(c) To keep or cause to be kept at the principal office of the corporation,
or at the office of the transfer agent or agents, a share register, or duplicate
share registers, showing the names of the shareholders and their addresses, the
number and classes of shares held by each, the number and date of certificates
issued for shares, and the number and date of cancellation of every certificate
surrendered for cancellation.

(d) To keep a supply of certificates for shares of the corporation, to fill
in all certificates issued, and to make a proper record of each such issuance;
provided that so long as the corporation shall have one or more duly appointed
and acting transfer agents of the shares, or any class or series of shares, of
the corporation, such duties with respect to such shares shall be performed by
such transfer agent or transfer agents.

(e) To transfer upon the share books of the corporation any and all shares
of the corporation; provided that so long as the corporation shall have one or
more duly appointed and acting transfer agents of the shares, or any class or
series of shares, of the corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents, and the method of
transfer of each certificate shall be subject to the reasonable regulations of
the transfer agent to which the certificate is presented for transfer, and also,
if the corporation then has one or more duly appointed and acting registrars, to
the reasonable regulations of the registrar to which the new certificate is
presented for registration; and provided, further, that no certificate for
shares of stock shall be issued or delivered or, if issued or delivered, shall
have any validity whatsoever until and unless it has been signed or
authenticated in the manner provided in Section 13.4 hereof.

(f) To make service and publication of all notices that may be necessary or
proper, and without command or direction from anyone. In case of the absence,
disability, refusal or neglect of the Secretary to make service or publication
of any notices, then such notices may be served and/or published by the
President and Chief Executive Officer or a Vice President, or by any person
thereunto authorized by either of them or by the Board of Directors or by the
holders of a majority of the outstanding shares of the corporation.

(g) Generally to do and perform all such duties as pertain to the office of
Secretary and as may be required by the Board of Directors.

Section 7.2 Assistant Secretaries. Each Assistant Secretary shall have
such powers and shall perform such duties as may be assigned to him by the Board
of Directors; and in case of the absence, disability or death of the Secretary,
an Assistant Secretary shall be designated by the Board of Directors to take his
place and perform his duties.

ARTICLE VIII

CHIEF FINANCIAL OFFICER AND TREASURER

Section 8.1 Powers and Duties. The powers and duties of the Chief
Financial Officer and Treasurer are:

(a) To supervise and control the keeping and maintaining of adequate and
correct accounts of the corporation's properties and business transactions,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any director.

(b) To have the custody of all funds, securities, evidence of indebtedness
and other valuable documents of the corporation and, at the discretion of the
Chief Financial Officer and Treasurer, to cause any or all thereof to be
deposited for the account of the corporation with such depositary as may be
designated from time to time by the Board of Directors.

(c) To receive or cause to be received, and to give or cause to be given,
receipts and acquittances for moneys paid in for the account of the corporation.

(d) To pay out of the corporation funds on hand all just debts of the
corporation of whatsoever nature upon maturity of the same and to disburse, or
cause to be disbursed, all funds of the corporation as may be directed by the
Board of Directors, taking proper vouchers for such disbursements.

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<PAGE> 43

(e) To render to the Chairman of the Board, to the President and Chief
Executive Officer and to the Board of Directors, whenever they may require,
accounts of all transactions and of the financial condition of the corporation.

(f) Generally to do and perform all such duties as pertain to the office of
Chief Financial Officer and Treasurer and as may be required by the Board of
Directors.

Section 8.2 Assistant Treasurers. Each Assistant Treasurer shall have such
powers and shall perform such duties as may be assigned to him by the Board of
Directors; and in case of the absence, disability or death of the Chief
Financial Officer and Treasurer, an Assistant Treasurer shall be designated by
the Board of Directors to take his place and perform his duties.

ARTICLE IX

CONTROLLER

Section 9.1 Powers and Duties. The Controller shall have charge of the
corporation's books of accounts, records and auditing, and generally do and
perform all such other duties as pertain to his office and as may be required by
the Board of Directors.

ARTICLE X

COMMITTEES OF THE BOARD

Section 10.1 Appointment and Procedure. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, including an Audit Committee, each consisting
of two or more directors, to serve at the pleasure of the Board. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of the committee.

Section 10.2 Powers. Any committee appointed by the Board of Directors, to
the extent provided in the resolution of the Board or in these Bylaws, shall
have all the authority of the Board except with respect to:

(a) the approval of any action which requires the approval or vote of the
shareholders;

(b) the filling of vacancies on the Board or on any committee;

(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;

(e) the amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;

(f) a distribution to the shareholders of the corporation, except at a rate
or in a periodic amount or within a price range determined by the Board;

(g) the appointment of other committees of the Board or the members
thereof.

Section 10.3 Executive Committee. In the event that the Board of Directors
appoints an Executive Committee, such Executive Committee shall include the
Chairman of the Board, if any, as one of its members. In all cases in which
specific directions to the contrary shall not have been given by the Board of
Directors, such Executive Committee shall have and may exercise, during the
intervals between the meetings of the Board of Directors, all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation (except as provided in Section 10.2 hereof ) in such
manner as the Executive Committee may deem in the best interest of the
corporation.

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<PAGE> 44

ARTICLE XI

MEETINGS OF SHAREHOLDERS

Section 11.1 Place of Meetings. Meetings (whether regular, special or
adjourned) of the shareholders of the corporation shall be held at the principal
office for the transaction of business as specified in accordance with Section
1.1 hereof, or any place within or without the State which may be designated by
written consent of all the shareholders entitled to vote thereat, or which may
be designated by the Board of Directors.

Section 11.2 Time of Annual Meetings. The annual meeting of the
shareholders shall be held at such time on such date within the month of April
of each year as shall be designated from time to time by resolution of the Board
of Directors.

Section 11.3 Special Meetings. Special meetings of the shareholders may be
called by the Board of Directors, the Chairman of the Board, the President or
the holders of shares entitled to cast not less than 10% of the votes at the
meeting.

Section 11.4 Notice of Meetings.

(a) Whenever shareholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given not less than 10 nor
more than 60 days before the day of the meeting to each shareholder entitled to
vote thereat. Such notice shall state the place, date and hour of the meeting
and (1) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted, or (2) in the case of
the annual meeting, those matters which the Board, at the time of the mailing of
the notice, intends to present for action by the shareholders, but subject to
provisions of subdivision (b) any proper matter may be presented at the meeting
for such action. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by management for election.

(b) Any shareholder approval at a meeting, other than unanimous approval by
those entitled to vote, on any of the matters listed below shall be valid only
if the general nature of the proposal so approved was stated in the notice of
meeting or in any written waiver of notice.

(1) a proposal to approve a contract or other transaction between the
corporation and one or more of its directors, or between the corporation
and any corporation, firm or association in which one or more directors has
a material financial interest;

(2) a proposal to amend the Articles of Incorporation;

(3) a proposal regarding a reorganization, merger or consolidation
involving the corporation;

(4) a proposal to wind up and dissolve the corporation;

(5) a proposal to adopt a plan of distribution of the shares,
obligations or securities of any other corporation, domestic or foreign, or
assets other than money which is not in accordance with the liquidation
rights of any preferred shares as specified in the Articles of
Incorporation.

Section 11.5 Delivery of Notice. Notice of a shareholders' meeting or any
report shall be given either personally or by mail or other means of written
communication, addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice; or if no such address appears or is
given, at the place where the principal executive office of the corporation is
located or by publication at least once in a newspaper of general circulation in
the county in which the principal executive office is located. The notice or
report shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by other means of written communication. An
affidavit of mailing of any notice or report in accordance with the provisions
of this section, executed by the secretary, assistant secretary or any transfer
agent, shall be prima facie evidence of the giving of notice or report.

If any notice or report addressed to the shareholders at the address of
such shareholder appearing on the books of the corporation is returned to the
corporation by United States Postal Service marked to indicate that the United
States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all

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future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice to all other
shareholders.

Section 11.6 Adjourned Meetings. When a shareholders' meeting is adjourned
to another time or place, unless the Bylaws otherwise require and except as
provided in this section, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than 45 days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.

Section 11.7 Attendance at Shareholders' Meeting. Attendance of a person
at a meeting of shareholders shall constitute a waiver of notice of such
meeting, except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by the California General
Corporation Law to be included in the notice but not so included in the notice
if such objection is expressly made at the meeting.

Section 11.8 Quorum.

(a) The presence in person or by proxy at any meeting of persons entitled
to case a majority of the votes entitled to be cast by the outstanding voting
shares shall constitute a quorum for the transaction of business. If a quorum is
present, the affirmative vote of a majority of votes entitled to be cast by the
shares represented at the meeting and entitled to vote on any matter shall be
the act of shareholders, unless the vote of a greater number or voting by
classes is required by law or the Articles of Incorporation or these Bylaws and
except as provided in subdivision (b).

(b) The shareholders present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by an
affirmative vote equal to at least a majority of the votes required to
constitute a quorum.

(c) In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of votes entitled to be
cast by the shares represented either in person or by proxy, but no other
business may be transacted, except as provided in subdivision (b).

Section 11.9 Actions Without Meeting.

(a) Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted; provided that,
subject to the provisions of Section 2.6, directors may not be elected by
written consent except by unanimous written consent of all shares entitled to
vote for the election of directors.

(b) Unless the consents of all shareholders entitled to vote have been
solicited in writing,

(1) notice of any shareholder approval on matters described in
subparagraphs (1), (3) or (5) of subdivision (b) Section 11.4 or respecting
indemnification of agents of the corporation without a meeting by less than
unanimous written consent shall be given at least ten (10) days before the
consummation of the action authorized by such approval, and

(2) prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous
written consent, to those shareholders entitled to vote who have not
consented in writing; the provisions of Section 11.5 shall apply to such
notice.

Section 11.10 Revocation of Consent. Any shareholder giving a written
consent, or the shareholder's proxyholders, or a transferee of the shares or a
personal representative of the shareholder or their respective

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<PAGE> 46

proxyholders, may revoke the consent by a writing received by the corporation
prior to the time that written consents of the number of shares required to
authorize the proposed action have been filed with the secretary of the
corporation, but may not do so thereafter. Such revocation is effective upon its
receipt by the secretary of the corporation.

Section 11.11 Voting Rights. Except as provided in Section 11.13 or in the
Articles of Incorporation or in the Certificate of Determination of Preferences
of any series of preferred shares or in any statute relating to the election of
directors or to other particular matters, each holder of preferred shares
entitled to be voted shall be entitled to sixteen votes for each such preferred
share and each holder of common shares entitled to be voted shall be entitled to
one vote for each common share with respect to each matter submitted to a vote
of shareholders. Any holder of shares entitled to vote on any matter may vote
part of the shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal, other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares such shareholder is
entitled to vote.

Section 11.12 Determination of Holders of Record.

(a) In order that the corporation may determine the shareholders entitled
to notice of any meeting or to vote or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days prior to the date of such meeting nor more than 60 days
prior to any other action.

(b) In the absence of any record date set by the Board of Directors
pursuant to subdivision (a) above, then:

(1) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.

(2) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior
action by the Board has been taken, shall be the day on which the first
written consent is given.

(3) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto, or the 60th day prior to the date of such
other action, whichever is later.

(c) A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting, but the
Board shall fix a new record date if the meeting is adjourned for more than 45
days from the date set for the original meeting.

(d) Shareholders on the record date are entitled to notice and to vote or
to receive the dividend, distribution or allotment of rights or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise provided in
the Articles or these Bylaws or by agreement or applicable law.

Section 11.13 Elections for Directors.

(a) Every shareholder complying with subdivision (b) and entitled to vote
at any election of directors may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit.

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(b) No shareholder shall be entitled to cumulate votes (i.e., cast for any
one or more candidates a number of votes greater than the number of votes to
which the shareholder's shares are entitled pursuant to Section 11.11) unless
such candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given written notice to the chairman of the
meeting at the meeting prior to the voting of the shareholder's intention to
cumulate the shareholder's votes. If any one shareholder has given such notice,
all shareholders may cumulate their votes for candidates in nomination.

(c) In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.

(d) Elections for directors need not be by ballot unless a shareholder
demands election by ballot at the meeting and before the voting begins or unless
the Bylaws so require.

Section 11.14 Proxies.

(a) Every person entitled to vote shares may authorize another person or
persons to act by proxy with respect to such shares. Any proxy purporting to be
executed in accordance with the provisions of the General Corporation Law of the
State of California shall be presumptively valid.

(b) No proxy shall be valid after the expiration of 11 months from the date
thereof unless otherwise provided in the proxy. Every proxy continues in full
force and effect until revoked by the person executing it prior to the vote
pursuant thereto, except as otherwise provided in this section. Such revocation
may be effected by a writing delivered to the corporation stating that the proxy
is revoked or by a subsequent proxy executed by, or by attendance at the meeting
and voting in person by, the person executing the proxy. The dates contained on
the forms of proxy presumptively determine the order of the execution,
regardless of the postmark dates on the envelopes in which they are mailed.

(c) A proxy is not revoked by the death or incapacity of the maker unless,
before the vote is counted, written notice of such death or incapacity is
received by the Corporation.

Section 11.15 Inspectors of Election.

(a) In advance of any meeting of shareholders the Board may appoint
inspectors of election to act at the meeting and any adjournment thereof. If
inspectors of election are not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any meeting of shareholders may, and
on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election (or persons to replace those who so fail or refuse) at
the meeting. The number of inspectors shall be either one or three. If appointed
at a meeting on the request of one or more shareholders or proxies, the holders
of shares entitled to cast a majority of the votes entitled to be cast by the
shares represented in person or by proxy shall determine whether one or three
inspectors are to be appointed.

(b) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.

(c) The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the fact stated thereon.

ARTICLE XII

MEETINGS OF DIRECTORS

Section 12.1 Place of Meetings. Unless otherwise specified in the notice
thereof, meetings (whether regular, special or adjourned) of the Board of
Directors of this corporation shall be held at the principal office of the
corporation for the transaction of business, as specified in accordance with
Section 1.1 hereof, which is

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hereby designated as an office for such purpose in accordance with the laws of
the State of California, or at any other place within or without the State which
has been designated from time to time by resolution of the Board or by written
consent of all members of the Board.

Section 12.2 Regular Meetings. Regular meetings of the Board of Directors
of which no notice need be given except as required by the laws of the State of
California, shall be held after the adjournment of each annual meeting of the
shareholders (which meeting shall be designated the Regular Annual Meeting) and
at such other times as may be designated from time to time by resolution of the
Board of Directors.

Section 12.3 Special Meetings. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board or the President or by
any Vice President or the Secretary or by any two or more of the directors.

Section 12.4 Notice of Meetings. Except in the case of regular meetings,
notice of which has been dispensed with, the meetings of the Board of Directors
shall be held upon four (4) days' notice by mail or forty-eight (48) hours'
notice delivered personally or by telephone, telegraph, or other electronic or
wireless means. If the address of a director is not shown on the records and is
not readily ascertainable, notice shall be addressed to him at the city or place
in which the meetings of the directors are regularly held. Except as set forth
in Section 12.6, notice of the time and place of holding an adjourned meeting
need not be given to absent directors if the time and place be fixed at the
meeting adjourned.

Section 12.5 Quorum. A majority of the authorized number of directors
constitute a quorum of the Board for the transaction of business. Every act or
decision done or made by a majority of the directors present at a meeting duly
held at which a quorum is present shall be regarded as the act of the Board of
Directors except as otherwise provided by law. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of Directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.

Section 12.6 Adjourned Meetings. A majority of the directors present,
whether or not a quorum is present, may adjourn any meeting to another time and
place. If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.

Section 12.7 Waiver of Notice and Consent.

(a) Notice of a meeting need not be given to any director who signs a
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director.

(b) The transactions of any meeting of the Board, however called and
noticed or wherever held, are as valid as though had at a meeting duly held
after regular call and notice if a quorum is present and if, either before or
after the meeting, each of the directors not present signs a written waiver of
notice, a consent to holding the meeting or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.

Section 12.8 Action Without a Meeting. Any action required or permitted to
be taken by the Board may be taken without a meeting, if all members of the
Board shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the Board. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.

Section 12.9 Conference Telephone Meetings. Members of the Board may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Participation in a meeting pursuant to this section
constitutes presence in person at such meeting.

Section 12.10 Meetings of Committees. The provision of this Article apply
also to committees of the Board and action by such committees.

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ARTICLE XIII

SUNDRY PROVISIONS

Section 13.1 Instruments in Writing. All checks, drafts, demands for money
and notes of the corporation, and all written contracts of the corporation,
shall be signed by such officer or officers, agent or agents, as the Board of
Directors may from time to time by resolution designate. No officer, agent, or
employee of the corporation shall have power to bind the corporation by contract
or otherwise unless authorized to do so by these Bylaws or by the Board of
Directors.

Section 13.2 Fiscal Year. The fiscal year of this corporation shall be the
calendar year.

Section 13.3 Shares Held by the Corporation. Shares in other corporations
standing in the name of this corporation may be voted or represented and all
rights incident thereto may be exercised on behalf of this corporation by the
President or by any other officer of this corporation authorized so to do by
resolution of the Board of Directors.

Section 13.4 Certificates of Stock There shall be issued to each holder of
fully paid shares of the capital stock of the corporation a certificate or
certificates for such shares. Any holder of shares in the corporation shall be
entitled to have a certificate signed in the name of the corporation by the
Chairman or Vice Chairman of the Board or the President and Chief Executive
Officer or a Vice President and by the Chief Financial Officer and Treasurer or
any Assistant Treasurer or the Secretary or any Assistant Secretary, certifying
the number of shares and the class or series of shares owned by the shareholder.
Any or all of the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.

Section 13.5 Lost Certificates. The Board of Directors may by resolution
provide that in the event any certificate or certificates for shares of the
capital stock of the corporation shall be alleged to have been lost or
destroyed, no new certificate or certificates shall be issued in lieu thereof
until an indemnity bond in such form and in such amount as shall be approved by
the President and Chief Executive Officer or a Vice President of the corporation
shall have been furnished. The Board of Directors may adopt such other
provisions and restrictions with reference to lost certificates as it shall in
its discretion deem appropriate.

Section 13.6 Certification and Inspection of Bylaws. The corporation shall
keep at its principal executive office in this state, or if its principal
executive office is not in this state at its principal business office in this
state, the original or a copy of these Bylaws as amended to date, which shall be
open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside this
state and the corporation has no principal business office in this state, it
shall upon the written request of any shareholder furnish to such shareholder a
copy of the Bylaws as amended to date.

Section 13.7 Notices. Any reference in these Bylaws to the time a notice
is given or sent means, unless otherwise expressly provided, the time a written
notice by mail is deposited in the United State mails, postage prepaid; or the
time any other written notice is personally delivered to the recipient or is
delivered to a common carrier for transmission, or actually transmitted by the
person giving the notice by electronic means, to the recipient; or the time any
oral notice is communicated, in person or by telephone or wireless, to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.

Section 13.8 Reports to Shareholders. The Board of Directors shall cause
an annual report to be sent to the shareholders not later than 120 days after
the close of the fiscal year or within such shorter time period as may be
required by applicable law, and such annual report shall contain such
information and be accompanied by such other documents as may be required by
applicable law.

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ARTICLE XIV

CONSTRUCTION OF BYLAWS WITH REFERENCE TO PROVISIONS OF LAW

Section 14.1 Definitions. Unless defined otherwise in these Bylaws or
unless the context otherwise requires, terms used herein shall have the same
meaning, if any, ascribed thereto in the California General Corporation Law, as
amended from time to time.

Section 14.2 Bylaw Provisions Additional and Supplemental to Provisions of
Law. All restrictions, limitations, requirements and other provisions of these
Bylaws shall be construed, insofar as possible, as supplemental and additional
to all provisions of law applicable to the subject matter thereof and shall be
fully complied with in addition to the said provisions of law unless such
compliance shall be illegal.

Section 14.3 Bylaw Provisions Contrary to or Inconsistent with Provisions
of Law. Any article, section, subsection, subdivision, sentence, clause or
phrase of these Bylaws which upon being construed in the manner provided in
Section 14.2 hereof, shall be contrary to or inconsistent with any applicable
provision of law, shall not apply so long as said provisions of law shall remain
in effect, but such result shall not affect the validity or applicability of any
other portions of these Bylaws, it being hereby declared that these Bylaws would
have been adopted and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, irrespective of the fact that any one or more
articles, sections, subsections, subdivisions, sentences, clauses or phrases is
or are illegal.

ARTICLE XV

ADOPTION, AMENDMENT OR REPEAL OF BYLAWS

Section 15.1 By Shareholders. Bylaws may be adopted, amended or repealed
by the affirmative vote of a majority of the votes entitled to be cast by the
outstanding voting shares of the corporation.

Section 15.2 By the Board of Directors. Subject to the right of
shareholders to adopt, amend or repeal Bylaws other than a Bylaw or amendment
thereof changing the authorized number of directors may be adopted, amended or
repealed by the Board of Directors. A Bylaw adopted by the shareholders may
restrict or eliminate the power of the Board of Directors to adopt, amend or
repeal any or all Bylaws.

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<PAGE> 51

CALIFORNIA WATER SERVICE COMPANY

PROXY SOLICITED BY THE BOARD OF DIRECTORS

PROXY

PETER C. NELSON and PAUL G. EKSTROM, and each of them with full power of
substitution, are hereby authorized to vote, as designated on the reverse side,
the stock of the undersigned at the Annual Meeting of Shareholders of
California Water Service Company to be held at 1720 N. First Street, San Jose,
California on Wednesday, April 16, 1997 at 10:00 A.M., or at any adjournment
thereof.

PLEASE DATE, SIGN AND MAIL IMMEDIATELY IN THE ENCLOSED ENVELOPE.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)

SEE REVERSE SIDE
<PAGE> 52
/X/ Please mark votes as in this example.

IF NOT OTHERWISE DIRECTED, THIS PROXY WILL BE VOTED FOR THE APPROVAL OF THE
FORMATION OF A HOLDING COMPANY, FOR THE ELECTION OF THE BOARD'S NOMINEES FOR
DIRECTORS, AND FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK, LLP AS
AUDITORS. THE BOARD OF DIRECTORS RECOMMENDS VOTING IN FAVOR OF THESE MATTERS.

1. PROPOSAL TO APPROVE THE FORMATION OF A HOLDING COMPANY

FOR: ____
AGAINST: ____
ABSTAIN: ____

2. ELECTION OF DIRECTORS

FOR ALL NOMINEES: ____ WITHHELD FROM ALL NOMINEES: ____
(except as marked below)

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE
STRIKE A LINE THROUGH NOMINEE'S NAME IN THE LIST BELOW.)

Robert W. Foy, Edward D. Harris, Jr., M.D., Robert K. Jaedicke, Linda R. Meier,
Peter C. Nelson, C.H. Stump, Edwin E. van Bronkhorst, Richard P. Magnuson, and
J.W. Weinhardt.

3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK, LLP
as the independent auditors of the Company.

FOR: ____
AGAINST: ____
ABSTAIN: ____

4. IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.

MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT ____

NOTE: Please sign exactly as name appears hereon. If signing as attorney,
executor, administrator, trustee, guardian or the like, please give your full
title as such. If signing for a corporation, please give your title. In the
case of shares standing in the name of two or more persons, California law
permits the voting of such shares under a proxy signed by any one of such
persons if none of the others is present in person or represented by proxy.

PLEASE DATE, SIGN and RETURN PROMPTLY

Signature _______________________ Date _______________