U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18552
Pennichuck Corporation
(Name of small business issuer in its charter)
New Hampshire 02-0177370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Water Street, Nashua, New Hampshire 03061
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 603-882-5191
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $1.00 per share)
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
$17,394,794
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the last sales price on March 1, 1999 of the
Registrant's Common Stock as reported on the Nasdaq National Market System
was $33,293,329. For purposes of this calculation, the "affiliates" of the
registrant include its directors and executive officers.
State the number of shares outstanding of each of the issuer's
classes of common stock as of March 1, 1999:
Common Stock, $1 Par Value - 1,722,009 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference into Part II of Form 10-
KSB.
Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held April 16, 1999 are incorporated by reference into
Part III of Form 10-KSB.
TABLE OF CONTENTS
PART I: Page
Item 1. DESCRIPTION OF BUSINESS................................ 2
Item 2. DESCRIPTION OF PROPERTIES.............................. 4
Item 3. LEGAL PROCEEDINGS ..................................... 6
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................... 6
PART II:
Item 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................... 6
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 7
Item 7. FINANCIAL STATEMENTS................................... 7
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 7
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT................................... 8
Item 10. EXECUTIVE COMPENSATION................................. 8
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................. 8
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 8
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K............................... 9
PART I:
Item 1. DESCRIPTION OF BUSINESS
Overview
We are a holding company based in Nashua, New Hampshire. Our
principal operating subsidiaries are engaged primarily in the collection,
storage, treatment, distribution and sale of potable water throughout
southern and central New Hampshire. These subsidiary corporations -
Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc.
("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield"),
are each engaged in business as a regulated public utility, subject to the
jurisdiction of the New Hampshire Public Utilities Commission (the"
NHPUC"). We collectively serve approximately 24,300 residential and 2,000
commercial and industrial customers. We were formed in 1983 following the
reorganization of Pennichuck Water Works, which was first established in
1852, into a dedicated water utility. At the same time several tracts of
land, formerly held for watershed protection purposes, were transferred to
The Southwood Corporation ("Southwood"). Southwood is involved in the
development of commercial and residential real estate. We also conduct
non-regulated, water-related management services and contract operations
through another subsidiary, Pennichuck Water Service Corporation (the
"Service Corporation").
Our Water Business
Pennichuck is franchised by the NHPUC to gather and distribute water
in the City of Nashua, New Hampshire and in portions of the towns of
Amherst, Bedford, Derry, Epping, Hollis, Merrimack, Milford and Plaistow,
New Hampshire. Pennichuck has transmission mains which directly
interconnect its core system in Nashua with the surrounding towns of
Amherst, Hudson, Merrimack and Milford. Our core system, which services
over 20,000 customers, accounts for 97% of Pennichuck's revenues and 96% of
its combined plant in service. Its franchises in the remaining towns
consist of stand-alone satellite water systems serving 1,065 customers.
Pennichuck has no competition in its core franchise area. Currently,
approximately 25% of its water revenues are derived from commercial and
industrial customers and approximately 54% from residential customers, with
the balance being derived from fire protection and other billings to
municipalities, principally the City of Nashua.
Pennichuck East was organized in 1998 to acquire certain water
utility assets from the Town of Hudson, New Hampshire ("Hudson"), following
its acquisition of those assets from an investor-owned water utility which
previously served Hudson and surrounding communities. Pennichuck East is
franchised to gather and distribute water in the New Hampshire towns of
Litchfield, Pelham, Windham, Londonderry, Derry, Raymond and Hooksett,
which are areas adjacent to the service franchise served by Pennichuck.
The water utility assets owned by Pennichuck East consist principally of
water transmission and distribution mains, hydrants, wells, pump stations
and pumping equipment, water services and meters, easements and certain
tracts of land. Pennichuck East serves approximately 3,600 customers and
annual revenues are estimated to be $2.3 million.
Pittsfield serves approximately 650 customers in and around
Pittsfield, New Hampshire with annual revenues of approximately $443,000.
Regulation
Our water utilities are regulated by the NHPUC with respect to their
water rates, securities issues and service. New Hampshire law provides
that utilities are entitled to charge rates which permit them to earn a
reasonable return on the cost of the property employed in serving its
customers, less accrued depreciation and contributed capital ("Rate Base").
The cost of capital permanently employed by a utility in its utility
business marks the minimum rate of return which a utility is lawfully
entitled to earn on its Rate Base. Pennichuck's currently approved water
rates are based on a March 1998 NHPUC order resulting from its latest
approved rate case. Pennichuck is authorized an overall rate of return of
8.34% on an approved rate base of approximately $34.61 million. Pennichuck
East is authorized an overall rate of return of 8.37% on an approved rate
base of approximately $7.5 million. Pittsfield is authorized an overall
rate of return of approximately ten percent on an approved rate base of
approximately $1.6 million.
Our utilities are subject to the water quality regulations issued by
the United States Environmental Protection Agency ("EPA"). The EPA is
required to periodically set new maximum contaminant levels for certain
chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The
quality of our treated water currently meets or exceeds all standards set
by the EPA and we do not anticipate that any significant capital
expenditures for regulatory compliance will be required in the next three
years given the present water quality standards set by the SDWA. The
reauthorization of the SDWA by Congress in 1996 may lead to stricter
monitoring standards which may require additional operating costs for the
Company. It is expected that any additional monitoring and testing costs
arising from EPA mandates should eventually be recouped through water
rates.
Other Operations
The Company formed the Service Corporation to conduct its non-
regulated, water-related activities. Its activities include providing
contract operations and maintenance, water testing and billing services to
municipalities. In 1998, the Service Corporation entered into a long-term
agreement with the Town of Hudson to provide operations and maintenance
contract services to the Town with respect to the water utility assets it
acquired from an investor-owned water utility.
Southwood, the Company's real estate subsidiary, was organized for
the purpose of owning, developing, selling and managing approximately 1,340
acres of undeveloped land in Nashua and Merrimack, New Hampshire formerly
owned by Pennichuck Water for watershed protection purposes.
Since 1988, Southwood has been involved in the planning and
development of two major office parks, Southwood Business Park and
Southwood Corporate Park, located in Nashua, New Hampshire. At the end of
1996, Southwood sold its last remaining lot in the Southwood Business Park
to the State of New Hampshire. Southwood still owns approximately 47 acres
of land in the Southwood Corporate Park which is zoned for commercial use.
In July 1995, Southwood entered into an option agreement with a regional
real estate developer ("the Developer") for the remaining acreage in
Southwood Corporate Park. Under that agreement, the Developer pays to
Southwood an option fee each year equal to the annual carrying costs
associated with that land. The option agreement is for a minimum term of
five years. In September 1997, Southwood and the Developer formed Westwood
Park LLC ("Westwood"), to develop a 404 acre tract of land in northwest
Nashua presently zoned for park-industrial use. Southwood conveyed the
land to Westwood in exchange for a 60% interest in Westwood.
In April 1996, Southwood entered into a joint venture known as Bowers
Pond LLC ("Bowers") for the development of a 46 unit residential
development. Under the terms of the joint venture agreement, Southwood
conveyed the related land parcel to Bowers in exchange for a non-interest
bearing note secured by a second mortgage on the real estate conveyed.
Southwood holds a 50% interest in this joint venture. As of December 31,
1998, 43 homes had been constructed and sold; the remaining 3 lots are
subject to purchase contracts and are scheduled to close in the first
quarter of 1999. Southwood has also recently formed a joint venture to
develop and build another residential development, Heron Cove, an 87-unit,
single-family community located in Merrimack, New Hampshire. The
construction and sale of these units are not expected to begin until the
first quarter of 1999.
Financial Information About Industry Segments
The business segment data of our Company and its subsidiaries for the
latest three years is presented in "Note J - Business Segment Information"
in the Notes to the Consolidated Financial Statements included in Item 7 of
this Form 10-KSB Report.
Employees
We employ 66 permanent employees and officers. Of these, there are
34 management and clerical employees who are non-union. The remaining
employees are members of the United Steelworkers Union. Our current union
contract, which was re-negotiated and completed in February 1997, has been
extended through February 2002. In the opinion of management, employee
relations are satisfactory.
Item 2. DESCRIPTION OF PROPERTIES
Office Buildings
The Company owns a three story, 11,616 square foot building located
in downtown Nashua, New Hampshire which it and its subsidiaries occupy. We
also own a separate building in Nashua which serves as an operations center
and storage facility for our construction and maintenance activities.
Except as noted in "Note H- Acquisition" on page 43 of the Consolidated
Financial Statements of Pennichuck Corporation, there are no mortgages or
encumbrances on our properties.
Water Supply Facilities
Pennichuck's principal properties are located in Nashua, New
Hampshire, with the exception of several source-of-supply land tracts which
are located in the neighboring towns of Amherst, Merrimack and Hollis, New
Hampshire. In addition, Pennichuck owns four impounding dams which are
situated on the Nashua and Merrimack border.
The location and general character of Pennichuck's principal plant
and other materially important physical properties are as follows:
1. Holt Pond, Bowers Pond, Harris Pond and Supply Pond and related
impounding dams comprise the chief source of water supply in Nashua and
Merrimack, New Hampshire.
2. An Infilco Degremont treatment plant using physical chemical
removal of suspended solids and sand filtration with a rated capacity of 35
million gallons per day, located in Nashua, New Hampshire.
3. A water intake plant and pumping facility located on the
Merrimack River in Merrimack. This 20 million gallon per day supplemental
water supply source provides an additional source of water during dry
summer periods and will provide a long-term supply for Pennichuck's service
area.
4. Approximately 672 acres of land located in Nashua and Merrimack
which are owned and held for watershed and reservoir purposes.
5. Ten water storage reservoirs having a total storage capacity of
23.1 million gallons, six of which are located in Nashua, two in Amherst,
one in Bedford and one in Hollis, New Hampshire.
The source of supply for Pennichuck East is a well system owned by
the Town of Hudson in Litchfield, New Hampshire. Pennichuck East has
entered into a long-term water supply agreement to obtain water from this
well system.
Pittsfield owns Berry Pond located in the vicinity of its water
treatment facility in Pittsfield, New Hampshire, which serves as its source
of supply.
Water Distribution Facilities
The distribution facilities of our regulated water companies consist
of the following:
<TABLE>
<CAPTION>
Pennichuck Pennichuck East Pittsfield
---------- --------------- ----------
<S> <C> <C> <C>
Transmission & Distribution
Mains (in miles) 354 103 13
Services 21,422 3,766 623
Meters 21,598 3,766 620
Hydrants 2,135 335 70
</TABLE>
Land Held for Future Development
Following Pennichuck Water Works' reorganization in 1984 into a
holding company structure, approximately 1,088 acres were transferred to
Southwood. Since 1984, Southwood has sold or transferred approximately 779
acres of land to third parties or to participating joint ventures. The
Company has transferred 499 acres of watershed protection land to
Pennichuck since 1984 and currently holds 425 acres of land which have not
been transferred to Pennichuck or Southwood due to access limitations which
restrict the ability to subdivide and transfer that land. Of that acreage,
approximately 242 acres are available for buffer and alternate use.
Based on vegetation, topographical, wetland and hydrological studies,
Southwood has subdivided its remaining 309 acres into buffer (non-
developable) and alternate use (developable) designations, resulting in an
approximate breakout of 108 and 201 acres, respectively. Of the
approximately 201 acres of alternate use land, 102 acres are located
primarily in the northwestern section of City of Nashua, New Hampshire and
99 acres are located in the western and southerly portions of the Town of
Merrimack, New Hampshire. The following table summarizes of the current
approved zoning for Southwood's alternate use land:
<TABLE>
<CAPTION>
Nashua, NH Merrimack, NH Total
---------- ------------- -----
<S> <C> <C> <C>
Residential 55 -- 55
Industrial 47 99 146
--- -- ---
Total Alternate Use Acreage 102 99 201
=== == ===
</TABLE>
Presently, 47 acres of Southwood's alternative-use land in the City
of Nashua are available for immediate development. The remainder of
Southwood's landholdings in both Nashua and Merrimack are classified under
"Current Use" status, which means that we pay property taxes based on the
property's actual use and not its highest or best use.
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any material
litigation or other proceedings which, in management's opinion, would have
an adverse effect on the business, the consolidated financial condition or
the operating results of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
we had no matters which were submitted to a vote of security holders.
PART II:
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Market & Dividend Information" on page 46 of the 1998 Pennichuck
Corporation Annual Report to Shareholders is incorporated herein by
reference. At the record date of March 11, 1999, there were 785 holders of
record of shares of the Company's common stock. The Company's common stock
presently trades on the Nasdaq National Market System under the symbol
"PNNW."
Certain bond and note agreements involving Pennichuck require, among
other things, restrictions on the payment or declaration of dividends by
Pennichuck to the Company. Under Pennichuck's most restrictive covenant,
approximately $4,382,000 of Pennichuck's retained earnings was unrestricted
for payment or declaration of common dividends to the Company at December
31, 1998.
As discussed in "Note F - Stock Based Compensation Plans" in the
Notes to the Consolidated Financial Statements included in Item 7 of this
Form 10-KSB Report, the Company maintains a stock option plan for the
benefit of its officers and key employees. Under the plan, incentive stock
options may be granted to acquire shares of the Company's common stock,
$1.00 par value, at an exercise price equal to the closing sale price of
the Company's common stock on the date of grant. During the 1996 fiscal
year, 510 shares of common stock were sold pursuant to the exercise of
options; during the 1997 fiscal year, 1,575 shares of common stock were
sold pursuant to the exercise of options; and, during the 1998 fiscal year,
6,378 shares of common stock were sold pursuant to the exercise of options
under the plan. The offer and sale of shares of common stock under the
plan is exempt from the registration requirements of the Securities Act of
1933, as amended ("Act"), pursuant to Section 3(a)(11) thereof, as (i) the
Company is incorporated under the laws of and does business within the
State of New Hampshire, and (ii) all employees receiving and exercising
stock option grants are residents of the State of New Hampshire. The
shares acquired pursuant to such exercise are restricted from transfer for
one year following the date of acquisition.
The Company filed a registration statement under the Act on Form S-2
(Commission File No. 333-65527) with respect to 483,000 shares of its
common stock; the offering was declared effective on November 17, 1998.
The shares were sold in a firm commitment underwriting through Edward D.
Jones & Co., L.P., as representative of the several underwriters of the
offering. The aggregate price of the offering amount registered was
$11,350,500; 483,000 shares were sold at an offering price of $19.50 per
share resulting in an aggregate offering price of amount sold of
$9,418,500. The Company incurred total offering expenses estimated to be
$616,000, consisting of underwriting discounts and commissions of $471,000,
listing fees of $39,000, and other expenses (including legal, accounting,
and printing/mailing) of $106,000. None of such expenses were paid directly
or indirectly to directors or officers of the Company or to any affiliate
of the Company or to any person owning ten (10) percent or more of any
class of equity security of the Company. The net offering proceeds to the
Company from the offering were approximately $8.8 million; of this amount,
$4.5 million was used to repay outstanding interim bank debt and the
remainder has been invested in short term securities to fund the Company's
capital improvement projects and to support operating cash flow needs of
the Company. None of such net proceeds were paid directly or indirectly to
directors or officers of the Company or to any affiliate of the Company or
to any person owning ten (10) percent or more of any class of equity
security of the Company.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appears on pages 17 to 26 of the 1998
Pennichuck Corporation Annual Report to Shareholders is incorporated herein
by reference.
Item 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Pennichuck Corporation
appearing on pages 28 to 32, together with the report thereon of Arthur
Andersen LLP dated January 26, 1999 appearing on page 27, and the Quarterly
Financial Data appearing on page 45 of the 1998 Pennichuck Corporation
Annual Report to Shareholders are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's
accountants on any accounting matters or financial disclosures during the
two most recent fiscal years.
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
"Election of Directors" on pages 3 through 7, and "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 8, of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April
16, 1999 are incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
"Executive Compensation" on pages 11 and 12 of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April
16, 1999 is incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" on pages 2 and 3 of the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders on April 16, 1999 is
incorporated herein by reference.
In determining which persons may be affiliates of the Company for the
purpose of disclosing on the cover page of this Form 10-KSB Report the
market value of voting shares held by non-affiliates, the Company has
treated only the members of its Board of Directors and executive officers
as affiliates and has excluded from the calculation all shares over which
such affiliates acknowledge beneficial ownership. No determination has been
made that any director or executive officer or person connected with a
director or executive officer is an affiliate or that any other person is
not an affiliate. The Company specifically disclaims any intention to
characterize any person as being or not being an affiliate.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Relationships and Related Transactions" on page 13 of the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders
on April 16, 1999 is incorporated herein by reference.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of financial statements and exhibits filed as part of this report:
(1) The following Consolidated Financial Statements of Pennichuck
Corporation and subsidiaries, included in the 1998 Annual
Report to Shareholders for the year ended December 31, 1998,
are incorporated by reference in Item 7:
<TABLE>
<CAPTION>
Page Reference In -
Annual
Shareholders Form 10-KSB
Report Report
------------ -----------
<S> <C> <C>
Report of Independent Public Accountants 27
Consolidated Balance Sheets at
December 31, 1998 and 1997 28-29
Consolidated Statements of Income for each of
the years ended December 31, 1998, 1997
and 1996 30
Consolidated Statements of Stockholders'
Equity for each of the years ended December 31,
1998, 1997, and 1996 31
Consolidated Statements of Cash Flows for each
of the years ended December 31, 1998, 1997 and
1996 32
Notes to Consolidated Financial Statements 33-45
(2) The Financial Statement Schedules for each
of the years 1998, 1997 and 1996:
Report of Independent Public Accountants
on Schedules for the years ended
December 31, 1998, 1997 and 1996 13
I - Condensed Financial Information of Registrant 14-16
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
(3) Exhibit Index:
--------------
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<C> <S>
3.1 Restated Articles of Incorporation of
Pennichuck Corporation (Filed as
Exhibit 3.1 to the Company's 1990
Form 10-K Report and incorporated
herein by reference)
3.2 Articles of Amendment to the Articles
of Incorporation of Pennichuck
Corporation (Filed as Exhibit 3.2 to
the Company's 1994 Form 10-KSB Report
and incorporated herein by reference)
3.3 Amended and Restated Bylaws of Pennichuck
Corporation (Filed as Exhibit 3.3 to
the Company's 1995 second quarter
Form 10-QSB Report and incorporated
herein by reference)
10.1 1985 Stock Option Plan (Filed as Exhibit 10.1
to the Company's registration statement on Form 10
filed in April 1990 and incorporated herein by reference)
10.2 Deferred Compensation Program for Directors of
Pennichuck Corporation (Filed as Exhibit 10.2 to the
Company's 1997 Form 10-KSB Report and incorporated
herein by reference)
10.3 Amended Line of Credit Agreement dated October 2, 1991
between Pennichuck Corporation and Fleet Bank-NH
(Filed as Exhibit 10.7 to the Company's 1991 Form 10-K
Report and incorporated herein by reference)
10.4 Second Amendment dated March 23, 1994 to Line of
Credit Agreement between Pennichuck Corporation
and Fleet Bank-NH dated October 2, 1991 (Filed as
Exhibit 10.7 to the Company's 1994 first quarter
Form 10-QSB Report and incorporated herein by reference)
10.5 Amended and Restated Revolving Line of Credit Loan
Agreement dated March 23, 1994 between Pennichuck
Corporation and Fleet Bank-NH
(Filed as Exhibit 10.8 to the Company's 1994 second
quarter Form 10-QSB Report and incorporated herein
by reference)
10.6 Insurance Funded Deferred Compensation Agreement
dated June 13, 1994 (Filed as Exhibit 10.9 to the
Company's 1994 second quarter Form 10-QSB Report and
incorporated herein by reference)
10.7 Amendment Agreement dated May 4, 1995 to Amended and
Restated Revolving Line of Credit Loan Agreement dated
March 23, 1994 between Pennichuck Corporation and Fleet
Bank-NH (Filed as Exhibit 10.8 to the Company's 1995
second quarter Form 10-QSB Report and incorporated
herein by reference)
10.8 1995 Incentive Stock Option Plan (Filed as Exhibit 10.9
to the Company's 1995 second quarter Form 10-QSB Report
and incorporated herein by reference)
10.9 Amendment Agreement dated July 31, 1996 to Amended
and Restated Revolving Line of Credit Loan Agreement dated
March 23, 1994 between Pennichuck Corporation and
Fleet Bank-NH (Filed as Exhibit 10.10 to the
Company's 1996 third quarter Form 10-QSB Report and
incorporated herein by reference)
10.10 Amendment Agreement dated March 18, 1998 to Amended
and Restated Revolving Line of Credit Loan Agreement dated
March 23, 1994 between Pennichuck Corporation and Fleet
Bank-NH (Filed as Exhibit 10.10 to the Company's 1998 first
quarter Form 10-QSB report and incorporated herein by reference)
10.11 Loan Agreement dated April 8, 1998 between Pennichuck
Corporation, Pennichuck East Utility, Inc. and Fleet Bank-
NH (Filed as Exhibit 10.11 to the Company's 1998 second
quarter Form 10-QSB report and incorporated herein by
reference)
10.12 Amendment Agreement dated April 24, 1998 to Loan
Agreement dated April 8, 1998 between Pennichuck
Corporation, Pennichuck East Utility, Inc., The Southwood
Corporation, Pennichuck Water Service Corporation and
Fleet Bank-NH (Filed as Exhibit 10.12 to the Company's
1998 second quarter Form 10-QSB report and incorporated
herein by reference)
10.13 Employment Agreement by and between Pennichuck Corporation and
Maurice L. Arel (Included in this Form 10-KSB Report)
13 1998 Annual Report to Shareholders
(Furnished only for the information of the Securities and
Exchange Commission and is not deemed to be filed except for
those portions which are expressly incorporated herein by
reference)
21 Subsidiaries of Pennichuck Corporation
(Filed as Exhibit 21 to the Company's 1997 Form 10-KSB and
incorporated herein by reference)
23 Consent of Arthur Andersen LLP
(Included in this Form 10-KSB Report)
99 Dividend Reinvestment and Common Stock Purchase Plan, as
amended (Filed as Exhibit 4.1 to Post-Effective Amendment No. 1
to Registration Statement on Form S-3 filed on March 24, 1997
and incorporated herein by reference)
</TABLE>
(b) There were no reports on Form 8-K filed in the fourth quarter of 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Pennichuck Corporation
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Pennichuck Corporation's
Annual Report to shareholders incorporated by reference in this Form 10-
KSB, and have issued our report thereon dated January 26, 1999. Our audits
were made for the purpose of forming an opinion on those basic financial
statements taken as a whole. The schedule listed in the attached index of
this Form 10-KSB is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 26, 1999
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets: $ 3,587,240 $ 366,560
Accounts Receivable 4,695
Refundable Income Taxes 146,057 13,011
Prepaid Expenses 9,915 45,480
---------------------------
Total Current Assets 3,743,212 429,746
Property and Equipment 1,233,493 1,163,424
Less Allowances for Depreciation 524,614 503,346
---------------------------
708,879 660,078
Other Assets 252,958 212,413
Investment in Wholly-Owned Subsidiaries 21,940,924 16,260,847
Advances to Wholly-Owned Subsidiaries 53,750 342,723
---------------------------
$26,699,723 $17,905,807
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Other Current Liabilities $ 141,921 $ 78,412
Long Term Debt 1,500,000 3,680,000
Other Long Term Liabilities 307,558 314,117
Stockholders' Equity 24,750,244 13,833,278
---------------------------
$26,699,723 $17,905,807
===========================
</TABLE>
Pennichuck Corporation
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Revenues $ 76,309 $ 60,698 $ 148,297
Operating Expenses (29,079) (46,026) 53,014
----------------------------------------
Operating Income 47,230 106,724 95,283
Interest Expense 144,116 189,208 198,021
----------------------------------------
Loss Before Income
Taxes and Equity in Net Income
of Subsidiaries (96,886) (82,484) (102,738)
Federal income tax benefit 32,941 28,045 34,931
----------------------------------------
Loss Before Equity
in Earnings of Subsidiaries (63,945) (54,439) (67,807)
Equity in Earnings of Subsidiaries 2,169,998 1,344,530 1,306,292
----------------------------------------
NET INCOME $2,106,053 $1,290,091 $1,238,485
========================================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES $ (41,727) $ (50,760) $ 188,521
-------------------------------------------
INVESTING ACTIVITIES:
Equity Transfer to Subsidiary (2,825,736) (162,185) (465,665)
Purchase of Equipment and
Other Assets (147,401) --- (223,649)
-------------------------------------------
(2,973,137) (162,185) (689,314)
-------------------------------------------
FINANCING ACTIVITIES:
Increase(Decrease) in Notes Payable (6,680,000) 485,000 (1,100,000)
Proceeds from issuance of Equity, net 8,802,337 --- ---
Proceeds from long-term borrowings 4,500,000 --- ---
Advances (to) from Subsidiaries 288,973 536,920 2,519,333
Repayment on Mortgage --- --- (653,057)
Payment of Dividends (970,196) (807,425) (765,367)
Proceeds from dividend reinvestment
and other, net 281,631 141,462 526,188
-------------------------------------------
355,957 527,097
INCREASE IN CASH 3,220,680 143,012 26,304
Cash at Beginning of Year 366,560 223,548 197,244
-------------------------------------------
CASH AT END OF YEAR $ 3,587,240 $ 366,560 $ 223,548
===========================================
</TABLE>
Pennichuck Corporation
Notes to Condensed Financial Statements
NOTE A -- ACCOUNTING POLICIES
Basis of Presentation. In the parent-company-only financial statements,
the Company's investment in its subsidiaries is stated at cost plus equity
in undistributed earnings of its subsidiaries. Parent-company-only
financial statements should be read in conjunction with the Company's
Annual Report to Shareholders for the year ended December 31, 1998.
NOTE B -- LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
Unsecured notes payable and line of credit
revolving loan facility with Fleet Bank-NH
at rates ranging from 7.44% to 8.50% due
June 30, 2000 $ --- $3,680,000
===== ==========
</TABLE>
NOTE C -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its
subsidiaries were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pennichuck Water Works, Inc. $945,181 $794,625 $755,767
Pittsfield Aqueduct Company, Inc. 12,800 12,800 9,600
Pennichuck East Utility, Inc. 12,215 ---- ---
----------------------------------
TOTAL $970,196 $807,425 $765,367
==================================
</TABLE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pennichuck Corporation
----------------------
(Registrant)
Date: March 26 ,1999
--------------
By: /s/ Charles J. Staab
--------------------
Charles J. Staab
Vice President, Treasurer and Chief
Financial Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <S> <S>
/s/ Maurice L. Arel President and Director (Principal
- ------------------------ Executive Officer) March 16, 1999
Maurice L. Arel
/s/ Stephen J. Densberger Executive Vice President
- ------------------------- and Director March 16, 1999
Stephen J. Densberger
/s/ Charles J. Staab Vice President, Treasurer
- ------------------------- Chief Financial Officer
Charles J. Staab and Director (Principal Financial Officer) March 16, 1999
/s/ Bonalyn J. Hartley Vice President and Controller
- ------------------------- (Principal Accounting Officer) March 17, 1999
Bonalyn J. Hartley
/s/ Joseph A. Bellavance Director March 17, 1999
- -------------------------
Joseph A. Bellavance
/s/ Charles E. Clough Director March 16, 1999
- -------------------------
Charles E. Clough
/s/ Robert P. Keller Director March 20, 1999
- -------------------------
Robert P. Keller
/s/ John R. Kreick Director March 17, 1999
- -------------------------
John R. Kreick
/s/ Hannah M. McCarthy Director March 20, 1999
- -------------------------
Hannah M. McCarthy
/s/ Martha E. O'Neill Director March 21, 1999
- -------------------------
Martha E. O'Neill
</TABLE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Agreement, made and entered into as of the 1st day of July, 1995
by and between Maurice L. Arel (the "Executive") of Nashua, New Hampshire
and Pennichuck Corporation (the "Corporation"), a New Hampshire corporation
with principal offices in Nashua, New Hampshire.
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and in consideration of the mutual covenants
and promises set forth in this Agreement, the parties agree as follows:
ARTICLE I
EMPLOYMENT
1.1. The Corporation hereby employs the Executive and the Executive
hereby accepts employment with the Corporation on the date hereof for the
Term (as defined below) of the Agreement, in the position and with the
duties and responsibilities set forth in Article II below and upon the other
terms and subject to the conditions hereinafter set forth.
ARTICLE II
POSITION, DUTIES AND RESPONSIBILITIES
2.1. During the Term of this Agreement, the Executive shall serve as
the President and Chief Executive Officer of the Corporation, and of its
subsidiaries Pennichuck Water Works, Inc., The Southwood Corporation and
Pennichuck Water Service Corporation. Subject only to the supervision,
control and guidance of the Board of Directors of the Corporation (the
"Board"), the Executive shall have all of the duties, responsibilities and
authorities typically enjoyed by a president and chief executive officer of
a corporation to control the day-to-day operations of the Corporation,
including, by example but not by way of limitation, the responsibility for
the overall operations of the Corporation, the supervision over the
property, business and affairs of the Corporation and the power to hire and
dismiss other employees.
2.2. The Executive shall devote substantially all of his business
time and attention to the business and affairs of the Corporation consistent
with his executive position with the Corporation, except for vacations
permitted pursuant to Section 5.4. and Disability (as defined in Section 8.3
hereof). Nothing in this Agreement, however, shall preclude the Executive
from engaging in charitable activities, community affairs and corporate
boards, or giving attention to his investments provided that such activities
do not interfere with the performance of his duties and responsibilities
enumerated within this Agreement.
ARTICLE III
TERM
3.1. The term of employment under this Agreement ("Term") shall be
for the period commencing on July 1, 1995 ("Effective Date") and ending
three (3) years from the Effective Date; provided, however, that commencing
on the first anniversary of the Effective Date and on or about each
anniversary of the Effective Date, the term of this Agreement shall be
extended for subsequent one (1) year periods by vote of the Board of
Directors, unless terminated sooner in accordance with the terms hereof, and
the provisions hereof shall remain applicable for each of such subsequent
three-year periods.
ARTICLE IV
COMPENSATION
4.1. Base Salary. The Executive shall be paid a base salary (the
"Base Salary") equal to $130,000 per annum for the Term. The Base Salary
shall be payable to the Executive in installments on the date on which the
Corporation's other executive officers are paid, but in no event less
frequently than monthly. The Base Salary shall be reviewed by the Board
each year and shall be subject to adjustment in the absolute discretion of
the Board taking into account additional responsibilities, if any, which may
have been assigned to him, corporate and individual performance and general
business conditions.
4.2. Incentive Compensation. During the Term, the Executive shall be
entitled to participate in bonus and incentive compensation plans made
available to executive officers of the Corporation.
4.3. Stock Options. During the Term, the Executive shall be entitled
to participate in any stock option plan or plans made available by the
Corporation.
Federal, state, and local withholding, social security, and other
appropriate taxes shall be deducted from all compensation paid to, or
provided by the Corporation for, Executive as and to the extent required by
law.
ARTICLE V
FRINGE BENEFIT PLANS
5.1. Employee Benefit Programs. The Executive shall be entitled to
(A) receive medical and dental insurance coverage, as and to the extent
provided by the Corporation to its executive officers; (B) receive group
life and disability coverage, as and to the extent provided by the
Corporation to its executive officers; (C) receive insurance on the life of
the Executive in the amount of four (4) times his annual salary, and (D) be
a full participant in (1) all of the Corporation's other benefit plans which
may be in effect from time to time, and (2) all of the Corporation's pension
and other retirement plans and profit-sharing plans, if any, or equivalent
successor plans, if any, that may hereafter be adopted and maintained by the
Corporation, in each case with at least the same opportunity to participate
therein as shall be applicable to other executive officers of the
Corporation. The Corporation acknowledges that the Executive currently
meets the eligibility criteria for participation in all of the Corporation's
present employee benefit programs.
5.2. Reimbursement of Expenses. It is contemplated that in
connection with the Executive's Employment hereunder, the Executive may be
required to incur business, entertainment and travel expenses. The
Corporation agrees to promptly reimburse the Executive in full for all
reasonable out-of-pocket business, entertainment and other related expenses
(including all expenses of travel and living expenses while away from home
on business at the request of, and in the service of, the Corporation)
incurred or expended by the Executive incident to the performance of his
duties hereunder; provided, that the Executive properly accounts for such
expenses in accordance with the policies and procedures established by the
Board and applicable to the executive officers of the Corporation.
5.3 Automobile. The Executive shall be provided the use of a company
automobile. The Corporation shall pay all gas, upkeep and maintenance on
said vehicle, provided, however, that the value of any personal use shall be
included in the Executive's taxable wages reported by the Corporation as and
to the extent required by applicable law.
5.4. Vacation. The Executive shall be entitled, in each year during
the Term, to the number of unpaid vacation days determined by the
Corporation from time to time to be appropriate for its executive officers,
but in no event less than four (4) weeks in any such year (pro-rated, as
necessary, for partial calendar years during the Term). The Executive may
take his allotted vacation days at such times as are mutually convenient for
the Corporation and the Executive, consistent with respect to its executive
officers. The Executive shall also be entitled to all paid holidays given
by the Corporation to its executive officers.
5.5 Membership. The Corporation will provide a membership for
Executive at the Nashua Country Club for business use. The Corporation will
reimburse Executive for all reasonable out-of-pocket expenses incurred by
Executive in connection with his business duties on behalf of Corporation.
ARTICLE VI
INDEMNIFICATION
The Executive shall be entitled, at all times, to the benefit of the
maximum indemnification and advancement of expenses available from time to
time under the Corporation's Articles of Incorporation and Bylaws, and under
the laws of the State of New Hampshire. Such indemnification shall survive
the termination of this Agreement unless such termination is for "Cause" (as
that term is defined in Section 8.2 below). In addition, the Corporation
shall have in full force and effect an officers' liability insurance policy
providing such coverages, exclusions and deductibles as the Corporation and
the Executive shall reasonably agree and as is available on a reasonable
premium basis.
ARTICLE VII
SUPPLEMENTAL RETIREMENT AGREEMENT
The parties acknowledge that they have entered into an Insurance
Funded Deferred Compensation Agreement as of the 13th day of June, 1994
("Supplemental Retirement Agreement"). The parties agree that the
Supplemental Retirement Agreement shall not be affected by any of the terms
hereof.
ARTICLE VIII
TERMINATION
8.1. Termination by the Executive. The Executive may terminate his
employment hereunder for any reason at any time upon at least thirty (30)
days prior written notice to the Corporation. In the event the Executive
terminates his employment, the Executive shall receive accrued but unpaid
salary, bonus (if any) and benefits through the last day of employment only.
8.2. Termination by the Corporation. The Corporation may terminate
Executive's employment hereunder at any time upon thirty (30) days prior
written notice to the Executive, and with or without Cause, with no
liability whatsoever with respect to such date of termination, other than
the obligation to pay or cause to be paid accrued but unpaid salary and
bonus, if any, as provided in Section 8.1 above; provided, however, that if
the Corporation terminates the Executive other than for Cause, or the
Executive's employment is terminated by the Corporation within six (6)
months before or after a "Change of Control" (as that term is defined
below), the Corporation shall provide the Executive with severance benefits,
payable as a lump sum, a series of installments or as salary continuation,
at the Corporation's election, equal to the Executive's then current salary
and fringe benefits for the period of twenty-four (24) months from the date
of termination; and provided further that if the Executive's employment is
terminated for Cause, the Corporation shall after the date of such
termination have no further obligations under this Agreement.
For purposes hereof, "Cause" shall have the same meaning as set forth
in the Supplemental Retirement Agreement, and "Change of Control" shall be
defined as a merger or consolidation which results in the shares of the
Corporation held by the stockholders of the Corporation immediately prior to
such transaction being converted into less than 50% of the outstanding
capital stock of the surviving corporation, or as the sale of substantially
all of the assets of the Corporation, or a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation
is disposed of.
8.3. Disability of the Executive. In the event the Executive shall
be prevented from rendering the essential functions of this position, with
or without reasonable accommodation, unless such accommodation would cause
the Corporation undue hardship, by reason of Disability, the Corporation
shall have the right to declare upon two (2) weeks prior written notice
rendered to the Executive, a Disability termination, whereupon the Executive
shall receive the Disability compensation provided by the Corporation's
disability insurance coverage. The Corporation may in its sole discretion,
accelerate the payment of any amount payable under this Section 8.3. For
purposes hereof "Disability" shall have the same meaning as set forth in the
Supplemental Retirement Agreement.
8.4. Death of the Executive. In the event the Executive dies during
the Term, this Agreement shall automatically terminate without notice on the
date of his death, and the Corporation shall have no further obligations
hereunder except that the Corporation shall pay or cause to be paid to the
Executive's designated beneficiary, or, failing such designation, his
estate, any salary, bonus and benefits due to the Executive in the amounts
and to the extent such payments are provided by the Corporation.
ARTICLE IX
NOTICES
Any notice or other communication ("Notice") pursuant to this
Agreement shall be in writing and shall be deemed to have been given or made
when personally delivered, or when mailed by registered or certified mail,
postage prepaid, return receipt requested, to the other party. In the case
of the Corporation, any such notice shall be delivered or mailed to its
principal office. In the case of the Executive, any such notice shall be
delivered in person or mailed to his last known address as reflected in the
records of the Corporation.
ARTICLE IX
ASSIGNMENT
The Executive acknowledges that the services to be rendered by him are
unique and personal. Accordingly, the Executive may not assign any of his
rights or delegate any of his duties or obligations under this Agreement or
otherwise assign this Agreement. The rights and obligations of the
Corporation under this Agreement shall inure to the benefit of, and shall be
binding upon, the successors and assigns of the Corporation.
ARTICLE X
ARBITRATION
Any dispute, controversy or claim arising out of or relating to this
Agreement shall be settled by arbitration conducted in Nashua, New Hampshire
or other mutually agreeable location. The matter will be heard promptly by
a single arbitrator selected by mutual agreement by the Corporation and the
Executive. Should the Corporation and the Executive be unable to agree upon
an arbitrator within a 30 day period, an arbitrator will be selected in
accordance with the commercial arbitration rules of the American Arbitration
Association. Unless the parties mutually agree otherwise, once appointed,
the arbitrator will make all rulings on procedural and evidentiary matters
and will determine the date, time and place of any hearings. The arbitrator
will issue a written decision within 30 days of the hearing or submission to
him. The arbitrator's decision will be final and binding on all parties.
Any arbitration conducted hereunder is subject to the provisions of RSA 542.
ARTICLE XI
MISCELLANEOUS
11.1. Entire Agreement. This Agreement constitutes the entire
agreement between the parties, relating to the subject matter hereof and
replaces all prior agreements (except the Supplemental Retirement Agreement)
relating to said subject matter.
11.2. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Hampshire without
reference to its conflicts of law provisions.
11.3. Waivers and Modifications. This Agreement, may not, in whole
or in part, be waived, changed, amended, discharged or terminated orally or
by any course of dealing between the parties, but only by an instrument in
writing signed by the parties hereto. No waiver by either party of any
breach by the other or any provision hereof shall be deemed to be a waiver
of any later or other breach hereof or as a waiver of any other provision of
this Agreement.
11.4. Severability. In any case any one or more of the provisions
contained in this Agreement for any reason shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or
unenforceable provisions had never been contained herein.
11.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but which taken
together shall constitute one instrument.
11.6. Section Headings. The descriptive section headings herein have
been inserted for convenience only and shall not be deemed to define, limit,
or otherwise affect the construction of any provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first written above.
WITNESS: PENNICHUCK CORPORATION
/s/ Lynn McLaughlin By: /s/ Charles E. Clough
- ----------------------------- -------------------------------
Chairman of Compensation and
Benefits Committee of
Board of Directors
/s/ Sharen A. Weston /s/ Maurice L. Rael
- ----------------------------- -------------------------------
Executive
EXHIBIT 13
[GRAPHIC OF INDIAN VILLAGE]
---------------
Pennichuck
Corporation
1998
Annual Report
---------------
<PAGE>
[GRAPHIC]
For as long as 20,000 years before the Europeans arrived, Indians inhabited
the northeastern United States. One tribe living in northern New England
was called the Abenaki, meaning "People of the Dawnland." Each day, the
sun's first rays shone on the land of the Abenaki, whose hunting grounds
stretched from the Atlantic Coast in Maine to Lake Champlain in the west,
north to the St. Lawrence, and south across the Merrimack River into
northern Massachusetts.
In addition to providing an abundant supply of fresh fish, the
Dawnland's many lakes and rivers enabled the Abenaki to travel great
distances in their lightweight birchbark canoes. They grew corn, beans and
squash in the rich, fertile soil of the river valleys, and hunted wild
game, including deer, moose, bear and beaver, in the region's expansive
forests.
Individual Abenaki groups, such as the Penacooks were made up of
bands of related families, with grandparents, parents and children, aunts,
uncles and cousins all living, traveling and hunting together. Abenaki
society placed great importance on sharing, generosity and hospitality,
because the health and well being of the group depended on the cooperation
of everyone. No family would feast while their neighbors went hungry, and
hunters were revered as much for their generosity in sharing their kill, as
for their skill with a spear or bow.
The Abenaki believed they were descendants of animals. They hunted
only for food, killed only what they needed, and would apologize to the
dead animal's spirit, thereby maintaining the natural balance that existed
between the human and animal worlds.
While each band of Abenaki had an elected chief, or sagamore, their
authority was limited, and seldom exercised without first consulting
trusted council. When important issues were considered, men, women and
children all had the opportunity to voice their opinions, and the highest
regard was given to the wisdom
CONTINUED: INSIDE BACK COVER
<PAGE>
Pennichuck:
A Historical
Perspective
<PAGE>
[GRAPHICS FROM TOP LEFT, CLOCKWISE: Dean & Main, Newspaper, Hydrant, Mill,
Bowers Dam, Jug, Treatment Plant, Construction, Indian Canoe, Beaver,
Factory, Plaque, Factory, Snow Station, Goose, Faucet, Farm, Fish, Harris
Dam, Laborer]
[GRAPHIC CENTER: River flowing through woods]
<PAGE> 2
Table
of
Contents
Selected Financial Data 3
Letter to Shareholders 4
Review of Operations 6
Board of Directors and Officers 16
Management's Discussion and Analysis 17
Report of Independent Public Accountants 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 30
Consolidated Statements of Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33
Market and Dividend Information 46
Annual Meeting and Shareholder Information 46
Five Year Selected Financial Data 47
Map of Service Territory 48
JANET MONTECALVO
The 1998 Pennichuck Annual Report showcases original artwork by Janet
Montecalvo of Framingham, Massachusetts. A renowned artist and graphic
designer, Janet's illustrations have graced children's books and
educational texts from national publishing houses, including Houghton
Mifflin, Scholastic Incorporated and Cahners. In addition to her work as an
illustrator, Janet creates specialty signs for the film and television
industries. Her work has been featured in numerous feature films and
television shows, and Janet earned an "Emmy" award for signs she created
for an NBC mini-series.
<PAGE> 3
Selected
Financial
Data
TOTAL ASSETS (IN 000'S OF DOLLARS)
$47,719 $49,136 $51,357 $57,240 $70,838
1994 1995 1996 1997 1998
NET INCOME (IN 000'S OF DOLLARS)
$966 $1,148 $1,289 $1,207 $2,106
1994 1995 1996 1997 1998
BASIC EARNINGS PER SHARE
$0.84 $1.00 $1.09 $1.01 $1.61
1994 1995 1996 1997 1998
DIVIDENDS PER SHARE
$.48 $.57 $.65 $.68 $.79
1994 1995 1996 1997 1998
CONSOLIDATED REVENUES (IN 000'S OF DOLLARS)
$10,430 $11,700 $12,417 $12,056 $17,395
1994 1995 1996 1997 1998
<PAGE> 4
Letter
to
Shareholders
DEAR SHAREHOLDERS
I believe 1998 will always stand out as a landmark year in your Company's
history. It was a year of great change, record growth and incredible
accomplishment. The strength of our management planning, the talents of our
dedicated employees, and the resources of our entire organization were all
put to the test. I am very pleased to report that we passed with flying
colors on all counts.
A successful stock offering resulted in the addition of over 1,000
new shareholders, and I would like to take this opportunity to personally
welcome all of you to Pennichuck Corporation. As you will see from this
report, 1998 was another successful year for our water-related operations,
as well as our real estate activities. Each of our business segments
contributed to the overall profitability of your Company.
Total consolidated revenues surpassed $17,000,000 in 1998, resulting
in net income of $2,100,000. We achieved record earnings of $1.61 per
share, enabling us to increase our dividend from 68(cent) per share in
1997, to 79(cent) per share in 1998, as adjusted for our recent three-for-
two stock split. Our post-stock-split annualized dividend now stands at
88(cent) per share. At the end of 1998, the Company's total operating
assets exceed $70 million, compared to $49 million just three years ago.
Gross utility revenues grew to nearly $15,000,000 in 1998, compared
to $11,400,000 in 1997. This increase came as a result of two major new
business acquisitions, combined with a rate increase of 16.8% for our core
system. As part of these rate case negotiations, Pennichuck also gained
approval to consolidate its water rates into one universal core system rate
for 10 of its individual community systems.
Throughout 1998, the majority of our efforts were focused on the
challenge of assimilating two new utilities into the Pennichuck
Corporation, and managing the associated 21% increase in our customer base.
Our acquisition of Pittsfield Aqueduct Company in January 1998, resulted in
the addition of 612 new customers and established a new operating
subsidiary of the same name. In April 1998, after purchasing $7.5 million
in water utility assets from a major water utility in southern New
Hampshire, we formed another subsidiary, Pennichuck East Utility, Inc., to
serve 3,766 new customers in the communities of Atkinson, Derry, Hooksett,
Litchfield, Londonderry, Pelham, Plaistow, Raymond, Sandown and Windham,
NH. Now, both of these new subsidiaries are fully integrated into the
Pennichuck organization.
In conjunction with the expansion of Pennichuck East, Pennichuck
Water Service Company entered into a separate agreement to operate and
manage the water system for the town of Hudson, NH. Although the town
retains ownership of its utility assets, Pennichuck Water Service Company
is responsible for providing service to the 4,760 customers within the
Hudson town limits. This is a long-term, non-regulated business contract
that we believe will generate significant revenues in the years to come.
However, Pennichuck Water Service Company was not successful in its
negotiations to renew the operations and management contract for the town
of Cohasset, MA. Our existing three-year contract expired in June 1998.
Although Pennichuck Water Service Company wasn't the successful bidder, we
are very proud of the accomplishments we made to improve water quality and
reliability while we operated this system.
The Southwood Corporation had another successful year, selling 19
residential lots in its Bowers Pond subdivision. Southwood also gained
approval and began construction of 87
<PAGE> 5
single-family detached condominiums in its Heron Cove development, and we
expect the first sale to occur in the first quarter of 1999. Also, we have
completed the development of the infrastructure in our Westwood Park
industrial subdivision and have sold one lot. Finally, Southwood has
obtained approval to construct an industrial building in Merrimack to be
called Heron Cove Office Park. All these projects were undertaken as joint
ventures with major regional developers.
Three significant financial events happened in the latter part of
1998. The first was a three-for-two stock split which occurred in
September. Then, in November, we completed the sale of 483,000 shares of
common stock, resulting in $9.4 million of new common equity for the
Company. The proceeds were used to pay down interim short-term debt,
thereby strengthening the Company's balance sheet and bringing our
financial ratios more in line with industry averages. Currently, $3.6
million is invested in short-term money market funds and will be used to
finance future growth opportunities and capital improvements. The third
event was the re-listing of Pennichuck common stock on the Nasdaq NMS
exchange. We hope that with this re-listing, the value of our common shares
will be better reflected in the marketplace and that your Company's
financial performance will be more visible in the investment community.
[PHOTO: Maurice Arel]
Maurice Arel
Strategic planning plays a crucial role in your Company's success.
Right now, we are reaping the rewards of sound, forward-thinking management
strategies established over the last decade and even before. Long-term
planning is a tradition that our management team continues today, in order
to ensure Pennichuck's success in the decades ahead.
In closing, I would like to express my gratitude to our employees and
directors for their efforts during the past year. The success of Pennichuck
truly is their success. I would also like to give special recognition to
all our shareholders, both old and new, for your loyalty and support.
Sincerely,
/s/ Maurice L. Arel
Maurice L. Arel
President and Chief Executive Officer
<PAGE> 6
Review
of
Operations
GROWTH AND ACQUISITION
1998 was the culmination of many years of preparation in developing
Pennichuck's long-term growth strategy. Over the last decade, we've been
steadily building our management team, streamlining our operations, and
strengthening our financial resources, such that when significant growth
opportunities arose, Pennichuck would be in a position to fully capitalize
on them. 1998 was the year that everything came together, and when those
new growth opportunities did arise, Pennichuck was more than ready.
Our acquisition of the Pittsfield Aqueduct Company, Inc., an
investor-owned water company with 612 customers in the town of Pittsfield,
NH, was concluded on January 30, 1998. Terms of the agreement provided for
a stock-for-stock exchange, whereby the former owners of Pittsfield
Aqueduct became Pennichuck shareholders. At the time of the acquisition,
Pittsfield Aqueduct had recently increased customers' water rates by
101.6%. This increase was to cover construction and operating expenses for
a new treatment plant, the cost of which had been mortgaged at a rate of
10.5%. Soon after taking over, Pennichuck Corporation succeeded in
refinancing the mortgage at a significantly lower interest rate of 6.5%.
The net benefit of this refinancing was a 3.89% reduction in rates for all
our Pittsfield customers.
[PHOTO: Dam]
Berry Pond Dam
Pittsfield, NH
Our second major expansion occurred in southern New Hampshire. Early
in the year, the town of Hudson voted to buy the local assets of Consumers
Water Company, then immediately re-sell those water systems outside the
town to Pennichuck for $7.5 million. In a separate agreement, your Company
contracted to operate and manage the town-owned system through our
subsidiary, Pennichuck Water Service Company.
With the purchase of these assets, Pennichuck acquired 24 community
water systems that, together, now comprise Pennichuck East Utility, Inc.
The condition of these systems ranged from excellent to very poor. As part
of our process
<PAGE> 7
to integrate these systems into the Pennichuck organization, we immediately
implemented our standard periodic preventive maintenance programs and
developed a capital improvement plan for each system. Specifically, our
plan for the town of Windham, NH, includes establishing an alternative
source of supply from nearby Canobie Lake, to solve issues of excessive
hardness, high manganese levels and frequent water outages.
[PHOTO: Dam Construction]
Holt Dam Construction
Nashua, NH
Throughout the year, we concentrated on addressing aesthetic issues
in certain community well systems, by adding potassium permanganate and
green sand filtration to eliminate iron and manganese in the water. We also
installed aeration units to reduce radon levels in several of our community
wells, and by the end of this year, all our community well systems will
have some kind of radon mitigation in place.
[PHOTO: Dam]
Holt Dam Completed
Nashua, NH
CORE SYSTEM IMPROVEMENTS
At Pennichuck, we are always fine-tuning our operations to gain greater
efficiency and better water quality. For example, we replaced the
hypochlorite pumps in our main treatment plant, perfecting the level of
disinfectant in the water while avoiding any perceptible chemical taste.
Given the varying elevations in our region, maintaining adequate and
consistent system-wide water pressure throughout all our communities
presents a challenge. In some of these communities, Pennichuck has
retrofitted variable frequency drives that enable our booster pumps to
maintain a consistent level in our holding tanks.
<PAGE> 8
Now, with our booster pumps operating within a stricter range, not only can
we maintain a more consistent pressure so our customers experience less
fluctuation at the tap, we have also dramatically cut our energy usage,
which in turn lowers our operating costs.
Oftentimes, innovative breakthroughs are simply the result of good
old-fashioned ingenuity. In our effort to improve water pressure to
approximately 200 hilltop homes in the Beauview Avenue area of our system,
we evaluated a number of potential solutions. Installing a special booster
zone was too expensive, given the small number of customers affected.
Instead, we chose to tie into an existing high pressure system half a mile
away. As a result, we succeeded in greatly improving service to this
hilltop community while incurring minimal expense.
Infrastructure replacement is a priority in our operations. This past
year, we replaced Holt Pond Dam, the last of our pre-1900's vintage dams.
Holt Dam is the smallest of the five dams owned by Pennichuck Water Works,
and straddles the town line between Nashua and Merrimack. Originally
constructed in 1890, Holt Dam has been refaced a number of times over its
100-year life. Although it was a wood crib construction, most of the below
grade timbers were still in good condition. The new dam is made of
reinforced concrete and provides flash board control to better regulate the
pond level.
Since acquiring Pittsfield Aqueduct and Pennichuck East, we have
upgraded the water monitoring systems already in place, in order to
integrate them with Pennichuck's more sophisticated Supervisory Control and
Data Acquisition (SCADA) system. At the same time, we continued to expand
and improve SCADA, by incorporating a number of new facilities into the
system using computers that communicate via radio signals. Every four
seconds, the central computer in our treatment plant pulls data from the
computer monitoring each pumping station. Should something be amiss, an
alarm will sound to alert an operator, who can call up and review on-screen
data showing the current condition of the system.
PLANNING FOR THE FUTURE
Long-term planning and preparation has always been a strength at
Pennichuck. It's an ongoing process where the benefits of the strategies we
put in place today, may only be fully realized many years into the future.
Least-cost planning involves forecasting
<PAGE> 9
the future demand and supply capabilities of your Company, and identifying
ways to increase capacity at the lowest possible cost. In 1998, Pennichuck
conducted a thorough in-house study to calculate the future demand for
water over the next 20 years, based on projected population growth within
our region. We assessed how current trends such as society's moving toward
a more service-oriented economy, and the growing awareness for
conservation, would impact consumer usage habits. On completion of our
study, we concluded that Pennichuck is in an excellent position to meet the
future demand for water, with no foreseeable need to develop new sources of
supply.
[PHOTO: Man in lab coat]
Pilot Study of Filtration Media at Treatment Plant
Nashua, NH
While Pennichuck has an abundant supply of water to satisfy normal
usage, peak summer periods still place an inordinately high burden on our
water systems. Indeed, overall consumption by some customers increases as
much as ten times, going from 200 gallons up to 2,000 gallons per day. As
part of our least-cost planning, we weigh the benefits of creating new
sources of supply for secondary uses such as lawn sprinkling during the
summer months, against alternative strategies such as conservation programs
or implementing higher water rates during the summer, to encourage more
responsible water usage.
WATERSHED MANAGEMENT
Preserving the quality of our source water is paramount to ensure a safe,
reliable supply of water for the future. In 1990, Pennichuck completed a
comprehensive Watershed Management Plan that identifies the source of all
the water that ultimately flows into the Pennichuck Brook System. In the
plan, we divided our 18,000-acre watershed into sub-watershed
<PAGE> 10
areas, and analyzed how the water quality in each subsection would impact
the Pennichuck Brook. Our efforts in recent years have focused on
rectifying problem areas identified in the primary study.
[PHOTO: Construction site]
Pennichuck Brook Urban Runoff Project
Nashua, NH
In a growing urban watershed area such as ours, residential and
commercial development can have a serious adverse impact. In the early
days, stormwater runoff was collected and piped directly into the nearest
stream or pond. However, phosphorous and other chemicals in the atmosphere
settle out on roadways, parking lots, rooftops and other impervious
surfaces. When it rains, the phosphorous is washed away along with the
stormwater, raising the concentration of these chemicals in our ponds.
Phosphorous is a powerful plant nutrient that promotes heavy weed growth,
which in turn, prevents natural settling and reduces the clarity of the
water.
[PHOTO: Men at ribbon cutting]
Ribbon Cutting Ceremony
Pennichuck Brook Urban Runoff Project
The Pennichuck Brook Urban Runoff Project is the first stormwater
treatment system of its kind in our state. It is located on the campus of
New Hampshire Community Technical College, in one of the most densely
developed areas of our watershed. The project entailed constructing vast
man-made wetlands to capture stormwater runoff, allowing it to slowly
filter through the earth and back into the water table, rather than being
discharged directly into the Pennichuck Brook.
Pennichuck management is also working with officials of the five
towns within our watershed, to evaluate planning requirements and building
codes, and establish new regulations that would help protect our water
supply. One ordinance has already been approved by the city of Nashua,
<PAGE> 11
under which any new development or redevelopment projects must now satisfy
the requirements for minimum setbacks and on-site stormwater treatment
stipulated in the Water Supply Protection Ordinance. Our challenge in 1999
will be to continue to work toward getting the other towns to adopt similar
requirements, and to raise public awareness for the importance of these
protective measures.
Yet another ongoing study with significant long-term impact is the
evaluation of alternative filter media for use in Pennichuck's core system
treatment plant. The one-millimeter sand we now use was installed 20 years
ago, and although it meets current requirements, new regulations will bring
more stringent water quality standards in the future. The results of the
study will determine which filtration medium is the most effective.
ECONOMIES OF SCALE
Doing more with less -- be it less energy, less maintenance, or less
manpower -- that's the key to Pennichuck's profitable growth. Our
operations and maintenance agreement in the town of Hudson illustrates this
point. This is a sizeable operation with over 4,700 customers. Yet,
Pennichuck is able to manage operations from our headquarters in Nashua,
drawing on the proven expertise of our seasoned management team and
administrative support professionals. Utilizing the talents and technical
resources of our existing organization creates huge economies of scale. As
a result, the town of Hudson enjoys the highest level of operating service
at the lowest possible price. It's a win-win situation for the town and for
Pennichuck. To date, Hudson is very pleased with the service provided, and
we've succeeded in achieving the financial goals we set for this contract.
Similarly, we continue to consolidate all of our customer service
operations, now serving over 22 communities from our Nashua headquarters.
Our acquisitions created the daunting task of converting all customer data
from the previous
[PHOTO: Women at computer]
Utility Billing Program
Customer Service Operations
<PAGE> 12
companies' administrative systems into the Pennichuck system to facilitate
billing and account information. Conversion of these records coincided with
our implementing a new utility billing package. This new software provides
greater administrative efficiencies for us, and provides better account
information for our customers.
One of the issues we read about every day concerns potential problems
caused at the turn of the next millennium, better known as the Y2K bug.
Over the last three years, we've been working diligently to ensure all the
software controlling Pennichuck's key financial and operational functions
are Y2K-compliant. An interesting fact is that because Pennichuck has been
operating since 1852, before the turn of this century, much of our data
already incorporated 8-digit date coding, so our task was not as difficult
as it might have been if we were a younger company. Nonetheless, the Y2K
issue is one we are taking very seriously, and we are happy and confident
with our progress to date.
[PHOTO: Construction site]
Main Street Upgrade
Nashua, NH
Pennichuck continues an active public relations effort, regularly
publishing newsletters to keep customers in our core and community systems
informed about system upgrades and changes in service. These newsletters
are supported by supplemental mailings to new and existing customers that
explain the details and the importance of special programs such as our
summer conservation program. On September 1, 1998, we also produced our
first "Water Quality Report" that gives an overview of our source of supply
and water quality statistics. Although this communication will be
<PAGE> 13
published annually per federal regulations, we are very pleased to have
completed our first issue one full year ahead of the government's October
1999 deadline.
Of course, our public relations efforts go beyond printed material.
Once again, we enjoyed a very successful "Water Week" when we conducted
tours of our treatment plant for local schoolchildren, and explained the
process of delivering quality water to customers' homes. We also launched
our website, providing all our latest news and financial information at
"www.pennichuck.com."
REAL ESTATE ACTIVITIES
Throughout our 150 year history, Pennichuck Corporation and its
predecessors made strategic land purchases. Today, we are one of the
largest land owners in southern New Hampshire. Not only is real estate
investment a prudent business practice, providing a means to diversify
corporate holdings, it also enables us to better control and manage the
ongoing development in critical areas adjacent to our watershed.
[PHOTO: Housing development]
Bowers Pond Development
Nashua, NH
[PHOTO: House]
Heron Cove
Merrimack, NH
Southwood Corporation is Pennichuck Corporation's real estate
subsidiary. It has always been our corporate mandate that real estate
projects undertaken by Southwood must be environmentally compatible with
our natural watershed resources.
Currently, Southwood is involved with two residential projects
undertaken as a joint venture with a major regional developer. The Village
at Bowers Pond project is nearing completion, with all 46 units either sold
or under P & S agreement. We sold 19 lots in this development during 1998,
<PAGE> 14
[PHOTO: Office building]
Delta Education
Westwood Park, Nashua, NH
and we expect the remaining three lots to close in the first six months of
1999.
Heron Cove at Merrimack is a community of 87 single-family detached
condominiums designed to preserve the natural beauty and integrity of the
existing land. These units are geared toward the mature segment of the
population, offering convenient, single-story living in a quiet and
picturesque setting. In 1998, we gained approval and began construction of
the development's infrastructure. Construction of the condominiums
themselves started in late '98. We anticipate a three-or four-year build-
out on this project, with the first closings occurring in the first quarter
of '99.
On the commercial side, Southwood completed construction of the
infrastructure, including roads, utilities and lighting, for the first
phase of Westwood Park. This is a 90-acre industrial park we're developing
as a joint venture with Winstanley Enterprises, Inc. The first sale has
already occurred; a 23-acre parcel bought by Delta Education. Winstanley
Enterprises is also our partner in Southwood Corporate Park. While no sales
were made in this development during 1998, our joint venture partner will
continue to aggressively market both Southwood Corporate Park and Westwood
Park throughout 1999.
In addition, Southwood gained approval to construct a 39,000-square-
foot office building to be known as Heron Cove Office Park. We expect this
building will be ready for occupancy around May 1, 1999, with the anchor
tenant being H.J. Stabile & Son, Inc., our joint venture partner in this
project.
We believe that bringing dormant land into mainstream use is
beneficial to the economic growth of the region. With Southwood, Pennichuck
leads by example, creating developments that satisfy both business and
environmental objectives.
PENNICHUCK PEOPLE
In 1998, Stephen J. Densberger, executive vice president of Pennichuck
Corporation, received the prestigious George Warren Fuller Award from the
New England Water Works Association.
<PAGE> 15
Established in 1937, this award is presented annually for distinguished
service in the water supply field, and in commemoration of the sound
engineering skill, brilliant diplomatic talent and constructive leadership
which characterized the life of George Warren Fuller, one of America's most
eminent engineers. Annually, each regional section of the American Water
Works Association may designate one of its members to receive a Fuller
award to recognize publicly that individual's contributions toward the
advancement of water works practice in the local region. In presenting him
with the Fuller Award, the New England Water Works Association recognized
Stephen for his many years of leadership and dedicated service to the
industry.
[PHOTO: Executive]
Stephen J. Densberger
Executive Vice President
During the year, our ranks increased from 57 employees to 66. Most of
these new hires came from the companies that previously operated Pittsfield
Aqueduct and Pennichuck East utilities. They brought with them invaluable
experience that contributed to our success in operating these systems.
Indeed, the effort put forth by all the employees of Pennichuck before,
during and after the acquisitions is truly commendable. Everyone embraced
the challenge, doing whatever was necessary to ensure our success, in what
proved to be an incredibly rewarding year for Pennichuck.
<PAGE> 16
Board
of
Directors and Officers
[PHOTO: Board members]
Board of Directors
Seated left to right: Charles J. Staab, Stephen J. Densberger, Maurice L. Arel,
John R. Kreick, Joseph A. Bellavance Standing left to right: Hannah M.
McCarthy, Robert P. Keller, Charles E. Clough, Martha E. O'Neill
BOARD OF DIRECTORS
Maurice L. Arel, President, Chief Executive Officer, Pennichuck Corporation
Joseph A. Bellavance, President, Bellavance Beverage Company, Inc.
Charles E. Clough, President, Freedom Partners, LLC
Stephen J. Densberger, Executive Vice President, Pennichuck Corporation
Robert P. Keller, President and Chief Executive Officer,
Eldorado Bancshares, Inc.
John R. Kreick, Phd., CEO, Lockheed Sanders, retired
Hannah M. McCarthy, President, Daniel Webster College
Martha E. O'Neill, Esq., Clancy and O'Neill, P.A.
Charles J. Staab, Vice President, Chief Financial Officer and Treasurer,
Pennichuck Corporation
SENIOR BOARD OF DIRECTORS
John C. Collins
OFFICERS
Maurice L. Arel, President, Chief Executive Officer
Stephen J. Densberger, Executive Vice President
Charles J. Staab, Vice President, Chief Financial Officer and Treasurer
Bonalyn J. Hartley, Vice President-Controller
Donald L. Ware, Vice President, Chief Engineer
James L. Sullivan Jr., Secretary
<PAGE> 17
Management's Discussion
and
Analysis
Pennichuck Corporation (the "Company") has five wholly-owned subsidiaries.
Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc.
("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield")
are involved in water supply and distribution in cities and towns
throughout southern and central New Hampshire. These water subsidiaries are
regulated by the New Hampshire Public Utilities Commission (the "NHPUC")
and, as such, they must obtain approval to increase their water rates to
recover increases in operating expenses and to obtain the opportunity to
earn a return on rate base investments. Pennichuck Water Service
Corporation (the "Service Corporation") is involved in non-regulated,
water-related services and operations and The Southwood Corporation
("Southwood") owns, manages and develops real estate.
In Management's Discussion and Analysis we explain the general
financial condition and the results of operations for the Company and its
operating subsidiaries, including:
* What factors affect our business,
* What our earnings and costs were in 1998, 1997 and 1996,
* Why those earnings and costs were different from the year before,
* Where our earnings come from,
* How all of this affects our overall financial condition,
* What our expenditures for capital projects were in 1998, and
* Where cash will come from to pay for future capital expenditures.
As you read Management's Discussion and Analysis, please refer to our
Consolidated Financial Statements contained in this Report and the Selected
Financial Data appearing on page three.
RESULTS OF OPERATIONS
In this section, we discuss our 1998, 1997 and 1996 results of operations
and the factors affecting them. We begin with a general overview of our
earnings per share (EPS) generated by our businesses and a discussion of an
accounting change we recently made that affects our historical financial
statements.
TOTAL EARNINGS PER SHARE OF COMMON STOCK
Twelve Months Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Water Utility Operations $1.44 $ .83 $ .91
Real Estate and Other Operations .17 .18 .18
----- ----- -----
Consolidated EPS $1.61 $1.01 $1.09
===== ===== =====
</TABLE>
RESTATEMENT FOR MERGER WITH PITTSFIELD
On January 30, 1998, we merged with Pittsfield by
<PAGE> 18
exchanging 49,428 of our shares for substantially all of the outstanding
common stock of Pittsfield. We used the pooling-of-interests method to
account for this merger. This methodology requires us to add Pittsfield's
historical financial statements with the Company's historical financial
statements for all periods which are shown prior to January 30, 1998.
You will notice that our consolidated net income and earnings per
share actually decreased from $1.09 in 1996 to $1.01 in 1997. This is not
indicative of the expected trend in future earnings of our Company. The
decrease is caused, primarily, by a one-time charge of approximately $.07
per share against our 1997 earnings per share. That charge related to
certain merger and other one-time costs of Pittsfield which were written
off in the fourth quarter of 1997. The inclusion of Pittsfield's financial
data did not have a material impact on any other aspects of the
consolidated financial statements of your Company.
RESULTS OF OPERATIONS -
1998 COMPARED TO 1997
In this section, we discuss the factors that affected our earnings for 1998
and 1997. Our consolidated revenues are generally seasonal, due to the
overall significance of the water sales of our water utility business as a
percent of consolidated revenues. Water revenues are typically at their
lowest point during the first and fourth quarters of the calendar year.
Water revenues tend to be greater in the second and third quarters because
of increased water consumption by our residential customers during the late
spring and summer months. In addition, our consolidated revenues are
significantly affected by sales of major real estate parcels which may
occur from time to time (see discussion below).
For the twelve-month period that ended on December 31, 1998, our
consolidated net income exceeded $2.1 million, or $1.61 per common share,
compared to $1.2 million, or $1.01 per common share, for 1997. The
consolidated revenues from all of our business activities in 1998 were
nearly $17.4 million, representing a $5.34 million, or 44.3%, increase over
last year. As we discuss below, that increase in consolidated operating
revenues is principally attributable to:
* Our water utility operations which now include the operating
activities of Pennichuck and our two new subsidiaries,
Pennichuck East and Pittsfield; and
* A major land sale which occurred in the third quarter of 1998.
WATER UTILITY OPERATIONS
The operating revenues from our water utility operations totaled nearly $15
million in 1998. This represents a $3.56 million increase in water revenues
compared to 1997. There are several reasons for this increase:
* First, our largest water utility, Pennichuck,
<PAGE> 19
was granted a permanent rate increase of approximately 16.8% by
the NHPUC effective on April 1, 1998. Beginning on that date, we
were authorized to increase our rates on water billings to our
customers. For 1998, our water utility revenues include
approximately $1.2 million relating to that rate increase.
* Second, Pittsfield's revenues more than doubled, from $215,000
in 1997, to $443,000 in 1998. The 106% increase in Pittsfield's
revenues resulted from a 101% rate increase which was approved
by the NHPUC in December 1997. We were granted that increase in
rates principally to allow us to recover the costs associated
with a $900,000 water treatment facility completed in October
1997.
* The third major factor affecting our increased water revenues
was the addition of our newly created water subsidiary,
Pennichuck East. Pennichuck East was formed in April 1998 and
serves approximately 3,600 customers in southern New Hampshire.
Pennichuck East contributed approximately $1.93 million in water
revenues during its first nine months of operation in 1998.
Our actual expenses for operating our water utility business include
Such broad categories as:
* Water treatment and purification,
* Pumping and other distribution system functions,
* General and administrative functions,
* Depreciation on existing operating assets, and
* Taxes other than income taxes.
On a combined basis, those utility operating expenses increased by
$1.75 million to $9.9 million for calendar year 1998. The principal reasons
for this increase were:
* $1.27 million relating to the additional operations of
Pennichuck East which commenced on April 8, 1998,
* $267,000 of additional depreciation expense recorded by
Pennichuck as a result of a higher composite depreciation rate
which we began using on April 1, 1998 (from 2.15% to 2.44%), and
nearly $4.2 million of new plant assets, and
* $116,000 of additional water treatment costs, principally due to
increased pumpage over 1997.
CONTRACT OPERATIONS
In April 1998, the Service Corporation signed a five year contract with the
neighboring Town of Hudson, New Hampshire ("Hudson"). We provide certain
operations and maintenance functions for Hudson in
<PAGE> 20
exchange for a fixed monthly fee as agreed upon by us and Hudson. In 1998,
revenues from this contract and other non-regulated operating activities
totaled $436,000. For the same period in 1997, revenues from our Service
Corporation were approximately $66,000, consisting of $46,000 from contract
operations and $20,000 from sundry leases and rents.
REAL ESTATE OPERATIONS
For the twelve months ended December 31, 1998 and 1997, we recognized
revenues from our real estate business activities of $1.91 million and
$514,000, respectively. In the third quarter of 1998, we recognized $1.3
million from the sale of a certain land parcel by Westwood Park LLC, of
which Southwood is a 60% owner. In addition, Southwood has recognized
$488,000 in revenues earned through its Bowers Pond LLC joint venture, and
$89,000 of option fee income earned under a development option agreement
with a regional developer.
The expenses associated with our real estate activities increased
from $198,000 in 1997 to $1.42 million in 1998. Of that increase,
approximately $1.1 million relates to the allocable land and infrastructure
costs for the major land parcel we sold in the third quarter of 1998. In
addition, Southwood adjusted its basis in a certain piece of residential
property, reflecting the demolition of an existing dwelling which was no
longer deemed useful. That write-down, together with the cost of razing the
dwelling, amounted to nearly $90,000 in the third quarter of 1998. The
remaining expenses are primarily for property taxes on Southwood's real
estate holdings, which were $76,000 in 1998 compared to $80,000 in 1997.
RESULTS OF OPERATIONS -
1997 COMPARED TO 1996
For the year ended December 31, 1997, our restated consolidated net income
was $1.2 million, or $1.01 per share, compared to $1.3 million, or $1.09
per share, in 1996. That decline was a result of certain one-time merger
costs recorded by Pittsfield and the write-off of certain Pittsfield
deferred charges during the fourth quarter of 1997. We also had two major
real estate sales in 1996, which provided us with $1.0 million of real
estate revenues, and we did not have any such major land sales in 1997.
WATER UTILITY OPERATIONS
Our water utility businesses provided us with operating revenues of $11.4
million for 1997 which is a 4.6% increase over 1996. This increase resulted
primarily from:
* A 5.1% temporary rate increase granted to Pennichuck,
* A 3.6% increase in water consumption, and
* A 1.1% increase in new customers.
<PAGE> 21
The increase in consumption reflects the drier and warmer than normal
third quarter we experienced in 1997 compared to 1996, and a 3.6% increase
in industrial and commercial consumption within Pennichuck's core system.
In May 1997, we filed a petition with the NHPUC requesting authority
to increase Pennichuck's water rates by approximately 18%. This increase
was necessary because Pennichuck's actual overall rate of return had
declined below its then authorized rate of return of 8.81%. Our rate of
return declined primarily because of:
* $4.5 million in additional investment in operating assets made
since our last rate increase in 1994, and
* Increased operating costs totaling nearly $300,000 for property
taxes and water treatment expenses incurred in 1996 and 1997.
In August 1997, the NHPUC granted Pennichuck's request for a
temporary rate increase, resulting in approximately $175,000 of additional
revenues which we realized in 1997. In February 1998, the NHPUC approved a
permanent rate increase of 16.8%, which we expect will provide
approximately $1.7 million of additional revenues on an annualized basis.
In December 1997, the NHPUC granted a 101% increase in Pittsfield's
water rates, to recover the operating and capital costs associated with the
construction of its new water treatment facility which became operational
in October 1997.
The operating expenses for our water utility businesses increased
5.2% from $7.7 million in 1996 to $8.1 million in 1997. The increased
operating expenses were principally due to:
* A $211,000 increase in additional treatment and production costs
incurred at Pennichuck's main water treatment facility in
Nashua, New Hampshire,
* A tripling in unit rates charged by the city of Nashua for
treatment plant by-products, and sludge generated by our
treatment facility and ultimately introduced into the city's
sewer treatment system ($154,000 in 1997 compared to $89,000 in
1996),
* Electrical and other power costs associated with Pennichuck's
treatment plant and outlying pumping stations increased by
nearly $39,000 over 1996, reflecting a 5.25% increase in per
kilowatt charges incurred during 1997, and
* Depreciation and property taxes related to $5.3 million of new
investment increased by $75,000 and $32,000 for calendar years
1997 and 1996, respectively.
In addition, during the fourth quarter of 1997, the
<PAGE> 22
NHPUC disallowed approximately $88,000 of deferred expenses and
miscellaneous studies which Pittsfield had incurred. Since those costs will
not be recoverable through future rates, they were written off in December
1997.
CONTRACT OPERATIONS
The Service Corporation was a 50% partner in a joint venture with a
regional water engineering firm from July 1, 1995 to June 30, 1998. The
purpose of the joint venture was to provide water-related operations and
maintenance contract services to municipalities, especially those that may
face financial difficulty complying with the required provisions of the
federal Safe Drinking Water Act ("SDWA"). Contract operations and public-
private partnerships provide viable alternatives for such municipalities.
During 1997, the joint venture provided operations and maintenance contract
services to the Town of Cohasset, Massachusetts, which included the
operation of its water treatment plant and distribution system. This joint
venture was not successful in renewing this three year contract, which
expired on June 30, 1998. For the twelve months ended December 31, 1997,
the Service Corporation had revenues of approximately $66,000, resulting in
pretax income of $19,000.
REAL ESTATE OPERATIONS
Southwood generated revenues of $514,000 for the year ended December 31,
1997, which was a significant decrease of $807,000 from 1996. Operating
results in 1996 included sales of Southwood's last two parcels in Southwood
Business Park, totaling $1.0 million. Southwood did not have any major land
sales in 1997.
Southwood is a 50% partner in Bowers Pond LLP, a joint venture for
the construction and sale of 46 homes. In 1997, we recorded approximately
$408,000 of revenues for this project, compared to $208,000 in 1996. At the
end of 1997, there were 22 lots still unsold in that development, of which
we sold 19 in 1998.
Other revenues from our real-estate-related activities during 1997,
included approximately $92,000 of option income earned under a September
1995 development agreement with a regional developer, with respect to 47
acres in the Southwood Corporate Park.
The operating expenses of Southwood totaled $198,000 for 1997, a
$784,000 decrease from 1996. In 1996, we recorded $730,000 of
infrastructure costs attributable to the 1996 Southwood Business Park land
sales discussed previously. The major components of Southwood's operating
expenses are property taxes and property management costs. In 1997, those
expenses were approximately $80,000 and $23,000, respectively. Property
taxes for 1997 increased $24,000 over 1996, principally due to the receipt
of certain tax abatements from the city of Nashua during 1996. There were
no significant adjustments to Southwood's property assessments during 1997.
<PAGE> 23
LIQUIDITY AND FINANCIAL CONDITION
In the following paragraphs, we discuss the financial condition of the
Company and its wholly-owned subsidiaries. This discussion focuses
primarily on the change in our consolidated balance sheet accounts from
December 31, 1997 to December 31, 1998, and on the adequacy of capital
needed for our business activities.
The primary source of cash, which we need for normal operating
activities, capital projects and dividend payments to our shareowners, is
the operating cash flow which we generate from day-to-day activities.
Historically, during those periods where operating cash flow was not
sufficient, we have borrowed funds under a revolving loan facility (the
"Loan Agreement") with our bank, Fleet Bank-NH ("Fleet"). The Loan
Agreement allows us to borrow up to $4.5 million at interest rates tied to
Fleet's cost of funds or LIBOR, whichever is lower. At December 31, 1998,
there were no borrowings outstanding under this Loan Agreement.
For 1999 and 2000, our cash flow needs are expected to be met by
short-term investments of nearly $3.6 million available at the end of 1998,
and from internally-generated funds projected during these years. The
short-term investments which we had on hand at the end of 1998 are the
remaining proceeds from an underwritten public offering which we completed
on November 30, 1998. In that offering, we issued 483,000 new common shares
which was nearly a 40% increase in the number of shares issued and
outstanding of the Company at that time. The net proceeds to us were
approximately $8.8 million, of which we used $4.5 million to repay
outstanding interim bank debt.
During the first quarter of 1998, we refinanced a $1.1 million
mortgage note issued by Pittsfield to a local bank using our Loan
Agreement. On April 24, 1998, we refinanced $1.5 million of outstanding
indebtedness under the Loan Agreement into a seven year note. This note is
payable interest only for seven years and is secured by, among other
things, the guarantees of Southwood and the Service Corporation.
As we discuss in Note H- "Acquisition" in the Notes to the
Consolidated Financial Statements, we purchased Pennichuck East's assets
with the proceeds of two bank loans totaling $7.5 million. Those loans of
$4.5 million and $3.0 million are for terms of 7 years and 2 years,
respectively, and the latter loan was repaid in November 1998 from the
proceeds of our common stock offering. In connection with the $1.5 million
and $4.5 million, seven year notes, we have entered into certain interest
rate swap agreements which fix the interest rates at 6.50% for the term of
these notes.
Excluding the acquisition of the Pennichuck East assets, our capital
expenditures totaled $4.4 million in 1998. Practically all of our capital
expenditures in 1998 were for projects relating to our water utility
business. Those projects included:
<PAGE> 24
* The replacement of 8,800 linear feet of pre-1900 distribution mains,
* The addition of more efficient motor starters on Pennichuck's
major electric pumps at its treatment plant,
* The reconstruction of one of Pennichuck's dams, and
* The relocation of distribution mains to accommodate ongoing
state highway construction projects.
The remaining items in the Company's 1998 capital program reflect
expenditures for ongoing, routine investment in new meters, services,
distribution mains and hydrants. For 1999, we expect that our total
expenditures for capital projects will be approximately at the same level
as in 1998.
The Consolidated Balance Sheet at December 31, 1998 also reflects a
line item captioned "Minority Interest" totaling $314,000. This represents
a 40% interest held by a third party in Westwood Park LLC ("Westwood"), a
real estate development venture. Southwood owns the remaining 60% majority
interest in Westwood, whose financial statements are included in the
accompanying consolidated financial statements at December 31, 1998. In May
1998, Westwood sold a tract of land to a third party for approximately $1.3
million. The terms of that sale required Westwood to use the sales proceeds
to construct the necessary access road and infrastructure for the
purchaser. The gain from this sale was recognized in the third quarter of
1998 when the infrastructure work was completed.
We offer a Dividend Reinvestment and Common Stock Purchase program
which is available to our shareholders and our residential New Hampshire
customers. Under this program, our shareholders may reinvest all or a
portion of their common dividends into shares of common stock at a 5%
discount from prevailing market prices. We also accept optional cash
payments to purchase additional shares at 100% of the prevailing market
prices. Since its inception in 1993, this program has provided us with over
$900,000 of additional common equity.
ENVIRONMENTAL MATTERS
Our water utility subsidiaries are subject to the water quality regulations
set forth by the United States Environmental Protection Agency ("EPA") and
the New Hampshire Department of Environmental Services. The EPA is required
to periodically set new maximum contaminant levels for certain chemicals as
required by the federal Safe Drinking Water Act ("SDWA"). The quality of
our treated water currently meets or exceeds all standards set by the EPA,
and we do not anticipate that any significant capital expenditures for
regulatory compliance will be required in the next three years, given the
present water quality standards set by the SDWA. However, the re-
<PAGE> 25
authorization of the SDWA by Congress in 1996 will lead to increased
monitoring standards which may require additional operating costs for us.
It is expected that any additional monitoring and testing costs arising
from EPA mandates should eventually be recouped through water rates.
YEAR 2000 ISSUE
We have performed an exhaustive review of our hardware and software systems
in order to determine their level of readiness to meet the next millennium.
Because we own some operating assets which pre-date 1900, we have been
aware of the potential Year 2000 problem well before the recent publicity,
and in fact, 8-digit dates have been a requirement for all in-house
software developed since 1987. The Year 2000 issue has also been addressed
and included in all computer migration and upgrades since 1990.
As part of our Year 2000 project planning, we identified mission-
critical applications and implemented a 5-year plan in early 1994 to
replace or upgrade both hardware and software. Our central computer
platform, consisting primarily of its minicomputer servers, is not
completely Year 2000 ready. However, those servers that are not Year 2000
ready are expected to be retired and replaced with Year 2000 ready servers
during 1999.
Additionally, all of our software applications have been evaluated to
identify any Year 2000 problems, their importance to our operations, and
efficiencies to be gained with newer and updated software. A software
development schedule has been created based on this risk assessment, with
the most critical applications being implemented first. At this time, our
NT network, financial accounting, billing, customer service information and
meter management, human resources and SCADA management systems are all Year
2000 ready. Our remaining software systems for work orders, inventory
control, and various maintenance programs are 90% compliant, and are
expected to be fully ready by the end of 1999.
We have identified and contracted all external vendors who provide
and/or require date dependent information, and those customers who are
material to our operations, to ensure that they will be in compliance with
the Year 2000 issue. For any vendors or customers who are determined to be
critical to our operations, we are developing a disaster recovery plan
outlining alternative action plans in the event of vendor non-compliance.
We anticipate having all critical resource alternative plans in place by
May 1999.
NEW ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the year ended December 31, 1997. This accounting
statement replaces primary earnings per share with basic earnings per
share. Basic earnings per share is calculated by dividing earnings
available to common
<PAGE> 26
shareholders by the weighted average shares outstanding. SFAS No. 128 also
requires us to present diluted earnings per share, which is calculated
similarly to fully-diluted earnings per share.
During the second quarter of 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
Our Company was not materially affected by the new reporting standards set
forth in these Statements.
In June 1998, the Financial Accounting Standards Board also issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of SFAS No. 133 will not have a material impact
on the Company.
EFFECTS OF INFLATION
The effects of inflation on the utility operations of the consolidated
group are not material since the NHPUC allows most prudent and reasonable
cost increases to be recouped through increased water rates. It should be
noted, however, that a regulatory lag exists from the time that the utility
incurs higher costs to the time that it is allowed to bill revenues
sufficient to cover these cost increases. In times of high inflation, this
lag could have a detrimental effect on the profitability of our water
utility companies and the Company. Conversely, during periods of lower
inflation and lower interest rates, the rates of return granted by the
NHPUC have tended to be reduced reflecting that lower inflation and
interest rate environment. There can be no assurance that the NHPUC will
approve rate increases to recover any future increased operational costs.
<PAGE> 27
Auditor's
Report
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF PENNICHUCK CORPORATION:
We have audited the accompanying consolidated balance sheets of Pennichuck
Corporation and subsidiaries (a New Hampshire corporation) as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pennichuck Corporation and subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 26, 1999
<PAGE> 28
Consolidated
Balance Sheets
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS December 31
1998 1997
<S> <C> <C>
Property, Plant and Equipment
Land $ 998,916 $ 424,421
Buildings 22,248,416 19,539,208
Equipment 53,104,353 45,414,514
Construction work in progress 295,846 139,511
----------- -----------
76,647,531 65,517,654
Less accumulated depreciation (18,258,227) (16,561,266)
----------- -----------
58,389,304 48,956,388
Current Assets
Cash 3,601,648 447,921
Restricted cash 639 905,768
Accounts receivable, net of reserves of
$37,000 in 1998 and 1997 1,024,329 671,086
Unbilled revenue 1,307,000 1,083,800
Refundable income taxes 51,519 12,971
Materials and supplies, at cost 319,744 207,832
Prepaid expenses and other current assets 470,352 484,429
----------- -----------
6,775,231 3,813,807
Other Assets
Deferred land costs 3,029,243 2,408,321
Deferred charges and other assets 2,169,775 1,751,722
Investment in real estate partnerships 474,628 310,211
----------- -----------
5,673,646 4,470,254
----------- -----------
$70,838,181 $57,240,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<PAGE> 29
Consolidated
Balance Sheets - CONTINUED
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY AND LIABILITIES December 31
1998 1997
<S> <C> <C>
Stockholders' Equity
Common stock-$1 par value - authorized
2,400,000 shares; issued 1,714,236
in 1998 and 1,213,001 shares in 1997 $ 1,714,236 $ 1,213,001
Additional paid in capital 13,820,759 5,229,727
Retained earnings 9,335,414 8,199,557
----------- -----------
24,870,409 14,642,285
Less cost of 4,412 shares of common stock in
treasury in 1998 and 3,962 shares in 1997 (59,240) (52,940)
----------- -----------
24,811,169 14,589,345
Minority Interest 314,078 --
Preferred stock, no par value, 100,000 shares
authorized, no shares issued in 1998 and 1997 -- --
Long-Term Debt, Less Current Portion 28,001,997 26,577,618
Current Liabilities
Current portion of long-term debt 183,000 100,000
Accounts payable 568,391 408,022
Accrued interest payable 350,065 350,597
Accrued post-retirement benefits 414,231 330,485
Other current liabilities 765,809 596,893
----------- -----------
2,281,496 1,785,997
Commitments and Contingencies
Deferred Credits and Other Reserves
Deferred income taxes 3,415,154 2,763,579
Deferred investment tax credits 1,131,318 1,164,354
Regulatory liability 1,213,605 1,217,040
Customer advances and other liabilities 160,467 162,951
----------- -----------
5,920,544 5,307,924
Contributions in Aid of Construction 9,508,897 8,979,565
----------- -----------
$70,838,181 $57,240,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<PAGE> 30
Consolidated
Statements of Income
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Revenues
Water utility operations $14,972,347 $11,415,065 $10,907,679
Real estate and other operations 2,422,447 640,452 1,509,537
----------- ----------- -----------
17,394,794 12,055,517 12,417,216
Operating Expenses
Water utility operations 9,898,732 8,148,894 7,726,897
Real estate and other operations 1,776,938 189,817 982,293
----------- ----------- -----------
11,675,670 8,338,711 8,709,190
Operating Income 5,719,124 3,716,806 3,708,026
Other Income 33,586 42,277 9,183
Interest Expense (2,263,636) (1,812,091) (1,645,254)
----------- ----------- -----------
Income Before Provision for Income Taxes 3,489,074 1,946,992 2,071,955
Provision for Income Taxes 1,342,405 739,969 782,937
----------- ----------- -----------
Net Income Before Minority Interest 2,146,669 1,207,023 1,289,018
Minority Interest in Earnings of
Westwood Park LLC (40,616) -- --
----------- ----------- -----------
Net Income $ 2,106,053 $ 1,207,023 $ 1,289,018
=========== =========== ===========
Earnings Per Common Share:
Basic $ 1.61 $ 1.01 $ 1.09
=========== =========== ===========
Diluted $ 1.59 $ 1.00 $ 1.09
=========== =========== ===========
Weighted Average Shares Outstanding:
Basic 1,306,286 1,200,287 1,178,883
=========== =========== ===========
Diluted 1,327,383 1,207,173 1,183,455
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<PAGE> 31
Consolidated
Statements of Stockholders' Equity
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Common Additional
Stock- Stock- Paid - in Retained Treasury
Shares Amount Capital Earnings Stock
--------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 1,157,004 $1,157,004 $ 4,675,980 $7,276,308 $(51,079)
Net income 1,289,018
Dividend reinvestment plan 39,327 39,327 426,337
Common dividends
declared - $.65 per share (765,367)
Common equity issuance costs (1,770)
Exercise of stock options 510 510 3,930
Repurchase of 153 common shares (1,861)
--------- ---------- ----------- ---------- --------
Balances at December 31, 1996 1,196,841 1,196,841 5,104,477 7,799,959 (52,940)
Net income 1,207,023
Dividend reinvestment plan 14,585 14,585 147,625
Common dividends declared --
$.68 per share (807,425)
Common equity issuance costs (34,300)
Exercise of stock options 1,575 1,575 11,925
--------- ---------- ----------- ---------- --------
Balances at December 31, 1997 1,213,001 1,213,001 5,229,727 8,199,557 (52,940)
Net income 2,106,053
Common stock offering, net 483,000 483,000 8,319,337
Dividend reinvestment plan 12,322 12,322 194,027
Common dividends declared --
$.79 per share (970,196)
Exercise of stock options 6,378 6,378 52,785 (6,300)
Retirement of repurchased shares (465) (465) (5,248)
Directors' deferred compensation plan 30,131
Balances at December 31, 1998 1,714,236 $1,714,236 $13,820,759 $9,335,414 $(59,240)
========= ========== =========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<PAGE> 32
Consolidated
Statements of Cash Flows
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Operating Activities
Net income $ 2,106,053 $ 1,207,023 $ 1,289,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,935,581 1,486,655 1,246,410
Amortization of deferred investment tax credits (33,036) (33,036) (33,036)
Provision for deferred income taxes 651,575 483,505 493,293
Changes in assets and liabilities:
Accounts receivable and unbilled revenue (576,443) 470,458 (384,858)
Refundable income taxes (38,548) 36,499 (48,757)
Materials and supplies (111,912) 36,559 (4,606)
Prepaid expenses 14,077 (83,330) 7,067
Deferred charges and other assets (1,594,872) (824,553) (253,658)
Accounts payable and accrued expenses 389,865 282,663 (247,680)
Other 18,713 (91,352) 311,438
----------- ----------- -----------
Net cash provided by operating activities 2,761,053 2,971,091 2,374,631
Investing Activities:
Purchases of property, plant & equipment (11,278,815) (5,974,194) (3,224,742)
Contributions in aid of construction 676,190 101,665 467,577
(Increase) decrease in restricted cash 905,129 (905,768) --
(Increase) decrease in investment in
real estate partnerships 154,942 (156,851) (36,877)
----------- ----------- -----------
Net cash used in investing activities (9,542,554) (6,935,148) (2,794,042)
Financing Activities:
Proceeds from long-term borrowings 9,446,395 5,197,618 8,000,000
Proceeds from common stock offering, net 8,802,337 -- --
Payments on long-term debt (4,259,016) (950,603) (6,124,635)
Net (decrease) increase in notes payable to bank (3,680,000) 485,000 (1,100,000)
Increase in minority interest 314,078 -- --
Dividends paid (970,197) (807,425) (765,367)
Proceeds from dividend reinvestment
plan and other, net 281,631 141,410 466,474
----------- ----------- -----------
Net cash provided from financing activities 9,935,228 4,066,000 476,472
Increase in cash 3,153,727 101,943 57,061
Cash at beginning of year 447,921 345,978 288,917
----------- ----------- -----------
Cash at end of year $ 3,601,648 $ 447,921 $ 345,978
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<PAGE> 33
Notes
to
Consolidated Financial Statements
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of Pennichuck Corporation and
subsidiaries are as follows:
Basis of Presentation: The financial statements include the accounts
of Pennichuck Corporation, an investor-owned holding company (the
"Company") and its subsidiaries, Pennichuck Water Works, Inc.
("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East"),
Pittsfield Aqueduct Company, Inc. ("Pittsfield"), The Southwood Corporation
("Southwood") and Pennichuck Water Service Corporation (the "Service
Corporation").
Nature of Operations: Pennichuck, Pennichuck East and Pittsfield
(collectively referred to as the "Company's utility subsidiaries") are
engaged principally in the gathering and distribution of potable water to
approximately 26,400 customers in southern and central New Hampshire. The
Service Corporation is involved in non-regulated, water-related services
and operations. Southwood owns, manages and develops real estate.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions. These may 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.
Property, Plant and Equipment: Property, plant and equipment, which
includes principally the water utility assets of the Company's utility
subsidiaries, is recorded at cost plus an allowance for funds used during
construction on major additions. The provision for depreciation is computed
on the straight-line method over the estimated useful lives of the assets
including property funded with contributions in aid of construction. The
useful lives range from six to ninety years and the average composite
depreciation rate was 2.47%, and 2.29% in 1998 and 1997, respectively.
Maintenance, repairs and minor improvements are charged to expense as
incurred. Improvements which significantly increase the value of property,
plant and equipment are capitalized.
Allowance for Funds Used During Construction ("AFUDC"): AFUDC
represents a non-cash credit to income with a corresponding charge to plant
in service. AFUDC amounts reflect the cost of borrowed funds and, if
applicable, equity capital when used to fund major plant construction
projects. Such AFUDC amounts were immaterial for 1998, 1997 and 1996.
Revenues: Standard charges for water utility services to customers
are recorded as revenue, based upon meter readings. Estimates of unbilled
service revenues are recorded in the period the services are provided.
Provision is made in the financial statements for estimated uncollectible
accounts.
Deferred Charges and Other Assets: Deferred charges include certain
regulatory assets and costs of obtaining debt financing. Regulatory assets
are amortized over periods being recovered through authorized rates. Debt
expenses are amortized over the term of the related bonds and notes.
Regulatory Assets: The Company's utility subsidiaries are subject to
the provisions of Statement of Financial Accounting Standard ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulations". Such utility
subsidiaries have recorded certain
<PAGE> 34
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
regulatory assets in cases where the New Hampshire Public Utilities
Commission (the "NHPUC") has permitted, or is expected to permit, recovery
of these costs over future periods. Included in deferred charges and other
assets are regulatory assets totaling $596,107 and $541,714 at December 31,
1998 and 1997, respectively.
Deferred Land Costs: Included in deferred land costs are Southwood's
original basis in its landholdings and developmental costs for its
Corporate Park. Deferred land costs are stated at the lower of cost or
market.
Investment in Partnerships: Southwood is a 50 percent general partner
in two residential development projects and has sold certain parcels of
land to those partnerships in exchange for promissory notes. Revenues
relating to the sales of those parcels are deferred until the lots are
ultimately sold to third parties. Real estate transactions are presented
using the cost recovery method. Under this method, any deferred gain and
related note receivable are offset for financial statement purposes.
Southwood's investment in these partnerships is recorded using the equity
method of accounting. As of December 31, 1998 and 1997, the notes
receivable balance was $1,060,500 and $440,000, respectively, which was
offset by the deferred gain of approximately $1,053,000 and $433,000 in
1998 and 1997, respectively. During 1998, one of the residential joint
venture partnerships sold land and a home to an executive officer of the
Company. The terms of that sale were the same as the terms which would be
given to any independent third party purchaser.
Income Taxes: The provision for federal and state income taxes is
based on income reported in the financial statements, adjusted for items
not recognized for income tax purposes. Provisions for deferred income
taxes are recognized for accelerated depreciation and other temporary
differences. Investment credits previously realized for income tax purposes
are amortized for financial statement purposes over the life of the
property giving rise to the credit.
Contributions in Aid of Construction ("CIAC"): Under construction
contracts with real estate developers and others, Pennichuck receives non-
refundable advances for the costs of new main installation. The CIAC
account and related plant asset are amortized over the life of the
property. Pennichuck also credits to CIAC the fair market value of
developer installed mains and any excess of fair market value over the cost
of community water systems purchased from developers.
<PAGE> 35
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the twelve months ended December
31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Twelve Months Ended 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share $1.61 $1.01 $1.09
Dilutive effect of unexercised stock options (.02) (.01) --
---------- ---------- ----------
Diluted earnings per share $1.59 $1.00 $1.09
========== ========== ==========
Numerator:
Basic net income $2,106,053 $1,207,023 $1,289,018
========== ========== ==========
Diluted net income $2,106,053 $1,207,023 $1,289,018
========== ========== ==========
Denominator:
Basic weighted average shares outstanding 1,306,286 1,200,287 1,178,883
Dilutive effect of unexercised stock options 21,097 6,886 4,572
---------- ---------- ----------
Diluted weighted average shares outstanding 1,327,383 1,207,173 1,183,455
========== ========== ==========
</TABLE>
NOTE B - INCOME TAXES
The components of the federal and state income tax provision at December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Federal $1,088,849 $599,533 $642,444
State 286,592 173,472 173,529
Amortization of investment tax credits (33,036) (33,036) (33,036)
---------- -------- --------
$1,342,405 $739,969 $782,937
========== ======== ========
Currently payable $856,765 $245,139 $341,942
Deferred 485,640 494,830 440,995
---------- -------- --------
$1,342,405 $739,969 $782,937
========== ======== ========
</TABLE>
<PAGE> 36
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE B - INCOME TAXES (CONTINUED)
The following is a reconciliation between the statutory federal
income tax rate and the effective income tax rate for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.4 5.6 5.6
Amortization of investment tax credits (.9) (1.6) (1.8)
---- ---- ----
Effective tax rate 38.5% 38.0% 37.8%
==== ==== ====
</TABLE>
The Company made income tax payments of $802,564, $353,000 and $403,000 in
1998, 1997 and 1996, respectively.
The Company has $214,732 and $384,289 of alternative minimum tax
credits available at December 31, 1998 and 1997, respectively. These
credits may be carried forward indefinitely to offset future regular tax
and are recorded as a reduction to accumulated deferred income taxes.
The Company has a regulatory liability related to income taxes of
$1,213,605 and $1,217,040 at December 31, 1998 and 1997, respectively. This
represents the amount of deferred taxes recorded at rates higher than
currently enacted rates and the impact of deferred investment tax credits
on future revenue. The liability is being amortized consistent with the
Company's ratemaking treatment.
The temporary items that give rise to the net deferred tax liability at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Liabilities:
Property related $5,368,591 $4,917,513
Other 320,295 254,542
---------- ----------
5,688,886 5,172,055
========== ==========
Assets:
Investment tax credits 706,908 710,343
Regulatory liability 197,282 197,282
Alternative minimum tax carry forward 214,732 384,289
Prepaid taxes on contributions in aid of construction 876,819 912,328
Other 277,991 204,234
---------- ----------
2,273,732 2,408,476
---------- ----------
Net Deferred Tax Liabilities $3,415,154 $2,763,579
========== ==========
</TABLE>
<PAGE> 37
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE C - DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Unsecured notes payable to various insurance companies:
9.10%, due April 1, 2005 $ 3,500,000 $ 3,500,000
7.40%, due March 1, 2021 8,000,000 8,000,000
Unsecured Industrial Development Authority
Revenue Bond (1988 Series), 7.50%, due July 1, 2018 1,300,000 1,300,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series A), 6.35%, due December 1, 2019 3,000,000 3,060,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series B), 6.45%, due December 1, 2016 1,900,000 1,940,000
Unsecured Business Finance Authority
1997 Revenue Bond, 6.30%, due May 1, 2022 4,000,000 4,000,000
Unsecured notes payable and line of credit
revolving loan facility at rates ranging from
7.44% to 8.50% due June 30, 2000 -- 3,680,000
Secured notes payable to bank, floating rate due April 8, 2005 6,000,000 --
Mortgage note payable to bank, 10%, due January 31, 2008 -- 1,141,792
Mortgage construction loan to bank at LIBOR plus 175
points due September 11, 2000 446,360 --
Capitalized lease obligation 38,637 55,826
----------- -----------
28,184,997 26,677,618
Less current portion 183,000 100,000
----------- -----------
$28,001,997 $26,577,618
=========== ===========
</TABLE>
The 1994 Series A and B Bonds are not subject to optional redemption
until 2004 at which time they may be redeemed in whole or in part at a
premium not to exceed 2% and may be redeemed at par on or after December 1,
2008. The notes and bonds payable require periodic interest payments
(either monthly or semi-annually) which are based on the outstanding
principal balances.
The aggregate principal payment requirements subsequent to December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999 $ 183,000
2000 779,360
2001 317,637
2002 315,000
2003 315,000
2004 and thereafter 26,275,000
</TABLE>
<PAGE> 38
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE C - DEBT (CONTINUED)
The note and bond agreements require, among other things, the maintenance
of certain financial ratios and restrict the payment or declaration of
dividends by Pennichuck. Under Pennichuck's most restrictive covenant,
cumulative common dividend payments or declarations by Pennichuck
subsequent to December 31, 1989 are limited to cumulative net income earned
after that date plus $1,000,000. At December 31, 1998, approximately
$4,382,000 of Pennichuck's retained earnings was unrestricted for payment
or declaration of common dividends.
During 1998, 1997 and 1996, the Company paid interest of $2,200,659,
$1,759,000 and $1,482,000, respectively.
The Company has available a $4,500,000 unsecured, revolving credit
facility with a bank and at December 31, 1998, there were no outstanding
borrowings under this facility. Any outstanding borrowings under this
facility are due on June 30, 2000. The weighted average interest rate on
borrowings under this facility of the Company was 7.66% and 7.75% during
1998 and 1997, respectively.
The Company has entered into interest rate exchange agreements to
mitigate interest rate risks associated with its floating-rate loans. The
agreements provide for the exchange of fixed rate interest payment
obligations for floating rate interest payment obligations on notional
amounts of principal. The net amounts paid and received under the
agreements are reflected as interest expense.
On April 24, 1998, the Company entered into two interest rate swap
agreements at a fixed rate of 6.50%. The notional amount of the debt for
which interest rate exchanges have been entered into under these agreements
is $6,000,000 at December 31, 1998. The Company has only the above
mentioned limited involvement with derivative financial instruments and
does not use them for trading purposes. They are used to manage specific
interest rate risks.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain financial instruments included in the
accompanying Consolidated Balance Sheet as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- -----------
<S> <C> <C>
Long-term debt $28,184,997 $29,916,747
Interest rate swaps $ -0- $ 324,500
</TABLE>
There are no quoted market prices for the Company's various long-term debt
issues and thus, their fair values have been determined based on quoted
market prices for securities similar in nature and in remaining maturities.
The fair value for long-term debt shown above does not purport to represent
the amounts at which those debt obligations would be settled. The fair
market value of the Company's interest rate swaps represents the estimated
cost to terminate these agreements based upon current interest rates.
The carrying values of the Company's cash and restricted cash
approximate their fair values because of the short maturity dates of those
financial instruments.
<PAGE> 39
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE E - BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan covering substantially all
full-time employees. The benefits are formula-based, giving consideration
to both past and future service. The Company's funding policy is to
contribute annually up to the maximum amount deductible for federal tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in
the future.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,435,571 in 1998 and $2,014,577 in 1997 $ 2,445,822 $ 2,023,847
=========== ===========
Projected benefit obligation for service rendered to date (2,949,116) (2,451,150)
Plan assets at a fair value (insurance contracts) 2,974,201 2,656,625
----------- -----------
Plan assets in excess of projected benefit obligation 25,085 205,475
Prior service costs 7,521 8,306
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 340,814 64,854
Unrecognized net transition asset (110,872) (124,679)
----------- -----------
Prepaid pension cost included in "Deferred charges and other assets" $ 262,548 $ 153,956
=========== ===========
</TABLE>
Net pension cost for 1998, 1997 and 1996 includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 149,581 $ 138,996 $ 126,933
Interest cost on projected benefit obligation 180,820 163,290 145,325
Expected return on plan assets (226,636) (200,193) (149,411)
Amortization of (gains) and deferrals (12,708) (11,596) (47,956)
--------- --------- ---------
Net periodic pension cost $ 91,057 $ 90,497 $ 74,891
========= ========= =========
</TABLE>
For the years ended December 31, 1998 and 1997, the actuarial present value
of the projected benefit obligation was determined using a discount rate of
7.0 percent in 1998 and 7.5 percent in 1997 and an assumed rate of increase
in future compensation levels of 5 percent in 1998 and 1997. The expected
long-term rate of return on plan assets was 9 percent in 1998, 1997 and
1996.
<PAGE> 40
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE E - BENEFIT PLANS (CONTINUED)
SALARY DEFERRAL PLAN
In addition, the Company has a salary deferral plan covering substantially
all full-time employees. Under this plan, the Company matches 100% of the
first 3% of the employee's salary contributed to the plan. The matching
employer's contributions were $78,312, $68,103 and $61,882, respectively,
for 1998, 1997 and 1996.
OTHER POST RETIREMENT BENEFITS
The Company provides post retirement medical benefits to current and
retired employees, which are payable upon reaching normal retirement date.
Future benefits payable to current employees are capped based on the actual
percentage of wage and salary increases earned from the plan inception date
to normal retirement date. The accumulated benefit obligation, unrecognized
transition obligation and net periodic post retirement benefit cost for the
years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accumulated post retirement benefit obligation:
Current active employees $(430,743) $(300,339)
Retirees (226,202) (198,457)
--------- ---------
Total (656,945) (498,796)
Plan assets at fair value 0 0
--------- ---------
Funded status (underfunded) (656,945) (498,796)
Unrecognized net (gain) (4,486) (124,289)
Unrecognized prior service cost 124,600 139,100
Unrecognized transition obligation 122,600 153,500
--------- ---------
Accrued post retirement benefit cost $(414,231) $(330,485)
========= =========
Service cost $ 24,805 $ 22,478
Interest cost 37,136 33,928
Amortization of prior service cost 14,500 14,500
Amortization of transition obligation 30,900 30,900
Amortization of unrecognized (gains) (3,598) (4,385)
--------- ---------
$ 103,743 $ 97,421
========= =========
</TABLE>
The Company is presently allowed to recover a portion of the post
retirement benefits relating to active employees and retirees in its rates.
To calculate the estimated accumulated benefit obligation for 1998 and
1997, the Company has assumed a discount rate of 7.0 percent and 7.5
percent, respectively and a maximum medical care cost trend rate of 5
percent, which is the projected annual increase in future compensation
levels. A one percent increase in the assumed health care cost trend rate
would have increased the post retirement benefit cost by $19,091 and the
accumulated post retirement benefit obligation by $121,894 in 1998.
<PAGE> 41
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE F - STOCK BASED COMPENSATION PLANS
The Company has a stock option plan for officers and key employees which
provides for incentive options. The Company accounts for the plan under APB
Opinion No. 25, under which no compensation cost has been recognized in the
Consolidated Statements of Income. On a pro forma basis, the Company's net
income and earnings per share would have been reduced to the following
amounts had compensation cost for the plan been determined consistent with
SFAS No. 123, "Accounting for Stock Based Compensation."
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income:
As reported $2,106,053 $1,207,023
Pro forma $2,070,895 $1,200,626
Earnings per share:
As reported $ 1.61 $ 1.01
Pro forma $ 1.59 $ 1.00
</TABLE>
Because the methodology prescribed by SFAS 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. At December 31, 1998, all options which had been granted were
exercisable and 75,000 shares were available for future grants under the
plan as shown in the following table:
<TABLE>
<CAPTION>
Reserved Options Price Per
Shares Outstanding Share
-------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 75,000 28,890 $ 8.33-$10.00
Granted 6,788 $11.50
Expired
Exercised (510) $ 8.33-$11.50
------ ------ -------------
Balance at December 31, 1996 75,000 35,168 $ 8.33-$11.50
Granted 6,788 $10.83
Expired --
Exercised (1,575) $ 8.33-$10.83
------ ------ -------------
Balance at December 31, 1997 75,000 40,381 $ 8.33-$11.50
Granted 11,288 $12.67
Expired (646) $8.33
------ ------ -------------
Exercised (6,378) $ 8.33-$12.67
Balance at December 31, 1998 75,000 44,645 $10.00-$12.67
====== ====== =============
</TABLE>
<PAGE> 42
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE F - STOCK BASED COMPENSATION PLANS (CONTINUED)
Of the 44,645 options outstanding at December 31, 1998, 21,050 have an
exercise price of $10.00 and a remaining contractual life of one to two
years; 6,505 shares have an exercise price of $11.50 and a remaining life
of 7 years; and 6,025 shares have an exercise price of $10.83 and a
remaining life of 8 years; and 11,065 shares have an exercise price of
$12.67 and a remaining life of 9 years. Shares acquired pursuant to such
options are subject to a restriction against transfer for a period of
twelve months after acquisition by the employee. The fair value of each
option grant is estimated on the date of grant using the Black-Sholes
option pricing model with the following assumptions used for grants in 1998
and 1997, respectively: risk-free interest rates of 6.3% and 5.5%; expected
dividend yields of 5.4% and 5.2%; expected lives of 5 years; and expected
volatility of 22% and 34%.
In September 1997, the Company amended its deferred compensation plan
for its directors. Under the terms of the amended plan, directors may elect
to receive their directors' fees in common shares of the Company or in cash
upon either attaining age 70 or retirement from the board of directors. As
of December 31, 1998, 14,136 common shares of the Company had been reserved
for issuance under this plan.
NOTE G - MERGER OF THE COMPANY AND PITTSFIELD AQUEDUCT COMPANY
On January 30, 1998, Pittsfield Aqueduct Company ("Pittsfield") was merged
with and into the Company through the issuance of 49,428 shares of
Pennichuck Corporation which were exchanged for substantially all of the
outstanding common shares of Pittsfield. The merger has been accounted for
as a pooling-of-interests. Accordingly, the Company's financial statements
have been restated to include the results of Pittsfield for all periods
presented.
The combined and separate results of the Company and Pittsfield during the
periods preceding and after the merger were as follows:
<TABLE>
<CAPTION>
Pennichuck
Corporation
Consolidated Pittsfield Combined
------------ ---------- --------
<S> <C> <C> <C>
Year ended December 31, 1998:
Operating revenues $16,952,067 $442,727 $17,394,794
Net income $ 2,070,747 $ 35,306 $ 2,106,053
Year ended December 31, 1997:
Operating revenues $11,840,700 $214,817 $12,055,517
Net income $ 1,290,091 $(83,068) $ 1,207,023
Year ended December 31, 1996:
Operating revenues $12,202,688 $214,528 $12,417,216
Net income $ 1,238,485 $ 50,533 $ 1,289,018
</TABLE>
<PAGE> 43
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE H - ACQUISITION
On November 5th, 1997, the Company entered into an Agreement of Purchase
and Sale of Assets with the Town of Hudson, New Hampshire (the "Town")
whereby the Company agreed to purchase from the Town certain water utility
assets located outside of the Town's municipal jurisdiction for $7.5
million. This purchase occurred in April 1998 once those assets , in
addition to certain water utility assets located within the Town, were
purchased by the Town from an investor-owned water utility previously
serving the Town and certain surrounding communities. Those assets
purchased by the Company were transferred into a new, wholly-owned,
operating subsidiary of the Company, Pennichuck East, which is a regulated
entity similar to Pennichuck. As a result of this purchase, the Company has
added approximately 3,600 customers to its existing customer base. Based on
unaudited data if the Company had acquired Pennichuck East at the beginning
of each period reported, consolidated revenues would have been
approximately $18,038,000 and $14,506,000 for 1998 and 1997, respectively.
In order to fund this purchase from the Town, the Company obtained a
commitment for permanent debt financing from its bank. The $7.5 million
financing consisted of two notes, $3 million and $4.5 million, with
maturities of 2 and 7 years, respectively. In connection with this debt,
the Company entered into two interest rate swap agreements which fix the
interest rates at 6.20% and 6.50%, respectively. In November 1998, the
Company repaid the $3 million note. The remaining note is secured by the
operating assets of the new operating subsidiary.
In addition, the Service Corporation and the Town entered into a
long-term contract whereby the Service Corporation will provide certain
operations and maintenance functions for the Town in exchange for an annual
fee. The initial term of this agreement is for five years with options to
renew thereafter.
NOTE I-STOCK SPLIT
On August 7, 1998, the Company's Board of Directors declared a three for
two stock split effected in the form of a stock dividend payable on
September 1, 1998 to shareholders of record on August 18, 1998. The
Company's retained earnings have been charged for the aggregate par value
of the shares issued as a dividend and such aggregate par value has been
transferred to the Company's common stock account for all periods presented
in the financial statements.
NOTE J-BUSINESS SEGMENT INFORMATION
Pennichuck Corporation's operating activities are grouped into two primary
business segments as follows:
Water utility - Involved in the collection, treatment and
distribution of potable water for domestic, industrial, commercial and fire
protection service in the City of Nashua and certain surrounding
communities in southern and central New Hampshire. Real estate - Involved
in the ownership, development, management and sale of industrial and
residential property in Nashua and Merrimack, New Hampshire. Other -
Includes the operations and maintenance activities of the Service
Corporation and sundry activities of the Company.
The tables below present information about Pennichuck Corporation's
two primary business segments for the years ended December 31, 1998, 1997
and 1996.
<PAGE> 44
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE J - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Water utility $14,972,347 $11,415,065 $10,907,679
Real estate 1,909,793 514,143 1,320,676
Other 512,654 126,309 188,861
----------- ----------- -----------
Total operating revenues $17,394,794 $12,055,517 $12,417,216
=========== =========== ===========
Operating income:
Water utility $ 5,073,615 $ 3,266,171 $ 3,180,782
Real estate 489,940 316,411 421,025
Other 155,569 134,224 106,219
----------- ----------- -----------
Total operating income $ 5,719,124 $ 3,716,806 $ 3,708,026
=========== =========== ===========
Capital additions:
Water utility $11,208,746 $ 5,974,194 $ 3,205,211
Real estate -- -- --
Other 70,069 -- 19,531
----------- ----------- -----------
Total capital additions $11,278,815 $ 5,974,194 $ 3,224,742
=========== =========== ===========
Identifiable assets:
Water utility $62,392,754 $53,331,333 $45,894,108
Real estate 3,666,320 2,554,608 3,223,048
Other 4,779,107 1,354,508 2,239,979
----------- ----------- -----------
Total identifiable assets $70,838,181 $57,240,449 $51,357,135
=========== =========== ===========
Depreciation and amortization expense:
Water utility $ 1,792,739 $ 1,452,757 $ 1,217,038
Real estate 80,833 4,385 --
Other 62,009 29,513 29,372
----------- ----------- -----------
Total depreciation and
amortization expense $ 1,935,581 $ 1,486,655 $ 1,246,410
=========== =========== ===========
</TABLE>
<PAGE> 45
Notes
to
Consolidated Financial Statements-CONTINUED
NOTE J - BUSINESS SEGMENT INFORMATION (CONTINUED)
The operating revenues within each business segment are sales to
unaffiliated customers. Operating income is defined as segment revenues
less operating expenses including allocable Parent Company expenses
attributable to each business segment as shown below.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Allocated parent expenses:
Water utility $416,106 $345,785 $273,983
Real estate and other 21,635 50,970 39,823
-------- -------- --------
Total allocated parent expenses $437,741 $396,755 $313,806
======== ======== ========
</TABLE>
Within the water utility business segment, one customer accounted for over
10 percent of total operating revenues. During 1998, 1997, and 1996, the
water utility recorded $1,726,000, $1,693,000 and $1,685,000, respectively,
in water revenues which were derived from fire protection and other
billings to the City of Nashua.
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
1998
Operating Revenues $2,916 $3,973 $6,404 $4,102
Operating Income 849 1,411 2,385 1,074
Net Income 236 510 1,049 311
Earnings Per Share $ .29 $ .32 $ .85 $ .15
1997
Operating Revenues $2,551 $2,946 $3,571 $2,988
Operating Income 593 961 1,411 752
Net Income 122 326 589 170
Earnings Per Share $ .10 $ .27 $ .49 $ .15
1996
Operating Revenues $2,961 $2,780 $3,161 $3,515
Operating Income 546 948 1,049 1,165
Net Income 79 347 396 467
Earnings Per Share $ .07 $ .29 $ .33 $ .40
</TABLE>
<PAGE> 46
Market
and
Dividend Information
The Company's common stock is currently traded on the Nasdaq National
Market System ("NMS") under the symbol "PNNW". From December 2, 1997 to
October 28, 1998, the Company's common stock had been traded on the Nasdaq
Over-the-Counter ("OTC") Bulletin Board system. On December 31, 1998, there
were approximately 785 holders of record of the 1,709,824 shares of the
Company's common stock outstanding. The following table sets forth the
comparative market prices per share of the Company's common stock based on
the high and low sales prices as reported on the Nasdaq NMS and OTC
Bulletin Board system during the applicable periods and the dividends
declared by the Company during those periods. All amounts have been
restated for the three for two stock split effected on September 1, 1998.
<TABLE>
<CAPTION>
Dividends
Period High Low Declared
- ------ ---- --- ---------
<S> <C> <C> <C>
1998
Fourth Quarter $22.00 $19.00 $.22
Third Quarter 20.50 15.00 .19
Second Quarter 16.00 15.00 .19
First Quarter 16.00 12.00 .19
1997
Fourth Quarter $13.33 $12.09 $.17
Third Quarter 13.50 12.00 .17
Second Quarter 13.00 10.33 .17
First Quarter 12.00 10.33 .17
1996
Fourth Quarter $13.25 $10.33 $.17
Third Quarter 13.92 12.00 .17
Second Quarter 14.00 11.33 .16
First Quarter 14.67 11.50 .15
</TABLE>
ANNUAL MEETING AND SHAREHOLDER INFORMATION
Pennichuck Corporation's Annual Shareholders' Meeting will be held at 3:00
p.m. on Friday, April 16, 1999, at the Nashua Marriott Hotel, 2200
Southwood Drive in Nashua, New Hampshire.
Shareholder Relations: Pennichuck Corporation, 4 Water Street, PO Box
448, Nashua, NH 03061-0448, Attn: Shareholder Relations. Tel: 603/882-5191.
Stock Transfer Agent and Registrar: EquiServe, Limited Partnership,
Shareholder Services Department, P.O. Box 8040, Boston, MA 02266-8040,
(781) 575-3100, www.equiserve.com
Dividend Reinvestment and Common Stock Purchase Plan: Pennichuck
Corporation has a Dividend Reinvestment and Common Stock Purchase Plan
which is open to all holders of Pennichuck's common shares and to all of
Pennichuck's New Hampshire residential customers. Participants in the Plan
receive their dividends in the form of Pennichuck common shares and may
also, within certain limits, make additional cash purchases through the
Plan. For a copy of the Plan Prospectus and an enrollment form, please call
Shareholder Relations.
<PAGE> 47
Five Year
Selected
Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating revenues (in 000's) $17,395 $12,056 $12,417 $11,700 $10,430
Net income (in 000's) $ 2,106 $ 1,207 $ 1,289 $ 1,148 $ 966
Earnings per share-basic $ 1.61 $ 1.01 $ 1.09 $ 1.00 $ .84
Cash dividends
declared per share
of common stock $ .79 $ .68 $ .65 $ .57 $ .48
Total assets (in 000's) $70,838 $57,240 $51,357 $49,136 $47,719
Long-term debt &
redeemable
preferred stock (in 000's) $28,185 $26,678 $21,946 $21,028 $17,032
Weighted average
shares outstanding-basic 1,306,286 1,200,287 1,178,883 1,148,610 1,146,240
Book value per share $14.51 $12.07 $11.78 $11.32 $11.04
Utility plant
additions (in 000's) $11,209 $5,974 $3,205 $2,569 $2,413
Water delivered
(million gallons per day) 14.44 12.74 12.51 13.03 12.75
Mains (miles) 470 364 361 356 355
Services:
Core & community systems 21,422 21,037 20,805 20,622 20,294
Pittsfield Aqueduct 623 615 615 616 622
Pennichuck East 3,766
Meters 25,984 21,759 21,526 21,279 21,034
Hydrants 2,540 2,194 2,190 2,182 2,177
Rainfall (in inches) 47.15 47.36 53.24 38.94 42.70
Number of employees
at year end 66 57 56 55 57
</TABLE>
Prior year numbers have been restated to reflect the merger of Pittsfield
Aqueduct Company, Inc. and the three-for-two stock split. 1998 numbers
reflect the acquisition of Pennichuck East Utility, Inc.
<PAGE> 48
Map
of
Service Territory
[A map of the service territory of Pennichuck Corporation]
PITTSFIELD
HOOKSETT
NEWMARKET
EPPING
GOFFSTOWN
RAYMOND
AUBURN
FREEMONT
MANCHESTER
BRENTWOOD
CHESTER
SANDOWN
BEDFORD
DANVILLE
KINGSTON
LONDONDERRY
DERRY
HAMPSTEAD
MERRIMACK
AMHERST
PLAISTOW
LITCHFIELD
ATKINSON
WINDHAM
MILFORD
SALEM
HUDSON
NASHUA
HOLLIS
PELHAM
Retail Service Area
Wholesale Water Sales
Operations & Maintenance Agreement
[A representation of the State of New Hampshire]
State of New Hampshire
<PAGE>
and advice of elderly members. After considering all sides of the issue,
the sagamore would make a decision that best reflected the consensus of the
whole group.
Between 1650 and 1800, the quiet existence of the Abenaki began to
change dramatically with the coming of the Europeans. Vast numbers
succumbed to diseases the foreigners brought with them, and a series of
ensuing wars caused the Abenaki to migrate into Canada in search of safer
places to live. After the conquest of Canada in 1759, New England was
opened up to great numbers of English settlers who established settlements
in the same areas once occupied by the Abenaki. Indeed, many of the Indian
names still live on today, including Nashua, meaning "between streams," and
Pennichuck, meaning "crooked stream."
Originally founded under the name of Dunstable, in 1673, the area now
known as Nashua was the fifth place in present day New Hampshire that was
chartered. By 1820, the population of Dunstable had grown to 2,400, marking
the change from a sleepy agricultural village to a fast-growing industrial
center. On January 1, 1837, Dunstable officially became Nashua, and in
1852, a group of investors incorporated Nashville Aqueduct for the purpose
of bringing water to the inhabitants of Nashua and the then independent
town of Nashville. Within a year, the initial capitalization was found to
be insufficient, so in 1853, new funding was raised and the name changed to
Pennichuck Water Works.
The company founders identified Pennichuck Brook as being the best
source to meet all the requirements for a water supply. More than 150 years
later, their wisdom is still confirmed today. The first supply was taken
from a pond created by damming Pennichuck Brook just west of Concord Road.
Between 1866 and 1883, the Holt, Harris and Bowers dams were constructed,
to supply water to Nashua's textile mills, and the city's growing industry.
Early on, Pennichuck management recognized the importance of ensuring
a protected source of supply for the future, and purchased key portions of
the watershed area. Today, Pennichuck continues the effort to ensure a safe
supply of high quality source water, through special remediation projects
and more effective management and treatment of stormwater runoff. As a
result, portions of the land surrounding Pennichuck's source of supply
remains in the same pristine condition that was once enjoyed by the Abenaki
when they were living here in the Dawnland.
<PAGE>
------------------------
Pennichuck Corporation
4 Water Street
PO Box 448
Nashua, NH 03061-0448
603 882 5191
Fax 603 882 4125
www.pennichuck.com
------------------------
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennichuck Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 26, 1999, into Pennichuck Corporation's
Form 10-KSB for the year ended December 31, 1998 and into the Company's
previously filed Registration Statement on Form S-3 (No. 33-98188). It should
be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998 or performed any audit procedures subsequent
to the date of our report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1999
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