<PAGE>
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
number 1-6659
PHILADELPHIA SUBURBAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
762 W. Lancaster Avenue,
Bryn Mawr, Pennsylvania 19010-3489
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (610)-527-8000
-------------------------------------
Securities registered pursuant to Section
12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------- -------------------------------------
Common stock, par value $.50 per share New York Stock Exchange, Inc.
Philadelphia Stock Exchange Inc.
Securities registered pursuant to Section
12(g) of the Act: None
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 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 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 amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 11, 1999. $721,807,021
For purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Part I of
this 10-K report, (b) all directors of registrant, and (c) each
shareholder that has informed registrant by March 11, 1999, that it
has sole or shared voting power of 5% or more of the outstanding
common stock of registrant.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 11, 1999. 40,812,334
Documents incorporated by reference
(1) Portions of registrant's 1998 Annual Report to Shareholders have been
incorporated by reference into Parts I and II of this Form 10-K
Report.
(2) Portions of the Proxy Statement, relative to the May 20, 1999 annual
meeting of shareholders of registrant, to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K Report,
have been incorporated by reference into Part III of this Form 10-K
Report.
<PAGE>
PART I
Item 1. Business
Philadelphia Suburban Corporation ("PSC" or the "Registrant"), a
Pennsylvania corporation, was incorporated in 1968. The information appearing in
"Management's Discussion and Analysis" from the portions of PSC's 1998 Annual
Report to Shareholders filed as Exhibit 13.6 to this Form 10-K Report is
incorporated by reference herein.
The business of PSC is conducted almost entirely through its subsidiary
Philadelphia Suburban Water Company ("PSW"), a regulated public utility. PSW
supplies water to approximately 300,000 residential, commercial, industrial and
public customers. PSW's service territory covers 481 square miles, comprising a
large portion of the suburban area west and north of the City of Philadelphia.
This territory is primarily residential in nature and is completely metered for
water service, except for fire hydrant service. In addition, PSW provides water
service to approximately 6,600 customers through an operating and maintenance
contract with a municipal authority which is contiguous to its service
territory. Based on the 1990 census, PSW estimates that the total number of
persons currently served is approximately 1,000,000. Excluding the customers
that were added at the time of acquisitions in the last three years, customer
accounts have grown at an average annual rate of approximately 1.1% for the last
three years. Including acquisitions, the customer base increased at an annual
compound growth rate of 4.3% over the last three years.
Operating revenues during the twelve months ended December 31, 1998 were
derived approximately as follows:
65.4% from residential customers
21.7% from commercial customers
4.3% from industrial customers
1.4% from public customers
6.2% from fire protection services
1.0% from sales to other water utilities and
miscellaneous customers
-----
100.0%
=====
On March 10, 1999, the Company and Consumers Water Company ("Consumers")
completed a merger with and into a wholly-owned subsidiary of the Company. The
merger was effected pursuant to the June 27, 1998 merger agreement, which was
amended and restated by the parties effective as of August 5, 1998. The merger
was completed after the transaction received the approvals from the state
utility commissions in each state in which the companies operate. The
shareholders of each company approved the merger at special meetings held on
November 16, 1998. Pursuant to the merger agreement, the Company issued
13,014,015 shares of common stock in exchange for all of the outstanding stock
of Consumers. Consumers common shareholders received 1.432 shares of the
Company's Common Stock for each Consumers common share and Consumers preferred
shareholders received 5.649 shares of the Company's Common Stock for each
preferred share. The merger will be accounted for as a pooling-of-interests
under Accounting Principles Board Opinion No. 16. Consumers serves approximately
226,000 customers in service territories covering parts of Pennsylvania, Ohio,
Illinois, New Jersey and Maine. Because the merger was not completed until after
December 31, 1998, the financial information, operating data and discussions
contained in this report, unless indicated or captioned otherwise, relate to the
Company without consideration to the impact of the merger.
During 1998, PSW made the following acquisitions and obtained related
service territory rights: in January, the water utility assets of West Chester
Area Municipal Authority; in April, the water system assets of Brandywine
Hospital; in June, the Flying Hills Water Company; and in November, the water
system assets of the Greenhills Corporate Center. The systems acquired in 1998
incorporate 17 square miles of service area contiguous or near PSW's existing
territory. The total purchase price for the four water systems acquired in 1998
was $24,498,000 in cash and 42,000 shares of the Company's Common Stock. The
annual revenues from these systems approximate $4,800,000, and revenues included
in the consolidated financial statements during the period owned by PSW were
$4,627,000. During 1998, PSW entered into a long-term water
2
<PAGE>
Item 1, Continued
sale agreement and an agreement with a local township to serve a one square mile
territory: in March, PSW entered into a 25-year water sale agreement with
Warwick Township Water and Sewer Authority for the sale of water to supplement
its water supply; and in April, PSW entered into an agreement with Bensalem
Township, Bucks County to provide water service to a new development in the
Township. Once fully developed over time, the annual revenues from these
agreements are anticipated to approximate $500,000.
Since December 1992, PSW has acquired 25 local water systems and two small
wastewater utilities. During 1997, PSW made the following acquisitions and
obtained related service territory rights: in January, the water utility assets
of Cherry Water Company; in September, the water utility assets of Perkiomen
Township Authority; and in September, both the water and wastewater utility
assets of the Peddler's View Utility Company. During 1996, PSW made the
following acquisitions and obtained related service territory rights: in
October, the water utility assets of Hatboro Borough Authority; in November,
Utility Group Services Corporation ("UGS") which owned three water utilities and
a wastewater utility; in December, the water utility assets of Bristol Borough
Water and Sewer Authority; and at various times during 1996 the water utility
assets of three smaller water systems. During various times in 1995, 1994, 1993,
and 1992 PSW acquired the water utility assets of ten water systems. Combined,
the 21 water systems and two wastewater systems acquired since December 1992 and
prior to 1998 added 136 square miles of service territory near or adjacent to
PSW's service territory and had revenues of $17,886,000 in 1998.
3
<PAGE>
Item 1, Continued
Selected operating statistics. Set forth below is a table showing certain
selected operating statistics for PSW for the past three years.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> C> <C> <C>
Revenues from water sales (000's omitted)
Residential $ 96,244 $ 87,783 $ 79,056
Commercial 32,029 27,807 26,504
Industrial 6,297 5,126 4,823
Public 2,108 1,496 1,373
Fire protection 9,096 8,323 8,140
Other 1,442 995 438
Tax Surcharge (credit) (101) - (1)
Distribution System Improvement Charge 229 1,104 -
-----------------------------------------
Total $147,344 $ 132,634 $ 120,333
=========================================
Water sales (million gallons)
Residential 19,941 19,142 17,228
Commercial 9,313 8,819 8,236
Industrial 2,471 2,302 1,768
Public 496 396 354
Fire protection - metered 69 73 84
Other 821 750 25
-----------------------------------------
Total 33,111 31,482 27,695
=========================================
System delivery by source (million gallons)
Surface (including Upper Merion
reservoir) 31,438 29,470 27,278
Wells 6,237 6,378 5,136
Purchased 2,025 2,023 2,055
-----------------------------------------
Total 39,700 37,871 34,469
=========================================
Number of metered customers (end of year)*
Residential 278,436 268,550 265,746
Commercial 15,032 13,512 13,422
Industrial 744 708 716
Public 919 823 797
Fire protection 4,710 3,911 3,449
Other 9 12 11
-----------------------------------------
Total 299,850 287,516 284,141
=========================================
Average consumption per
customer in gallons 112,745 110,143 103,206
=========================================
</TABLE>
* Excludes customers served under operating and maintenance contracts.
4
<PAGE>
Item 1, Continued
Water supplies and usage. PSW's principal supply of water is surface water
from the Schuylkill River, Delaware River, eight rural streams which are
tributaries of the Schuylkill and Delaware Rivers, and the Upper Merion
Reservoir, a former quarry now impounding groundwater. All of these are either
within or adjacent to PSW's service territory. PSW holds the appropriate water
rights and regulatory approvals to use these sources. PSW has six impounding
reservoirs and has eight treatment and pumping facilities to provide storage and
treatment of these surface water supplies.
The Pennsylvania Department of Environmental Protection ("DEP") has
regulatory power with respect to sources of supply and the construction,
operation and safety practices for certain dams and other water containment
structures under the Pennsylvania Dam Safety and Encroachments Act. PSW's dams
are in compliance with these requirements in all material respects.
PSW's surface supplies are supplemented by 61 wells. PSW also has
interconnections with: the Chester Water Authority, which provides for a maximum
supply of up to 6.75 million gallons per day ("mgd"); and the Bucks County Water
and Sewer Authority, which provides for a supply of up to 7.0 mgd. Agreements
regarding these interconnections require PSW to purchase certain minimum amounts
of water.
PSW believes it possesses all the necessary permits to obtain its supply of
water from all of the sources described above. The minimum safe yield of all
sources of supply described above, based on low stream flows of record with
respect to surface supplies, is as follows:
Surface supplies 119.3 mgd
Wells 23.7
Purchased supplies 8.5
------
Total 151.5 mgd
======
During periods of normal precipitation, the water available is more than
the minimum shown above. Under normal operating conditions, PSW can deliver a
maximum of 175.9 mgd to its distribution system for short periods of time. The
average daily sendout for 1998, 1997 and 1996 was 108.8, 103.8 and 94.2 mgd,
respectively.
The maximum demand ever placed upon PSW's facilities for one month occurred
during August 1998, when sendout averaged 121.7 mgd. The peak day of record
occurred during July 1997 when water use reached 142.5 mgd.
Actual water usage (as measured by the water meters installed at each
service location) is less than the amount of water delivered into the system due
to leaks, PSW's operational use of water, fire hydrant usage and other similar
uses. Water consumption per customer is affected by local weather conditions
during the year. In general, during the late spring and summer, an increase in
rainfall reduces water consumption, while extended periods of dry weather
increases consumption. Also, an increase in the average temperature generally
causes an increase in water consumption.
Energy supplies. PSW does all of its pumping using electric power and
energy supplies have been sufficient to meet PSW's customer demand. In December
1996, the Governor of Pennsylvania signed into law the Electricity Generation
Customer Choice and Competition Act ("Electric Act") which provides for the
restructuring of the electric utility industry in Pennsylvania. The Electric Act
requires the unbundling of electric services into separate generation,
transmission and distribution services with open competition for generation. PSW
has negotiated an electric supply contract with a provider and believes that the
provider has the resources and supply adequate to meet PSW's demand.
5
<PAGE>
Item 1, Continued
Adequacy of water supplies. The Delaware River Basin, which is the drainage
area of the Delaware River from New York State to Delaware, periodically
experiences water shortages, particularly during the summer months. To the
extent that the reservoirs in the upper part of the Basin are affected by a lack
of precipitation, the Delaware River Basin Commission (the "DRBC") may impose
either voluntary or mandatory water use restrictions on portions or all of the
Basin. The Commonwealth of Pennsylvania (the "Commonwealth") also has the
authority to impose similar restrictions on a county-by-county basis.
PSW's raw water supplies have been adequate to meet customer demand for the
past five years principally because of its six impounding reservoirs. However,
PSW's customers may be required to comply with the Commonwealth and DRBC water
use restrictions, even if PSW's supplies are adequate.
In December 1998 and October 1997, the DRBC issued drought warnings for the
Delaware River Basin which includes PSW's service territory. The DRBC lifted the
drought warnings in February 1999 and January 1998, respectively. Under a
drought warning, the DRBC asks for voluntary restrictions on water use,
particularly non-essential uses of water. In September 1995, the Governor of the
Commonwealth declared a drought emergency in the counties served by PSW. The
drought emergency imposed a mandatory ban on all nonessential water usage by
PSW's customers. The drought emergency was lifted by the end of 1995. Because
these actions were issued at times other than the summer months, when
nonessential and recreational use of water has traditionally declined, the
restrictions did not have a significant impact on PSW revenues. Throughout the
drought warnings and drought emergency described above, PSW maintained adequate
storage levels of treated water and had sufficient quantities of raw water. No
other drought restrictions were imposed by the Commonwealth or DRBC in the
preceding five years.
Regulation by the Pennsylvania Public Utility Commission. PSW is subject to
regulation by the Pennsylvania Public Utility Commission ("PUC") which has
jurisdiction with respect to rates, service, accounting procedures, issuance of
securities, acquisitions and other matters.
Under applicable Pennsylvania statutes, PSW has rights granted under its
Articles of Incorporation and by certificates of public convenience from the PUC
authorizing it to conduct its present operations in the manner in which such
operations are now conducted and in the territory in which it now renders
service, to exercise the right of eminent domain and to maintain its mains in
the streets and highways of such territory. Such rights are generally
nonexclusive, although it has been the practice of the PUC to allow only one
water company to actually provide service to a given area. Consequently, PSW has
been subject to competition only with respect to potential customers who also
may have access to the service of another water supplier, wells, or where other
water service opportunities exist (including non-utility companies with riparian
rights or access to an adequate supply from a neighboring facility).
In 1993, the PUC initiated a rulemaking procedure intended to facilitate
the development of practical standards by which water mains should be extended
to "bona fide service applicants", typically existing homes or businesses in
need of a reliable public water supply. In December 1995, the PUC issued a final
rulemaking, reflecting the position that the primary costs of such extensions
should be supported by anticipated revenues and borne by the utility. Generally,
construction costs beyond those supported by anticipated revenues must be borne
by the applicant. The formula used to determine a utility's investment requires
that revenues from the bona fide service applicant offset the interest,
depreciation and incremental operating expense associated with the investment.
Under the rule, PSW is required to invest $4,000 per bona fide service applicant
in a main extension prior to requiring any customer contribution.
In 1996, the PUC approved a mechanism, the Distribution System
Improvement Charge ("DSIC"), which allows Pennsylvania water utilities to add a
surcharge to their water bills to offset the additional depreciation and capital
costs associated with certain non-revenue producing, non-expense reducing
capital expenditures related to replacing and rehabilitating distribution
systems. The DSIC mechanism is intended to eliminate many of the disincentives
faced by water utilities in rehabilitating their distribution systems. These
disincentives, often referred to as regulatory lag, are due to the rate making
process which, prior to the establishment of the DSIC mechanism, required water
utilities to absorb all of the depreciation and capital costs of these projects
between base rate increases without the benefit of additional revenues. The DSIC
may be adjusted quarterly based on additional qualified capital expenditures
made in the previous quarter, but may never exceed 5% of the base rates in
effect. The PUC limits use of the DSIC to periods when a company's return on
equity is less than a benchmark it establishes each quarter. The DSIC is reset
to zero when new base rates that reflect the costs of those additions become
effective.
6
<PAGE>
Item 1, Continued
Water Quality & Environmental Issues. PSW is subject to regulation of water
quality by the U.S. Environmental Protection Agency ("EPA") under the Federal
Safe Drinking Water Act (the "SDWA") and by the Pennsylvania Department of
Environmental Protection ("DEP") under the Pennsylvania Safe Drinking Water Act.
The SDWA provides for the establishment of minimum water quality standards, as
well as governmental authority to specify the type of treatment process to be
used for public drinking water. PSW is presently in compliance with all current
standards and treatment requirements promulgated to date.
The EPA has an ongoing directive to issue additional regulations under the
SDWA. The directive was clarified in 1986 when Congress amended the SDWA to
require, among other revisions, disinfection of all drinking water, additional
maximum contaminant level ("MCL") specifications, and filtration of all surface
water supplies. PSW has already installed the necessary equipment to provide for
the disinfection of the drinking water throughout the system and is monitoring
for the additional specified contaminants. All PSW's surface water supplies are
filtered.
On August 6, 1996, the President signed into law the reauthorization of the
SDWA. The new Act places a greater emphasis on the cost/benefit of regulating
additional substances by requiring definitive research on the impact of such
regulations. The reauthorized SDWA focuses regulations on contaminants known to
be of public health concern based on occurrence, health risks and cost benefit
considerations. The new Act eliminated the previous requirement of the 1986 SDWA
Amendments that had required the EPA to promulgate MCL's for many chemicals not
previously regulated and mandated further MCL's every three years. The new Act
also specifies that the EPA shall study radon, arsenic and sulfates and propose
respective rulemakings in 1999, 2000 and 2001 if these chemicals are deemed to
be a threat to public health. The reauthorized SDWA is not expected to have a
material impact on PSW's operations or financial condition. PSW may, in the
future, have to change its method of treating drinking water at certain of its
sources of supply if additional regulations become effective.
In 1991, EPA promulgated final regulations for lead and copper (the "Lead
and Copper Rule"). Under the Lead and Copper Rule, large water utilities are
required to conduct corrosion control studies and to sample certain high-risk
customer homes to determine the extent of treatment techniques that may be
required. PSW conducted the two required rounds of sampling in 1992 and again in
1997. The results of both studies did not exceed the EPA action levels for
either lead or copper. Additional sampling will be required in the future. PSW
has developed a corrosion control program for its surface sources of supply and
does not foresee the need to make any major additional treatment changes or
capital expenditures as a result of the Lead and Copper Rule.
On January 1, 1993, federal regulations ("Phase II") became effective for
certain volatile organics, herbicides, pesticides and inorganic parameters. All
required Phase II monitoring was completed in 1995. In the few cases where Phase
II contaminants were detected, concentrations were below MCL's. Future
monitoring will be required, but no major treatment modifications are
anticipated as a result of these regulations.
In May 1996, the EPA issued the first rule of a three-rule package
addressing Disinfection By-Products ("DBP") and monitoring of disease-causing
micro-organisms. DBP's are chemicals formed during the drinking water treatment
process. The first rule is an Information Collection Rule ("ICR") designed to
collect data to be used in developing further rules. As required, PSW began
sampling under the requirements of the ICR in July 1997 and completed the ICR
phase in December 1998. Studies by the EPA on the data collected may result in
new treatment standards and processes. In December 1998, the EPA issued
additional rules concerning DBP and PSW meets the requirements of these new
rules.
PSW is also subject to other environmental statutes administered by the EPA
and DEP. These include the Federal Clean Water Act ("FCWA") and the Resource
Conservation and Recovery Act ("RCRA"). Under the FCWA, the Company must obtain
National Pollutant Discharge Elimination System ("NPDES") permits for discharges
from its water treatment stations. PSW currently maintains six NPDES permits
relating to its water treatment plants, which are subject to renewal every five
years. PSW presently meets all NPDES requirements. Although management
recognizes that permit renewal may become more difficult if more stringent
guidelines are imposed, no significant obstacles to permit renewal are presently
foreseen.
7
<PAGE>
Item 1, Continued
Under RCRA, PSW is subject to specific regulations regarding the solid
waste generated from the water treatment process. The DEP promulgated a "Final
Rulemaking" for solid waste (Residual Waste Management) in July 1992. PSW'
obtained the permits for its three residual waste disposal sites in accordance
with regulatory requirements. The terms of the permits are for a period of ten
years and the renewals are due in 2008.
PSW operates the Little Washington Wastewater Company ("LWW"), a wastewater
utility which serves approximately 500 customers in two service territories that
are located within the service territory of PSW. LWW is subject to regulation by
the EPA and DEP, and is subject to environmental statutes, including FCWA and
RCRA. LWW currently maintains permits for its wastewater treatment stations in
accordance with FCWA and is presently in compliance with all standards and
treatment requirements promulgated to date.
Where PSW is required to make certain capital investments in order to
maintain its compliance with any of the various regulations discussed above, it
is management's belief that all such expenditures would be fully recoverable in
PSW's rates. However, under current law, such capital investments would have to
be financed prior to their inclusion in PSW's rate structure, and the resulting
rate increases would not necessarily be timely.
Year 2000
Overview
The Company is actively pursuing a Year 2000 Program (the "Program"). The
objective of the Program is to provide reasonable assurance that the Company's
critical systems and processes that impact the Company's ability to deliver
water to its customers will not experience significant interruptions that would
interfere with such water service or result in a material business impairment
that would have an adverse impact to the Company's operations, liquidity or
financial condition as a result of the Year 2000 issue. For purposes of the
Program, the Year 2000 issue is defined as whether information technology
accurately processes date and time data from, into and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations.
The Company's systems and processes being reviewed include: (i) internal systems
and processes, consisting of software, databases, information technology
hardware and imbedded microprocessors; and (ii) relationships with third
parties. The Program involves a systematic approach to the Year 2000 issue
consisting of the following steps: (i) inventorying the component elements of
the Company's systems and processes; (ii) assessing whether there are Year 2000
issues with such systems and processes; (iii) remediation of systems and
processes that are identified as having Year 2000 issues; (iv) testing the
remediation measures that are implemented; and (v) developing contingency plans.
In addition to the Company's Program, the PUC has instituted a formal proceeding
for the purpose of determining all matters concerning Year 2000 compliance of
all jurisdictional fixed utilities, which would include the Company's primary
subsidiary, PSW. The PUC is requiring that utilities affirmatively demonstrate
that their mission-critical systems will be Year 2000 compliant by March 31,
1999 or provide the PUC with detailed contingency plans for the continuation of
utility service throughout the transition from the twentieth to the twenty-first
century, including leap year. PSW has responded to the PUC's initial
questionnaire concerning Year 2000 compliance and intends to comply with the
PUC's requirements.
The Company's State of Readiness
Internal Systems and Processes - The Company is evaluating its systems and
processes based on a prioritization of the risks they pose to the overall
objectives of the Program. Therefore, different systems and processes are in
different phases of the overall Program. An inventory of all critical systems
and processes was completed in November 1998. An assessment of Year 2000 issues
for the Company's critical systems was completed in December 1998. As a result
of the assessment, it was determined that none of the internal systems and
processes directly related to the treatment and distribution of water to its
customers would be significantly affected by the Year 2000 issue. Some financial
and office systems may be affected and the remediation or replacement and
testing of these systems has started. It is anticipated that remediation or
replacement and testing of these systems will be completed by mid-1999.
Relationships with Third Parties - The Company's relationships with third
parties that may be affected by the Year 2000 issue may be classified into three
categories: customers; suppliers; and third party software vendors. Based on
1998 revenues, approximately 65% of the Company's revenues are from residential
customers, 21% from commercial customers (consisting primarily of apartments,
colleges,
8
<PAGE>
Item 1, Continued
hospitals, small businesses and municipalities), and 6% from fire protection
services. It is not anticipated that water use by customers in these categories
will be significantly affected by the Year 2000 issue. The Company's industrial
customers represent approximately 4% of its total 1998 revenues and the Company
intends to contact its largest industrial customers to determine whether they
anticipate any adverse effect on their demand for water as a result of the Year
2000 issue. No single customer accounted for more than one percent of the
Company's 1998 revenues. The Company has contacted its key suppliers to
determine their Year 2000 compliance status and the responses received to date
indicate that such suppliers are or intend to be Year 2000 compliant. Because of
the substantial electric power requirements of the Company's water treatment and
distribution systems, electric power supply may be the most critical supplier
relationship. To date, the Company's electric supplier, which is also subject to
the PUC's review, has indicated that it expects to be Year 2000 compliant by
October 31, 1999. Third party vendors of critical software systems have been
contacted regarding the compliance status of their software and either the
vendors have represented that their software packages are compliant or the
software is being remedied as part of the Company's Year 2000 Program.
The Costs to Address the Company's Year 2000 Issues
The Company estimates its cost to date for its Year 2000 Program to be
approximately $3,200,000 which includes the costs to develop a new customer
billing system that the Company is implementing to provide added capacity and
capabilities. The Company presently estimates that it will spend an additional
amount of approximately $1,500,000 to bring all of its critical systems into
compliance.
The Risks of the Company's Year 2000 Issues
A material Year 2000 noncompliance could result in an interruption in, or
failure of, certain normal business activities or operations. Such noncompliance
could materially and adversely affect the Company's water service and results of
operations, liquidity and financial condition. Because of the uncertainty
inherent in the Year 2000 issue, due primarily from the uncertainty of the Year
2000 readiness of third party suppliers, the Company is unable to determine at
this time whether the consequences of Year 2000 noncompliances will have a
material impact on the Company. The Company's Year 2000 Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
issue and, in particular, about the Year 2000 compliance and readiness of its
key vendors and suppliers. The Company believes that, with the completion of its
Program, the possibility of significant interruptions of normal operations
should be reduced.
The Company's Contingency Plans
The Company is evaluating contingency plans in the event that any critical
systems or processes or vender relationships cannot be verified as Year 2000
compliant by March 1999. Contingency plans may also be developed for certain
other critical systems, notwithstanding a determination of their Year 2000
compliance, if such systems would have a significant effect on the Company's
ability to deliver water to its customers. The Company intends to complete its
contingency planning process for its mission critical systems by March 1999.
Forward-looking Statements
The statements in the Company's Year 2000 disclosure contain
forward-looking statements and should be read in conjunction with the Company's
disclosure under the "Forward-looking Statements" section "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Employee Relations
As of December 31, 1998, the Registrant employed a total of 542 full-time
persons. Hourly employees of PSW are represented by the International
Brotherhood of Firemen and Oilers, Local No. 473. The contract with the union
expires on December 1, 2001. Management considers its employee relations to be
good.
9
<PAGE>
Item 2. Properties.
The Registrant believes that the facilities used in the operation of its
business are in good condition in terms of suitability, adequacy and
utilization.
The property of PSW consists of a waterworks system devoted to the
collection, storage, treatment and distribution of water in its service
territory. Management considers that its properties are maintained in good
operating condition and in accordance with current standards of good waterworks
practice. The following table summarizes the principal physical properties owned
by PSW:
<TABLE>
<CAPTION>
No. of Square Feet
Location Buildings Description Floor Area
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania 7 Office & warehouse 179,413
Pennsylvania 19 Pumping stations and
treatment buildings 235,200
Pennsylvania 23 Well stations Approx. 600 ea.
Pennsylvania 38 Well stations Approx. 150 ea.
Pennsylvania 52 Booster stations Approx. 1,100 ea.
</TABLE>
In addition, PSW also owns 77 storage facilities for treated water
throughout its service territory with a combined capacity of 167.54 million
gallons and six surface water impounding reservoirs. The water utility also owns
approximately 3,523 miles of transmission and distribution mains, has 299,850
active metered services and 14,388 fire hydrants.
PSW's properties referred to herein, with certain minor exceptions which do
not materially interfere with their use, are owned by PSW and are subject to the
lien of an Indenture of Mortgage dated as of January 1, 1941, as supplemented.
In the case of properties acquired through the exercise of the power of eminent
domain and certain properties acquired through purchase, it has title only for
water supply purposes.
The Registrant's corporate offices are leased from PSW and located in Bryn
Mawr, Pennsylvania.
Item 3. Legal Proceedings
There are various legal proceedings in which the Company is involved.
Although the results of legal proceedings cannot be predicted with certainty,
there are no pending legal proceedings to which the Registrant or any of its
subsidiaries is a party or to which any of their properties is the subject that
present a reasonable likelihood of a material adverse impact on the Registrant.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Information with respect to the executive officers of the Company is
contained in Item 10 hereof and is hereby incorporated by reference herein.
Results of Vote of Security Holders
The Special Meeting of Shareholders of PSC was held on November 16, 1998 at
the headquarters of the Company, 762 W. Lancaster Avenue, Bryn Mawr,
Pennsylvania, pursuant to the Notice sent on or about October 2, 1998 to all
shareholders of record at the close of business on September 18, 1998. At that
meeting, the shareholders were asked to act upon the following proposals:
1. Approval of the Amended and Restated Agreement and Plan of Merger, dated
as of August 5, 1998 (the "Merger Agreement"), by and among PSC, Consumers
Acquisition Company ("Acquisition") and Consumers Water Company ("Consumers"),
providing for the merger of Consumers with and into Acquisition, a wholly-owned
subsidiary of PSC.
For Against Abstentions
---------- ------- -----------
20,029,416 188,612 177,946
2. Approval of an amendment to PSC's Articles of Incorporation increasing
the authorized shares of PSC common stock, par value $.50 per share from
40,000,000 to 100,000,000.
For Against Abstentions
---------- ------- -----------
18,675,085 1,511,642 209,247
3. Approval of an amendment to PSC's 1994 Equity Compensation Plan (the
"Equity Compensation Plan") to increase from 1,900,000 to 2,900,000, the
aggregate authorized shares of the PSC Common Stock that may be issued or
transferred under the Equity Compensation Plan and to adopt certain other
amendments to the terms of the Equity Compensation Plan necessary for the
issuance of options to holders of options to purchase Consumers Common Stock
pursuant to the Merger Agreement.
For Against Abstentions
---------- ------- -----------
18,620,728 1,357,866 417,380
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is traded on the New York Stock Exchange and the
Philadelphia Stock Exchange. As of March 11, 1999, there were approximately
20,642 holders of record of the Company's common stock.
The following selected quarterly financial data of the Company is in
thousands of dollars, except for per share amounts:
<TABLE>
<CAPTION>
Total
First Second Third Fourth Year
-------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $34,276 $37,341 $41,656 $37,704 $ 150,977
Operations and maintenance 13,668 14,020 14,714 15,772 58,174
Net income available to common
stock 5,706 7,435 9,022 6,461 28,624
Basic net income per common share 0.21 0.27 0.33 0.23 1.04
Diluted net income per common share 0.21 0.27 0.32 0.23 1.03
Dividend paid per common share 0.1625 0.1625 0.1700 0.1700 0.6650
Price range of common stock
- high 25.75 22.56 28.19 30.06 30.06
- low 19.56 18.88 20.50 23.00 18.88
1997
- --------------------------------------------------------------------------------------------------------------------
Operating revenues $31,021 $33,315 $36,754 $35,081 $ 136,171
Operations and maintenance 13,068 13,295 14,466 15,070 55,899
Net income available to common
stock 4,460 5,778 7,323 5,432 22,993
Basic net income per common share 0.17 0.23 0.28 0.21 0.89
Diluted net income per common share 0.17 0.22 0.28 0.21 0.88
Dividend paid per common share 0.152 0.152 0.159 0.159 0.622
Price range of common stock
- high 15.47 15.10 18.00 22.18 22.18
- low 11.72 11.44 14.07 15.10 11.44
</TABLE>
High and low prices of the Company's common stock are as reported on the New
York Stock Exchange Composite Tape.
12
<PAGE>
Item 5, Continued
Following is a recent history of income from continuing operations and common
dividends of the Company:
- -----------------------------------------------------------------------------
Basic
income per
share from Dividend
Cash dividend continuing payout
per common share operations ratio
- -----------------------------------------------------------------------------
1994 $ 0.55 $ 0.68 81%
1995 0.57 0.75 76%
1996 0.59 0.79 75%
1997 0.62 0.89 70%
1998 0.67 1.04 64%
- -----------------------------------------------------------------------------
Dividends have averaged approximately 72% of income from continuing
operations during this period. In 1998, the dividend rate increased by 4.6%. As
a result, beginning with the dividend payable in September 1998, the annual
dividend rate increased to $.68 per share.
Item 6. Selected Financial Data
The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of the Company's 1998 Annual Report to
Shareholders filed as Exhibit 13.6 to this Form 10-K Report is incorporated by
reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information appearing in the section captioned "Management's Discussion
and Analysis" from the portions of the Company's 1998 Annual Report to
Shareholders filed as Exhibit 13.6 to this Form 10-K Report is incorporated by
reference herein.
Item 8. Financial Statements and Supplementary Data
Information appearing under the captions "Consolidated Statements of
Income", "Consolidated Balance Sheets", "Consolidated Cash Flow Statements"
"Consolidated Statements of Capitalization" and "Notes to Consolidated Financial
Statements" from the portions of the Company's 1998 Annual Report to
Shareholders filed as Exhibit 13.6 to this Form 10-K Report is incorporated by
reference herein. Also, the information appearing in the section captioned
"Reports on Financial Statements" from the portions of the Company's 1998 Annual
Report to Shareholders filed as Exhibit 13.6 to this Form 10-K Report is
incorporated by reference herein.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
13
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
The information appearing in the section captioned "Information Regarding
Nominees and Directors" of the Proxy Statement relating to the May 20, 1999,
annual meeting of shareholders of the Company, to be filed within 120 days after
the end of the fiscal year covered by this Form 10-K Report, is incorporated
herein by reference.
Executive Officers of the Registrant
The following table and the notes thereto set forth information with
respect to the executive officers of the Registrant, including their names,
ages, positions with the Registrant and business experience during the last five
years:
Position with the Registrant
Name Age and date of election (1)
- ---- --- ----------------------------
Nicholas DeBenedictis 53 President and Chairman (May 1993 to present);
President and Chief Executive Officer (July
1992 to May 1993); Chairman and Chief
Executive Officer, Philadelphia Suburban Water
Company (July 1992 to present); President,
Philadelphia Suburban Water Company (February
1995 to January 1999) (2)
Morrison Coulter 62 President, Philadelphia Suburban Water Company
(January 1999 to present); Senior Vice
President - Production, Philadelphia Suburban
Water Company (February 1996 to January 1999);
Vice President - Production, Philadelphia
Suburban Water Company (April 1989 to February
1996) (3)
Richard R. Riegler 52 Senior Vice President - Engineering and
Environmental Affairs (January 1999 to
present); Senior Vice President - Operations,
Philadelphia Suburban Water Company (April
1989 to January 1999) (4)
Roy H. Stahl 46 Senior Vice President and General Counsel
(April 1991 to present) (5)
Michael P. Graham 50 Senior Vice President - Finance and Treasurer
(March 1993 to present) (6)
(1) In addition to the capacities indicated, the individuals named in the above
table hold other offices or directorships with subsidiaries of the
Registrant. Officers serve at the discretion of the Board of Directors.
(2) Mr. DeBenedictis was Secretary of the Pennsylvania Department of
Environmental Resources from 1983 to 1986. From December 1986 to April
1989, he was President of the Greater Philadelphia Chamber of Commerce. Mr.
DeBenedictis was Senior Vice President for Corporate and Public Affairs of
Philadelphia Electric Company from April 1989 to June 1992.
(3) Mr. Coulter was Superintendent of Pumping Facilities from 1971 to 1982.
From 1982 to 1987 he served as Manager - Electrical/Mechanical Department
and from 1987 to 1989 he was Assistant Vice President Production.
(4) Mr. Riegler was Chief Engineer of Philadelphia Suburban Water Company from
1982 to 1984. He then served as Vice President and Chief Engineer from 1984
to 1986 and Vice President of Operations from 1986 to 1989.
14
<PAGE>
Item 10, Continued
(5) From January 1984 to August 1985, Mr. Stahl was Corporate Counsel, from
August 1985 to May 1988 he was Vice President - Administration and
Corporate Counsel of the Registrant, and from May 1988 to April 1991 he was
Vice President and General Counsel of the Registrant.
(6) Mr. Graham was Controller of the Company from 1984 to September 1990, and
from September 1990 to May 1991 he was Chief Financial Officer and
Treasurer. From May 1991 to March 1993, Mr. Graham was Vice President
Finance and Treasurer.
Item 11. Executive Compensation
The information appearing in the sections captioned "Executive
Compensation" of the Proxy Statement relating to the May 20, 1999, annual
meeting of shareholders of the Company, to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K Report, is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing in the sections captioned "Ownership of Common
Stock" of the Proxy Statement relating to the May 20, 1999, annual meeting of
shareholders of the Company, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information appearing in the sections captioned "Certain Relationships
and Related Transactions" of the Proxy Statement relating to the May 20 1999,
annual meeting of shareholders of the Company, to be filed within 120 days after
the end of the fiscal year covered by this Form 10-K Report, is incorporated
herein by reference.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements. The following is a list of the consolidated financial
statements of the Company and its subsidiaries and supplementary data
incorporated by reference in Item 8 hereof:
Management's Report
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - 1998, 1997 and 1996
Consolidated Statements of Cash Flow - 1998, 1997, and 1996
Consolidated Statements of Capitalization - December 31, 1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules. The financial statement schedules, or
supplemental schedules, filed as part of this annual report on Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
Reports on Form 8-K.
Current Report on Form 8-K filed on November 18, 1998, responding to Item 5,
Other Events. (Related to the November 16, 1998 Special Meeting of the Company's
Shareholders pursuant to the Notice sent on or about October 2, 1998 to all
shareholders of record at the close of business on September 18, 1998 concerning
the approval of three proposals, including the approval of the merger with
Consumers).
Current Report on Form 8-K filed on March 12, 1999, responding to Item 2,
Acquisition or Disposition of Assets; Item 5, Other Events; and Item 7,
Financial Statements and Exhibits. (Related to the March 10, 1999 consummation
of the previously announced agreement to merge Consumers Water Company with and
into a wholly-owned subsidiary of PSC).
Exhibits, Including Those Incorporated by Reference. The following is a list of
exhibits filed as part of this annual report on Form 10-K. Where so indicated by
footnote, exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses. The page numbers listed refer to
page numbers where such exhibits are located using the sequential numbering
system specified by Rules 0-3 and 403.
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, as -
amended (1) (Exhibit 3.1)
3.2 By-Laws, as amended (17) (Exhibit 3.2) -
3.3 Amendment to Amended and Restated Articles of -
Incorporation, as amended, to increase the number
of authorized shares to 41,770,819 and to
provide that 40,000,000 of such shares be
shares of Common Stock (17) (Exhibit 3.3)
3.4 Amendment to Amended and Restated Articles of -
Incorporation, as amended, designating the
Series B Preferred Stock (17) (Exhibit 3.4)
3.5 Amendment to Section 3.03 and addition of Section 3.17 -
to Bylaws (19) (Exhibits 1 and 2)
3.6 Amendment to Amended and Restated Articles of -
Incorporation, designating the terms of the Series A
Junior Participating Preferred Shares (21) (Exhibit 3.6)
3.7 Amendment to Amended and Restated Articles of Incorporation, -
to increase the number of authorized shares to 101,770,819
and to provide that 100,000,000 of such shares be shares of
Common Stock (23) (Annex E)
4.1 Indenture of Mortgage dated as of January 1, 1941 -
between Philadelphia Suburban Water Company and The
Pennsylvania Company for Insurance on Lives and Granting
Annuities(now First Pennsylvania Bank, N.A.), as Trustee, with
supplements thereto through the Twentieth Supplemental Indenture
dated as of August 1, 1983 (2) (Exhibits 4.1 through 4.16)
4.2 Revolving Credit Agreement between Philadelphia Suburban -
Water Company and Mellon Bank (East) National Association
dated as of February 16, 1990 (3) (Exhibit 4.3)
4.3 First Amendment to Revolving Credit Agreement between -
Philadelphia Suburban Water Company and Mellon Bank
N.A. dated as of September 1, 1992 (1) (Exhibit 4.3)
4.4 Preferred Stock Agreement between Philadelphia Suburban -
Water Company and Provident Life and Accident Insurance
Company dated as of January 1, 1991 (3) (Exhibit 4.4)
4.5 Indenture dated as of July 1, 1988 between Philadelphia -
Suburban Corporation and the Philadelphia National
Bank, as Trustee. (4) (Exhibit 4)
4.6 Form of Rights Agreement, dated as of February 19, 1988, -
between Philadelphia Suburban Corporation and
Mellon Bank (East) National Association, as amended
by Amendment No. 1. (5) (Exhibit 1)
4.7 Agreement to furnish copies of other long-term debt -
instruments (1) (Exhibit 4.7)
4.8 Twenty-first Supplemental Indenture dated as of August 1, -
1985 (6) (Exhibit 4.2)
</TABLE>
17
<PAGE>
EXHIBIT INDEX, Continued
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.9 Twenty-second Supplemental Indenture dated as of April 1, -
1986 (7) (Exhibit 4.3)
4.10 Twenty-third Supplemental Indenture dated as of April 1, -
1987 (8) (Exhibit 4.4)
4.11 Twenty-fourth Supplemental Indenture dated as of June 1, -
1988 (9) (Exhibit 4.5)
4.12 Twenty-fifth Supplemental Indenture dated as of -
January 1, 1990 (10)(Exhibit 4.6)
4.13 Twenty-sixth Supplemental Indenture dated as of November -
1, 1991 (11) (Exhibit 4.12)
4.14 Twenty-seventh Supplemental Indenture dated as of June 1, -
1992 (1) (Exhibit 4.14)
4.15 Twenty-eighth Supplemental Indenture dated as of April 1, -
1993 (12) (Exhibit 4.15)
4.16 Revolving Credit Agreement between Philadelphia -
Suburban Water Company and Mellon Bank, N.A., PNC Bank
National Association, First Union National Bank, N.A.
and CoreStates Bank, N.A. dated as of March 17, 1994
(12) (Exhibit 4.16)
4.17 Twenty-Ninth Supplemental Indenture dated as of March 30, -
1995 (14) (Exhibit 4.17)
4.18 Thirtieth Supplemental Indenture dated as of August 15, -
1995 (15) (Exhibit 4.18)
4.19 First Amendment to Revolving Credit Agreement dated as of May -
22, 1995, between Philadelphia Suburban Water Company and
Mellon Bank, N.A., PNC Bank National Association, First Fidelity
National Bank, N.A., Meridian Bank, N.A. dated as of March 17,
1994 (17) (Exhibit 4.19)
4.20 Second Amendment to Revolving Credit Agreement dated as of July -
21, 1995, between Philadelphia Suburban Water Company and
Mellon Bank, N.A., PNC Bank National Association, First Fidelity
National Bank, N.A., Meridian Bank, N.A. dated as of March 17,
1994 (17) (Exhibit 4.20)
4.21 Third Amendment to Revolving Credit Agreement dated as of December -
20, 1996, between Philadelphia Suburban Water Company and
Mellon Bank, N.A., PNC Bank National Association, First Union
National Bank, N.A., CoreStates Bank, N.A. dated as of March 17,
1994 (17) (Exhibit 4.21)
4.22 Thirty-First Supplemental Indenture dated as of July 1, -
1997 (18) (Exhibit 4.22)
4.23 Fourth Amendment to Revolving Credit Agreement dated as of January 15, -
1998, between Philadelphia Suburban Water Company and
Mellon Bank, N.A., PNC Bank National Association, First Union
National Bank, N.A., and CoreStates Bank, N.A. dated as of
March 17,1994 (21) (Exhibit 4.23)
</TABLE>
18
<PAGE>
EXHIBIT INDEX, Continued
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.24 Rights Agreement, dated as of March 1, 1998 between Philadelphia -
Suburban Corporation and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (20) (Exhibit 1)
4.25 Rights Agreement, dated as of March 1, 1998 between Philadelphia 25
Suburban Corporation and BankBoston, N.A., as Rights Agent
10.1 1982 Stock Option Plan, as amended and restated effective -
May 21, 1992* (1) (Exhibit 10.1)
10.2 1988 Stock Option Plan, as amended and restated effective -
May 21, 1992* (1) (Exhibit 10.2)
10.3 Executive Incentive Award Plan, as amended March 21, -
1989 and February 6, 1990* (10) (Exhibit 10.3)
10.4 Excess Benefit Plan for Salaried Employees, effective -
December 1, 1989* (10) (Exhibit 10.4)
10.5 Supplemental Executive Retirement Plan, effective -
December 1, 1989* (10) (Exhibit 10.5)
10.6 Supplemental Executive Retirement Plan, effective March -
15, 1992* (1) (Exhibit 10.6)
10.7 1993 Incentive Compensation Plan* (1) (Exhibit 10.7) -
10.8 Employment letter agreement with Mr. Nicholas -
DeBenedictis* (1) (Exhibit 10.8)
10.9 1994 Incentive Compensation Program* (12) (Exhibit 10.9) -
10.10 1994 Equity Compensation Plan, as amended by Amendment -
1994-1* (16) (Exhibit 10.10)
10.11 1995 Incentive Compensation Plan* (13) (Exhibit 10.11) -
10.12 Placement Agency Agreement between Philadelphia -
Suburban Water Company and PaineWebber Incorporated
dated as of March 30, 1995 (14) (Exhibit 10.12)
10.13 Bond Purchase Agreement among the Delaware County -
Industrial Development Authority, Philadelphia
Suburban Water Company and Legg Mason Wood Walker,
Incorporated dated August 24, 1995 (15) (Exhibit 10.13)
10.14 Construction and Financing Agreement between the -
Delaware County Industrial Development Authority and
Philadelphia Suburban Water Company dated as of August
15, 1995 (15) (Exhibit 10.14)
10.15 1996 Annual Cash Incentive Compensation Plan* (16) -
(Exhibit 13.4)
10.16 Amendment 1994-2 to 1994 Equity Compensation -
Plan, as amended* (17) (Exhibit 10.16)
10.17 1997 Annual Cash Incentive Compensation Plan* (17) (Exhibit 10.17) -
10.18 Agreement among Philadelphia Suburban Corporation, -
Philadelphia Suburban Water Company and Nicholas
DeBenedictis, dated as of January 1, 1997* (17) (Exhibit 10.18)
</TABLE>
19
<PAGE>
EXHIBIT INDEX, Continued
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.19 Agreement among Philadelphia Suburban Corporation, -
Philadelphia Suburban Water Company and Roy H.
Stahl, dated as of January 1, 1997* (17) (Exhibit 10.19)
10.20 Agreement among Philadelphia Suburban Corporation, -
Philadelphia Suburban Water Company and Michael P.
Graham, dated as of January 1, 1997* (17) (Exhibit 10.20)
10.21 Agreement among Philadelphia Suburban Corporation, -
Philadelphia Suburban Water Company and Richard R.
Riegler, dated as of January 1, 1997* (17) (Exhibit 10.21)
10.22 Agreement among Philadelphia Suburban Corporation, -
Philadelphia Suburban Water Company and Morrison
Coulter, dated as of January 1, 1997* (17) (Exhibit 10.22)
10.23 Philadelphia Suburban Corporation Amended and
Restated Executive Deferral Plan* (17) (Exhibit 10.23) -
10.24 Philadelphia Suburban Corporation Deferred -
Compensation Plan Master Trust Agreement
with PNC Bank, National Association, dated
as of December 31, 1996* (17) (Exhibit 10.24)
10.25 First Amendment to Supplemental Executive Retirement -
Plan* (17) (Exhibit 10.25)
10.26 Placement Agency Agreement between Philadelphia -
Suburban Water Company and A.G. Edwards and Sons,
Inc., Janney Montgomery Scott Inc., HSBC Securities,
Inc., and PaineWebber Incorporated (18) (Exhibit 10.26)
10.27 1998 Annual Cash Incentive Compensation Plan* (21) -
(Exhibit 10.27)
10.28 Philadelphia Suburban Corporation Director Deferral Plan* 83
10.29 Amendment No. 1 dated as of February 1, 1999 to Agreement 90
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Nicholas DeBenedictis,
dated as of January 1, 1997*
10.30 Amendment No. 1 dated as of February 1, 1999 to Agreement 91
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Roy H. Stahl, dated as of
January 1, 1997*
10.31 Amendment No. 1 dated as of February 1, 1999 to Agreement 92
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Michael P. Graham,
dated as of January 1, 1997*
10.32 Amendment No. 1 dated as of February 1, 1999 to Agreement 93
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Richard R. Riegler, dated
as of January 1, 1997*
10.33 Amendment No. 1 dated as of February 1, 1999 to Agreement 94
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Morrison Coulter, dated
as of January 1, 1997*
</TABLE>
20
<PAGE>
EXHIBIT INDEX, Continued
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.34 1999 Annual Cash Incentive Compensation Plan* 95
10.35 The Philadelphia Suburban Corporation 1994 Equity -
Compensation Plan (as Amended and Restated
Effective March 3, 1998)* (22) (Exhibit A)
10.36 Amendment 1998-1 to The Philadelphia Suburban -
Corporation 1994 Equity Compensation Plan*
(23) (Annex F)
13.1 Selected portions of Annual Report to Shareholders -
for the year ended December 31, 1993 incorporated
by reference in Annual Report on Form 10-K for
the year ended December 31, 1993 (12) (Exhibit 13.1)
13.2 Selected portions of Annual Report to Shareholders -
for the year ended December 31, 1994 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1994 (13) (Exhibit 13.2)
13.3 Selected portions of Annual Report to Shareholders -
for the year ended December 31, 1995 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1995 (16) (Exhibit 13.3)
13.4 Selected portions of Annual Report to Shareholders -
for the year ended December 31, 1996 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1996 (17) (Exhibit 13.4)
13.5 Selected portions of Annual Report to Shareholders -
for the year ended December 31, 1997 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1997 (21) (Exhibit 13.5)
13.6 Selected portions of Annual Report to Shareholders 100
for the year ended December 31, 1998 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1998
21. Subsidiaries of Philadelphia Suburban Corporation 143
23. Consent of Independent Auditors 144
24. Power of Attorney (set forth as a part of this report) 23
27. Financial Data Schedule 145
</TABLE>
21
<PAGE>
- Notes -
Documents Incorporated by Reference
(1) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1992.
(2) Indenture of Mortgage dated as of January 1, 1941 with supplements thereto
through the Twentieth Supplemental Indenture dated as of August 1, 1983
were filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1983.
(3) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990.
(4) Filed as Exhibit 4 to the Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on June 14, 1988.
(5) Filed as Exhibit 1 to the Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on March 1, 1988, with respect to
the New York Stock Exchange, and on November 9, 1988, with respect to the
Philadelphia Stock Exchange.
(6) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1985.
(7) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986.
(8) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987.
(9) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988.
(10) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1989.
(11) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991.
(12) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993.
(13) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1994.
(14) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(15) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(16) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1995.
(17) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1996.
(18) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(19) Filed as an Exhibit to Form 8-K filed August 7, 1997.
(20) Filed as Exhibit 1 to the Registration Statement on Form 8-A filed on
March 17, 1998.
(21) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1997.
(22) Filed as Exhibit A to definitive Proxy Statement dated April 7, 1998.
(23) Filed as an Annex to Registration Statement on Form S-4 filed on September
11, 1998.
* Indicates management contract or compensatory plan or arrangement.
22
<PAGE>
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.
PHILADELPHIA SUBURBAN CORPORATION
By /s/ Nicholas DeBenedictis
--------------------------------------
Nicholas DeBenedictis
President and Chairman
Date: March 29, 1999
Pursuant to the requirements of the Securities and 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.
Each person in so signing also makes, constitutes and appoints Nicholas
DeBenedictis, President and Chairman of Philadelphia Suburban Corporation,
Michael P. Graham, Senior Vice President - Finance and Treasurer of Philadelphia
Suburban Corporation, and each of them, his or her true and lawful
attorneys-in-fact, in his or her name, place and stead to execute and cause to
be filed with the Securities and Exchange Commission any and all amendments to
this report.
23
<PAGE>
/s/ Mary C. Carroll /s/ Nicholas DeBenedictis
- --------------------------------------- -------------------------------------
Mary C. Carroll Nicholas DeBenedictis
Director President and Chairman
(principal executive officer)
and Director
/s/ G. Fred DiBona, Jr. /s/ Richard H. Glanton
- --------------------------------------- -------------------------------------
G. Fred DiBona, Jr. Richard H. Glanton
Director Director
/s/ Michael P. Graham /s/ Alan Hirsig
- --------------------------------------- -------------------------------------
Michael P. Graham /s/ Alan Hirsig
Senior Vice President-Finance and Director
Treasurer (principal financial and
accounting officer)
/s/ John F. McCaughan /s/ Richard L. Smoot
- --------------------------------------- -------------------------------------
John F. McCaughan Richard L. Smoot
Director Director
/s/ Harvey J. Wilson
- ---------------------------------------
Harvey J. Wilson
Director
24
<PAGE>
- --------------------------------------------------------------------------------
PHILADELPHIA SUBURBAN CORPORATION
and
BANKBOSTON, N.A.
as Rights Agent
RIGHTS AGREEMENT
Dated as of March 1, 1998
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Table of Contents
Section Page
1. Certain Definitions........................................................2
2. Appointment of Rights Agent................................................5
3. Issue of Rights Certificates...............................................6
4. Form of Rights Certificates................................................8
5. Countersignature and Registration..........................................9
6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates.............................................................9
7. Exercise of Rights; Purchase Price; Expiration
Date of Rights..........................................................10
8. Cancellation and Destruction of Rights Certificates.......................12
9. Reservation and Availability of Capital Stock;
Registration of Securities..............................................13
10. Capital Stock Record Date................................................14
11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights.............................................15
12. Certificate of Adjusted Purchase Price or Number of Shares...............25
13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power..........................................................26
14. Fractional Rights and Fractional Shares..................................29
15. Rights of Action.........................................................30
16. Agreement of Rights Holders..............................................31
17. Rights Certificate Holder Not Deemed a Shareholder.......................31
18. Concerning the Rights Agent..............................................32
19. Merger or Consolidation or Change of Name of Rights Agent................32
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20. Duties of Rights Agent...................................................33
21. Change of Rights Agent...................................................35
22. Issuance of New Rights Certificates......................................36
23. Redemption and Termination...............................................37
24. Exchange.................................................................38
25. Notice of Certain Events.................................................39
26. Notices..................................................................40
27. Supplements and Amendments...............................................41
28. Successors...............................................................42
29. Determinations and Actions by the Board of Directors, etc. ..............42
30. Benefits of this Agreement...............................................42
31. Severability.............................................................42
32. Governing Law............................................................43
33. Counterparts.............................................................43
34. Descriptive Headings.....................................................43
Exhibit A Resolution of the Board of Directors with respect to
Series A Junior Participating Preferred Shares
Exhibit B Form of Rights Certificate
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RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March 1, 1998 (the "Agreement"), between
PHILADELPHIA SUBURBAN CORPORATION, a Pennsylvania corporation (the "Company"),
and BANKBOSTON, N.A., a national banking banking association (the "Rights
Agent").
W I T N E S S E T H
WHEREAS, on February 3, 1998 (the "Rights Dividend Declaration Date"), the
Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each Common Share (as hereinafter defined) of the
Company outstanding at the close of business on March 1, 1998 (the "Record
Date") (which for these purposes shall include all Common Shares presently
entitled to receive dividends) and has authorized the issuance of one Right (as
such number may hereafter be adjusted pursuant to the provisions of Section
11(i) hereof) for each Common Share of the Company issued between the Record
Date (whether originally issued or delivered from the Company's treasury) and
the Distribution Date (as hereinafter defined), each Right initially
representing the right to purchase one one-thousandth of a Preferred Share (as
hereinafter defined) of the Company having the rights, powers and preferences
set forth in the form of the Resolution of the Board of Directors attached
hereto as Exhibit A, upon the terms and subject to the conditions hereinafter
set forth (the "Rights"); and
WHEREAS, the Rights will be held by the Rights Agent under this Agreement
as trustee for the shareholders of the Company until the Distribution Date; and
WHEREAS, the Board of Directors of the Company has considered whether
approval of this Agreement and the distribution of the Rights is in the best
interests of the Company and all other pertinent factors; and
WHEREAS, the Board of Directors of the Company has concluded that approval
of this Agreement and the distribution of the Rights is in the best interests of
the Company because the existence of the Rights will help (i) reduce the risk of
coercive two-tiered, front-end loaded or partial offers that may not offer fair
value to all shareholders, (ii) mitigate against market accumulators who through
open market and/or private purchases may achieve a position of substantial
influence or control without paying to selling or remaining shareholders a fair
control premium, (iii) deter market accumulators who are simply interested in
putting the Company into "play," (iv) restrict self-dealing by a substantial
shareholder, and (v) preserve the Board of Directors' bargaining power and
flexibility to deal with third-party acquirors, to pursue the business
strategies of the Company and to otherwise seek to maximize values for all
shareholders.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, and intending to be legally bound hereby, the parties hereby
agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
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(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 20% or more of the Common Shares then outstanding, but shall not include the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan. Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition of Common Shares by the Company which,
by reducing the number of Common Shares outstanding, increases the proportionate
number of Common Shares beneficially owned by such Person to 20% or more of the
Common Shares then outstanding; provided, however, that if a Person shall become
the Beneficial Owner of 20% or more of the then outstanding Common Shares by
reason of Common Shares purchased by the Company and shall, after such share
purchases by the Company, become the Beneficial Owner of any additional Common
Shares, then such Person shall be deemed to be an "Acquiring Person."
Notwithstanding the foregoing, if a majority of the Continuing Directors then in
office determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an Acquiring Person, as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
"Acquiring Person" for purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended and in effect on the date hereof
(the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) that such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon
the exercise of conversion rights, exchange rights, rights, warrants or
options, or otherwise; provided, however, that a Person shall not be deemed
the "Beneficial Owner" of, or to "beneficially own," (A) securities
tendered pursuant to a tender or exchange offer made by such Person or any
of such Person's Affiliates or Associates until such tendered securities
are accepted for payment, purchase or exchange, or (B) securities issuable
upon exercise of Rights at any time prior to the occurrence of a Triggering
Event, or (C) securities issuable upon exercise of Rights from and after
the occurrence of a Triggering Event which Rights were acquired by such
Person or any of such Person's Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection with
an adjustment made with respect to any Original Rights;
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(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including without
limitation pursuant to any agreement, arrangement or understanding (whether
or not in writing); provided, however, that a Person shall not be deemed
the "Beneficial Owner" of, or to "beneficially own," any security under
this subparagraph (ii) as a result of an oral or written agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable provisions of the General Rules
and Regulations under the Exchange Act, and (B) is not also then reportable
by such Person on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) that are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose
of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to subparagraph (ii) of this paragraph (c)) or
disposing of any voting securities of the Company,
provided, however, that nothing in this paragraph (c) shall cause a person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
(d) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in The Commonwealth of Massachusetts or the
Commonwealth of Pennsylvania are authorized or obligated by law or executive
order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M.,
Eastern time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Eastern time, on the next succeeding
Business Day.
(f) "Common Share" shall mean, when used with reference to the
Company, a share of common stock, par value $.50 per share, of the Company and,
to the extent that there are not a sufficient number of Common Shares authorized
to permit the full exercise of the Rights, shares of any other class or series
of the Company designated for such purpose containing terms substantially
similar to the terms of the Common Shares, except that "Common
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Share" when used with reference to any Person other than the Company shall mean
the shares of common stock of such Person with the greatest voting power, or the
equity securities or other equity interest having power to control or direct the
management, of such Person.
(g) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while such Person is a member of such Board, who is
not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or
a representative of an Acquiring Person or of any such Affiliate or Associate,
and was a member of such Board prior to the date of this Agreement, or (ii) any
Person who subsequently becomes a member of the Board, while such Person is a
member of such Board, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or a representative of an Acquiring Person or
of any such Affiliate or Associate, if such Person's nomination for election or
election to the Board is recommended or approved by a majority of the Continuing
Directors.
(h) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(i) "Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(j) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company or other entity.
(k) "Preferred Share" shall mean a share of Series A Junior
Participating Preferred Shares, par value $1.00 per share, of the Company and,
to the extent that there are not a sufficient number of shares of Series A
Junior Participating Preferred Shares authorized to permit the full exercise of
the Rights, shares of any other series of Series Preferred Stock of the Company
designated for such purpose containing terms substantially similar to the terms
of the Series A Junior Participating Preferred Shares.
(l) "Preferred Share Fraction" shall mean one one-thousandth of a
Preferred Share.
(m) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) (A), (B) or (C) hereof.
(n) "Section 13 Event" shall mean any event described in clauses (x),
(y) or (z) of Section 13(a) hereof.
(o) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
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(p) "Subsidiary" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act.
(q) "Trading Day" shall have the meaning set forth in Section 11(d)(i)
hereof.
(r) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Unless otherwise specified, where reference is made in this Agreement
to sections of, and the General Rules and Regulations under, the Exchange Act,
such reference shall mean such sections and rules as amended from time to time
and any successor provisions thereto.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable, upon ten (10) days= prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and shall in no event
be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the Close of Business on the tenth
Business Day after a Stock Acquisition Date involving an Acquiring Person that
has become such in a transaction as to which the Board of Directors has not made
the determination referred to in Section 11(a)(ii)(B) hereof, or (ii) within ten
(10) Business Days (or such later date as may be determined by action of the
Board of Directors prior to such time any Person becomes an Acquiring Person)
after the date that a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan) is first published or sent or given within the meaning of Rule 14d-2(a) of
the General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would be the Beneficial Owner of 20% or more of the Common
Shares then outstanding (the earlier of (i) and (ii) being herein referred to as
the "Distribution Date"), (x) beneficial interests in the Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Shares registered in the names of the holders of the
Common Shares (which certificates for Common
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Shares shall be deemed also to be certificates for beneficial interests in the
Rights) and not by separate certificates, and (y) the Rights and beneficial
interests therein will be transferable only in connection with the transfer of
the underlying Common Shares (including a transfer to the Company). The Company
must promptly notify the Rights Agent of such Distribution Date and request that
its transfer agent provide the Rights Agent with a list of the record holders of
the Company=s Common Shares as of the close of business on the Distribution
Date. As soon as practicable after the Rights Agent receives such notice and
list, the Rights Agent will send by first-class, postage prepaid mail, to each
record holder of the Common Shares as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Company, one or more rights certificates, in substantially the form of Exhibit B
hereto (the "Rights Certificates"), evidencing one Right for each Common Share
so held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per Common Share has been made pursuant to
Section 11(p) hereof, at the time of distribution of the Rights Certificates,
the Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) With respect to certificates for the Common Shares outstanding as
of the Record Date, until the Distribution Date, the registered holders of the
Common Shares shall also be the registered holders of the beneficial interests
in the associated Rights. Until the earlier of the Distribution Date or the
Expiration Date (as such term is defined in Section 7 hereof), the transfer of
any certificates representing Common Shares in respect of which Rights have been
issued shall also constitute the transfer of the Rights associated with such
Common Shares. Certificates issued after the Record Date upon the transfer of
Common Shares outstanding on the Record Date shall bear the legend set forth in
subsection (c).
(c) Except as provided in Section 22 hereof, Rights shall be issued in
respect of all Common Shares that are issued (whether originally issued or
delivered from the Company's treasury) after the Record Date but prior to the
earlier of the Distribution Date or the Expiration Date. Certificates
representing such Common Shares shall also be deemed to be certificates for
beneficial interests in the associated Rights, and shall bear the following
legend:
"This certificate also evidences a beneficial interest in and entitles
the holder hereof to certain Rights as set forth in the Rights Agreement
between Philadelphia Suburban Corporation (the "Company") and BankBoston,
N.A. (the "Rights Agent") dated as of March 1, 1998 (the "Rights
Agreement"), and as the same may be amended from time to time, the terms of
which are hereby incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain circumstances,
as set forth in the Rights Agreement, such Rights will be evidenced by
separate certificates and beneficial
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interests therein will no longer be evidenced by this certificate. The
Company will mail to the holder of this certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without charge promptly
after receipt of a written request therefor. Under certain circumstances
set forth in the Rights Agreement, Rights issued to, or held by, any Person
who is, was or becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent holder,
may become null and void."
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, beneficial
interests in the Rights associated with the Common Shares represented by such
certificates shall be evidenced by such certificates alone and registered
holders of Common Shares shall also be the registered holders of beneficial
interests in the associated Rights, and the transfer of any of such certificates
shall also constitute the transfer of beneficial interests in the Rights
associated with the Common Shares represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and
of assignment to be printed on the reverse thereof) shall each be substantially
in the form set forth in Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate (which do not affect the
duties or responsibilities of the Rights Agent) and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or the Nasdaq Stock Market on which the
Rights may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall entitle the holders thereof to purchase such number
of Preferred Share Fractions as shall be set forth therein at the price set
forth therein (such exercise price per Preferred Share Fraction, the "Purchase
Price"), but the amount and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights that the Company knows are beneficially owned
by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not
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for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has any
continuing oral or written plan, agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer that the Board of Directors
of the Company has determined is part of an oral or written plan, agreement,
arrangement or understanding that has as a primary purpose or effect avoidance
of Section 7(e) hereof, and provided that the Company shall have notified the
Rights Agent that this Section 4(b) applies, any Rights Certificate issued
pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement
or adjustment of any other Rights Certificate referred to in this sentence,
shall contain (to the extent feasible) the following legend:
"The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights represented
hereby may become null and void in the circumstances specified in Section
7(e) of such Agreement."
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President or any Vice President, either
manually or by facsimile signature, and shall have affixed thereto the Company's
seal or a facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
The Rights Certificates shall be manually countersigned by the Rights Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
of the Company who shall have signed any of the Rights Certificates shall cease
to be such officer of the Company before countersignature by the Rights Agent
and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the Person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any Person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Agreement any such Person was not such an officer.
(b) Following the Distribution Date and upon receipt by the Rights
Agent of the notice and list of recordholders of the Rights referred to in
Section 3(a), the Rights Agent will keep or cause to be kept, at its office or
offices designated pursuant to Section 25 hereof, books for registration and
transfer of the Rights Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Rights Certificates, the
number of
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Rights evidenced on its face by each of the Rights Certificates, the Certificate
number and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the Close of Business on the Distribution
Date, and at or prior to the Close of Business on the Expiration Date, any
Rights Certificate or Certificates may be transferred, split up, combined or
exchanged for another Rights Certificate or Certificates, entitling the
registered holder to purchase a like number of Preferred Share Fractions (or,
following a Triggering Event, Common Shares or other securities, cash or other
assets, as the case may be), as the Rights Certificate or Certificates
surrendered then entitled such holder or former holder in the case of a transfer
to purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate or Certificates shall make such request in
writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Certificates to be transferred, split up, combined or exchanged
at the office of the Rights Agent designated for such purpose. Neither the
Rights Agent nor the Company shall be obligated to take any action whatsoever
with respect to the transfer of any such surrendered Rights Certificate or
Certificates until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company or the Rights Agent shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and
Section 14 hereof, countersign and deliver to the Person entitled thereto a
Rights Certificate or Rights Certificates, as the case may be, as so requested.
The Rights Agent shall not be obligated to process the transaction until it has
received evidence that all taxes and charges arising from the transaction have
been paid. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security satisfactory to them, and reimbursement to the Company and the
Rights Agent of all reasonable expenses incidental thereto, and upon surrender
to the Rights Agent and cancellation of the Rights Certificate if mutilated, the
Company will execute and deliver a new Rights Certificate of like tenor to the
Rights Agent for countersignature and delivery to the registered owner in lieu
of the Rights Certificate so lost, stolen, destroyed or mutilated.
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Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to subsection (e), the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the office of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price (except as provided in Section 11(q)
hereof) with respect to the total number of Preferred Share Fractions (or Common
Shares, other securities, cash or other assets, as the case may be) as to which
such surrendered Rights are then exercisable (except as provided in Section
11(q) hereof), at or prior to the earliest of (i) the Close of Business on March
1, 2008 (the "Final Expiration Date"), (ii) the consummation of a transaction
contemplated by Section 13(d) hereof, or (iii) the time at which the Rights are
redeemed or terminated as provided in Section 23 hereof (the earliest of (i),
(ii) and (iii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each Preferred Share Fraction pursuant to
the exercise of a Right shall initially be $90, and shall be subject to
adjustment from time to time as provided in Sections 11 and 13(a) hereof and
shall be payable in accordance with subsection (c).
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per Preferred Share Fraction (or Common Shares, other securities, cash or
other assets, as the case may be) to be purchased as set forth below and an
amount equal to any applicable tax or governmental charge, the Rights Agent
shall, subject to Section 20(k) and Section 14(b) hereof, thereupon promptly (i)
(A) requisition from any transfer agent of the Preferred Shares (or make
available, if the Rights Agent is the transfer agent for the Common Shares)
certificates for the total number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) if the Company shall have elected to deposit some or all of the
total number of Preferred Shares issuable upon exercise of the Rights hereunder
with a depositary agent, requisition from the depositary agent depositary
receipts representing such number of Preferred Share Fractions as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company will direct the depositary agent to comply with such
request, (ii) requisition from the Company the amount of cash, if any, to be
paid in lieu of fractional shares in accordance with Section 14 hereof, (iii)
after receipt of such certificates or depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon
the order of the registered holder of such Rights Certificate. The payment of
the Purchase Price (as such amount may be reduced pursuant
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to Section 11(a)(iii) hereof) may be made, at the election of the holder of the
Rights Certificate, (x) in cash or by certified bank check or money order
payable to the order of the Company or (y) by delivery of Rights if and to the
extent authorized by Section 11(q) hereof. In the event that the Company is
obligated to issue other securities of the Company (including Common Shares) pay
cash and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other securities, cash
and/or other property are available for distribution by the Rights Agent, if and
when necessary to comply with this agreement.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 6 and Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing oral or written plan, agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Company has determined is part of an oral or
written plan, agreement, arrangement or understanding which has as a primary
purpose or effect the avoidance of this Section 7(e), shall become null and void
without any further action and no holder of such Rights shall have any rights
whatsoever with respect to such Rights, whether under any provision of this
Agreement or otherwise; provided, however, that the Rights held by an Acquiring
Person, an Affiliate or Associate of an Acquiring Person or the transferees of
such persons referred to above shall not be voided unless the Acquiring Person
in question or an Affiliate or Associate of such Acquiring Person shall be
involved in the transaction giving rise to the Section 11(a)(ii) Event. The
Company shall notify the Rights Agent when this Section 7(e) applies and shall
use all reasonable efforts to insure that the provisions of this Section 7(e)
and Section 4(b) hereof are complied with, but neither the Company nor the
Rights Agent shall have any liability to any holder of Rights Certificates or
other Person as a result of the Company's failure to make any determinations
with respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
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(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) properly completed and signed the certificate contained in the form of
election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall or the Rights Agent reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock; Registration of
Securities.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available for issuance upon the exercise of outstanding Rights as many
of its authorized and unissued Preferred Shares (and, following the occurrence
of a Triggering Event, out of its authorized and unissued or treasury Common
Shares and/or other securities) or out of its authorized and issued shares held
in its treasury, which together, shall at all times after the Distribution Date
be sufficient to permit the exercise in full of all outstanding Rights.
(b) So long as the Preferred Shares (and, following the occurrence of
a Triggering Event, Common Shares or other securities) issuable and deliverable
upon the exercise of the Rights may be listed on any stock exchange, or quoted
on the Nasdaq Stock Market, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares and other
securities reserved for such issuance to be listed on such exchange upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or as soon as is required by law following the
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Distribution Date, as the case may be, a registration statement or statements
under the Securities Act of 1933, as amended (the "Act"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate form or
forms, (ii) cause such registration statement or statements to become effective
as soon as practicable after such filing, and (iii) cause such registration
statement or statements to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the
Expiration Date. The Company will also take such action as may be appropriate
under, or to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights. The Company
may temporarily suspend, for a period of time not to exceed ninety (90) days
after the date set forth in clause (i) of the first sentence of this subsection
(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. In addition,
if the Company shall determine that a registration statement is required
following the Distribution Date, the Company may, by issuing a public
announcement, temporarily suspend the exercisability of the Rights until such
time as a registration statement has been declared effective. The Company shall
notify the Rights Agent whenever it makes a public announcement pursuant to this
subsection (c) and give the Rights Agent a copy of the announcement.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained, nor shall the Rights be
exercisable if the exercise thereof shall not be permitted under applicable law
or a registration statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares (and, following a
Triggering Event, Common Shares or other securities) delivered upon exercise of
Rights shall, at the time of delivery of the certificates for such shares or
other securities (subject to payment of the Purchase Price), be duly and validly
authorized and issued and, with respect to Preferred Shares, Common Shares or
other shares of capital stock, fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all taxes and governmental charges that may be payable in
respect of the issuance or delivery of the Rights Certificates and of any
certificates for a number of Preferred Share Fractions (or Common Shares or
other securities, as the case may be) upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax that may be payable in
respect of any transfer or delivery of Rights Certificates to a Person other
than, or the issuance or delivery of a number of Preferred Share Fractions (or
Common Shares or other securities, as the case may be) in respect of a name
other than that of the registered holder of the Rights Certificates evidencing
Rights surrendered for exercise or to issue or deliver any
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<PAGE>
certificates for a number of Preferred Share Fractions (or Common Shares or
other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Capital Stock Record Date. Each Person in whose name any
certificate for a number of Preferred Share Fractions (or Common Shares or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such Preferred
Share Fractions (or Common Shares or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and all applicable taxes and governmental charges) was
made; provided, however, that if the date of such surrender and payment is a
date upon which the applicable transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares
(fractional or otherwise) on, and such certificate shall be dated, the next
succeeding Business Day on which the applicable transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a shareholder of the
Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares and other
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on any security of the Company payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of shares, or (D) issue
any shares of its capital stock in a reclassification of the Preferred Shares
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of Preferred Shares or capital stock, as the case may be,
issuable on such date, shall be proportionately adjusted so that the holder of
any Right exercised after such time shall be entitled to receive, upon payment
of the adjusted Purchase Price, the aggregate number and kind of Preferred
Shares or capital stock, as the case may be, that, if such
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<PAGE>
Right had been exercised immediately prior to such date and at a time when the
Preferred Share transfer books were open, such holder would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. If an event occurs which would require an
adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section 11(a)(ii)
hereof.
(ii) In the event:
(A) any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, at any time after the Stock Acquisition Date,
directly or indirectly, (1) shall merge into the Company or otherwise
combine with the Company and the Company shall be the continuing or
surviving corporation of such merger or combination and the Common
Shares of the Company or other equity securities of the Company shall
remain outstanding, (2) shall, in one transaction or a series of
transactions, transfer any assets to the Company or to any of its
Subsidiaries in exchange (in whole or in part) for Common Shares, for
shares of other equity securities of the Company, or for securities
exercisable for or convertible into shares of equity securities of the
Company (Common Shares or otherwise) or otherwise obtain from the
Company, with or without consideration, any additional shares of such
equity securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a pro rata
distribution to all holders of Common Shares), (3) shall sell,
purchase, lease, exchange, mortgage, pledge, transfer or otherwise
acquire or dispose of assets in one transaction or a series of
transactions, to, from or with (as the case may be) the Company or any
of its Subsidiaries, on terms and conditions less favorable to the
Company than the Company would be able to obtain in arm=s-length
negotiation with an unaffiliated third party, other than pursuant to a
Section 13 Event, (4) shall sell, purchase, lease, exchange, mortgage,
pledge, transfer or otherwise dispose of assets having an aggregate
fair market value of more than $5,000,000 in one transaction or a
series of transactions, to, from or with (as the case may be) the
Company or any of the Company=s Subsidiaries (other than incidental to
the lines of business, if any, engaged in as of the date hereof
between the Company and such Acquiring Person or Associate or
Affiliate), other than pursuant to a Section 13 Event, (5) shall
receive any compensation from the Company or any of the Company=s
Subsidiaries other than compensation for full-time employment as a
regular employee at rates in accordance with the Company=s (or its
Subsidiaries=) past practices, or (6) shall receive the benefit,
directly or indirectly (except proportionately as a shareholder and
except if resulting from a requirement of law or governmental
regulation), of any loans,
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<PAGE>
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Company or any of its
Subsidiaries; or
(B) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary
of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such
plan), alone or together with its Affiliates and Associates, shall, at
any time after the Rights Dividend Declaration Date, become the
Beneficial Owner of 20% or more of the Common Shares then outstanding,
unless the event causing the 20% threshold to be crossed is a Section
13 Event, or is an acquisition of Common Shares pursuant to a tender
offer or an exchange offer for all outstanding Common Shares at a
price and on terms determined by at least a majority of the Continuing
Directors, after receiving advice from one or more nationally
recognized investment banking firms, to be in the best interests of
the Company and its shareholders (a AQualifying Offer@), after taking
into consideration all factors that such members of the Board of
Directors deem relevant, including, without limitation, the long-term
prospects and value of the Company and the prices and terms that such
members of the Board of Directors believe, in good faith, could
reasonably be achieved if the Company or its assets were sold on an
orderly basis designed to realize maximum value, or
(C) during such time as there is an Acquiring Person, there shall
be any reclassification of securities (including any reverse stock
split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any other
transaction or series of transactions involving the Company or any of
its Subsidiaries, other than a Section 13 Event or series of such
Section 13 Events (whether or not with or into or otherwise involving
an Acquiring Person) that has the effect, directly or indirectly, of
increasing by more than 1% the proportionate share of the outstanding
shares of any class of equity securities of the Company or any of its
Subsidiaries that is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any Acquiring
Person,
then, promptly following the first occurrence of a Section 11(a)(ii) Event,
proper provision shall be made so that each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the right
to receive, upon exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, in lieu of a number of
Preferred Share Fractions, such number of Common Shares of the Company as
shall equal the result obtained by (x) multiplying the then current
Purchase Price by the then number of Preferred Share Fractions for which a
Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event, and (y) dividing that product
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(which, following such first occurrence, shall thereafter be referred to as
the "Purchase Price" for each Right and for all purposes of this Agreement)
by 50% of the current market price (as defined in and determined pursuant
to Section 11(d) hereof) per Common Share on the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of Common Shares that are
authorized by the Company's Articles of Incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the
Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall: (A) determine the excess of the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over the
Purchase Price (such excess, the "Spread"), and (B) with respect to each
Right, make adequate provision to substitute for the Adjustment Shares,
upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in
the Purchase Price, (3) Common Shares of the same or a different class or
other equity securities of the Company (including, without limitation,
preferred shares or units of preferred shares that a majority of the
Continuing Directors in office at the time has deemed (based, among other
things, on the dividend and liquidation rights of such preferred shares) to
have substantially the same economic value as Common Shares (such preferred
shares, hereinafter referred to as "common share equivalents")), (4) debt
securities of the Company, (5) other assets, or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where such
aggregate value has been determined by a majority of the Continuing
Directors in office at the time after considering the advice of a
nationally recognized investment banking firm selected by the Board of
Directors of the Company; provided, however, if the Company shall not have
made adequate provision to deliver value pursuant to clause (B) above
within thirty (30) days following the later of (x) the first occurrence of
a Section 11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Purchase Price, Common Shares
(to the extent available) and then, if necessary, cash, which shares and/or
cash have an aggregate value equal to the Spread. If the Board of Directors
of the Company shall determine in good faith that it is likely that
sufficient additional Common Shares could be authorized for issuance upon
exercise in full of the Rights, the thirty (30) day period set forth above
may be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may
seek shareholder approval for the authorization of such additional shares
(such period, as it may be extended, the "Substitution Period"). To the
extent that the Company determines that some action need be taken pursuant
to the first and/or second sentences of this Section 11(a)(iii), the
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Company shall provide, subject to Section 7(e) hereof, that such action
shall apply uniformly to all outstanding Rights, and may suspend the
exercisability of the Rights until the expiration of the Substitution
Period in order to seek any authorization of additional shares and/or to
decide the appropriate form of distribution to be made pursuant to such
first sentence and to determine the value thereof. The Company shall make a
public announcement when the exercisability of the Rights has been
temporarily suspended, and again when such suspension is no longer in
effect. The Company shall notify the Rights Agent of the suspension of the
exercisability of the Rights, and provide the Rights Agent with a copy of
such public announcement. For purposes of this Section 11(a)(iii), the
value of the Common Shares shall be the current market price (as determined
pursuant to Section 11(d) hereof) per Common Share on the Section 11(a)(ii)
Trigger Date and the value of any "common share equivalent" shall be deemed
to have the same value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to holders of any security of the Company entitling
them to subscribe for or purchase (for a period expiring within forty-five (45)
calendar days after such record date) Preferred Shares (or shares having the
same rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or per equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
current market price (as determined pursuant to Section 11(d) hereof) per
Preferred Share on such record date, the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date, plus
the number of Preferred Shares that the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price, and the denominator
of which shall be the number of Preferred Shares outstanding on such record
date, plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such
subscription price may be paid by delivery of consideration part or all of which
may be in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Company, the Rights Agent and the holders of the Rights.
Preferred Shares owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed, and in the
event that such rights or warrants are not so issued, the Purchase Price shall
be adjusted to be the Purchase Price that would then be in effect if such record
date had not been fixed.
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(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Shares (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
dividend out of the earnings or retained earnings of the Company), assets (other
than a regular quarterly dividend referred to above or dividend payable in
Preferred Shares, but including any dividend payable in stock other than
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per Preferred Share on such record date, less the then fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants applicable to a Preferred Share and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
Preferred Share. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "current market
price" per Common Share on any date shall be deemed to be the average of the
daily closing prices per Common Share for the thirty (30) consecutive Trading
Days (as such term is hereinafter defined) immediately prior to and not
including such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per Common Share on any date shall
be deemed to be the average of the daily closing prices per Common Share for the
ten (10) consecutive Trading Days immediately following and not including such
date; provided, however, that in the event that the current market price per
Common Share is determined during a period following the announcement by the
issuer of such Common Share of (A) a dividend or distribution on such Common
Share payable in Common Shares or securities convertible into Common Shares
(other than the Rights), or (B) any subdivision, combination or reclassification
of such Common Shares, and prior to the expiration of the requisite thirty (30)
Trading Day or ten (10) Trading Day period, as set forth above, after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such case, the
"current market price" shall be properly adjusted to take into account
ex-dividend trading. The closing price for each Trading Day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal
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consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Common Shares are
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common Shares are listed or admitted to trading or, if the Common Shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System ("Nasdaq") or such other
system then in use, or, if on any such date the Common Shares are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common Shares
selected by the Board of Directors of the Company. If on any such date no market
maker is making a market in the Common Shares, the fair value of such shares on
such date as determined in good faith by the Board of Directors of the Company
shall be used. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common Shares are listed or admitted
to trading is open for the transaction of business or, if the Common Shares are
not listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Shares are not publicly held or not so listed or
traded, "current market price" per share shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the "current market
price" per Preferred Share shall be determined in the same manner as set
forth above for the Common Shares in clause (i) of this Section 11(d)
(other than the last sentence thereof). If the current market price per
Preferred Share cannot be determined in the manner provided above or if the
Preferred Shares are not publicly held or listed or traded in a manner
described in clause (i) of this Section 11(d), the "current market price"
per Preferred Share shall be conclusively deemed to be an amount equal to
one hundred (as such number may be appropriately adjusted for such events
as stock splits, stock dividends and recapitalizations with respect to the
Common Shares occurring after the date of this Agreement) multiplied by the
current market price per Common Share. If neither the Common Shares nor the
Preferred Shares are publicly held or so listed or traded, "current market
price" per Preferred Share shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent
and shall be conclusive for all purposes. For all purposes of this
Agreement, the "current market price" of a Preferred Share Fraction shall
be equal to the "current market price" of one Preferred Share divided by
1000.
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(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest ten-thousandth of a Common Share or one
millionth of a Preferred Share, as the case may be. Notwithstanding the first
sentence of this subsection (e), any adjustment required by this Section 11
shall be made no later than the earlier of (i) three (3) years from the date of
the transaction that mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock other than Preferred
Shares, thereafter the number of such other shares so receivable upon exercise
of any Right and the Purchase Price thereof shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Shares contained in Sections 11(a),
(b), (c), (e), (g), (h), (i), (j), (k), (m) and (q), and the provisions of
Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Shares shall
apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Preferred Share
Fractions purchasable from time to time hereunder upon exercise of the Rights,
all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in subsections (b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Preferred Share
Fractions (calculated to the nearest one-one millionth of a Preferred Share)
obtained by (i) multiplying (x) the number of Preferred Share Fractions covered
by a Right immediately prior to this adjustment, by (y) the Purchase Price in
effect immediately prior to such adjustment of the Purchase Price, and (ii)
dividing the product so obtained by the Purchase Price in effect immediately
after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of Preferred Share Fractions purchasable upon the exercise of a
Right. Each of the Rights outstanding after the adjustment in the number of
Rights shall be exercisable for the number of Preferred Share Fractions for
which a Right was exercisable immediately prior to such adjustment. Each Right
held of record prior to such adjustment of the number of Rights shall
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become that number of Rights (calculated to the nearest one-one millionth of a
Preferred Share) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. The Company shall forward a copy of such public
announcement to the Rights Agent. The record date for the adjustment may be the
date on which the Purchase Price is adjusted or any day thereafter, but, if the
Rights Certificates have been issued, shall be at least ten (10) days later than
the date of the public announcement. If Rights Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of Preferred Share Fractions issuable upon the exercise of the
Rights, the Rights Certificates theretofore and thereafter issued may continue
to express the Purchase Price per Preferred Share Fraction and the number of
Preferred Share Fractions that were expressed in the initial Rights Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then stated or par value, if any, of the number of
Preferred Share Fractions issuable upon exercise of the Rights, the Company
shall take any corporate action that may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue such number of
fully paid and nonassessable Preferred Share Fractions at such adjusted Purchase
Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of Preferred Share Fractions and other capital stock or securities of
the Company, if any, issuable upon such exercise over and above the number of
Preferred Share Fractions and other capital stock or securities of the Company,
if any, issuable
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upon such exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) or securities upon the
occurrence of the event requiring such adjustment, and the Company shall also
deliver a copy of such bill or instrument to the Rights Agent.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Shares, (ii) issuance wholly for cash of any
Preferred Shares at less than the current market price, (iii) issuance wholly
for cash for Preferred Shares or securities which by their terms are convertible
into or exchangeable for Preferred Shares, (iv) stock dividends or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
shareholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other person or persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect that would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23 or Section 26 hereof, take
(or permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish substantially
or otherwise eliminate the benefits intended to be afforded by the Rights.
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(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date (i) declare a dividend on the
outstanding Common Shares payable in Common Shares, (ii) subdivide the
outstanding Common Shares, or (iii) combine the outstanding Common Shares into a
smaller number of shares, the number of Rights associated with each Common Share
then outstanding, or issued or delivered thereafter but prior to the
Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each Common Share following any such event
shall equal the result obtained by multiplying the number of Rights associated
with each Common Share immediately prior to such event by a fraction the
numerator of which shall be the total number of Common Shares outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of Common Shares outstanding immediately following the
occurrence of such event.
(q) In the event that the Rights become exercisable following a
Section 11(a)(ii) Event, the Company, by action of a majority of the Continuing
Directors in office at the time, may authorize that the Rights, subject to
Section 7(e) hereof, either (i) will only be, or (ii) may, at the option of the
holder entitled to exercise the Rights be, exercisable for, in either case 50%
of the Common Shares (or cash or other securities or assets to be substituted
for the Adjustment Shares pursuant to subsection (a)(iii)) that would otherwise
be purchasable under subsection (a), in consideration of the surrender to the
Company of the Rights so exercised and without other payment of the Purchase
Price. Rights exercised under this subsection (q) shall be deemed to have been
exercised in full and shall be canceled.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief, reasonably detailed statement of the facts and
computations accounting for such adjustment, (b) promptly file with the Rights
Agent, and with each transfer agent for the Preferred Shares and the Common
Shares, a copy of such certificate, and (c) mail a brief summary thereof to each
holder of a Rights Certificate (or, if prior to the Distribution Date, to each
holder of a certificate representing Common Shares) in accordance with Section
25 hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained and shall have no duty with
respect to and shall not be deemed to have knowledge of any such adjustment
unless and until it shall have received such a certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such
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consolidation or merger, (y) any person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall consolidate
with, or merge with or into, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
Common Shares shall be changed into or exchanged for stock or other securities
of any other Person or cash or any other property, or (z) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets, operating
income, cash flow or earning power of the Company and its Subsidiaries (taken as
a whole) to any Person or Persons (other than the Company or any Subsidiary of
the Company in one or more transactions each of which complies with Section
11(o) hereof), then, and in each such case and except as contemplated by
subsection (d), proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e) hereof
or subsection (e), shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the
terms of this Agreement, such number of validly authorized and issued,
fully paid, non assessable and freely tradeable Common Shares of the
Principal Party (as such term is hereinafter defined), not subject to any
liens, encumbrances, rights of first refusal or other adverse claims, as
shall be equal to the result obtained by (1) multiplying the then current
Purchase Price by the number of Preferred Share Fractions for which a Right
is exercisable immediately prior to the first occurrence of a Section 13
Event (or, if a Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13 Event, multiplying the number of such shares for
which a Right was exercisable immediately prior to the first occurrence of
a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior
to such first occurrence), and (2) dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by
50% of the current market price (determined pursuant to Section 11(d)(i)
hereof) per Common Share of such Principal Party on the date of
consummation of such Section 13 Event;
(ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement;
(iii) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the
first occurrence of a Section 13 Event;
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<PAGE>
(iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of its Common Shares) in
connection with the consummation of any such transaction as may be
necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its Common
Shares thereafter deliverable upon the exercise of the Rights; and
(v) the provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of subsection (a), the Person that is the issuer of any
securities into which Common Shares of the Company are converted in such
merger or consolidation, and if no securities are so issued, the Person
that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of the
first sentence of subsection (a), the Person that is the party receiving
the greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions;
provided, however, that in the case of either (i) or (ii) above, (1) if the
Common Shares of such Person are not at such time and have not been continuously
over the preceding twelve (12) month period registered under Section 12 of the
Exchange Act, and such Person is a direct or indirect Subsidiary of another
Person the Common Shares of which are and have been so registered, "Principal
Party" shall refer to such other Person, and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Shares
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Shares that have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that, as soon as practicable after the date of any Section
13 event, the Principal Party will
(i) prepare and file a registration statement under the Act, with
respect to the Rights and the securities purchasable upon exercise of the
Rights on an
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appropriate form, and will use its best efforts to cause such registration
statement to (A) become effective as soon as practicable after such filing
and (B) remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date;
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under blue sky laws of
such jurisdiction, as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates that comply in all
respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights that have not theretofore been exercised shall thereafter become
exercisable solely in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 (other than this subsection (d)) shall not be applicable to, and the
term "Section 13 Event" shall not include, a transaction described in
subparagraphs (x) and (y) of Section 13(a) if (i) such transaction is
consummated with a Person, or Persons who acquired Common Shares pursuant to a
Qualifying Offer (or a wholly owned Subsidiary of any such Person or Persons),
(ii) the price per Common Share offered in such transaction is not less than the
price per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such tender offer or exchange offer and (iii) the form of
consideration being offered to the remaining holders of Common Shares pursuant
to such transaction is the same as the form of consideration paid pursuant to
such tender or exchange offer. Upon consummation of any such transaction
contemplated by this subsection (d), all Rights hereunder shall expire.
(e) In the event that the Rights become exercisable under subsection
(a) (except as provided in subsection (d)), the Company, by action of a majority
of the Continuing Directors in office at the time, may authorize that the Rights
either (i) will only be or (ii) may, at the option of the Principal Party be,
exercisable for, 50% of the Common Shares of the Principal Party that would
otherwise be purchasable under subsection (a), in consideration of the surrender
to the Principal Party, as the successor to the Company under subsection (a)
(ii), of the Rights so exercised and without other payment of the Purchase
Price. Rights exercised under this subsection (e) shall be deemed to have been
exercised in full and shall be canceled.
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Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates that evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this subsection (a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or if the Rights
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by Nasdaq or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares upon exercise of the Rights or to distribute certificates which evidence
fractional Preferred Shares, except in each case for fractions which are
integral multiples of Preferred Shares. In lieu of fractional Preferred Shares
that are not integral multiples of Preferred Shares, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of a Preferred Share. For purposes of this subsection (b), the
current market value of one Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to Section 11(d)(ii) hereof) for the
Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of Common Shares upon exercise of the Rights
or to distribute certificates that evidence fractional Common Shares. In lieu of
fractional Common Shares, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the current market value of one
Common Share. For purposes of this subsection (c), the current market value of
one
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Common Share shall be the closing price of one Common Share (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(d) Whenever a payment for fractional Rights or fractional shares is
to be made by the Rights Agent, the Company shall (i) promptly prepare and
deliver to the Rights Agent a certificate setting forth in reasonable detail the
facts related to such payment and the process and/or formulas utilized in
calculating such payments, and (ii) provide sufficient monies to the Rights
Agent in the form of fully collected funds to make such payments. The Rights
Agent shall be fully protected in relying on such certificate and shall have no
duty with respect to and shall not be deemed to have knowledge of any payment
for fractional Rights or fractional shares under this Section 4 unless and until
it shall have received such a certificate and sufficient monies.
(e) The holder of a Right or a beneficial interest in a Right by the
acceptance thereof expressly waives his right to receive any fractional Rights
or any fractional Common Shares upon exercise of a Right, except as permitted by
this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights or beneficial interests
therein, it is specifically acknowledged that the holders of Rights or
beneficial interests therein would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right or a
beneficial interest in a Right by accepting the same consents and agrees with
the Company and the Rights Agent and with every other such holder that:
(a) prior to the Distribution Date, beneficial interests in the Rights
will be transferable only in connection with the transfer of Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent
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designated for such purposes, duly endorsed or accompanied by a proper
instrument of transfer and with the appropriate forms and certificates fully
executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the Person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Share
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Share certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be required to be affected by any
notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or a beneficial interest in a Right or other Person as a result of
its inability to perform any of its obligations under this Agreement by reason
of any preliminary or permanent injunction or other order, decree, judgment or
ruling (whether interlocutory or final) issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree, judgment or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No holder,
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the number of Preferred Share
Fractions or any other securities of the Company (including the Common Shares)
that may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive
notice of meetings or other actions affecting shareholders (except as provided
in Section 24 hereof), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the preparation, execution,
delivery, amendment, administration and
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execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent and its
directors, officers, employees and agents, for and to hold each of them harmless
against, any loss, liability, damage, judgment, fine, penalty, claim, demand,
settlement, cost or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent or any such indemnified
party, for any action taken, suffered or omitted by the Rights Agent in
connection with the acceptance or administration of this Agreement or the
exercise of its duties hereunder, including without limitation the costs and
expenses of defending against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with the acceptance and administration of this Agreement or in the exercise of
its duties hereunder in reliance upon any Rights Certificate or certificate for
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any Person succeeding to the
shareholder services or stock transfer business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto; provided, however, that such Person would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations, and only the duties and obligations, expressly imposed by this
Agreement (and no implied duties or obligations) upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates
or beneficial interests in the Rights, by their acceptance thereof, shall be
bound:
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(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the advice or written opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent, and
the Rights Agent shall incur no liability for or in respect of, any action
taken, suffered or omitted by it in good faith and in accordance with such
advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the Company
prior to taking, suffering or omitting any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
and protection to the Rights Agent and the Rights Agent shall incur no liability
for or in respect of any action taken, suffered or omitted in good faith by it
under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct; provided, however that the Rights
Agent shall not be liable for special, indirect, incidental or consequential
loss or damage of any kind whatsoever, even if the Rights Agent has been advised
of the likelihood of such loss or damage.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any liability or
responsibility in respect of the validity of any provision of this Agreement or
the execution and delivery hereof (except the due execution hereof by the Rights
Agent) or in respect of the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any adjustment
required under the provisions of this Agreement or responsible for the manner,
method or amount of any such adjustment or the ascertaining of the existence of
facts that would require any such adjustment (except with respect to the
exercise of Rights evidenced by Rights Certificates after actual notice of any
such adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Common
Shares to be issued pursuant to this
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Agreement or any Rights Certificate or as to whether any Common Shares or
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and such instructions shall be full authorization
and protection for the Rights Agent and the Rights Agent shall incur no
liability for or in respect of any action taken, suffered or omitted to be taken
by it in good faith in accordance with instructions of any such officer. The
Rights Agent may conclusively rely on the most recent instructions provided to
it by any such officer.
(h) The Rights Agent and any shareholder, affiliate, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
the Rights Agent under this Agreement and none of such actions shall constitute
a breach of trust. Nothing herein shall preclude the Rights Agent from acting in
any other capacity for the Company or for any other Person or legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company or any other Person resulting from any
such act, default, neglect or misconduct, absent gross negligence, bad faith or
willful misconduct in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
it believes that repayment of such funds or adequate indemnification against
such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an
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affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not
take any further action with respect to such requested exercise or transfer
without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' prior written notice mailed to the Company and to each
transfer agent of the Common Shares and Preferred Shares by registered or
certified mail, and to the holders of the Rights Certificates by first- class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' prior written notice mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common
Shares and Preferred Shares, by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his Rights Certificate
for inspection by the Company), then any registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a Person organized, doing business and
in good standing under the laws of the United States or of any state, having a
principal office in the State of New York or the Commonwealth of Massachusetts,
that is authorized by law to exercise shareholder services and stock transfer
powers and is subject to supervision or examination by federal or state
authority and that has at the time of its appointment as Rights Agent a combined
capital and surplus of at least $50,000,000 or (b) an Affiliate of any such
Person. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
and Preferred Shares and mail a notice thereof in writing to the registered
holders of the Rights Certificates or, prior to the Distribution Date, to the
registered holders of the Common Shares. In case at the time such successor
Rights Agent shall succeed to the agency and trust created by this Agreement,
any of the Rights Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of a predecessor
Rights Agent and deliver such Rights Certificates so countersigned; and in case
at that time any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights Certificates either in
the name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the
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full force provided in the Rights Certificates and in this Agreement. Failure to
give any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Rights Certificates made in accordance with
the provisions of this Agreement. In addition, in connection with the issuance,
sale or delivery of Common Shares following the Distribution Date and prior to
the redemption or expiration of the Rights, the Company (a) shall, with respect
to Common Shares so issued, sold or delivered pursuant to the exercise of stock
options, stock appreciation rights, grants or awards outstanding on the
Distribution Date under any benefit plan or arrangement for employees or
directors, or upon the exercise, conversion or exchange of securities
outstanding on the Record Date or hereinafter issued by the Company, and (b)
may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Company, issue Rights Certificates representing the appropriate
number of Rights in connection with such issuance or sale; provided, however,
that (i) no such Rights Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Rights Certificate would be issued, and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the Close of Business on the tenth day
following a Stock Acquisition Date (or, if the Stock Acquisition Date shall have
occurred prior to the Record Date, the Close of Business on the tenth day
following the Record Date), or (ii) the Close of Business on the Final
Expiration Date, redeem all but not less than all the then outstanding Rights at
a redemption price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price") and the Company may, at its option, pay
the Redemption Price either in Common Shares (based on the "current market
price", as defined in Section 11(d)(i) hereof, of the Common Shares at the time
of redemption) or cash; provided, however, if the Board of Directors of the
Company authorizes redemption of the Rights in either of the circumstances set
forth in clauses (i) and (ii) of this proviso, then there must be Continuing
Directors then in office and such authorization shall require the concurrence of
a majority of such
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Continuing Directors; and provided further, however, that if, following the
occurrence of a Stock Acquisition Date and following the expiration of the right
of redemption hereunder but prior to any Triggering Event, (i) an Acquiring
Person shall have transferred or otherwise disposed of a number of Common Shares
in one transaction or series of transactions, not directly or indirectly
involving the Company or any of its Subsidiaries, which did not result in the
occurrence of a Triggering Event or the Company (with the approval of the
majority of Continuing Directors) shall have issued additional equity
securities, in either instance such that such Person is thereafter a Beneficial
Owner of 10% or less of the outstanding Common Shares, and (ii) there is no
other Acquiring Person immediately following the occurrence of the event
described in clause (i), then the right of redemption shall be reinstated and
thereafter be subject to the provisions of this Section 23. Notwithstanding
anything contained in this Agreement to the contrary, the Rights shall not be
exercisable after the first occurrence of a Section 11(a)(ii) Event until such
time as the Company's right of redemption hereunder has expired.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, without any notice, or further
action, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by, in the
case of notice to holders, mailing such notice to all such holders at each
holder's last address as it appears upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the Transfer Agent
for the Common Shares. Any notice that is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
have become null and void pursuant to the provisions of Section 7(e) hereof) for
Common Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the AExchange Ratio@). Notwithstanding the foregoing, the Company=s Board
of Directors shall not be empowered to effect such exchange at any time after
any Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any Person organized,
appointed or established by the Company for or pursuant to the terms of any such
plan), together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of fifty percent (50%) or more of the Common Shares then
outstanding.
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(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of the
holders of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company shall promptly notify the
Rights Agent of any such exchange. The Company promptly shall mail a notice of
any such exchange to all of the holders of such Rights at their last addresses
as they appear upon the registry books of the Rights Agent. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of exchange will state the method
by which the exchange of the Common Shares for Rights will be effected and, in
the event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but issued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable, an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
subsection (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Shares or to make any other distribution to the holders of
Preferred Shares (other than a regular quarterly dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Shares rights or warrants to subscribe for or to purchase any additional
Preferred Shares or shares of stock of any class or any other securities, rights
or options, or (iii)
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to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), or (iv) to effect any consolidation or merger into or with any other
Person (other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), or to effect any sale or other transfer (or to
permit one or more of its Subsidiaries to effect any sale or other transfer), in
one transaction or a series of related transactions, of more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of
the Company, then, in each such case, the Company shall give to the Rights Agent
and to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of Preferred Shares, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least twenty (20) days prior to
the record date for determining holders of Preferred Shares for purposes of such
action, and in the case of any such other action, at least twenty (20) days
prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Preferred Shares, whichever shall be the
earlier.
(b) Upon the occurrence of a Section 11(a)(ii) Event, (i) the Company
shall as soon as practicable thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 26 hereof, a
notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof,
and (ii) all references in the preceding paragraph to Preferred Shares shall be
deemed thereafter to refer to Common Shares and/or, if appropriate, other
securities.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Philadelphia Suburban Corporation
762 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
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BankBoston, N.A.
C/O Equiserve Limited Partnership
150 Royall Street
Canton, MA 02021
ATTN: Client Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date to the holder of certificates representing Common
Shares) shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date and
subject to the penultimate sentence of this Section 27, the Company may and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement without the approval of any holders of certificates
representing Common Shares. From and after the Distribution Date and subject to
the penultimate sentence of this Section 27, the Company may and the Rights
Agent shall, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
to shorten or lengthen any time period hereunder, or (iv) to change or
supplement the provisions hereunder in any manner that the Company may deem
necessary or desirable and that shall not adversely affect the interests of the
holders of Rights Certificates; provided, this Agreement may not be supplemented
or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable, or (B) any other time period unless such lengthening is
for the purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company that states that the proposed supplement or
amendment is in compliance with the terms of this Section 27, and if requested
by the Rights Agent, an opinion of counsel, the Rights Agent shall execute such
supplement or amendment. Notwithstanding anything contained in this Agreement to
the contrary, (i) no supplement or amendment shall be made that changes the
Redemption Price, the Final Expiration Date, the Purchase Price or the number of
Preferred Share Fractions for which a Right is exercisable, (ii) any supplement
or amendment shall be effective only if there are Continuing Directors and shall
require the concurrence of a majority of such Continuing Directors if: (x) such
supplement or amendment occurs on or after the time a Person becomes an
Acquiring Person, or (y) such supplement or amendment occurs on or after the
date of a change (resulting from a proxy or consent solicitation) in a majority
of the directors in office at the commencement of such solicitation if any
Person who is a participant in such solicitation has stated (or, if upon the
commencement of such solicitation, a majority of the Board of Directors of the
Company has determined in good faith) that such Person (or any of its
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Affiliates or Associates) intends to take, or may consider taking, any action
that would result in such Person becoming an Acquiring Person or that would
cause the occurrence of a Triggering Event unless, concurrent with such
solicitation, such Person (or one or more of its Affiliates or Associates) is
making a cash tender offer pursuant to a Schedule 14D-1 (or any successor form)
filed with the Securities and Exchange Commission for all outstanding Common
Shares not beneficially owned by such Person (or by its Affiliates or
Associates), and (iii) no supplement or amendment that changes or increases the
obligations and duties of the Rights Agent under this Agreement shall be
effective without the consent of the Rights Agent. Prior to the Distribution
Date, the interests of the beneficial owners of Rights shall be deemed
coincident with the interests of the holders of Common Shares.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc. For
all purposes of this Agreement, any calculation of the number of Common Shares
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding Common Shares of which any Person is
the Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company (with, where specifically provided for herein,
the concurrence of the Continuing Directors) shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board (with, where specifically provided for herein,
the concurrence of the Continuing Directors) or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend or supplement the Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) that are done or
made by the Board (with, where specifically provided for herein, the concurrence
of the Continuing Directors) in good faith, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other Persons, and (y) not subject the Board or the Continuing Directors to any
liability to the holders of the Rights. For purposes of this Agreement, the
Rights Agent shall be allowed to assume that all such actions, calculations,
interpretations and determinations have been done or made by the Board in good
faith.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the
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Common Shares) any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Company, the Rights Agent and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, registered holders of the Common Shares).
Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable for any purpose or under any set
of circumstances or as applied to any Person, such invalid, void or
unenforceable term, provision, covenant or restriction shall continue in effect
to the maximum extent possible for all other purposes, under all other
circumstances and as applied to all other Persons; and the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Board of Directors.
Without limiting the foregoing, if any provisions requiring that a determination
be made by less than the entire Board (or at a time or with the concurrence of a
group of directors consisting of less than the entire Board) is held by a court
of competent jurisdiction or other authority to be invalid, void or
unenforceable, such determination shall then be made by the Board in accordance
with applicable law and the Company's Certificate of Incorporation and by-laws.
Section 32. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed in accordance with the laws of such jurisdiction applicable to
contracts made and to be performed entirely within such jurisdiction; except
that all provisions regarding the rights, duties and obligations of the Rights
Agent shall by governed by and construed in accordance with the laws of the
State of New York applicable to contracts made and to be performed entirely
within such jurisdiction.
Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PHILADELPHIA SUBURBAN CORPORATION
By /s/ Roy H. Stahl
-------------------------
Name: Roy H. Stahl
Title: Senior Vice President and General Counsel
BANKBOSTON, N.A.
By /s/ Carol Mulvey-Eori
-------------------------
Name: Carol Mulvey-Eori
Title: Adminstrative Manger
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EXHIBIT A
RESOLUTION OF THE BOARD OF DIRECTORS OF
PHILADELPHIA SUBURBAN CORPORATION
ESTABLISHING AND DESIGNATING
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
AS A SERIES OF THE PREFERRED STOCK
RESOLVED, that pursuant to the authority expressly vested in the Board of
Directors of Philadelphia Suburban Corporation (the ACorporation@) by Article
FIFTH of the Articles of Incorporation of the Corporation, the Board of
Directors hereby fixes and determines the voting rights, designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of the first series of
the Series Preferred Stock, par value $1.00 per share, which shall consist of
100,000 shares and shall be designated as Series A Junior Participating
Preferred Shares (the "Series A Preferred Shares").
Special Terms of the Series A Preferred Shares
Section 1. Dividends and Distributions.
(a) The rate of dividends payable per share of Series A Preferred
Shares on the first day of January, April, July and October in each year or such
other quarterly payment date as shall be specified by the Board of Directors
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of the Series A Preferred Shares,
shall be (rounded to the nearest cent) equal to the greater of (i) $10.00 or
(ii) subject to the provision for adjustment hereinafter set forth, 1,000 times
the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in cash, based upon the fair market value at
the time the non-cash dividend or other distribution is declared or paid as
determined in good faith by the Board of Directors) of all non-cash dividends or
other distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, $.50 par value per share, of the
Corporation since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of the Series A Preferred Shares.
Dividends on the Series A Preferred Shares shall be paid out of funds legally
available for such purpose. In the event the Corporation shall at any time after
March 1, 1998 (the "Rights Declaration Date") (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares
of Common Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the amounts to which holders of
Series A Preferred Shares were entitled immediately prior to such event under
clause (ii) of the preceding sentence shall be adjusted by multiplying each such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the
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denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Preferred Shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
Section 2. Voting Rights. In addition to any other voting rights required
by law, the holders of Series A Preferred Shares shall have the following voting
rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Series A Preferred Share shall entitle the holder thereof to 1,000 votes on
all matters submitted to a vote of the shareholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of Series A Preferred
Shares were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred Shares
shall be in arrears to an amount equal to six full quarterly dividends thereon,
the holders of such Series A Preferred Shares shall become entitled to the
extent hereinafter provided to vote noncumulatively at all elections of
directors of the Corporation, and to receive notice of all shareholders'
meetings to be held for such purpose. At such meetings, to the extent that
directors are being elected, the holders of such Series A Preferred Shares
voting as a class shall be entitled solely to elect two members of the Board of
Directors of the Corporation; and all other directors of the Corporation shall
be elected by the other shareholders of the Corporation entitled to vote in the
election of directors. Such voting rights of the holders of such Series A
Preferred Shares shall continue until all accumulated and unpaid dividends
thereon shall have been paid or funds sufficient therefor set aside, whereupon
all such voting rights of the holders of shares of such series shall cease,
subject to being again revived from time to time upon the reoccurrence of the
conditions above described as giving rise thereto.
A-2
<PAGE>
At any time when such right to elect directors separately as a class
shall have so vested, the Corporation may, and upon the written request of the
holders of record of not less than 20% of the then outstanding total number of
shares of all the Series A Preferred Shares having the right to elect directors
in such circumstances shall, call a special meeting of holders of such Series A
Preferred Shares for the election of directors. In the case of such a written
request, such special meeting shall be held within 90 days after the delivery of
such request, and, in either case, at the place and upon the notice provided by
law and in the By-laws of the Corporation; provided, that the Corporation shall
not be required to call such a special meeting if such request is received less
than 120 days before the date fixed for the next ensuing annual or special
meeting of shareholders of the Corporation. Upon the mailing of the notice of
such special meeting to the holders of such Series A Preferred Shares, or, if no
such meeting be held, then upon the mailing of the notice of the next annual or
special meeting of shareholders for the election of directors, the number of
directors of the Corporation shall, ipso facto, be increased to the extent, but
only to the extent, necessary to provide sufficient vacancies to enable the
holders of such Series A Preferred Shares to elect the two directors hereinabove
provided for, and all such vacancies shall be filled only by vote of the holders
of such Series A Preferred Shares as hereinabove provided. Whenever the number
of directors of the Corporation shall have been increased, the number as so
increased may thereafter be further increased or decreased in such manner as may
be permitted by the By-laws and without the vote of the holders of Series A
Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by the
death or resignation of any director elected by the holders of Series A
Preferred Shares, shall, until the next meeting of shareholders for the election
of directors, in each case be filled by the remaining director elected by the
holders of Series A Preferred Shares having the right to elect directors in such
circumstances.
Upon termination of the voting rights of the holders of any series of
Series A Preferred Shares the terms of office of all persons who shall have been
elected directors of the Corporation by vote of the holders of Series A
Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become
A-3
<PAGE>
authorized but unissued Series Preferred Stock and may be reissued as part of a
new series of Series Preferred Stock to be created by resolution or resolutions
of the Board of Directors.
Section 4. Liquidation, Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $100.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 5. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Preferred Shares shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, or (iii) combine the outstanding shares of Common Stock
into a smaller number of shares, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Shares shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 6. No Redemption. The Series A Preferred Shares shall not be
redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank junior to all
other series of the Corporation's Series Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
A-4
<PAGE>
Section 8. Fractional Shares. Series A Preferred Shares may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Shares.
A-5
<PAGE>
EXHIBIT B
[Form of Rights Certificate]
Certificate No. R- ___________ Rights
NOT EXERCISABLE AFTER MARCH 1, 2008 OR AFTER EARLIER REDEMPTION BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT
HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED
BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON
WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED
HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.]*
- ---------------
* The bracketed portion of the legend shall be inserted only if applicable
and shall replace the preceding sentence.
B-1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION
RIGHTS CERTIFICATE
This certifies that ___________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of March 1, 1998 (the "Rights Agreement"), between
Philadelphia Suburban Corporation, a Pennsylvania corporation (the "Company"),
and BankBoston, N.A., a Massacusetts limited liability company (the "Rights
Agent"), to purchase from the Company at any time prior to 5:00 P.M.
(Philadelphia time) on March 1, 2008 at the office or offices of the Rights
Agent designated for such purpose, or its successors as Rights Agent, one
one-thousandth of a fully paid, nonassessable share of Series A Junior
Participating Preferred Stock (the "Preferred Share") of the Company, at a
purchase price (the "Purchase Price") of $90 per one one-thousandth of a
Preferred Share (such fraction, a "Preferred Share Fraction"), upon presentation
and surrender of this Rights Certificate with the Form of Election to Purchase
and related Certificate duly executed. Except as provided in Sections 11(q) and
13(e) of the Rights Agreement, the Purchase Price shall be paid, at the option
of the Company, in cash or Common Stock, of the Company (the "Common Shares")
having an equivalent value. The number of Rights evidenced by this Rights
Certificate (and the number of Preferred Share Fractions that may be purchased
upon exercise thereof) set forth above, and the Purchase Price per Preferred
Share Fraction set forth above, are the number and Purchase Price as of March 1,
1998, based on the Preferred Shares as constituted at such date.
Except as otherwise provided in the Rights Agreement, upon the occurrence
of any Section 11(a)(ii) Event (as such term is defined in the Rights
Agreement), if the Rights evidenced by this Rights Certificate are beneficially
owned by (i) an Acquiring Person or Associate or Affiliate or Associate of any
Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of any Acquiring Person (of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of a
person who, after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of any such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of Preferred Shares or other securities that may be purchased upon the
exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events, including
Triggering Events and a Section 11 (a) (ii) Event.
This Rights Certificate is subject to all of the terms, covenants and
restrictions of the Rights Agreement, which terms, covenants and restrictions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a
B-2
<PAGE>
full description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Rights Agent, the Company and the holders of the
Rights Certificates, which limitations of rights include the temporary
suspension of the exercisability of such Rights under the specific circumstances
set forth in the Rights Agreement. Copies of the Rights Agreement are on file at
the above-mentioned office of the Rights Agent and are also available upon
written request to the Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing Rights entitling the holder to purchase a like aggregate
number of Preferred Share Fractions as the Rights evidenced by the Rights
Certificate or Rights Certificates surrendered shall have entitled such holder
to purchase. If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights Certificate or
Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at its option at a redemption
price of $.01 per Right at any time prior to the earlier of the Close of
Business (as such term is defined in the Rights Agreement) on (i) the tenth day
following the Stock Acquisition Date (as such time period may be extended
pursuant to the Rights Agreement), and (ii) the Final Expiration Date. Under
certain circumstances set forth in the Rights Agreement, the decision to redeem
shall require the concurrence of a majority of the Continuing Directors.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of a Preferred Share, which may, as the election of the Company, be
evidenced by depositary receipts), but in lieu thereof a cash payment will be
made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of Preferred Shares or of any
other securities of the Company (including Common Shares) that may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
B-3
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal.
Dated as of ____________, 19__
ATTEST PHILADELPHIA SUBURBAN CORPORATION
____________________ By_______________________________
Secretary Title:
Countersigned
BANKBOSTON, N.A.
By____________________
Authorized Signature
B-4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ________________________________________ hereby sells,
assigns and transfers unto ____________________________________________________
(Please print name and address of transferee)
____________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _________________, 19 __
_____________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: ________________, 19__ _____________________
Signature
Signature Guaranteed:
B-5
<PAGE>
NOTICE
The signatures to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
B-6
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: PHILADELPHIA SUBURBAN CORPORATION:
The undersigned hereby irrevocably elects to exercise ________ Rights
represented by this Rights Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or Common Shares or such other securities of
the Company or of any other person that may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of
and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: _____________, 19__
_____________________
Signature
Signature Guaranteed:
B-7
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes that
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.
Dated: _____________, 19__
_____________________
Signature
Signature Guaranteed:
NOTICE
The signatures to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-8
<PAGE>
Exhibit 10.28
PHILADELPHIA SUBURBAN CORPORATION
DIRECTOR DEFERRAL PLAN
In recognition of the services provided by non-employee directors,
Philadelphia Suburban Corporation wishes to make a vehicle available to them
that will facilitate the provision of additional retirement benefits to those
individuals under the terms and conditions hereinafter set forth.
ARTICLE 1
Definitions
1.1 "Account" means a bookkeeping account established pursuant to Section
3.1 which reflects the amount standing to the credit of the Participant
under the Plan.
1.2 "Affiliated Company" means any affiliate or subsidiary of the Company.
1.3 "Base Retainer" means the annual amount of retainer paid by the Company
to a Director for any calendar year including meeting fees, committee
fees and fees for committee chairs.
1.3 "Beneficiary" means the person(s) designated by a Director to receive
any benefits payable under this Plan subsequent to the Director's death.
The Committee shall provide a form for this purpose. In the event a
Director has not filed a Beneficiary designation with the Company, the
Beneficiary shall be the Director's estate.
1.4 "Board" means the Board of Directors of the Company.
1.5 "Committee" means the Compensation Committee of the Board which shall
act for the Company in making decisions and performing specified duties
with respect to the Plan.
1.6 "Company" means Philadelphia Suburban Corporation and its successors.
1.7 "Director" means each individual who serves as a non-employee member of
the Board or of the board of directors of an Employer. In the event of
the death or incompetency of a Director, the term shall mean the
Director's personal representative or guardian. An individual shall
remain a Director until that individual has received full distribution
of any amount credited to the Director's Account.
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<PAGE>
1.8 "Effective Date" means January 1, 1995.
1.9 "Employer" means the Company and/or any Participating Employer, either
collectively or individually, as the context requires.
1.10 "Participating Employer" means any Affiliated Company which is
designated by the Board as a Participating Employer under the Plan and
whose designation as such has become effective upon acceptance of such
status by the board of directors of the Affiliated Company. A
Participating Employer may revoke its acceptance of such designation at
any time, but until such acceptance has been revoked, all the provisions
of the Plan and amendments thereto shall apply to each Director of the
Participating Employer. In the event the designation as a Participating
Employer is revoked by the board of directors of an Affiliated Company,
the Plan shall be deemed terminated only with respect to such
Participating Employer.
1.11 "Plan" means the Philadelphia Suburban Corporation Director Deferral
Plan as the same is set forth herein, and as it may be amended from time
to time.
1.12 "Plan Year" means the calendar year.
1.13 "Termination from Service" means the Director's resignation or other
termination from service as a member of the Board for any reason. Except
as otherwise provided herein, a Termination from Service shall be deemed
to have occurred on the last day of the Director's service as a member
of the Board.
ARTICLE 2
Eligibility
2.1 Each Director shall be eligible to participate in the Plan on the first
day of the calendar quarter following election as a Director.
ARTICLE 3
Benefits
3.1 The Employer shall create and maintain on its books an Account for each
Director to which it shall credit amounts contributed to the Plan
pursuant to this Article 3. The Employer shall also credit each
Director's Account with deemed earnings for each Plan Year in accordance
with the provisions of Article 8 hereof.
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<PAGE>
3.2 At least 30 days prior to the commencement of any calendar quarter in a
Plan Year, a Director may elect to have the Employer credit to the
Director's Account an amount equal to any whole percentage or dollar
amount (or shares of stock of the Employer ("Shares") to the extent that
the Base Retainer would otherwise be paid in Shares) of the Director's
Base Retainer, if any, to be earned for the balance of such Plan Year.
If an election is made to have a contribution credited to the Director's
Account for a Plan Year, the credit shall be made at the time that such
amount would otherwise have been paid (or Shares distributed) and shall
reduce the Director's Base Retainer with respect to that Plan Year by a
corresponding amount. The Committee may establish minimum or maximum
amounts that may be deferred under this Section and may change such
standards from time to time. Any such limits shall be communicated by
the Committee to the Directors prior to the commencement of a Plan Year.
3.3 Any elections under this Article shall be made in writing on such form
as the Committee shall specify. Any election by a Director pursuant to
this Section 3.3 shall be irrevocable and may not be modified in any
respect.
ARTICLE 4
Distributions to Directors
4.1 A Director's benefit under the Plan shall be distributed in one lump sum
(including Shares to the extent the Director elected to defer the
receipt of such Shares pursuant to Section 3.2), or, if the value of the
Director's Account is at least $25,000, in 12 annual installments (with
the balance to be distributed, including Shares, if applicable,
continuing to be credited with deemed earnings for each subsequent Plan
Year in accordance with the provisions of Article 8 hereof) equal to
1\12, 1\11, 1\10\, 1\9, 1\8, 1\7, 1\6, 1\5, 1\4, 1\3, 1\2, and 1\1 of
the balance then credited to the Director's Account, and shall be paid,
or commence, as soon as practicable following the completion of the
valuation of the Director's Account for the last day of the month in
which the Director has a Termination from Service; provided however,
that each Director shall make an election, in the form and manner
specified by the Committee, as to the form of payment on or before the
end of the year preceding the year of payment. If no such election has
been made by the first day of the year in which the Director has a
Termination from Service then distribution shall be delayed and shall be
made, or commence, as soon as practicable after the first day of the
year following the year in which the Director has a Termination from
Service. Notwithstanding anything herein to the contrary, in the event
that such a Director fails to make an election, distribution shall be in
the form of one lump sum payment, including Shares, paid as soon as
practicable after the first day of the year following the date the
Director has a Termination from Service.
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<PAGE>
4.2 In the event that a Director incurs a "significant financial hardship"
while a Director, as determined by the Committee, the Director may
apply, in writing, for a withdrawal of all or a portion of the balance
credited to the Director's Account (including Shares, if elected by the
Director) in the form of a lump sum. All determinations by the Committee
regarding the existence of a financial hardship shall be made in
accordance with the provisions of the Company's Thrift Plan dealing with
whether a financial hardship exists for purposes of permitting
withdrawals thereunder. The Committee shall determine whether to permit
a such a withdrawal and, based upon the Director's application, the
amount necessary to satisfy that hardship, which shall be distributed in
a single sum (including any Shares, as elected by the Director) as soon
as practicable after the Committee's determination.
ARTICLE 5
Death Benefit
5.1 In the event of the death of a Director prior to the payment of the full
benefit due pursuant to Article 4, the Director's Beneficiary shall
receive a lump sum distribution equal to the balance of the Director's
Account on the date of death. The benefit payment to the Beneficiary
will be made as soon as practicable following the completion of the
valuation of the deceased Director's Account. In the event of the death
of a Director after payment of a benefit has commenced in installments,
pursuant to Section 4.1 hereof, the Director's Beneficiary shall receive
the payments due following the Director's death; provided, however, that
prior to receiving the next annual installment, the Beneficiary may
elect to receive, on the next payment date, in full satisfaction of the
Beneficiary's entitlement under the Plan, a lump sum distribution
(including any Shares then credited to the Director's Account) equal to
the remaining balance then credited to the Director's Account.
ARTICLE 6
Vesting
6.1 The balance credited to a Director's Account attributable to Section 3.2
shall be fully vested at all times.
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<PAGE>
ARTICLE 7
Funding
7.1 The Board may, but shall not be required to, authorize the establishment
of a trust by the Employer to serve as the funding vehicle for the
benefits described in Article 3 hereof. In any event, the Employer's
obligation hereunder shall constitute a general, unsecured obligation,
payable solely out of its general assets, and no Director shall have any
right to any specific assets of the Employer. In addition, it is the
intention of the Employer that the Plan be unfunded for tax purposes and
for purposes of Title I of the Employee Retirement Income Security Act
of 1974, as amended.
ARTICLE 8
Investments
8.1 The balance credited to a Director's Account (other than Shares) shall
be deemed to be invested in an interest bearing instrument which shall
provide for interest to be credited and compounded monthly at an
effective rate equal to 50 basis points in excess of the prime
commercial lending rate established by Mellon Bank N.A., or such other
bank determined by the Committee to be the Company's primary bank as of
the beginning of any Plan Year, as in effect on the 15th day of each
month (or if such day is a non-business day, on the first business day
thereafter) during which there is a positive balance in a Director's
Account. Interest shall be applied to the average balance of each
Director's Account during the prior 30-day period. For any Plan Year,
the Committee may determine to make available, and announce to the
Directors the procedure to elect, other deemed forms of investment for
the amounts credited to the Accounts. A Director's Account, to the
extent credited with any Shares, shall be deemed to earn any dividends
paid with respect to such Shares and the accumulated dividends, as and
when sufficient in amount, shall be deemed invested in additional whole
Shares.
ARTICLE 9
Administration
9.1 The Committee shall have full power and authority to interpret the Plan,
to prescribe, amend and rescind any rules, forms and procedures as it
deems necessary or appropriate for the proper administration of the Plan
and to make any other determinations and to take any other such actions
as it deems necessary or advisable in carrying out its duties under the
Plan. All action taken by the Committee arising out of, or in connection
with, the administration of the Plan or any rules adopted thereunder,
shall, in each case, lie within its sole discretion, and shall be final,
conclusive and binding upon the Employer, the Board, all Employees, all
beneficiaries of Employees and all persons and entities having an
interest therein.
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<PAGE>
9.2 Members of the Committee shall serve without compensation for their
services unless otherwise determined by the Board. All expenses of
administering the Plan shall be paid by the Employer.
9.3 The Company shall indemnify and hold harmless each member of the
Committee from any and all claims, losses, damages, expenses (including
counsel fees) and liability (including any amounts paid in settlement of
any claim or any other matter with the consent of the Board) arising
from any act or omission of such member, except when the same is due to
gross negligence or willful misconduct.
9.4 Any decisions, actions or interpretations to be made under the Plan by
the Company, the Employer or the Committee (other than in the
administration of the Plan) shall be made in its sole discretion, not in
any fiduciary capacity and need not be uniformly applied to similarly
situated individuals and shall be final, binding and conclusive on all
persons interested in the Plan.
ARTICLE 10
Amendment
10.1 The Plan may be amended by the Committee at any time and from time to
time all without prior notice to any person or entity; provided,
however, that no such amendment shall have the effect of divesting a
Director of the benefit which the Director would otherwise receive
hereunder at the time the amendment is adopted.
ARTICLE 11
Termination
11.1 Continuance of the Plan is completely voluntary and is not assumed as a
contractual obligation of the Employer. The Committee, acting on behalf
of the Employer, shall have the right to terminate the Plan in whole or
in part at any time all without prior notice to any person or entity;
provided, however, that such termination shall not have the effect of
divesting a Director of the benefit which the Director would otherwise
receive hereunder at the time of the termination.
-6-
<PAGE>
ARTICLE 12
Miscellaneous
12.1 Nothing contained herein shall be construed as conferring upon a
Director the right to continue in such capacity.
12.2 The rights and obligations created hereunder shall be binding on a
Director's heirs, executors and administrators and on the successors and
assigns of the Employer.
12.3 The provisions of the Plan shall be construed and applied under the laws
of the Commonwealth of Pennsylvania.
12.4 The rights of any Director under this Plan are personal and may not be
assigned, transferred, pledged or encumbered. Any attempt to do so shall
be void. In addition, a Director's rights hereunder are not subject, in
any manner, to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment or garnishment by creditors of the
Director or the Director's Beneficiary.
12.5 If any provision of the Plan shall be held invalid or unenforceable,
such invalidity or unenforceability shall not effect any other
provisions hereof and the Plan shall be construed and enforced as if
such provisions had not been included.
12.6 The headings and captions herein are provided for convenience only, and
shall not be construed as part of the Plan, and shall not be employed in
the construction of the Plan.
12.7 Any benefit payable to or for the benefit of a payee who is a minor, an
incompetent person, or is otherwise incapable of receipting therefore
shall be deemed paid when paid to such person's guardian or to the party
providing, or a reasonably appearing to provide, the care for such
person, and such payment shall fully discharge the Employer, the
Committee, the Board and all other parties with respect thereto.
<PAGE>
Exhibit 10.29
Amendment No. 1
This Amendment No. 1 made as of February 1, 1999 to the Agreement between
Philadelphia Suburban Corporation and Philadelphia Suburban Water Company (the
ACompany@) and Nicholas DeBenedictis (the "Executive") dated as of January 1,
1999 (the AAgreement@).
WHEREAS, the Company and Executive recognize that the changes set forth below
are necessary and appropriated to secure for both the Company and Executive the
benefits contemplated by the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
Paragraph 12 of the Agreement is hereby deleted in its entirely and the
following paragraph is inserted in its place:
12. Term of Agreement. The term of this Agreement shall be indefinite until
the Company notifies the Executive in writing that this Agreement will not
be renewed at least sixty days prior to the proposed termination; provided,
however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and
(ii) this Agreement shall terminate if, prior to a Change of Control, the
employment of the Executive with the Company and its Subsidiaries, as the
case may be, shall terminate for any reason; provided, however, that if a
Change of Control occurs within 18 months after (a) the Executive=s
termination incurred for any reason other than a voluntary resignation or
retirement (a Good Reason Termination shall not be deemed voluntary) or
termination for Cause or (b) the termination of this Agreement, the
Executive shall be entitled to all of the terms and conditions of this
Agreement as if the Executive=s termination had occurred on the date of the
Change of Control.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 1 as of
the date set forth above.
Attest Philadelphia Suburban Corporation
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
----------------------------- --------------------------------
Title: Corporate Secretary Title: Senior Vice President
--------------------------- ----------------------------
Attest Philadelphia Suburban Water Company
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
----------------------------- -------------------------------
Title: Corporate Secretary Title: Senior Vice President
-------------------------- ----------------------------
Executive:
/s/ Nicholas DeBenedictis
-------------------------------
<PAGE>
Exhibit 10.30
Amendment No. 1
This Amendment No. 1 made as of February 1, 1999 to the Agreement between
Philadelphia Suburban Corporation and Philadelphia Suburban Water Company (the
"Company") and Roy H. Stahl (the "Executive") dated as of January 1, 1999 (the
"Agreement").
WHEREAS, the Company and Executive recognize that the changes set forth below
are necessary and appropriated to secure for both the Company and Executive the
benefits contemplated by the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
Paragraph 12 of the Agreement is hereby deleted in its entirely and the
following paragraph is inserted in its place:
12. Term of Agreement. The term of this Agreement shall be indefinite until
the Company notifies the Executive in writing that this Agreement will not
be renewed at least sixty days prior to the proposed termination; provided,
however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and
(ii) this Agreement shall terminate if, prior to a Change of Control, the
employment of the Executive with the Company and its Subsidiaries, as the
case may be, shall terminate for any reason; provided, however, that if a
Change of Control occurs within 18 months after (a) the Executive's
termination incurred for any reason other than a voluntary resignation or
retirement (a Good Reason Termination shall not be deemed voluntary) or
termination for Cause or (b) the termination of this Agreement, the
Executive shall be entitled to all of the terms and conditions of this
Agreement as if the Executive's termination had occurred on the date of the
Change of Control.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 1 as of
the date set forth above.
Attest Philadelphia Suburban Corporation
By: /s/ Patricia M. Mycek By: /s/ Nicholas DeBenedictis
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Chairman and President
------------------------------ --------------------------------
Attest Philadelphia Suburban Water Company
By: /s/ Patricia M. Mycek By: /s/ Nicholas DeBenedictis
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Chairman
------------------------------ --------------------------------
Executive:
/s/ Roy H. Stahl
---------------------------------------
<PAGE>
Exhibit 10.31
Amendment No. 1
This Amendment No. 1 made as of February 1, 1999 to the Agreement between
Philadelphia Suburban Corporation and Philadelphia Suburban Water Company (the
"Company") and Michael P. Graham (the "Executive") dated as of January 1, 1999
(the "Agreement").
WHEREAS, the Company and Executive recognize that the changes set forth below
are necessary and appropriated to secure for both the Company and Executive the
benefits contemplated by the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
Paragraph 12 of the Agreement is hereby deleted in its entirely and the
following paragraph is inserted in its place:
12. Term of Agreement. The term of this Agreement shall be indefinite until
the Company notifies the Executive in writing that this Agreement will not
be renewed at least sixty days prior to the proposed termination; provided,
however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and
(ii) this Agreement shall terminate if, prior to a Change of Control, the
employment of the Executive with the Company and its Subsidiaries, as the
case may be, shall terminate for any reason; provided, however, that if a
Change of Control occurs within 18 months after (a) the Executive's
termination incurred for any reason other than a voluntary resignation or
retirement (a Good Reason Termination shall not be deemed voluntary) or
termination for Cause or (b) the termination of this Agreement, the
Executive shall be entitled to all of the terms and conditions of this
Agreement as if the Executive's termination had occurred on the date of the
Change of Control.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 1 as of
the date set forth above.
Attest Philadelphia Suburban Corporation
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------ --------------------------------
Attest Philadelphia Suburban Water Company
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------- --------------------------------
Executive:
/s/ Michael P. Graham
---------------------------------------
<PAGE>
Exhibit 10.32
Amendment No. 1
This Amendment No. 1 made as of February 1, 1999 to the Agreement between
Philadelphia Suburban Corporation and Philadelphia Suburban Water Company (the
"Company") and Richard R. Riegler (the "Executive") dated as of January 1, 1999
(the "Agreement").
WHEREAS, the Company and Executive recognize that the changes set forth below
are necessary and appropriated to secure for both the Company and Executive the
benefits contemplated by the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
Paragraph 12 of the Agreement is hereby deleted in its entirely and the
following paragraph is inserted in its place:
12. Term of Agreement. The term of this Agreement shall be indefinite until
the Company notifies the Executive in writing that this Agreement will not
be renewed at least sixty days prior to the proposed termination; provided,
however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and
(ii) this Agreement shall terminate if, prior to a Change of Control, the
employment of the Executive with the Company and its Subsidiaries, as the
case may be, shall terminate for any reason; provided, however, that if a
Change of Control occurs within 18 months after (a) the Executive's
termination incurred for any reason other than a voluntary resignation or
retirement (a Good Reason Termination shall not be deemed voluntary) or
termination for Cause or (b) the termination of this Agreement, the
Executive shall be entitled to all of the terms and conditions of this
Agreement as if the Executive's termination had occurred on the date of the
Change of Control.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 1 as of
the date set forth above.
Attest Philadelphia Suburban Corporation
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------ --------------------------------
Attest Philadelphia Suburban Water Company
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------ --------------------------------
Executive:
/s/ Richard R. Riegler
---------------------------------------
<PAGE>
Exhibit 10.33
Amendment No. 1
This Amendment No. 1 made as of February 1, 1999 to the Agreement between
Philadelphia Suburban Corporation and Philadelphia Suburban Water Company (the
"Company") and Morrison Coulter (the "Executive") dated as of January 1, 1999
(the "Agreement").
WHEREAS, the Company and Executive recognize that the changes set forth below
are necessary and appropriated to secure for both the Company and Executive the
benefits contemplated by the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
Paragraph 12 of the Agreement is hereby deleted in its entirely and the
following paragraph is inserted in its place:
12. Term of Agreement. The term of this Agreement shall be indefinite until
the Company notifies the Executive in writing that this Agreement will not
be renewed at least sixty days prior to the proposed termination; provided,
however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and
(ii) this Agreement shall terminate if, prior to a Change of Control, the
employment of the Executive with the Company and its Subsidiaries, as the
case may be, shall terminate for any reason; provided, however, that if a
Change of Control occurs within 18 months after (a) the Executive's
termination incurred for any reason other than a voluntary resignation or
retirement (a Good Reason Termination shall not be deemed voluntary) or
termination for Cause or (b) the termination of this Agreement, the
Executive shall be entitled to all of the terms and conditions of this
Agreement as if the Executive's termination had occurred on the date of the
Change of Control.
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 1 as of
the date set forth above.
Attest Philadelphia Suburban Corporation
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------ --------------------------------
Attest Philadelphia Suburban Water Company
By: /s/ Patricia M. Mycek By: /s/ Roy H. Stahl
--------------------------------- -----------------------------------
Title: Corporate Secretary Title: Senior Vice President
------------------------------ --------------------------------
Executive:
/s/ Morrison Coulter
---------------------------------------
<PAGE>
Exhibit 10.34
PHILADELPHIA SUBURBAN CORPORATION
PHILADELPHIA SUBURBAN WATER COMPANY
1999 ANNUAL CASH INCENTIVE COMPENSATION PLAN
BACKGROUND
o During the first quarter of 1989, the Company and its compensation consultant
conducted a feasibility study to determine whether the Company should
implement an incentive compensation plan. The study was prompted by the
positive experience of other investor-owned water companies and PSC's
experience with incentive compensation.
o The study included interviews with PSWC and PSC executives and an analysis of
competitive compensation levels. Based on the results, the compensation
consultant recommended that the Company's objectives and competitive practice
supported the adoption of an annual incentive plan (the "Plan"). The Company
has had a cash incentive compensation plan in place since 1990 and management
and the Board of Directors feel it has had a positive effect on the Company's
operations, aiding employees, shareholders (higher earnings) and customers
(better service and controlling expenses).
o The Plan has two components - a Management Incentive Program and an Employee
Recognition ("Chairman's Award") Program.
o The Plan is designed to provide an appropriate incentive to the officers and
managers of the Company. The 1999 Management Incentive Program will cover all
officers and managers of Philadelphia Suburban Corporation, and its
subsidiaries, other than those employees covered under the Consumers Water
Company Incentive Compensation Plan.
o The plan is periodically reviewed by the Company's outside compensation
consultant and the target bonus percentages are reviewed and approved each
year as part of the compensation consultant's annual review of the Company's
total compensation plan.
MANAGEMENT INCENTIVE PROGRAM
o Performance Measures
-- Annual incentive bonus awards are calculated by multiplying an
individual's Target Bonus by a Company Rating factor based on the
Company's performance and an Individual Rating factor based on the
individual employee's performance.
The approach of having a plan tied to the Company's income performance is
appropriate as the participants' assume some of the same risks and rewards
as the shareholders who are investing in the Company and making its
capital construction and acquisition programs possible. Customers also
benefit from the Company's employees' objectives being met as improvements
1
<PAGE>
in performance are accomplished by controlling costs, improving
efficiencies and enhancing customer service. For these reasons, future
rate relief should be lessened and less frequent, which directly benefits
all customers.
-- The Company's actual after-tax net income from continuing operations
relative to the annual budget will be the primary measure for the
Company's performance. Each year a "Target Net Income" level will be
established. For purposes of the Plan, the Target Net Income may differ
from the budgeted net income level. For 1999, the Target Net Income will
include the impact of the merger with Consumers Water Company, but exclude
the impact of any unbudgeted extraordinary gains or losses, changes in
accounting principles, changes in tax rates or assessments, any gains or
losses related to the discontinued operations and transaction costs
related to the PSC/Consumers merger.
-- Based on a review of historic performance, the minimum or threshold level
of performance is set at 90 percent of the Target Net Income. That is, no
bonus awards will be made if actual net income is less than 90 percent of
the Target Net Income for the year. No additional bonus will be earned for
results exceeding 110 percent of the Target Net Income.
-- Each individual's performance and achievement of his or her objectives
will also be evaluated and factored into the bonus calculation.
Performance objectives for each participant are established at the
beginning of the year and are primarily directed toward controlling costs,
improving efficiencies and productivity and enhancing customer service.
Each objective has specific performance measures that are used to
determine the level of achievement for each objective.
o Participation
-- Participation in the Management Incentive Program will be determined each
year. Each participant will be assigned a "Target Bonus Percentage"
ranging from 5 to 50 percent of salary depending on duties and
responsibilities.
-- Actual bonuses may range from 0, if the Company's financial results fall
below the minimum threshold or the participant does not make sufficient
progress toward achieving his or her objectives (i.e. performance measure
points totaling less than 70 points), to 187.5 percent if performance --
both Company and individual -- is rated at the maximum.
2
<PAGE>
Company Performance
-- Company performance will be measured on the following schedule:
Percent of Company
1999 Plan Rating
---------- --------
Threshold..........................<90% 0%
90 50
92 65
95 80
96 85
97 90
98 94
99 97
Plan...............................100 100
105 110
<110 125
-- The actual Company Rating should be calculated by interpolation between
the points shown in the table above.
-- Regardless of the Company rating resulting from this Schedule, the
Executive Compensation and Employee Benefits Committee retains the
authority to determine the final Company Rating for purposes of this Plan.
o Individual Performance
-- Individual performance will be measured on the following scale:
Performance Measure Individual
Points Rating
------ ------
0 - 69 0%
70 70%
80 80%
90 90%
100 100%
110 110%
-- In addition, up to 40 additional points and additional percentage points
may be awarded to a participant at the discretion of the Chief Executive
Officer for exemplary performance. Individual Performance points for the
Chief Executive Officer are determined by the Executive Compensation and
Employee Benefits Committee.
3
<PAGE>
Sample Calculations
- -------------------
o Example 1
Salary $70,000
Target Bonus 10 percent ($7,000)
Company Rating 100 percent
Individual Rating 90 percent
Calculation:
Company Individual
Target Bonus x Rating x Rating = Bonus Earned
------------ ------- ---------- ------------
$7,000 x 100% x 90% = $6,300
======
o Example 2
-- Using the same salary and target bonus, but assuming Company performance
was less than 90 percent of Target Net Income, there would be no bonus
earned.
Calculation:
$7,000 x 0 x 90% = 0
o Example 3
-- Similarly, if individual Performance is rated below 70 points, no bonus
would be earned regardless of the Company Rating.
Calculation:
$7,000 x 100% x 0 = 0
4
<PAGE>
EMPLOYEE RECOGNITION ("CHAIRMAN'S AWARD") PROGRAM
o In addition to the Management Incentive Program, the Company maintains an
Employee Recognition Program known as the Chairman's Award program to reward
employees not eligible for the management bonus plan for general superior
performance that contains costs, improves efficiency and productivity of the
workforce and better serves our customers. Awards may also be made for a
special action, or heroic deed, or for a project that positively impacts the
performance or image of the Company.
o Awards will be made from an annual pool, not to exceed $175,000 (which
represents approximately 2% of the base payroll for the non-union employees
who do not participate in the Management Incentive Program), established at
the beginning of the year. Unused funds will not be carried over to the next
year. If financial performance warrants, management may request permission
from the Executive Compensation and Employee Benefits Committee for special
awards under the program.
o Awards will be made throughout the year and through the first quarter of the
following year with payment as close to the timing of the event being
rewarded as possible.
o Department Heads may nominate individuals in their unit to the applicable
Vice President and document the reasons for the recommendations. The
applicable Vice President will review the nominations and forward their
recommendations to the Chief Executive Officer.
o The Chief Executive Officer will determine the individuals to actually
receive a bonus and the amount.
<PAGE>
EXHIBIT 13.6
SELECTED PORTION OF ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1998
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
FORWARD-LOOKING STATEMENTS
This report contains, in addition to historical information,
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements address, among
other things, Philadelphia Suburban Corporation ("PSC"): use of cash; projected
capital expenditures; the merger with Consumers Water Company; liquidity; Year
2000 disclosure, including statements regarding readiness, remediation, costs,
risks and contingency plans; as well as information contained elsewhere in this
report where statements are preceded by, followed by or include the words
"believes," "expects," "anticipates," "plans" or similar expressions. These
statements are based on a number of assumptions concerning future events, and
are subject to a number of uncertainties and other factors, many of which are
outside PSC's control. Actual results may differ materially from such statements
for a number of reasons, including the effects of regulation, changes in capital
requirements and funding, acquisitions and the Year 2000 readiness of third
parties with whom PSC deals. PSC undertakes no obligation to update or revise
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL INFORMATION
PSC is the holding company of Philadelphia Suburban Water Company
("PSW"), a regulated water utility. PSW provides water service to approximately
300,000 customers in 96 municipalities within its 481 square mile service
territory. In addition, PSW serves approximately 6,600 customers through an
operating and maintenance contract with a municipal authority located contiguous
to its service territory. PSW's service territory is located in Pennsylvania,
north and west of the City of Philadelphia.
On March 10, 1999, PSC completed a merger with Consumers Water Company
("CWC"). On the date of the merger, PSC issued 13,014,015 shares of Common Stock
in exchange for all of the outstanding shares of CWC and CWC became a
wholly-owned subsidiary of PSC. CWC owns 100% of the voting stock of four water
companies and at least 96% of the voting stock of three water companies. These
water companies operate 27 divisions providing water and wastewater service to
approximately 226,000 customers in Pennsylvania, Ohio, Illinois, New Jersey and
Maine.
Because the merger was completed after December 31, 1998, the audited
financial statements and management's discussion and analysis contained in this
report, unless indicated or captioned otherwise, relate to PSC without
consideration to the impact of the merger. For purposes of financial reporting,
the merger will be accounted for under the pooling-of-interests method of
accounting and, accordingly, future consolidated financial statements will be
restated to include CWC's results of operations and financial position, as
though they have been combined at the beginning of the periods presented.
1
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Following are selected five-year financial statistics for PSC:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $150,977 $136,171 $122,503 $117,044 $108,636
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 48,424 $ 39,061 $ 33,749 $ 30,931 $ 27,209
- ------------------------------------------------------------------------------------------------------------
Operating Statistics
Operating revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Operations and maintenance 38.5% 41.1% 42.1% 44.2% 46.3%
Depreciation and amortization 10.7% 10.7% 10.9% 9.9% 9.5%
Taxes other than income taxes 6.6% 6.5% 6.8% 6.6% 6.6%
Interest expense* 12.6% 13.4% 12.9% 13.2% 12.7%
Allowance for funds used during
construction (0.5)% (0.4)% (0.2)% (0.3)% (0.1)%
- ------------------------------------------------------------------------------------------------------------
Total costs and expenses 67.9% 71.3% 72.5% 73.6% 75.0%
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 32.1% 28.7% 27.5% 26.4% 25.0%
============================================================================================================
Effective tax rates 40.5% 40.6% 41.4% 41.7% 42.5%
============================================================================================================
Income from continuing operations
as a percentage of average
stockholders' equity 13.4% 12.4% 11.7% 12.0% 11.2%
============================================================================================================
</TABLE>
*Includes dividends on preferred stock of PSW with mandatory redemption
requirements.
2
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Following are selected five-year operating and sales statistics for PSW:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daily sendout
(Million gallons Maximum 139.4 142.5 109.5 121.8 110.4
per day) Average 108.8 103.8 94.2 92.6 89.8
========================================================================================
Metered Residential 278,436 268,550 265,746 248,500 234,624
customers Commercial 15,032 13,512 13,422 12,019 11,071
Industrial 744 708 716 554 539
Other 5,638 4,746 4,257 3,792 3,299
----------------------------------------------------------------------------------------
Total 299,850 287,516 284,141 264,865 249,533
========================================================================================
Consumption
per customer
in gallons Average 112,745 110,143 103,206 109,084 109,001
========================================================================================
Revenues from Residential $ 96,330 $ 88,542 $ 79,056 $ 77,744 $ 69,483
water sales Commercial 32,058 28,048 26,504 24,368 23,431
Industrial 6,303 5,170 4,823 4,512 4,737
Other 12,653 10,874 9,950 9,249 9,151
----------------------------------------------------------------------------------------
Total $147,344 $132,634 $120,333 $115,873 $106,802
========================================================================================
</TABLE>
RESULTS OF OPERATIONS
PSC's income from continuing operations has grown at an annual compound
rate of approximately 15.8% during the five-year period ended December 31, 1998.
During this same period, revenues and total expenses, other than income taxes,
have grown at compound rates of 8.3% and 5.9%, respectively.
Operating Revenues
The growth in revenues over the past five years is a result of
increases in the customer base and in water rates. The number of customers
increased at an annual compound rate of 4.0% in the past five years primarily as
a result of acquisitions of local water systems. Acquisitions made during the
five-year period ended December 31, 1998 have provided water revenues of
approximately $18,164, $11,130 and $5,029 in 1998, 1997 and 1996, respectively.
Excluding the effect of acquisitions, the customer base increased at a five-year
annual compound rate of 1.0%. Water rates have increased at an annual compound
growth rate of 4.5% over the five-year period.
Water Rates - Rates charged by PSW for water service are subject to the approval
of the Pennsylvania Public Utility Commission ("PUC"). PSW continuously reviews
the necessity of filing applications with the PUC for increases in rates charged
for water service. Management considers the following factors in determining the
need to apply for increased rates:
o the amount of utility plant additions and replacements made since the previous
rate decision;
o changes in the cost of capital and the capital structure of
PSW; and
3
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
o changes since the previous rate decision in operating expenses (including
wages, fringe benefits, electric and chemical expenses), depreciation and
taxes.
Based on these assessments, PSW periodically files requests with the
PUC to increase its rates. The PUC typically suspends rate requests for up to
nine months during which time evidentiary hearings on the merits of the request
are held. The positions of PSW, as well as the PUC staff, the Office of Consumer
Advocate ("OCA") and other interested parties are presented and evaluated during
these hearings.
In April 1997, PSW filed an application with the PUC to increase its
rates by 13.2%. The request was suspended to allow the PUC staff, the OCA and
other interested parties a period of additional discovery and to hold hearings
on the merits of this request. Prior to the commencement of hearings, PSW
reached a settlement with the OCA and the other interested parties. The
settlement was subsequently approved by the PUC and it provided for a 7.3%
increase over the rates that were in effect at the time of the filing. Since
rates in effect at the time of the filing included a Distribution System
Improvement Charge of 1% or $1,300 on an annual basis, the settlement resulted
in a total base rate increase of 8.3% or $10,600 on an annual basis. The new
base rates were effective on October 24, 1997. As part of the settlement, PSW
has agreed not to file its next base rate increase request prior to April 1999,
absent extraordinary circumstances.
In addition to the 1997 base rate increase, during the past five years
base rates were increased 5.3% and 9.1% in 1995 and 1994, respectively. In
recent years, PSW's utility plant additions, including acquisitions and the
costs of the capital used to finance these acquisitions, were the most
significant factor in determining the need for a rate increase and the actual
rate increases granted.
Distribution System Improvement Charge - In 1996, the PUC approved the
Distribution System Improvement Charge ("DSIC"). The DSIC is a mechanism that
allows Pennsylvania water utilities to add a surcharge to their water bills.
This surcharge offsets the additional depreciation and capital costs associated
with certain non-revenue producing, non-expense reducing capital expenditures
related to replacing and rehabilitating distribution systems. Prior to the DSIC
mechanism, water utilities absorbed all of the depreciation and capital costs of
these projects between base rate increases without the benefit of additional
revenues. The gap between the time that a capital project is completed and the
recovery of its costs in base rates is known as regulatory lag. The DSIC
mechanism is intended to eliminate or reduce regulatory lag that often acted as
a disincentive to water utilities in rehabilitating their distribution systems.
The DSIC is adjusted quarterly based on additional qualified capital
expenditures made in the previous quarter. However, the DSIC may not exceed 5%
of the base rates in effect. PSW resets the DSIC to zero when new base rates
that reflect the costs of those additions become effective. The PUC also
suspends the use of the DSIC in the quarter subsequent to a twelve-month period
that a company's return on equity, adjusted for certain pro forma costs, exceeds
a benchmark established by the PUC. The benchmark is established quarterly by
the PUC staff based on recent economic data.
The DSIC was 0.5% in the first quarter of 1997. Based on subsequent
qualified capital expenditures the DSIC was increased to 1.0%, 1.4% and 1.82% in
the second, third and fourth quarters of 1997, prior to the effective date of
the new base rate increase, when the DSIC was reset to zero. The DSIC was 0.67%
in the third quarter of 1998, but was suspended in the fourth quarter of 1998 as
PSW's adjusted return on equity for the twelve months ending June 30, 1998
exceeded the PUC benchmark. Based on the adjusted return on equity for the
twelve months ending September 30, 1998, the DSIC remained suspended in the
first quarter of 1999. The adjusted return on equity for 1998 is expected to
allow the DSIC to resume in the second quarter of 1999. Total DSIC revenues in
1998 and 1997 were $229 and $1,104, respectively.
4
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Rate Surcharges - In addition to increases in base rates and the DSIC, the PUC
adjusts rates using a surcharge or credit to reflect changes in the state tax
laws, which were not reflected in the base rates approved by the PUC. These
adjustments are eliminated when the tax changes are reflected in base rates. In
May 1998, a .11% credit was implemented as a result of a decrease in the
statutory Pennsylvania Capital Stock tax rate. The tax credit reduced 1998
revenues by $101. In February 1999, a 1.04% surcharge was implemented as a
result of an increased Pennsylvania Public Utility Realty Tax. During 1995 and
1994, rates were reduced by various credits as a result of reductions in
Pennsylvania Corporate Net Income Tax. These credits resulted in revenue
reductions of $504 in 1995 and $97 in 1994.
Sendout - "Sendout" represents the quantity of treated water delivered to the
distribution system. Management uses sendout as an indicator of customer demand
and to accrue revenues. Consumption per customer is the sendout used by metered
customers. Consumption per customer is based on the actual bills rendered during
the year. The average annual consumption per customer for the past five years
was 108,837 gallons. Weather conditions tend to impact water consumption,
particularly during the late spring and summer months when nonessential and
recreational use of water is at its highest. Consequently, a higher proportion
of annual operating revenues is realized in the second and third quarters.
However, it is difficult to correlate weather and water consumption, since
conservation and even day-to-day variations in weather patterns can have a
significant effect. Conservation efforts, construction codes which require the
use of low flow plumbing fixtures as well as mandated water use restrictions in
response to drought conditions also may affect water consumption.
Over the past five years, sendout has increased primarily as a result of
the growth in the number of customers. The average annual consumption per
customer was higher than the five-year average in 1998 and in 1997 by 3.6% and
1.2%, and lower by 5.2% in 1996. The increase in the average consumption per
customer in both 1998 and 1997 is attributable to the relatively hot, dry
summers experienced in these years in contrast to 1996 when average consumption
per customer was reduced by rainfalls that were well above average and
temperatures that were cooler than normal during the spring and summer months.
In December 1998 and October 1997, the Delaware River Basin Commission
("DRBC") issued drought warnings for the Delaware River Basin, which includes
PSW's service territory. The DRBC lifted the drought warnings in February 1999
and January 1998, respectively. Under a drought warning, the DRBC asks for
voluntary restrictions on water use, particularly non-essential uses of water.
Because these warnings were issued at times other than the summer months, when
nonessential and recreational use of water has traditionally declined, the
restrictions did not have a significant impact on PSW revenues. Throughout the
drought warnings, PSW maintained adequate storage levels of treated water and
had sufficient quantities of raw water.
Operations and Maintenance
Operations and maintenance expenses for 1998, 1997 and 1996, totaled
$58,174, $55,899 and $51,615, respectively. Most elements of operating costs are
subject to the effects of inflation, as well as the effects of changes in the
number of customers served, in water consumption and the degree of water
treatment required due to variations in the quality of the raw water. The
principal elements of operating costs are labor, electricity, chemicals and
maintenance expenses. Electricity and chemical expenses vary in relationship to
water consumption and raw water quality. Maintenance expenses are sensitive to
extreme cold weather, which can cause water mains to rupture.
Operations and maintenance expenses increased in 1998 over 1997 by
$2,275 or 4.1% primarily as a result the increase in the number of customers,
5
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
increased wages and higher production costs resulting from the increased volume
of water sold in 1998. The increased wages reflect normal merit increases. The
increased operating costs were partially offset by the effects of the mild
winter in early 1998 that resulted in fewer main breaks and reduced maintenance
expenses and savings from reduced electric costs as a result of the electric
deregulation pilot program in Pennsylvania.
Operations and maintenance expenses increased in 1997 over 1996 by
$4,284 or 8.3% primarily as a result of the increase in the number of customers,
higher production costs resulting from the increased volume of water sold, and
increased wage and administrative expenses, partially offset by lower
maintenance expenses. Administrative costs increased as a result of increases in
insurance costs and in the bad debt reserve, which is related to the increase in
revenues. Maintenance expenses declined due to fewer main breaks as a result of
the effects of the relatively mild 1997 winter.
For the past three years, parent company costs were less than 1% of the
total company's operations and maintenance expenses. Such expenses include those
unallocated general and administrative expenses associated with maintaining a
publicly-held company.
Depreciation and Amortization
Depreciation expense was $15,355, $14,311 and $13,068 in 1998,
1997 and 1996, respectively, and has increased principally as a result of the
significant capital expenditures made to expand and improve the water utility
facilities, and as a result of acquisitions of water systems. Depreciation
expense was approximately 2.5%, 2.5% and 2.6% of the average balance of
depreciable utility plant in service for 1998, 1997 and 1996, respectively. The
decrease in the accrual rate from 1996 to 1997 is primarily due to the change in
the nature or mix of the utility plant additions. A greater portion of capital
additions in the last two years has been water main replacements and other
infrastructure improvements that have longer depreciable lives. Amortization was
$734, $269 and $265 in 1998, 1997 and 1996. The increase in 1998 is due to the
amortization of the costs of PSW's 1997 rate filing. The increase in 1997 over
1996 is due to the amortization of additional debt issuance expenses and
amortization of the costs of PSW's 1997 rate filing, offset in part by the
completion of amortization of the costs of PSW's 1995 rate filing. Expenses
associated with filing rate cases are deferred and amortized over approximately
18 months.
Taxes Other than Income Taxes
Taxes other than income taxes increased by approximately 12.8%
and 7.6% in 1998 and 1997 over the previous years, respectively. The increase in
each year is associated with increases in the base on which the Pennsylvania
Public Utility Realty Tax ("PURTA"), local real estate taxes and the Capital
Stock Tax are calculated. The increase in the taxable base for the PURTA and
local real estate taxes is due to the capital expenditures, and the acquisitions
completed in the last three years. In addition, the effective PURTA tax rate
increased in 1998 by 24%. The effective PURTA tax rate increased due to an
additional tax assessment to offset a statewide deficit in the collection of
this tax. The increase in the Capital Stock Tax is due to the increases in
common equity over the past three years.
6
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Interest Expense
Interest expense was $18,976, $17,890 and $15,311 in 1998, 1997
and 1996, respectively, and has increased in 1998 and 1997 primarily as a result
of higher levels of borrowing offset in part by a reduction in interest rates.
The level of debt increased in order to finance acquisitions and other capital
expenditures made since 1996.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") was
$736, $522 and $264 in 1998, 1997 and 1996, respectively, and has varied over
the years as a result of increases in the average balance of utility plant
construction work in progress ("CWIP"), to which AFUDC is applied, and to
changes in the AFUDC rate.
The average balance of CWIP to which AFUDC is applied was
$11,203, $8,641 and $4,441 in 1998, 1997 and 1996, respectively. The increase in
1998 in the average balance of CWIP was due to the increased level of capital
expenditures in 1998 and 1997. AFUDC is not applied to projects after they are
placed in service.
The AFUDC rate has varied due to changes in the interest rate on PSW's
revolving credit facility. The average AFUDC rate was 5.9%, 6.1% and 6.1% in
1998, 1997 and 1996, respectively.
Income Taxes
PSC's effective income tax rate was 40.5% in 1998 as compared to 40.6%
in 1997 and 41.4% in 1996. The changes in the effective tax rates in 1998 and
1997 are due to differences between tax deductible expenses and book expenses.
Discontinued Operations
In 1993, PSC completed the sale of the last of its nonregulated
businesses. These businesses are accounted for as discontinued operations. In
connection with the decision to sell these businesses, PSC established reserves
to cover future costs and contingencies that PSC could be required to pay.
In 1996, PSC reversed $965, net of related income taxes, of the
reserves. The reversal was made as a result of: the receipt of contingent sales
proceeds from one of the businesses that was sold; the passage of time, which
reduced certain potential lease obligations; and the assessment of current
information on potential legal claims related to these businesses. In 1997, PSC
received additional sale proceeds of $250 from one of the businesses sold and
included the amount in Operating Revenues. The balance of the reserves for
discontinued operations of $1,008 at December 31, 1998 consists primarily of
reserves for future and contingent costs, including potential lease, legal and
insurance costs associated with these businesses.
7
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Summary
Operating income in 1998, 1997 and 1996 was $66,679, $56,799 and
$49,290, respectively, and income from continuing operations was $28,819,
$23,188 and $19,778, respectively, for the same periods. Diluted income per
share from continuing operations in 1998, 1997 and 1996 was $1.03, $.88 and
$.78, respectively. The increases in the per share income in 1998 and 1997 over
the previous years were due to the aforementioned improvements in profits offset
in part by a 5.8% and 4.0% increase in the average number of common shares
outstanding during 1998 and 1997, respectively.
Although PSC and PSW have experienced increased income in the recent
past, continued adequate rate increases reflecting increased operating costs and
new capital investments are important to the future realization of improved
profitability.
Fourth Quarter Results
Net income available to common stock for the fourth quarter of 1998
increased over the same period in 1997 by $1,029 to $6,461 primarily as a result
of a $2,623 increase in revenues, offset in part by increases in operations and
maintenance expenses, depreciation and interest expense. The increase in
revenues was primarily a result of the number of customers added during the past
year, the rate increase, which took effect October 24, 1997 and an increase in
water sales. Operations and maintenance expenses increased primarily due to
costs associated with the increase in the number of customers and the increased
water sales. Depreciation increased due to utility plant additions and the
acquisitions made since the fourth quarter of 1997. Interest increased in the
fourth quarter primarily as a result of higher borrowing levels.
Effects of Inflation
As a regulated enterprise, PSW's rates are established to provide
recovery of costs and a return on its investment. Recovery of the effects of
inflation through higher water rates is dependent upon receiving adequate and
timely rate increases. However, rate increases are not retroactive and often lag
increases in costs caused by inflation. During periods of moderate to low
inflation, as has been experienced for the past several years, the effects of
inflation on PSW's operating results are not significant.
Electric Deregulation
In December 1996, the Governor of Pennsylvania signed into law the
Electricity Generation Customer Choice and Competition Act ("Electric Act")
which provides for the restructuring of the electric utility industry in
Pennsylvania. The Electric Act requires the unbundling of electric services into
separate generation, transmission and distribution services and a transition
charge with open competition for generation. The transition charge allows the
electric utility, PECO Energy Company ("PECO"), to recover the costs of its
assets stranded as a result of the restructuring of the electric industry.
Beginning in November 1997, approximately 18% of PSW's electricity
requirements were selected to be included in the State's pilot implementation
program. Under the pilot program, PSW was allowed to negotiate its electric
generation rates and the total rates for those accounts were reduced by
approximately 13% from the rates paid just prior to the pilot program. Prior to
the pilot program, PSW had purchased all of its electricity from PECO. PSW
estimates that it saved $130 in electric costs in 1998 as a result of its
participation in the pilot program.
8
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
On May 14, 1998, the PUC issued a final restructuring order approving a
settlement reached with PECO as to the ultimate implementation of the Electric
Act. As a result, PSW was allowed to select an electric generation provider for
all of its accounts for service rendered after January 2, 1999. PSW has an
agreement with a generation supplier, fixing the costs of PSW's generation rates
until June 2000. The total electric cost for 1998 was approximately $8,815. PSW
estimates that its average electric rate for all of its accounts in 1999 will be
approximately 15% lower than the average rate paid in 1998. Since electric usage
is dependent on water demand, the exact savings in electric costs cannot be
determined at this time.
YEAR 2000
Overview
PSC is actively pursuing a Year 2000 Program (the "Program"). The
objective of the Program is to provide reasonable assurance that PSC's critical
systems and processes that impact PSC's ability to deliver water to its
customers will not experience significant interruptions that would interfere
with such water service or result in a material business impairment that would
have an adverse impact to the PSC's operations, liquidity or financial condition
as a result of the Year 2000 issue. For purposes of the Program, the Year 2000
issue is defined as whether information technology accurately processes date and
time data from, into and between the twentieth and twenty-first centuries, and
the years 1999 and 2000 and leap year calculations. PSC's systems and processes
being reviewed include: (i) internal systems and processes, consisting of
software, databases, information technology hardware and imbedded
microprocessors; and (ii) relationships with third parties. The Program involves
a systematic approach to the Year 2000 issue consisting of the following steps:
(i) inventorying the component elements of PSC's systems and processes; (ii)
assessing whether there are Year 2000 issues with such systems and processes;
(iii) remediation of systems and processes that are identified as having Year
2000 issues; (iv) testing the remediation measures that are implemented; and (v)
developing contingency plans. In addition to PSC's Program, the PUC has
instituted a formal proceeding for the purpose of determining all matters
concerning Year 2000 compliance of all jurisdictional fixed utilities, which
would include PSC's primary subsidiary, PSW. The PUC is requiring that utilities
affirmatively demonstrate that their mission-critical systems will be Year 2000
compliant by March 31, 1999 or provide the PUC with detailed contingency plans
for the continuation of utility service throughout the transition from the
twentieth to the twenty-first century, including leap year. PSW has responded to
the PUC's initial questionnaire concerning Year 2000 compliance and intends to
comply with the PUC's requirements.
PSC's State of Readiness
Internal Systems and Processes - PSC is evaluating its systems and processes
based on a prioritization of the risks they pose to the overall objectives of
the Program. Therefore, different systems and processes are in different phases
of the overall Program. An inventory of all critical systems and processes was
completed in November 1998. An assessment of Year 2000 issues for PSC's critical
systems was completed in December 1998. As a result of the assessment, it was
determined that none of the internal systems and processes directly related to
the treatment and distribution of water to its customers would be significantly
affected by the Year 2000 issue. Some financial and office systems may be
affected and the remediation or replacement and testing of these systems has
started. It is anticipated that remediation or replacement and testing of these
systems will be completed by mid-1999.
Relationships with Third Parties - PSC's relationships with third parties that
may be affected by the Year 2000 issue may be classified into three categories:
customers; suppliers; and third party software vendors. Based on 1998 revenues,
9
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
approximately 65% of PSW's revenues are from residential customers, 22% from
commercial customers (consisting primarily of apartments, colleges, hospitals,
small businesses and municipalities), and 6% from fire protection services. It
is not anticipated that water use by customers in these categories will be
significantly affected by the Year 2000 issue. PSW's industrial customers
represent approximately 4% of its total 1998 revenues and PSW intends to contact
its largest industrial customers to determine whether they anticipate any
adverse effect on their demand for water as a result of the Year 2000 issue. No
single customer accounted for more than one percent of the PSW's 1998 revenues.
PSC has contacted its key suppliers to determine their Year 2000 compliance
status and the responses received to date indicate that such suppliers are or
intend to be Year 2000 compliant. Because of the substantial electric power
requirements of PSW's water treatment and distribution systems, electric power
supply may be the most critical supplier relationship. To date, PSW's electric
supplier, which is also subject to the PUC's review, has indicated that it
expects to be Year 2000 compliant by October 31, 1999. Third party vendors of
critical software systems have been contacted regarding the compliance status of
their software and either the vendors have represented that their software
packages are compliant or the software is being remedied as part of PSC's Year
2000 Program.
The Costs to Address PSC's Year 2000 Issues
PSC estimates its cost to date for its Year 2000 Program to be
approximately $3,200, which includes the costs to develop a new customer billing
system that PSW is implementing to provide added capacity and capabilities. PSC
presently estimates that it will spend an additional amount of approximately
$1,500 to bring all of its critical systems into compliance.
The Risks of PSC's Year 2000 Issues
A material Year 2000 noncompliance could result in an interruption in,
or failure of, certain normal business activities or operations. Such
noncompliance could materially and adversely affect PSW's water service and
results of operations, liquidity and financial condition. Because of the
uncertainty inherent in the Year 2000 issue, due primarily from the uncertainty
of the Year 2000 readiness of third party suppliers, PSC is unable to determine
at this time whether the consequences of Year 2000 noncompliances will have a
material impact on PSC. PSC's Year 2000 Program is expected to significantly
reduce PSC's level of uncertainty about the Year 2000 issue and, in particular,
about the Year 2000 compliance and readiness of its key vendors and suppliers.
PSC believes that, with the completion of its Program, the possibility of
significant interruptions of normal operations should be reduced.
PSC's Contingency Plans
PSC is evaluating contingency plans in the event that any critical
systems or processes or vendor relationships cannot be verified as Year 2000
compliant by March 1999. Contingency plans may also be developed for certain
other critical systems, notwithstanding a determination of their Year 2000
compliance, if such systems would have a significant effect on PSW's ability to
deliver water to its customers. PSC intends to complete its contingency planning
process for its mission critical systems by March 1999.
Forward-looking Statements
The statements in PSC's Year 2000 disclosure contain forward-looking
statements and should be read in conjunction with PSC's disclosure under the
"Forward-looking Statements" section in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
10
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
FINANCIAL CONDITION
Cash Flow and Capital Expenditures
Net operating cash flow, dividends paid on common stock and capital
expenditures, including allowances for funds used during construction, for the
five years ended December 31, 1998 were as follows:
- -------------------------------------------------------------------------------
Net Operating Common Capital
Cash Flow Dividends Expenditures
- -------------------------------------------------------------------------------
1994 $ 29,125 $ 12,637 $ 27,379
1995 33,079 13,546 33,182
1996 38,082 14,795 31,389
1997 42,377 16,129 38,960
1998 55,205 18,313 58,922
- -------------------------------------------------------------------------------
$ 197,868 $ 75,420 $ 189,832
===============================================================================
Included in capital expenditures for the five-year period are: $2,853
for the construction of a surface water treatment plant; $14,396 for the
modernization of existing treatment plants; $26,642 for new water mains and
customer service lines; $39,515 for the rehabilitation of existing water mains;
$12,293 to rehabilitate hydrants and customer service lines; $21,013 for water
meters; and $4,945 for the construction of a divisional operations center.
During this five-year period, PSW received $9,953 of customer advances and
contributions in aid of construction to finance new water mains. In addition to
its capital program, PSW has made sinking fund contributions aggregating $5,103,
retired $47,150 of debt and $10,000 of preferred stock, and has refunded $14,067
of customer advances for construction. PSW has also expended $98,911 related to
the acquisition of 22 water systems and 2 small wastewater utilities since the
start of 1994.
Since net operating cash flow to PSW plus advances and contributions in
aid of construction have not been sufficient to fully fund its cash
requirements, PSW issued approximately $139,000 of First Mortgage Bonds and
received $23,810 of equity investments from PSC during the past five years.
PSC has funded its investment in PSW with the proceeds from the sale of
stock. In February 1998, PSC sold 1,250,000 shares of common stock in a public
offering for net proceeds of $25,840. The proceeds of this offering were used to
make a $19,000 equity contribution to PSW and to repay short-term debt.
PSC has a Dividend Reinvestment and Direct Stock Purchase Plan ("Plan")
that replaced the Customer Stock Purchase Plan and the Dividend Reinvestment and
Optional Stock Purchase Plan in December 1997. Under the direct stock purchase
portion of the Plan, shares are sold throughout the year and the shares are
obtained by PSC's transfer agent in the open market instead of PSC original
issue shares of stock, as was done under the previous plan. The dividend
reinvestment portion of the Plan continues to offer a 5% discount on the
purchase of original issue shares of common stock with reinvested dividends. As
of the December 1998 dividend payment, holders of 22% of the common shares
outstanding participated in the dividend reinvestment portion of the Plan.
During the past five years, PSC has sold 1,193,716 original issue shares of
11
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
common stock for net proceeds of $15,169 through its dividend reinvestment
program. Before its replacement in December 1997, over the past five years PSC
has sold 1,757,534 original issue shares of common stock for net proceeds of
$19,296 through its former Customer Stock Purchase Plan. Proceeds from these
plans were used to invest in PSW, to relieve PSW of the need to pay a dividend
to PSC, to repay short-term debt, and for general corporate purposes.
In August 1997, the Board of Directors approved a resolution
authorizing PSC to purchase, from time to time, 669,612 shares of its common
stock in the open market or through privately negotiated transactions. A similar
resolution was approved in 1993. Management has used this authority, from time
to time, to offset the dilutive effect on earnings per share resulting from the
original issue shares issued through the plans previously discussed. During
1998, 1997 and 1996, PSC purchased 151,406, 152,000 and 4,339 shares at a net
cost of $3,333, $2,284 and $52, respectively. As of December 31, 1998, the
remaining number of shares PSC may purchase under the Board of Director's
authorization, after adjusting for a stock split in the form of a stock
dividend, is 476,739. Funding for future stock purchases, if any, is not
expected to have a material impact on PSC's financial position.
PSW's planned 1999 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $56,000 of which $30,000 is for DSIC qualified projects. PSW has increased
its capital spending for infrastructure rehabilitation in response to the DSIC.
Should the DSIC be discontinued for any reason, which is not anticipated, PSW
would likely reduce its capital program significantly. The 1999 capital program,
along with $2,452 of sinking fund obligations and $1,460 of preferred stock
redemptions by PSC is expected to be financed through internally-generated
funds, the revolving credit facility, and issuance of new long-term debt.
PSW continues to hold acquisition discussions with several water
systems that are near or adjacent to PSW's service territory. The cash needed
for acquisitions is expected to be funded initially with short-term debt with
subsequent repayment from the proceeds of long-term debt or equity investments
from PSC.
Future utility construction in the period 2000 through 2003, including
recurring programs, such as the ongoing replacement of water meters, the
rehabilitation of water mains and additional transmission mains to meet customer
demands, exclusive of the costs of new mains financed by advances and
contributions in aid of construction, is estimated to require aggregate
expenditures of approximately $240,000, the majority of which will be DSIC
qualified projects to rehabilitate the distribution system. PSC anticipates that
approximately 50% of these expenditures will require external financing
including the additional issuance of Common Stock through PSC's dividend
reinvestment plan and possible future public equity offerings. PSC expects to
refinance $50,660 of debt maturities during this period as they become due with
new issues of long-term debt. The estimates discussed above do not include any
amounts for possible future acquisitions of water systems or the financing
necessary to support them.
PSW's ability to finance its future construction programs, as well as
its acquisition activities, depends on its ability to attract the necessary
external financing and maintain or increase internally-generated funds. Rate
orders permitting compensatory rates of return on invested capital and timely
rate adjustments will be required to allow PSW to achieve an adequate level of
earnings to enable it to secure the capital it will need and to maintain
satisfactory debt coverage ratios.
12
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Capitalization
The following table summarizes PSC's capitalization during the past
five years:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt* 53.0% 54.2% 55.3% 53.5% 49.9%
Preferred stock* 0.6% 1.7% 2.1% 2.0% 3.3%
Common stockholders' equity 46.4% 44.1% 42.6% 44.5% 46.8%
- --------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
==================================================================================================
</TABLE>
*Includes current portion.
The changes in the capitalization ratios result from the issuance of
common stock over the past five years and the issuance of debt by PSW to finance
its acquisitions and capital program. It is PSC's and PSW's goal to maintain an
equity ratio adequate to support PSW's current Standard and Poors debt rating of
"A+".
IMPACT OF CONSUMERS WATER COMPANY MERGER
On March 10, 1999, PSC completed a merger ("the Merger") with Consumers
Water Company ("CWC"). On the date of the Merger, PSC issued 13,014,015 shares
of Common Stock in exchange for all of the outstanding shares of CWC and CWC
became a wholly-owned subsidiary of PSC. CWC owns 100% of the voting stock of
four water companies and at least 96% of the voting stock of three water
companies. These water companies operate 27 divisions providing water and
wastewater service to approximately 226,000 customers in Pennsylvania, Ohio,
Illinois, New Jersey and Maine. The following table provides key operating and
financial highlights of CWC:
December 31,
------------------------
1998 1997
------------------------
Net property, plant and equipment $ 406,386 $ 418,143
Total assets 456,291 465,699
Total long-term debt 152,012 172,607
Total capitalization 270,341 284,678
Years ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Operating revenues $ 99,741 $ 98,991 $ 93,810
Operating income 32,835 32,470 28,718
Income from continuing operations 16,196 12,022 9,426
Net income available to common stock 16,196 9,285 6,196
Income from continuing operations for 1998 includes the April 1998 net
gain of $3,903 ($6,680 before taxes) on the sale of CWC's New Hampshire
operations pursuant to the State's condemnation statute. The New Hampshire
system had operating revenues of $1,600 in 1998 prior to the sale, $6,500 in
1997 and $6,400 in 1996. During 1997, CWC discontinued the operations of its
non-regulated technical service company, Consumers Applied Technologies, Inc.,
and recorded losses on discontinued operations of $2,737 and $3,230 in 1997 and
1996, respectively.
13
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
For purposes of financial reporting, the Merger will be accounted for
under the pooling-of-interests method of accounting. Accordingly, the assets and
liabilities of PSC and CWC will be combined at their historical amounts. As
required by the pooling-of-interests method, future consolidated financial
statements will be restated to include CWC's results of operations and financial
position, as though they have been combined at the beginning of the periods
presented.
PSC has deferred the merger-related costs paid during 1998, consisting
primarily of fees for investment bankers, attorneys, accountants, financial
printing and other administrative charges. In the first quarter of 1999, PSC
will charge-off the merger-related costs paid in 1998 and 1999, and the
restructuring costs that includes severance and other costs associated with the
closing of CWC's corporate office. As of December 31, 1998, $1,050 was deferred
by PSC and the total charge for the merger, including costs incurred by CWC, is
expected to approximate $9,700, net of tax benefits of $1,000.
The following selected unaudited pro forma combined financial data has been
derived from the historical financial statements of PSC and CWC and give effect
to the Merger as though they have been combined at the beginning of the periods
presented. This information is not necessarily indicative of the financial
results that would have occurred had the Merger been consummated on the dates
for which the Merger is being given effect, or the merged companies' future
financial results, and should be read in conjunction with the historical
financial statements of PSC and CWC.
December 31,
-------------------------
1998 1997
-------------------------
Net property, plant and equipment $1,016,194 $ 952,626
Total assets 1,156,733 1,083,162
Total long-term debt 416,290 407,526
Total capitalization 769,378 718,556
Years ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Operating revenues $ 250,718 $ 235,162 $ 216,313
Operating income 99,514 89,269 78,008
Income from continuing operations 45,015 35,210 29,204
Net income available to common stock 44,820 32,278 26,918
Diluted net income per common share:
Income from continuing operations 1.10 0.90 0.77
Net income 1.10 0.83 0.71
PSC expects to achieve some level of cost reductions primarily as a
result of combining certain management and administrative functions and
accomplishing certain other economies of scale in purchasing and other areas.
PSC is still in the process of evaluating the nature and the amount of those
savings. However, due to the nature of the rate making process, most of these
synergies will be used to minimize rate increases in the future. In addition,
PSC intends to look for additional acquisition opportunities, consistent with
PSW's growth strategy, in the areas near to CWC's operating service territories.
CWC's planned 1999 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $29,000 of which $13,300 will be used to construct the Shenango plant. The
balance of the capital expenditures will be used for routine system replacements
14
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
and betterments and to expand service territories. The 1999 capital program,
along with $529 of sinking fund obligations and long-term debt retirements is
expected to be financed through internally-generated funds, existing credit
facilities and the issuance of new long-term debt.
CWC's capital program for the years 2000 and 2001 is expected to
approximate $25,000 per year. The capital program, along with sinking fund
obligations and long-term debt retirements in those years of $13,024 is expected
to be financed through internally generated funds, the issuance of new long-term
debt and, where appropriate, equity contributions from PSC.
CWC's ability to finance its future construction programs, as well as
its acquisition activities, depends on its ability to attract the necessary
external financing and maintain or increase internally-generated funds. Rate
orders permitting compensatory rates of return on invested capital and timely
rate adjustments will be required to allow CWC to achieve an adequate level of
earnings to enable it to secure the capital it will need and to maintain
satisfactory debt coverage ratios.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. PSC has adopted this Statement effective January 1,
1998 and has no components of other comprehensive income to report.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). This Statement established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. PSC adopted
this statement on January 1, 1998, as required. The adoption of this Statement
did not affect results from operations, financial conditions or long-term
liquidity.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). This statement revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of costs associated with those plans. It
standardizes the disclosure requirements, eliminates unnecessary disclosures and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS 132
supersedes the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions" and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
PSC has adopted this statement in its 1998 Annual Report as required.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." PSC intends to adopt
this statement in its 1999 Annual Report as required. The adoption of SOP 98-1
will not have a material impact on PSC's results from operations or financial
condition.
15
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. PSC
plans to adopt this statement in 2000 as required. As of December 31, 1998, PSC
had no derivative instruments or hedging activities.
DIVIDENDS ON COMMON STOCK
Following is a recent history of PSC's income from continuing operations
and dividends:
- --------------------------------------------------------------------------------
Basic
income per
share from Dividend
Cash dividend continuing payout
per common share operations ratio
- --------------------------------------------------------------------------------
1994 $ 0.55 $ 0.68 81%
1995 0.57 0.75 76%
1996 0.59 0.79 75%
1997 0.62 0.89 70%
1998 0.67 1.04 64%
- --------------------------------------------------------------------------------
Dividends have averaged approximately 72% of income from continuing
operations during this period. In 1998, the dividend rate increased by 4.6%. As
a result, beginning with the dividend payable in September 1998, the annual
dividend rate increased to $.68 per share.
16
<PAGE>
MANAGEMENT'S REPORT
The consolidated financial statements and related information for the
years ended December 31, 1998, 1997 and 1996 were prepared by management in
accordance with generally accepted accounting principles and include
management's best estimates and judgments, as required. Financial information
included in other sections of this annual report is consistent with that in the
consolidated financial statements.
The Company has an internal accounting control structure designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly authorized and recorded in accordance with established policies and
procedures. The internal control structure is supported by the selection and
training of qualified personnel, the delegation of management authority and
responsibility and dissemination of policies and procedures.
The Company's independent auditors, KPMG LLP, provide an independent
review of management's reporting of results of operations and financial
condition. KPMG has audited the financial statements by conducting tests as they
deemed appropriate and their report follows.
The Board of Directors through the Audit Committee selects the
Company's independent auditors and reviews the scope and results of their
audits. The Audit Committee also reviews the adequacy of the Company's internal
control structure and other significant matters. The Audit Committee is
comprised of three outside Directors who meet periodically with management and
the independent auditors. The Audit Committee held two meetings in 1998.
Nicholas DeBenedictis Michael P. Graham
Chairman & Senior Vice President - Finance
President & Treasurer
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Philadelphia Suburban Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Philadelphia Suburban Corporation and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, and cash flow for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Philadelphia
Suburban Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 1, 1999, except as to the information included under the caption
"Merger with Consumers Water Company" on pages 26 and 27 and in the second
paragraph on page 23 which are as of March 10, 1999
18
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Operating revenues $ 150,977 $ 136,171 $ 122,503
Costs and expenses:
Operations and maintenance 58,174 55,899 51,615
Depreciation 15,355 14,311 13,068
Amortization 734 269 265
Taxes other than income taxes 10,035 8,893 8,265
----------------------------------------
84,298 79,372 73,213
Operating income 66,679 56,799 49,290
Interest expense 18,976 17,890 15,311
Dividends on preferred stock of subsidiary 15 370 494
Allowance for funds used during construction (736) (522) (264)
----------------------------------------
Income from continuing operations before income taxes 48,424 39,061 33,749
Provision for income taxes 19,605 15,873 13,971
----------------------------------------
Income from continuing operations 28,819 23,188 19,778
Reversal of reserve for discontinued operations, net of
income tax of $520 in 1996 - - 965
----------------------------------------
Net income 28,819 23,188 20,743
Dividends on preferred stock 195 195 21
----------------------------------------
Net income available to common stock $ 28,624 $ 22,993 $ 20,722
========================================
Basic net income per common share:
Continuing operations $ 1.04 $ 0.89 $ 0.79
Discontinued operations - - 0.04
----------------------------------------
Total $ 1.04 $ 0.89 $ 0.83
========================================
Diluted net income per common share:
Continuing operations $ 1.03 $ 0.88 $ 0.78
Discontinued operations - - 0.04
----------------------------------------
Total $ 1.03 $ 0.88 $ 0.82
========================================
Average common shares outstanding during the period
Basic 27,408 25,908 24,966
========================================
Diluted 27,876 26,273 25,262
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Assets
Property, plant and equipment, at cost $ 745,532 $ 656,011
Less accumulated depreciation 135,724 121,528
-------------------------
Net property, plant and equipment 609,808 534,483
-------------------------
Current assets:
Cash 664 680
Accounts receivable and unbilled revenue, net 27,231 23,534
Inventory, materials and supplies 1,909 1,847
Prepayments and other current assets 1,152 1,002
-------------------------
Total current assets 30,956 27,063
-------------------------
Regulatory assets 53,578 51,203
Deferred charges and other assets, net 7,108 5,723
-------------------------
$ 701,450 $ 618,472
=========================
Liabilities and Stockholders' Equity
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock at $.50 par value, authorized 100,000,000 shares,
outstanding 27,726,654 and 26,210,654 in 1998 and 1997 14,130 13,294
Capital in excess of par value 160,440 128,065
Retained earnings 66,447 56,136
Treasury stock, 533,292 and 376,510 shares in 1998 and 1997 (9,478) (5,970)
-------------------------
Total stockholders' equity 234,759 194,745
-------------------------
Long-term debt, excluding current portion 261,826 232,471
Commitments - -
Current liabilities:
Current portion of long-term debt and preferred stock of subsidiary 2,452 6,662
Loans payable 5,305 10,400
Accounts payable 16,694 10,259
Accrued interest 4,453 3,978
Accrued taxes 5,991 3,643
Other accrued liabilities 9,961 9,755
-------------------------
Total current liabilities 44,856 44,697
-------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 91,128 83,129
Customers' advances for construction 35,853 31,902
Other 6,808 6,588
-------------------------
Total deferred credits and other liabilities 133,789 121,619
-------------------------
Contributions in aid of construction 26,220 24,940
-------------------------
$ 701,450 $ 618,472
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Stockholders' equity:
6.05% Series B cumulative preferred stock $ 3,220 $ 3,220
Common stock, $.50 par value 14,130 13,294
Capital in excess of par value 160,440 128,065
Retained earnings 66,447 56,136
Treasury stock (9,478) (5,970)
------------------------
Total stockholders' equity 234,759 194,745
------------------------
Preferred stock of subsidiary with mandatory
redemption requirements - 4,214
Current portion of preferred stock of subsidiary - 4,214
------------------------
- -
------------------------
Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
5.50% to 5.99% 11,600 2,000
6.00% to 6.49% 42,000 32,000
6.50% to 6.99% 55,200 55,200
7.00% to 7.49% 40,000 42,000
7.50% to 7.99% 15,000 15,000
9.00% to 9.49% 45,000 45,000
9.50% to 9.99% 15,000 15,000
------------------------
Total First Mortgage Bonds 223,800 206,200
Note payable to bank under revolving credit agreement, due March 2000 38,935 27,128
Installment note payable, 9%, due in equal annual payments through 2013 1,543 1,591
------------------------
264,278 234,919
Current portion of long-term debt 2,452 2,448
------------------------
Long-term debt, excluding current portion 261,826 232,471
------------------------
Total capitalization $ 496,585 $ 427,216
========================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands of dollars)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 28,819 $ 23,188 $ 19,778
Adjustments to reconcile income from
continuing operations to net cash
flows from operating activities:
Depreciation and amortization 16,089 14,580 13,333
Deferred income taxes 5,016 4,331 3,287
Net increase in receivables,
inventory and prepayments (3,857) (1,396) (517)
Net increase in payables, accrued interest
and other accrued liabilities 9,867 2,354 1,749
Other (729) (680) 452
-----------------------------------------
Net cash flows from operating activities 55,205 42,377 38,082
-----------------------------------------
Cash flows from investing activities:
Property, plant and equipment additions,
including allowance for funds used during
construction of $736, $522 and $264 (58,922) (38,960) (31,389)
Acquisitions of water and wastewater systems (24,498) (1,226) (42,122)
Other (965) (535) 24
-----------------------------------------
Net cash flows used in investing activities (84,385) (40,721) (73,487)
-----------------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of
construction 1,555 1,059 577
Repayments of customers' advances (1,984) (3,048) (2,909)
Net proceeds (repayments) of short-term debt (5,095) 4,840 (895)
Proceeds from long-term debt 31,586 29,665 64,256
Repayments of long-term debt including
premium on early retirement (2,448) (25,042) (24,094)
Redemption of preferred stock of subsidiary (4,214) (1,428) (1,500)
Proceeds from issuing common stock 32,119 10,695 14,651
Repurchase of common stock (3,801) (2,829) (760)
Dividends paid on preferred stock (195) (195) (4)
Dividends paid on common stock (18,313) (16,129) (14,795)
Other (46) (82) (167)
-----------------------------------------
Net cash flows from (used in) financing activities 29,164 (2,494) 34,360
-----------------------------------------
Net cash flows from discontinued operations - - 176
-----------------------------------------
Net decrease in cash (16) (838) (869)
Cash balance beginning of year 680 1,518 2,387
-----------------------------------------
Cash balance end of year $ 664 $ 680 $ 1,518
=========================================
</TABLE>
See Summary of Significant Accounting Policies-Customers' Advances for
Construction, Acquisitions and Employee Stock and Incentive Plans footnotes
for description of non-cash investing and financing activities.
See accompanying notes to consolidated financial statements.
22
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)
Summary of Significant Accounting Policies
Nature of Operations - The business of Philadelphia Suburban Corporation (the
"Company") is conducted primarily through its subsidiary Philadelphia Suburban
Water Company ("PSW"). PSW is a regulated public utility which supplies water to
approximately 300,000 customers. The customers are residential, commercial and
industrial in nature, and no single customer accounted for more than one percent
of PSW's sales. The service territory of PSW covers a 481 square mile area
located west and north of the City of Philadelphia. In addition, PSW provides
water service to approximately 6,600 customers through an operating and
maintenance contract with a municipal authority contiguous to its service
territory. PSW is subject to regulation by the Pennsylvania Public Utility
Commission ("PUC") which has jurisdiction with respect to rates, service,
accounting procedures, issuance of securities, acquisitions and other matters.
On March 10, 1999, the Company completed a merger with Consumers Water
Company ("CWC"). On the date of the merger, the Company issued 13,014,015 shares
of Common Stock in exchange for all of the outstanding shares of CWC and CWC
became a wholly-owned subsidiary of the Company. CWC owns 100% of the voting
stock of four water companies and at least 96% of the voting stock of three
water companies. These water companies operate 27 divisions providing water and
wastewater service to approximately 226,000 customers in Pennsylvania, Ohio,
Illinois, New Jersey and Maine. Because the merger was completed after December
31, 1998, the consolidated financial statements and footnotes contained in this
report, unless indicated or captioned otherwise relate to the Company without
consideration to the impact of the merger.
Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries as of December 31, 1998, all of which are
wholly-owned. All material intercompany accounts and transactions have been
eliminated.
Recognition of Revenues - Revenues include amounts billed to customers on a
cycle basis and unbilled amounts based on estimated usage from the latest
billing to the end of the accounting period. Non-utility revenues are recognized
when services are performed.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
consist primarily of utility plant. The cost of additions includes contracted
cost, direct labor and fringe benefits, materials, overheads and, for certain
utility plant, allowance for funds used during construction. Water systems
acquired are recorded at estimated original cost of utility plant when first
devoted to utility service and the applicable depreciation is recorded to
accumulated depreciation. The difference between the estimated original cost,
less applicable accumulated depreciation, and the purchase price is recorded as
an acquisition adjustment within utility plant. At December 31, 1998, utility
plant includes a credit acquisition adjustment of $6,261, which is being
amortized over 20 years. Consistent with PSW's rate settlements, $448 was
amortized during 1998, $449 was amortized during 1997 and $526 was amortized
during 1996.
Utility expenditures for maintenance and repairs, including minor
renewals and betterments, are charged to operating expenses in accordance with
the Uniform System of Accounts prescribed by the PUC. The cost of new units of
property and betterments are capitalized. When units of utility property are
replaced, retired or abandoned, the recorded value thereof is credited to the
asset account and such value, together with the net cost of removal, is charged
to accumulated depreciation.
23
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The straight-line remaining life method is used to compute depreciation
on utility plant. The straight-line method is used with respect to
transportation and mechanical equipment, office equipment and laboratory
equipment.
In accordance with the requirements of SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of", the long-lived assets of the Company, which consist primarily of Utility
Plant in Service and a regulatory asset, have been reviewed for impairment.
There has been no change in circumstances or events that have occurred that
require adjustments to the carrying values of these assets.
Allowance for Funds Used During Construction - The allowance for funds used
during construction ("AFUDC") is a non-cash credit which represents the
estimated cost of funds used to finance the construction of utility plant. AFUDC
is applied to construction projects requiring more than one month to complete.
No AFUDC is applied to projects funded by customer advances for construction or
contributions in aid of construction. AFUDC includes the net cost of borrowed
funds and a rate of return on other funds when used, and is recovered through
water rates as the utility plant is depreciated. There was no AFUDC related to
equity funds in any of the years presented.
Deferred Charges and Other Assets - Deferred bond and preferred stock issuance
expenses are amortized by the straight-line method over the life of the related
issues.
Call premiums related to the early redemption of long-term debt, along
with the unamortized balance of the related issuance expense, are deferred and
amortized over the life of the long-term debt used to fund the redemption.
Expenses associated with filing for rate increases are deferred and
amortized over approximately 18 months. Other costs, for which PSW has received
or expects to receive prospective rate recovery, are deferred and amortized over
the period of rate recovery.
Income Taxes - The Company accounts for certain income and expense items in
different time periods for financial reporting than for tax reporting purposes.
Deferred income taxes are provided on the temporary differences between the tax
basis of the assets and liabilities and the amounts at which they are carried in
the financial statements. These deferred income taxes are based on the enacted
tax rates expected to be in effect when such temporary differences are projected
to reverse.
Customers' Advances for Construction - Water mains or, in some instances, cash
advances to reimburse PSW its costs to construct water mains, are contributed to
PSW by customers, real estate developers and builders in order to extend water
service to their properties. The value of these contributions is recorded as
Customers' Advances for Construction. PSW makes refunds on these advances over a
specific period of time based on operating revenues related to the main or as
new customers are connected to and take service from the main. After all refunds
are made, any remaining balance is transferred to Contributions in Aid of
Construction. Non-cash property, in the form of water mains, has been received,
generally from developers, as advances or contributions of $5,498 in 1998 and
$3,997 in 1997.
Contributions in Aid of Construction - Contributions in aid of construction
include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable.
24
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Inventories, Materials and Supplies - Inventories are stated at cost, not in
excess of market value. Cost is determined using the first-in, first-out method.
Stock-Based Compensation - The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", electing the provision of the statement allowing it
to continue its practice of not recognizing compensation expense related to
granting of stock options to the extent that the option price of the underlying
stock was equal to, or greater than, the market price on the date of option
grant. Disclosure of the impact on the results of operations, had the Company
elected to recognize compensation expense, is provided in the Employee Stock and
Incentive Plans footnote as required by the Statement.
Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain prior year amounts have been reclassified to conform
with current year's presentation.
25
<PAGE>
Merger with Consumers Water Company
On March 10, 1999, the Company completed a merger ("the Merger") with
Consumers Water Company ("CWC"). The Merger was effected pursuant to a June 27,
1998 merger agreement, as amended and restated by the parties effective as of
August 5, 1998. The Merger was completed after the transaction received the
approvals from the state utility commissions in each state in which the
companies operate. The shareholders of each company approved the Merger at
special meetings held on November 16, 1998. Pursuant to the merger agreement,
the Company issued 13,014,015 shares of common stock in exchange for all of the
outstanding stock of CWC. CWC common shareholders received 1.432 shares of the
Company's Common Stock for each CWC common share and CWC preferred shareholders
received 5.649 shares of the Company's Common Stock for each preferred share. As
a result of the Merger, CWC became a wholly-owned subsidiary of the Company. The
Merger will be accounted for as a pooling-of-interests under Accounting
Principles Board Opinion No. 16. CWC serves approximately 226,000 customers in
service territories covering parts of Pennsylvania, Ohio, Illinois, New Jersey
and Maine.
The Company has deferred the merger-related costs paid during 1998,
consisting primarily of fees for investment bankers, attorneys, accountants,
financial printing and other administrative charges. In the first quarter of
1999, the Company will charge-off the merger-related costs paid in 1998 and
1999, and the restructuring costs that includes severance and other costs
associated with the closing of CWC's corporate office. As of December 31, 1998,
$1,050 was deferred by PSC and the total charge for the Merger, including costs
incurred by CWC, is expected to approximate $9,700, net of tax benefits of
$1,000.
The following selected unaudited pro forma combined financial data has
been derived from the historical financial statements of PSC and CWC and give
effect to the Merger as though they have been combined at the beginning of the
periods presented. This information is not necessarily indicative of the
financial results that would have occurred had the Merger been consummated on
the dates for which the merger is being given effect, or the merged companies'
future financial results, and should be read in conjunction with the historical
financial statements of PSC and CWC.
December 31,
-------------------------
1998 1997
-------------------------
(unaudited)
Net property, plant and equipment $1,016,194 $ 952,626
Total assets 1,156,733 1,083,162
Total long-term debt 416,290 407,526
Total capitalization 769,378 718,556
Years ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
(unaudited)
Operating revenues $ 250,718 $ 235,162 $ 216,313
Operating income 99,514 89,269 78,008
Income from continuing operations 45,015 35,210 29,204
Net income available to common stock 44,820 32,278 26,918
Diluted net income per common share:
Income from continuing operations 1.10 0.90 0.77
Net income 1.10 0.83 0.71
26
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Income from continuing operations for 1998 includes the April 1998 net
gain of $3,903 ($6,680 pre-tax) or $0.10 per share on the sale of CWC's New
Hampshire operations pursuant to the State's condemnation statute. The New
Hampshire system had operating revenues of $1,600 in 1998 prior to the sale,
$6,500 in 1997 and $6,400 in 1996. During 1997, CWC discontinued the operations
of its non-regulated technical service company, Consumers Applied Technologies,
and recorded losses on discontinued operations of $2,737 and $3,230 in 1997 and
1996, respectively.
Acquisitions and Water Sale Agreements
During 1998, PSW made the following acquisitions and obtained related
service territory rights: in January, the water utility assets of West Chester
Municipal Authority; in June, the water utility assets of the Flying Hills Water
Company; and at various times during 1998, the water utility assets of two small
water systems and the origination of two long-term water sale agreements. The
systems acquired in 1998 incorporate 17 square miles of service area near or
adjacent to PSW's existing territory. The total purchase price for the four
water systems acquired in 1998 was $24,498 in cash and the issuance of 42,000
shares of the Company's common stock. The annual revenues from the acquired
systems approximate $4,800, and revenues included in the consolidated financial
statements during the period owned by PSW were $4,627. The annual revenues from
the water sale agreements are expected to approximate $500.
During 1997, PSW made the following acquisitions and obtained related
service territory rights: in January, the water utility assets of Cherry Water
Company; in September, the water utility assets of Perkiomen Township and in
September, both the water and wastewater utility assets of the Peddler's View
Utility Company. The systems acquired in 1997 incorporate two square miles of
service area near PSW's existing territory. The total purchase price for the
three water systems and wastewater system acquired in 1997 was $1,226. Revenues
included in the consolidated financial statements related to the systems
acquired in 1997 were $367 in 1998 and $175 in 1997.
During 1996, PSW made the following acquisitions and obtained related
service territory rights: in October the water utility assets of Hatboro Borough
Authority; in November, Utility Group Services Corporation ("UGS") which owned
three water utilities and a wastewater utility; in December, the water utility
assets of Bristol Borough Water and Sewer Authority; and at various times during
1996 the water utility assets of three smaller water systems. The total purchase
price for the eight water systems and wastewater system acquired in 1996 was
$47,889, including the issuance of $3,220 of the Company's preferred stock and
the assumption of $2,547 in liabilities. These systems have a combined service
territory of 64 square miles. Revenues included in the consolidated financial
statements related to the systems acquired in 1996 were $6,680 in 1998, $5,902
in 1997 and $466 in 1996.
27
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Property, Plant and Equipment
December 31,
--------------------------
1998 1997
--------------------------
Utility plant and equipment $735,813 $641,303
Utility construction work in progress 7,449 12,426
Non-utility plant and equipment 2,270 2,282
--------------------------
Total property, plant and equipment $745,532 $656,011
==========================
Depreciation is computed based on estimated useful lives of 5 to 110
years for utility plant and 3 to 10 years for both utility transportation and
mechanical equipment and all non-utility plant and equipment.
Accounts Receivable
December 31,
--------------------------
1998 1997
--------------------------
Billed water revenue $ 12,911 $ 9,230
Unbilled water revenue 14,349 13,949
Other 471 855
--------------------------
27,731 24,034
Less allowance for doubtful accounts 500 500
--------------------------
Net accounts receivable $ 27,231 $ 23,534
==========================
All of the Company's customers are located in southeastern
Pennsylvania. No single customer accounted for more than one percent of the
Company's sales in 1998 or 1997 and no account receivable from any customer
exceeded one percent of the Company's total stockholders' equity.
Regulatory Asset
The regulatory asset represents costs that have been prudently incurred
and are expected to be fully recovered in future rates. The two components of
this asset are deferred income taxes and postretirement benefits other than
pensions. Items giving rise to deferred state income taxes, as well as a portion
of deferred Federal income taxes related to certain differences between tax and
book depreciation expense, are recognized in the rate setting process on a cash
or flow-through basis and will be recovered as they reverse. The portion of the
asset related to postretirement benefits other than pensions represents costs
that were deferred during the period that the accrual method of accounting for
these benefits was adopted in 1993 and the recognition of the accrual method in
the Company's rates in 1994. Amortization of the amount deferred for
postretirement benefits other than pensions began in 1994 and is currently being
recovered in rates.
December 31,
-------------------------
1998 1997
-------------------------
Income taxes $ 51,764 $ 49,229
Postretirement benefits other than pensions 1,814 1,974
-------------------------
$ 53,578 $ 51,203
=========================
28
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Income Taxes
Total income tax expense is allocated as follows:
Years Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Income from continuing operations $ 19,605 $ 15,873 $ 13,971
Common stockholders' equity related
to stock option activity which
reduces taxable income (402) (401) (126)
Discontinued operations - - 520
---------------------------------------
$ 19,203 $ 15,472 $ 14,365
=======================================
Income tax expense attributable to income from continuing operations
consists of:
Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
Current:
Federal $ 10,559 $ 8,742 $ 8,084
State 4,030 2,800 2,600
--------------------------------------
14,589 11,542 10,684
--------------------------------------
Deferred:
Federal 4,934 4,004 3,002
State 82 327 285
--------------------------------------
5,016 4,331 3,287
--------------------------------------
Total tax expense $ 19,605 $ 15,873 $ 13,971
======================================
The significant components of deferred income tax expense are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Excess of tax over financial statement depreciation $ 5,333 $ 3,308 $ 2,458
Amortization of deferred investment tax credits (100) (105) (115)
Current year investment tax credits deferred 20 35 40
Differences in basis of fixed assets due to variations
in tax and book accounting methods that reverse
through depreciation 1,366 860 770
Pension, deferred compensation and other
postretirement benefits (715) (151) (91)
Customers' advances for construction, net 352 556 196
Other, net (1,240) (172) 29
---------------------------------
Total deferred income tax expense $ 5,016 $ 4,331 $ 3,287
=================================
</TABLE>
The statutory Federal tax rate is 35% and the Pennsylvania Corporate
Net Income Tax rate is 9.99% for all years presented.
29
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The reasons for the differences between amounts computed by applying
the statutory Federal income tax rate to income from continuing operations
before Federal tax and the actual Federal tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Computed Federal tax expense at statutory rate $ 15,441 $ 12,508 $ 10,795
Increase (decrease) in tax expense for items to be
recovered in future rates:
Depreciation expense 66 70 179
Losses on asset disposals - (2) (12)
Amortization of deferred investment tax credits (100) (105) (115)
Preferred stock dividend 73 197 180
Other, net 13 78 59
--------------------------------------
Actual Federal tax expense $ 15,493 $ 12,746 $ 11,086
======================================
</TABLE>
The tax effects of temporary differences between book and tax
accounting that give rise to the deferred tax assets and deferred tax
liabilities are as follows:
December 31,
-----------------------
1998 1997
-----------------------
Deferred tax assets:
Customers' advances for construction $ 8,827 $ 9,198
Costs expensed for book not deducted
for tax, principally accrued expenses
and bad debt reserves 2,728 2,393
Other 406 642
-----------------------
Total gross deferred tax assets 11,961 12,233
-----------------------
Deferred tax liabilities:
Utility plant, principally due to
depreciation and differences in the basis
of fixed assets due to variation in tax
and book accounting 78,711 71,888
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences 20,240 18,937
Deferred investment tax credit 4,138 4,218
Other - 319
-----------------------
Total gross deferred tax liabilities 103,089 95,362
-----------------------
Net deferred tax liability $ 91,128 $ 83,129
=======================
The Company made income tax payments, which include amounts related to
discontinued operations, of $11,273, $11,346 and $10,199 in 1998, 1997 and 1996,
respectively. The Company's Federal income tax returns for all years through
1995 have been closed.
30
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Commitments
PSW maintains agreements with the Chester Water Authority and the Bucks
County Water and Sewer Authority for the purchase of water to supplement its
water supply, particularly during periods of peak demand. The agreements
stipulate purchases of minimum quantities of water to the year 2017. The
estimated annual commitments related to such purchases total approximately
$2,852 through 2003. PSW purchased approximately $3,012, $2,978 and $2,889 of
water under these agreements during the years ended December 31, 1998, 1997 and
1996, respectively.
PSW leases motor vehicles and other equipment under operating leases
that are noncancelable and expire on various dates through 2003. During the next
five years, $2,325 of future minimum lease payments are due: $990 in 1999, $671
in 2000, $509 in 2001, $120 in 2002 and $35 in 2003. PSW leases parcels of land
on which its Media treatment plant and other facilities are situated and
adjacent parcels that are used for watershed protection. The operating lease is
noncancelable, expires in 2045 and contains certain renewal provisions. The
lease is subject to an adjustment every five years based on changes in the
Consumer Price Index. During each of the next five years, $292 of lease payments
for land, subject to the aforesaid adjustment, are due.
Rent expense was $1,504, $1,334 and $1,332 for the years ended December
31, 1998, 1997 and 1996, respectively.
Long-term Debt and Loans Payable
The Consolidated Statements of Capitalization provides a summary of
long-term debt and loans outstanding as of December 31, 1998 and 1997. The
supplemental indentures with respect to certain issues of the First Mortgage
Bonds restrict the ability of PSW to declare dividends, in cash or property, or
repurchase or otherwise acquire PSW's stock. As of December 31, 1998,
approximately $133,000 of retained earnings were free of these restrictions.
Certain supplemental indentures also prohibit PSW from making loans to or
purchasing the stock of the Company.
Annual sinking fund payments are required for certain issues of First
Mortgage Bonds by the supplemental indentures. Excluding amounts due under PSW's
revolving credit agreement, the Company's future sinking fund payments and debt
maturities are as follows:
<TABLE>
<CAPTION>
Interest Rate Range 1999 2000 2001 2002 2003 Thereafter
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.50% to 5.99% $ 400 $ 400 $ 400 $ 400 $ 10,000 $ -
6.00% to 6.49% - - - 10,000 - 32,000
6.50% to 6.99% - - - - 10,400 44,800
7.00% to 7.49% 2,000 2,000 2,000 2,000 12,000 20,000
7.50% to 7.99% - - - - - 15,000
9.00% to 9.49% 52 57 62 467 474 45,431
9.50% to 9.99% - - - - - 15,000
================================================================================
Total $ 2,452 $ 2,457 $ 2,462 $ 12,867 $ 32,874 $ 172,231
================================================================================
</TABLE>
31
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In July 1997, PSW established a two-year $150,000 medium-term note
program providing for the issuance of long-term debt with maturities ranging
between one and 35 years at fixed rates of interest, as determined at the time
of issuance. This program replaced a similar program that expired in March 1997.
The notes issued under this program are secured by the Thirty-First Supplement
to the trust indenture relating to PSW's First Mortgage Bonds. In January 1998,
PSW issued First Mortgage Bonds through the program as follows: $10,000 6.14%
Series due 2008 and $10,000 5.8% Series due 2003. During 1997, First Mortgage
Bond issuances through these programs were as follows: $10,000 in March 1997,
7.06% Series due 2004; $10,000 in July 1997, 6.75% Series due 2007; and $10,000
in October 1997, 6.3% Series due 2002. The proceeds from these issuances were
used to fund acquisitions and for PSW's ongoing capital program.
In January 1999, PSW issued a First Mortgage Bond of $10,000 5.85%
Series due 2004 through the medium-term note program. Proceeds from this issue
were used to reduce the balance of PSW's revolving credit facility.
PSW has a $50,000 revolving credit agreement due January 2000 with four
banks. Interest under this facility is based, at PSW's option, on the prime
rate, an adjusted federal funds rate, an adjusted certificate of deposit rate
corresponding to the interest period selected, an adjusted Euro-Rate
corresponding to the interest period selected or at rates offered by the banks.
This agreement restricts the total amount of short-term borrowings of PSW. A
commitment fee of 1/8 of 1% is charged on the unused portion of the loan. The
average cost of borrowing under this facility was 5.97% and 6.08%, and the
average borrowing was $29,015 and $36,746, during 1998 and 1997, respectively.
The maximum amount outstanding at the end of any one month was $38,935 in 1998
and $46,968 in 1997.
At December 31, 1998 and 1997, the Company and PSW had combined
short-term lines of credit of $16,000. In February 1999, the Company's
short-term lines of credit were increased by $3,000. Funds borrowed under these
lines are classified as loans payable and are used to provide working capital.
The average borrowing under the lines was $5,995 and $8,009 during 1998 and
1997, respectively. The maximum amount outstanding at the end of any one month
was $10,670 in 1998 and $10,840 in 1997. Interest under the lines is based at
the Company's option, depending on the line, on the prime rate, an adjusted
Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The
average cost of borrowings under all lines during 1998 and 1997 was 5.98% and
6.13%, respectively.
The total amount of interest paid on all borrowings, net of amounts
capitalized, was $17,857, $17,445 and $15,483 in 1998, 1997 and 1996,
respectively. The pro forma weighted cost of long-term debt at December 31, 1998
and 1997 was 7.18% and 7.52%, respectively.
32
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Preferred Stock of Subsidiary with Mandatory Redemption Requirements
PSW is authorized to issue up to 1,000,000 shares of preferred stock,
with stated par value, in one or more series. In 1991, PSW issued 100,000 shares
of 8.66% Series 1 Cumulative Preferred Stock, at par value of $100 per share in
a private placement. In December 1997, PSW called all of the remaining shares of
its preferred stock for retirement in January 1998. As of December 31,1997,
$4,214 has been classified as the current portion of preferred stock.
Fair Value of Financial Instruments
The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as of the dates
presented. The carrying amount and estimated fair value of the Company's
long-term debt as of December 31, 1998 is $264,278 and $290,275, respectively.
The fair value of long-term debt has been determined by discounting the future
cash flows using current market interest rates for similar financial instruments
of the same duration.
The Company's customers' advances for construction and related tax
deposits have carrying values of $30,032 and $5,821, respectively at December
31, 1998. Their relative fair values cannot be accurately estimated since future
refund payments depend on several variables, including new customer connections,
customer consumption levels and future rate increases. Portions of these
non-interest bearing instruments are payable annually through 2019 and amounts
not paid by the contract expiration dates become non-refundable. The fair value
of these amounts would, however, be less than their carrying value due to the
non-interest bearing feature.
Stockholders' Equity
At December 31, 1998, the Company had 1,770,819 shares of Series
Preferred Stock with a $1.00 par value authorized, of which 100,000 shares are
designated as Series A Preferred Stock. During 1996, the Company designated
32,200 shares as Series B Preferred Stock, $1.00 par value. The Series A
Preferred Stock, as well as the undesignated shares of Series Preferred Stock,
remains unissued. In 1996, the Company issued all of the 6.05% Series B
Preferred Stock in connection with the acquisition of UGS. The Series B
Preferred Stock is recorded on the balance sheet at its liquidation value of
$100 per share. Dividends on the Series B Preferred Stock are cumulative and
payable quarterly. PSC may not pay dividends on common stock unless provision
has been made for payment of the preferred dividends. Under the provisions of
this issue, the holders may redeem the shares, in whole or in part, at the
liquidation value beginning December 1, 1998 and the Company may redeem up to
20% of this issue each year beginning December 1, 2001 and, at the holders'
option, this redemption may be made in cash or through the issuance of debt with
a five year maturity at an interest rate of 6.05%. As of December 31, 1998, all
dividends have been provided for. In December 1998, 14,600 shares of this issue
were called for early redemption by the holders. In January 1999, these shares
were redeemed in cash at the liquidation value of $100 per share.
In November 1998, the Company's shareholders approved an increase in
the number of shares of common stock authorized, par value $.50 per share, from
40,000,000 shares to 100,000,000 shares. Shares outstanding at December 31,
1998, 1997 and 1996 were 27,726,654, 26,210,654 and 25,598,105, respectively.
Treasury shares held at December 31, 1998, 1997 and 1996 were 533,292, 376,510
and 262,230, respectively.
33
<PAGE>
The following table summarizes the activity of common stockholders'
equity:
<TABLE>
<CAPTION>
Capital in
Common Treasury excess of Retained
stock stock par value earnings Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 6,224 $ (3,580) $ 110,987 $ 43,345 $ 156,976
Net income - - - 20,722 20,722
Dividends - - - (14,795) (14,795)
Stock split 3,140 - (3,140) - -
Sale of stock 298 693 11,546 - 12,537
Repurchase of stock - (760) - - (760)
Equity Compensation Plan 1 - 38 - 39
Exercise of stock options 68 - 2,008 - 2,076
------------------------------------------------------------------------------
Balance at December 31, 1996 9,731 (3,647) 121,439 49,272 176,795
------------------------------------------------------------------------------
Net income - - - 22,993 22,993
Dividends - - - (16,129) (16,129)
Stock split 3,276 - (3,276) - -
Sale of stock 178 506 7,128 - 7,812
Repurchase of stock - (2,829) - - (2,829)
Equity Compensation Plan 1 - 50 - 51
Exercise of stock options 108 - 2,724 - 2,832
------------------------------------------------------------------------------
Balance at December 31, 1997 13,294 (5,970) 128,065 56,136 191,525
------------------------------------------------------------------------------
Net income - - - 28,624 28,624
Dividends - - - (18,313) (18,313)
Sale of stock 741 293 29,985 - 31,019
Repurchase of stock - (3,801) - - (3,801)
Equity Compensation Plan 12 - 491 - 503
Exercise of stock options 83 - 1,899 - 1,982
------------------------------------------------------------------------------
Balance at December 31, 1998 $ 14,130 $ (9,478) $ 160,440 $ 66,447 $ 231,539
==============================================================================
</TABLE>
In February 1998, the Company issued 1,250,000 shares of common stock
through a public offering, providing proceeds of $25,840, net of expenses. The
proceeds of this offering were used to repay short term debt and to make a
$19,000 equity contribution to PSW. PSW used the contribution from the Company
to reduce the balance of its revolving credit loan.
In December 1997, the Company adopted a Dividend Reinvestment and Direct
Stock Purchase Plan ("Plan") that replaced the Customer Stock Purchase Plan and
the Dividend Reinvestment and Optional Stock Purchase Plan. Under the Plan,
reinvested dividends continue to be used to purchase original issue shares of
common stock at a five percent discount from the current market value. Under the
direct stock purchase program, shares are purchased by investors throughout the
year, instead of during limited subscription periods, at market price and the
shares are purchased by the Company's transfer agent in the open-market at least
weekly. The plans that were replaced sold original issue shares exclusively.
During 1998, under the dividend reinvestment portion of the Plan, 190,290
original issue shares of common stock were sold providing the Company with
proceeds of $4,037. Under the former plans, 489,296 and 1,007,633 original issue
shares of common stock were sold providing the Company with $7,567 and $12,280
of additional capital, after expenses, during 1997 and 1996 , respectively.
In August 1997, the Board of Directors approved a resolution authorizing
the Company to purchase, from time to time, up to 669,612 shares of its common
stock in the open market or through privately
34
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
negotiated transactions. In 1993, the Board of Directors approved a similar
authorization. During 1998, 1997 and 1996, 151,406, 152,000 and 4,339 shares
have been purchased at a net cost of $3,333, $2,284 and $52, respectively. As of
December 31, 1998, 476,739 shares remain available for purchase by the Company.
Net Income per Common Share and Equity per Common Share
Basic net income per share is based on the weighted average number of
common shares outstanding. Diluted net income per share is based on the weighted
average number of common shares outstanding and potentially dilutive shares. The
dilutive effect of employee stock options is included in the computation of
Diluted net income per share. The following table summarizes the shares used in
computing Basic and Diluted net income per share:
Years ended December 31,
-----------------------------
1998 1997 1996
-----------------------------
Average common shares outstanding during
the period for Basic computation 27,408 25,908 24,966
Dilutive effect of employee stock options 468 365 296
-----------------------------
Average common shares outstanding during
the period for Diluted computation 27,876 26,273 25,262
=============================
Equity per common share was $8.35 and $7.31 at December 31, 1998 and
1997, respectively. These amounts were computed by dividing common stockholders'
equity by the number of shares of common stock outstanding at the end of each
year.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan designed to protect the
Company's shareholders in the event of an unsolicited unfair offer to acquire
the Company. Each outstanding common share is entitled to one Right which is
evidenced by the common share certificate. In the event that any person acquires
20% or more of the outstanding common shares or commences a tender or exchange
offer which, if consummated, would result in a person or corporation owning at
least 20% of the outstanding common shares of the Company, the Rights will begin
to trade independently from the common shares and, if certain circumstances
occur, including the acquisition by a person of 20% or more of the outstanding
common shares, each Right would then entitle its holder to purchase a number of
common shares of the Company at a substantial discount. If the Company is
involved in a merger or other business combination at any time after the Rights
become exercisable, the Rights will entitle the holder to acquire a certain
number of shares of common stock of the acquiring company at a substantial
discount. The Rights are redeemable by the Company at a redemption price of $.01
per Right at any time before the Rights become exercisable. The Rights will
expire on March 1, 2008, unless previously redeemed.
Employee Stock and Incentive Plans
Under the 1994 Equity Compensation Plan ("1994 Plan"), as amended and
restated effective March 3, 1998, the Company may grant qualified and
non-qualified stock options to officers, key employees and consultants. Officers
and key employees may also be granted dividend equivalents and restricted stock.
Restricted stock may also be granted to non-employee members of the Board of
Directors ("Board"). In November 1998, the Shareholders authorized an increase
to the number of shares from 1,900,000 shares to 2,900,000 shares of common
stock for issuance under the 1994 Plan. The maximum number of shares that may be
subject to grants under the 1994 Plan to any one individual in any one year is
100,000. Awards under this plan are made by the Board of Directors or a
committee of the Board.
35
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Options under the 1994 plan, as well as the earlier 1988 Stock Option
Plan were issued at the market price of the stock on the day of the grant.
Options are exercisable in installments ranging from 20% to 33% annually,
starting one year from the date of the grant and expire 10 years from the date
of the grant.
The following table summarizes stock option transactions for the two
plans:
<TABLE>
<CAPTION>
As Of or For the Years Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding, beginning of year 968,137 $ 10.86 1,030,701 $ 9.08 1,055,038 $ 8.33
Granted 263,500 22.13 263,333 15.14 254,000 11.20
Terminated (444) 15.14 (33,405) 10.45 (38,136) 8.76
Exercised (166,881) 9.50 (292,492) 8.45 (240,201) 8.11
---------------------- ------------------------- -------------------------
Outstanding, end of year 1,064,312 $ 13.86 968,137 $ 10.86 1,030,701 $ 9.08
====================== ========================= =========================
Exercisable, end of year 548,680 $ 9.83 439,527 $ 8.76 412,723 $ 8.16
====================== ========================= =========================
</TABLE>
Options exercised during 1998 ranged in price from $6.59 per share to
$15.14 per share. The options outstanding at December 31, 1998 range in price
from $6.59 to $22.13 and the options exercisable range from $6.59 to $15.14 per
share. The weighted-average remaining life of the outstanding options at
December 31, 1998 is 7.1 years. At December 31, 1998, 1,645,352 options under
the 1994 Plan were still available for grant.
Under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company elects to continue to apply the provisions of APB Opinion No. 25 and to
provide the pro forma disclosure provisions of this statement. Accordingly, no
compensation cost has been recognized in the financial statements for stock
options that have been granted. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income available to common stock and Basic and Diluted
net income per share would have been reduced to the pro forma amounts indicated
below:
Years Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
Net income available to common stock:
As reported $ 28,624 $ 22,993 $ 20,722
Pro forma 27,222 22,229 20,337
Basic net income per share:
As reported $ 1.04 $ 0.89 $ 0.83
Pro forma 0.99 0.86 0.81
Diluted net income per share:
As reported $ 1.03 $ 0.88 $ 0.82
Pro forma 0.98 0.85 0.81
36
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The per share weighted-average fair value at the date of grant for
stock options granted during 1998, 1997 and 1996 was $5.32, $2.90 and $1.52 per
option, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
1998 1997 1996
-----------------------------
Expected life (years) 10 10 10
Interest rate 5.6% 6.6% 6.4%
Volatility 16.9% 13.8% 14.0%
Dividend yield 2.9% 4.0% 5.2%
Dividend equivalents provide the grantee with an amount equal to the
dividends paid on a share of common stock over a specified period of time, not
to exceed four years, multiplied by the number of dividend equivalents awarded.
Payments of these awards are deferred until the completion of certain objectives
during a performance period established by a Committee of the Board at the time
of grant. A performance period is generally four years but may be adjusted by
the Committee to as long as eight years or as short as two years depending on
the Company's success in completing the objectives. Dividend equivalents are
"compensatory" and, as such, are charged to operating expense over the
performance period. The effect of changes to the performance period is accrued
when known or projected. The Board granted 104,000, 104,000 and 99,000 dividend
equivalents in 1998, 1997 and 1996, respectively, and costs associated with
these awards were $205 in 1998, $330 in 1997 and $234 in 1996. During 1998 and
1997, payments associated with the dividend equivalents of $249 and $191,
respectively, were made to recipients.
Restricted stock awards provide the grantee with the rights of a
shareholder, including the right to receive dividends and to vote such shares,
but not the right to sell or otherwise transfer the shares during the
restriction period. During 1998, 1997 and 1996, 23,600, 3,600 and 3,200 shares
of restricted stock were granted with a restriction period ranging from six to
36 months. The value of restricted stock awards, which are "compensatory", is
equal to the fair market value of the stock on the date of the grant less
payments made by the grantee and is amortized ratably over the restriction
period.
Pension Plans and Other Postretirement Benefits
The Company has defined benefit pension plans that cover its full-time
employees. Retirement benefits under the plans are generally based on the
employee's total years of service and compensation during the last five years of
employment. The Company's policy is to fund these plans annually at a level
which is deductible for income tax purposes and which provides assets sufficient
to meet its pension obligations. To offset certain limitations imposed by the
Internal Revenue Code with respect to payments under qualified plans, the
Company has a non-qualified Excess Benefit Plan for Salaried Employees in order
to prevent certain employees from being penalized by these limitations. The
Company also has non-qualified Supplemental Executive Retirement Plans for one
current and one retired employee. The net pension costs and obligations of the
qualified and non-qualified plans are included in the tables which follow.
37
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In addition to providing pension benefits, PSW offers certain
Postretirement Benefits other than Pensions ("PBOPs") to employees retiring with
at least 15 years of service. These PBOPs include continuation of medical and
prescription drug benefits for all eligible retirees and a life insurance policy
for eligible union retirees. The Company funds its gross PBOP cost through
various trust accounts.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefit plans but
does not change the measurement or recognition of costs associated with those
plans. It standardizes the disclosure requirements, eliminates unnecessary
disclosures and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. SFAS 132 supersedes the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for
Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions."
The Company's pension expense includes the following components:
Years Ended December 31,
-------------------------------
1998 1997 1996
-------------------------------
Benefits earned during the year $ 1,710 $ 1,432 $ 1,374
Interest cost on projected benefit obligation 4,078 3,796 3,523
Expected return on plan assets (5,285) (4,502) (4,102)
Net amortization and deferral 177 222 221
Capitalized costs (42) (40) (34)
Rate-regulated adjustment (141) (567) (707)
-------------------------------
Net pension cost $ 497 $ 341 $ 275
===============================
The rate-regulated adjustment set forth above is required in order to
reflect pension expense for PSW in accordance with the method used in
establishing water rates.
The Company's costs for postretirement benefits other than pensions
includes the following components:
Years Ended December 31,
-------------------------------
1998 1997 1996
-------------------------------
Benefits earned during the year $ 484 $ 389 $ 296
Interest cost 977 919 872
Expected return on plan assets (452) (272) (161)
Net amortization and deferral 544 541 555
Amortization of regulatory asset 136 136 136
-------------------------------
Gross PBOP cost 1,689 1,713 1,698
Capitalized costs (426) (407) (79)
-------------------------------
Net PBOP cost $ 1,263 $ 1,306 $ 1,619
===============================
38
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The changes in the benefit obligation and fair value of plan assets,
the funded status of the plans and the assumptions used in the measurement of
the company's benefit obligation are as follows:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1, $ 57,157 $ 51,321 $ 12,727 $ 12,617
Service cost 1,710 1,432 484 389
Interest cost 4,078 3,796 977 919
Plan amendments 11 492 928 (1,348)
Actuarial loss 3,045 2,794 527 538
Benefits paid (2,949) (2,678) (397) (388)
--------- --------- --------- ---------
Benefit obligation at December 31, 63,052 57,157 15,246 12,727
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at January 1, 60,112 51,249 5,437 3,500
Actual return on plan assets 12,201 11,502 1,033 629
Employer contributions 53 39 1,541 1,699
Benefits paid (2,949) (2,678) (333) (391)
--------- --------- --------- ---------
Fair value of plan assets at December 31, 69,417 60,112 7,678 5,437
--------- --------- --------- ---------
Funded status of plan:
Funded status at December 31, (6,365) (2,955) 7,568 7,290
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions 11,511 7,715 3,939 3,984
Unrecognized prior service cost (1,583) (1,737) 876 1,908
Rate-regulated adjustment (1,803) (1,662) - -
Unrecognized net transition obligation (276) (364) (10,408) (11,151)
--------- --------- --------- ---------
Accrued benefit costs $ 1,484 $ 997 $ 1,975 $ 2,031
========= ========= ========= =========
Weighted-average assumptions
as of December 31,
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.50% 5.50% - -
</TABLE>
The assumed medical inflation rates are 9%, reducing to 4.5% in 2002
for retirees under the age of 65 and 40%, reducing to 4.5% by 2006 for retirees
65 years of age and over. The effect of a 1% increase in the assumed medical
inflation rates would be to increase the accumulated postretirement benefit
obligation as of December 31, 1998 and the 1998 PBOP costs by $899 and $69,
respectively. The effect of a 1% decrease in the assumed medical inflation rates
would be to decrease the accumulated postretirement benefit obligation as of
December 31, 1998 and the 1998 PBOP costs by $826 and $67, respectively. The
benefits of retired officers and certain other retirees are paid by the Company
and not from plan assets due to limitations imposed by the Internal Revenue
Code.
39
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Water Rates
On October 23, 1997, the Pennsylvania Public Utility Commission ("PUC")
approved a rate settlement reached between PSW and the parties actively
litigating the rate application PSW filed in April 1997. The settlement was
designed to increase PSW's annual revenue by $9,300 or 7.3% over the level in
effect at the time of the filing. The rates in effect at the time of the filing
included a 1% or $1,300 Distribution System Improvement Charge ("DSIC").
Consequently, the settlement resulted in a total base rate increase of $10,600
or 8.3%. As a part of the settlement, the DSIC was reset to zero and the Company
agreed not to file a base rate increase request prior to April 1999, absent
extraordinary circumstances.
In 1996, the PUC approved PSW's request to add a DSIC to its water
bills. The DSIC enabled PSW to add a surcharge to customer bills beginning
January 1, 1997 reflecting the capital costs and depreciation related to certain
distribution system improvement projects completed and placed into service
between base rate filings. PSW is permitted to request adjustments to the DSIC
quarterly to reflect subsequent capital expenditures and it is reset to zero
when new base rates that reflect the costs of those additions become effective.
The maximum DSIC that can be in effect at any time is 5%. PUC rules require PSW
to suspend the use of the DSIC in the quarter subsequent to a twelve month
period that PSW's adjusted return on equity exceeds a benchmark established by
the PUC. The benchmark is established quarterly by the PUC staff based on recent
economic data. The Company's adjusted return on equity for the twelve months
ending June 30, 1998 and September 30, 1998 exceeded the benchmark, and as a
result the DSIC was suspended in the fourth quarter of 1998 and the first
quarter of 1999. Based on the adjusted return on equity for 1998 and the most
recent benchmark, the DSIC will be resumed in the second quarter of 1999.
Previously, the DSIC had been set at 0.67% of base water rates during the third
quarter of 1998 after having been zero since the adoption of new base rates in
October 1997. Prior to the new base rates, the DSIC rate had been 1.82%. The
DSIC provided revenues in 1998 and 1997 of $229 and $1,104, respectively.
In addition to its base rates and the DSIC, PSW has utilized a
surcharge or credit on its bills to reflect certain changes in Pennsylvania
State taxes until such time as the tax changes are incorporated into base rates.
Effective May 18, 1998, PSW was required to initiate a revenue credit of .11%
($110 on an annual basis) of base water rates in order to provide its customers
with the savings associated with a decrease in the Pennsylvania Capital Stock
Tax rate. In February 1999, a 1.04% surcharge was implemented as a result of
increases in the Pennsylvania Public Utility Realty Tax.
40
<PAGE>
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Discontinued Operations
The Board of Directors had authorized the sale of substantially all of
the Company's non-regulated businesses and the last of these businesses was sold
in 1993. At the time the Board of Directors authorized the sale of these
businesses, the Company established reserves for: projected operating losses of
these businesses subsequent to their sale authorizations; estimated losses on
the sale transactions; and certain future costs, including administrative and
legal services related to the sales, contingent legal and lease obligations and
certain employee costs. These reserves were recorded on the balance sheet net of
related income tax benefits.
As a result of the continuing assessment of asserted and unasserted
legal claims related to these businesses, the passage of time, which reduced
certain lease contingencies, and the receipt of contingent sale proceeds, the
Company has determined that, the net reserves were in excess of estimates of
potential costs. Consequently, in 1996, the Company reversed $965 net of related
income taxes, of these reserves. At December 31, 1998 there remains a balance in
the reserve for discontinued operations of $1,008 which is included in other
accrued liabilities.
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Selected Quarterly Financial Data (Unaudited) Philadelphia Suburban Corporation and Subsidiaries
(in thousands of dollars, except per share amounts)
Total
First Second Third Fourth Year
--------------------------------------------------------------
1998
- ---------------------------------------------------------------------------------------------------------------
Operating revenues $34,276 $37,341 $41,656 $37,704 $ 150,977
Operations and maintenance 13,668 14,020 14,714 15,772 58,174
Net income available to common
stock 5,706 7,435 9,022 6,461 28,624
Basic net income per common share 0.21 0.27 0.33 0.23 1.04
Diluted net income per common share 0.21 0.27 0.32 0.23 1.03
Dividend paid per common share 0.1625 0.1625 0.1700 0.1700 0.6650
Price range of common stock
- high 25.75 22.56 28.19 30.06 30.06
- low 19.56 18.88 20.50 23.00 18.88
1997
- ---------------------------------------------------------------------------------------------------------------
Operating revenues $31,021 $33,315 $36,754 $35,081 $ 136,171
Operations and maintenance 13,068 13,295 14,466 15,070 55,899
Net income available to common
stock 4,460 5,778 7,323 5,432 22,993
Basic net income per common share 0.17 0.23 0.28 0.21 0.89
Diluted net income per common share 0.17 0.22 0.28 0.21 0.88
Dividend paid per common share 0.152 0.152 0.159 0.159 0.622
Price range of common stock
- high 15.47 15.10 18.00 22.18 22.18
- low 11.72 11.44 14.07 15.10 11.44
</TABLE>
High and low prices of the Company's common stock are as reported on
the New York Stock Exchange Composite Tape.
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Summary of Selected Financial Data Philadelphia Suburban Corporation and Subsidiaries
(in thousands of dollars, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Income from continuing operations
Basic $ 1.04 $ 0.89 $ 0.79 $ 0.75 $ 0.68
Diluted 1.03 0.88 0.78 0.75 0.68
Net income
Basic 1.04 0.89 0.83 0.77 0.68
Diluted 1.03 0.88 0.82 0.77 0.68
Cash dividends 0.67 0.62 0.59 0.57 0.55
Return on average shareholders' equity (a) 13% 12% 12% 12% 11%
Book value at year end $8.35 $ 7.31 $ 6.91 $ 6.44 $ 6.14
Market value at year end 29.56 22.08 14.91 10.38 9.06
- -------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT HIGHLIGHTS:
Operating revenues (a) $150,977 $136,171 $122,503 $117,044 $108,636
Depreciation and amortization (a) 16,089 14,580 13,333 11,557 10,330
Interest expense (a) (b) 18,255 17,738 15,541 15,178 13,636
Income before income taxes (a) 48,424 39,061 33,749 30,931 27,209
Provision for income taxes (a) 19,605 15,873 13,971 12,901 11,571
Income from continuing operations 28,819 23,188 19,778 18,030 15,638
Net income available to common stock 28,624 22,993 20,722 18,400 15,638
- -------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS:
Total assets $701,450 $618,472 $582,944 $518,051 $460,062
Property, plant and equipment, net 609,808 534,483 502,938 436,905 385,709
Stockholders' equity 234,759 194,745 180,015 156,976 143,795
Preferred stock with mandatory redemption (c) - 4,214 5,643 7,143 10,000
Long-term debt (c) 264,278 234,919 229,962 188,985 153,082
Total debt 269,583 245,319 235,522 195,440 157,132
- -------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION:
Net cash flows from operating activities (a) $ 55,205 $ 42,377 $ 38,082 $ 33,079 $ 29,125
Capital additions (a) (d) 58,922 38,960 31,389 33,182 27,379
Dividends on common stock 18,313 16,129 14,795 13,546 12,637
Number of metered water customers 299,850 287,516 284,141 264,865 249,533
Number of shareholders of common stock 14,898 13,894 13,650 12,209 11,243
Common shares outstanding (000) 27,727 26,210 25,598 24,377 23,436
Employees (full-time) 542 531 540 535 525
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Continuing operations only.
(b) Includes dividend on preferred stock of subsidiary and is net of allowance
for funds used during construction.
(c) Includes current portion.
(d) Excludes payments for acquired water systems of $24,498 in 1998, $1,226
in 1997, $42,122 in 1996, $26,351 in 1995 and $612 in 1994.
<PAGE>
EXHIBIT 21
(unaudited)
PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
The following table lists all of the subsidiaries of the Company at December 31,
1998:
Philadelphia Suburban Water Company (Pa.)
Utility & Municipal Services, Inc. (Pa.)
PSC Services, Inc. (Del.)
Suburban Wastewater Company (Pa.)
Suburban Environmental Services, Inc. (Pa.)
Little Washington Wastewater Company (Pa.)
Drexel Hill Corporation (Pa.)
Pennsylvania Suburban Water Company (Pa.)
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Philadelphia Suburban Corporation
We consent to incorporation by reference in the Registration Statements on Form
S-8 (1994 Equity Compensation Plan No. 333-70859), (1994 Employee Stock Purchase
Plan No. 033-52557), (1988 Stock Option Plan No. 33-27032), (1982 Stock Option
Plan No. 2-81757); and on Form S-3 (Dividend Reinvestment and Direct Stock
Purchase Plan No. 333-42275), (Customer Stock Purchase Plan No. 33-64301) of
Philadelphia Suburban Corporation of our report dated February 1, 1999, except
as to the information included under the caption "Merger with Consumers Water
Company" on pages 26 and 27 and in the second paragraph on page 23 which are as
of March 10, 1999, relating to the consolidated balance sheets and the
statements of capitalization of Philadelphia Suburban Corporation and
subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of income and cash flow for each of the years in the three-year
period ended December 31, 1998, which report is incorporated by reference in the
December 31, 1998 Annual Report on Form 10-K of Philadelphia Suburban
Corporation.
KPMG LLP
Philadelphia, Pennsylvania
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of capitalization at December 31,
1998, and the consolidated statements of income and cash flow for the year ended
December 31, 1998, 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> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 609,746
<OTHER-PROPERTY-AND-INVEST> 62
<TOTAL-CURRENT-ASSETS> 30,956
<TOTAL-DEFERRED-CHARGES> 7,108
<OTHER-ASSETS> 53,578
<TOTAL-ASSETS> 701,450
<COMMON> 4,652
<CAPITAL-SURPLUS-PAID-IN> 160,440
<RETAINED-EARNINGS> 66,447
<TOTAL-COMMON-STOCKHOLDERS-EQ> 231,539
0
3,220
<LONG-TERM-DEBT-NET> 261,826
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,305
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,452
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 197,108
<TOT-CAPITALIZATION-AND-LIAB> 701,450
<GROSS-OPERATING-REVENUE> 150,977
<INCOME-TAX-EXPENSE> 19,605
<OTHER-OPERATING-EXPENSES> 84,298
<TOTAL-OPERATING-EXPENSES> 103,903
<OPERATING-INCOME-LOSS> 47,074
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 47,074
<TOTAL-INTEREST-EXPENSE> 18,255
<NET-INCOME> 28,819
195
<EARNINGS-AVAILABLE-FOR-COMM> 28,624
<COMMON-STOCK-DIVIDENDS> 18,313
<TOTAL-INTEREST-ON-BONDS> 16,751
<CASH-FLOW-OPERATIONS> 55,205
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
</TABLE>
