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