SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13, or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file No.0-6028
BIRMINGHAM UTILITIES, INC.
(Exact Name of registrant as specified in its charter)
CONNECTICUT 06-0878647
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
230 Beaver Street, Ansonia, CT 06401-0426
(Address of principal executive offices Zip Code
Registrant's telephone number including area code (203) 735-1888
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange
None None
Securities registered pursuant to Section 12(g) of the Act
Common Stock (no par value)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates* of
the registrant based on the average bid and asked prices of such stock
as of March 26, 1998: $7,710,304.
Indicate the number of shares outstanding or each of the registrant's
class of common stock, as of the latest practicable date.
Class Outstanding at March 26, 1999
Common Stock, no par value 1,554,716
PAGE 2
* For purposes of setting forth on the cover sheet of this Annual
Report on Form 10-K the aggregate market value of the voting stock held
by non-affiliates of the registrant, the registrant has deemed that all
shares beneficially held by officers, directors, and nominees are shares
held by affiliates.
PART I
Item 1. Business
The Company is a specially chartered Connecticut public service
corporation in the business of collecting and distributing water for
domestic, commercial and industrial uses and fire protection in Ansonia
and Derby, Connecticut, and in small parts of the contiguous Town of
Seymour. Under its charter, the Company enjoys a monopoly franchise in
the distribution of water in the area which it serves. In conjunction
with its right to sell water, the Company has the power of eminent
domain and the right to erect and maintain certain facilities on and in
public highways and grounds, all subject to such consents and approvals
of public bodies and others as may be required by law.
The current sources of the Company's water are wells located in Derby
and Seymour and interconnections with the South Central Connecticut
Regional Water Authority's (the "Regional Water Authority") system (a)
at the border of Orange and Derby (the "Grassy Hill Interconnection")
and (b) near the border of Seymour and Ansonia (the "Woodbridge
Interconnection"). The Company maintains its interconnected Beaver
Lake Reservoir System, a 2.2 million gallon per day (MGD) surface
supply in case of emergency needs.
The Company's entire system has a safe daily yield (including only
those supplies that comply with the SDWA on a consistent basis) of
approximately 8.0 MGD, while the average daily demand and the maximum
daily demand on the system during 1998 were approximately 3.2 MGD and
4.7 MGD, respectively. The distribution system with the exception of
the well supplies, is mainly through gravity, but there are seven
distinct areas at higher elevations where pumping, pressure tanks and
standpipes are utilized. These higher areas serve approximately 25%
of the Company's customers.
During 1997 approximately 1.18 billion gallons of water from all
sources were delivered to the Company's customers. The Company has
approximately 8,902 customers of whom approximately 94% are residential
and commercial. No single customer accounted for as much as 10% of
total billings in 1997. The business of the Company is to some extent
seasonal, since greater quantities of water are delivered to customers
in the hot summer months.
The Company had, as of February 28, 1999, 19 full-time employees. The
Company's employees are not affiliated with any union organization.
PAGE 3
The Company is subject to the jurisdiction of the Connecticut Department
of Public Utility Control ("DPUC") as to accounting, financing,
ratemaking, disposal of property, the issuance of long term securities
and other matters affecting its operations. The Connecticut Department
of Public Health (the "Health Department" or "DPH") has regulatory
powers over the Company under state law with respect to water quality,
sources of supply, and the use of watershed land. The Connecticut
Department of Environmental Protection ("DEP") is authorized to regulate
the Company's operations with regard to water pollution abatement,
diversion of water from streams and rivers, safety of dams and the
location, construction and alteration of certain water facilities. The
Company's activities are also subject to regulation with regard to
environmental and other operational matters by federal, state and local
authorities, including, without limitation, zoning authorities.
The Company is subject to regulation of its water quality under the
Federal Safe Drinking Water Act ("SDWA"). The United States
Environmental Protection Agency has granted to the Health Department the
primary enforcement responsibility in Connecticut under the SDWA. The
Health Department has established regulations containing maximum limits
on contaminants which have or may have an adverse effect on health.
Executive Officers of the Registrant
Name, Age and Position Business Experience Past 5 Years
Betsy Henley-Cohn, 46
Chairwoman of the Board Chairwoman of the Board of Directors of
the Company since May of 1992; Chairman
of the Board of Directors and Treasurer,
Joseph Cohn & Sons, Inc. (construction
sub-contractors); Director, United
Illuminating Company; Director, Aristotle
Corp.; Director, Citizens Bank of
Connecticut; Society for Savings Bancorp,
Director 1985-1993.
John S. Tomac, 45
President President of the Company since October 1,
1998. Vice President and Treasurer of the
Company December 1, 1997-September 30,
1998.
Assistant Controller, BHC Company
since 1991.
PAGE 4
Item 2. Properties
The Company's properties consist chiefly of land, wells, reservoirs,
and pipelines. The Company has 5 production wells with an aggregate
effective capacity of approximately 3.0 MGD. The Company's existing
interconnections with the Regional Water Authority can provide 5.0 MGD.
The Company's entire system has a safe daily yield (including only those
supplies that comply with the SDWA on a consistent basis) of
approximately 8.0 MGD, while the average daily demand and the maximum
daily demand on the system during 1997 were approximately 3.2 MGD and
4.7 MGD, respectively. The distribution system, with the exception of
the well supplies, is mainly through gravity, but there are seven
distinct areas at higher elevations where pumping, pressure tanks and
standpipes are utilized. These higher areas serve approximately 25% of
the Company's customers.
The Company has three emergency stand-by reservoirs (Peat Swamp,
Quillinan and Middle) with a storage capacity of 484 million gallons and
a safe daily yield of approximately 2.2 MGD. Because the water produced
by those reservoirs does not consistently meet the quality standards of
the SDWA, none of those reservoirs is actively being used by the Company
to supply water to the system. During 1996 and in January of 1998, the
Company sold to the City of Ansonia and the City of Derby the Sentinel
Hill Reservoir system and its watershed located in Ansonia and Derby.
In November of 1998, the Company sold to the Town of Seymour the Great
Hill reservoir system and its watershed located in the Towns of Seymour
and Oxford.
The Company's dams are subject to inspection by and the approval of the
DEP. All of the Company's dams are in compliance with improvements
previously ordered by the U.S. Army Corps of Engineers.
The Company has an office building at 230 Beaver Street, in Ansonia.
That building was built in 1964, is of brick construction, and contains
4,200 square feet of office and storage space. In addition, the Company
owns two buildings devoted to equipment storage. The Company also
maintains some office space in a wood frame, residential building owned
by the Company at 228 Beaver Street, Ansonia.
The Company's approximately 3,400 acres of land were acquired over the
years principally in watershed areas to protect the quality and purity
of the Company's water at a time when land use was not regulated and
standards for water quality in streams were non-existent.
PAGE 5
Under Connecticut law a water Company cannot abandon a source of supply
or dispose of any land holdings associated with a source of supply until
it has a "water supply plan" approved by the Health Department. The
Health Department approved the Company's first Water Supply Plan in 1988
and updated Water Supply Plan in 1993. Pursuant to abandonment permits
issued by the Health Department in 1988, the Company abandoned its Upper
and Lower Sentinel Hill Reservoirs, Steep Hill (Bungay) Reservoir, and
Fountain Lake Reservoir, and the land associated with them then became
available for sale. In 1994, the abandonment of Great Hill Reservoir
was approved by the Health Department.
Since 1988, the Company has sold approximately 1,364 acres of land in
Bethany, Ansonia, Derby, Seymour and Oxford, realizing net gains of
$6,994,974.
The Company believes that approximately 1,050 acres of its land holdings
will not be needed in the future for water supply purposes and can be
sold. The Company has proposed, and the DPUC has accepted with respect
to prior transactions, an accounting and ratemaking mechanism by which
the gain on the sale of the Company's land holdings is shared between
ratepayers and stockholders as contemplated by Connecticut law. (See
Note 1 to the Company's Financial Statements).
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for the Registrant's Common Stock and Related Security
Holding Matters
Page 1 of the Company's Annual Report to shareholders for the year ended
December 31, 1998, (Financial Highlights), is incorporated herein by
reference, pursuant to Rule 12b-23 of the Securities and Exchange Act
of 1934 (the "Act") and to Instruction G(2) to Form 10-K.
Item 6. Selected Financial Data
Page 1 of the Company's Annual Report to shareholders for the year ended
December 31, 1998 (Financial Highlights) is incorporated herein by
reference, pursuant to Rule 12b-23 of the Act and to Instruction G(2) to
Form 10-K.
Item 7.Management's Discussion and Analysis of Financial
Condition and Results of Operations
PAGE 6
Net Income
Pages 8 through 11 of the Company's Annual Report to Shareholders for
the year ended December 31, 1998 are incorporated herein by reference,
pursuant to Rule 12b-23 of the Act and to Instruction G(2) to Form 10-K.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report therein,
of Dworken, Hillman, LaMorte and Sterczala, P.C., dated February 3,
1999, appearing on pages 12 through 24 of the accompanying 1998 Annual
Report to Shareholders of Birmingham Utilities, Inc. are incorporated
herein by reference, pursuant to Rule 12b-23 of the Act and Instruction
G(2) to Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The following list identifies all current directors of the Company.
No director or executive officer has (i) any family relationship with
any other such person or (ii) been involved in any legal proceeding
which would require disclosure under Item 401 of Regulation S-K. There
are no arrangements between any director or officer and any other person
pursuant to which he or she was or is to be selected as a director or
officer or as a nominee therefor.
Business Experience during the Last Director
Name Age Five Years and Other Directorships Since
Stephen P. Ahern 69 V.P., Unicco Security Services; 1994
Principal, Ahern Builders
Edward G. Brickett 69 Retired; Director of Finance,Town 1979
of Southington, CT until June 1995
James E. Cohen 52 Lawyer in Practice in Derby; 1982
Director, Great Country Bank (1987-1993)
PAGE 7
Betsy Henley-Cohn 46 Chairwoman of the Board of 1981
Directors of the 1981 Company;
Chairman and Treasurer, Joseph
Cohn & Sons, Inc.(construction,
sub-contractors); Director,
United Illuminating Corp.;
Director, Aristotle Corp.;
Director, Citizens Bank of
Connecticut; Director, Society
for Savings Bancorp,Inc.
(1985-1993)
Alvaro da Silva 53 President, B.I.D., Inc. 1997
(land development and home
building company); Managing
Partner Connecticut Commercial
Investors, LLC., (a commercial
real estate and investment
partnership); Chairman, Shelton
Inland Wetlands Commission;
Board of Governors Unquowa School
Aldore J. Rivers 65 Retired; Former President of the 1986
Company
B. Lance Sauerteig 53 Lawyer in Practice in Westport; 1996
Principal in BLS Strategic
Capital, Inc. (financial and inv.
advisory company); President,
First Spring Corp., (1986-1994)
(financial & investment advisory
company); Director, OFFITBANK
(a New York based private investment
management bank)
Kenneth E. Schaible 57 Bank Consultant and Real Estate 1994
Developer;Senior Vice President,
Webster Bank (1995-1996);
President, Shelton Savings Bank
and Shelton Bancorp.,Inc.
(1967-1995)
David Silverstone 52 Group Vice President, The Southern 1994
Connecticut Gas Company; Lawyer in
Practice in Hartford until
March 31, 1998.
PAGE 8
The Board of Directors' Audit Committee consisted of Messrs. Brickett,
da Silva and Schaible during 1998. It performs the function of
recommending the engagement and reviewing the performance of the
Company's independent public accountants. The Audit Committee met
three times in 1998. The Board of Directors' Personnel and Pension
Committee consisted of Ms. Henley-Cohn (ex-officio) and Messrs. Ahern,
Brickett, Sauerteig and Silverstone and performs the function of
reviewing Executive Office compensation and proposing the same to the
full Board of Directors for action. It also proposes to the full Board
overall payroll pool levels and pension plan arrangements for all
employees. The Personnel and Pension Committee met six times in 1998.
In 1998, five meetings of the full Board of Directors were held, and all
Directors attended at least 75% of the meetings of the full Board and
committees on which they served.
(b) Section 16(a) Beneficial Ownership Reporting Compliance. 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 reports of
ownership and changes in ownership with the Securities and Exchange
Commission and the Company.
Based solely on review of copies of such forms furnished to the Company,
or written representations that no reconciliation forms were required,
the Company believes that during fiscal year ending December 31, 1998,
all section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent shareholders were complied with.
Item 11. Compensation of Directors and Executive Officers
Page 5 of the Company's Definitive Proxy Statement, dated April 6, 1999
relating to the proposed Annual Meeting of Shareholders to be held on
May 12, 1999, filed or to be filed with the Commission pursuant to
Regulation 14A under the Act, is incorporated herein by reference,
pursuant to Rule12b-23 of the Act and Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Management and Certain Beneficial Owners
Pages 3 through 5 of the Company's Definitive Proxy Statement, dated
April 6, 1999, relating to the proposed Annual Meeting of Shareholders
to be held on May 12, 1999, filed or to be filed with the Commission
pursuant to Regulation 14A under the Act, are incorporated herein by
reference, pursuant to Rule 12b-23 of the Act and Instruction G(3) to
Form 10-K.
Item 13. Certain Relationships and Related Transactions
Mr. Cohen is a partner in the law firm of Cohen and Thomas, which has
represented the Company on occasions in past years; the Company may
continue to employ that firm on occasion in the future.
PAGE 9
Mr. Silverstone was, until March 31, 1998, a partner in the law firm of
Silverstone & Koontz, which represented the Company on rate matters in
1997.
Mr. Sauerteig is a principal in the law firm of Levett, Rockwood and
Sanders, which provided legal services to the Company in past years and
may do so in the future.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) The following documents are filed as part of this report:
Page in
Annual Report*
Statements of Income and Retained
earnings for the three years ended
December 31, 1998 14
Balance Sheets at December 31, 1998 13
Statements of Cash Flows for the three
years ended December 31, 1998 15
Notes to the Consolidated Financial
Statements 16-24
Report of Independent Accountants 12
Financial Highlights 1
Selected Financial Data 1
Management's Discussion and Analysis 8-11
* Incorporated by reference from the indicated pages
of the 1998 Annual Report and included as
Exhibit (13), attached hereto as pp. 35 to 71.
(3) Certificate of Incorporation and By-Laws of Birmingham Utilities,
Inc. Incorporated herein by reference is Exhibit 3 of Birmingham
Utilities, Inc.'s Annual report on Form 10K for the period ended
December 31, 1994.
(4) Instruments Defining Rights of Security Holders
(i) Amended and Restated Mortgage Indenture by and between The Ansonia
Derby Water Company and The Connecticut National Bank as Trustee, dated
as of August 9, 1991. Incorporated herein by reference is Exhibit 4(i)
of the Annual Report on Form 10-K of Birmingham Utilities, Inc. for the
period ended December 31, 1997.
PAGE 10
(ii) Commercial Term and Revolving Loan Agreement by and between
Birmingham Utilities, Inc. and Fleet Bank, N.A., dated April 29, 1994,
as amended by a Third Extension and Reaffirmation Agreement dated
September 17, 1998. (Incorporated herein by reference is Exhibit 10(1)
of the Quarterly Report on Form 10-Q/A of Birmingham Utilities, Inc.
for the period ended June 30, 1994.) The Third Extension and
Reaffirmation Agreement is attached as pp. 14 to 21.
(iii) Birmingham Utilities, Inc. Dividend Reinvestment Plan, adopted
by its Board of Directors on September 13, 1994. Incorporated herein
by reference is Exhibit 4 (iii) of Birmingham Utilities, Inc.'s Annual
Report on Form 10-K for the period ended December 31, 1994.
(10) Material Contracts
(10.1) Agreement to Purchase Water by and between The Ansonia Derby
Water Company and South Central Connecticut Regional Water Authority
dated January 18, 1984 for the sale of water by the Authority to the
Company and subsequent amendment dated December 29, 1988. Incorporated
herein by reference is Exhibit (10.1) of the Annual Report on Form 10-K
of Birmingham Utilities, Inc. for the period ended December 31, 1993.
(10.2) Agreement to Purchase Water by and between The Ansonia Derby
Water Company and South Central Connecticut Regional Water Authority
dated November 30, 1984 for the sale by the Authority to the company of
water and for the construction of the pipeline and pumping and storage
facilities in connection therewith by the Authority at the expense
primarily of the Company and Bridgeport Hydraulic Company. Incorporated
herein by reference is Exhibit (10.2) of the Annual Report on Form 10-K
of Birmingham Utilities, Inc. for the period ended December 31, 1996.
(10.3) Employment Agreement between Birmingham Utilities, Inc. and
John S. Tomac dated October 1, 1998. Attached hereto as pp. 22 to 27.
(10.4) Birmingham Utilities, Inc. 1994 Stock Incentive Plan adopted by
its Board of Directors on September 13, 1994. Incorporated herein by
reference is Exhibit (10.9) of Birmingham Utilities, Inc.'s Annual
Report on Form 10-K for the period ended December 31, 1994.
(10.5) Birmingham Utilities, Inc. Stock Option plan for Non-Employee
Directors adopted by its Board of directors on September 13, 1994.
Incorporated herein by reference is Exhibit (10.10) of Birmingham
Utilities, Inc.'s Annual Report on Form 10-K for the period ended
December 31, 1994.
(10.6) Purchase and Sale Agreement by and between Birmingham Utilities,
Inc. and M/1 Homes, LLC dated March 18, 1997 for the sale by the Company
to M/1 Homes of approximately 245 acres of unimproved land in Seymour,
Connecticut. Incorporated herein by reference is Exhibit (10.6) of the
Annual Report on Form 10-K of Birmingham Utilities, Inc. for the period
ended December 31, 1996.
PAGE 11
(10.7) Amendment to Purchase and Sale Agreement by and between
Birmingham Utilities, Inc. and M/1 Homes, LLC, dated as of December 31,
1998 for the sale by the Company to M/1 Homes, LLC, of approximately
245 acres of unimproved land in Seymour, CT, dated as of December 31,
1998. Attached hereto as pp.28 to 34.
(10.8) Birmingham Utilities, Inc. 1998 Stock Incentive Plan adopted by
its Board of Directors on September, 1998. Incorporated herein by
reference is Exhibit A to its Definitive Proxy Statement, dated April
6, 1999, filed or to be filed with the Commission pursuant to
Regulation 14A under the Act.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Registrant during the last quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) BIRMINGHAM UTILITIES, INC.
BY:/s/ Betsy Henley-Cohn
Betsy Henley-Cohn
Chairwoman of the Board
BY:/s/ John S. Tomac
John S. Tomac
President
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
PAGE 12
/s/ Stephen P. Ahern /s/ Aldore J. Rivers
Stephen P. Ahern, Director Aldore J. Rivers, Director
Date: March 25, 1999 Date: March 24, 1999
/s/ Edward G. Brickett /s/ B. Lance Sauerteig
Edward G. Brickett, Director B. Lance Sauerteig, Director
Date: March 26, 1999 Date: March 26, 1999
/s/ James E. Cohen /s/ Kenneth E. Schaible
James E. Cohen, Director Kenneth E. Schaible, Director
Date: March 24, 1999 Date: March 26, 1999
/s/ Betsy Henley-Cohn /s/ David Silverstone
Betsy Henley-Cohn, Chairwoman David Silverstone, Director
Board of Directors Date: March 30, 1999
Date: March 30, 1999
/s/ Alvaro da Silva
Alvaro da Silva, Director
Date: March 29, 1999
PAGE 13
BIRMINGHAM UTILITIES, INC.
INDEX TO EXHIBITS
Item No. Page No.
4(ii) Third Extension and Reaffirmation
Agreement by and between Fleet Bank
and Birmingham Utilities, Inc. dated
September 12, 1998 14
10.3 Employment Agreement between Birmingham
Utilities, Inc. and John S. Tomac dated
as of October 1, 1998 22
10.7 Amendment to Purchase and Sale
Agreement by and between Birmingham
Utilities, Inc. and M/1 Homes, LLC,
dated as of December 31, 1998 28
13 Birmingham Utilities, Inc. 1998 Annual
Report to Shareholders 35
23 Consent of Dworken, Hillman, LaMorte
& Sterczala, P.C. 72
PAGE 14
THIRD EXTENSION AND REAFFIRMATION AGREEMENT
This Agreement entered into as of the 17th day of September, 1998,
by and between, BIRMINGHAM UTILITIES, INC., a Connecticut public service
corporation with a place of business at 230 Beaver Street, Ansonia,
Connecticut ("Borrower"), and FLEET NATIONAL BANK, a national banking
association with an office at 157 Church Street, New Haven, Connecticut
("Bank")
W I T N E S S E T H
WHEREAS, the Borrower executed and delivered to Bank a certain
Revolving Note dated April 29, 1994 in the principal amount of Six
Hundred Thousand and 00/100 Dollars ($600,000.00) (the "LC Note") and
a certain Revolving Note dated April 29, 1994 in the principal amount
of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00)
(the "Revolving Note" and collectively with the LC Note, the "Original
Notes") pursuant to a Commercial Term and Revolving Loan Agreement
between Borrower and Bank of even date therewith (the "Loan Agreement");
and
WHEREAS, Bank is the holder and owner of a certain Open-End
Mortgage Deed and Security Agreement dated as of April 29, 1994 (the
"Original Mortgage") as to certain real property and collateral more
particularly described therein (collectively, the "Mortgaged
Premises"), which Original Mortgage was executed and delivered by
Borrower to Bank and was recorded in the Office of the Secretary of
the State of the State of Connecticut on April 29, 1994 in Volume 67,
Page 1857 of Railroad Mortgages, and certificates with respect to
which were, in accordance with the provisions of Section 49-5 of
the Connecticut General Statutes: (i) recorded in Volume 275 at
Page 749 of the land records of the Town of Ansonia, Connecticut;
(ii) recorded in Volume 245 at Page 951 of the land records of the
Town of Derby, Connecticut; (iii) recorded in Volume 210 at Page
884 of the land records of the Town of Seymour, Connecticut; (iv)
recorded in Volume 104 at Page 1090 of the land records of the Town
of Bethany, Connecticut; (v) recorded in Volume 91 at Page 900 of the
land records of the Town of Beacon Falls, Connecticut; and (vi)
recorded in Volume 215 at Page 140 of the land records of the Town
of Woodbridge, Connecticut ; and
WHEREAS, the Original Notes, Original Mortgage and Loan Agreement
were modified by a First Modification To Revolving Notes, Commercial
Term And Revolving Loan Agreement and Open-End Mortgage Deed And
Security Agreement dated as of May 1, 1996 (the "First Modification");
and
WHEREAS, the Original Notes, Original Mortgage and Loan Agreement
were further modified by an Extension and Reaffirmation Agreement
dated as of May 1, 1997 ("the "Extension") and a Second Extension and
Reaffirmation Agreement dated as of April 30, 1998 (the "Second
Extension") (All references to the Original Notes, Original Mortgage
PAGE 15
and Loan Agreement shall refer to such respective documents as modified
and/or extended by the First Modification, the Extension and the
Second Extension); and
WHEREAS, Borrower has requested Bank to terminate the LC Note,
and to extend the maturity date of and increase the availability under
the Revolving Note; and
WHEREAS, Bank has agreed to extend the maturity date of the
Revolving Note and to increase the availability thereunder pursuant to
the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto agree as follows:
1. The LC Note is hereby terminated. No additional
borrowing shall be permitted thereunder.
2. The Loan Agreement is hereby amended in the following respects:
"(a) Section 1.1(a) is deleted in its entirety
and the following is substituted in lieu thereof:
(a) Aggregate Amount. Upon the terms and subject to the
conditions of this Agreement, Lender agrees to lend
and relend to the Borrower from to time during the
period from and including the Effective Date (as
defined herein) through June 1, 2000, as requested
by the Borrower in accordance with the terms of
Section 1.1(c), amounts which in the aggregate at
any one time outstanding do not exceed $2,100,000.00.
Provided, however, Borrower shall reduce the aggregate
outstanding balance to no more than $1,500,000.00 for
30 consecutive days during each twelve month period."
(b) Section 1.1(e) and 1.1(f) are deleted in their
entirety and the following are substituted in lieu
thereof:
"(e) Payment. Interest on the outstanding principal
balance of each Prime Rate Loan and Fleet Cost of
Funds Loan is due and payable by the Borrower to the
Lender each month commencing on June 1, 1994, and on
the first day of each consecutive month thereafter;
and interest on the outstanding principal balance of
each LIBOR Rate Loan is due and payable by the
Borrower to the Lender on the last day of each
Interest Period applicable thereto. Notwithstanding
the foregoing, the unpaid principal and all accrued
and unpaid interest on all Revolving Loans are due
PAGE 16
and payable in full by the Borrower on June 30, 2000,
provided, however, Borrower may, upon written notice
to the Lender by May 30, 2000, elect to convert the
Revolving Loans to a term loan, amortized over a 20
year period, with all outstanding and unpaid
principal and interest due and payable on June 30,
2006 (the "Converted Term Loan").
(f) Interest. (i) Each Revolving Loan shall bear
interest on the unpaid principal amount thereof for
each day from the day such Revolving Loan is made
until such Loan shall be due at a floating rate per
annum equal to: (1) the 30 day LIBOR Rate plus 100
basis points; (2) the 90 day LIBOR Rate plus 100
basis points; or (3) the Prime Rate, as elected by
Borrower from time to time pursuant to Section 1.1(c);
(ii) the Converted Term Loan, if any, shall bear
interest from the date the Revolving Loans are
converted to the Converted Term Loan pursuant to
Section 1.1(e) until such Loan shall be due at (A)
a fixed rate per annum equal to the 6 year Fleet Cost
of Funds Rate plus 100 basis points; or (B) a variable
rate per annum equal to: (1) Prime Rate; or (2) the
90 day LIBOR Rate plus 100 basis points, readjusted
for each 90 day period.
Any change in the interest rate because of a change
in the Prime Rate, the LIBOR Rate or the Fleet Cost
of Funds Rate, as the case may be, shall become
effective immediately, without notice or demand, on
the day of the change in the Prime Rate, the LIBOR
Rate or the Fleet Cost of Funds Rate, as the case may
be. Borrower shall also be obligated to pay
additional interest in accordance with the terms of
Section 1.3 of this Agreement."
(c) Section 8.1 of the Loan Agreement is amended so that
future notices to the Bank shall be sent, in
accordance with the provisions of Section 8.1 as
follows:
"If to the Lender:
Fleet National Bank
157 Church Street
New Haven, Connecticut 06510
Attn: Anthony Castellon
with a copy to:
Susman, Duffy & Segaloff, P.C.
P.O, Box 1684
New Haven, Connecticut, 06507
Attn: Andrew R. Lubin"
PAGE 17
(d) All references to the "LC Note" and "LC Loan" are
hereby deleted.
(e) All references to the "Revolving Note" shall mean
the "Amended and Restated Revolving Note"executed
by the Borrower this date a copy of which is
attached hereto as Schedule A.
(f) All references to the "Revolving Loan" and
"Revolving Loans" shall mean the loan or loans
made pursuant to the Amended and Restated
Revolving Note.
3. Borrower shall execute the Amended and Restated Revolving
Note attached hereto as Schedule A. Said Note re-evidences the
indebtedness evidenced by the Revolving Note and a consolidation
thereof with the LC Note and is given is substitution for, and not
in payment of, the Revolving Note.
4. The Original Mortgage is hereby amended as follows:
(a) All references to the "L/C Note" are hereby
deleted.
(b) All references in the Original Mortgage to the
"Revolving Note," shall hereinafter be deemed to refer to the Amended
and Restated Revolving Note.
(c) Schedule B to the Original Mortgage shall hereinafter
be deemed to include the amendments set forth in this Modification.
(d) "Borrower, as Grantor, does hereby give, grant, bargain,
sell and confirm unto the Grantee, its successors and assigns forever,
all that tract or parcel of land and all improvements now or hereafter
thereon situated, lying and being in the towns of Ansonia, Derby,
Seymour, Bethany, Beacon Falls and Woodbridge, Connecticut and more
particularly described in Schedule A to the Original Mortgage, which
Schedule A is hereby amended to reflect the release by the Grantee of
the so-called PARCEL 6 thereon by release dated April 13, 1998 and
recorded at Volume 286, Page 207 of the Woodbridge Land Records on
April 29, 1998, and Volume 117 at Page 539 of the Bethany Land Records
on April 29, 1998" which is hereby incorporated by reference
hereinafter called the "Premises");
TOGETHER with all right, title and interest of the Grantor in and
to any and all sidewalks, plazas and alleys, and all strips
and gores of land adjoining or adjacent to said Premises, and all and
singular the tenements, hereditaments, privileges, easements and
appurtenances belonging or in any wise appertaining to said Premises,
and all the estate, right, title, interest, claim and demand
whatsoever, in law or in equity, which the Grantor now has or may
hereafter acquire in and to such property;
PAGE 18
TOGETHER with all right, title and interest of the Grantor now
owned or hereafter acquired, in and to any and all buildings,
structures and improvements now or at any time hereafter erected,
constructed or situated upon said Premises or any part thereof and
all apparatus, fixtures, furniture, furnishings and equipment now or
hereafter attached to or used or procured for use in connection with
the operation or maintenance of any such building, structure or other
improvement, including, but without limiting the generality of the
foregoing, all engines, furnaces, boilers, pumps, heaters, tanks,
dynamos, antennae, motors, generators, switchboards, electrical
equipment, heating, plumbing, lifting and ventilating apparatus,
air-cooling and air-conditioning apparatus, gas and electric fixtures,
refrigerating equipment, elevators, escalators, fittings and machinery,
awnings, storm and screen windows and doors, window shades and blinds,
together with any and all substitutions therefor, replacements thereof
and additions thereto, all of which are hereby declared and shall be
deemed to be fixtures and an accession to the freehold and a part of
the realty and to be subject to the lien of the Original Mortgage;
TOGETHER with all buildings, improvements, standpipes, reservoirs,
wells, flumes, sluices, canals, basins, cribs, machinery, mains,
conduits, hydrants, pipes, pipe lines, service pipes, water works
plans and systems, tanks, shops, structures, purification systems,
pumping stations, fixtures, engines, boilers, pumps, meters and equipment
(including all improvements, additions and extensions appurtenant to
any property hereby conveyed) used or useful in connection with the
Grantor's utility business, whether the same or any thereof are now
owned or may hereafter be acquired by the Grantor, including, without
limiting the generality of the foregoing, all property identified in
Schedule A hereto, which Schedule A is hereby incorporated in and made
a part of this Granting Clause as if set forth herein in full;
TOGETHER with all corporate and other franchises, all water and
flowage rights, riparian rights, easements and rights-of-way, and all
permits, licenses, rights, grants, privileges and immunities, and all
renewals, extensions, additions or modifications of any of the
foregoing, whether the same or any thereof, or any renewals,
extensions, additions or modifications thereof, are now owned or may
hereafter be acquired, owned, held or enjoyed by the Grantor;
TOGETHER with all property which may from time to time after
the date hereof be delivered, or which may by writing of any kind be
conveyed, pledged, assigned or transferred, to the Grantor;
TOGETHER with all right, title and interest, if any, of the
Grantor, now owned or hereafter acquired in and to any land lying in
the bed of any street, road or avenue, open or proposed, in front of
or adjoining said land, to the center line thereof (all of the
foregoing Premises and property being hereinafter collectively called
the "Mortgaged Premises").
PAGE 19
TO HAVE AND TO HOLD the above-granted and bargained Mortgaged
Premises with all the privileges and appurtenances thereof, unto Bank,
as Grantee, its successors and assigns forever, to its and their
proper use and behoof.
AND ALSO, the Grantor does for itself, its successor and
assigns, covenant with the Grantee, its successors and assigns, that
at and until the ensealing of these presents, it has good right to
bargain and sell said Mortgaged Premises in manner and form above
written, and that the same is free from all encumbrances whatsoever,
except as set forth in said Schedule A."
5. Borrower acknowledges and affirms that it has not voluntarily
or involuntarily granted any type of lien, encumbrance or mortgage on
any of the Mortgaged Premises subsequent to the Original Mortgage.
6. The Amended and Restated Revolving Note (hereafter the
"Note"), Loan Agreement and all other documents executed and/or
delivered therewith including without limitation a certain Open-End
Mortgage and Security Agreement (the "Mortgage")(collectively, the
"Loan Documents") are hereby modified to incorporate the terms
contained in this Agreement. Any default by Borrower under this
Agreement shall be an Event of Default as provided in the Loan
Agreement.
7. The Borrower ratifies and reaffirms all of the representations,
warranties and covenants (both affirmative and negative) waivers and
indemnities contained in the Loan Documents. All of the
representations and warranties set forth in the Loan Documents are
true and correct as if made on the date hereof.
8. The Borrower represents, acknowledges and affirms that it has
no claim, defense, or counterclaim whatsoever against Bank with
respect to Loan Agreement, the Original Notes, the Note, the Mortgage,
any other Loan Document, or the modifications made herein, and that
Bank is relying on this representation in agreeing to said
modifications. The Borrower further acknowledges that Bank would not
agree to said modifications unless the Borrower made the representations
contained in this paragraph and elsewhere in this Agreement freely and
willingly, after due consultation with its attorneys. Borrower further
represents that this Agreement and all of the Loan Documents executed
by it are its valid and binding obligations, enforceable in accordance
with their terms and that no Event of Default (as defined in the Loan
Agreement) has occurred nor has there occurred any event or condition
which, with notice or the passage of time or both would constitute an
Event of Default.
9. In furtherance of the immediately preceding paragraph, Borrower
hereby releases, and forever discharges the Bank, its directors,
officers, agents, employees and their successors and assigns, from any
and all claims, actions, causes of action, obligations and liabilities
of any kind which the Borrower has or may have in tort, at law or in
PAGE 20
equity as of the date hereof whether relating to the Original Notes, the
Note, Loan Agreement, any Loan Documents, or any of the transactions
contemplated hereby or consummated in connection herewith, or any
negotiations in connection with any of the foregoing.
10. The parties agree that nothing contained herein shall in any
way impair in any manner the Note, Loan Agreement, Original Mortgage
or any other Loan Documents.
11. Except as modified by this Agreement, all Loan Documents shall
remain unchanged and in full force and effect. Borrower shall keep
and perform all of the terms and agreements contained therein as may
be applicable to it.
12. This Agreement shall be binding upon and inure to the benefit
of the parties hereto, their respective successors and assigns. This
Agreement may only be amended in writing.
13. This Agreement may be signed in one or more counterparts all
of which shall constitute one document. This Agreement shall be
construed under the laws of the State of Connecticut.
14. THE BORROWER ACKNOWLEDGES THAT THE NOTE, ALL LOAN DOCUMENTS
AND THIS MODIFICATION RESULT FROM A COMMERCIAL TRANSACTION AND THE
BORROWER HEREBY WAIVES ANY RIGHT TO NOTICE OR HEARING UNDER THE
CONSTITUTION OF THE UNITED STATES OR ANY STATE OR FEDERAL LAW,
INCLUDING CONNECTICUT GENERAL STATUTES SECTION 52-278a ET SEQ., AS
NOW OR HEREAFTER AMENDED, OR ANY SUCCESSOR ACT OR ACTS THERETO, AND
WAIVES ANY REQUIREMENTS FOR THE POSTING OF ANY BOND IN CONNECTION
WITH ANY PREJUDGMENT REMEDY SOUGHT. THE BORROWER AUTHORIZES THE
ATTORNEY FOR ANY HOLDER OF THE NOTE TO ISSUE A WRIT FOR PREJUDGMENT
REMEDY WITHOUT COURT ORDER. BORROWER ACKNOWLEDGES THAT IT MAKES
THIS WAIVER KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH ITS
ATTORNEY.
15. THE BORROWER WAIVES TRIAL BY JURY IN ANY COURT IN ANY
SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH
THE NOTE, ANY LOAN DOCUMENT, THIS AGREEMENT OR IN ANY WAY RELATED
TO THE FINANCING TRANSACTIONS OF WHICH THIS AGREEMENT IS A PART
AND/OR THE DEFENSE OR ENFORCEMENT OF ANY OF BANK'S RIGHTS OR
REMEDIES. BORROWER ACKNOWLEDGES THAT IT MAKES THIS WAIVER
KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH ITS ATTORNEY.
PAGE 21
IN WITNESS WHEREOF, the undersigned hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
Signed, Sealed and Delivered
In The Presence Of:
BIRMINGHAM UTILITIES, INC.
By: /s/ John Tomac
John Tomac
Its: reasurer
FLEET NATIONAL BANK
By: /s/ Anthony Castellon
Anthony Castellon
Its: Vice President
STATE OF CONNECTICUT)
ss: September 17, 1998
COUNTY OF NEW HAVEN )
On this 17th day of September, 1998, personally appeared John Tomac,
Treasurer of Birmingham Utilities, Inc., a Connecticut public
service corporation, signer and sealer of the foregoing instrument and
acknowledged the same to be his free act and deed as such officer and
the free act and deed of said public service corporation, before me.
Commissioner of the Superior Court
Notary Public
My Commission Expires:
STATE OF CONNECTICUT)
ss: September 17, 1998
COUNTY OF NEW HAVEN )
On this 17th day of September, 1998, personally appeared Anthony
Castellon, Vice President of Fleet National Bank, a national banking
association, signer and sealer of the foregoing instrument and
acknowledged the same to be his free act and deed as such officer
and the free act and deed of said banking association, before me.
Commissioner of the Superior Court
Notary Public
My Commission Expires:
PAGE 22
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of October 1, 1998, between
BIRMINGHAM UTILITIES, INC. (the "Company"), a Connecticut corporation
with its principal offices in Ansonia, Connecticut, and JOHN S. TOMAC
of Stratford, Connecticut ("Executive").
RECITALS
The Company desires to retain the services of Executive as
President of the Company, and Executive is willing to be employed by
the Company on the terms and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Term of Employment. The Company agrees to employ Executive, and
Executive agrees to accept employment with the Company, for a term
commencing on October 1, 1998 and continuing for a period of three (3)
years, unless sooner terminated as provided in this Agreement. Unless
written notice shall have been given to Executive by the Company, or to
the Company by Executive, that this Agreement will no longer be
automatically extended, the term of employment (the "Employment Period")
shall automatically be extended on the first day of each succeeding
calendar month to end three years from each such date of extension,
without further action by the parties. For example, absent prior notice
of no further automatic renewal, on November 1, 1998 this Agreement
will automatically be extended for a new three year term ending on
October 31, 2001.
2. Duties.
a. During the Employment Period, the Company shall employ Executive
as the President of the Company and of any successors to the Company's
water supply business, and Executive shall perform, in Ansonia,
Connecticut or its general environs, the duties and exercise the powers
relating to the office of President of the Company or any successors to
the Company's water supply business and shall have full responsibility
and authority for the direction and management of those business
operations of the Company and its successors.
b. During the Employment Period, Executive shall devote
substantially all of his business time, best efforts and ability to the
business of the Company.
c. The failure of the Company or its successors to allow the
Executive to perform the functions and duties, and exercise the
authority and responsibility required, of his office shall be deemed to
be a breach of this Agreement by the Company or its successors, as
applicable.
PAGE 23
3. Compensation and Benefits.
a. Base Salary. The Company shall pay Executive as compensation for
his services during the first year of the Employment Period a Base
Salary at an annual rate of One Hundred Thousand Dollars ($100,000.00).
Executive's Base Salary for each successive twelve (12) month period
during the Employment Period shall be reviewed by the Company's Board
of Directors but shall not, in any event, be less than the initial Base
Salary of $100,000.00. Salary payments shall be made in equal
increments consistent with the Company's standard payroll practices
for its officers.
b. Automobile. In addition to the Base Salary set forth in
subsection 3(a) above, the Company shall provide Executive with an
automobile of equivalent value to that currently provided to the
Executive, available for use twenty-four (24) hours per day, seven (7)
days per week, and shall pay all expenses in connection with the
operation of the vehicle, including without limitation all fuel expenses
for such use.
c. Expenses and Facilities. Upon submission of appropriate invoices
or vouchers, the Company shall pay or reimburse Executive for all
reasonable expenses incurred by Executive in the performance of his
duties under this Agreement. The Company shall provide the Executive
with an office and secretarial facilities required in the performance
of his duties.
d. Vacation. Executive shall be entitled to four (4) weeks paid
vacation each contract year, to be taken each year at a time or times
as shall be mutually agreed upon by the Company and Executive.
e. Benefits. At all times during the Employment Period, Executive
shall be entitled to and shall be included in any employee welfare
and retirement plan or program of the Company available generally to
its employees and/or officers including, without limitation,
hospital/medical/dental benefits (including without limitation such
benefits during retirement), retirement benefits, savings plans, sick
pay, and any other plans generally available to employees and/or
officers of the Company.
4. Termination.
a. Termination by Death. If Executive dies during the Employment
Period, the Company's obligations under this Agreement shall terminate
three (3) months from the date of death, and Executive's estate shall be
entitled to all arrearages of salary and expenses but shall not be
entitled to further compensation.
b. Termination by Mutual Agreement. This Agreement may be
terminated at any time by mutual agreement of the Company and Executive.
PAGE 24
c. Termination upon Breach by Company. This Agreement may be
terminated by the Executive at his option in the event of a breach
hereof by the Company. In the event of such termination, Executive
shall continue to receive all of the compensation and benefits
enumerated in Section 3 hereof as if no breach had occurred.
d. Termination For Cause. If the Executive's employment is
terminated by the Company for Cause (as defined below) prior to the
expiration of the Employment Period, the Executive shall immediately
forfeit the right to receive any further payments of Base Salary and
benefits, except as may be required by law. "Cause" shall include (i)
the Executive's conviction in a court of law of any crime or offense
involving misuse or misappropriation of money or other property of the
Employer, or (ii) the Executive's continued or repeated willful
failure, or the Executive's refusal, to perform his obligations
under this Agreement, and such failure or refusal is not remedied by
the Executive within thirty (30) days after notice, or (iii) any
flagrant act of dishonesty or disloyalty by the Executive or any act
involving gross moral turpitude of the Executive, which act materially
adversely affects the business of the Company.
e. Termination At Option of Employer. Except in the event of a
Change of Control as set forth in paragraph 4 (g) below, during the
period from October 1, 2000 through March 31, 2001, and during
successive six month periods, each commencing two years and six months
from the end of the preceding period (for example, October 1, 2003
through March 31, 2004 and October 1, 2006 through March 31, 2007),
the Employer may terminate the Executive's employment under this
Agreement without Cause, and upon termination under this Section 4 (e),
the Executive shall be entitled to Base Salary plus continued Benefits
(both as in effect at the time of such termination) for a period of
one year from the date of such termination as severance pay.
f. Disability. If the Executive becomes totally disabled (as
defined below) during the term of the Employment Period, the Company
may terminate the employment of the Executive under this Agreement.
If the employment of the Executive hereunder is so terminated, the
Executive shall receive the same payments he would have been entitled
to receive under Section 4(a) above as if death had occurred on the
date of the total disability. For purposes of this Section, the
Executive shall be deemed "totally disabled" when, and only when, (i)
in the reasonable judgment of the Board of Directors of the Company,
he is unable to perform the services required under this Agreement
because of a medically determinable physical or mental disability and
(ii) such inability has lasted for a period of not less than six
continuous months.
g. Termination after Change of Control. Notwithstanding any other
provision hereof, should a Change of Control (as defined below) occur
during his term of employment, Executive may, upon such Change of
Control, elect to terminate this Agreement and receive a lump sum cash
payment equal to two (2) times the greater of the following: (A)
PAGE 25
Executive's compensation (the "Compensation") from the Company for
services rendered for the last full fiscal year immediately preceding
the election or (B) Executive's average annual Compensation with respect
to the two (2) most recent fiscal years ending before such election.
Compensation as described above shall include all Base Salary, bonus and
other cash incentive payments to Executive for services rendered for the
time period in question. Payment of this severance shall be paid in
full within 90 days following the election and shall not be reduced by
any compensation which the Executive may receive from the Company or
from other employment with another employer should Executive's
employment with the Company terminate. In the event that Executive does
not elect to terminate this Agreement after a Change of Control as set
forth in the preceding sentence, this Agreement shall continue for a
period of three years from such Change of Control, and shall terminate
at the end of such three year period, provided that should the Company,
during the first two years after such Change of Control, modify
Executive's conditions of employment, including but not limited to
compensation, title, duties and responsibilities, Executive may
terminate this Agreement and shall be entitled to receive the Base
Salary plus continued Benefits (both as in effect at the time of such
termination) for the remainder of the three year period.
For purposes of this Agreement, a "Change of Control" shall mean:
(i) a merger, acquisition, consolidation, sale of assets or other
reorganization to which the Company is a party, as a consequence of
which members of the Company's Board of Directors in office immediately
prior to such transaction constitute less than a majority of the
appropriate Board of Directors immediately thereafter; (ii) a proxy
contest to which the Company is a party, as a consequence of which
members of the Company's Board of Directors in office immediately prior
to such event constitute less than a majority of the Board of Directors
thereafter; (iii) an event or events occurring after the Effective Date
hereof as a result of which any Person (as hereinafter defined) is or
becomes the Beneficial Owner (as hereinafter defined), directly or
indirectly, of 50% or more of the combined voting power of the
Company's then outstanding securities without the prior approval of at
least two-thirds of the members of the Company's Board of Directors in
office immediately prior to such Person attaining such percentage
interest. "Person" shall have the meaning of such term as used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Act"). "Beneficial Owner" shall have the definition of such term as
defined in Rule 1 3d-3 under the Act.5. Indemnification. The Company
will indemnify the Executive (and his legal representatives or other
successors) to the fullest extent permitted by the laws of the State of
Connecticut that are in effect at the time of the subject act or
omission, or by the Certificate of Incorporation and By-Laws of the
Company as in effect at such time or on the effective date of this
Agreement, whichever affords or afforded greater protection to the
Executive (including payment of expenses in advance of final disposition
of a proceeding) against all costs, charges and expenses whatsoever
incurred or sustained by him or his legal representatives in connection
PAGE 26
with any action, suit or proceeding to which he (or is legal
representatives or other successors) may be made a party by reason of
his being or having been a director, officer or employee of the
Company or his serving or having served any other enterprise as a
director, officer or employee at the request of the Company.
Furthermore, the Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for
the benefit of its directors and officers with respect to such costs,
charges and expenses.
6. General Provisions.
a. All notices required by this Agreement shall be in writing and
shall be sufficiently given if delivered or mailed by registered or
certified mail, return receipt requested, to the parties at their
respective addresses set forth below. Any party may specify a different
address by written notice to the other, in accordance with this Section.
All notices shall be deemed to have been given as of the date so
delivered or mailed
to the Company:
Birmingham Utilities, Inc.
230 Beaver Street
Ansonia, Connecticut 06401
Attention: Chairman
and a copy to:
Robert J. Metzler, II
Tyler Cooper & Alcorn, LLP
CityPlace, 35th Floor
Hartford, Connecticut 06103-3488
to Executive:
John S. Tomac
175 Twin Oaks Terrace
Stratford, Connecticut 06614
b. This Agreement contains the entire agreement between the parties
as to the employment of Executive by the Company, and there are no other
representations, warranties, conditions or agreements relating to the
subject matter of this Agreement.
c. The waiver by any party of any breach or default of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
d. This Agreement may be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement
of any waiver, change, modification, consent or discharge is sought.
PAGE 27
e. This Agreement shall be binding upon and inure to the benefit of
the Company and Executive and their respective successors, assigns,
heirs and legal representatives. This Agreement shall not be assigned
by either party.
f. Each of the parties agrees to execute all further instruments
and documents and to take all further action as the other party may
reasonably request in order to effectuate the terms and purposes of this
Agreement.
g. This Agreement may be executed in one or more counterparts, all
of which taken together shall constitute one and the same instrument.
h. This Agreement shall be construed pursuant to and in accordance
with the laws of the State of Connecticut.
i. Wherever used in this Agreement, the masculine, feminine and
neuter pronouns shall be fully interchangeable, and the singular shall
include the plural where the context so requires and vice versa.
j. If any term or provision of this Agreement is held or deemed to
be invalid or unenforceable, in whole or in part, by a court of
competent jurisdiction, such term or provision shall be ineffective to
the extent of such invalidity or unenforceability without rendering
invalid or unenforceable the remaining terms and provisions of this
Agreement.
k. If Executive must, in the exercise of his sole discretion,
bring legal action against the Company or its successors, as applicable,
in order to recover damages or to enforce his rights under this
Agreement, or both, Executive shall be reimbursed by the Company or its
successor, as applicable, his reasonable expenses, including without
limitation, legal fees and disbursements, if he prevails in such action,
either partially or wholly.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
BIRMINGHAM UTILITIES, INC.
By: /s/ Betsy Henley-Cohn
Betsy Henley-Cohn, Chairwoman
EXECUTIVE
By: /s/ John S. Tomac
John S. Tomac
PAGE 28
AMENDMENT TO PURCHASE AND SALE AGREEMENT
THIS AMENDMENT AGREEMENT dated as of December 31, 1998 is made and
entered into by and between BIRMINGHAM UTILITIES, INC., a Connecticut
corporation ("Seller"), M/1 HOMES, LLC, a limited liability company
organized under the laws of Connecticut ("Buyer").
WHEREAS, Seller and Buyer are parties to a certain Purchase and
Sale Agreement dated as of March 18, 1997 (the "Purchase and Sale
Agreement"); and
WHEREAS, Seller and Buyer desire to amend the Purchase and Sale
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants set forth
in this Amendment Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Paragraph 1 of the Purchase and Sale Agreement is hereby amended
by deleting the provisions thereof and substituting in lieu thereof
the following:
"1. CONSIDERATION
The Purchase Price, subject to the Provisions of Paragraph 13(a)
hereof, is: $4,020,000.00
Which the Buyer agrees to pay, as follows:
(a) As Earnest Money, paid with the
execution hereof, receipt of which,
subject to collection, is hereby
acknowledged: $50,000.00
(b) No later than 30 days prior to the
first day of public hearings scheduled by
the Connecticut Department of Public
Utility Control ("DPUC") as set forth in
the first schedule of proceedings to be
issued in the docket opened by the DPUC
to consider the Company's application
contemplated in Paragraph 12(b) hereof, a
Supplementary Deposit, in immediately
available funds: $147,500.00
(c) In immediately available funds
delivered to the Seller on the date of
the Closing of the title and upon
delivery of the deed as hereinafter
provided below: $2,370,000.00
PAGE 29
(d) By delivery to the Seller of a
promissory note in the principal
amount of $1,650,000, payable in
full one year from the date of the
Closing and secured by a first
mortgage on that portion of the
Premises described as Phase Two
in Paragraph 13(a) hereof: $1,650,000.00
$4,020,000.00
The Earnest Money deposit paid herewith in accordance with
Paragraph 1(a) above and the Supplementary Deposit paid in accordance
with Paragraph 1(b) above shall be held, subject to the provisions of
Paragraphs 12, 13, and 18 hereof, by the Seller's attorney in an
interest bearing account. At the time of the Closing, the Earnest
Money deposit and the Supplementary Deposit, together with the interest
thereon, shall be released and paid to the Seller as part of the
immediately available funds payable at the Closing. The promissory
note and the first mortgage referred to in Paragraph 1(d) above shall
be, respectively, in the forms set forth on Schedule D and Schedule E
attached hereto."
2. Paragraph 9 of the Purchase and Sale Agreement is hereby amended
by deleting the date "December 31, 1998" and inserting in lieu thereof
the date "June 30, 1999" as part (a) of the definition of the Closing
Date.
3. Paragraph 13 of the Purchase and Sale Agreement is hereby
amended by deleting the provisions thereof and substituting in lieu
thereof the following:
"13. BUYER CONTINGENCIES
(a) Notwithstanding any provision of this Agreement to the
contrary, the Buyer's obligation to Purchase the Premises hereunder is
conditioned upon the Buyer obtaining Final approval (which approval
shall become "Final" only upon the expiration of the applicable appeal
periods without any appeal having been filed or served) reasonably
satisfactory to the Buyer of federal, state and local land use
regulatory authorities, including without limitation, the Traffic
Commission of the State of Connecticut, the United States Corps of
Engineers, and the Town of Seymour Planning and Zoning and Inland
Wetlands Commissions necessary for the development on the Premises
for Phase I, that being the first 103 units, of a 183 unit residential
active adult housing project including a clubhouse and amenities
(hereinafter referred to as the "Project") on or before June 30, 1999.
(It is understood that (i) the Buyer plans additional development on
the Premises, known as Phase II, which additional development is
contemplated to consist of an 80 unit residential active adult housing
project, the owners of which units will have access to the clubhouse
and amenities included in Phase I, (ii) Phase II is not included in
the definition of "Project" for the purposes hereof, (iii) that the
PAGE 30
real property upon which Phase II will be located will be subject to
the First Mortgage in favor of the Seller contemplated in Paragraph 1(d)
hereof, and (iv) the approximate boundaries of Phase II will be as set
forth on the map entitled "The Preserve, Holbrook Road, Seymour,
Connecticut" by Michael H. Horbal, Land Surveyors and Planners,
which map was submitted to the Seymour Planning and Zoning Commission
in connection with the Buyer's application for conceptual approval of
the development of the Premises and is attached hereto as Schedule F.)
Buyer agrees to submit in good faith applications for all such approvals
of the Project on or before March 15, 1999 and to pursue such
applications diligently. Buyer shall submit to the Seller, on or
before March 15, 1999, a certificate executed by a Member duly
authorized, to the effect that Buyer has applied in good faith for all
approvals necessary to satisfy the above condition to its purchase of
the Premises. Seller agrees to provide reasonable cooperation to the
Buyer in connection with the Buyer's applications. If the Buyer fails
to submit all such applications in good faith by March 15, 1999 or fails
to submit the above certificate to the Seller, the Seller may terminate
this Agreement and, subject to the provisions set forth below with
respect to the treatment of the Earnest Money and the Supplementary
Deposit and the right to possession of development plans with respect to
the Premises, the obligations of the parties hereunder shall terminate
and come to an end. If the Buyer shall have duly applied in good faith
for and diligently pursued the above approvals as contemplated above,
but shall not have received all such Final approvals by June 30, 1999,
the Buyer may, upon written notice submitted to the Seller not later
than June 30, 1999, terminate this Agreement and, subject to the
provisions of the following sentence with respect to the treatment of
the Earnest Money and the Supplementary Deposit, all obligations of the
parties hereunder shall terminate and come to an end. Upon (i) Seller
terminating this Agreement as a result of the Buyer failing to submit
all such applications or providing to the Seller the certificate with
respect to such submissions as set forth above, or (ii) the Buyer
terminating this Agreement as a result of being unable to obtain the
Final approvals by June 30, 1999, the Seller may retain the Earnest
Money deposit paid by the Buyer in accordance with Paragraph 1(a)
hereof, together with the interest thereon, and $50,000 of the
Supplementary Deposit paid in accordance with Paragraph 1(b) hereof,
together with the interest thereon, and the Seller shall return to the
Buyer the balance of the Supplementary Deposit (being $97,500) together
with the interest thereon. If this Agreement is terminated or the
purchase and sale contemplated herein does not take place for any
reason other than the failure of the Seller to comply with the
provisions of this Agreement, the Buyer shall, upon the request of
the Seller, provide to the Seller as soon as practicable after such
request copies of all documents, plans, drawings, letters, notebooks,
reports, or other papers or electronic media detailing Buyer's
proposed development of the Premises and all applications for
approvals contemplated in this Paragraph 13.
PAGE 31
Notwithstanding the provisions set forth in this Paragraph 13(a)
above, if (iii) the Buyer shall have obtained all of the approvals
contemplated in this Paragraph 13(a) on or before June 30, 1999, but one
or more of the said approvals has not become Final solely because a third
party has initiated an appeal of such approval to a court of competent
jurisdiction, in lieu of terminating this Agreement as contemplated
above, the Buyer may, by written notice to the Seller not later than
June 30, 1999, elect to extend this Agreement and the date for Closing
to the earlier of (A) June 30, 2001, or (B) the date which is thirty
(30) days after all such appeals have been determined finally in a
manner reasonably satisfactory to the Buyer, and (iv) if, prior to
June 30, 1999, one or more of the Buyer's applications for approval
contemplated in this Paragraph 13 is denied, the Buyer may, by written
notice submitted to the Seller not later than June 30, 1999, elect to
appeal, at Buyer's expense, any such denial and to extend this Agreement
and the date for the Closing to the earlier of (X) June 30, 2001, or
(Y) the date which is thirty (30) days after all such appeals have been
determined finally in a manner reasonably satisfactory to the Buyer,
provided however, that if the Closing shall occur after June 30, 2000
by reason of the Buyer's election pursuant to this Paragraph 13(a), the
Purchase Price to be paid by the Buyer for the Premises shall increase
by twenty thousand dollars ($20,000) for each month or portion thereof
which passes from June 30, 2000 until the Closing, which amounts shall
be payable monthly, in advance, and shall be deemed to be additional
Earnest Money deposit for all purposes under this Agreement and shall
be applied to increase that portion of the Purchase Price payable at
the Closing in immediately available funds as contemplated in
Paragraph 1(c) hereof.
(b) Seller agrees that it shall, at its sole expense, construct a
sanitary sewer line (the "Sewer Extension") with capacity reasonably
satisfactory to the Buyer's engineer to serve Buyer's proposed
development on the Premises as described is Paragraph 13(a) above, which
Sewer Extension shall connect to the Sewer system of the Seymour Water
Pollution Control Authority through an easement over the Seller's
property adjacent to the Premises located on Cemetery and Holbrook Roads
(hereinafter referred to as "Parcel B"). The Sewer Extension to be
constructed by the Seller shall end at the boundary of the Premises on
Cemetery Road. The Seller shall obtain at its expense final design
plans and all approvals necessary for the construction of the Sewer
Extension not later than April 1, 1999 Seller shall obtain the capacity
requirements for the design from the Town Engineer and/or the Seymour
Water Pollution Control Authority based on 183 homes with three bedrooms
each, plus a 5,000 square foot clubhouse with a pool, plus capacity for
future connections to the system, as may be required by the Town of
Seymour. It shall be a condition of Closing by Purchaser herein that
the Seller shall have begun construction of the Sewer Extension in
accordance with said approvals prior to the Closing. The Seller agrees
to pursue diligently all governmental approvals necessary for the
construction of the Sewer Extension, to provide reasonable surety for
the completion thereof, provided that Buyer agrees that if the Town of
Seymour shall require a bond for the completion of the Sewer Extension,
PAGE 32
such bond shall be deemed to satisfy the surety required herein, and to
use reasonable and diligent efforts to complete construction of the
Sewer Extension as soon as reasonably practicable after beginning
construction thereof.
(c) The non-defaulting party shall give notice to the defaulting
party of any default by the defaulting party and the defaulting party
shall have ten (10) days from the receipt of notice to cure.
(d) The Buyer may at its option waive any of the conditions set
forth in this Paragraph 13 and agree to Close notwithstanding that any
or all of such conditions may not have occurred"
4. Paragraph 18 of the Purchase and Sale Agreement is hereby
amended by deleting the provisions thereof and substituting in lieu
thereof the following:
"18. BUYER'S FINANCIAL CONDITION DOCUMENTATION
On or before May 15, 1999, the Buyer shall (a) obtain from a bank
or other financial institution qualified to do business in Connecticut
a binding commitment to provide to the Buyer financing in the principal
amount not less than $1,422,000 with which to consummate the Closing and
(b) deliver to the Seller (i) a copy of such binding commitment and (ii)
evidence reasonably satisfactory to the Seller that the Buyer has
sufficient equity and ready access to funds, that is the balance of the
portion of the purchase price to be paid at the Closing, in order to
consummate the Closing. If the Buyer fails to obtain such binding
commitment and to deliver a copy of such commitment and evidence of
financial capacity to the Seller on or before May 15, 1999, the Seller
may terminate this Agreement and, subject to the provisions with respect
to the treatment of the Earnest Money and the Supplementary Deposit set
forth below and the right to possession of certain development plans
with respect to the Premises as set forth in Paragraph 13(a) hereof,
the obligations of the parties hereunder shall terminate and come to an
end. Upon Seller terminating this Agreement as contemplated in the
preceding sentence, the Seller may retain the Earnest Money deposit paid
by the Buyer in accordance with Paragraph 1(a) hereof, together with
the interest thereon, and $50,000 of the Supplementary Deposit paid in
accordance with Paragraph 1(b) hereof, together with the interest
thereon, and the Seller shall return to the Buyer the balance of the
supplementary Deposit (being $97,500) together with the interest thereon.
5. The Purchase and Sale Agreement is hereby further amended by
adding thereto a new Paragraph 19, as follows:
"19.Cemetery Road Engineering. The Seller acknowledges that the
Buyer has obtained from the Seymour Planning and Zoning Commission
so-called "conceptual" approval for the Project, which approval
contemplates, as a condition of final approval, the widening and partial
PAGE 33
relocation of Cemetery Road across Parcel B, and Seller agrees (a) to
allow a portion of Cemetery Road to be relocated onto Parcel B as
contemplated in the conceptual approval by the Seymour Planning and
Zoning Commission and (b) to provide to the Buyer as soon as reasonably
practicable, at Seller's expense, the design engineering necessary for
such relocation."
6. This Amendment Agreement is subject to the Seller obtaining
approval by the Connecticut Department of Public Utility Control
("DPUC") of its provisions, including without limitation, a specific
acknowledgment that (a) the agreement with respect to the allocation
of open space set forth in Paragraph 7(d) of the Purchase and Sale
Agreement, as amended by this Amendment Agreement, will, so long as
such allocation of open space is made at the time of the Closing,
continue to entitle the Seller to the ratemaking treatment based upon
an allocation of 50% of the Premises to open space, regardless of the
Seller's potential foreclosure and resale of Phase II of the Project,
and (b) rate base reductions occasioned by the gain to be received by
the Company on the sale of the Premises shall be recognized for
ratemaking purposes subsequent and with respect only to proceeds
actually received by the Company from the sale. Notwithstanding
the preceding sentence, the parties acknowledge that the extension of
time for Closing contemplated by this Amendment Agreement results, in
part, from both parties' inability to obtain local regulatory approvals
by December 31, 1998, and the parties, irrespective of approval of this
Amendment Agreement, hereby mutually release each other from and against
all claims for loss or damage, other than the Seller's right to retain
the Earnest Money deposit, together with interest thereon, resulting
from their respective failures to obtain local approvals as
contemplated in the original Purchase and Sale Agreement. The Seller
will, in order to seek the DPUC's approval of this Amendment Agreement,
apply to the DPUC as soon as reasonably practicable to reopen the
proceeding in which the DPUC approved the Purchase and Sale Agreement.
During the pendancy of the DPUC proceeding, the parties shall proceed
in good faith to obtain all approvals contemplated in Paragraphs 13,
18 and 19 of the Purchase and Sale Agreement, as amended by this
Amendment Agreement, and agree that the dates set forth in the Purchase
and Sale Agreement, as so amended, for the performance of any act or
acts by a party, other than the Seller's obligation to convey the
Premises, shall not be modified or extended by virtue of any delay in
obtaining the DPUC approval contemplated herein.
PAGE 34
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party hereto as of the
date first above written.
BIRMINGHAM UTILITIES, INC.
By: /s/ Betsy Henley-Cohn
Betsy Henley-Cohn, Its Chairwoman,
Duly Authorized
M/1 HOMES, LLC
By: /s/Glenn Tatangelo
Glenn Tatangelo, Its Member,
Duly Authorized
PAGE 35
1998 Birmingham Utilities Annual Report
Company Profile
The Company is in the business of collecting and distributing
water for domestic, commercial and industrial uses and fire protection
in Ansonia, Derby and in small parts of the contiguous Town of Seymour,
Connecticut. On February 1, 1999, the Company maintained a workforce
of 19 full-time employees, none of whom are affiliated with any union.
The Strategy to dispose of excess Water Company
Lands in a prudent and equitable manner benefits the Company's
customers, shareholders and fosters a partnership with the communities
in which the Company operates.
John S. Tomac
Sources of Supply
Wells:
Located in Derby and Seymour with a safe daily yield of 3.0
million gallons per day (MGD).
Interconnections:
Two interconnections with the South Central Regional Water
Authority at the border of Orange and Derby (the "Grassy Hill
Interconnection") and near the border of Seymour and Ansonia
(the "Woodbridge Interconnection"). Annual purchases of water
contracted at a minimum of 600 million gallons a year. Safe daily
yield of Interconnection - 5.0 MGD.
Emergency Supply:
Beaver Lake Reservoir System - 2.2 MGD surface water supply.
Customer Base and Demand
8,902 customers, 94% residential and commercial
Water delivered in 1998 - 1.18 Billion Gallons
Average daily demand - 3.2 MGD.
Maximum daily demand in 1998 - 4.7 MGD.
Total safe daily yield - 8.0 MGD.
Regulation
The Company is subject to jurisdiction by the following agencies:
Connecticut Department of Public Utility Control (DPUC)
Matters related to ratemaking, financing, accounting,
disposal of property, issuance of long-term debt and
securities and other operational matters.
PAGE 36
Connecticut Department of Public Health (DPH)
Water quality, sources of supply and use of watershed
land.
Connecticut Department of Environmental Protection (DEP)
Water quality, pollution abatement, diversion of water from
streams and rivers, safety of dams and location, construction
and alteration of certain water facilities.
The Company is also subject to regulation of its water quality under
the Federal Safe Drinking Water Act ("SDWA"). The United States
Environmental Protection Agency has granted to the Health Department
the primary enforcement responsibility in Connecticut under the SDWA.
The Health Department has established regulations containing maximum
limits on contaminants which have or may have an adverse effect on
health.
Financial Highlights
Market For the Registrant's Common Stock and
Related Security Holding Matters
As of December 31, 1998, there were approximately 486 record holders of
the Company's common stock. Approximately 37% of the Company's stock is
held in "nominee" or "street" name. The Company's common stock is
traded on the NASDAQ Small Cap Market. The market is not active, and
actual trades are infrequent. The following table sets forth the
dividend record for the Company's common stock and the range of bid
prices for the last two calendar years. The stock prices are based
upon NASDAQ records provided to the Company. The prices given are
retail prices. The Company's Mortgage Bond Indenture under which its
First Mortgage Bonds are issued contains provisions that limit the
dividends the Company may pay, under certain circumstances.
<TABLE>
<S> <C> <C> <C> <C>
Bid Dividend
High Low Paid
1998 First Quarter $15.00 $11.75 $ .17
Second Quarter 18.50 14.50 .17
Third Quarter 19.13 15.75 .17
Fourth Quarter 25.25 18.50 .17
1997 First Quarter 9.00 8.60 .15
Second Quarter 10.00 9.80 .15
Third Quarter 13.00 11.00 .15
Fourth Quarter 15.00 13.00 .15
</TABLE>
PAGE 37
Selected Financial Data
Presented below is a summary of selected financial data for the years
1994 through 1998:
(000's omitted except for per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Operating Revenues $ 4,395 $ 4,367 $ 4,380 $ 4,238 $ 4,124
Income before Interest
Charges 1,170 1,112 968 863 913
Income from Land
Dispositions* 3,354 195 387 279 _
Net Income 3,911 668 765 518 363
Earnings Per Share-
Basic** 5.10 .88 1.02 .69 .48
Earnings Per Share-
Diluted** 4.95 .87 1.02 .69 .48
Cash Dividends Declared
(per share) .68 .60 .50 .48 .48
Total Assets 19,519 16,491 15,568 14,624 15,246
Long Term Debt 4,418 5,662 5,981 6,001 6,329
Short Term Debt 94 1,524 294 75 165
Shareholder Equity 7,648 4,097 3,841 3,408 3,220
</TABLE>
* See Management Discussion and Analysis, Results of Operations - Land
Dispositions
** See Note 18 to the financial statements
Fellow Shareholders
I998 was a year of great accomplishment and change for your Company. It
was a fitting year to mark the retirement of Aldore J. Rivers, our
President since 1985, and the election of John S. Tomac, as Al's
successor. John had joined us in 1997 as the Company's Chief Financial
Officer and has over 20 years experience in the water industry.
Birmingham Utilities continued its strategy to dispose of its excess
lands to improve its aging water system infrastructure. As a result of
the land sales, earnings achieved in 1998 were at record levels. Land
PAGE 38
sales in 1998 included 145 acres to the City of Derby, 229 acres to
the Town of Seymour and 515 acres to the Town of Oxford, most of
which will be maintained as open space for the residents of our
communities to enjoy. The Seymour and Oxford transactions involved
sales prices at below market levels. The "bargain prices" were
available due to a unique relationship established among the Company,
Town officials and the Trust for Public Land. As a result of the
bargain sales, the Company expects to be afforded reductions in
federal and state income taxes. These sales were accomplished with
the wholehearted support of the local communities, both local and
state elected officials, and the Company's regulators. Because of that
support and cooperation, the sales were accomplished in a timely
fashion that benefited both the Company and its customers as well as
the communities involved. The combination of the income tax deductions
and the ability to consummate the sales quickly because of the
local community support, resulted in financial gains on the sales
comparable to those that would have been enjoyed in fair market value
transactions.
We hope our land sale strategy will bear additional fruit in 1999 and
beyond. The Company continues to have an additional 245 acres of land
in Seymour under contract for sale to a developer. Under the original
1997 contract, the developer had proposed the construction of a golf
course, together with 180 units of "active adult" housing. During the
latter part of 1997 and in 1998, it became clear that the developer
would not be able to obtain land use approvals necessary to construct
the golf course. As a result, the developer has amended his plans and,
rather than construct a golf course along with the housing, has
proposed that over 50% of the land involved be donated to the Town
of Seymour for open space. The amended plans resulted in the need to
amend our contract with the developer to extend the originally
anticipated closing date from December 31, 1998 until June 30, 1999,
subject to the developer receiving the appropriate land use approvals
for the project. The Company and the developer agreed to an amended
contract, which also increased the purchase price from $3,950,000 to
$4,020,000, of which $2,370,000 will be payable on June 30, 1999 and
the balance of $1,650,000 on June 30, 2000. In addition to the necessary
land use approvals, the amendments to the contract also must be
approved by the Connecticut Department of Public Utility Control. We
cannot predict whether or not all the required approvals can be
obtained, but we are aware of no reasons why they should not be.
In addition, we have recently received approval from the Connecticut
Department of Health of the five-year update to the Company's
Comprehensive Water Supply Plan. The updated plan includes the
Company's proposal to abandon as a public water supply source our
Quillinan Reservoir in Ansonia. That abandonment will allow the
approximately 600 acres of land associated with the reservoir,
primarily in Ansonia, to be reclassified from "watershed" to
"non-watershed" land and make it available for sale for the first
time. Because of your Company's commitment to try to keep as much of
its land in its natural state as possible, consistent with our need
PAGE 39
to realize a reasonable gain and proceeds for investment into new
utility facilities, the Company has already been in contact with the
Trust for Public Land in order to try to meet both the Company's and
the communities' goals. We hope to be able to structure a transaction
that will meet all of our goals.
Your Board of Directors and I again want to welcome John Tomac at
this critical and exciting point in our Company's development. John's
experience and professionalism, together with the experience and
dedication of the loyal employee corps developed by Al Rivers over
the past 15 years, will be invaluable as we continue to enhance the
Company's ability to provide first class service to our customers and
to provide an exceptional return on your investment. As always, feel
free to contact me at the Company.
Your fellow shareholder,
Betsy Henley-Cohn
Chairwoman
Fellow Shareholders
I want to take this opportunity to report to you the extraordinary
financial results and operational accomplishments your Company achieved
in 1998. Net income for the year was an unprecedented $3,900,000,
compared with $668,000 in 1997 and $765,000 in 1996. The amount of the
Company's net income attributable to both current and prior land sales
was approximately $3,507,000, $371,000, and $548,000 in each of those
years, respectively. Net income from operations also increased in 1998
to $403,000, a 35% gain over net income from operations achieved in
1997. The operational gain is principally a result of a reduction of
operating and maintenance expenses in 1998, and to a lesser extent,
rate relief granted early in 1998.
The strategy of the Company to dispose of land no longer necessary to
its water supply business and to convert those under-utilized assets
into operating capital, financially transformed your Company in 1998.
The 1998 land sales, with aggregate sales prices of approximately
$6,900,000, resulted in net proceeds to the Company, after taxes and
selling expenses, of approximately $4,200,000. With those net proceeds,
the Company was able to repay all short-term debt and the Company's
long-term loan. All of the repaid debt had been incurred in recent
years to fund the construction of new utility facilities as part of
the Company's Capital Improvement Program. The 1998 land sale proceeds
also allowed the Company to invest approximately $1,800,000 in new
1998 capital improvements as well as to plan for an additional
$1,800,000 in capital improvements in 1999. Because of the reinvestment
PAGE 40
of the net land sales proceeds, which is required by Connecticut law,
we expect that we can continue to make the desired improvements to the
water supply system without having to ask our customers to pay increased
water rates for the foreseeable future.
The extraordinary financial results achieved in 1998 have increased the
book value of your Company's Common Stock by 83% to $9.87 per share at
year end 1998 from $5.38 per share at year end 1997. The Company's
total capitalization increased more than $2,300,000 during 1998, while
the equity component of that capitalization increased to 63% at year
end 1998 from 42% at year end 1997. Your Board of Directors declared
and the Company paid dividends of $.68 per share in 1998, a 13%
increase over the dividends of $.60 per share paid in 1997. I know you
will agree that our plans to add value to your investment in the Company
bore fruit in 1998.
With abundant water supplies already in place, the Company's long range
planning continues to focus on protecting those sources, as well as
replacing aged piping and increasing pipe capacities in key areas to
improve fire and domestic service. Replacement of aging infrastructure
has been well documented in the water industry as the "next challenge"
for water utilities, especially for companies located in the Northeast.
I am pleased to report that, as a result of the successful land
sale program in 1998 and the optimistic outlook for future sales in
1999 and beyond, your Company has been positioned financially to meet
those challenges ahead.
The Company's Capital Improvement Program, which is spearheaded by Vice
President of Operations, John J. Keefe, Jr., took major steps in 1998.
As part of the program, the Company installed almost 3.6 miles of new
8-inch and 12-inch water mains. Remarkably for a company our size,
almost 75% of the installations were accomplished by our in-house
construction crew rather than through outside contractors. Because of
our capacity to install water mains with our in-house crew, the cost
of our infrastructure replacements has been and will continue to be
minimized. For example, in 1998, our average cost to install the 3.6
miles of new pipe approximated $70.00 per foot, including paving. This
per-foot cost compares favorably with the average per-foot main
installation costs incurred by any water utility, large or small. The
increased flows from these new mains not only improved customer
service, reduced leaks, and allowed for expanded service to undeveloped
land areas and residential areas previously served by private wells,
they also allowed the Company to abandon three pump stations, thus
reducing operating expenses associated with those stations.
During 1998, we were also successful in reducing other operating
expenses and maintenance expenses as well. We were able to reduce
operating expenses in 1998 by over $120,000 (approximately
4.8%) from those incurred in 1997. Reductions in expenses for outside
professional fees, casualty insurance premiums, uncollectibles,
pension, and post-retirement benefits all contributed to the savings.
Similarly, the Company's maintenance expense was reduced in 1998 by
PAGE 41
approximately $23,000 (approximately 12.4%) from the 1997 amount. As
we proceed with the replacement of older water mains, we hope to
continue the trend in reductions in maintenance expenses experienced
over the past several years.
Your Company is committed to continued planning for the types of capital
improvements described above. Our budget for capital improvements over
the next five years approximates $10,000,000. Our goal is to continue
to enhance shareholder value while simultaneously improving a sound
water supply distribution system. Our strategy allows for improved
customer service, enhanced reliability over the long term, and reduced
operating expenses. Our new financial strength will allow us to honor
that commitment while maintaining water service rates at a level that
remains affordable.
It has been a privilege and an honor to be elected by your Board of
Directors as your Company's new President. I would especially like to
thank Al Rivers for his guidance and insight and for making my
transition to this position as comfortable as possible. We are
fortunate indeed that Al will be remaining as a Director and as a
part time consultant to the Company. I would also like to thank our
very dedicated and talented group of employees whose performance
standards are unmatched in the water industry.
I look forward to the many challenges ahead.
Sincerely,
/s/ John S. Tomac
John S. Tomac
President & Treasurer
Birmingham Contributors
BOARD OF DIRECTORS
Betsy Henley-Cohn (2)*
Chairwoman of the Board of Directors
of the Company since May of 1992;
Chairman and Treasurer,
Joseph Cohn & Sons, Inc.;
Director, United Illuminating Corp.;
PAGE 42
Director, Aristotle Corp.;
Director, Society for Savings Bancorp, Inc.
(1985-1993).;
Director Citizens Bank of Connecticut;
* Ex-Officio on all other committees
Aldore J. Rivers (2,3)
Retired; President of the Company from 1985
to October 1998
Stephen P. Ahern (3,4)
Vice President, Unicco Security Services;
Principal, Ahern Builders
Edward G. Brickett (1,4)
Retired; Director of Finance,
Town of Southington, Connecticut
until June 1995
James E. Cohen (2,3)
Lawyer in Practice in Derby;
Director, Great Country Bank (1987-1993)
Alvaro da Silva (1,3)
President, DSA Corp.;
President, B.I.D., Inc. (land development &
home building company);
Managing Partner Connecticut Commercial
Investors, LLC., (a commercial real estate
and investment partnership);
Chairman of Shelton Inland Wetlands Comm;
Board of Governors Unquowa School;
Director of Great Country Bank
(1991-1995);
Director Griffin Hospital (1987-1990)
PAGE 43
B. Lance Sauerteig (3,4)
Lawyer in Practice in Westport;
Principal in BLS Strategic Capital, Inc.
(financial and investment advisory company)
previously, President, First Spring Corporation,
1986-1994 (private family investment management company);
Director, OFFITBANK (a New York based private
investment management bank)
Kenneth E. Schaible (1,3)
Bank Consultant and Real Estate Developer;
previously, Senior Vice President, Webster Bank,
1995-1996;
President, Shelton Savings Bank and Shelton Bancorp.,
Inc., 1967 to 1995
David Silverstone (1,2)
Vice President, The Southern Connecticut Gas Company,
since April 1, 1998;
Lawyer in Practice since 1972
Charles T. Seccombe
Director Emeritus
Officers
Betsy Henley-Cohn
Chairwoman and CEO
John S. Tomac
President and Treasurer
John J. Keefe, Jr.
Vice President, Operations
Anne A. Hobson
Secretary
Diane G. DeBiase
Assistant Treasurer
PAGE 44
Auditors
Dworken, Hillman, LaMorte
& Sterczala, P.C.
Bridgeport, Connecticut
General Counsel
Tyler Cooper & Alcorn, LLP
Hartford, Connecticut
Registrar and
Transfer Agent
American Stock Transfer
& Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Stock Market Listing
NASDAQ - Under the symbol BIRM
Committees
(1) Audit Committee meets regularly with the management and independent
accountants to review and discuss the scope and results of the annual
audit of the Company's financial statements.
(2) Executive Committee reviews strategic planning alternatives,
recommends to and advises the Board of Directors on financial policy,
issuance of securities and other high priority issues.
(3) Land Committee makes recommendations regarding the sale and/or
development of land available for sale.
(4) Personnel and Pension Committee makes recommendations to the
Board of Directors regarding officers' compensation including the
promotion and hiring of officers; reviews Company fringe benefit plans
other than retirement plans; reviews the Pension Trust Fund of the
Birmingham Utilities, Inc. Defined Benefit Plan and the Retired
Employee Welfare Benefit Trust for retiree medical benefits; reviews
and determines actuarial policies, investment guidelines and selects
the investment manager.
PAGE 45
Contents
Management's Discussion and Analysis 8
Independent Auditors' Report 12
Balance Sheets 13
Statements of Income and Retained Earnings 14
Statements of Cash Flows 15
Notes to Financial Statements 16
Management's Discussion and Analysis
Results of Operations
Overview
The Company's net income for 1998 was $3,910,793 compared with net
income of $667,879 in 1997 and $764,737 in 1996. Earnings per share,
basic for 1998, 1997 and 1996 were $5.10, $.88 and $1.02, respectively.
The increase in net income of $3,242,914 in 1998 is principally due to
sales of large parcels of excess water company lands to the Towns of
Oxford, Seymour and Derby, Connecticut and, to a lesser extent,
increased operating income from utility operations. The decrease in
net income in 1997 from 1996 of $96,858 was a result of a decline in
land sale income of $191,252. The decline, however, was largely offset
by increased other income of $70,625 and decreased income taxes from
operations of $58,745.
Revenues
Water sales to the Company's customers, primarily in the cities of
Ansonia and Derby, Connecticut, of $4,394,911 were $27,554 higher than
the sales achieved in 1997 of $4,367,357. A general water service rate
increase of 4.1% that became effective on February 1, 1998 primarily
accounts for this increase. This rate increase more than offsets a 5%
rate reduction that took place on July 1, 1997 as a result of the
repeal of the Connecticut Gross Receipts tax. Consumption in 1998,
for the most part, is only slightly ahead of consumption levels in 1997.
In 1997, water service revenues were $12,414 lower than the revenues
achieved in 1996 principally due to the 5% rate reduction. The rate
reduction, however, was somewhat offset by increased consumption
in 1997 vs. 1996 by the Company's residential class of customers.
PAGE 46
Operating Expenses
Operating expenses of $2,363,523 in 1998 have decreased $120,352, or
4.8%, over total operating expenses of $2,483,875 for 1997. Decreased
costs associated with professional fees, casualty insurance,
uncollectible expenses, pension expense and post retirement benefits
principally account for this variance. Operating expenses in 1997 were
$89,145 higher than in 1996 primarily as a result of special services
relating to professional fees.
Maintenance Expenses
Maintenance expenses of $162,126 for 1998 are $23,005 or 12.4% lower
than maintenance expenses of $185,131 for 1997. Lower expenses
relating to main maintenance and service repairs principally contribute
to this favorable variance. Maintenance expense in 1997 was $39,931
lower than 1996, also due to lower main maintenance and service repair
costs.
Depreciation Expense
Depreciation expense for 1998 of $488,386 exceeds depreciation expense
for 1997 of $439,116 by $49,270. Depreciation expense relating to an
increasing amount of general plant additions made in 1998 and 1997
accounts for this variance. Depreciation expense in 1997 was $44,057
higher than in 1996, due to the continuation of plant additions.
Taxes other than Income Taxes
Taxes other than income taxes of $274,863 in 1998 are $131,697 lower
than the expense of $403,560 in 1997. The repeal of the Connecticut
Gross Receipts tax that became effective July 1, 1997 and lower
property taxes due to the disposition of property in Derby, Connecticut
account for this variance. Taxes other than income taxes in 1997
of $403,560 are $106,239 lower than the expense of $509,799 for 1996.
The repeal of the Gross Receipts tax also accounted for the reduction
from 1996.
Income Taxes
Income tax expense from operations in 1998 of $210,934 is $141,220
higher than income tax expense recorded in 1997. Increased operating
earnings in 1998 principally account for this variance. Taxes on the
Company's income from operations were $69,714 in 1997 and $128,459
in 1996. The decrease in 1997 from 1996 is principally the result of
tax deductions for property donations in conjunction with the sale
of Company excess land in Seymour, CT to the Town of Seymour and
property in Derby, CT to Yale University, as well as an increase in
flow through tax deductions principally relating to rate case
expense.
PAGE 47
The Company also incurs income tax liability for gains from land
transactions, both in the year in which they occur and in the
later years in which income, previously deferred in accordance with
the DPUC's orders concerning the sharing of the gains between the
Company's shareholders and ratepayers, is recognized by the Company.
Taxes related to gains on land transactions were $1,756,937, $258,476
and $382,107 in 1998, 1997 and 1996, respectively. The Company's total
income tax liability including both the tax on operating income and on
land sale gains was $1,967,871 in 1998, $328,190 in 1997 and $510,566
in 1996.
Land Dispositions
When the Company disposes of land, any gain recognized, net of tax, is
shared between ratepayers and stockholders based upon a formula
approved by the DPUC. The impact of land dispositions is recognized in
two places on the statement of income.
The statement of income reflects income from the disposition of land
(net of taxes) of $3,354,240 in 1998, $195,457 in 1997 and $386,709
in 1996, which represent the stockholders' immediate share of income
from land dispositions occurring in each year.
Land disposition income is also recognized in the financial statements
as a component of operating income on the line entitled "Amortization
of Deferred Income on Dispositions of Land." These amounts represent
the recognition of income deferred on land dispositions which occurred
in prior years. The amortization of deferred income on land
dispositions, net of tax, was $153,225, $175,744 and $161,065 for the
years 1998, 1997 and 1996, respectively.
Recognition of deferred income will continue over time periods ranging
from three to fifteen years, depending upon the amortization period
ordered by the DPUC for each particular disposition. See Note 6 of
the Financial Statements.
Other Income
Other income in 1998 of $121,571 is $29,137 lower than other income of
$150,708 achieved in 1997. Decreased jobbing income and lower fees
associated with the Company's managed system account for the decline
Other income in 1997 of $150,708 is $70,652 greater than the level
achieved in 1996 of $80,083. Increased jobbing income and fees
associated with the Company's managed system and increased AFUDC
account for this favorable increase.
Interest Expense
Interest expense of $613,322 in 1998 is $26,671 lower than interest
charges of $639,993 recorded in 1997. Lower interest charges due to
decreased short-term borrowings account for this decline. Interest
expense in 1997 was $50,209 higher than interest charges in 1996.
PAGE 48
Interest charges relating to increased short-term borrowing in 1997
account for this variance.
Inflation
Inflation, as measured by the Consumer Price Index, increased 1.6
percent, 1.7 percent and 3.3 percent in 1998, 1997 and 1996,
respectively. The regulatory authorities allow the recovery of
depreciation through revenues solely on the basis of the historical
cost of plant. The replacement cost of utility plant would be
significantly higher than the historical cost. While the regulatory
authorities give no recognition in the ratemaking process to the current
cost of replacing utility plant, the Company believes that, based on
past practices, the Company will continue to be allowed to earn a return
on the increased cost of their net investment when prudent replacement
of facilities actually occurs.
Financial Resources
During 1998, 1997 and 1996, the Company's water operations generated
funds available for investment in utility plant and for use in financing
activities, including payment of dividends on common stock, of $968,556,
$489,361 and $456,951, respectively (see Statement of Cash Flows).
Net cash provided by operating activities increased $479,225 from 1997
to 1998. Increases in operating income and accounts payable principally
accounts for this variance.
During the three-year period 1996, 1997 and 1998, the Company has
generated sufficient funds to meet its day-to-day operational needs,
including regular expenses, payment of dividends, and investment in
normal plant replacements, such as new services, meters and hydrants.
It expects to be able to continue to do so for the foreseeable future.
Completion of the Company's Long Term Capital Improvement Program is
dependent upon the Company's ability to raise capital from external
sources, including, for the purpose of this analysis, proceeds from
the sale of the Company's holdings of excess land. During 1998, 1997
and 1996, the Company's additions to utility plant, net of customer
advances, cost $1,597,247, $1,281,242 and $1,461,152, respectively
(see Statement of Cash Flows). These additions were financed primarily
from external sources, including proceeds from land sales and increases
in debt.
The Company has outstanding $4,512,000 principal amount of Mortgage
Bonds, due September 1, 2011, issued under its Mortgage Indenture. The
Mortgage Indenture limits the issuing of additional First Mortgage
Bonds and the payment of dividends. It does not, however, restrict the
issuance of either long term or short term debt which is either
unsecured or secured with liens subject to the lien of the Mortgage
Indenture. The Company also had a $1,500,000 secured, term loan which
PAGE 49
was repaid in full on November 23, 1998. Principal and interest payments
were made monthly in 1998, up to the time of the repayment.
In 1998, the Company converted a $600,000 working capital line of credit
and a $1,500,000 secured line of credit to a two-year $2,100,000
revolving line of credit. In June, 2000, the Company will have
the option to convert any outstanding balance to a six-year term note
with a 20-year amortization schedule, resulting in a balloon payment at
the end of the six-year term. The revolving line of credit is secured
by a lien (subordinate to the lien of the Mortgage Bond Indenture - See
Note 4) on all of the Company's utility property other than its excess
land available for sale. There were no borrowings outstanding on the
revolving line of credit on December 31, 1998.
The interest rate on the revolving line of credit is a variable option
of 30- or 90-day LIBOR plus 100 basis points or prime. The term option
consists of a fixed rate of the bank's cost of funds plus 100 basis
points or a variable rate of the prime rate or 90 day LIBOR plus 100
basis points which is reset every 90 days.
The Company's 1999 Capital Budget of $1,800,000 is two-tiered. The
first tier consists of typical capital improvements made each year for
services, hydrants and meters budgeted for $550,000 in 1999 and is
expected to be financed primarily with internally generated funds.
The second tier of the 1999 Capital Budget consists of replacements and
betterments which are part of the Company's Long Term Capital Improvement
Program and includes $1,250,000 of budgeted plant additions. The Company
believes that the balance of the net proceeds from the 1998 land sales
described below, after the 1998 repayment of debt and the investment in
new facilities in 1998, will be sufficient to finance the 1999 budgeted
Long Term Capital Improvement Program. Plant additions from this part of
the capital budget, in the future years, may require external financing
in addition to the Company's line of credit. Second tier plant additions
can be, and portions of it are expected to be, deferred to future years
if funds are not available for their construction.
The Company believes that by selling excess lands it can generate
sufficient equity capital to support its 5 year capital budget,
currently estimated at $10,000.000. Such land dispositions are subject
to approval by the DPUC. Proceeds from the sale of land are recorded as
revenue at the time of closing and portions of the gains are deferred
and amortized over various time periods as stipulated by the DPUC.
On January 21, 1998, the Company sold to the City of Derby, Connecticut,
145 acres of land in Derby, Connecticut for $1,800,000. The total gain
from the sale amounted to $910,306 of which $81,983 was deferred and
will be recognized over a 3-year period, as approved by the DPUC.
On April 29, 1998, the Company sold 2.9 acres of land in Woodbridge,
Connecticut for the development of a single-family home for $96,000.
The total gain from the sale amounted to $28,955 of which $9,243 was
PAGE 50
deferred and will be recognized over a 10-year period as approved
by the DPUC.
The Company also sold, on November 23, 1998, 229 acres of land in
Seymour and Oxford, Connecticut to the Town of Seymour. This parcel
was sold below market value, and as a result, the transaction was
classified as a bargain sale for income tax purposes. The net gain from
the sale amounted to $1,010,209 of which $90,965 was deferred and will
be recognized over a 3-year period as approved by the DPUC. As a result
of the bargain sale, the net gain also includes tax deductions of
$177,064 of which $98,900 will be carried forward to reduce the
Company's tax liability in subsequent years.
On December 3, 1998, the Company sold 515 acres of land in Oxford and
Seymour, Connecticut to The Trust for Public Land for $3,220,000. The
Trust for Public Land, in turn, simultaneously sold the property to
the Town of Oxford for the same price. This parcel was also sold below
market value, and therefore, the transaction was classified as a bargain
sale for income tax purposes. The net gain from the sale amounted to
$1,743,998 of which $157,037 was deferred and will be recognized over
a 3-year period as approved by the DPUC. As a result of the bargain
sale, the net gain includes tax deductions of $329,274 of which $184,100
will be carried forward to reduce the Company `s tax liability in
subsequent years.
As of December 31, 1998, the Company has approximately 360 additional
acres of excess land available for sale. That land consists of land
currently classified as Class III, non-watershed land under the
statutory classification system for water company lands.
Included in the unsold acreage is a 245-acre parcel of land in Seymour
which is under contract for sale to M/1 Homes LLC ("M/1 Homes"). In
1997, the Company had entered into a contract to sell the parcel to
M/1 Homes by December 31, 1998 for a purchase price of $3,950,000.
Because M/1 Homes had been unable to secure various land use approvals
for the part of its development plan that included construction of an
18-hole golf course, it has amended its development plan. The delays
caused by, among other things, the modified development plan, resulted
in M/1 Homes requesting that the Company extend the closing deadline
beyond the original December 31, 1998 date. The Company and M/1 Homes
recently agreed to a contract amendment extending the closing date to
June 30, 1999 and providing for certain other modifications to the
agreement. The amended agreement contemplates, instead of a golf course,
the donation by M/1 Homes of over 50% (approximately 130 acres) of the
acreage included in the transaction to the Town of Seymour for open
space purposes. Among other things, the modified agreement also
provides for a $70,000 increase in the purchase price to $4,020,000, of
which $2,370,000 will be payable at the closing, and the $1,650,000
balance within one year from the closing. Payment of the deferred
portion of the purchase price will be secured by a first mortgage on a
portion of the property in favor of the Company. The original 1997
agreement had been approved by the DPUC, and the amendment also must
PAGE 51
be so approved. The Company has applied to the DPUC for such approval
but cannot predict whether or not the DPUC will grant it. The Company
knows of no reason, however, why such approval should not be granted.
The agreement may also be terminated by M/1 Homes if it does not obtain
all required land use approvals, such as local site plan and inland
wetlands approvals, by the scheduled closing date. The Company cannot
predict whether or not M/1 Homes will be able to obtain all of the
required approvals. In the event the DPUC approves the amendment and
M/1 Homes terminates the agreement because of its inability to obtain
the required approvals, the Company is entitled to retain the $100,000
deposit made toward the purchase price by M/1 Homes.
The Company also has approximately 600 acres of unsold land associated
with the Company's former Quillinan Reservoir in Ansonia. The Company
recently received approval from the Department of Public Health for its
5-year update to the Company's Comprehensive Water Supply Plan, which
called for the abandonment of its Quillinan Reservoir. Upon receipt by
the Company of an abandonment permit from the Department of Public
Health, the land associated with the former reservoir becomes
available for sale by the Company for the first time. The land
associated with the former Quillinan Reservoir is currently subject to
the lien of the Company's Mortgage Indenture, and the Company
will need to secure the release of that lien prior to the consummation
of any sale. The trustee under the Mortgage Indenture pursuant to which
the Company's First Mortgage Bonds are issued is not, pursuant to the
terms of that Mortgage Indenture, required to grant such release. The
Company believes, however, that it will be able to obtain the required
release.
The Company maintains a common stock Dividend Reinvestment Plan (the
"Plan") pursuant to which shareholders will be entitled to purchase up
to 70,000 new shares of the Company's Common Stock by applying to the
purchase price of the new shares cash dividends which otherwise would
be issued by the Company with respect to its existing common stock. The
Plan provides that the purchase price for the new shares will be their
fair market value at the time of the purchase. Dividends reinvested
during 1997 totaled $45,581 and in 1998, $52,493.
PAGE 52
Independent Auditors' Report
To the Shareholders
Birmingham Utilities, Inc.
Ansonia, Connecticut
We have audited the accompanying balance sheets of Birmingham Utilities,
Inc. as of December 31, 1998 and 1997, and the related statements of
income and retained earnings and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Birmingham
Utilities, Inc. as of December 31, 1998 and 1997 and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
February 3, 1999
Bridgeport, Connecticut
Balance Sheets
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Assets
Utility plant $20,622,907 $19,045,629
Accumulated depreciation (6,189,596) (5,834,113)
14,433,311 13,211,516
Current assets:
Cash and cash equivalents 2,696,706 62,699
Accounts receivable, net of
allowance for doubtful
accounts of $50,000 in 1998
and 1997. 493,165 604,627
PAGE 53
Accrued utility and other revenue 361,448 375,327
Materials and supplies 62,046 56,976
Prepayments 42,643 15,068
Total current assets 3,656,008 1,114,697
Deferred charges 377,182 1,148,510
Unamortized debt expense 170,481 176,057
Income taxes recoverable 414,078 446,551
Other assets 467,826 394,096
1,429,567 2,165,214
$19,518,886 $16,491,427
Shareholders' Equity and Liabilities
Shareholders' equity:
Common stock, no par value;
authorized 2,000,000 shares;
issued and outstanding (1998,
775,158 shares; 1997, 761,702
shares) $ 2,427,752 $ 2,266,027
Retained earnings 5,219,875 1,831,377
7,647,627 4,097,404
Notes payable _ 1,150,000
Long term debt 4,418,000 4,512,000
4,418,000 5,662,000
Current liabilities:
Notes payable _ 1,355,000
Current portion of note payable
and long term debt 94,000 169,000
Accounts payable and accrued
liabilities 2,456,271 454,659
Total current liabilities 2,550,271 1,978,659
Customers' advances for construction 1,261,090 1,238,339
Contributions in aid of construction 1,043,719 851,154
Regulatory liability - income taxes
refundable 172,356 179,916
Deferred income taxes 1,391,476 1,695,608
Deferred income on dispositions of land 1,034,347 788,347
Commitments and contingent liabilities
(Note 13) _ _
4,902,988 4,753,364
$19,518,886 $16,491,427
</TABLE>
See notes to financial statements
PAGE 54
Statements of Income and Retained Earnings
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Operating revenues:
Residential and commercial $3,319,318 $3,335,743 $3,325,758
Industrial 148,367 160,307 169,070
Fire protection 657,005 621,592 628,558
Public authorities 95,135 82,488 74,320
Other 175,086 167,227 182,065
4,394,911 4,367,357 4,379,771
Operating deductions:
Operating expenses 2,363,523 2,483,875 2,394,730
Maintenance expenses 162,126 185,131 225,062
Depreciation 488,386 439,116 395,059
Taxes, other than income taxes 274,863 403,560 509,799
Taxes on income 210,934 69,714 128,459
3,499,832 3,581,396 3,653,109
895,079 785,961 726,662
Amortization of deferred income
on dispositions of land (net of
income taxes of $108,175 in 1998,
$124,718 in 1997 and $115,977
in 1996) 153,225 175,744 161,065
Operating income 1,048,304 961,705 887,727
Other income, net 121,571 150,708 80,083
Income before interest expense 1,169,875 1,112,413 967,810
Interest expense 613,322 639,991 589,782
PAGE 55
Income from dispositions of land
(net of income taxes of $1,648,762
in 1998, $133,758 in 1997 and
$266,130 in 1996) 3,354,240 195,457 386,709
Net income 3,910,793 667,879 764,737
Retained earnings, beginning
of year 1,831,377 1,619,188 1,235,482
Dividends 522,295 455,690 381,031
Retained earnings, end of year $5,219,875 $1,831,377 $1,619,188
Earnings per share, basic $ 5.10 $ .88 $ 1.02
Earnings per share, diluted $ 4.95 $ .87 $ 1.02
PAGE 55
Dividends per share $ .68 $ .60 $ .50
See notes to financial statements
</TABLE>
Statements of Cash Flows
<TABLE>
Years Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net income $ 3,910,793 $ 667,879 $ 764,737
Adjustments to reconcile net
income to net cash provided
by operating activities:
Income from land dispositions (3,354,240) (195,457) (386,709)
Depreciation and amortization 551,498 491,208 453,116
Amortization of deferred income (153,225) (175,744) (161,065)
Deferred income taxes (2,033,909) (91,243) (302,617)
Allowance for funds used during
construction (46,639) (41,741) (20,262)
Change in assets and liabilities:
Decrease in accounts receivable
and accrued revenues 125,341 112,781 45,294
(Increase) in materials and
supplies (5,070) (5,183) (952)
(Increase) decrease in
prepayments (27,575) 19,518 (7,426)
Increase (decrease) in accounts
payable and accrued
liabilities 2,001,612 (292,657) 72,835
Net cash provided by operating
activities 968,586 489,361 456,951
Cash flows from investing
activities:
Capital expenditures (1,820,297) (1,359,886) (1,518,142)
Sales of utility plant 25,000 _ _
Proceeds from land disposition 6,916,000 475,000 1,041,350
Increase in deferred charges
and other assets (523,941) (306,790) (108,178)
Customer advances 223,050 78,644 56,990
Customer advances for construction _ _ (9,180)
Net cash provided by (used in) investing
activities 4,819,812 (1,113,032) (537,160)
PAGE 56
Cash flows from financing activities:
Borrowings under line of credit _ 1,205,000 275,000
Repayments of note payable and
long term debt (1,319,000) (169,000) (75,564)
Repayments of line of credit (1,355,000) (125,000) _
Debt issuance cost (10,590) _ (2,972)
Dividends paid, net (469,801) (410,109) (329,645)
Net cash provided by (used in)
financing activities (3,154,391) 500,891 (133,181)
Net increase (decrease) in cash 2,634,007 (122,780) (213,290)
Cash and cash equivalents, beginning
of year 62,699 185,479 398,869
Cash and cash equivalents,
end of year $ 2,696,706 $ 62,699 $ 185,479
</TABLE>
See notes to financial statements
Notes to Financial Statements
Note 1
Accounting Policies
Description of business
Birmingham Utilities, Inc.'s (the "Company") predominant business
activity is to provide water service to various cities and towns in
Connecticut. The Company's accounting policies conform to generally
accepted accounting principles, and the Uniform System of Accounts and
ratemaking practices prescribed by the Connecticut Department of Public
Utility Control ("DPUC").
Estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results could
vary from those estimates.
Utility plant
The costs of additions to utility plant and the costs of renewals and
betterments are capitalized. The cost of repairs and maintenance is
charged to income. Upon retirement of depreciable utility plant in
service, accumulated depreciation is charged with the book cost of the
PAGE 57
property retired and the cost of removal, and is credited with the
salvage value and any other amounts recovered.
Depreciation
For financial statement purposes, the Company provides for depreciation
using the straight-line method. The rates used are intended to
distribute the cost of depreciable properties over their estimated
service lives. For income tax purposes, the Company provides for
depreciation utilizing the straight-line and accelerated methods.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and overnight
investment accounts in banks. From time to time, the Company has on
deposit at financial institutions cash balances which exceed federal
deposit insurance limitations. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Allowance for funds used during construction
An allowance for funds used during construction ("AFUDC") is made by
applying the last allowed rate of return on rate base granted by the
DPUC to construction projects exceeding $10,000 and requiring more
than one month to complete. AFUDC represents the net cost, for the
period of construction, of borrowed funds used for construction
purposes and a reasonable rate on other funds used. AFUDC represents
a noncash credit to income. Utility plant under construction is not
recognized as part of the Company's rate base for ratemaking purposes
until facilities are placed into service. Accordingly, the Company
capitalizes AFUDC as a portion of the construction cost of utility
plant until it is completed. Capitalized AFUDC is recovered through
water service rates over the service lives of the facilities.
Revenue recognition
The Company follows the practice of recognizing revenue when bills are
rendered to customers. In addition, the Company accrues revenue for the
estimated amount of water sold but not billed as of the balance sheet
date.
Advances for construction/contributions in aid of construction
The Company receives cash advances from developers and customers to
finance construction of new water main extensions. These advances
are partially refunded over a 10-year contract period to developers,
as revenues are earned on the new water mains. Any unrefunded balances
are reclassified to "Contributions in aid of Construction" and are no
longer refundable.
PAGE 58
Fair value of financial instruments
The carrying amount of cash and cash equivalents, trade accounts
receivable, and trade accounts payable approximates their fair values
due to their short-term nature. The carrying amount of note payable
and long term debt approximate fair value based on market conditions for
debt of similar terms and maturities.
Income taxes
Except for accelerated depreciation since 1981 (federal only), the tax
effect of contributions in aid of construction for the period January
1, 1987 through June 12, 1996, and in 1998 the tax effect of bargain
sale of land, for which deferred income taxes have been provided, the
Company's policy is to reflect as income tax expense the amount of tax
currently payable. This method, known as the flow-through method of
accounting, is consistent with the ratemaking policies of the DPUC,
and is based on the expectation that tax expense payments in future
years will be allowed for ratemaking purposes.
The Company's deferred tax provision was determined under the liability
method. Deferred tax assets and liabilities were recognized based on
differences between the book and tax bases of assets and liabilities
using presently enacted tax rates. The provision for income taxes is the
sum of the amount of income tax paid or payable as determined by
applying the provisions of enacted tax laws to the taxable income for
that year and the net change during the year in the Company's deferred
tax assets and liabilities.
In addition, the Company is required to record an additional deferred
liability for temporary differences not previously recognized. This
additional deferred tax liability totaled $241,724 at December 31, 1998
and $266,635 at December 31, 1997. Management believes that these
deferred taxes will be recovered through the ratemaking process.
Accordingly, the Company has recorded an offsetting regulatory asset
and regulatory liability.
Employee benefits
The Company has a noncontributory defined benefit plan which covers
substantially all employees. The benefits are primarily based on years
of service and the employee's compensation. Pension expense includes
the amortization of a net transition obligation over a twenty-three
year period. The Company's funding policy is to make annual
contributions in an amount that approximates what was allowed for
ratemaking purposes consistent with ERISA funding requirements.
Contributions are intended to provide not only for benefits attributed
to service to date, but also for those expected to be earned in the
future.
PAGE 59
The Company has a 401(k) Plan. Employees are allowed to contribute a
percentage of salary, based on certain parameters. From January 1, 1995
through March 31, 1996 the Company matched 25% of employee contributions
up to 6% of total compensation. Effective April 1, 1996, the Company
matches 50% of employee contributions up to 6% of total compensation.
In addition, the Company provides certain health care and life
insurance benefits for retired employees and their spouses. Generally,
the plan provides for Medicare wrap-around coverage plus life insurance
based on a percentage of each participant's final salary. Substantially
all of the Company's employees may become eligible for these benefits if
they reach retirement age while working for the Company. The Company's
obligation for postretirement benefits expected to be provided to or
for an employee must be fully accrued by the date that the employee
attains full eligibility for benefits. The Company has elected to
recognize the unfunded accumulated postretirement benefit obligation
over 20 years. The Company's funding policy is to contribute amounts
annually to a benefit trust and pay directly all current retiree
premiums.
Compensated absences
Company policy and practice does not provide for any accumulated but
unused vacation, sick time or any other compensated absences to be
carried over beyond the year end.
Deferred charges
Deferred charges consist primarily of costs incurred to prepare the
Company's surplus land for future disposition. Deferred charges are
allocated to dispositions of land based on specific identification,
if applicable, and on the percentage of acres disposed to total surplus
acres.
Land dispositions
The Company is actively seeking to dispose of surplus land not required
for utility operations. The net gain of each disposition, after deducting
costs, expenses and taxes is allocated between the shareholders and
ratepayers by a method approved by the DPUC based on legislation passed
by the Connecticut General Assembly. The portion of income applicable to
shareholders is recognized in the year of disposition. Income
attributable to ratepayers is deferred and amortized in a manner that
reflects reduced water revenue resulting from the sharing formula as
determined by the DPUC.
Unamortized debt expense
Cost related to the issuance of debt are capitalized and amortized over
the term of the related indebtedness. The Company has received
permission from the DPUC to amortize the costs associated with debt
previously outstanding over the term of the new indebtedness.
PAGE 60
Note 2
Utility Plant
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Pumping, treatment and distribution $15,741,525 $14,590,321
Source of Supply 3,242,662 3,216,090
General Plant 1,313,180 1,146,517
Organization 30,219 30,219
20,327,586 18,983,147
Construction in process 295,321 62,482
$20,622,907 $19,045,629
</TABLE>
Note 3
Notes Payable
Notes Payable consists of a $2,100,000 two-year, secured line of credit,
which may, at the Company's option, at the end of the two-year period,
be converted into a six-year term loan with a 20-year amortization
schedule. During the revolving period, the Company can choose between
variable rate options of 30- or 90-day LIBOR plus 1.00%, or Prime plus
0%. The Company is required to pay only interest during the revolving
period. During the term period, the Company may choose among interest
rate options, including a fixed rate at 100 basis points over the bank's
six-year cost of funds or a 90-day rate at 1.00% over the 90-day LIBOR
rate.
The DPUC approved this transaction on September 16, 1998. The $2,100,000
two-year, secured line of credit replaces the Company's $1,500,000
secured line of credit and $600,000 unsecured working capital line of
credit, which expired during the second quarter of 1998. The two year,
secured line of credit is secured by a lien (subordinate to the lien of
the Mortgage Bond Indenture - see Note 4) on all of the Company's
utility property other than its excess land for sale and requires the
maintenance of certain financial ratios and shareholders' equity of
$3,000,000.
There were no borrowings outstanding on the Revolving Line of Credit on
December 31, 1998.
The Company also maintained a $1,500,000 term loan which was paid in
full on November 23, 1998, as a result of the consummation of a land
sale between the Town of Seymour and the Company. The applicable
interest rate for that term loan was 8.18% and required annual
principal payments of $75,000.
PAGE 61
Note 4
Long Term Debt
<TABLE>
December 31,
<S> <C> <C>
1998 1997
First mortgage bonds, Series E. 9.64%,
due September 1, 2011 $4,512,000 $4,606,000
</TABLE>
Pursuant to its Mortgage Bond Indenture, the Company has outstanding,
a series of first mortgage bonds in the amount of $4,512,000 due on
September 1, 2011. The terms of the indenture provide, among other
things, annual sinking fund requirements commencing September 1, 1997,
and limitations on (a) payment of cash dividends; and (b) incurrence
of additional bonded indebtedness. Under the dividend limitation,
approximately $4,292,000 was available to pay dividends at December 31,
1998 after the quarterly dividend payment made on that date. Interest
is payable semi-annually on the first day of March and September. The
indenture is secured by a lien on all of the Company's utility property
other than excess land available for sale.
The Company began to pay current maturities of long term debt of $94,000
on September 1, 1997, and is required to pay $94,000 each September 1
thereafter, until the bonds are paid in full.
Note 5
Accounts Payable and Accrued Liabilities
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Accounts payable $ 179,967 $139,782
Accrued liabilities:
Interest 144,986 148,005
Taxes 1,785,452 (30,541)
Pension 281,286 160,597
Other 64,580 36,816
$2,456,271 $454,659
</TABLE>
Note 6
Deferred Income on Dispositions of Land
Deferred income on the prior dispositions of land is amortized to
operating income under a method that coordinates the sharing of the
net gains from land sales between the Company's shareholders and
ratepayers, in accordance with a rate making formula approved by the
DPUC. Amortization of deferred income and related taxes to be included
in future years operating income for land sales completed as of the
balance sheet date follow:
PAGE 62
<TABLE>
<S> <C> <C> <C>
Deferred Amortization To
Deferred Income Be Included In
Year Ending December 31: Income Taxes Operating Income
1999 $ 535,689 $192,731 $342,958
2000 293,049 108,490 184,559
2001 94,990 39,523 55,467
2002 51,873 21,511 30,362
2003 30,332 12,568 17,764
Thereafter 28,414 11,754 16,660
$1,034,347 $386,577 $647,770
</TABLE>
The amortization of deferred income on prior land sales does not
include the effect of anticipated future land sales under the
Company's ongoing land sales program.
Note 7
Taxes, Other Than Income Taxes
<TABLE>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Municipal $194,472 $227,022 $225,320
Gross receipts _ 105,403 215,300
Payroll 80,391 71,135 69,179
$274,863 $403,560 $509,799
</TABLE>
The Connecticut Gross Receipts tax was repealed as of July 1, 1997
and as a result, water service rates were also reduced to reflect
that reduction.
Note 8
Income Taxes
The provisions for taxes on income for the years ended December 31,
1998, 1997 and 1996 consist of:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Current:
Federal $1,715,170 $ 119,666 $318,311
State 529,545 41,291 112,765
Deferred:
Federal:
Accelerated depreciation 76,240 96,384 81,714
Income on land dispositions (268,490) 83,117 15,127
PAGE 63
Investment tax credit (14,700) (14,700) (14,700)
Other 4,606 (12,207) (5,071)
State (74,500) 14,639 2,420
$1,967,871 $328,190 $510,566
</TABLE>
State deferred income taxes relate solely to timing differences in
the recognition of income related to land dispositions.
A reconciliation of the income tax expense at the federal statutory tax
rate of 34 percent to the effective rate follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Federal income tax at statutory
rates $1,998,791 $338,665 $433,603
Increase (decrease) resulting from:
State income tax, net of federal
benefit 398,669 17,590 72,828
Bargain sale portion of land
dispositions (392,950) _ _
Rate case expense 5,384 (21,508) 4,536
SFAS 106 expense in excess of
funding 713 750 768
Other, net (28,036) 7,393 13,531
Investment tax credit (14,700) (14,700) (14,700)
Total provision for income taxes 1,967,871 328,190 510,566
Taxes related to land
dispositions (1,756,937) (258,476) (382,107)
Operating provision for taxes $ 210,934 $69,714 $128,459
Deferred tax liabilities (assets) were comprised of the following:
<S> <C> <C>
1998 1997
Depreciation $1,724,831 $1,662,767
Investment tax credits 334,561 349,261
Other 217,701 244,573
Gross deferred tax liabilities 2,277,093 2,256,601
Land Sales (669,639) (326,650)
Alternative minimum tax _ (2,228)
Other (215,978) (232,115)
PAGE 64
Gross deferred tax assets (885,617) (560,993)
Total deferred income taxes $1,391,476 $1,695,608
</TABLE>
Note 9
Related Party Transactions
The Company has paid legal and consulting fees to firms whose partners
are directors and shareholders of the Company. During the years ended
December 31, 1998, 1997 and 1996, fees paid amounted to $26,038,
$123,439 and $32,378, respectively.
Note 10
Allowance for Doubtful Accounts
<TABLE>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Allowance for doubtful accounts,
beginning $50,000 $75,000 $75,000
Provision 9,389 28,251 43,237
Recoveries 17,047 3,051 8,549
Charge-offs (26,436) (56,302) (51,786)
Allowance for doubtful accounts,
ending $50,000 $50,000 $75,000
</TABLE>
Note 11
Pension and Other Postretirement Benefits
Pension Plan
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). The provisions of SFAS
132 revise the disclosure requirements related to pension and other
postretirement benefit plans. SFAS 132 does not change the measurement
or recognition of these plans.
The following provides a reconciliation of benefit obligations, plan
assets and funded status of the plans.
PAGE 65
Pension Benefits Other Postretirement Benefits
<TABLE>
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Change in Benefit Obligation:
Benefit obligation, beginning
of year $851,292 $742,517 $449,159 $431,219
Service cost 44,549 48,297 14,186 19,779
Interest cost 52,384 53,319 24,249 30,709
Actuarial loss/(gain) (90,428) 30,331 (89,341) (10,984)
Benefits paid (25,035) (23,172) (26,797) (21,564)
Benefit obligation, end of year 832,762 851,292 371,456 449,159
Change in Plan Assets:
Fair value, beginning of year 625,767 502,793 271,622 214,759
Actual return on plan assets 16,277 94,454 3,094 33,363
Employer contribution 65,000 51,692 _ 23,500
Benefits paid (25,035) (23,172) _ _
Fair value, end of year 682,009 625,767 274,716 271,622
Funded Status (150,753) (225,525) (96,740) (177,537)
Unrecognized net actuarial
gain/(loss) 107,163 161,758 (258,391) (203,080)
Unrecognized transition
obligation 76,333 82,205 355,292 380,670
Unrecognized prior service cost (39,674) (41,928) _ -
Prepaid (accrued) benefit cost $ (6,931) $(23,490) $ 161 53
Weighted-average Assumptions as
of December 31:
Discount rate 7% 7% 7% 7%
Expected return on plan assets 8% 8% 8% 8%
Rate of compensation increase 5% 5% 5% 5%
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter.
Net periodic pension and other postretirement benefit costs include the
following components:
PAGE 66
Pension Benefits Other Postretirement Benefits
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
Components of Net Periodic
Benefit Cost:
Service Cost $ 44,549 $ 48,297 $40,780 $ 14,186 $ 19,779 $19,612
Interest Cost 52,384 53,319 46,694 24,249 30,709 29,385
Expected return on
plan assets (52,110) (41,153)(37,757) (21,730) (16,107)(13,622)
Amortization of
unrecognized
transition obligation 5,872 5,872 5,872 25,378 25,378 25,378
Amortization of
unrecognized
prior service cost (2,254) (2,254) (2,254) _ _ _
Recognized net actuarial
gain _ 9,980 8,065 (15,394) (14,748)(11,366)
Net periodic benefit
cost $ 48,441 $ 74,061 $61,400 $26,689 $ 45,011 $49,387
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan.
A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<S> <C> <C>
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total of service and
interest cost components $ 6,102 $ (5,716)
Effect on postretirement benefit
obligation $52,973 $(48,649)
</TABLE>
The Company has established tax effective funding vehicles for such
retirement benefits in the form of a qualified Voluntary Employee
Beneficiary Association (VEBA) trust. The Company funded the VEBA
trust with tax deductible contributions of $0, $23,500 and $28,480
in 1998, 1997 and 1996, respectively.
The employment contract of the Company's former President required
accounting for benefits payable in accordance with SFAS 106. The
accumulated present value of future benefits was recognized during
his term of service to the Company which ended on October 1, 1998.
The liability recorded at December 31, 1998 and 1997 was $254,300
and $136,650, respectively. At December 31, 1998, an amount of
$195,300 has been included in other assets relating to a regulatory
asset for costs which were included in the Company's rate case.
Employer matching contributions to the 401(k) plan were $23,568,
$17,645 and $14,372 in 1998, 1997 and 1996.
PAGE 67
Note 12
Earnings per share Supplemental Information
The following table summarizes the number of common shares used in the
calculation of earnings per share:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Weighted average shares outstanding
for earnings per share, basic 766,461 759,495 754,449
Incremental shares from assumed
conversion of stock options 23,000 8,051 _
Weighted average shares outstanding
for earnings per share, diluted 789,461 767,546 754,449
</TABLE>
See note 18
Note 13
Commitments and Contingent Liabilities
Management agreement
The Company maintains an agreement with the City of Derby (the "City"),
pursuant to which agreement, the Company manages the water system owned
by the City. The Company is responsible for costs of maintenance and
improvements. Amounts collected from customers, net of expenses, are
retained by the Company.
Capital budget
Management has budgeted $1,800,000 for capital expenditures in 1999,
$550,000 of which is expected to be necessary to meet its service
obligations for the coming year.
Purchase commitment
The Company has an agreement with South Central Connecticut Regional
Water Authority to purchase water. This agreement provides for a
minimum purchase of 600 million gallons of water annually. Charges to
expense were $705,162, $691,166 and $680,125 for the years 1998, 1997
and 1996, respectively. The purchase price is based on South Central
Connecticut Regional Water Authority's wholesale rate. At December 31,
1998, this rate was $1,150 per million gallons. This agreement expires
December 31, 2015 and provides for two ten-year extensions at the
Company's option.
PAGE 68
Note 14
Year 2000 Compliance
The Company is currently evaluating its exposure to the Year 2000
problem and taking steps to be Year 2000 compliant. In general terms,
the problem arises from the fact that many existing computer systems
and other equipment containing date-sensitive embedded technology
use only two digits to identify a year in the date field, with
the assumption that the first two digits of the year are always "19".
As a result, such systems may misinterpret dates after December 31,
1999, which may result in miscalculations, other malfunctions or
the total failure of such systems.
The Company is currently evaluating its computer systems for compliance
with issues related to the Year 2000. As a result, the Company will
replace existing billing and accounting software with software that is
readily available on the market. Management anticipates its computer
systems will be fully compliant by the end of the second quarter of 1999.
The Company is also evaluating the Year 2000 compliance of systems and
equipment which are not linked to billing and accounting software and
has identified items that could be impacted by the Year 2000 problem.
For the items identified as possibly presenting a Year 2000 problem,
the Company has contacted suppliers, where possible, to obtain adequate
assurance that it is Year 2000 compliant or else is in the process of
determining and addressing any noncompliance. In addition, wherever
practical, the Company is independently testing the item for compliance.
In addition to its own systems and equipment, the Company depends upon
the proper function of computer systems and other date-sensitive
equipment of outside parties. These parties include other water
companies, banks, telecommunications service providers and electric and
other utilities. The Company has initiated communications with such
parties to determine the extent to which they are vulnerable to the
Year 2000 issue.
Due to the uncertainties presented by such third party Year 2000
problems, and the possibility that, despite its efforts, the Company
may be unsuccessful in preparing its internal systems and equipment
for the Year 2000, the Company is developing working plans for dealing
with its most reasonably likely worst-case scenario, many of which are
contained in the Company's approved Emergency Contingency Plan. The
Company's assessment of its most reasonably likely worst-case
scenario and the exact nature and scope of its contingency plans will
be affected by the Company's continued Year 2000 assessment. The
Company expects to complete such assessment and contingency planning
during the third quarter of 1999, and to have all contingency systems
in place and fully tested by the fourth quarter of 1999. Costs to meet
Year 2000 compliance are not expected to have a material impact on the
Company's financial position or results of operations.
PAGE 69
Note 15
Rate Matters
On July 18, 1997, the Company filed a rate application with the DPUC
for a 14.2 percent water service rate increase designed to provide a
$601,382 increase in annual water service revenues and a return on
equity of 12.95%. The Company subsequently revised its request to
$439,426 or an increase in annual revenues of 10.4 percent. On January
21, 1998, the DPUC granted the Company a 4.1 percent water service rate
increase designed to provide a $177,260 annual increase in revenues and
a 12.16% return on common equity.
Note 16
Equity
<TABLE>
<S> <C> <C>
Common Stock Number
of Shares Amount
Balance, January 1, 1997 757,892 $2,221,876
Stock issued through Dividend
Reinvestment Plan 3,810 45,581
Amortization of stock plan costs _ (1,340)
Balance, December 31, 1997 761,702 2,266,027
Stock issued through Dividend
Reinvestment Plan 2,956 52,493
Stock issued through Key Employee and
Non-Employee Stock Option Plans 10,500 110,250
Amortization of stock plan costs _ (1,018)
Balance, December 31, 1998 775,158 $2,427,752
</TABLE>
Stock option plans
The Company has three stock option plans, a non-employee director stock
option plan and two key employee incentive stock option plans. 40,000,
35,000 and 30,000 shares, respectively, were authorized under the
three plans which provide for options to purchase common stock of the
Company at the fair market value at the date of the grant. The options
vest over various periods and must be exercised within 10 years from
date of grant. The first Key Employee Plan was adopted in 1994 and
subsequently approved by the Company's shareholders and the DPUC in
1995. The second Key Employee Plan was adopted in 1998 and is subject
to approval by the shareholders and the DPUC in 1999. The following
table summarizes the transactions of the Company's stock option plans
for the three years ended December 31, 1998:
PAGE 70
<TABLE>
Granted Exercisable
<S> <C> <C> <C> <C>
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at December
31, 1995 57,750 $10.53 22,750 $10.50
Granted 5,000 $8.50
Outstanding at December
31, 1996 62,750 $10.37 55,875 $10.52
Granted 2,500 $12.25
Forfeited (3,000) $10.50
Outstanding at December
31, 1997 62,250 $10.44 57,250 $10.45
Granted 12,500 $17.55
Exercised (10,500) $10.50
Outstanding at December
31, 1998 64,250 $11.81 50,500 $10.38
</TABLE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123).
As permitted by SFAS 123, the Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and, accordingly, no compensation cost
has been recognized for stock options in the financial statements. The
pro-forma effect of these options on net income and earnings per share,
utilizing the Black-Scholes option-pricing model, consistent with the
method stipulated by SFAS 123, was not material to the Company's
results of operations.
Dividend reinvestment plan
The Company has a dividend reinvestment plan which provides for the
issuance and sale of up to 70,000 shares of the Company's authorized
but unissued common stock to its shareholders who elect to reinvest
cash dividends on the Company's existing shares. Shares under the plan
will be purchased at their fair market value price on the date of the
dividends to be invested in the new shares.
Note 17
Supplemental Disclosure of Cash Flow Information and Noncash Financing
Activities
Cash paid for interest for the years ended 1998, 1997 and 1996 was
$616,341, $625,729 and $574,993, respectively.
PAGE 71
Cash paid for income taxes for the years ended 1998, 1997 and 1996 was
$428,600, $283,150 and $539,200, respectively.
The Company receives contributions of plant from developers. These
contributions are reported in utility plant and in customers' advances
for construction. The contributions are deducted from construction
expenditures to determine cash expenditures by the Company.
<TABLE>
December 31,
<S> <C> <C> <C>
1998 1997 1996
Gross plant additions $1,820,297 $1,359,886 $1,518,142
Customers' advances for
construction (223,050) (78,644) (56,990)
$1,597,247 $1,281,242 $1,461,152
</TABLE>
Note 18
Subsequent Event
On January 11, 1999, the Company filed with the DPUC an Application for
Approval to Issue approximately 780,000 additional shares of common
stock in conjunction with a 2-for-1 stock split. The stock split was
approved by the Board of Directors in December, 1998, and by the
DPUC on February 26, 1999. No financial information contained in the
report has been adjusted to reflect the impact of the common stock
split. The following table represents earnings per share, giving
retroactive effect to the stock split.
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Earnings per share, basic $2.55 $ .44 $ .51 $ .35 $ .24
Earnings per share, diluted $2.48 $ .44 $ .51 $ .35 $ .24
</TABLE>
On written request, the Company will furnish to any shareholder a copy
of its most recent annual report to the Securities and Exchange
Commission on Form 10K, without charge, including the financial
statements and schedules thereto. Such requests should be addressed to
Anne A. Hobson, Secretary, Birmingham Utilities, Inc. P.O. Box 426,
Ansonia, CT 06401-0426.
Birmingham Utilities, Inc.
230 Beaver Street
P.O. Box 426
Ansonia, Connecticut 06401-0426
(203) 735-1888
Consent of Independent Public Accountants
We hereby consent to the incorporation by reference in the Registration
Statements of Birmingham Utilities, Inc., on Form S-8 dated July 25,
1995 and in the Prospectus constituting part of the Registration
Statement of Birmingham Utilities, Inc., on Form S-3 dated June 12,
1995 of our report dated February 3, 1999 and appearing in the Annual
Report on Form 10-K of Birmingham Utilities, Inc. for the year ended
December 31, 1998.
March 29, 1999 /s/ Dworken, Hillman, LaMorte & Sterczala
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1998 AUDITED BALANCE SHEET, INCOME STATEMENT
AND CASH FLOW STATEMENT, AND NOTES THERETO, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 14,433,311
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 3,656,008
<TOTAL-DEFERRED-CHARGES> 377,182
<OTHER-ASSETS> 1,052,385
<TOTAL-ASSETS> 19,518,886
<COMMON> 2,427,752
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 5,219,875
<TOTAL-COMMON-STOCKHOLDERS-EQ> 7,647,627
0
0
<LONG-TERM-DEBT-NET> 4,418,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 94,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 7,359,259
<TOT-CAPITALIZATION-AND-LIAB> 19,518,886
<GROSS-OPERATING-REVENUE> 4,394,911
<INCOME-TAX-EXPENSE> 210,934
<OTHER-OPERATING-EXPENSES> 3,288,898
<TOTAL-OPERATING-EXPENSES> 3,499,832
<OPERATING-INCOME-LOSS> 895,079
<OTHER-INCOME-NET> 3,629,036
<INCOME-BEFORE-INTEREST-EXPEN> 4,524,115
<TOTAL-INTEREST-EXPENSE> 613,322
<NET-INCOME> 3,910,793
0
<EARNINGS-AVAILABLE-FOR-COMM> 3,910,793
<COMMON-STOCK-DIVIDENDS> 522,295
<TOTAL-INTEREST-ON-BONDS> 440,999
<CASH-FLOW-OPERATIONS> 968,586
<EPS-PRIMARY> 5.10
<EPS-DILUTED> 4.95
</TABLE>
