FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996.
Commission file number 0-18516.
ARTESIAN RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification No.: 51-0002090
Address of principal executive offices: 664 Churchmans Road, Newark, Delaware
Zip Code: 19702
Registrant's telephone number, including area code: 302-453-6900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of class: Class A Non-Voting Common Stock
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes _ No
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X Yes _ No
The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 9, 1997 was $ 5,179,119.
As of March 3, 1997, 1,249,292 shares and 504,790 shares of Class A
Non-Voting Common Stock and Class B Common Stock, respectively, were
outstanding.
PART I
ITEM 1. - BUSINESS
Artesian Resources Corporation (Artesian Resources) operates as the
parent holding company of Artesian Water Company, Inc. (Artesian Water),
the principal subsidiary of Artesian Resources and a regulated public
water utility.
Artesian Water Company was organized in 1927 as the successor to the
Richardson Park Water Company, founded in 1905. In 1984, the name of Artesian
Water Company was changed to Artesian Resources Corporation and the utility
assets were contributed to a newly formed subsidiary, Artesian Water.
Artesian Water provides water utility service to customers with in its
established service territory in portions of New Castle County, Delaware,
pursuant to rates filed with and approved by the Delaware Public Service
Commission (PSC). As of December 31, 1996, Artesian Water was serving 57,934
customers. The Company operates two distinct water systems withing 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 20 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. In 1993, Artesian
Water began acquiring service territory in Southern New Castle County south of
the C&D Canal, comprising its southern system. The southern system has
experienced substantial residential development in the past six years. In
addition, the State of Delaware is constructing a new limited access highway
running north and south through southern New Castle County, portions of which
are open to traffic. A substantial portion of southern New Castle County
remains to be developed and is not presently covered by Certificates of Public
Convenience and Necessity (CPCN) or served by public water systems,
presenting significant expansion opportunities for Artesian Water as
development continues. The pursuit of additional service area in the State of
Delaware south of the C&D Canal is competitive. Artesian Water began managing
the Town of Townsend's water system in June 1995 and subsequently purchased
the water system's assets and right to serve its 200 customers on December 5,
1995.
The Company's sources of water in the northern system are self-supply from
wells that pump ground water 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 principal source of Artesian Water's water supply for both its northern
and southern systems is the Potomac aquifer, which, together with certain
smaller formations, is currently capable of supplying a peak capacity of
approximately 21 million gallons a day. The Potomac aquifer covers a large
area beneath northern Delaware and Maryland. Although the Mt. Laurel and
water table aquifers, which are located closer to the ground surface, could
provide ample supply in the southern system, 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 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.
Artesian Water has several well sites on land it owns or leases with in its
existing and proposed service territory. Access to the aquifer is not
exclusive; however, any significant withdrawals from the aquifer require state
regulatory approvals. Artesian Water also obtains water supply in the
northern system through interconnections with several neighboring utilities
which increases peak capacity to approximately 40 million gallons a day. In
1996, the Company's highest daily consumption was 22.0 million gallons and
average daily consumption was 17.5 million gallons. The quality of water
distributed by the system is subject to the rules of federal and state
environmental regulatory agencies.
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 wastewater and similar effluent from treatment plants. As a normal
by-product 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. Management believes that compliance with existing
federal, state or local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment
has no material effect upon the business and affairs of Artesian Resources.
In 1985, Artesian Laboratories, Inc. (Artesian Laboratories) was organized
as the principal non-regulated subsidiary of Artesian Resources. In April
1993, the rental operations of the County Commerce Office Park (CCOP),
previously conducted under Artesian Resources, were reorganized and are
conducted under Artesian Development Corporation (Artesian Development), a
non-regulated land development subsidiary of Artesian Resources, which was
organized in 1985. None of the operations of the subsidiaries is considered
seasonal.
On October 16, 1995, an agreement was reached for the sale of Artesian
Development's rental office building and 4.27 acres of land at the CCOP. The
rental office building and land, with a net book value of $2,658,000, were
sold to an unrelated third party on March 13, 1996 for $2,050,000.
On December 21, 1995, the Board of Directors of Artesian Resources
authorized the disposal of substantially all the net assets of Artesian
Laboratories. In 1997, the net assets of Artesian Laboratories are expected
to be sold for approximately $425,000 in cash and $150,000 note receivable to
be held by Artesian Resources.
On December 19, 1996 Artesian Wastewater Management, Inc. (Artesian
Wastewater) was created as an additional non-regulated subsidiary of Artesian
Resources. Artesian Wastewater plans to provide wastewater treatment services
in New Castle County. This company did not engage in any business activity
in 1996.
ITEM 2. - PROPERTIES
Artesian Resources' corporate headquarters are located at 664
Churchmans Road, Newark, Delaware. Corporate headquarters for Artesian Water
are also located at the aforementioned address. The property is leased from
White Clay Realty by Artesian Water through December 31, 2002. See Item 13,
Certain Relationships and Related Transactions, for further disclosures. The
lease may be extended at the lessee's option for two consecutive five-year
renewal terms subject to the terms set forth in the lease.
Artesian Resources and Artesian Development own various parcels of land in
New Castle County, Delaware. Artesian Water 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 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 are being evaluated for the site of a new
reservoir in New Castle County. Substantially all of Artesian Water's utility
plant, except utility plant within the town of Townsend, Delaware, is pledged
as security for First Mortgage Bonds.
All of Artesian Water's existing facilities adequately meet current
necessary productive capacities and current levels of utilization.
ITEM 3. - LEGAL PROCEEDINGS
On February 28, 1997, Artesian Water filed a petition with the PSC to
implement new rates to meet an increased revenue requirement of approximately
13.5% or $3.0 million on an annualized basis. Artesian Water is permitted to
collect a temporary rate increase not in excess of $2.5 million on an
annualized basis, under bond, until permanent rates are approved. Such
temporary rates become effective on or about May 1, 1997.
There are no other material legal proceedings pending at this date.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. - MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Class A Non-Voting Common Stock (Class A Stock) of Artesian Resources
began trading on the Nasdaq National Market (symbol ARTNA) on Friday, May 24,
1996. Also on May 24, 1996, the trading symbol of Artesian Resources' Class B
Common Stock changed to ARTNB. The Class B Common Stock is traded on the
Nasdaq Bulletin Board.
Prior to the commencement of trading of Class A Stock on the Nasdaq National
market on May 24, 1996, the Class A Common Stock traded sporadically on the
over-the-counter market. There has been a limited public trading market for
the Class B Stock on the over-the-counter market. The following table sets
forth the high and low closing bid quotations for the Class A Stock on the OTC
bulletin board for the periods indicated below prior to May 24, 1996 and on
the Nasdaq national market after that date, and sets forth high and low
closing bid quotations on the OTC bulletin board for the Class B Stock for
the period indicated. The table also sets forth for the periods indicated the
cash dividends declared per share.
CLASS A NON-VOTING CLASS B VOTING
COMMON STOCK COMMON STOCK
DIV. DIV.
HIGH LOW PER SHARE HIGH LOW PER SHARE
1995
First Quarter $13.25 $ 9.75 $0.15 $16.50 $14.00 $0.15
Second Quarter 13.25 9.75 0.15 16.25 14.00 0.15
Third Quarter 13.25 13.00 0.15 16.25 14.00 0.15
Fourth Quarter 13.25 13.00 0.18 16.25 15.00 0.18
1996
First Quarter $13.88 $13.00 $0.21 $16.25 $15.00 $0.21
Second Quarter 16.00 13.50 0.23 16.25 15.00 0.23
Third Quarter 16.63 14.50 0.23 16.87 15.25 0.23
Fourth Quarter 17.00 15.75 0.23 16.87 16.25 0.23
The above quotations reflect prices between dealers and do not include
retail markups or mark downs or commissions and may not necessarily represent
actual transactions.
Artesian Resources paid cash dividends of 21 cents per share in the first
quarter of 1996 and 23 cents per share in each of the last three quarters of
1996. In 1995, Artesian Resources paid cash dividends of 15 cents per share
in each of the first three quarters and 18 cents per share in the fourth
quarter. In 1994, Artesian Resources paid a cash dividend of 15 cents per
share in each quarter.
As of March 3, 1997, there were 642 shareholders of record of Class A
Stock and 251 shareholders of record Class B Stock.
ITEM 6 - SELECTED FINANCIAL DATA
SUMMARY OF FIVE YEARS OF OPERATION
1996 1995 1994 1993 1992
Operating revenues $20,891,993 $22,631,283 $21,012,292 $20,340,246$18,216,186
Operating expenses
Operation&maint. 12,153,977 13,384,812 13,014,014 12,417,723 11,687,289
Depreciation 2,192,692 2,239,909 1,985,783 1,955,249 1,979,623
State & Federal
income taxes 1,096,075 791,438 963,514 914,097 364,050
Write-down on
rental office
building --- 783,600 --- --- ---
Loss on disposal
of Artesian
Laboratories --- 127,771 --- --- ---
Property and
other taxes 1,348,330 1,370,395 1,234,821 1,229,882 1,096,657
16,791,074 18,697,925 17,198,132 16,516,951 15,127,619
Operating income 4,100,919 3,933,358 3,814,160 3,823,295 3,088,567
Other income
(expense)-net 93,586 32,565 5,896 (14,332) (89,789)
Total income
before interest
charges 4,194,505 3,965,923 3,820,056 3,808,963 2,998,778
Interest charges
Long-term debt 1,600,924 2,249,907 2,252,449 2,286,235 1,820,254
Short-term debt 880,583 462,626 28,396 55,543 371,426
Amortization of
debt expense 25,684 26,428 26,493 68,436 26,032
Other 28,659 19,534 26,940 23,835 15,042
2,535,850 2,758,495 2,334,278 2,434,049 2,232,754
Income before
cumulative effect
of changes in
accounting
principles 1,658,655 1,207,428 1,485,778 1,374,914 766,024
Cumulative effect
of changes in
accounting
principles --- --- --- 250,901 ---
Net income $ 1,658,655 $ 1,207,428 $ 1,485,778 $ 1,625,815 $ 766,024
Per share:
Income before
cumulative
effect of
changes in
accounting
principles $ 1.06 $ 1.06 $ 1.34 $ 1.25 $ .63
Cumulative effect
of changes in
accounting
principles --- --- --- $ .25 ---
Net income $ 1.06 $ 1.06 $ 1.34 $ 1.50 $ .63
Dividends per
share of
common stock $ 0.90 $ .63 $ .60 $ .30 $ .05
Utility plant at
year-end, cost $112,312,266 $104,434,261 $92,684,238 $84,560,729 $80,637,313
Total assets $ 99,708,153 $ 96,841,166 $87,453,236 $81,826,810 $76,482,455
Long-term
obligations and
redeemable
preferred stock $27,355,677 $ 18,802,500 $26,044,928 $26,116,684 $19,298,068
Total capitalization
at year-end $52,843,160 $ 34,198,399 $40,772,731 $39,917,564 $31,766,778
Average water sales
per customer $ 359 $ 367 $ 344 $ 348 $ 326
Water pumped
(millions of
gallons) 6,419 6,561 6,506 6,409 6,208
Number of customers
served at
year-end 57,934 56,672 55,097 53,599 52,014
Miles of water main
at year-end 781 763 746 728 718
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
OVERVIEW
Artesian Resources Corporation (Artesian Resources) increased net income
for the year ended December 31, 1996 by $451,227, or 37.4%, as compared to
1995. For the year ended December 31, 1996, Artesian Resources and its
subsidiaries realized 98.4% of its total revenue from the sale of water by its
water utility subsidiary, Artesian Water Company, Inc. (Artesian Water), 1.3%
from other utility revenues and 0.3% from rental income generated by its
non-regulated subsidiary, Artesian Development Corporation (Artesian
Development). In late 1995, the Board of Directors of Artesian Resources
authorized the sale of Artesian Development's rental office building which
was completed on March 13, 1996, and the sale of the net assets of Artesian
Laboratories, Inc. (Artesian Laboratories) which is expected to be completed
in 1997.
Artesian Resources recorded net income of $1,658,655 for the year ended
December 31, 1996, compared to net income of $1,207,428 for 1995. The
increase in net income is attributable to the recognition of losses in 1995
related to the planned disposition of certain assets of its non-regulated
subsidiaries. Artesian Resources recognized pre-tax losses in 1995 of
$783,600 and $127,771, respectively, related to the planned sale of the rental
office building owned by Artesian Development and the planned disposition of
the net assets of Artesian Laboratories.
The following table sets forth certain information with respect to Artesian
Resources' consolidated statement of operations as a percentage of revenue:
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AS A
PERCENTAGE OF REVENUE
DECEMBER 31,
1996 1995 1994
OPERATING REVENUES
Water sales 98.4% 90.7% 89.1%
Other utility operating revenue 1.3% 0.9% 1.0%
Non-utility operating revenue 0.3% 8.4% 9.9%
100.0% 100.0% 100.0%
OPERATING EXPENSES
Utility operating expenses 56.7% 50.9% 53.1%
Non-utility operating expenses 0.3% 7.1% 7.6%
Related party expenses 1.2% 1.1% 1.2%
Depreciation 10.5% 9.9% 9.5%
State and federal taxes 5.2% 3.5% 4.6%
Property and other 6.5% 6.1% 5.9%
Write-down on rental
office building --- 3.5% ---
Loss on disposal of Artesian
Laboratories --- 0.6% ---
80.4% 82.7% 81.9%
OPERATING INCOME 19.6% 17.3% 18.1%
OTHER INCOME, NET 0.5% 0.1% 0.1%
20.1% 17.4% 18.2%
INTEREST CHARGES 12.1% 12.2% 11.0%
NET INCOME 8.0% 5.2% 7.2%
DIVIDENDS ON PREFERRED STOCK 0.5% 0.5% 0.6%
NET INCOME APPLICABLE TO
COMMON STOCK 7.5% 4.7% 6.6%
1996 COMPARED TO 1995
UTILITY REVENUES. Although Artesian Water experienced a 2.2% increase in
the number of customers served from 1995 to 1996, the extremely wet weather
conditions during 1996, as well as the continuing effects of Artesian Water's
conservation education efforts, decreased per capita water usage, resulting
in 1996 water sales revenue just about equal to those of 1995. The number of
customers served increased from 56,672 in 1995 to 57,934 in 1996, while
customers' average billed consumption decreased to 258 gallons per day in 1996
compared to 276 gallons per day in 1995.
The $79,483, or 40.9%, increase in other utility revenues is primarily
attributable to a $33,277 increase in rental income received in 1996 for
various cellular communication antennas installed on Artesian Water's storage
tanks by third parties who signed long-term rental agreements with Artesian
Water. Revenue from late payment fees and purchase discounts also increased
$23,706 and $17,488, respectively.
UTILITY OPERATING EXPENSES. The expense for water purchased from
neighboring utilities increased $171,561, or 6.9%. The increase in purchased
water expense is due primarily to a 19% price increase effective September 1,
1996 and a 12.3% increase in the minimum monthly contractual purchase
requirements from the Chester Water Authority (Chester Water). Effective
October 1996, the minimum monthly purchase requirement from Chester Water
increased to 121.6 million gallons from 108.3 million gallons, and will
continue at that level until the agreement expires in 2002. Artesian Water
also has a take-or-pay arrangement totaling 300 million gallons per year with
the City of Wilmington. Artesian Water experienced an 8.3% price increase
from the City of Wilmington effective January 1, 1996. Artesian Water
continues to keep its demand for purchased supplies to the minimum level
required under its contract arrangements with Chester Water and the City of
Wilmington.
Repair and maintenance expense increased $87,920, or 15.4%, primarily due to
increased tank painting expense. Artesian Water did not take any storage
tanks out of service for painting during the drought conditions in 1995.
The remainder of the increase is primarily attributable to completing routine
maintenance work in 1996 which was not performed in 1995 due to the drought
conditions.
Payroll and related expenses for Artesian Water increased $142,802, or 2.6%,
primarily due to a $188,554 increase related to annual salary adjustments,
promotions, and bonuses paid during 1996 of approximately 4.8%. Offsetting
this increase is a $45,752 reduction in employee benefits expense primarily
attributable to a change in medical insurance providers during 1996.
Administrative expenses decreased $91,911, or 5.6%, primarily due to a drop in
legal expenses. A significant portion of the 1995 legal costs were one-time
expenses associated with proceedings concerning applications for additional
franchised area of Artesian Water in southern New Castle County.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $47,217, or 2.1%. The disposal of the assets of the non-utility
subsidiaries decreased depreciation and amortization expense by $287,330
while the overall increase in utility plant assets in service at December 31,
1996 increased Artesian Water's depreciation and amortization expense by
$240,113.
TAXES. Income tax expense in 1996 increased $304,637, or 38.5%, due
primarily to the loss reflected in 1995 associated with the disposition of
non-utility assets discussed above in "Overview." The total income tax
effective rate for 1996 was 39.8% as compared to 39.7% for 1995. See Notes 1
and 3 to the Consolidated Financial Statements and the Schedule of Income Tax
Expense. Property and other taxes decreased $22,065 from 1995 to 1996 due
primarily to the disposal of the non-utility subsidiaries.
OTHER INCOME. Allowance for funds used during construction (AFUDC)
decreased $53,612, primarily due to two construction projects commenced and
completed in 1995 at a cost of approximately $5 million and financed by
Artesian Water. See Note 1 to the Consolidated Financial Statements for a
complete discussion relating to the calculation of AFUDC. Offsetting the
decrease in other income is the decrease in other miscellaneous expenses of
$114,633. The decrease is primarily attributable to one-time expenses
recorded in the settlement of an employee litigation matter in 1995.
INTEREST CHARGES. The decrease in interest and debt amortization expense
of $222,645 is attributable to the repayment of Artesian Development's
building mortgage in March 1996 and to Artesian Water's decreased use of its
$15 million available lines of credit as a result of the application of the
proceeds from the public offering of equity securities to repay this debt in
May 1996. Also, Artesian Water's Series J Mortgage Bonds were repaid on
December 1, 1996. See Note 6 to the Consolidated Financial Statements.
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 (PSC) 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.
Customers'average billed consumption decreased slightly to 276 gallons per day
in 1995 compared to 283 gallons per day in 1994. The decrease was primarily
due to mandatory water use restrictions ordered by the State of Delaware due
to drought conditions experienced by water utilities in northern New Castle
County relying on surface sources of supply, as well as continuing effects of
Artesian Water's conservation education efforts. Artesian Water's water
supplies were not significantly affected by the drought, and Artesian Water
was able to supplement the water supplies of neighboring utilities during this
period. However, the customers of Artesian Water reduced their consumption
during this period pursuant to the mandatory water use restrictions.
The approximately $23,000, or 10.4%, decrease in other utility revenues is
attributable to a reduction in miscellaneous charges other than water sales.
These revenues include late payment fees, frozen meter repairs, flow tests
and charges to developers.
UTILITY OPERATING EXPENSE. The expense for water purchased from neighboring
utilities decreased approximately $225,000, or 8.3%. The decrease in
purchased water expense is 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 reduction in expense was partially offset by an increase in the
minimum monthly purchase requirements from Chester Water which increased from
75.0 million gallons to 91.6 million gallons effective October 1994.
Effective October 1995, the minimum monthly purchase requirement increased to
108.3 million gallons. 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 44%, from $0.87
per thousand gallons to $1.25 per thousand gallons in 1995.
Repair and maintenance expenses decreased approximately $69,000 in
1995 due to the postponement of the painting of certain water tanks, as a
result of drought conditions 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 increased
due to the recognition in 1995 of amortization related to an environmental
impact study for the location of a new reservoir and expenses related to the
Class A 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 PSC. 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 related to annual salary adjustments,
promotions, and bonuses paid during 1995 of approximately 5.2%. The pension
expense increased $29,000, or 2.5%, reflecting the increase in Artesian
Resources' matching contribution for employee participation in its 401(k)
plan. In addition, Artesian Water recorded an increase of $162,000 in
expenses, from 1994 to 1995, related to its supplemental retirement plan due
to the recognition of a full year of expense. Artesian Water implemented its
supplemental retirement plan on October 1, 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately $254,000, or 12.8%. The increase is 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 the Consolidated
Financial Statements and the Schedule of Income Tax Expense. Property and
other taxes rose approximately $140,000 from 1994 to 1995. Local real estate
property taxes increased approximately $68,000 as a result of two separate
local tax increases. In addition, the total property on which Artesian
Resources is assessed increased from 1994 to 1995 as a result of property
additions which include land and miles of water main. Payroll taxes increased
approximately $72,000 as a result of the overall increase in Artesian
Resources' payroll expense. The total effective income tax rate for 1995 was
39.7% as compared to 39.3% for 1994.
OTHER 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 and
financed by Artesian Water. See Note 1 to the Consolidated Financial
Statements for a complete discussion relating to the calculation of AFUDC.
Partially offsetting the increase in other income is the increase in other
miscellaneous expenses of approximately $150,000. The increase is primarily
attributable to the settlement of an employee litigation matter in 1995.
INTEREST CHARGES. The increase of $434,000 in short term debt interest
expense is primarily due to increased usage of Artesian Water's short term
lines of credit to finance capital investments. At December 31, 1995, there
was approximately $9.2 million in loans outstanding on Artesian Water's $15
million lines of credit. See Note 6 to the Consolidated Financial Statements.
NON-UTILITY REVENUES AND EXPENSES
Non-utility revenues, primarily from Artesian Laboratories and Artesian
Development, totaled $70,848, $1,911,219, and $2,074,868 in 1996, 1995 and
1994, respectively. The non-utility revenue in 1996 is attributable to
Artesian Development's rental income received prior to the sale of the rental
office building on March 13, 1996. The decrease in 1995 is 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 from the revenue recorded for this subsidiary in 1994 as a result of
decreased contract work from existing customers.
Non-utility expenses, primarily from Artesian Laboratories and Artesian
Development, totaled $53,319, $1,613,865, and $1,605,578 in 1996, 1995 and
1994, respectively. These expenses relate primarily to administrative
expenses, payroll and related benefit expenses which decreased significantly
in 1996 due to the recording of the planned disposal of the non-utility
operations in 1995.
LIQUIDITY & CAPITAL RESOURCES
OVERVIEW
Artesian Resources' sources of liquidity are cash flow from operations, net
proceeds from the issuance of common stock 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 operation and
maintenance expenses, the timeliness and adequacy of rate increases, and
weather conditions, such as the extremely wet conditions experienced in 1996
referred to above.
Artesian Resources relies on its sources of liquidity for investments in its
facilities and to meet its various payment obligations. The total amount of
Artesian Resources' obligations for 1997 related to the dividend and sinking
fund payments on preferred stock, principal and interest payments on
indebtedness, rental payments and water service interconnection agreements is
anticipated to be approximately $6.2 million. Artesian Water currently
estimates that its aggregate investments in its facilities in 1997 will be
approximately $11.6 million.
INVESTMENT IN FACILITIES
Utility plant financed by Artesian Water decreased from approximately $9.8
million in 1995 to approximately $6.4 million during 1996. In addition,
developers financed $1.7 million for the installation of water mains and
hydrants serving their developments, pursuant to agreements. Artesian Water
invested $1.7 million in 1996 drilling new wells and expanding facilities in
its continued efforts to locate and develop additional sources of supply south
of the Chesapeake and Delaware Canal (the "C&D" Canal) in southern New Castle
County, Delaware. In northern New Castle County, Artesian Water invested
$3.5 million to drill new wells and upgrade facilities, and $0.7 million to
relocate water mains due to the widening of several roads. An additional
$0.5 million was invested in general facilities such as transportation
equipment, computer equipment, building renovations and furniture and
fixtures.
Artesian Water intends to continue its attempts to increase self supply and
system reliability, and expects to invest approximately $10.8 million in new
plant and equipment in 1997. The most significant effort to obtain new self
supply will occur in Artesian Water's service area south of the C&D Canal,
where new residential developments require water service. Four new
residential developments, requiring four separate water supply systems,
including two water storage tanks, at a total cost of approximately $2.6
million, are scheduled for construction in 1997 in Artesian Water's southern
system. In addition, in 1997, approximately $2.2 million is projected for
main relocations and renewals due to governmental actions, such as the
widening or relocation of several roads within Artesian Water's service area.
The largest single project is proposed by the Delaware Department of
Transportation and requires Artesian Water to relocate a segment of its water
main at a cost of $1.4 million. This project began in 1996 and is projected
to be completed in 1997. Six other relocation projects are scheduled for 1997
totaling $0.8 million. Nearly $1.8 million has been budgeted to install new
transmission and distribution mains in 1997. Of the $1.8 million,
approximately $0.5 million is for transmission main to be installed in
Artesian Water's service area south of the C&D Canal in an effort to utilize
current water supply and begin to interconnect a larger regional system.
Replacement and renewal of older mains which require high maintenance is
expected to total nearly $1.7 million in 1997. The two largest projects,
located in Wilmington Manor and the town of Townsend, began in 1996 and are
expected to be completed in 1998 at an annual cost of $505,000 and $664,000,
respectively. 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, will total approximately $1.0 million in 1997. 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 of mains
and hydrants in new developments. As discussed below, capital expenditures in
1997 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, 1999, Artesian Resources
estimates that 87% of its capital expenditures will be financed by the
operations of Artesian Water and external sources, including a combination of
capital contributions, the proceeds from the sale by Artesian Water of
long-term debentures and short-term borrowings by Artesian Water under its
revolving credit agreement discussed below. The remaining 13% of capital
expenditures for this three year period will be financed by developers.
At December 31, 1996, Artesian Resources had a working capital deficit of
approximately $0.3 million which decreased from a deficit of $17 million at
December 31, 1995. The significant drop in the working capital deficit is
primarily attributable to the reclassification of the $9.1 million borrowed on
Artesian Water's lines of credit to long-term debt due to an agreement entered
into by Artesian Water for a $10 million bond issuance discussed below. In
addition, proceeds from the sale of Artesian Development's rental office
building were used to repay the $2.0 million mortgage on March 13, 1996.
At December 31, 1996, Artesian Water had two lines of credit totaling $15
million to meet its temporary cash requirements. These revolving credit
facilities are unsecured. As of March 4, 1997, Artesian Water had $3.9
million of available unused funds under these lines. The interest rate for
borrowing under these lines is the London Interbank Offering Rate (LIBOR) plus
1.50% or the banks' federal funds rate plus 1.50%, at Artesian Water's
discretion. Both facilities are reviewed annually by the respective banks for
renewal. Artesian Water will continue to have available its two lines of
credit totaling $15 million to support future investment in its facilities.
On May 24, 1996, Artesian Resources issued 675,000 of Class A Non-Voting
Common Stock (Class A Stock) at $15 per share through underwriters led by
Janney Montgomery Scott, Inc. Net proceeds from the offering of $9.3 million
were contributed to Artesian Water as paid in capital and were used to repay a
portion of the short-term borrowings under the credit lines discussed above.
In addition, during 1997, Artesian Water anticipates issuing $15 million in
mortgage bonds at an interest rate equivalent to the ten year U.S. Treasury
yield plus 1.25% on or about the day of funding. Artesian Water anticipates
that a ten year $10 million mortgage bond will be issued in April 1997. Prior
to the end of 1997, Artesian Water anticipates that it will issue, in $500,000
increments, the additional $5 million in mortgage bonds, which will mature on
the same date as the ten year mortgage bond. Artesian Resources anticipates
cash flows from operations and Artesian Water's available lines of credit
following issuance of the $15 million in mortgage bonds in 1997 noted above to
be sufficient to fund its projected capital expenditures through 1999.
On February 28, 1997, Artesian Water filed a petition with the PSC to
implement new rates to meet an increased revenue requirement of approximately
13.5%, or $3.0 million on an annualized basis. Artesian Water is permitted to
collect a temporary increase not in excess of $2.5 million on an annualized
basis, under bond, until permanent rates are approved by the PSC. Such
temporary rates will become effective on or about May 1, 1997.
Artesian Resources anticipates the sale of the net assets of Artesian
Laboratories to be completed in 1997 for approximately $425,000 in cash and
$150,000 note receivable to be held by Artesian Resources. Proceeds from the
sale of the net assets of Artesian Laboratories will be reinvested in the
water utility operations.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
ASSETS
Utility plant, at original cost
less accumulated depreciation $ 88,993,073 $83,160,422
Current assets
Cash and cash equivalents 147,712 149,704
Accounts receivable, net 1,884,541 2,133,217
Unbilled operating revenues 1,663,500 1,332,000
Materials and supplies-at cost
on FIFO basis 620,745 606,674
Prepaid property taxes 489,986 462,451
Prepaid expenses and other 320,094 236,860
State and federal income taxes 232,885 ---
5,359,463 4,920,906
Other assets
Non-utility property (less
accumulated depreciation
1996-$1,505,411; 1995-$2,108,835) 873,948 2,952,676
Deferred income taxes 730,380 1,764,231
Other deferred assets 1,156,150 1,328,218
2,760,478 6,045,125
Regulatory assets, net 2,595,139 2,714,713
$ 99,708,153 $ 96,841,166
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock $ 1,748,285 $ 1,037,494
Additional paid-in capital 17,125,506 8,041,183
Retained earnings 6,613,692 6,317,222
Total common stockholders' equity 25,487,483 15,395,899
Preferred stock-mandatorily redeemable 825,000 972,500
Preferred stock 271,700 271,700
1,096,700 1,244,200
Long-term debt, net of current portion 26,258,977 17,558,300
52,843,160 34,198,399
Current liabilities
Notes payable 25,000 9,225,000
Current portion of long-term debt 349,939 7,345,154
Accounts payable 2,883,429 2,735,119
Overdraft payable 686,777 669,023
State and federal income taxes --- 139,702
Deferred income taxes 178,655 166,241
Interest accrued 629,830 667,157
Customer deposits 378,068 321,811
Other 518,919 577,298
5,650,617 21,846,505
Deferred credits and other liabilities
Net advances for construction 19,079,822 21,492,568
Postretirement benefit obligation 1,759,364 1,772,960
Deferred investment tax credits 1,024,834 1,060,636
Commitments and contingencies (Note 13)
21,864,020 24,326,164
Net contributions in aid of construction 19,350,356 16,470,098
$ 99,708,153 $96,841,166
The notes and schedules are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
1996 1995 1994
Operating revenues
Water sales $20,547,183 $20,525,585 $18,720,292
Other utility operating revenue 273,962 194,479 217,132
Non-utility operating revenue
(Note 7) 70,848 1,911,219 2,074,868
20,891,993 22,631,283 21,012,292
Operating expenses
Utility operating expenses 11,854,899 11,526,523 11,164,912
Non-utility operating expenses
(Note 7) 53,319 1,613,865 1,605,578
Related party expenses (Note 8) 245,759 244,424 243,524
Depreciation and amortization 2,192,692 2,239,909 1,985,783
Taxes
State and federal income
Currently payable 61,150 668,007 1,169,438
Deferred 1,034,925 123,431 (205,924)
Property and other 1,348,330 1,370,395 1,234,821
Write-down on rental office
building --- 783,600 ---
Loss on disposal of Artesian
Laboratories --- 127,771 ---
16,791,074 18,697,925 17,198,132
Operating income 4,100,919 3,933,358 3,814,160
Other income (expense)-net
Allowance for funds used
during construction 178,484 232,096 55,695
Miscellaneous (84,898) (199,531) (49,799)
93,586 32,565 5,896
Income before interest charges 4,194,505 3,965,923 3,820,056
Interest charges
Long-term debt 1,600,924 2,249,907 2,252,449
Short-term debt 880,583 462,626 28,396
Amortization of debt expense 25,684 26,428 26,493
Other 28,659 19,534 26,940
2,535,850 2,758,495 2,334,278
Net income 1,658,655 1,207,428 1,485,778
Dividends on preferred stock 104,498 119,189 131,391
Net income applicable to common stock $1,554,157 $ 1,088,239 $ 1,354,387
Per share:
Net income $ 1.06 $ 1.06 $ 1.34
Cash dividends per share
of common stock $ 0.90 $ 0.63 $ 0.60
The notes and schedules are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $1,658,655 $1,207,428 $1,485,778
Adjustments to reconcile net
cash provided by operating
activities:
Depreciation and amortization 2,030,718 2,082,309 1,835,570
Allowance for funds used
during construction (178,484) (232,096) (55,695)
Write-down on rental office
building --- 783,600 ---
Loss on disposal of Artesian
Laboratories --- 127,771 ---
Changes in assets and liabilities:
Accounts receivable, net 248,676 (216,457) (247,727)
Unbilled operating revenues (331,500) (262,000) 131,000
Materials and supplies (14,071) (4,538) (91,183)
Prepaid property taxes (27,535) (32,144) (25,265)
Prepaid expenses and other (83,234) (187,116) 42,759
Deferred income taxes, net 1,010,463 108,374 (439,146)
Other deferred assets 172,068 225,656 140,791
Regulatory assets 119,574 (58,890) 159,607
Accounts payable 148,310 (835,527) 1,291,450
State and federal income taxes (372,587) 160,676 274,199
Interest accrued (37,327) 38,170 2,112
Customer deposits and other, net (2,122) 175,511 (104,512)
Postretirement benefit obligation (13,596) (24,119) 195,808
NET CASH PROVIDED BY OPERATING
ACTIVITIES 4,328,008 3,056,608 4,595,546
CASH FLOWS USED IN INVESTING
ACTIVITIES
Capital expenditures
(net of AFUDC) (8,084,312) (11,992,730) (8,290,309)
Proceeds from sale of assets 2,107,128 22,809 9,240
NET CASH USED IN INVESTING
ACTIVITIES (5,977,184) (11,969,921) (8,281,069)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under
line of credit agreements (142,000) 7,700,000 1,475,000
Overdraft payable 17,754 164,530 504,493
Net advances and contributions
in aid of construction 838,540 1,873,547 1,677,974
Proceeds from issuance of
long-term debt --- 146,206 53,238
Proceeds from issuance of
common stock 9,795,114 228,535 177,730
Dividends (1,362,185) (767,867) (736,567)
Repayment of mortgage bond (5,000,000) --- ---
Principal payments under
capital lease obligation (335,888) (292,435) (234,738)
Principal payments under
long-term debt obligations (2,016,651) (71,672) (66,672)
Redemption of preferred stock (147,500) (147,500) (47,500)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,647,184 8,833,344 2,802,958
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,992) (79,969) (882,565)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 149,704 229,673 1,112,238
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 147,712 $ 149,704 $ 229,673
Supplemental Disclosures of Cash Flow Information:
Interest paid $2,547,493 $ 2,693,897 $2,305,673
Income taxes paid $ 468,037 $ 555,000 $ 895,000
Supplemental Schedule of Non-Cash Investing and Financial Activities:
Capital lease obligations
incurred $ --- $ 114,405 $ 301,786
The notes and schedules are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Mandatorily Common
Shares Redeemable Shares Common
Outstanding Preferred Outstanding Shares
7% Prior Shares Class A Outstanding
Preferred Outstanding Non-Voting Class B
Balance as of January 1, 1994 10,868 46,700 507,925 493,831
Net income
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Dividend reinvestment plan 6,771 3,781
Employee stock options 4,917 172
Mandatory sinking fund payments (1,900)
Balance as of December 31, 1994 10,868 44,800 519,613 497,784
Net income
Par value adjustment on Class A
Non-Voting common stock (4)
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Dividend reinvestment plan 6,527 3,336
Employee stock options 12,471 174
Reacquired shares held as
treasury stock (3) (52) (2,359)
Mandatory sinking fund payments (5,900)
Balance as of December 31, 1995 10,868 38,900 538,559 498,935
Net income
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Bonus issuance 3,546
Dividend reinvestment plan 8,866 4,670
Employee stock options 18,709
Issuance of common stock (5) 675,000
Mandatory sinking fund payments (5,900)
Balance as of December 31, 1996 10,868 33,000 1,244,680 503,605
$25 $25
Par Value Par Value $1 $1
Preferred Mandatorily Par Value Par Value
7% Prior Redeemable Class A (1) Class B
Preferred Preferred(6) Non-Voting (2)
Balance as of January 1, 1994 $271,700 $1,167,500 $3,517,129 $493,831
Net income
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Dividend reinvestment plan 73,985 3,781
Employee stock options 46,712 172
Mandatory sinking fund payments (47,500)
Balance as of December 31, 1994 $271,700 $1,120,000 $3,637,826 $497,784
Net income
Par value adjustment on Class A
Non-Voting common stock (4) (3,118,213)
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Dividend reinvestment plan 6,527 3,336
Employee stock options 12,471 174
Reacquired shares held as
treasury stock (3) (52) (2,359)
Mandatory sinking fund payments (147,500)
Balance as of December 31, 1995 $271,700 $ 972,500 $ 538,559 $498,935
Net income
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Bonus issuance 3,546
Dividend reinvestment plan 8,866 4,670
Employee stock options 18,709
Issuance of common stock (5) 675,000
Mandatory sinking fund payments (147,500)
Balance as of December 31, 1996 $271,700 $ 825,000 $1,244,680 $503,605
Additional
Paid-in Retained
Capital Earnings Total
Balance as of January 1, 1994 $ 4,661,452 $5,128,450 $15,240,062
Net income 1,485,778 1,485,778
Cash dividends declared
Common stock (605,176) (605,176)
Preferred stock (131,391) (131,391)
Issuance of common stock
Dividend reinvestment plan 50,575 128,341
Employee stock options 2,505 49,389
Mandatory sinking fund payments (47,500)
Balance as of December 31, 1994 $ 4,714,532 $5,877,661 $16,119,503
Net income 1,207,428 1,207,428
Par value adjustment on Class A
Non-Voting common stock (4) 3,118,213
Cash dividends declared
Common stock (648,678) (648,678)
Preferred stock (119,189) (119,189)
Issuance of common stock
Dividend reinvestment plan 135,213 145,076
Employee stock options 109,837 122,482
Reacquired shares held as
treasury stock (3) (36,612) (39,023)
Mandatory sinking fund payments (147,500)
Balance as of December 31, 1995 $ 8,041,183 $6,317,222 $16,640,099
Net income 1,658,655 1,658,655
Cash dividends declared
Common stock (1,257,687) (1,257,687)
Preferred stock (104,498) (104,498)
Issuance of common stock
Bonus issuance 43,381 46,927
Dividend reinvestment plan 198,192 211,728
Employee stock options 242,196 260,905
Issuance of common stock (5) 8,600,554 9,275,554
Mandatory sinking fund payments (147,500)
Balance as of December 31, 1996 $17,125,506 $6,613,692 $26,584,183
(1) At December 31, 1996, Class A Non-Voting Stock had 3,500,000 shares
authorized. At December 31, 1995 and 1994, the Class A Non-Voting Common
Stock had no par value and 1,000,000 shares were authorized.
(2) At December 31, 1996, Class B Common Stock had 1,040,000 shares
authorized. At December 31, 1995 and 1994, the Class B Common Stock had
520,000 shares authorized.
(3) Treasury stock is recorded at cost.
(4) On May 23, 1995, a reclassification on the balance sheet between common
stock and additional paid in capital occurred as a result of the
shareholders' approval to change the Class A Non-Voting Common Stock from
no par stock to stock with a par value of $1.00 per share.
(5) Artesian Resources Corporation issued 675,000 shares of Class A Non-Voting
Common stock on May 24, 1996.
(6) Mandatorily Redeemable Cumulative Prior Preferred stock had 80,000 shares
authorized as of December 31, 1996, 1995, and 1994. See Note 4.
The notes and schedules are an integral part of the consolidated financial
statements.
SCHEDULE OF INCOME TAX EXPENSE
For the Year Ended December 31,
1996 1995 1994
STATE INCOME TAXES
Current $ 47,092 $140,716 $235,103
Deferred - current
Property taxes 3,551 3,116 2,078
Allowance for bad debts (3,501)
Deferred - non-current
Accelerated depreciation 225,087 223,781 135,072
Rate case expenses (6,146) 8,268 (13,152)
Taxable contractor advances
and contributions in aid
of construction (4,655) (119,793) (134,007)
Other (11,034) 10,153 3,933
Total State Income Tax Expense $250,394 $266,241 $229,027
FEDERAL INCOME TAXES
Current $ 14,058 $527,291 $934,335
Deferred - current
Property taxes 8,154 9,870 7,884
Allowance for bad debts (12,491) --- ---
Deferred non-current
Alternative minimum tax --- --- (130,417)
Accelerated depreciation 665,322 681,145 470,797
Rate case expenses (21,929) 29,501 (46,928)
Taxable contractor advances
and contributions in aid
of construction (16,609) (427,426) (478,141)
Amortization of investment
tax credits (34,997) (36,455) (37,257)
Write-down on rental building
and Artesian Laboratories 265,270 (309,882) ---
Amortization of regulatory
asset for deferred taxes 15,096 15,096 ---
Other (36,193) 36,057 14,214
Total Federal Income Tax Expense $845,681 $525,197 $734,487
1996 1995 1994
Amount % Amount % Amount %
RECONCILIATION OF EFFECTIVE
TAX RATE
Income before federal and
state income taxes less
amortization of deferred
investment tax credits $2,754,730 100.0 $1,998,866 100.0 $2,449,292 100.0
Amount computed at
statutory rate 936,608 34.0 679,615 34.0 832,759 34.0
Reconciling items
State income tax-net of
federal tax benefit 165,260 6.0 175,719 8.8 151,158 6.2
Allowance for funds used
during construction not
treated as income for
tax purposes --- --- (78,913) (3.9) (18,936) (0.8)
Other (5,793) (.2) 15,017 0.8 (1,467) (0.1)
Total Income Tax Expense
and Effective Rate $1,096,075 39.8 $ 791,438 39.7 $ 963,514 39.3
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
or the Company), 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 as incurred.
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. The rate used to capitalize AFUDC in 1996, 1995, and
1994 was 10.9%, 10.6%, and 10.6%, respectively.
Utility plant comprises:
December 31,
1996 1995
Utility plant, at original cost
Utility plant in service
Intangible plant $ 100,536 $ 100,536
Source of supply plant 3,703,967 3,121,095
Pumping and water treatment plant 9,280,200 8,338,940
Transmission and distribution plant 86,327,094 81,412,640
General plant 9,488,448 8,701,957
Property held for future use 1,310,390 1,200,402
Construction work in progress 2,101,631 1,558,691
112,312,266 104,434,261
Less - accumulated depreciation 23,319,193 21,273,839
$ 88,993,073 $ 83,160,422
Non-utility property primarily comprises leasehold improvements and
laboratory equipment of Artesian Laboratories, Inc. (Artesian Laboratories).
Depreciation and amortization expense of this property aggregated
approximately $214,000, $294,300, and $348,900 in 1996, 1995, and 1994,
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
2.35%, 2.12%, and 2.25% for the years ended December 31, 1996, 1995, and 1994,
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 two to ten 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 ratemaking 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 three years. The postretirement benefit obligation, which is being
amortized over 20 years, is adjusted for the difference between the net
periodic postretirement 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 customers reverse.
Regulatory assets at December 31, net of amortization, comprise:
1996 1995
Postretirement benefit obligation $ 1,759,364 $ 1,772,960
Deferred income taxes recoverable
in future rates 725,171 740,267
Expense of rate proceedings 110,604 201,486
$ 2,595,139 $ 2,714,713
Income Taxes--
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 basis 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 difference between state income tax at the statutory rate of 8.7% and
the effective rate of 9.1%, 13.3%, and 9.2% in 1996, 1995, and 1994,
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 cannot 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. The 1996 Tax Act provides an exclusion from
taxable income for CIAC and Advances received after June 12, 1996 by Artesian
Water that are not included in rate base for rate-making purposes.
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.
Net Income Per Share--
Per share net income applicable to common stock is calculated on the basis
of the weighted average number of shares outstanding as follows:
1996 - 1,472,494; 1995 - 1,030,559; 1994 - 1,010,351.
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.
Cash and Cash Equivalents--
For purposes of the Consolidated 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 service 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from management's estimate.
Reclassification--
Certain previously reported amounts have been reclassified to conform with
current year presentation.
NOTE 2
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, 1996 and 1995, determined by
discounting their future cash flows using current market interest rates on
similar instruments with comparable maturities, are approximately as follows:
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Long-term debt $26,259,000 $ 27,363,000 $ 17,558,000 $19,675,000
Mandatorily redeemable
preferred stock $ 825,000 $ 799,000 $ 972,500 $ 939,000
The fair value of Advances 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 would be less
than the carrying amount because these financial instruments are non-interest
bearing.
NOTE 3
INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
December 31,
1996 1995
Property, plant and equipment basis
differences $ 609,808 $1,590,308
State operating loss and federal
tax credit carry forwards 872,361 1,154,458
Gross noncurrent deferred tax assets 1,482,169 2,744,766
Valuation allowance (660,144) (802,316)
822,025 1,942,450
Expenses of rate proceedings (39,260) (67,337)
Other (52,385) (110,882)
Noncurrent deferred tax liabilities (91,645) (178,219)
Net noncurrent deferred tax asset $ 730,380 $1,764,231
Current deferred tax liability-
property taxes $ (194,648) $ (166,241)
Current deferred tax asset - bad
debt allowance 15,993 ---
Net current deferred tax liability $ (178,655) $ (166,241)
For state income tax purposes, net operating losses generated by the
non-regulated subsidiaries, totaling $7,587,871, can be carried forward
through the year ending December 31, 2011. 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 decreased from $802,316 in 1995
to $660,144 in 1996 as a result of decreased net operating loss carry
forwards. See the Schedule of Income Tax Expense.
NOTE 4
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 $25.09 through January 31, 1997, to $25.00 after February 1,
2003. Under mandatory sinking fund provisions, redemptions will aggregate
$112,500 (4,500 shares) in 1997 and 1998; and $100,000 (4,000 shares) in 1999,
2000, and 2001. The Company also has 100,000 shares of $1 par value Series
Preferred stock authorized but unissued. See the Consolidated Statement of
Stockholders' Equity.
The following Cumulative Prior Preferred stock was outstanding at
December 31:
Par Value
of Shares Cash
Shares Outstanding Dividends
Mandatorily Redeemable
Authorized 80,000
Outstanding at December 31:
9 5/8% Series
1996 --- $ --- $ 361
1995 600 15,000 1,805
1994 1,200 30,000 3,248
8 1/2% Series
1996 1,000 $ 25,000 $ 2,390
1995 1,500 37,500 3,453
1994 2,000 50,000 4,516
11 1/8% Series
1996 --- $ --- $ 556
1995 800 20,000 2,781
1994 1,600 40,000 5,006
9.96% Series
1996 32,000 $ 800,000 $82,170
1995 36,000 900,000 92,130
1994 40,000 1,000,000 99,600
NOTE 5
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
In 1996, Artesian Resources issued 675,000 shares of Class A Non-Voting
Common Stock (Class A Stock) at $15.00 per share. Net proceeds from the
offering were used to reduce debt incurred to finance investment in utility
plant.
The Class A Stock of Artesian Resources began trading on the Nasdaq National
Market (symbol ARTNA) on Friday, May 24, 1996. Also on May 24, 1996, the
trading symbol of Artesian Resources' Class B Common Stock changed to ARTNB.
The Class B Common Stock is traded on the Nasdaq Bulletin Board.
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 net income 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 1996, 1995, and
1994. Under Artesian Resources' dividend reinvestment plan, stockholders were
issued 13,536, 9,863, and 10,552 shares at fair market value for the
reinvestment of $211,728, $145,076 and $128,324 of their cash dividends for
the years 1996, 1995, and 1994, respectively.
NOTE 6
DEBT
Artesian Water has available unsecured lines of credit, with no financial
covenant restrictions, totaling $15,000,000 at December 31, 1996 which are
renewable annually at the banks' 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 banks' Federal Funds Rate plus 1.5%,
at the option of Artesian Water.
At December 31, 1996, 1995, and 1994, Artesian Water had $9,058,000,
$9,200,000, and $1,500,000 outstanding under these lines at weighted average
interest rates of 7.0%, 7.4%, and 8.3%, respectively. The maximum amount
outstanding was $11,400,000, $9,500,000, and $1,700,000 in 1996, 1995, and
1994, respectively. The average amount outstanding was approximately
$9,129,000, $5,350,000, and $750,000, at weighted average annual interest
rates of 6.9%, 7.8%, and 7.4% in 1996, 1995, and 1994, respectively. At
December 31, 1996, the $9,058,000 outstanding on these lines and a $112,500
sinking fund payment due in 1997 were classified as long-term debt due to a
refinancing agreement entered into on March 31, 1997, as described in Note 15.
Artesian Laboratories has a line of credit with a bank totaling $75,000 at
December 31, 1996, 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, 1996 and 1995. Borrowings under this line of credit bear
interest at the bank's prime rate.
On March 13, 1996, the Company completed the sale of Artesian Development's
rental office building and 4.27 acres of land for $2,050,000. The proceeds
were used to repay the mortgage on the property and related closing costs (See
Note 11).
On December 1, 1996, the $5,000,000 Series J First Mortgage Bond was repaid.
No other repayments or sinking fund deposits are required over the next five
years. As of December 31, 1996 and 1995, 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, 1996, however, no dividend restrictions were imposed under these
covenants.
Long-term debt consists of:
December 31,
1996 1995
First mortgage bonds
Series J, 9.55%, due December 1, 1996 $ --- $ 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
17,000,000 22,000,000
Notes payable 9,058,000 ---
Capitalized lease obligations 550,916 886,803
Building mortgage on non-utility
property, 7.90%, due April 15, 1996 --- 1,823,873
Building mortgage on non-utility
property, 8.30%, due April 15, 1996 --- 192,778
26,608,916 24,903,454
Less current maturities 349,939 7,345,154
$26,258,977 $17,558,300
NOTE 7
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:
1996 1995 1994
Artesian Laboratories (1) $ --- $1,616,074 $1,785,891
Artesian Development (2) 70,848 295,145 288,132
Artesian Resources --- --- 845
Total $ 70,848 $1,911,219 $2,074,868
Non-utility operating expenses are as follows:
1996 1995 1994
Artesian Laboratories (1) $ --- $1,365,842 $1,338,838
Artesian Development (2) 53,230 241,649 266,541
Artesian Resources 89 6,374 199
Total $ 53,319 $1,613,865 $1,605,578
(1) See Note 12.
(2) See Note 11.
NOTE 8
RELATED PARTY TRANSACTIONS
The office building and shop complex utilized by Artesian Water are leased
at an 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 2002, with provisions for renewals for two five year periods
thereafter. Management believes that the payments made to White Clay Realty
for the lease of its office building and shop complex are generally comparable
to what Artesian Water would have to pay to unaffiliated parties for similar
facilities (See Note 13).
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
$41,707. 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.
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:
1996 1995 1994
White Clay Realty $204,052 $204,052 $204,052
Glendale Enterprises 41,707 40,372 39,472
Total $245,759 $244,424 $243,524
NOTE 9
STOCK COMPENSATION PLANS
At December 31, 1996, the Company has two stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for compensation expense under its plans.
Accordingly, the compensation cost that has been charged against income for
the two plans was $41,696 and $20,170 for 1996 and 1995, respectively. Had
compensation cost for the Company's two plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method recommended by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), the Company's net income
and net income per common share would have been reduced to the pro-forma
amounts indicated below:
1996 1995
Net income applicable
to common stock
As reported $1,554,157 $1,088,239
Pro-forma $1,496,193 $1,064,199
Net income per share
As reported $ 1.06 $ 1.06
Pro-forma $ 1.02 $ 1.03
In 1995 and 1994, the Company continued the 1992 Non-qualified Stock Option
Plan (the 1992 Plan), under which options may be granted to purchase up to
50,000 shares, subject to certain adjustments, of the Company's Class A Stock.
Options to purchase shares of Class A 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
the Company 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 the Company
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 the
Company, and are adjusted for stock dividends and splits. No more than 34
directors, officers and employees were permitted to participate in the 1992
Plan each year in 1995 and 1994.
On April 30, 1996, the Board of Directors amended the 1992 Plan. Under the
amended plan: (i) the number of shares of Class A Stock authorized for
issuance was increased to 100,000, (ii) the maximum amount of shares of Class
A Stock that may be granted to any individual during the term of the 1992 Plan
is an amount equal to 50% of the number of shares of Class A Stock available
for issuance under the 1992 Plan, (iii) the Company may require a participant
to enter into a covenant not to compete and/or a confidentiality agreement as
a condition of an option grant, (iv) provisions relating to grants to
directors and officers of the Company were changed to add a prohibition on
amending such provisions more than once in any six month period, to extend the
exercise term from one to ten years and to eliminate the possibility of
administrative discretion with respect to such grants, and (v) the provision
that limited to 34 the number of plan participants eligible to receive options
under the 1992 Plan within any calendar year was removed.
On April 30, 1996, the Board of Directors adopted the Incentive Stock Option
Plan (ISO Plan), under which the Company may grant options to its key
employees and officers for up to 100,000 shares of Class A Stock. Options
will be granted at the fair market value on the date of grant. The option
exercise period shall not exceed ten years from the date of grant and will be
determined by the Company for each stock option granted. Options granted will
vest in accordance with the terms and conditions determined by the Company and
are adjusted for stock dividends and splits.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
6.0% and 4.8%; expected volatility of .31% for each year; risk free interest
rates of 4.90% and 5.42% for the employee options under the 1992 Plan, 6.60%
and 5.89% for the director and officer options under the 1992 Plan and 6.60%
for the 1996 ISO Plan options; and expected lives of one year for the
employee options under the 1992 Plan for all years, five years for 1996 and
one year for 1995 for the director and officer options under the 1992 Plan,
and five years for the 1996 ISO Plan options.
The following summary reflects changes in the Class A shares under option:
1996 1995 1994
Options outstanding at
beginning of year
(1996-$11.26 to $12.49,
1995 & 1994-$8.55 to $8.08) 25,063 18,231 12,648
Granted (1996-$11.90 to $15.54,
1995-$11.26 to $12.49, &
1994-$8.55 to $8.08) 47,340 25,450 18,200
Exercised (1996-$11.26 to $12.49,
1995-$8.08 to $11.26, &
1994-$8.55 to $8.08) (18,709) (12,467) (4,917)
Options reverting back to the
plan during the year (10,140) (6,151) (7,700)
Options outstanding and exercisable
at end of year (1996-$11.09 to
$15.54, 1995-$11.26 to $12.49,
& 1994-$8.55 to $8.08) 43,554 25,063 18,231
The following summary reflects changes in the Class B shares under option:
Class B Option Shares
1995 1994
Options outstanding at beginning of year
(1995 & 1994-- $12.75) 620 792
Exercised (1995 & 1994-- $12.75) (179) (172)
Options reverting back to the plan
during the year (441) ---
Options outstanding and exercisable at
end of year (1994-- $12.75) 0 620
NOTE 10
EMPLOYEE BENEFIT PLANS
401(k) Plan--
Artesian Resources has a defined contribution 401(k)Salary Reduction Plan
(the 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. No such additional contributions were made
in 1996, 1995, and 1994. Plan expenses, which include Company contributions
and administrative fees, for the years 1996, 1995, and 1994, were
approximately $259,000, $239,000, and $260,000, respectively.
Postretirement Benefit Plan--
Artesian Resources has a Postretirement Benefit Plan (the Benefit Plan)
which provides medical and life insurance benefits to certain retired
employees. Prior to the amendment of the Benefit 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" (SFAS 106). The Statement
requires Artesian Resources 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 Resources 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 Resources amended its Benefit Plan effective
January 1, 1993 to reduce eligibility. 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 Benefit 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 SFAS 106 to approximately $1,600,000.
Artesian Resources recognized an offsetting regulatory asset with respect to
the SFAS 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 SFAS 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 $89,851, $105,339,
and $107,538, for 1996, 1995, and 1994 respectively.
The following table sets forth the amount recognized in Artesian Resources'
consolidated balance sheet for the Benefit Plan as of December 31:
1996 1995
Accumulated Postretirement Benefit Obligation
Retirees $ (855,054) $(1,175,129)
Actives fully eligible (71,005) (228,980)
Total Accumulated Postretirement Benefit
Obligation (926,059) (1,404,109)
Unrecognized:
Transition obligation 144,500 153,000
Net gain from changes in assumptions (977,805) (521,851)
Postretirement Benefit Obligation $(1,759,364) $(1,772,960)
Net Periodic Postretirement Benefit Cost for: 1996 1995
Interest cost $ 94,016 $ 103,643
Amortization of transition obligation 8,500 8,500
Amortization of net gain (26,261) (30,923)
Total Net Periodic Postretirement
Benefit Cost 76,255 81,220
Amounts charged to expense 89,851 105,339
Decrease in Regulatory Asset $ (13,596) $ (24,119)
For measurement purposes, a 9.5% annual rate of increase in per capita cost
of covered health care benefits was assumed for 1996; 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,
1996 by $67,316 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 7.75% and 7.0% for the years ended
December 31, 1996 and 1995, respectively.
Supplemental Pension Plan--
Effective October 1, 1994, Artesian Water established a Supplemental Pension
Plan (the Supplemental 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,
which include Company contributions and administrative fees, for the years
1996, 1995, and 1994 were approximately $220,000, $221,000, and $59,000,
respectively.
NOTE 11
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 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 was
completed in March 1996.
NOTE 12
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 which was recorded as an
operating expense in 1995. The loss reflected the difference between the
projected sales price and the net book value of substantially all the assets
and liabilities of the business, and also included 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
net income per share by $0.08 for the year ended December 31, 1995. The
disposal of Artesian Laboratories is expected to be completed during 1997.
NOTE 13
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 8).
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 1996 and the present value of the minimum lease payments as of
December 31, 1996, are as follows:
Artesian Water Artesian Laboratories
Artesian Water Computer Laboratory
Office Building Equipment Equipment(1)
1997 $204,052 $57,770 $146,313
1998 183,647 57,770 67,407
1999 181,606 48,474 23,845
2000 179,566 16,654 9,871
2001 177,525 --- ---
Minimum lease
payments 926,396 180,668 247,436
Less amount representing
interest 40,264 36,808 33,059
Present value of
minimum lease
payments $886,132 $143,860 $214,377
(1) See Note 12.
Artesian Water has three water service interconnection agreements with two
neighboring utilities which require minimum annual purchases. Rates charged
under all agreements are subject to change. The minimum annual purchase
commitments for all interconnection agreements for 1997 through 2002 are as
follows:
1997 $ 3,034,027
1998 3,082,957
1999 2,999,624
2000 2,999,624
2001 2,999,624
2002 2,874,624
$17,990,480
Expenses for purchased water were $2,662,994, $2,491,433, and $2,716,188 for
the years ended December 31, 1996, 1995, and 1994, respectively.
Budgeted mandatory utility plant expenditures, due to planned governmental
highway projects which require the relocation of Artesian Water's water
service mains, expected to be incurred in 1997 are $2,210,750. No mandatory
utility plant expenditures are currently expected for the years 1998 through
2001. The exact timing and extent of these relocation projects is controlled
primarily by the Delaware Department of Transportation.
During 1996, Artesian Water and Artesian Laboratories entered into ten year
lease commitments for office space. The minimum lease commitments for 1997
through 2001 and the aggregate total for the five years 2002 through 2006, at
current rates, are as follows:
Artesian Water Artesian Laboratories (1)
1997 $ 62,315 $ 113,755
1998 63,995 116,820
1999 65,676 119,884
2000 67,356 122,949
2001 69,036 126,013
2002 & thereafter 305,623 557,830
$634,001 $1,157,251
(1) See Note 12.
Rent expense for 1996 relating to the office space leases was $47,665 and
$101,624 for Artesian Water and Artesian Laboratories, respectively.
NOTE 14
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 PSC. As of December 31,
1996, Artesian Water is serving 57,934 customers.
Artesian Laboratories provides environmental testing services of water,
wastewater, 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 165 customers as of December 31, 1996. The customer breakdown
by state is approximately 95 in Delaware, 45 in Maryland, 20 in Pennsylvania
and 5 in New Jersey.
NOTE 15
SUBSEQUENT EVENT
On February 28, 1997, Artesian Water filed a petition with the PSC to
implement new rates to meet an increased revenue requirement of approximately
13.5% or $3.0 million on an annualized basis. Artesian Water is permitted to
collect a temporary rate increase not in excess of $2.5 million on an
annualized basis, under bond, until permanent rates are approved. Such
temporary rates become effective on or about May 1, 1997.
On March 31, 1997, Artesian Water entered into an agreement with a bank to
issue $15 million in mortgage bonds during 1997 at an interest rate equivalent
to the ten year U.S. Treasury yield plus 1.25% on or about the day of funding.
Artesian Water anticipates that a ten year $10 million mortgage bond will be
issued in April 1997. Prior to the end of 1997, Artesian Water anticipates
that it will issue, in $500,000 increments, the additional $5 million in
mortgage bonds, which will mature on the same date as the ten year mortgage
bond.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Artesian Resources Corporation
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Artesian
Resources Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Artesian
Resources Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
in the three year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Wilmington, Delaware
February 14, 1997 except as to Note 15
which is as of March 31, 1997
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Dian C. Taylor 51 Director; Chair of the Board since July 1993, and
Chief Executive Officer and President of the Company
since September 1992. Executive Vice President from
April 1992 through September 1992 and Vice President
of Corporate Development of the Company from August
1991 through April 1992. Formerly consultant to the
Small Business Development Center at the University of
Delaware from February 1991 to August 1991 and
Owner/President of Achievement Resources Inc. from
1977 to 1991. Achievement Resources, Inc.
specialized in strategic planning, marketing,
entrepreneurial and human resources development
consulting. 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. She serves on the Executive Committee.
Ellis D. Taylor 80 Director; Chairman Emeritus of the Company since
August 1991. Formerly President and Chief Executive
Officer of the Company. He is presently a Trustee of
The Medical Center of Delaware - Christiana Hospital.
Mr. Taylor is the uncle of Dian C. Taylor. He serves
on the Personnel, Compensation and Benefits Committee.
Kenneth R.
Biederman 53 Director; Currently, Professor of Finance at the
College of Business and Economics of the University
of Delaware. Dean of the College of Business and
Economics of the University of Delaware from 1990 to
1996. Director of Chase Manhattan Bank USA from 1993
to 1996. Formerly a financial and banking consultant
from 1989 to 1990 and President of Gibraltar Bank from
1987 to 1989. Previously Chief Executive Officer and
Chairman of the Board of West Chester Savings Bank;
Economist and former Treasurer of the State of New
Jersey and Staff Economist for the United States
Senate Budget Committee. He serves on the Executive;
Audit; Personnel, Compensation and Benefits; and
Budget Committees of the Board.
John R.
Eisenbrey, Jr. 41 Director; Owner/President of Bear Industries, Inc.,
a privately held mechanical contracting firm
specializing in fire protection for more than ten
years. Mr. Eisenbrey is the nephew of Dian C. Taylor.
He serves on the Audit and Budget Committees.
William C. Wyer 50 Director; President of AllNation Life Insurance and
Senior Vice President of Blue Cross/Blue Shield of
Delaware. Managing Director of Wilmington 2000, a
private organization seeking to revitalize the City
of Wilmington, Delaware, from May 1993 to September
1995. Formerly President of Wyer Group, Inc. from
1991 to 1993 and Commerce Enterprise Group from 1989
to 1991, management consulting firms specializing in
operations reviews designed to increase productivity,
cut overhead and increase competitiveness, and
President of the Delaware State Chamber of Commerce
from 1978 to 1989. He serves on the Executive; Audit;
Budget; and Personnel, Compensation and Benefits
Committees.
David B. Spacht 37 Vice President, Chief Financial Officer and Treasurer
of Artesian Resources Corporation and Subsidiaries
since January 1995. Mr. Spacht previously served as
Treasurer and Chief Financial Officer of Artesian
Resources Corporation and Subsidiaries since July
1992. Mr. Spacht formerly held the positions of
Assistant Secretary, Assistant Treasurer and
Controller of Artesian Resources Corporation and
Subsidiaries and has been employed by the Company for
seventeen years.
Joseph A.
DiNunzio 34 Vice President and Secretary of Artesian Resources
Corporation and Subsidiaries since January 1995.
Mr. DiNunzio previously served as Secretary of
Artesian Resources Corporation and Subsidiaries since
July 1992. Mr. DiNunzio formerly held the positions
of Assistant Secretary and Manager of Budgeting and
Financial Planning. Mr. DiNunzio was employed by
Price Waterhouse from 1984 to 1989.
Bruce P.
Kraeuter 47 Vice President and Chief Engineer of Artesian Water
Company, Inc. since January 1995. Mr. Kraeuter
formerly held the position of Manager of Engineering
since February 1994 and has been employed by Artesian
Water Company, Inc. as an engineer since July 1989.
Mr. Kraeuter served as Senior Engineer with the Water
Resources Agency for New Castle County, Delaware from
1974 to 1989.
George F. Powell 46 Mr. Powell was appointed Vice President of Operations
as of June 3, 1996. Mr. Powell was previously
employed for nineteen years with Consumers Water
Company, a public water utility. Prior to joining
Artesian Resources, Mr. Powell served three years as
Vice President of Operations and twelve years as
Manager of Engineering for Consumers' New Jersey
system.
In accordance with the provisions of Artesian Resources' certificate of
incorporation and bylaws, Artesian Resources Board of Directors is divided
into three classes. Members of each class serve for three years, and one
class is elected each year to serve a term until his or her successor shall
have been elected and qualified or until earlier resignation or removal. The
term of Kenneth R. Biederman will expire at the 1997 annual meeting at which
time Mr. Biederman will be nominated for reelection. The terms of Ellis D.
Taylor and William C. Wyer will expire at the 1998 annual meeting. The terms
of Dian C. Taylor and John R. Eisenbrey, Jr. will expire at the 1999 annual
meeting.
Officers are currently elected annually by the Board of Directors and hold
office until their successor has been chosen and qualified, or until death,
resignation or removal by the Board of Directors.
ITEM 11 - EXECUTIVE COMPENSATION
The name and cash compensation paid to those executive officers of Artesian
Resources whose total direct remuneration exceeded $100,000 for the year ended
December 31, 1996 is as follows:
ANNUAL LONG TERM
COMPENSATION COMPENSATION
Number of
Name and Principal Other Annual Securities All Other
Position Year Salary Bonus Compensation Underlying Compensation
Options Awarded
Dian C. Taylor, 1996 $143,785 $ 9,648 $11,986 (3) 8,000 $10,263 (4)
Chair, CEO & 1995 $116,359 $ 7,500 $21,620 (3) 3,000 $ 8,368 (4)
President 1994 $110,160 $16,338 (3) 3,000 $ 5,204 (4)
David B. Spacht 1996 $ 94,604 $ 8,897 (1) $ 293 5,000 $ 9,582 (4)
Vice President, 1995 $ 89,128 $ 11,572 (2) $ 1,979 3,000 $ 8,270 (4)
Treasurer & 1994 $ 80,160 $ 1,189 3,000 $ 3,877 (4)
Chief Financial
Officer
(1) The Executive Committee of the Board approved a stock and cash bonus to
Mr. Spacht on June 20, 1996. Mr. Spacht received 300 shares of Class A
Non-voting Common stock and $2,463 in cash. The cash portion of the bonus
was issued to cover his individual tax liability associated with the stock
bonus issued. The fair market value of the Class A Non-voting Common
stock issued was $14.25 per share.
(2) The Executive Committee of the Board approved a stock and cash bonus
under the Cash and Stock Bonus Compensation Plan previously approved by
the shareholders to Mr. Spacht at its meeting held on December 13, 1995.
The bonus was paid in January 1996. Mr. Spacht received 500 shares of
Class A Non-voting Common stock and $4,947 in cash. The cash portion of
the bonus was issued to cover his individual tax liability associated with
the stock bonus issued. The fair market value of the Class A Non-voting
Common stock issued was $13.25 per share.
(3) Includes $11,750 in 1996, $17,900 in 1995, and $13,200 in 1994 received
as compensation for attendance at meetings of the Board and its
committees.
(4) Artesian Water contributes two percent of an eligible employee's gross
earnings to the 401(k) Deferred Compensation Retirement Plan. In
addition, employees can contribute up to twelve percent, and Artesian
Water will match fifty percent of the first six percent of the employee's
gross earnings. Ms. Taylor received $7,622, $6,042, and $4,612 in company
contributions to the 401(k) Deferred Compensation Retirement Plan in 1996,
1995 and 1994, respectively. Mr. Spacht received $4,765, $3,817 and
$2,800 in company contributions to the 401(k) Deferred Compensation
Retirement Plan in 1996, 1995 and 1994, respectively. In addition,
effective October 1, 1994, the Company established a supplemental 401(k)
retirement plan. All employees hired before April 26, 1994 and under the
age of sixty at that date are eligible for the supplemental 401(k)
retirement plan. Employees over the age of sixty waived participation in
the plan in order to receive company paid medical, dental and life
insurance benefits upon retirement. Such benefits will not be provided by
the Artesian Water to any other current or future employees.
Contributions are made by the Company to the supplemental 401(k)
retirement plan based upon an eligible employee's years of service. Ms.
Taylor received $2,635, $2,326 and $592 in Artesian Water contributions to
the supplemental 401(k) retirement plan in 1996, 1995 and 1994,
respectively. Mr. Spacht received $4,817, $4,453 and $1,077 in company
contributions to the supplemental 401(k) retirement plan in 1996, 1995 and
1994, respectively.
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value
Assumed Annual Rates of
Appreciation for
Option Term
Individual Grants at Stock Price
Number % of
of Total
Securities Options/
Underlying SARS Market
Options/ Granted to Price on Exercise or Expir-
SARS Employees Date of Base Price ation
Name Granted in Fiscal Grant per Share Date 0%($) 5%($) 10%($)
Year
Dian C.
Taylor 3,000 (1) 10.0% $14.125 $12.71 May 7, $4,245 $30,894 $ 71,781
2006
5,000 (2) 28.9% $14.125 $14.125 May 14, $44,415 $112,560
2006
David B.
Spacht 3,000 (1) 10.0% $14.125 $12.71 May 7, $4,245 $30,894 $71,781
2006
2,000 (2) 11.6% $14.125 $14.125 May 14, $17,766 $45,024
2006
(1) Option granted for Class A Non-Voting Common stock under the
1992 Non-qualified Stock Option Plan.
(2) Option granted for Class A Non-Voting Common stock under the
Incentive Stock Option Plan. These grants vest annually in
five equal installments from the date of grant.
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option/SAR Values
Number of Securities Value of
Unexercised
Shares Acquired Underlying Unexercised In-the-Money
Name On Exercise Value Realized Options/SARS at Fiscal Options/SARS at
Year End Fiscal Year End
(Un)Exercisable (Un)Exercisable
Dian C.
Taylor 3,000 (1) $7,530 3,000 (1)/5,000 (2) $12,120/$13,125
David B.
Spacht 3,000 (1) $7,530 3,000 (1)/2,000 (2) $12,120/$ 5,250
(1) Class A Non-Voting Common stock under the 1992 Non-qualified Stock Option
Plan.
(2) Class A Non-Voting Common stock under the Incentive Stock Option Plan.
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 other day. The Chair of each
Committee, who is also an outside Director, receives an annual retainer of
$1,000.
Artesian Resources has an Officer's Medical Reimbursement Plan which
reimburses officers for certain medical expenses not covered under the
Company's medical insurance plan.
Artesian Resources has a Cash and Stock Bonus Compensation Plan for
Officers. The purpose of this Plan is to compensate the Officers of Artesian
Resources and Artesian Water, as appointed by the Board of Directors, for
their contributions to the long-term growth and prosperity of the companies in
the form of cash or shares of the Class A Stock of Artesian Resources.
Compensation in the form of a bonus of the Class A Stock of Artesian Resources
also serves to increase their proprietary interest in the companies.
ITEM 12 - SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN
OTHER BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of the equity
securities of the Company for each director and nominee for director, each
executive officer of the Company 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 executive officers as a group as of March 3,
1997, based in each case on information furnished to the Company.
BENEFICIAL OWNERSHIP (1)
CLASS A NON CLASS B COMMON 7%
NAME -VOTING COMMON (2) PREFERRED
(2) (2)
Ellis D. Taylor (3)
212 Washington Avenue
Newport, Delaware 19804 36,186 2.8% 127,157 25.2% 898 8.3%
Dian C. Taylor
664 Churchmans Road
Newark, DE 19702 14,546 1.1% 46,792 9.3%
John R. Eisenbrey, Jr. (4)
P. O. Box 9174
Newark, DE 19711 19,025 1.5% 16,862 3.3%
Kenneth R. Biederman
14 Hayden Way
Newark, Delaware 19711 10,500
William C. Wyer
1980 Superfine Lane
Apt. 501
Wilmington, Delaware
19802 9,000
David B. Spacht (5)
664 Churchmans Rd.
Newark, Delaware 19702 7,345 72 31
Norman H. Taylor, Jr. (6)
1597 Porter Road
Bear, Delaware 19701 2,761 97,469 19.3%
Louisa Taylor Welcher (7)
219 Laurel Avenue
Newark, Delaware 19711 7,177 39,681 7.9% 150 1.4%
Hilda Taylor
4 East Green Valley Circle
Newark, Delaware 19711 32,377 2.5% 41,509 8.2% 41
Directors and Executive
Officers as a Group
(8 Individuals) 108,006 8.5% 190,904 37.8% 929 8.3%
(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
March 3, 1997. At March 3, 1997, Messrs. Taylor, Eisenbrey, Jr.,
Biederman, Wyer, Ms. Taylor, and Mr. David B. Spacht, Vice President,
Chief Financial Officer and Treasurer, each held options for 3,000 shares
of Class A stock under the 1992 Non-qualified Stock Option Plan.
(2) The percentage of the total number of shares of the class outstanding is
shown where that percentage is one percent or greater. Percentages for
each person or group are based on the aggregate number of shares of the
applicable class outstanding as of March 3, 1997, 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 690 shares of Class B stock, 12,380 shares of Class A stock and
898 shares of 7% 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 stock held by a Company wholly owned by Mr. Taylor.
(4) Includes 312 shares of Class B stock owned by a trust of which Mr.
Eisenbrey, Jr. is a trustee and in which he has a beneficial ownership
interest.
(5) Includes 51 shares of Class B stock held by the Trustees under the
Company's Employee Stock Ownership Plan which are subject to restrictions
on transfer.
(6) Includes 323 shares of Class B stock held by the Trustees under the
Company's Employee Stock Ownership Plan which are subject to restrictions
on transfer and 598 shares of Class B stock owned by Mr. Taylor's wife to
which Mr. Taylor disclaims beneficial ownership.
(7) Includes 56 shares of Class B stock held jointly by Ms. Welcher's husband
and son, 107 shares of Class A stock owned by Ms. Welcher's husband and
107 shares owned by Ms. Welcher's son, to which Ms. Welcher disclaims
beneficial ownership.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of the copies of beneficial ownership statements
received by it, or written representations from certain reporting persons that
no beneficial ownership statements were required for those persons, the
Company believes that during 1996 all beneficial ownership statements under
Section 16(a) of the Exchange Act which were required to be filed by executive
officers and directors of the Company in their personal capacities were filed
in a timely manner.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Artesian Water rents an office building and shop complex at an aggregate
annual rental of $204,052 from White Clay Realty, a partnership in which Ellis
D. Taylor, Patia Ziegler (daughter of Mr. Taylor), Dian C. Taylor, Louisa
Welcher (sister of Ms. Taylor), and a trust in which John R. Eisenbrey, Jr.
and Virginia Rettig (sister of Mr. Eisenbrey) are trustees and in which they
have a beneficial interest, are partners. The lease expires in 2002, with
provisions for renewals for two five year periods thereafter. 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.
Management believes that payments made to White Clay Realty are generally
comparable to what would be paid 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.
These water production wells provide a portion of Artesian Water's source of
supply. The initial term of the lease was for the ten years ended September
30, 1995 with automatic year to year renewal thereafter unless sixty days
written notice is given by either party prior to the end of the lease year.
The annual rental was $40,372 in 1995 and 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 providing sixty days written notice to
Glendale Enterprises should water supply be exhausted or other conditions
beyond the control of Artesian Water materially and adversely affect its
interest in the lease.
The terms of transactions with related parties are determined on a basis
that management believes is comparable to terms which could be negotiated
with non-affiliates.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
Page(s)*
a) The following documents are filed as part of this report:
(1) Financial Statements:
Consolidated Balance Sheets at December 31,
1996 and 1995 15-16
Consolidated Statements of Operations for the
three years ended December 31, 1996 16-17
Consolidated Statements of Cash Flows for the
three years ended December 31, 1996 17-18
Consolidated Statements of Changes in
Stockholders' Equity for the three years
ended December 31, 1996 19-21
Schedules Accompanying Financial Statements 22
Notes to Consolidated Financial Statements 23-38
Reports of Independent Accountants 39
(2) Financial Statement Schedule:
Reports of Independent Accountants on
Financial Statement Schedule 54
Schedule V: Valuation and Qualifying Accounts 56
* Page number shown refers to page number in this Report on Form 10-K.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) Exhibits: The Exhibits listed in the accompanying Index to Exhibits
on Page 52 are filed as part of, or incorporated by
reference into, this Form 10-K Annual Report.
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Report on Form 10-K,
Artesian Resources filed no reports on Form 8-K
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ARTESIAN RESOURCES CORPORATION
Date: 3/31/97 By: David B. Spacht
David B. Spacht, Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
Principal Executive Officer:
Dian C. Taylor President and Chief Executive Officer 3/31/97
Principal Financial and Accounting Officer:
David B. Spacht Vice President, Chief Financial Officer
and Treasurer 3/31/97
Directors:
Ellis D. Taylor
Dian C. Taylor
Kenneth R. Biederman
William C. Wyer
John R. Eisenbrey, Jr.
ARTESIAN RESOURCES CORPORATION
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3 ARTICLES OF INCORPORATION AND BY-LAWS PAGE*
(a) Restated Certificate of Incorporation of the (h)
Company effective May 26, 1995 including
Certificate of Amendment
(b) Restated Certificate of Incorporation of the (f)
Company effective April 26, 1994 including
Certificate of Correction
(c) By-Laws of the Company effective April 27, 1993 (d)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES
(a) Twelfth Supplemental Indenture dated as of December (i)
5, 1995 between Artesian Water Company, Inc.
subsidiary of Artesian Resources Corporation, and
Wilmington Trust Company
(b) Eleventh Supplemental Indenture dated as of February
16, 1993 between Artesian Water Company, Inc.,
subsidiary of Artesian Resources Corporation, and
Principal Mutual Life Insurance Company
(c) Tenth Supplemental Indenture dated as of April 1, (a)
1989 between Artesian Water Company, Inc.,
subsidiary of Artesian Resources Corporation,
and Wilmington Trust Company, as Trustee
(d) Other Supplemental Indentures with amounts (a)
authorized less than ten percent of the total
assets of the Company and its subsidiaries on a
consolidated basis will be furnished upon request
10 MATERIAL CONTRACTS
(a) Artesian Resources Corporation Non-Qualified (a)
Stock Option Plan
(b) Lease dated as of March 1, 1972 between White Clay (a)
Realty Company and Artesian Water Company, Inc.
(c) 1992 Artesian Resources Corporation Non-Qualified (b)
Stock Option Plan
(d) Artesian Resources Corporation Cash and Stock Bonus (e)
Compensation Plan for Officers
(e) Artesian Resources Corporation Incentive Stock (i)
Option Plan
11 COMPUTATION OF EARNINGS PER COMMON SHARE 55
22 SUBSIDIARIES OF THE COMPANY AS OF DECEMBER
31, 1996 55
* See footnote explanation on page 53 and 54.
FOOTNOTE EXPLANATIONS:
(a) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Registration Statement on
Form 10 filed April 30, 1990 and as amended by Form 8
filed on June 19, 1990.
(b) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Annual Report on Form 10-K
for the year ended December 31, 1991
(c) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Annual Report on Form 10-K
for the year ended December 31, 1992
(d) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Form 8-K filed April
27, 1993
(e) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Form 10-K for the year
ended December 31, 1993
(f) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Form 10-Q for the quarter
ended March 31, 1994
(g) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Form 8-K filed July 5, 1994
(h) Incorporated by reference to the exhibit filed with Artesian
Resources Corporation Form 10-Q for the quarter ended
June 30, 1995
(i) Incorporated by reference to the exhibit filed with the
Artesian Resources Corporation Annual Report on Form
10-K for the year ended December 31, 1995
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Artesian Resources Corporation:
Our audits of the consolidated financial statements referred to in our
report dated February 14, 1997 (except as to Note 15 which is as of March 31,
1997) appearing on page 41 of this Annual Report on Form 10-K also included
audits of the Financial Statement Schedule for the years ended December 31,
1996, 1995, and 1994 listed in Item 14(a) of this Form 10-K. In our opinion,
this Financial Statement Schedule for the years ended December 31, 1996, 1995,
and 1994 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
KPMG PEAT MARWICK LLP
Wilmington, Delaware
February 14, 1997
EXHIBIT 11
ARTESIAN RESOURCES CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
For the Twelve Months Ended December 31,
1996 1995 1994
Earnings
Income Applicable to Common
Stock $1,554,157 $1,088,239 $1,354,387
Shares
Weighted average number of
Shares outstanding 1,472,494 1,055,622 1,029,202
Net Income per Common Share $ 1.06 $ 1.06 $ 1.34
EXHIBIT 22
ARTESIAN RESOURCES CORPORATION AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT
The following list includes the Registrant and all of its subsidiaries as of
December 31, 1996. The voting stock of each company shown is owned, to the
extent indicated by the percentage, by the company immediately above which is
not indented to the same degree. All subsidiaries of the Registrant appearing
in the following table are included in the consolidated financial statements
of the Registrant and its subsidiaries.
State of Percentage of Voting
Name of Company Incorporation Stock Owned
Artesian Resources Corporation Delaware
Artesian Water Company, Inc. Delaware 100
Southwood Company Pennsylvania 100
Artesian Laboratories, Inc. Delaware 100
Artesian Development, Corporation Delaware 100
Artesian Wastewater Management, Inc. Delaware 100
ARTESIAN RESOURCES CORPORATION
SCHEDULE V-VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other The End of
Classification Of Period Expenses Accounts Deductions Period
For the Year Ended December 31, 1996:
Valuation allowance for
deferred tax assets $802,316 $(142,172) $660,144
For the Year Ended December 31, 1995:
Valuation allowance for
deferred tax assets $598,505 $ 203,811 $802,316
For the Year Ended December 31, 1994:
Valuation allowance for
deferred tax assets $591,650 $ 6,855 $598,505
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income contained
in the Company's 1996 Annual Report to Stockholders and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 88,993,073 88,993,073
<OTHER-PROPERTY-AND-INVEST> 873,948 873,948
<TOTAL-CURRENT-ASSETS> 5,359,463 5,359,463
<TOTAL-DEFERRED-CHARGES> 4,481,669 4,481,669
<OTHER-ASSETS> 0 0
<TOTAL-ASSETS> 99,708,153 99,708,153
<COMMON> 1,748,285 1,748,285
<CAPITAL-SURPLUS-PAID-IN> 17,125,506 17,125,506
<RETAINED-EARNINGS> 6,613,692 6,613,692
<TOTAL-COMMON-STOCKHOLDERS-EQ> 25,487,483 25,487,483
712,500 712,500
271,700 271,700
<LONG-TERM-DEBT-NET> 17,000,000 17,000,000
<SHORT-TERM-NOTES> 0 0
<LONG-TERM-NOTES-PAYABLE> 9,058,000 9,058,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 0 0
112,500 112,500
<CAPITAL-LEASE-OBLIGATIONS> 200,977 200,977
<LEASES-CURRENT> 349,939 349,939
<OTHER-ITEMS-CAPITAL-AND-LIAB> 46,515,054 46,515,054
<TOT-CAPITALIZATION-AND-LIAB> 99,708,153 99,708,153
<GROSS-OPERATING-REVENUE> 5,263,614 20,891,993
<INCOME-TAX-EXPENSE> 204,075 1,096,075
<OTHER-OPERATING-EXPENSES> 4,210,310 15,694,999
<TOTAL-OPERATING-EXPENSES> 4,414,385 16,791,074
<OPERATING-INCOME-LOSS> 849,229 4,100,919
<OTHER-INCOME-NET> 46,835 93,586
<INCOME-BEFORE-INTEREST-EXPEN> 896,064 4,194,505
<TOTAL-INTEREST-EXPENSE> 574,859 2,535,850
<NET-INCOME> 321,205 1,658,655
25,206 104,498
<EARNINGS-AVAILABLE-FOR-COMM> 295,999 1,554,157
<COMMON-STOCK-DIVIDENDS> 401,398 1,257,687
<TOTAL-INTEREST-ON-BONDS> 1,514,900 1,514,900
<CASH-FLOW-OPERATIONS> 2,397,202 4,328,008
<EPS-PRIMARY> 0.16 1.06
<EPS-DILUTED> 0.16 1.06
</TABLE>
