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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- ------------------ ---------------------------------------------- ---------------------
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
Securities registered pursuant to Section 12(b) of the Act:
AMERICAN STATES WATER COMPANY
COMMON SHARES, $2.50 STATED VALUE NEW YORK STOCK EXCHANGE
--------------------------------- -----------------------
Title of Each Class Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether Registrant 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 and has been subject to such filing requirements for the
past 90 days.
American States Water Company Yes [x] No [ ]
Southern California Water Company Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the total voting stock held by non-affiliates of
American States Water Company was approximately $226,836,000 on March 26, 1999.
The closing price per Common Share on that date, as quoted in the Western
Edition of The Wall Street Journal, was $25-5/16. Voting Preferred Shares of
American States Water Company, for which there is no established market, were
valued on March 26, 1999 at $1,434,000 based on a yield of 5.56%. As of March
26, 1999, the number of Common Shares of American States Water Company, $2.50
Stated Value, outstanding was 8,957,671. As of that same date, all 100
outstanding Common Shares of Southern California Water Company were owned by
American States Water Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement filed with the Securities and Exchange
Commission on or about March 28, 1999 as to Part III, Item Nos. 10, 11, 12 and
13, in each case as specifically referenced herein.
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AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-K
INDEX
Page No.
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PART I
Item 1: Business 1
Item 2: Properties 2 - 3
Item 3: Legal Proceedings 3 - 6
Item 4: Submission of Matters to a Vote of Security Holders 6
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 6 - 7
Item 6: Selected Financial Data 8
Item 7: Management's Discussion and Analysis of Financial Conditions and
Results of Operation 8 - 24
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 25
Item 8: Financial Statements and Supplementary Data 25 - 56
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 57
PART III
Item 10: Directors and Executive Officers of Registrant 57
Item 11: Executive Compensation 57
Item 12: Security Ownership of Certain Beneficial Owners and Management 57
Item 13: Certain Relationships and Related Transactions 57
PART IV
Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 57 - 58
Exhibit Index 58 - 60
Signature(s) 61 - 62
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ITEM 1. BUSINESS
This annual report on Form 10-K is a combined report being filed by two
separate Registrants: American States Water Company (hereinafter "AWR") and
Southern California Water Company (hereinafter "SCW"). References in this report
to "Registrant" are to AWR and SCW, collectively, unless otherwise specified.
SCW makes no representations as to the information contained in this report
relating to AWR and its subsidiaries, other than SCW.
GENERAL
AWR was incorporated in 1998 in connection with the formation of a
holding company by SCW and became a public company on July 1, 1998. AWR has no
material assets other than the common stock of SCW. SCW is a public utility
company engaged principally in the purchase, production, distribution and sale
of water (SIC No. 4941). SCW also distributes electricity in one customer
service area (SIC No. 4911). SCW is regulated by the California Public Utilities
Commission ("CPUC") and was incorporated on December 31, 1929 under the laws of
the State of California. AWR has another subsidiary, American States Utility
Services, Inc. ("ASUS") which contracts to lease, operate and maintain
governmentally owned water and wastewater systems and to provide other services
to local governments to assist them in the operation and maintenance of their
water and wastewater systems. Neither AWR nor ASUS are regulated by the CPUC.
SCW is organized into three regions operating within 75 communities in
10 counties in the State of California and provides water service in 21 customer
service areas. Region I incorporates 7 customer service areas in northern and
central California, Region II has 6 customer service areas located in Los
Angeles and Orange counties; and Region III incorporates 8 water customer
service areas and the Bear Valley Electric customer service area. As of December
31, 1998, about 73% of SCW's water customers were located in the greater
metropolitan areas of Los Angeles and Orange Counties. SCW also provides
electric service to the City of Big Bear Lake and surrounding areas in San
Bernardino County. All electric energy sold by SCW to customers in its Bear
Valley Electric customer service area in 1998 was purchased under an energy
brokerage contract with Sempra Energy Corporation.
SCW's utility operations exhibit seasonal trends. Although SCW's water
utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 91% and
93% of total water revenues in 1998 and 1997, respectively.
SCW served 242,634 water customers and 20,865 electric customers at
December 31, 1998, or a total of 263,499 customers, compared with 262,279 total
customers at December 31, 1997.
COMPETITION
The business of SCW is substantially free from direct and indirect
competition with other public utilities, municipalities and other public
agencies. AWR's other subsidiary, ASUS, actively competes with other
investor-owned utilities and governmental entities on the basis of price and
quality of service.
EMPLOYEE RELATIONS
Registrant had 470 employees as of December 31, 1998 as compared to 467
at December 31, 1997. Seventeen positions in SCW's Bear Valley Electric customer
service area are covered by a collective bargaining unit agreement, which
expires in 1999, with the International Brotherhood of Electrical Workers.
Forty-nine positions in SCW's Metropolitan ratemaking district are covered by a
collective bargaining unit agreement, which expires in 2001, with the Utility
Workers of America. Registrant has no other unionized employees.
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ITEM 2 - PROPERTIES
FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES
SCW holds all necessary franchises from the incorporated communities and
the counties which it serves. SCW holds certificates of public convenience and
necessity granted by the CPUC in each of the ratemaking districts it serves.
SCW's certificates, franchises and similar rights are subject to alteration,
suspension or repeal by the respective governmental authorities having
jurisdiction.
The laws of the State of California provide for the acquisition of
public utility property by governmental agencies through their power of eminent
domain, also known as condemnation. Registrant has not been, within the last
three years, involved in activities related to the condemnation of any of its
water customer service areas or in its Bear Valley Electric customer service
area.
ELECTRIC PROPERTIES
SCW's electric properties are all located in the Big Bear area of San
Bernardino County. As of December 31, 1998, SCW operated 28.7 miles of overhead
34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines,
172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5 miles of underground
cable and 14 sub-stations. There are no generating plants in SCW's system.
OFFICE BUILDINGS
Registrant's general offices are housed in a single-story office
building located in San Dimas, California. The land and the building, which was
completed and occupied in early 1990, are owned by SCW. SCW also owns and
occupies certain facilities housing regional, district and customer service
offices while other such facilities are housed in leased premises.
WATER PROPERTIES
As of December 31, 1998, SCW's physical properties consisted of water
transmission and distribution systems which included 2,768 miles of pipeline
together with services, meters and fire hydrants and 437 parcels of land,
generally less than 1 acre each, on which are located wells, pumping plants,
reservoirs and other water utility facilities including five surface water
treatment plants.
As of December 31, 1998, SCW owned and operated 294 active wells
equipped with pumps with an aggregate capacity of approximately 180 million
gallons per day. SCW has 52 connections to the water distribution facilities of
the Metropolitan Water District of Southern California ("MWD") and other
municipal water agencies. SCW's storage reservoirs and tanks have an aggregate
capacity of approximately 95 million gallons. SCW owns no dams in its customer
service areas. The following table provides, in greater detail, selected water
utility plant of SCW for each of its water ratemaking districts:
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Pumps Distribution Facilities Reservoirs
---------------- ----------------------------------------------------- ------------------
Well Booster Mains (ft.) Meters Services Hydrants Tanks Capacity
---- ------- ----------- ------ -------- -------- ----- --------
Arden Cordova 25 17 473,391 3,389 8,337 1,175 3 4,000
Barstow 25 37 866,308 14,404 10,765 997 13 8,025
Bay Point 1 16 139,299 5,150 3,034 300 7 4,046
Calipatria 0 8 134,879 1,133 1,664 73 1 150
Claremont 27 35 722,899 16,394 11,229 1,175 16 16,082
Clearlake 0 13 189,418 2,549 915 74 4 647
Desert 17 22 749,165 7,408 4,562 572 14 1,477
Los Osos 10 10 195,812 3,916 1,385 154 8 834
Metro 79 83 4,743,429 150,102 108,328 7,440 41 25,209
Ojai 5 12 234,318 5,120 3,434 348 5 1,494
Orange 33 37 2,176,187 59,498 40,762 4,433 18 11,903
San Dimas 11 37 1,198,326 20,571 7,901 861 16 10,149
San Gabriel 23 10 551,101 12,827 12,849 784 3 1,520
Santa Maria 29 23 956,414 21,628 7,617 767 8 2,541
Simi 1 22 470,091 13,940 9,492 826 6 6,210
Wrightwood 8 5 216,809 5,428 670 76 7 1,546
--- --- ---------- ------- ------- ------ --- ------
Total 294 387 14,017,846 343,457 232,944 20,055 170 95,833
Capacity is measured in thousands of gallons
MORTGAGE AND OTHER LIENS
As of December 31, 1998, Registrant had no mortgage debt outstanding,
and its properties were free of any liens securing indebtedness.
ITEM 3 - LEGAL PROCEEDINGS
WATER QUALITY-RELATED LITIGATION
On April 24, 1997, a complaint in multiple counts seeking recovery for
negligence, wrongful death, strict liability, trespass, public nuisance, private
nuisance, negligence per se, strict liability for ultrahazardous activities and
fraudulent concealment was filed in Los Angeles Superior Court on behalf of
approximately 145 plaintiffs (the "Adler Matter"). After preliminary Demurrers
and Motions to Strike, these same plaintiffs filed a First Amended Complaint on
or about October 16, 1997 seeking recovery on essentially the same theories.
Plaintiffs allege SCW has provided and continues to provide them with allegedly
contaminated water from wells located in an area of the San Gabriel Valley that
has been designated a federal environmental superfund site, and that the
maintenance of this contaminated well water has resulted in contamination of the
soil, subsurface soil, and surrounding air, with trichloroethylene ("TCE"),
perchloroethene ("PCE"), carbon tetrachloride and other solvents. Plaintiffs
further allege that SCW's actions have caused, and continue to cause, injuries
to the plaintiffs. Plaintiffs seek damages, including general, special, and
punitive damages, according to proof at trial, as well as attorney's fees on
certain causes of action, costs of suit, and other unspecified relief.
On June 24, 1998, the judge assigned to the Adler Matter, acting on the
Court's own motion, issued a stay until June 15, 1999 of all proceedings in the
Adler matter pending the outcome of the CPUC's Order Instituting Investigation
("OII") proceeding described below. Plaintiffs in the Adler matter petitioned
the Second District Court of Appeal for a Writ of Mandamus to have the stay
lifted. Prior to hearings before the Appellate Court, the Court advised all
parties of a potential conflict of interest due to the fact that two clerical
staff members of the Court were plaintiffs in one of the consolidated cases,
Santamaria v. Suburban Water Systems. As a result, the Adler matter and all the
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consolidated cases were transferred to the First District Court of Appeal in San
Francisco. The Writ of Mandamus is scheduled to be heard by the First District
Appellate Court on April 19, 1999. In addition, the Appellate Court has
requested argument as to why the lower courts issued a stay in the Adler matter
rather than dismissing the case.
SCW was served on November 3, 1997 as Doe 1 in the matter of Santamaria
v. Suburban Water Systems which was filed in Los Angeles Superior Court (the
"Santamaria Matter"). On August 27, 1998, the judge assigned to the Santamaria
Matter sustained SCW's demurrer without leave to amend and dismissed the action
against SCW. Plaintiff's filed a Notice of Appeal with the Second District Court
of Appeals and this matter was consolidated with the Adler and other cases. A
conflict of interest arose as was mentioned previously. As a result, the Notice
of Appeal was transferred to the First District Court of Appeal. The Santamaria
matter was requested to be hear by the First District Appellate Court on April
19, 1999, along with the other cases. There has been no word as yet as to
whether the plaintiffs will agree to have the Santamaria matter heard at the
same time as Adler and the other cases since they are appealing the dismissal
and not responding to Writ petitions.
In January 1998 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al which was filed in
Sacramento Superior Court. The complaint makes claims based on wrongful death,
personal injury, property damage as a result of nuisance and trespass, medical
monitoring, and diminution of property values (the "Allen Matter"). Plaintiffs
allege that SCW and other defendants have delivered water to plaintiffs which
allegedly is, or has been in the past, contaminated with a number of chemicals,
including TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent
chromium and other, unnamed, chemicals. SCW filed Demurrers and Motion to Strike
in this matter on June 5, 1998. On August 31, 1998, the judge assigned to the
Allen Matter, acting on the Court's own motion, issued a stay until June 15,
1999 of all proceedings in the Allen matter pending the outcome of the CPUC's
OII proceeding. The plaintiff's petitioned the Third District Court of Appeal
for a Writ of Mandamus to overrule the stay. The Court denied the petition.
Plaintiff's then petitioned the California Supreme Court for relief from the
Appellate Court's ruling. The California Supreme Court denied plaintiff's
petition. Thus the stay in the Allen Matter remains in effect.
In April 1998, SCW was named a defendant in the matter of Daphne Adams,
et al. v. Aerojet General, et al. which was filed in Sacramento Superior Court
(the "Adams Matter"). The complaint makes claims based on negligence, strict
liability, trespass, public nuisance, private nuisance, negligence per se,
absolute liability for ultrahazardous activity, fraudulent concealment,
violation of California Business and Professions Code section 17200 et seq.,
intentional infliction of emotional distress, intentional spoilage of evidence,
negligent destruction of evidence needed for prospective civil litigation,
wrongful death and medical monitoring. Plaintiff's seek damages, including
general, punitive and exemplary damages, as well as attorney's fees, costs of
suit, injunctive and restitutionary relief, disgorged profits and civil
penalties, medical monitoring according to proof and other unspecified relief.
SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. On
August 31, 1998, the judge assigned to the Adams Matter, acting on the Court's
own motion, issued a stay until June 15, 1999 of all proceedings in the Adams
matter pending the outcome of the CPUC's OII proceeding. The plaintiff's
petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule
the stay. The Court denied the petition. Plaintiff's then petitioned the
California Supreme Court for relief from the Appellate Court's ruling. The
California Supreme Court denied plaintiff's petition. Thus the stay in the Adams
Matter remains in effect.
On July 30, 1998, a complaint in multiple counts, styled Georgianna
Dominguez, et al. v. Southern California Water Company, et al., was filed in Los
Angeles Superior Court seeking recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public permanent nuisance,
public continuing nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment on behalf of six plaintiffs
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(the "Dominguez Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served with
the complaint on September 21, 1998.
By Stipulation, the Dominguez Matter has been "attached" to the Adler
Matter, and the parties have agreed that the Dominguez Matter will be bound by
actions taken in the Adler Matter. Parties to the Stipulation have, however
reserved any rights that might be distinct in the Dominguez Matter. Thus, the
Dominguez matter is presently under the same stay order as was issued in the
Adler Matter.
On October 13, 1998, a complaint in multiple counts was filed in Los
Angeles Superior Court, styled Anderson, et al. v. Suburban Water Systems, et
al., which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, continuing nuisance, permanent
nuisance, negligence per se, absolute liability for ultrahazardous activity,
fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair
business practices on behalf of 180 plaintiffs (the "Anderson Matter").
Plaintiff's seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW has not yet been served in this matter.
On December 30, 1998, SCW was named as a defendant in a complaint in
multiple counts, styled Abarca, et al. v. City of Pomona, et al., filed in Los
Angeles Superior Court which seeks recovery for negligence, wrongful death,
strict liability, permanent trespass, continuing trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and
unfair business practices on behalf of 383 plaintiffs (the "Abarca Matter").
Plaintiff's seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW has not yet been served in this matter.
SCW was served on March 19, 1999 as Doe 1 in the matter styled Celi, et
al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Celi Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 3 in the matter styled Boswell,
et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior Court
which seeks recovery for negligence, wrongful death, strict liability, permanent
trespass, continuing trespass, public continuing nuisance, public permanent
nuisance, private permanent nuisance, private continuing nuisance, negligence
per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Boswell Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 1 in the matter styled Demciuc,
et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior Court
which seeks recovery for negligence, wrongful death, strict liability, permanent
trespass, continuing trespass, public continuing nuisance, public permanent
nuisance, private permanent nuisance, private continuing nuisance, negligence
per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Demciuc Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
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SCW was served on March 19, 1999 as Doe 1 in the matter styled Criner,
et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Criner Matter"). Plaintiff's seek damages,
including general and special damages according to proof, punitive and exemplary
damages, as well as attorney's fees, costs of suit and other unspecified relief.
The Celi, Boswell, Domcuic and Criner Matters will be bound by actions
taken in the Adler Matter, although the parties have reserved any rights that
might be distinct in these matters.
In light of the breadth of plaintiff claims in these matters, the lack
of factual information regarding plaintiff's claims and injuries, if any, and
the fact that no discovery has yet been completed, SCW is unable at this time to
determine what, if any, potential liability it may have with respect to these
claims. Registrant intends to vigorously defend against these claims.
ORDER INSTITUTING INVESTIGATION
In March 1998, the CPUC issued an Order Instituting Investigation (OII)
to regulated water utilities in the state of California, including SCW. The
purpose of the OII is to determine whether existing standards and policies
regarding drinking water quality adequately protect the public health and
whether those standards and policies are being uniformly complied with by those
water utilities. The OII delineates the constitutional and statutory
jurisdiction of the CPUC and the California Department of Health Services
("DOHS") in establishing and enforcing adherence to water quality standards. The
CPUC's jurisdiction provides for the establishment of rates which permit water
utilities to furnish safe water meeting the established water quality standards
at prices which are both affordable and allow the utility to earn a reasonable
return on its investment. SCW has provided its response to a series of questions
dealing with the adequacy of current drinking water standards, compliance by
water utilities with such standards, appropriate remedies for failure to comply
with safe drinking water standards and whether increased enforcement and
additional drinking water standards are necessary. SCW anticipates a final
decision by the CPUC on this matter in or about June 1999. See Note 8 to the
Notes to Financial Statements contained in Part II, Item 8.
OTHER LITIGATION
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation to which Registrant is a party or of which any
of its properties is the subject which are believed to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION RELATING TO COMMON SHARES -
Common shares of American States Water Company are traded on the
New York Stock Exchange under the symbol "AWR". The high and low sales
prices of the
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Common Shares of AWR for the third and fourth quarters of 1998 and of
SCW for all other periods for the past two years are as follows:
STOCK PRICES
-----------------------
HIGH LOW
--------- --------
1998
First Quarter $ 26 $ 23-1/16
Second Quarter 27-1/8 21-1/8
Third Quarter 27 23-1/4
Fourth Quarter 29-1/4 24-7/8
1997
First Quarter $ 23 $ 20-5/8
Second Quarter 24-1/2 20-1/4
Third Quarter 24-5/8 20-1/2
Fourth Quarter 25-5/8 21-1/2
All of the outstanding Common Shares of SCW and ASUS are owned
by AWR. Hence, there is no market for the Common Shares of either
entity.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES -
As of February 26, 1999, there were 3,691 holders of record of
Common Shares of AWR. All of the outstanding Common Shares of SSCW and
ASUS are owned by AWR.
(c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND
RESTRICTIONS
For the last three years, Registrant has paid dividends on its
Common Shares on March 1, June 1, September 1 and December 1. The
following table lists the amount of dividends paid on Common Shares of
AWR for the third and fourth quarters of 1998 and of SCW for all other
periods for the last two years:
1998 1997
---------- ----------
First Quarter $ 0.315 $ 0.310
Second Quarter 0.315 0.310
Third Quarter 0.315 0.310
Fourth Quarter 0.315 0.315
---------- ----------
Total $ 1.260 $ 1.245
Information on dividend restrictions for AWR and SCW may be
found in Note 2 captioned "Capital Stock" of the Notes to Financial
Statements in Part II, Item 8 Financial Statements and Supplementary
Data.
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ITEM 6. SELECTED FINANCIAL DATA
($ in thousand, except per share amounts) 1998 1997 1996 1995 1994
INCOME STATEMENT INFORMATION
Total Operating Revenues $148,060 $153,755 $151,529 $129,813 $122,675
Total Operating Expenses 122,999 130,297 128,100 108,425 103,745
Operating Income 25,061 23,458 23,429 21,388 18,930
Other Income 769 758 531 336 236
Interest Charges 11,207 10,157 10,500 9,559 7,828
Net Income 14,623 14,059 13,460 12,165 11,338
Preferred Dividends 90 92 94 96 98
Earnings Available for Common
Shareholders 14,533 13,967 13,366 12,069 11,240
Basic Earnings per Common Share $ 1.62 $ 1.56 $ 1.69 $ 1.54 $ 1.43
Dividends Declared per Common Shares $ 1.26 $ 1.25 $ 1.23 $ 1.21 $ 1.20
BALANCE SHEET INFORMATION
Total Assets $484,671 $457,074 $430,922 $406,255 $383,627
Common Shareholders' Equity 154,299 151,053 146,766 121,576 118,962
Long-Term Debt 120,809 115,286 107,190 107,455 92,891
Preferred Shares-Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600
Preferred Shares-Mandatory Redemption 400 440 480 520 560
Total Capitalization $277,108 $268,379 $256,036 $231,151 $214,013
Book Value per Common Share $ 17.23 $ 16.86 $ 16.52 $ 15.50 $ 15.16
Average Shares Outstanding 8,958 8,957 7,891 7,845 7,842
OTHER INFORMATION
Ratio of Earnings to Fixed Charges 3.21% 3.35% 3.26% 3.19% 3.58%
Ratio of Earnings to Total Fixed Charges 3.17% 3.30% 3.21% 3.14% 3.50%
Return on Average Common Equity 9.6% 9.5% 10.7% 10.3% 9.7%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Unless specifically noted, the following discussion and analysis
provides information on AWR's consolidated operations and assets. There are no
material differences between the consolidated operations and assets of AWR and
the operations and assets of SCW.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the "safe harbor" from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as the Company or Registrant "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives, estimates or goals are also forward-looking
statements. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, rates, water quality and other
regulatory matters, adequacy of water supplies, liquidity and capital resources,
opportunities related to operations of municipally-owned water systems and
accounting matters. Actual results in each case could differ materially from
those currently anticipated in such statements, by reason of factors such as
utility restructuring, including ongoing local, state and federal activities;
future economic conditions, including changes in customer demand; future
climatic conditions; legislative, regulatory and other circumstances affecting
anticipated revenues and costs; and abilities of other companies to remain or
become year 2000 ready.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Basic earnings per common share in 1998 increased by 3.8% to $1.62 per
share as compared to $1.56 per share for the comparable period last year.
Although wet weather significantly impacted revenues in 1998, lower supply costs
and modest increases in other operating expenses partially offset the decline in
revenues.
Water operating revenues decreased by 4.3% in 1998 to $134.9 million
from the $141.0 million reported in 1997. Water sales volumes in 1998 were 9.9%
lower than 1997 due to extremely wet weather during the first half of 1998. The
decrease in sales was partially offset by rate increases effective during 1998.
Electric operating revenues of $13.2 million were 3.4% higher in 1998 as
compared to 1997 due to the impact of a general rate increase effective January
1998 as well as a 2.0% increase in kilowatt-hour sales.
Purchased water costs decreased in 1998 to $30.8 million as compared to
$38.3 million in 1997 due to a 20.8% decrease in volumes purchased and refunds
received from SCW's wholesale water supplier during 1998 of approximately $1.4
million. Refunds of $2.0 million were received in 1997.
Costs of power purchased for pumping decreased by 7.2% to $7.0 million
in 1998 chiefly as the result of the reduced energy costs from SCW's suppliers.
Costs of power purchased for resale in 1998 decreased by 3.4% to $5.0
million from the $5.2 million recorded in 1997 due to reduced costs from SCW's
energy providers, which partially offset the effects of increased kilowatt-hour
sales volumes recorded during the year.
Groundwater production assessments increased 10.5% to $7.6 million in
1998 from $6.8 million in 1997 due to the increased amounts of pumped water in
SCW's resource mix as well as additional assessments associated with increased
pumping in SCW's Metropolitan and Orange County customer service areas.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. Recovery of previously
under-collected supply costs was lower in 1998 than 1997 due to the expiration
in January 1998 of a surcharge designed to recover those costs. It is
anticipated that new rates, effective January 1999, will increase collection of
these under-collected costs. The balancing account mechanism insulates earnings
from changes in the unit cost of supply costs which are outside of the immediate
control of Registrant. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Other operating expenses increased by 10.6% from the $13.1 million
recorded in 1997 due to employee time charged to this category. Reversals in
1997 of costs associated with recovery of water quality expenditures through the
CPUC's memorandum account mechanism also contributed to the increase. There were
no such reversals of equal magnitude in 1998.
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Administrative and general expenses decreased slightly by 0.7% to $22.0
million in 1998 from the $22.1 million recorded in 1997. The decrease is due to
stability in costs associated with health insurance, post-retirement medical
benefits, pension and 401(k) plan costs and to a reduction of time charge by
employees to this category.
In 1998, maintenance expense remained at approximately the $7.3 million
level recorded in 1997 due principally to the wet weather conditions during the
first part of the year that hampered planned maintenance activity.
Depreciation expense in 1998 increased by 14.5% to $12.5 million
reflecting the effects of recording approximately $38 million in net plant
additions during 1997, depreciation on which began in 1998. In addition,
amortization of start-up and organizational costs associated with the formation
of AWR is reflected in 1998. There were no similar amortization costs in 1997.
Taxes on income increased by approximately 3.1% to $10.1 million in 1998
as compared to the $9.8 million in 1997 due to a 5.7% increase in operating
income partially offset by a lower effective tax rate.
Property and other taxes decreased by 2.5% in 1998 to $6.1 million due
primarily to reduced franchise tax payments directly attributable to reduced
revenues.
Other income increased by 1.5% in 1998 due principally to the
flow-through of tax benefits related to refinancing of long-term debt which was
partially offset by an increase in reserves against costs associated with SCW's
non-regulated activities.
Interest expense increased by 10.3% to $11.2 million primarily due to
increased short-term bank borrowing and the issuance of $15 million in long-term
debt in March 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Basic earnings per common share in 1997 decreased by 7.7% to $1.56 per
share as compared to $1.69 per share for the comparable period in 1996, directly
attributable to significantly increased supply costs during the first eight
months of 1997.
Water operating revenues increased by 0.7% in 1997 to $141.0 million
from the $140.0 million reported in 1996. Although water sales volumes were 2.7%
higher in 1997, in 1996 SCW began recovery of previously incurred supply costs,
in accordance with rules of the CPUC. In 1997, recovery of these costs was
completed in several customer service areas and rates were accordingly reduced,
partially offsetting rate increases effective during 1997 in other customer
service areas.
Electric operating revenues of $12.8 million were 10.7% higher in 1997
as compared to 1996 due to the impact of a general rate increase effective
January 1997 as well as a 3.6% increase in kilowatt-hour sales.
Purchased water costs remained relatively the same at $38.3 million in
1997 as compared to $38.4 million in 1996, despite a 6.4% increase in volumes
purchased, due to refunds received from SCW's wholesale water supplier during
1997 of approximately $2.0 million, which reduced recorded purchased water
costs. There were no such refunds received during 1996.
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Costs of power purchased for pumping decreased by 2.0% to $7.6 million
in 1997, chiefly as the result of the reduced amounts of water produced from
pumped sources in SCW's resource mix. During 1997, SCW had several wells out of
service due to water quality issues which significantly affected its ability to
fully utilize its groundwater resources.
Costs of power purchased for resale in 1997 decreased by 10.9% to $5.2
million from the $5.8 million recorded in 1996 due to reduced costs from SCW's
energy provider which partially offset the effects of increased kilowatt-hour
sales volumes recorded during the year.
Groundwater production assessments increased 15.2% to $6.8 million in
1997 from $5.9 million in 1996 due to additional assessments associated with
increased pumping in SCW's San Gabriel Valley and San Dimas customer service
areas.
The positive entry for supply cost balancing accounts for 1997 is a
result of approval by the CPUC of rate increases sufficient to recover
previously under-collected purchased supply costs, as well as refunds received
during 1997 from wholesale suppliers. The balancing account mechanism insulates
earnings from changes in the unit costs of supply costs which are outside of the
immediate control of SCW. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Administrative and general expenses increased by 7.7% to $22.1 million
in 1997 from the $20.5 million recorded in 1996. This increase reflects higher
labor costs. In addition, during 1997 SCW incurred costs for consulting on water
quality litigation for which there was no corresponding amount in 1996.
In 1997, maintenance expense decreased by 5.7% to $7.3 million from $7.7
million recorded in 1996 due principally to increased emphasis being placed on
SCW's meter replacement and capital improvement program which partially offset
increased maintenance on SCW's water supply sources.
Depreciation expense in 1997 increased by 8.4% to $11.0 million
reflecting the effects of recording approximately $31.0 million in net plant
additions during 1996, on which depreciation began in 1997.
Taxes on income decreased by approximately 4.4% to $9.8 million in 1997
as compared to the $10.3 million in 1996 as a result of lower pre-tax income.
Other taxes increased by 3.0% in 1997 to $6.3 million due primarily to increased
property taxes resulting from higher valuation assessments in 1997.
Other income increased by 42.7% in 1997 due principally to an increase
in billings to the City of Folsom for the lease of a portion of SCW's water
rights in the American River.
Interest expense decreased by 3.3% to $10.2 million primarily due to
reduced short-term bank borrowing and the lower borrowing rates experienced
during 1997.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses, dividends on its outstanding Common
and Preferred Shares and makes its mandatory sinking fund payments principally
through dividends from SCW. In December 1998, AWR filed a Registration Statement
with the Securities and Exchange Commission (SEC) for issuance, from time to
time, of up to $60 million in Common Shares, Preferred Shares and/or debt
securities. The proceeds will be used primarily for investment in its
subsidiaries.
SCW funds the majority of its operating expenses, interest payments on
its debt and dividends on its outstanding Common Shares through internal
sources. SCW continues to rely on external sources,
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including short-term bank borrowing, contributions-in-aid-of-construction,
advances for construction and install-and-convey advances, to fund the majority
of its construction expenditures.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of December 31, 1998 of which a
total of $38 million was outstanding. SCW routinely employs short-term bank
borrowing as an interim financing source prior to executing either a long-term
debt or equity issue. SCW issued long-term debt totaling $15.0 million in March
1998. The funds were used initially to repay short-term bank borrowings, after
which construction expenditures were funded.
In December 1998, SCW redeemed, at a premium, the entire $10 million
outstanding of its 10.10% Notes. These Notes were refinanced in January 1999.
In December 1998, SCW filed a Registration Statement with the SEC for
issuance, from time to time, of up to $60 million in long-term debt with the net
proceeds being used to repay short-term bank borrowings and fund construction
needs. In January 1999, SCW issued $40 million of long-term debt pursuant to
this Registration Statement, all of which was used to reduce bank borrowing.
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk.
CONSTRUCTION PROGRAM
SCW's construction program is designed to ensure its customers high
quality service. A program for water pipeline replacement is on-going throughout
the 22 customer service areas, based on priority of leaks detected, fire
protection enhancements and reflection of the underlying replacement schedule.
In addition, general upgrades in SCW's water supply facilities are anticipated
to be on-going. SCW's Board of Directors has approved anticipated net capital
expenditures of $42.1 million in 1999. Neither AWR nor ASUS have material
capital requirements.
REGULATORY MATTERS
SCW is subject to regulation by the CPUC, which has broad powers with
respect to service and facilities, rates, classifications of accounts, valuation
of properties, the purchase, disposition and mortgaging of properties necessary
or useful in rendering public utility service, the issuance of securities, the
granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters. AWR and ASUS are not directly
regulated by the CPUC. The CPUC does, however, regulate certain transaction
between SCW and its unregulated affiliates.
The 22 customer service areas of SCW are grouped into 16 water districts
and one electric district for ratemaking purposes. Water rates vary among the 16
ratemaking districts due to differences in operating conditions and costs. SCW
monitors operations on a regional basis in each of these districts so that
applications for rate changes may be filed, when warranted. Under the CPUC's
practices, rates may be increased by three methods: general rate case increases
(GRC's), offsets for certain expense increases and advice letter filings related
to certain plant additions. GRC's are typically for three-year periods, which
include step increases for the second and third year. Rates are based on
projected expenses and capital costs. GRC's have a typical regulatory lag of one
year. Offset rate increases typically have a two to four month regulatory lag.
The following table lists information on estimated annual rate changes during
1998, 1997 and 1996:
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Supply Balancing General
Cost Account and Step Advice
Year Offset Amortization Increases Letters Total
- ---- ------ ------------ --------- ------- -----
(Amounts are in $000's)
-----------------------
1998 $ 786 $(2,852) $ 3,590 $ 713 $ 2,237
1997 $ 183 $ 64 $ 1,332 $ (126) $ 1,453
1996 $ 103 $ (758) $16,805 $ 913 $17,063
New water rates were implemented in three of SCW's customer service
areas in January 1, 1998 to recover costs associated with capital projects in
those areas. Step increases in rates were effective in April 1998 in Barstow and
in May 1998 in Santa Maria. Increased rates for six additional water ratemaking
districts and recovery of costs associated with SCW's general office functions
were effective January 1, 1999.
Applications to increase water rates were filed for four water
ratemaking districts in February 1999. The new rates, if authorized in total or
in part by the CPUC, would be effective January 1, 2000.
SCW has filed an application with the CPUC to combine tariff schedules
into regional rates for the customer service areas that make up SCW's Region
III. A final decision from the CPUC is anticipated by the fourth quarter of
1999.
Hearings were held before the CPUC in November 1998 on SCW's filing
seeking recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project (the
"Project"). In February 1999, the Administrative Law Judge assigned to the
application issued his proposed decision which denied recovery of SCW's costs in
the Project. SCW is continuing to pursue alternative forms of recovery of its
investment in the Project including sale of its interests therein to other
participants in the Project. A final order from the CPUC is anticipated in the
second quarter of 1999. See Note 8 of the Notes to Financial Statements in Part
II, Item 8.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to the Safe
Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The U. S. Environmental Protection Agency ("EPA") can only
regulate contaminants that may have adverse health effects, are known or likely
to occur at levels of public health concern, and the regulation of which will
provide "a meaningful opportunity for health risk reduction." The EPA has
published a list of contaminants for possible regulation and must update that
list every five years. In addition, every five years, the EPA must select at
least five contaminants on that list and determine whether to regulate them. The
new law allows the EPA to bypass the selection process and adopt interim
regulations for contaminants in order to address urgent health threats. Current
regulations, however, remain in place and are not subject to the new
standard-setting provisions. The DOHS, acting on behalf of the EPA, administers
the EPA's program in California.
The 1996 SDWA amendments allow the EPA for the first time to base
primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
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SCW currently tests its wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCLs is treated before it is delivered to
customers.
Since the SDWA became effective, SCW has experienced increased operating
costs for testing to determine the levels, if any, of the constituents in SCW's
sources of supply and additional expense to lower the level of any contaminants
in order to meet the MCL standards. Such costs and the costs of controlling any
other contaminants may cause SCW to experience additional capital costs as well
as increased operating costs.
Registrant is currently unable to predict the ultimate impact that the
1996 SDWA amendments might have on its financial position or its results of
operation. The CPUC ratemaking process provides SCW with the opportunity to
recover prudently incurred capital and operating costs associated with water
quality. Management believes that such incurred costs will be authorized for
recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule ("ESWTR") which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and forwarded to
the EPA pursuant to EPA's Information Collection Rule, which requires such water
suppliers to monitor microbial and other contaminants in their water supplies
and to conduct certain tests in respect of such contaminants. The EPA has
adopted an Interim ESWTR applicable only to systems serving greater than 10,000
persons. The long-term ESWTR, in any of the forms currently proposed, would
apply to each of SCW's five surface water treatment plants and is expected to be
promulgated by November 2000. However, because it is impossible to predict the
version of the ESWTR that will be promulgated, Registrant is unable to predict
what additional costs, if any, will be incurred to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant is also subject to the new regulations concerning
disinfection/disinfection by-products ("DBPs"), Stage I of which regulations
were effective in November, 1998 with full compliance required by 2001. Stage I
requires reduction of tri-halomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. It is anticipated that both systems will be in full
compliance by 2001.
The EPA must adopt Stage II rules pertaining to DBPs, according to a
negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBPs but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
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Ground Water Rule
By August 1999, the EPA is scheduled to propose regulations requiring
disinfection of certain groundwater systems and provide guidance on determining
which systems must provide disinfection facilities. The EPA may utilize the
cost/benefit analysis provided in the 1996 SDWA amendments to establish such
regulations. It is anticipated that the regulations will apply to several of
SCW's systems using groundwater supplies. While no assurance can be given as to
the nature and cost of any additional compliance measures, if any, Registrant
does not believe that such regulations will impose significant compliance costs,
since SCW already currently engages in disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon and
arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a rule
one year later. The EPA originally had 180 days after enactment of the 1996 SDWA
amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and was authorized to enter into cooperative agreements to carry
out the study. It is anticipated that the completed study will be available for
review in 1999. Depending on the MCL eventually established for arsenic,
compliance could cause Registrant to implement costly well-head treatment
remedies such as ion exchange or, alternatively, to purchase additional and more
expensive water supplies already in compliance, for blending with well sources.
The EPA has withdrawn its proposed radon rule and has arranged for the
National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The
National Academy of Sciences has completed its study and has agreed with much of
EPA's original findings but has slightly reduced the ingestion risk initially
assumed by EPA. The EPA is expected to establish an MCL based on the findings of
the National Academy of Sciences' risk assessment report and to set an
alternative MCL based on potential mitigation measures for overall radon
reduction by August 1999. Although Registrant is unable to predict the standard
for radon, Registrant itself is currently conducting studies to determine the
best treatment for affected wells.
Voluntary Efforts to Exceed Surface Water Treatment Standards
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed current regulations governing surface water treatment to
ensure that its surface treatment facilities are performing as efficiently as
possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733 which
requires fluoridation of water supplies for public water systems serving more
than 10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January, 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its 27
wells serving its Arden-Cordova system. Aerojet-General Corporation has, in the
past, used ammonium perchlorate in their processing as an oxidizer of rocket
fuels. SCW took the three wells detected with ammonium perchlorate out of
service at that time. Although neither the EPA nor the DOHS has established a
drinking water standard for ammonium
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perchlorate, DOHS has established an action level of 18 parts per billion
("ppb") which required SCW to notify customers in its Arden-Cordova customer
service area of detection of ammonium perchlorate in amounts in excess of this
action level. In April, 1997, SCW found ammonium perchlorate in three additional
wells and, at that time, removed those wells from service until it was
determined that the levels were below the state-determined action level. Those
wells were returned to service. SCW periodically monitors of these wells to
determine that levels of perchlorate are below the action level currently in
effect.
In February 1998, SCW was informed that a substance called
nitrosodimethylemine ("NDMA") had been detected in amounts in excess of the EPA
reference dosage for health risks in three of its wells in its Arden-Cordova
system. Each of the wells has been removed from service. NDMA is an additional
by-product from the production of rocket fuel and it is believed that such
contamination is related to the activities of Aerojet-General Corporation.
Aerojet-General Corporation has reimbursed SCW for constructing a pipeline to
interconnect with the City of Folsom water system to provide an alternative
source(s) of water supply in SCW's Arden-Cordova customer service area as well
as reimburse SCW for costs associated with the drilling and equipping of two new
wells.
SCW and Aerojet-General Corporation are in negotiations on other matters
related to procedures to address cleanup of the contaminated wells, costs
associated with the cleanup, costs associated with increased costs of purchased
water as compared to pumped sources and costs associated with developing new
sources of groundwater supply. Registrant is unable to predict when the
negotiations will be completed or the likely outcome of such negotiations.
Matters Relating to Culver City System
The compound, methyl tertiary butyl ether ("MTBE"), has been detected in
the Charnock Basin, located in the city of Santa Monica and within SCW's Culver
City customer service area. MTBE is an oxygenate used in reformulated fuels. At
the request of the Regional Water Quality Control Board, the City of Santa
Monica and the California Environmental Protection Agency, SCW removed two of
its wells in the Culver City system from service in October, 1996 to help in
efforts to avoid further spread of the MTBE contamination plume. Neither of
these wells has been found to be contaminated with MTBE. SCW is purchasing water
from the MWD at an increased cost to replace the water supply formerly pumped
from the two wells removed from service.
Several studies are under way to determine the possible sources and
causes of the MTBE contamination. The federal EPA is pursuing an enforcement
effort to reach a settlement with the potentially responsible parties on matters
relating to the cleanup of the contamination. Registrant is unable to predict
the outcome of the EPA's enforcement efforts. Pursuant to an agreement with SCW,
two of the potentially responsible parties have reimbursed SCW's legal and
consulting costs related to this matter as well as for increased costs incurred
by SCW in purchasing replacement water. SCW and such parties have negotiated a
month-to-month extension of this agreement which is anticipated to remain
effective until the underlying groundwater basin contamination is remediated.
Bear Valley Electric
SCW has been, in conjunction with the Southern California Edison unit of
Edison International, planning to upgrade transmission facilities to 115kv (the
"115kv Project")in order to meet increased energy and demand requirements. The
115kv Project is subject to an environmental impact report ("EIR") and delays in
approval of the EIR may impact service in SCW's Bear Valley electric customer
service area. SCW has, however, taken other measures, including some measures
that will be enacted on an emergency basis, to meet load growth in order
mitigate delays in approval of the EIR.
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WATER SUPPLY
During 1998, the Company supplied a total of 179,927 acre feet of water.
Of this amount, approximately 61% came from pumped sources and 39% was purchased
from others, principally the MWD. The remaining amount was supplied by the
Bureau of Reclamation (the "Bureau") under a no-cost contract. During 1997, the
Company produced 199,146 acre feet of water, 54% of which came from pumped
sources, 45% was purchased and the remainder was supplied by the Bureau.
The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. The Company has 52 connections for the water distribution
facilities of MWD and other municipal water agencies. MWD imports water from two
principal sources: the Colorado River and the State Water Project ("SWP").
Available water supplies from the Colorado River and the SWP have historically
been sufficient to meet most of MWD's requirements and MWD's supplies from these
sources are anticipated to remain adequate through 1999. However, MWD has taken
a number of steps to secure additional storage capacity and increase available
water supplies, including effecting transfers of water rights from other
sources.
The 1997-1998 water year, which ended September 1998, was labeled a "wet
one" by the California Department of Water Resources. The outlook for water
supply in 1999 remains favorable. In those customer services areas of SCW which
pump groundwater, overall groundwater conditions remain at adequate levels.
However, certain of SCW's groundwater supplies have been affected to varying
degrees by various forms of contamination which, in some cases, has caused
increased reliance on purchased water in its resource mix.
BUSINESS SEGMENTS
AWR currently has two principal business units: water service and
electric distribution utility operations conducted through its SCW subsidiary,
and its non-regulated activities through its ASUS subsidiary. All activities of
Registrant currently are geographically located within the State of California,
except for one contract providing customer service and billing services to a
utility located in the state of Arizona. SCW is a regulated utility which
operates both water and electric systems. On a stand alone basis, AWR has no
material assets other than its investments in its subsidiaries. SCW terminated
its Golden State Water Company joint venture effective December 31, 1998.
YEAR 2000 ISSUE
Registrant continues to evaluate its exposure to the Year 2000 (Y2K)
problem that arises from the fact that many existing computer systems may
contain date sensitive embedded technology that uses only two digits to identify
a year in the date field. Based on the assumption that the first two digits of
the date field are always "19", such systems may misinterpret dates after
December 31, 1999. Because Registrant is dependent upon the proper functioning
of these computer systems and other equipment containing date sensitive
technology, a failure of these systems could have a material and adverse affect
on Registrant resulting in business interruption or shutdown, financial loss,
regulatory citations and legal liability.
Registrant has been actively assessing its Y2K readiness since early
1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which are intended to be Y2K ready. All major upgrades to
these systems are completed and were operational at year-end 1998. Costs
associated with the implementation and upgrade of major management information
and customer service software systems, as
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well as upgrades to mainframe hardware systems, have been approved by the CPUC
and are being recovered through rates.
In addition to work being done on its internal systems, Registrant has
sought compliance certification from external vendors and service providers.
Testing on Registrant's interface with financial and other institutions with
which it does business is being conducted to ensure Y2K readiness. In order to
more fully address Y2K readiness of its field equipment, major vendors and
service providers, Registrant engaged the services of a nationally-recognized
business consulting firm and has completed its written plan to address the Y2K
issue. Registrant has established a Year 2000 Task Force consisting of senior
management and operating personnel which will complete the inventory of computer
systems and other devices with embedded technology, as well as other
considerations potentially not revealed in preliminary internal analyses.
Registrant's general process for addressing the Y2K issue is (i) to
inventory all systems that may have a potential Y2K impact, (ii) to determine
the materiality of these non-Y2K ready systems, (iii) to replace and test,
correct and test, or prepare for the failure of material items that have been
determined to be non-Y2K ready, and (iv) to prepare contingency plans. Some,
less critical systems may not be fully Y2K ready, but are not anticipated to
materially affect Registrant's operations.
Registrant is significantly dependent on third party suppliers, such as
energy and telecommunication companies and wholesale water suppliers. In order
to conduct its business, Registrant has initiated due diligence with certain of
its major service providers to address their Y2K readiness. In the event that
such suppliers might be adversely affected by Y2K, Registrant is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems and the
use of electric generators capable of providing power during a black-out.
Registrant does not have, and may never fully have, sufficient information about
the Y2K exposure or remediation plans of these third parties to adequately
predict the risks posed by them to Registrant. If the third parties have Y2K
problems that are not remedied, resulting problems could include loss of utility
services and disruption of water supplies.
To date, there have been no significant costs associated with Y2K
readiness that have not been approved by the CPUC for recovery through rates.
Registrant estimates that it may incur up to $800,000 in costs depending on the
results of on-going tests, to make critical systems Y2K ready. Registrant
believes that the future costs, which are prudently incurred, will also be
allowed for recovery through rates. The CPUC has notified all utilities under
its jurisdiction, including SCW, that it will review their Y2K preparations.
RISK FACTOR SUMMARY
This report (written in plain English) summarizes certain risks of our
business that may affect our future financial results. We also periodically file
with the Securities and Exchange Commission documents that include more
information on these risks. It is important for investors to read these
documents.
Litigation
SCW has recently been sued in nine water-quality related lawsuits:
- a suit filed on April 24, 1997 alleging personal injury
and property damage as a result of the sale of water
from wells located in an area of the San Gabriel Valley
that has been designated a federal superfund site
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- a suit filed on November 3, 1997 alleging personal
injury and property damage as a result of the sale of
water; few of our systems are located in the
geographical area covered by this suit
- a suit filed on January 8, 1998 alleging personal injury
and property damage as a result of the delivery of
contaminated water in SCW's Arden-Cordova service area
- a suit filed on February 2, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
- a suit filed on February 4, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
- a suit filed in April 1998 alleging personal injury and
property damage as a result of the delivery of
contaminated water in SCW's Arden-Cordova service area
- three suits filed on July 30, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
In March 1998, the CPUC issued an order instituting investigation (the
"OII") as a result of these types of suits being filed against water utilities
in California. The CPUC is seeking to determine:
- whether existing standards and policies regarding drinking water
quality adequately protect the public health
- whether water utilities are following existing standards
The lawsuits have been stayed pending the outcome of the OII and a
hearing before the First District Court of Appeal on April 19, 1999. We
anticipate that the CPUC will issue a decision in the OII on or about June 1999.
We are unable to predict the nature of the CPUC's final decision or the outcome
of the lawsuits. An adverse outcome in this type of litigation is, however,
likely to be material.
The CPUC has authorized a memorandum account for legal expenses incurred
by water utilities, including SCW, in the water quality lawsuits. Under the
memorandum account procedure, SCW may recover litigation costs from ratepayers
to the extent authorized by the CPUC. The CPUC has not yet authorized SCW to
recover any of its litigation costs.
Environmental Regulation
We are subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
- the 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to minimum containment levels
- interim regulations expected to be adopted before the end of
1998 requiring increased surface-water treatment to decrease the
risk of microbial contamination; these regulations will affect
SCW's five surface water treatment plants
- additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 1998; these regulations
will potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end of
1998 requiring disinfection of certain groundwater systems;
these regulations will potentially impact several of SCW's
systems using groundwater supplies
- potential regulation of radon and arsenic
19
22
- new California requirements to fluoridate public water systems
serving over 10,000 customers
We may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR and ASUS are not directly
subject to CPUC regulation. The CPUC may, however, regulate transactions between
SCW and AWR, including the manner in which overhead costs are allocated between
SCW and AWR and the pricing of services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is permitted to
charge its customers. SCW may increase rates in three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions,
thereby increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that are beyond
SCW's control. The balancing account is not, however, designed to insulate SCW's
earnings against changes in supply mix. As a result, SCW may not recover
increased costs due to increased use of purchased water through the balancing
account mechanism. In addition, balancing account adjustments, if authorized by
the CPUC, may result in either increases or decreases in revenues attributable
to supply costs incurred in prior periods, depending upon whether there has been
an undercollection or overcollection of supply costs.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
- applications filed by SCW to increase rates in four of its 16
rate-making jurisdictions; a final decision is not expected
until near year-end 1999
- an application filed to consolidate the rate-making
jurisdictions located in SCW's Region III area into a single
tariff
- an application filed by SCW for permission to recover certain
costs of SCW's participation in the coastal aqueduct extension
of the state water project; the ALJ assigned to this matter has
issued a proposed decision that denies recovery of our costs for
participation in the project; the final order could differ
uphold the ALJ's decision or differ materially from his proposed
decision
- the OII
- new guidelines under consideration by the CPUC for the
acquisition and merger of water utilities and for privatization
transactions
20
23
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon a
variety of factors, including
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
As a result of heavier than normal rainfall in the winter of 1997-1998,
most of California's reservoirs are near capacity and the outlook for water
supply in the near term is generally favorable. Population growth and increases
in the amount of water used have, however, increased limitations on use to
prevent overdrafting of groundwater basins. The import of water from the
Colorado River, one of our important sources of supply, is expected to decrease
in future years due to the requirements of the Central Arizona Project. We also
have in recent years taken wells out of service due to water quality problems.
Water shortages affect us in several ways:
- they adversely affect supply mix by causing us to rely on more
expensive purchased water
- they adversely affect operating costs
- they may result in an increase in capital expenditures for
building pipelines to connect to alternative sources of supplies
and reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities.
In certain circumstances, we may recover these costs from third parties
that may be responsible, or potentially responsible, for groundwater
contamination. We are currently in negotiations with Aerojet General Corporation
regarding costs associated with the cleanup of the groundwater supply for our
Arden-Cordova System and for the increased costs of purchasing water and
developing new sources of groundwater supply. We are also negotiating with two
potentially responsible parties on matters relating to the clean-up and purchase
of replacement water in the Charnock Basin located in the cities of Santa Monica
and Culver City. These two potentially responsible parties have previously
reimbursed us for replacement water and certain legal and consulting expenses.
The Charnock Basin is in SCW's service territory.
Water Quality
SCW has detected ammonium perchlorate and nitrosodimethylemine in
amounts in excess of certain state or federal limits in wells serving its
Arden-Cordova system. Both substances are byproducts from the production of
rocket fuel. SCW has taken wells out of service, increased monitoring of other
wells and drilled new wells in the area. In addition, SCW is constructing a new
pipeline to the City of Folsom's water system in order to obtain an alternative
source of supply for its Arden-Cordova customers. Aerojet General Corporation
has reimbursed SCW for certain of these costs. Negotiations with Aerojet General
corporation are continuing with respect to other costs.
21
24
The compound methyl tertiary butyl ether has been detected in the
Charnock Basin. SCW has taken two wells out of service in this area and is
purchasing more expensive groundwater from the Metropolitan Water District to
replace the water supply formerly obtained from these wells. SCW is negotiating
with two of the potentially responsible parties for continuation of recovery of
its increased costs.
SCW has recently been sued on water quality issues. In addition, we are
subject to increasing regulation relating to water quality matters.
Weather
Our business may be affected by weather in a variety of ways. For
instance:
- water volumes sold decrease during wet weather
- water volumes sold decrease during cold weather
- water volumes sold may also decrease during drought conditions
if mandatory rationing is imposed
- we may be required to purchase more expensive water and to use
less groundwater during drought conditions
- kilowatt-hour sales of electricity decrease if winters are
warmer than normal or summers are cooler than normal
- maintenance and capital expenditures decrease during periods of
inclement weather
- adverse weather conditions may result in damage to our water and
electric systems resulting in increased repair and capital
replacement costs, loss of sales and loss of water from broken
reservoirs and mains
Weather patterns in California are inherently uncertain. It is therefore
difficult to predict from year to year the impact of weather on our financial
results.
Unregulated Activities
ASUS was formed for the purpose of, among other things, operating and
maintaining municipally-owned water systems and providing billing, meter reading
and other services for municipalities and special water districts and making
investments in subsidiaries and other entities. These activities present
different risks than CPUC-regulated activities. ASUS does not have extensive
experience in engaging in these types of activities and must compete with other
private parties with more experience and greater capital resources. It must also
compete with special water districts and other government agencies that may have
a lower cost of funds and other competitive advantages afforded governmental
entities.
AWR's ability to earn a profit on these activities will depend upon a
variety of factors, including
- its ability to obtain contracts in a competitive marketplace
- its ability to price its services at a level sufficient to
enable it to earn a profit
- its ability to recover the costs of obtaining contracts in a
competitive marketplace
- the cost of developing the privatization market in California
- its ability to operate in a cost effective matter
- its ability to negotiate contracts containing favorable terms
Our unregulated activities are not currently profitable. As a result,
our unregulated activities cannot currently be financed from AWR's earnings.
Under California law, SCW is not permitted to issue securities to finance
unregulated activities. Our unregulated activities must therefore be financed
directly by
22
25
AWR or its unregulated subsidiaries or from dividends received by AWR from SCW.
To the extent that AWR's activities are financed from dividends from SCW, the
funds available for the payment of dividends to AWR's shareholders will be
reduced.
Potential Year 2000 Risks
We are currently addressing the effect of the Year 2000 ("Y2K") issue on
our reporting systems and operations. We are also assessing operational risks
related to our suppliers and vendors and developing contingency plans in order
to mitigate this risk. We have not currently experienced significant costs with
respect to addressing these issues. We anticipate completion of our assessment
of risks related to our suppliers and vendors and our operational contingency
plan by June 1999.
The primary business risk associated with Y2K is our ability to continue
to treat, transport and distribute water to our customers without interruption.
Our operations could be significantly impacted if
- we are unable to resolve or fail to identify all Y2K problems
prior to January 1, 2000
- any of our critical suppliers and vendors, such as suppliers of
chemicals for water treatment or electric utilities, are unable
to resolve or fail to identify all Y2K problems affecting our
business prior to January 1, 2000
- we are unable to mitigate or fail to address all operational
risks in our contingency plans
Capital Expenditures
We anticipate spending approximately $46.5 million on capital
expenditures during the next 12 months. We anticipate that approximately 45 to
60% of these funds will come from developers and other external sources. The
price and terms of this funding will depend upon conditions in the capital
markets at the time funds are needed.
We anticipate that capital expenditures will continue to increase due to
a variety of factors, including:
- the need to replace aging infrastructure
- the need to comply with increasingly stringent environmental
requirements
- the need to address potential water shortage problems
- the need to address water quality problems
Capital expenditures may also increase if AWR is successful in its
privatization efforts since many municipalities view privatization as a means to
finance needed capital improvements.
Economic Conditions
Our ability to finance capital expenditures, unregulated
activities and other matters will depend upon general economic conditions and
conditions in the capital markets. Conditions in the capital markets are
currently uncertain. We are unable to predict to what extent this uncertainty
may impact our access to capital or financing costs or our ability to compete in
the privatization market.
Interest rates have recently been declining. Declining interest
rates are generally believed to be favorable for utilities because of their high
capital costs. On the other hand, SCW's authorized rate of return may be reduced
because of lower interest rates. As a result, funds available for the payment of
dividends may be reduced.
Sales may also be adversely affected by unfavorable economic
conditions if business activity and employment are reduced.
23
26
Condemnation
Under California law, a governmental agency may acquire public utility
property through the power of eminent domain, also know as condemnation.
Although we have not had any of our systems condemned during the past three
years, the potential for condemnation nevertheless remains.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
the reporting and displaying of comprehensive income and its components, such as
minimum pension liability, in a full set of general-purpose financial
statements. Adoption of this statement, effective for fiscal years beginning
after December 15, 1997, did not have a significant impact on the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
method of reporting information about operating segments in annual financial
statements and in interim reports issued to shareholders. Adoption of this
statement, effective for fiscal years beginning after December 15, 1997, did not
have a significant impact on disclosure of segment related information.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends SFAS No. 87 and
SFAS No. 109 and revises employers' disclosure concerning pension and other
postretirement benefits plans. Adoption of this statement, effective for fiscal
years beginning after December 15, 1997, did not have a significant impact the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for
accounting for derivative and hedging activities, and supersedes and amends a
number of existing standards. Adoption of this statement, effective for fiscal
years beginning after June 15, 1999, will not have a significant impact on
financial position or results of operation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk. The disclosure required is, therefore, not
applicable.
24
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American States Water Company - Consolidated
Balance Sheets - December 31, 1998 and 1997
Statements of Capitalization - December 31, 1998 and 1997
Statements of Income - for the years ended December 31, 1998, 1997 and
1996
Statements of Changes in Common Shareholders' Equity - for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows - for the years ended December 31, 1998, 1997
and 1996
American States Water Company - Parent Company - Condensed
Balance Sheets - December 31, 1998
Statements of Capitalization - December 31, 1998
Statements of Income - for the six months ended December 31, 1998
Statements of Changes in Common Shareholders' Equity - for the six months
ended December 31, 1998
Statements of Cash Flows - for the six months ended
December 31, 1998
Southern California Water Company
Balance Sheets - December 31, 1998 and 1997
Statements of Capitalization - December 31, 1998 and 1997
Statements of Income - for the years ended December 31, 1998, 1997 and 1996
Statements of Changes in Common Shareholders' Equity - for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows - for the years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
Report of Independent Public Accountants
25
28
AMERICAN STATES WATER COMPANY
CONSOLIDATED
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
--------- ---------
Assets
UTILITY PLANT, AT COST
Water $ 482,989 $ 446,605
Electric 35,171 34,137
--------- ---------
518,160 480,742
Less - Accumulated depreciation (138,423) (125,020)
--------- ---------
379,737 355,722
Construction work in progress 35,016 27,901
--------- ---------
Net utility plant 414,753 383,623
--------- ---------
OTHER PROPERTY AND INVESTMENTS 1,077 1,355
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 620 4,186
Accounts receivable-Customers, less reserves of $403 in 1998;
and $466 in 1997 7,626 8,544
Other 5,301 3,614
Unbilled revenue 9,303 9,106
Materials and supplies, at average cost 994 1,299
Supply cost balancing accounts 4,300 4,286
Prepayments 5,988 7,676
Accumulated deferred income taxes - net 5,156 5,783
--------- ---------
Total current assets 39,288 44,494
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets 21,506 22,337
Other 8,047 5,265
--------- ---------
Total deferred charges 29,553 27,602
--------- ---------
Total Assets $ 484,671 $ 457,074
========= =========
The accompanying notes are an integral part of these financial statements
26
29
AMERICAN STATES WATER COMPANY
CONSOLIDATED
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
-------- --------
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $154,299 $151,053
Preferred shares 1,600 1,600
Preferred shares - mandatory redemption 400 440
Long-term debt 120,809 115,286
-------- --------
Total capitalization 277,108 268,379
-------- --------
CURRENT LIABILITIES
Notes payable to banks 38,000 26,000
Long-term debt and preferred shares - current 260 231
Accounts payable 10,218 11,770
Taxes payable 5,900 9,115
Accrued interest 1,405 1,868
Other 7,985 7,196
-------- --------
Total current liabilities 63,768 56,180
-------- --------
OTHER CREDITS
Advances for construction 54,743 55,574
Contributions in aid of construction 36,530 28,467
Accumulated deferred income taxes - net 46,902 42,984
Unamortized investment tax credits 3,155 3,246
Regulatory tax-related liability 1,906 1,950
Other 559 294
-------- --------
Total other credits 143,795 132,515
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $484,671 $457,074
======== ========
The accompanying notes are an integral part of these financial statements
27
30
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
For the years ended December 31,
($ in thousands) 1998 1997
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, $2.50 stated value--
Authorized 30,000,000 shares
Outstanding 8,957,671 in 1998 and 1997 $ 22,394 $ 22,394
Additional paid-in capital 74,937 74,937
Earnings reinvested in the business 56,968 53,722
--------- ---------
154,299 151,053
--------- ---------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800 800
Outstanding 32,000 shares, 4 1/4% Series 800 800
--------- ---------
1,600 1,600
--------- ---------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 17,600 shares in 1998 and
19,200 shares in 1997, 5% Series 440 480
Less: Preferred shares to be redeemed within one year (40) (40)
--------- ---------
400 440
--------- ---------
LONG-TERM DEBT
5.82% notes due 2003 12,500 12,500
10.10% notes due 2009 -- 10,000
6.64% notes due 2013 1,100 1,100
6.80% notes due 2013 2,000 2,000
8.50% fixed rate obligation due 2013 1,882 1,947
Variable rate obligation due 2014 6,000 6,000
Variable rate obligation due 2018 630 --
6.87% notes due 2023 5,000 5,000
7.00% notes due 2023 10,000 10,000
7.55% notes due 2025 8,000 8,000
7.65% notes due 2025 22,000 22,000
5.50% notes due 2026 8,000 8,000
6.81% notes due 2028 15,000 --
9.56% notes due 2031 28,000 28,000
Other 917 930
--------- ---------
121,029 115,477
Less: Current maturities (220) (191)
--------- ---------
120,809 115,286
--------- ---------
TOTAL CAPITALIZATION $ 277,108 $ 268,379
========= =========
The accompanying notes are an integral part of these financial statements
28
31
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
($ in thousand, except per share amounts) For the years ended December 31,
1998 1997 1996
--------- --------- ---------
OPERATING REVENUES
Water $ 134,859 $ 140,988 $ 139,997
Electric 13,201 12,767 11,532
--------- --------- ---------
Total operating revenues 148,060 153,755 151,529
--------- --------- ---------
OPERATING EXPENSES
Water purchased 30,833 38,318 38,355
Power purchased for resale 5,013 5,188 5,825
Power purchased for pumping 7,009 7,554 7,711
Groundwater production assessment 7,567 6,847 5,946
Supply cost balancing accounts 28 2,813 2,064
Other operating expenses 14,459 13,074 13,421
Administrative and general expenses 21,987 22,138 20,549
Depreciation 12,538 10,952 10,102
Maintenance 7,311 7,301 7,745
Taxes on income 10,130 9,830 10,283
Property and other taxes 6,124 6,282 6,099
--------- --------- ---------
Total operating expenses 122,999 130,297 128,100
--------- --------- ---------
OPERATING INCOME 25,061 23,458 23,429
--------- --------- ---------
OTHER INCOME
Total other income - net 769 758 531
--------- --------- ---------
Income before interest charges 25,830 24,216 23,960
--------- --------- ---------
INTEREST CHARGES
Interest on long-term debt 9,612 8,821 8,551
Other interest and amortization of debt expense 1,595 1,336 1,949
--------- --------- ---------
Total interest charges 11,207 10,157 10,500
--------- --------- ---------
NET INCOME 14,623 14,059 13,460
Dividends on Preferred Shares (90) (92) (94)
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 14,533 $ 13,967 $ 13,366
BASIC EARNINGS PER COMMON SHARE $ 1.62 $ 1.56 $ 1.69
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,958 8,957 7,891
The accompanying notes are an integral part of these financial statements
29
32
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) Shares Amount Capital Business
----- ------- ------- -------
BALANCES AT DECEMBER 31, 1995 7,845 $19,613 $54,753 $47,210
Add:
Net Income 13,460
Issuance of Common Shares
for public offering 1,000 2,500 18,090
under Dividend Reinvestment and 401(k)
Plans 41 102 802
Deduct:
Dividends on Preferred Shares 94
Dividends on Common Shares - $1.225 per
share 9,670
----- ------- ------- -------
BALANCES AT DECEMBER 31, 1996 8,886 $22,215 $73,645 $50,906
Add:
Net Income 14,059
Issuance of Common Shares for public
offering 72 179 1,292
Deduct:
Dividends on Preferred Shares 92
Dividends on Common Shares - $1.245 per
share 11,151
----- ------- ------- -------
BALANCES AT DECEMBER 31, 1997 8,958 $22,394 $74,937 $53,722
Add:
Net Income 14,623
Deduct:
Dividends on Preferred Shares 90
Dividends on Common Shares - $1.26 per
share 11,287
----- ------- ------- -------
BALANCES AT DECEMBER 31, 1998 8,958 $22,394 $74,937 $56,968
===== ======= ======= =======
The accompanying notes are an integral part of these financial statements
30
33
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the years ended December 31,
($ in thousands) 1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 14,623 $ 14,059 $ 13,460
Adjustments for non-cash items:
Depreciation and amortization 12,929 11,387 10,389
Deferred income taxes and investment tax credits 5,241 826 577
Other - net 2,036 (1,426) (1,660)
Changes in assets and liabilities:
Customer receivables 918 (673) 368
Supply cost balancing accounts (14) 1,987 1,800
Accounts payable (1,552) (1,095) 6,026
Taxes payable (3,215) 3,338 215
Other - net 438 341 122
-------- -------- --------
Net cash provided 31,404 28,744 31,297
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (41,826) (34,717) (31,953)
-------- -------- --------
Net cash used (41,826) (34,717) (31,953)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Shares -- 1,472 21,494
Issuance of long-term debt and lease obligations 15,000 8,000 --
Receipt of advances for and contributions in aid
of construction 3,381 1,302 2,462
Refunds on advances for construction (2,651) (2,957) (2,088)
Retirement or repayments of long-term debt and (9,488) (198) (15,447)
redemption of preferred shares - net
Net change in notes payable to banks 12,000 10,000 7,500
Common and preferred dividends paid (11,386) (11,243) (9,825)
-------- -------- --------
Net cash provided 6,856 6,376 4,096
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,566) 403 3,440
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,186 3,783 343
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR 620 4,186 $ 3,783
-------- -------- --------
TAXES AND INTEREST PAID:
Income taxes paid $ 5,430 $ 6,338 $ 10,767
Interest paid $ 11,391 9,451 10,128
-------- -------- --------
NON-CASH TRANSACTIONS:
Property installed by developers and conveyed to
Company $ 1,797 $ 2,082 $ 957
======== ======== ========
The accompanying notes are an integral part of these financial statements
31
34
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF THE PARENT
BALANCE SHEET
December 31,
($ in thousands) 1998
---------
Assets
OTHER PROPERTY AND INVESTMENTS $ 156,035
CURRENT ASSETS
Cash and cash equivalents 96
Accounts receivable 128
Other 28
Accumulated deferred income taxes - net (17)
---------
Total current assets 235
DEFERRED CHARGES 50
=========
TOTAL ASSETS $ 156,320
=========
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $ 154,299
Preferred shares 1,600
Preferred shares - mandatory redemption 400
---------
Total capitalization 156,299
---------
CURRENT LIABILITIES
Intercompany Payable 104
Accounts payable 164
Taxes payable (247)
---------
Total current liabilities 21
---------
TOTAL CAPITALIZATION AND LIABILITIES $ 156,320
=========
The accompanying notes are an integral part of these financial statements
32
35
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF CAPITALIZATION
December 31,
($ in thousands) 1998
---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, $2.50 stated value--
Authorized 30,000,000 shares
Outstanding 8,957,671 $ 22,394
Additional paid-in capital 74,937
Earnings reinvested in the business 56,968
---------
154,299
---------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800
Outstanding 32,000 shares, 4 1/4% Series 800
---------
1,600
---------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 17,600 shares in 1998, 5% Series 440
Less: Preferred shares to be redeemed within one year (40)
---------
400
---------
TOTAL CAPITALIZATION 156,299
=========
The accompanying notes are an integral part of these financial statements
33
36
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF INCOME
($ in thousand, except per share amounts) For the six months ended December 31,
1998
-------
OPERATING REVENUES
Management Fees $ 65
OPERATING EXPENSES
Other operating expenses 3
Customer accounts expense 21
Administrative and general expenses 102
Employees' pension and benefits 1
Maintenance 1
Amortization 268
Taxes on income (231)
Property and other taxes 1
-------
Total operating expenses 166
-------
OPERATING INCOME (101)
-------
OTHER INCOME
Total other income - net (462)
Dividends from SCW 5,889
-------
NET INCOME/(LOSS) 5,326
Dividends on Preferred Shares (45)
-------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 5,282
=======
BASIC EARNINGS PER COMMON SHARE $ 0.59
-------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
8,958
-------
Included in Net Income are intercompany dividends which are eliminated as part
of the consolidated financial statements
The accompanying notes are an integral part of these financial statements
34
37
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF THE PARENT
STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) Shares Amount Capital Business
------- ------- ------- -------
BALANCES AT JULY 1, 1998 8,958 $22,394 $74,937 $52,643
Add:
Net Income 5,326
Net Increase in Subsidiary Equity 4,687
Deduct:
Dividends on Preferred Shares 45
Dividends on Common Shares - $.63 per share 5,643
------- ------- ------- -------
BALANCES AT DECEMBER 31, 1998 8,958 $22,394 $74,937 $56,968
======= ======= ======= =======
35
38
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENTS OF CASH FLOWS
For the six months ended December 31,
($ in thousands) 1998
-------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 5,326
Adjustments for non-cash items:
Amortization 268
Deferred income taxes and investment tax credits 17
Other - net 317
Changes in assets and liabilities (135)
-------
Net cash used 5,793
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common and preferred dividends paid (5,697)
-------
Net cash provided (5,697)
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 96
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 96
-------
The accompanying notes are an integral part of these financial statements
36
39
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
--------- ---------
Assets
UTILITY PLANT, AT COST
Water $ 482,989 $ 446,605
Electric 35,171 34,137
--------- ---------
518,160 480,742
Less - Accumulated depreciation (138,423) (125,020)
--------- ---------
379,737 355,722
Construction work in progress 35,016 27,901
--------- ---------
Net utility plant 414,753 383,623
--------- ---------
OTHER PROPERTY AND INVESTMENTS 763 1,355
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 524 4,186
Accounts receivable-Customers, less reserves of $403 in 1998;
$466 in 1997 7,498 8,544
Other 5,272 3,614
Intercompany receivable 104 --
Unbilled revenue 9,303 9,106
Materials and supplies, at average cost 994 1,299
Supply cost balancing accounts 4,300 4,286
Prepayments 5,988 7,676
Accumulated deferred income taxes - net 5,173 5,783
--------- ---------
Total current assets 39,156 44,494
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets 21,506 22,337
Other 7,997 5,265
--------- ---------
Total deferred charges 29,503 27,602
--------- ---------
Total Assets $ 484,175 $ 457,074
========= =========
The accompanying notes are an integral part of these financial statements
37
40
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
--------------- ----------------
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $155,721 $151,053
Preferred shares - 1,600
Preferred shares - mandatory redemption - 440
Long-term debt 120,809 115,286
--------------- ----------------
Total capitalization 276,530 268,379
--------------- ----------------
CURRENT LIABILITIES
Notes payable to banks 38,000 26,000
Long-term debt and preferred shares - current 260 231
Accounts payable 10,054 11,770
Taxes payable 6,147 9,115
Accrued interest 1,405 1,868
Other 7,984 7,196
--------------- ----------------
Total current liabilities 63,850 56,180
--------------- ----------------
OTHER CREDITS
Advances for construction 54,744 55,574
Contributions in aid of construction 36,530 28,467
Accumulated deferred income taxes - net 46,902 42,984
Unamortized investment tax credits 3,155 3,246
Regulatory tax-related liability 1,906 1,950
Other 558 294
--------------- ----------------
Total other credits 143,795 132,515
=============== ================
TOTAL CAPITALIZATION AND LIABILITIES $484,175 $457,074
=============== ================
The accompanying notes are an integral part of these financial statements
38
41
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CAPITALIZATION
For the years ended December 31,
($ in thousands) 1998 1997
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, no par value
Outstanding 100 in 1998
and 8,957,671 in 1997 $ 98,391 $ 22,394
Additional paid-in capital -- 74,937
Earnings reinvested in the business 57,330 53,722
--------- ---------
155,721 151,053
--------- ---------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series -- 800
Outstanding 32,000 shares, 4 1/4 % Series -- 800
--------- ---------
-- 1,600
--------- ---------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 19,200 shares in 1997, 5% Series -- 480
Less: Preferred shares to be redeemed within one year -- (40)
--------- ---------
-- 440
--------- ---------
LONG-TERM DEBT
5.82% notes due 2003 12,500 12,500
10.10% notes due 2009 -- 10,000
6.64% notes due 2013 1,100 1,100
6.80% notes due 2013 2,000 2,000
8.50% fixed rate obligation due 2013 1,882 1,947
Variable rate obligation due 2014 6,000 6,000
Variable rate obligation due 2018 630 --
6.87% notes due 2023 5,000 5,000
7.00% notes due 2023 10,000 10,000
7.55% notes due 2025 8,000 8,000
7.65% notes due 2025 22,000 22,000
5.50% notes due 2026 8,000 8,000
6.81% notes due 2028 15,000 --
9.56% notes due 2031 28,000 28,000
Other 917 930
--------- ---------
121,029 115,477
Less: Current maturities (220) (191)
--------- ---------
120,809 115,286
--------- ---------
TOTAL CAPITALIZATION $ 276,530 $ 268,379
========= =========
The accompanying notes are an integral part of these financial statements. All
information has been adjusted to reflect formation of a holding company in 1998.
39
42
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
($ in thousand, expect per share amounts) For the years ended December 31,
1998 1997 1996
--------- --------- ---------
OPERATING REVENUES
Water $ 134,793 $ 140,988 $ 139,997
Electric 13,201 12,767 11,532
--------- --------- ---------
Total operating revenues 147,994 153,755 151,529
--------- --------- ---------
OPERATING EXPENSES
Water purchased 30,833 38,318 38,355
Power purchased for resale 5,013 5,188 5,825
Power purchased for pumping 7,009 7,554 7,711
Groundwater production assessment 7,567 6,847 5,946
Supply cost balancing accounts 28 2,813 2,064
Other operating expenses 14,434 13,074 13,421
Administrative and general expenses 21,884 22,138 20,549
Depreciation 12,270 10,952 10,102
Maintenance 7,311 7,301 7,745
Taxes on income 10,360 9,830 10,283
Property and other taxes 6,124 6,282 6,099
--------- --------- ---------
Total operating expenses 122,833 130,297 128,100
--------- --------- ---------
OPERATING INCOME 25,161 23,458 23,429
--------- --------- ---------
OTHER INCOME
Total other income - net 1,231 758 531
--------- --------- ---------
Income before interest charges 26,392 24,216 23,960
--------- --------- ---------
INTEREST CHARGES
Interest on long-term debt 9,612 8,821 8,551
Other interest and amortization of debt expense 1,595 1,336 1,949
--------- --------- ---------
Total interest charges 11,207 10,157 10,500
--------- --------- ---------
NET INCOME 15,185 14,059 13,460
Dividends on Preferred Shares (46) (92) (94)
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 15,139 $ 13,967 $ 13,366
BASIC EARNINGS PER COMMON SHARE $ 151.39 $ 139.67 $ 133.66
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 100 100 100
The accompanying notes are an integral part of these financial statements.
All information has been adjusted to reflect formation of holding
company in 1998.
40
43
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) Shares Amount Capital Business
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 1995 7,845 $ 19,613 $ 54,753 $ 47,210
Add:
Net Income 13,460
Issuance of Common Shares
for public offering 1,000 2,500 18,090
under Dividend Reinvestment and 401(k)
Plans 41 102 802
Deduct:
Dividends on Preferred Shares 94
Dividends on Common Shares - $1.225 per
share 9,670
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 1996 8,886 $ 22,215 $ 73,645 $ 50,906
Add:
Net Income 14,059
Issuance of Common Shares for public
offering 72 179 1,292
Deduct:
Dividends on Preferred Shares 92
Dividends on Common Shares - $1.245 per
share 11,151
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 1997 8,958 $ 22,394 $ 74,937 $ 53,722
Add:
Formation of Holding Company (8,858) $ 74,397 ($74,397)
Transfer Preferred Shares & Investments $ 1,060
Net Income 15,185
Deduct:
Dividends on Preferred Shares 45
Dividends on Common Shares - $.63 per share 5,643
Dividends on Common Shares - $58.89 per share 5,889
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 1998 100 $ 98,391 $ 0 $ 57,330
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
41
44
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CASH FLOWS
($ in thousands) For the years ended December 31,
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,185 $ 14,059 $ 13,460
Adjustments for non-cash items:
Depreciation and amortization 12,661 11,387 10,389
Deferred income taxes and investment tax credits 5,224 826 577
Other - net 1,719 (1,426) (1,660)
Changes in assets and liabilities:
Customer receivables 1,046 (673) 368
Supply cost balancing accounts (14) 1,987 1,800
Accounts payable (1,716) (1,095) 6,026
Taxes payable (2,968) 3,338 215
Other - net 362 341 122
-------- -------- --------
Net cash provided 31,499 28,744 31,297
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (41,826) (34,717) (31,953)
-------- -------- --------
Net cash used (41,826) (34,717) (31,953)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Shares -- 1,472 21,494
Issuance of long-term debt and lease obligations 15,000 8,000 --
Receipt of advances for and contributions in aid
of construction 3,381 1,302 2,462
Refunds on advances for construction (2,651) (2,957) (2,088)
Retirement or repayments of long-term debt and
redemption of preferred shares - net (9,488) (198) (15,447)
Net change in notes payable to banks 12,000 10,000 7,500
Common and preferred dividends paid (11,577) (11,243) (9,825)
-------- -------- --------
Net cash provided 6,665 6,376 4,096
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,662) 403 3,440
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,186 3,783 343
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR 524 4,186 $ 3,783
-------- -------- --------
TAXES AND INTEREST PAID:
Income taxes paid $ 5,430 $ 6,338 $ 10,767
Interest paid $ 11,391 9,451 10,128
-------- -------- --------
NON-CASH TRANSACTIONS:
Property installed by developers and conveyed to
Company $ 1,797 $ 2,082 $ 957
======== ======== ========
42
45
NOTES TO FINANCIAL STATEMENTS
In April 1998, shareholders of Southern California Water Company (SCW)
voted to approve formation of a holding company. The formation process was
completed on July 1, 1998 at which time American States Water Company (AWR)
became the parent company. As a result of the holding company formation, SCW
became one of AWR's two operating subsidiaries. SCW will continue to be a public
utility engaged principally in the purchase, production, distribution and sale
of water and also the distributor of electricity in several mountain
communities. SCW is regulated by the California Public Utilities Commission
(CPUC) as to its water and electric business including properties, rates,
services, facilities and other matters. The other subsidiary, American States
Utility Services, Inc. (ASUS) is a new company which will perform non-regulated,
water related services and operations. The consolidated financial statements
include the accounts of SCW which comprise virtually all of AWR's assets and
revenues.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of American
States Water Company and its wholly-owned subsidiaries, Southern California
Water Company and American States Utility Services, Inc., collectively referred
to as Registrant. Intercompany transactions and balances have been eliminated.
The accounting records for SCW are maintained in accordance with the
Uniform System of Accounts prescribed by the CPUC. The preparation of these
financial statements required the use of certain estimates by management in
determining the company's assets, liabilities, revenues and expenses.
Property and Depreciation - SCW capitalizes as utility plant the cost of
additions and replacements of retirement units. Such cost includes labor,
material and certain indirect charges. Depreciation is computed on the
straight-line, remaining-life basis. For the years 1998, 1997 and 1996, the
aggregate provisions for depreciation approximated 2.79%, 2.77% and 2.71% of
beginning of the year depreciable plant, respectively.
Interest - Interest is generally not capitalized for financial reporting
purposes as such procedure is usually not followed for rate-making purposes.
Revenues - Revenues include amounts billed to customers and an amount of
unbilled revenue representing amounts to be billed for usage from the last meter
reading date to the end of the accounting period.
Basic Earnings Per Common Share - Basic Earnings per Common Share are
based upon the weighted average number of Common Shares outstanding and net
income after deducting preferred dividend requirements. There are no dilutive
securities. Accordingly, diluted earnings per share is not calculated.
Supply Cost Balancing Accounts - As permitted by the CPUC, SCW maintains
water and electric supply cost balancing accounts to account for
under-collections and over-collections of revenues designed to recover such
costs. Recoverability of such costs is recorded in income and charged to
balancing accounts when such costs are incurred. The balancing accounts are
reversed when such costs are recovered through rate adjustments. SCW accrues
interest on its supply cost balancing accounts at the rate prevailing for 90-day
commercial paper.
43
46
Debt Issue Expense and Redemption Premiums - Original debt issue
expenses are amortized over the lives of the respective issues. Premiums paid on
the early redemption of debt which is reacquired through refunding are deferred
and amortized over the life of the debt issued to finance the refunding. The
redemption premium on debt reacquired without refunding is amortized over the
remaining period the debt would have been outstanding.
Other Credits - Advances for construction represent amounts advanced by
developers which are generally refundable at either a rate of 22% of the revenue
received from the installations for which funds were advanced or in equal annual
installments over a 40-year period. Contributions in aid of construction are
similar to advances, but require no refunding and are amortized over the useful
lives of the related property.
Cash and Cash Equivalents - For purposes of the Statements of Cash
Flows, cash and cash equivalents include short-term cash investments with an
original maturity of three months or less.
Financial Instrument Risk - Registrant does not carry any financial
instruments with off-balance sheet risk nor does its operations result in
concentrations of credit risk.
Fair Value of Financial Instruments - The table below estimates the fair
value of each represented class of financial instrument. For cash and cash
equivalents, accounts receivable and short-term debt, the carrying amount is
used. Otherwise, rates available to Registrant at December 31, 1998 and 1997 for
debt with similar terms and remaining maturities were used to estimate fair
value for long-term debt. Changes in the assumptions will produce differing
results.
1998 1997
----------------------------- -------------------------------
($ in thousands) Carrying amount Fair value Carrying amount Fair value
--------------- ---------- --------------- ----------
Financial assets:
Cash $ 620 $ 620 $ 4,186 $ 4,186
Accounts receivable 22,230 22,230 21,264 21,264
Financial liabilities:
Short-term debt 38,000 38,000 26,000 26,000
Long-term debt 120,809 135,092 115,326 126,930
NOTE 2 - CAPITAL STOCK
All of the series of Preferred Shares outstanding at December 31, 1998
are redeemable at the option of Registrant. At December 31, 1998, the redemption
price per share for each series of $25 Preferred Shares was $27.00, $26.50 and
$25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption
prices must be added accrued and unpaid dividends to the redemption date.
The $25 Preferred Shares, 5% Series, are subject to mandatory redemption
provisions of 1,600 shares per year. The annual aggregate mandatory redemption
requirements for this Series for the five years subsequent to December 31, 1998
is $40,000 each year.
In 1996, Registrant issued 1,000,000 Common Shares through a secondary
public offering. In January 1997, Registrant issued 71,500 Common Shares through
a secondary public offering. The net proceeds from this sale were used to repay
a portion of short-term debt then outstanding.
44
47
For the years ended December 31, 1998 and December 31, 1997, all shares
issued under Registrant's Common Share Purchase and Dividend Reinvestment Plan
(DRP) and the 401(k) Plan were purchased on the open market. For the year ended
December 31, 1996, Registrant issued 20,228 and 20,851 Common Shares,
respectively, under the DRP and the 401(k) programs. There are 89,226 and 71,408
Common Shares reserved for issuance under the DRP and the 401(k) Plan,
respectively, at December 31, 1998. Shares reserved for the 401(k) Plan are in
relation to matching contributions made by Registrant and for investment
purposes by participants.
As of December 31, 1998 there were no retained earnings restricted as to
the payment of cash dividends on Common Shares.
In August 1998, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan) and authorized a dividend distribution of one right (a "Right") to
purchase 1/1000th share of Junior Participating Preferred Stock for each
outstanding Common Share. The Rights became effective in September 1998 and will
expire in September 2008. The Rights Plan is designed to provide shareholders'
protection and to maximize shareholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/1000th of Junior
Participating Preferred Stock at the price of $120, subject to adjustment (the
"Purchase Price"). Each share of Junior Participating Preferred Stock is
entitled to receive a dividend equal to 1000 times any dividend paid on Common
Shares and 100 votes per share in any shareholder election. The Rights become
exercisable either (i) ten business days following a public announcement that a
person or group of persons has acquired a beneficial ownership of 15% or more of
AWR's general voting power, other than pursuant to a "qualified offer" or (ii)
ten business days (or such later date as may be determined by AWR's Board of
Directors) following the commencement of, or the announcement of an intention to
make, a tender offer or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of AWR's general
voting power. A "qualified offer" is a tender offer or exchange offer for all
outstanding Common Shares of AWR, which is determined by AWR's directors to be
fair and otherwise in the best interests of AWR and its shareholders.
Until the occurrence of a an event described above, each Right trades
with the Common Shares and is not separately transferable. After an event
described above occurs, AWR would distribute separately Rights Certificates to
Common Shareholders and the Rights would subsequently trade separately from the
Common Shares and each holder of a Right, other than the acquiring person whose
Rights will thereafter be void, will have the right to receive upon exercise at
its then current Purchase Price that number of Common Shares having a market
value of two times the Purchase Price of the Right. If AWR merges into the
acquiring person, other than a merger which follows a qualified offer at the
same or a higher price, or 50% or more of the consolidated assets or earnings
power of AWR is sold, the Right becomes a right to purchase Common Shares of the
acquiring person having a market value of two times the Purchase Price.
The Board of Directors may determine that in certain circumstances a
proposal which would cause a distribution of the Rights is in the best interest
of AWR's shareholders. Therefore, the Board of Directors may, at its option,
redeem the Rights at a redemption price of $0.01 per Right.
NOTE 3 - COMPENSATING BALANCES AND BANK DEBT
At December 31, 1998, SCW maintained $47.0 million in aggregate
borrowing capacity with three commercial banks with no compensating balances
required. Of this amount, $38.0 million was outstanding at year-end. Loans can
be obtained at the option of SCW and bear interest at rates based on floating
prime borrowing rates or at money market rates. Neither AWR nor ASUS have
established short term lines of credit.
45
48
Short-term borrowing activities for the last three years were as
follows:
December 31,
-----------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
------- ------- -------
Balance Outstanding at December 31, $38,000 $26,000 $16,000
Interest Rate at December 31, 5.86% 6.39% 6.17%
Average Amount
Outstanding 19,309 $15,678 $26,109
Weighted Average Annual Interest Rate 6.78% 6.27% 5.97%
Maximum Amount Outstanding $39,000 $32,000 $36,000
NOTE 4 - LONG TERM DEBT
In December 1996, SCW sold $8 million in tax-exempt debt that was issued
through the California Pollution Control Financing Authority. The funds were
deposited with a trustee and were used during 1997 to finance water main
replacements.
In March 1998, SCW sold the remaining $15 million under its Series B
Medium Term Note Program and in December 1998, SCW redeemed all of its
outstanding 10.10% Notes. In January 1999, $40 million of Series C Medium Term
Notes were sold by SCW. The funds were used initially to repay short-term bank
borrowings and, after that, fund construction expenditures. Registrant has no
mortgage debt, and leases and other similar financial arrangements are not
material.
SCW has posted an Irrevocable Letter of Credit, which expires July 31,
1999, in the amount of $797,979 as security for its self-insured workers'
compensation plan. SCW has also provided an Irrevocable Letter of Credit in the
amount of $6,296,000 to a trustee with respect to the variable rate obligation
issued by the Three Valleys Municipal Water District.
Annual maturities of all long-term debt, including capitalized leases,
amount to $220,139, $227,277, $236,167, $230,383 and $199,841 for the 5 years
ending December 31, 1999 through 2003, respectively.
NOTE 5 - TAXES ON INCOME
Registrant provides deferred income taxes for temporary differences
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109) for certain transactions which are recognized for
income tax purposes in a period different from that in which they are reported
in the financial statements. The most significant items are the tax effects of
accelerated depreciation, the supply cost balancing accounts and advances for
and contributions in aid of construction. SFAS No. 109 also requires that
rate-regulated enterprises record deferred income taxes for temporary
differences accorded flow-through treatment at the direction of a regulatory
commission. The resulting deferred tax assets and liabilities are recorded at
the expected cash flow to be reflected in future rates. Since the CPUC has
consistently permitted the recovery of previously flowed-through tax effects,
SCW has established regulatory liabilities and assets offsetting such deferred
tax assets and liabilities.
Deferred investment tax credits are being amortized to other income
ratably over the lives of the property giving rise to the credits.
46
49
The significant components of deferred tax assets and deferred tax
liabilities, as reflected in the balance sheets, and the accumulated net
deferred income tax liabilities at December 31, 1998 and 1997 were:
December 31,
--------------------------
(dollars in thousands) 1998 1997
-------- --------
Deferred tax assets:
Balancing accounts $ 33 $ 27
State tax effect 5,123 5,756
-------- --------
5,156 5,783
-------- --------
Deferred tax liabilities
Depreciation (43,442) (40,822)
Advances and contributions 16,694 17,005
Other property related (11,488) (9,602)
Other non-property related (8,666) (9,565)
-------- --------
(46,902) (42,984)
-------- --------
Accumulated deferred income taxes - net $(41,746) $(37,201)
-------- --------
The current and deferred components of income tax expense are as
follows:
December 31,
--------------------------------------------
(dollars in thousands) 1998 1997 1996
-------- -------- --------
Current
Federal $ 5,219 $ 7,205 $ 7,224
State 1,727 2,287 2,452
-------- -------- --------
Total current tax expense 6,946 9,492 9,676
-------- -------- --------
Deferred - Federal and State:
Accelerated depreciation 3,319 2,996 3,175
Balancing accounts 6 (871) (798)
State Water Project -- -- 296
Advances and contributions -- (210) (894)
California privilege year franchise tax (544) (617) (683)
Adjustments to prior year provision -- -- 410
Other (398) (566) (732)
-------- -------- --------
Total deferred tax expense 2,383 732 774
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Income taxes included in operating expenses $ 10,130 $ 9,830 $ 10,283
Income taxes included in other income and expenses
- - net (801) 394 167
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
47
50
Additional information regarding taxes on income is set forth in the
following table:
December 31,
----------------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
-------- -------- --------
Federal taxes on pre-tax income at statutory rates $ 8,470 $ 8,451 $ 8,368
Increase (decrease) in taxes resulting from:
State income tax expense 1,654 1,864 2,051
Depreciation 944 853 716
Federal benefit of state taxes (579) (652) (718)
Adjustments to prior years' provisions (97) (143) 254
Payment of premium on redemption (813) -- --
Other - net (250) (149) (221)
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Pre-tax income $ 23,952 $ 24,145 $ 23,910
-------- -------- --------
Effective income tax rate 38.9% 42.3% 43.7%
-------- -------- --------
NOTE 6 - EMPLOYEE BENEFIT PLANS
Registrant maintains a pension plan (the Plan) which provides eligible
employees (those age 21 and older, with one year of service) monthly benefits
upon retirement based on average salaries and length of service. The normal
retirement benefit is equal to 2% of the five highest consecutive years average
earnings multiplied by the number of years of credited service, up to a maximum
of 40 years, reduced by a percentage of primary social security benefits. There
is also an early retirement option. Annual contributions are made to the Plan
which comply with the funding requirements of the Employee Retirement Income
Security Act (ERISA). At December 31, 1998, the Company had 431 employees
participating in the Plan, 69 of these employees are covered by collective
bargaining agreements, the earliest of which expires in 1999.
Registrant also provides all active employees medical, dental and vision
care benefits through a medical insurance plan. Eligible employees who retired
prior to age 65, and/or their spouses, were able to retain the benefits under
the active plan until reaching age 65. Upon reaching age 65, and for those
employees retiring at or after age 65, and/or their spouses, continued coverage
was provided through a Medicare supplement insurance policy paid for by
Registrant.
The CPUC has issued a decision which provides for the recovery in rates
of tax-deductible contributions made to a separately trusteed fund. In
accordance with that decision, SCW established two separate trusts in 1995, one
for those retirees who were subject to a collectively bargained agreement and
another for all other retirees. SCW's funding policy is to contribute annually
an amount at least equal to the revenues authorized to be collected through
rates for post-retirement benefit costs. Post-retirement benefit costs for 1993,
1994 and 1995 were estimated at a total of $1.6 million and have been recorded
as a regulatory asset for recovery over a 20 year period.
The following table sets forth the Plan's funded status and amounts
recognized in Registrant's balance sheets and the components of net pension cost
and accrued post-retirement liability at December 31, 1998 and 1997:
48
51
Pension Benefits Other Benefits
----------------------- -----------------------
(dollars in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit Obligation at beginning of year $ 33,410 $ 28,733 $ 4,503 $ 4,013
Service Cost 1,597 1,351 112 120
Interest Cost 2,278 2,112 283 295
Actuarial Loss/(Gain) 2,514 2,373 (368) 225
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- -------- --------
Benefit Obligation at end of year $ 38,572 $ 33,410 $ 4,363 $ 4,503
CHANGES IN PLAN ASSETS:
Fair Value of Plan Assets at beginning
of year $ 33,433 $ 29,240 $ 1,104 $ 548
Actual Return of Plan Assets 6,051 4,065 44 49
Employer Contributions 1,284 1,287 461 656
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- -------- --------
Fair Value of Plan Assets at end of year $ 39,541 $ 33,433 $ 1,442 $ 1,103
RECONCILIATION OF FUNDED STATUS:
Funded Status $ 969 $ 23 $ (2,921) $ (3,399)
Unrecognized Transition Obligation 114 171 6,707 7,126
Unrecognized Net Loss/(Gain) 677 1,538 (1,860) (1,644)
Unrecognized Prior Service Cost 400 444 (3,427) (3,627)
-------- -------- -------- --------
Prepaid/(Accrued) Pension Cost $ 2,160 $ 2,176 $ (1,501) $ (1,544)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount Rate 6.50% 7.00% 6.50% 7.00%
Long-term Rate of Return 8.00% 8.00% 8.00% 8.00%
Salary Assumption 4.00% 4.00% -- --
A sliding scale for assumed health care cost increases was used for both
periods, starting at 11% in 1996 declining 1% per year for five years and then
remaining at 6% thereafter.
The components of net periodic post-retirement benefits cost for 1998
and 1997 are as follows:
Pension Benefits Other Benefits
-------------------- ---------------------
(dollars in thousands) 1998 1997 1998 1997
------- ------- ------- -------
COMPONENTS OF NET PERIODIC BENEFITS
COST
Service Cost $ 1,597 $ 1,351 $ 112 $ 120
Interest Cost 2,278 2,112 283 294
Actual Return on Plan Assets (6,051) (4,065) (44) (48)
Net Amortization 3,476 1,873 67 140
------- ------- ------- -------
Net Periodic Pension Cost $ 1,300 $ 1,271 $ 418 $ 506
49
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Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
(dollars in thousands) Increase Decrease
-------- --------
Effect on Total of Service and Interest Cost $13 $(11)
Components
Effect on Postretirement Benefit Obligation 206 (180)
Registrant has a 401(k) Investment Incentive Program under which
employees may invest a percentage of their pay, up to a maximum investment
prescribed by law, in an investment program managed by an outside investment
manager. Contributions to the 401(k) are based upon a percentage of individual
employee contributions and, for 1998, 1997 and 1996, totaled $874,113, $785,687,
and $839,000, respectively.
NOTE 7 - BUSINESS RISKS AND CONCENTRATION OF SALES
Registrant's utility operations are engaged in supplying water and
electric service to the public. SCW is required to provide service and grant
credit to customers within its defined service areas. Although SCW has a
diversified base of residential, industrial and other customers, revenues
derived from commercial and residential water customers accounted for
approximately 91% and 93% of total water revenues in 1998 and 1997. SCW faces
additional risks associated with weather conditions, adequacy and quality of
water supplies, regulatory decisions, pronouncements and laws, water-related
litigation, general business conditions and condemnation.
Approximately 39% of SCW's water supply is purchased from wholesalers of
imported water, with the remainder produced from owned wells. The long term
availability of imported water supplies is dependent upon, among other things,
drought conditions throughout the state, increases in population, water quality
standards and legislation that may potentially reduce water supplies. SCW does
not anticipate any constraints on its imported water supplies in 1999.
NOTE 8 - CONTINGENCIES
In 1998, ASUS was formed to pursue non-regulated opportunities such as
long-term leases and operation and maintenance contracts for
governmentally-owned water and wastewater systems. And to provide other services
for such systems. SCW terminated its Golden State Water Company joint venture
effective December 31, 1998. Accordingly, Registrant reserved approximately
$336,000 against future losses and capital account adjustments.
Hearings were held before the CPUC in November 1998 on SCW's filing
seeking recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project (the
Project). In February 1999, the Administrative Law Judge in this proceeding
issued his proposed decision that denied rate recovery of SCW's costs in the
Project. A final order from the CPUC is anticipated in 1999. SCW is unable to
predict if the CPUC will authorize recovery of all or any of the costs
associated with its participation in the Project. Alternate forms of recovery
are also being pursued including assessment of costs to new construction based
on an equivalent dwelling unit charge or other applicable unit of measurement,
which assessment will require CPUC approval prior to implementation or, failing
that, sale of SCW's participation in the Project.
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53
SCW has been named as a defendant in ten lawsuits which allege that the
SCW delivered contaminated water to its customers. Plaintiffs in these actions
seek damages, including general, special, and punitive damages, according to
proof of trial, as well as attorney's fees on certain causes of action, costs of
suit, and other unspecified relief. Stays have been issued by the respective
courts in eight of these cases pending the outcome of the CPUC's investigation
into water quality discussed below. One action has been dismissed against SCW
and SCW has petitioned for dismissal in the remaining case. Most activity
related to these lawsuits has ceased due to the stays although SCW anticipates
that plaintiff's attorneys will petition the courts to reconsider their prior
decisions. In light of the breadth of plaintiff's claims, the lack of factual
information regarding plaintiff's claims and injuries, if any, the fact that no
discovery has yet been completed, SCW is unable to determine at this time what,
if any, potential liability it may have with respect to these claims. SCW
intends to vigorously defend itself against these allegations. Management can
not predict the outcome of these proceedings and if SCW is found liable, SCW
would pursue recovery through its insurance coverage providers.
In response to those lawsuits and similar actions, in March 1998 the
CPUC issued an Order Instituting Investigation (OII) directed to all Class A and
B water utilities in the state of California, including SCW, into whether
existing standards and policies regarding drinking water quality adequately
protect the public health and whether those standards and policies are being
uniformly complied with by those water utilities. The OII notes the
constitutional and statutory jurisdiction of the CPUC and the DOHS to establish
and enforce adherence to water quality standards for water delivered by
utilities to their customers and, in the case of the CPUC, to establish rates
which permit water utilities to furnish safe water, meeting the established
water quality standards at prices which are both affordable and that allow the
utility to earn a reasonable return on its investment. SCW has made its filing
in this proceeding on a series of questions dealing with the safety of current
drinking water standards, compliance by water utilities with such standards,
appropriate remedies for failure to comply with safe drinking standards and
whether stricter or additional safety drinking water standards are required. The
Water Division of the CPUC has issued its report based on these filings by the
utilities. Although the OII leaves open the possibility of evidentiary hearings
and further action by the CPUC, SCW is currently unable to predict the outcome
of this proceeding.
Management believes that proper insurance coverage and reserves are in
place to insure against anticipated property, general and product liability and
workers' compensation claims.
NOTE 9 - CONSTRUCTION PROGRAM
SCW's 1999 construction budget provides for gross expenditures of
approximately $46.5 million of which $4.4 million is anticipated to be obtained
from developers and others. AWR and ASUS have no material capital expenditure
programs.
NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The table below presents SCW's provision for doubtful accounts charged
to expense and accounts written off, net of recoveries for the last three years.
December 31,
---------------------------
(dollars in thousands) 1998 1997 1996
----- ----- -----
Balance at beginning of year $ 466 $ 387 $ 648
Provision charged to expense 631 707 571
Accounts written off, net of recoveries (694) (628) (832)
----- ----- -----
Balance at end of year $ 403 $ 466 $ 387
----- ----- -----
Neither AWR nor ASUS have established any provision for doubtful
accounts.
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NOTE 11 - BUSINESS SEGMENTS
Registrant has no material operations other than its SCW subsidiary. The
tables below set forth information relating to SCW's operating segments. SCW
manages its operations on a regional basis using the five categories below as
broad-level measures of profitability. In addition to the amounts set forth,
certain assets have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.
(dollars in thousands) Year Ended December 31, 1998
-----------------------------------------------
Water Electric
Region I Region II Region III
-------- -------- -------- --------
Operating revenues $ 24,927 $ 76,304 $ 33,552 $ 13,211
Operating income before income
taxes 6,799 15,615 9,261 3,847
Identifiable assets 97,463 176,832 115,475 26,719
Depreciation expense 2,551 4,755 3,324 1,640
Capital additions $ 13,206 $ 20,650 $ 9,714 $ 1,699
-------- -------- -------- --------
(dollars in thousands) Year Ended December 31, 1997
-----------------------------------------------
Water Electric
Region I Region II Region III
-------- -------- -------- --------
Operating revenues $ 24,340 $ 81,200 $ 35,436 $ 12,779
Operating income before income
taxes 5,897 13,032 10,270 4,089
Identifiable assets 87,039 162,037 109,436 25,095
Depreciation expense 2,306 4,483 3,162 1,001
Capital additions $ 10,065 $ 18,882 $ 8,139 $ 2,140
-------- -------- -------- --------
(dollars in thousands) Year Ended December 31, 1996
-----------------------------------------------
Water Electric
Region I Region II Region III
-------- -------- -------- --------
Operating revenues $ 23,536 $ 81,474 $ 34,980 $ 11,540
Operating income before income
taxes 4,705 14,813 10,776 3,418
Identifiable assets 79,974 148,078 104,390 25,333
Depreciation expense 2,109 4,131 2,939 924
Capital additions $ 5,975 $ 19,370 $ 6,537 $ 2,492
-------- -------- -------- --------
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial information presented below is unaudited. The
business of Registrant is of a seasonal nature and it is management's opinion
that comparisons of earnings for the quarterly periods do not reflect overall
trends and changes in Registrant's operations.
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55
Operating Operating Earnings
Revenues Income Net Income per Share
---------------------- ---------------------- ---------------------- ----------------
(in thousands,
except per share
amounts) 1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- -------- ----- -----
First Quarter $ 29,955 $ 32,206 $ 4,382 $ 3,738 $ 1,843 $ 1,312 $0.20 $0.14
Second Quarter 35,001 39,343 5,586 5,372 2,767 3,080 0.31 0.34
Third Quarter 47,002 45,700 9,432 8,385 6,374 6,044 0.71 0.67
Fourth Quarter 36,102 36,506 5,661 5,963 3,639 3,623 0.40 0.41
-------- -------- -------- -------- -------- -------- ----- -----
Year $148,060 $153,755 $ 25,061 $ 23,458 $ 14,623 $ 14,059 $1.62 $1.56
-------- -------- -------- -------- -------- -------- ----- -----
NOTE 13 - YEAR 2000 READINESS
Registrant continues to evaluate its exposure to the Year 2000 (Y2K)
problem that arises from the fact that many existing computer systems may
contain date sensitive embedded technology that uses only two digits to identify
a year in the date field. Based on the assumption that the first two digits of
the date field are always "19", such systems may misinterpret dates after
December 31, 1999. Because Registrant is dependent upon the proper functioning
of these computer systems and other equipment containing date sensitive
technology, a failure of these systems could have a material and adverse affect
on Registrant resulting in business interruption or shutdown, financial loss,
regulatory citations and legal liability.
Registrant has been actively assessing its Y2K readiness since early
1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which are intended to be Y2K ready. All major upgrades to
these systems are completed and were operational at year-end 1998. Costs
associated with the implementation and upgrade of major management information
and customer service software systems, as well as upgrades to mainframe hardware
systems, have been approved by the CPUC and are being recovered through rates.
In addition to work being done on its internal systems, Registrant has
sought compliance certification from external vendors and service providers.
Testing on Registrant's interface with financial and other institutions with
which it does business is being conducted to ensure Y2K readiness. In order to
more fully address Y2K readiness of its field equipment, major vendors and
service providers, Registrant engaged the services of a nationally-recognized
business consulting firm and has completed its written plan to address the Y2K
issue. Registrant has established a Year 2000 Task Force consisting of senior
management and operating personnel which will complete the inventory of computer
systems and other devices with embedded technology, as well as other
considerations potentially not revealed in preliminary internal analyses.
Registrant's general process for addressing the Y2K issue is (i) to
inventory all systems that may have a potential Y2K impact, (ii) to determine
the materiality of these non-Y2K ready systems, (iii) to replace and test,
correct and test, or prepare for the failure of material items that have been
determined to be non-Y2K ready, and (iv) to prepare contingency plans. Some,
less critical systems may not be fully Y2K ready, but are not anticipated to
materially affect Registrant's operations.
Registrant is significantly dependent on third party suppliers, such as
energy and telecommunication companies and wholesale water suppliers. In order
to conduct its business, Registrant has initiated due diligence with certain of
its major service providers to address their Y2K readiness. In the event that
such suppliers might be adversely affected by Y2K, Registrant is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems and the
use of electric generators capable of providing power during a black-out.
53
56
Registrant does not have, and may never fully have, sufficient information about
the Y2K exposure or remediation plans of these third parties to adequately
predict the risks posed by them to Registrant. If the third parties have Y2K
problems that are not remedied, resulting problems could include loss of utility
services and disruption of water supplies.
To date, there have been no significant costs associated with Y2K
readiness that have not been approved by the CPUC for recovery through rates.
Registrant estimates that it may incur up to $800,000 in costs depending on the
results of on-going tests, to make critical systems Y2K ready. Registrant
believes that the future costs, which are prudently incurred, will also be
allowed for recovery through rates. The CPUC has notified all utilities under
its jurisdiction, including SCW, that it will review their Y2K preparations.
54
57
REPORT OF MANAGEMENT
The financial statements contained in this annual report were prepared
by the management of American States Water Company, which is responsible for
their integrity and objectivity. The financial statements were prepared in
accordance with generally accepted accounting principles and include, where
necessary, amounts based upon management's best estimates and judgments. All
other financial information in the annual report is consistent with the
financial statements and is also the responsibility of management.
Registrant maintains systems of internal control which are designed to
help safeguard the assets of the Company and provide reasonable assurance that
accounting and financial records can be relied upon to generate accurate
financial statements. These systems include the hiring and training of qualified
personnel, appropriate segregation of duties, delegation of authority and an
internal audit function which has reporting responsibility to the Audit
Committee of the Board of Directors.
The Audit Committee, composed of three outside directors, exercises
oversight of management's discharge of its responsibilities regarding the
systems of internal control and financial reporting. The committee periodically
meets with management, the internal auditor and the independent accountants to
review the work and findings of each. The committee also reviews the
qualifications of, and recommends to the Board of Directors, a firm of
independent accountants.
The independent accountants, Arthur Andersen LLP, have performed an
audit of the financial statements in accordance with generally accepted auditing
standards. Their audit gave consideration to Registrant's system of internal
accounting control as a basis for establishing the nature, timing and scope of
their work. The result of their work is expressed in their Report of Independent
Public Accountants.
/s/ Floyd E. Wicks /s/ McClellan Harris III
- ---------------------------------- ------------------------------------
President, Chief Executive Officer Chief Financial Officer,
Vice President - Finance,
Treasurer and Corporate Secretary
March 26, 1999
55
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of American States Water Company:
We have audited the accompanying consolidated and condensed balance
sheets and statements of capitalization of American States Water Company and its
subsidiary, Southern California Water Company (California corporations), as of
December 31, 1998 and 1997 and the related statements of income, changes in
common shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American States
Water Company and its subsidiary, Southern California Water Company, as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ----------------------------------
Arthur Andersen LLP
Los Angeles, California
March 26, 1999
56
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responsive to Part III, Item 10 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and is incorporated
herein by reference pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to Part III, Item 11 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and "Performance
Graph" and is incorporated herein by reference pursuant to General Instruction
G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to Part III, Item 12 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and is incorporated
herein by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Part III, Item 13 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and is
incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Reference is made to the Financial Statements incorporated
herein by reference to Part II, Item 8 hereof.
2. All required schedules may be found in the Financial
Statements and Notes to Financial Statements incorporated herein
by reference to Part II, Item 8 hereof. Schedules I, III, IV,
and V are omitted as they are not applicable.
3. See (c) below.
57
60
(b) Registrant filed a Form 8-K with the Securities and Exchange
Commission on November 2, 1998 which contained a discussion and
summary of certain risks faced by Registrant in the conduct of
its businesses all or any one of which could affect future
financial results. The risks discussed included litigation,
environmental regulation, rates and CPUC regulation, adequacy of
water supplies, water quality, weather, unregulated activities,
potential Year 2000 risks, capital expenditures, economic
conditions and condemnation. Included as exhibits to the form
8-K were the Amended and restated Articles of American States
Water Company, the by-laws of American States Water Company,
change-in-control agreements between American States Water
Company, Southern California Water Company and certain
executives, and change-in-control agreements between Southern
California Water Company and certain executives. There were no
financial statements filed with this Form 8-K.
(c) Exhibits -
3.1 By-Laws of American States Water Company incorporated
herein by reference to Registrant's Form 8-K, dated
November 2, 1998. Commission File No. 333-47647.
3.2 By-laws of Southern California Water Company.(1)
3.3 Amended and Restated Articles of Incorporation of
American States Water Company incorporated herein by
reference to Registrant's Form 8-K, dated November 2,
1998. Commission File No. 333-47647.
3.3.1 Certificate of Amendment of Articles of Incorporation,
dated August 25, 1998, of American States Water
Company.(1)
3.4 Restated Articles of Incorporation of Southern
California Water Company incorporated herein by
reference to Registrant's Form 8-K, dated January 20,
1999. Commission File No. 000-01121.
4.1 Amended and Restated Rights Agreement, dated January 25,
1999, by and between American States Water Company and
ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.(1)
4.2 Indenture, dated September 1, 1993 between Southern
California Water Company and Chemical Trust Company of
California incorporated herein by reference to
Registrant's Form 8-K. Registration No. 33-62832.
10.1 Agreement of Merger dated as of June 25, 1998 by and
among Southern California Water Company, SCW Acquisition
Corp. and American States Water Company incorporated
herein by reference to Registrant's Form 8-K, dated July
1, 1998. Commission File No. 333-47647.
10.2 Deferred Compensation Plan for Directors and Executives
incorporated herein by reference to Registrant's
Registration Statement on Form S-2. Registration No.
33-5151.(2)
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61
10.3 Reimbursement Agreement, dated October 3, 1997, between
Southern California Water Company and The Bank of Nova
Scotia incorporated herein by reference to Registrant's
Form 10-K with respect to the year ended December 31,
1997. Commission File No. 000-01121.
10.4 Second Sublease dated October 5, 1984 between Southern
California Water Company and Three Valleys Municipal
Water District incorporated herein by reference to
Registrant's Registration Statement on Form S-2.
Registration No. 33-5151.
10.5 Note Agreement dated as of May 15, 1991 between Southern
California Water Company and Transamerica Occidental
Life Insurance Company incorporated herein by reference
to Registrant's Form 10-Q with respect to the quarter
ended June 30, 1991. Commission File No. 000-01121.
10.6 Schedule of omitted Note Agreements, dated May 15, 1991,
between Southern California Water Company and
Transamerica Annuity Life Insurance Company, and
Southern California Water Company and First Colony Life
Insurance Company incorporated herein by reference to
Registrant's Form 10-Q with respect to the quarter ended
June 30, 1991. Commission File No. 000-01121.
10.7 Loan Agreement between California Pollution Control
Financing Authority and Southern California Water
Company, dated as of December 1, 1996.(1)
10.8 Agreement for Financing Capital Improvement dated as of
June 2, 1992 between Southern California Water Company
and Three Valleys Municipal Water District incorporated
herein by reference to Registrant's Form 10-K with
respect to the year ended December 31, 1992. Commission
File No. 000-01121.
10.9 Water Supply Agreement dated as of June 1, 1994 between
Southern California Water Company and Central Coast
Water Authority incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1994. Commission File No. 000-01121.
10.10 Retirement Plan for Non-Employee Directors of Southern
California Water Company, as amended, January 25, 1995
incorporated herein by reference to Registrant's Form
10-K with respect to the year ended December 31, 1994.
Commission File No. 000-01121.(2)
10.11 Dividend Reinvestment and Common Share Purchase Plan
incorporated herein by reference to American States
Water Company Rule 424 (b) (3) filing dated August 28,
1998. (Registration No. 33-42218).
10.12 Key Executive Long-Term Incentive Plan incorporated
herein by reference to Registrant's 1995 Proxy
Statement, Commission File No. 00 0-01121.(2)
10.13 Energy Management Services Agreement between Southern
California Water Company and Enova Energy, Inc.
incorporated herein by reference to Registrant's Form
10-K with respect to the year ended December 31, 1996.
Commission File No. 000-01121.
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62
10.14 Change in Control Agreements, dated as of October 27,
1998, between American States Water Company, Southern
California Water Company and certain executives
incorporated herein by reference to Registrant's Form
8-K filed November 2, 1998. Commission File No.
333-47647.(2)
10.15 Change in Control Agreements, dated as of October 27,
1998, between Southern California Water Company and
certain executives incorporated herein by reference to
Registrant's Form 8-K filed November 2, 1998. Commission
File No. 000-01121.(2)
13. 1998 Annual Report to Shareholders.(1)
21. Subsidiaries of Registrant.
23. Consent of Independent Public Accountants.(1)
27. Schedule UT.(1)
(d) None.
--------------------
(1) Filed concurrently herewith
(2) Management contract or compensatory arrangement
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63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ McCLELLAN HARRIS III
---------------------------------
McClellan Harris III
Vice President - Finance, Treasurer,
Chief Financial Officer and Secretary
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
/s/ W. V. CAVENEY Date: March 26, 1999
- -------------------------------------------
W. V. Caveney
Chairman of the Board and Director
/s/ FLOYD E. WICKS March 26, 1999
- -------------------------------------------
Floyd E. Wicks
Principal Executive Officer;
President, CEO and Director
/s/ McCLELLAN HARRIS III March 26, 1999
- ---------------------------------------
McClellan Harris III
Principal Financial and Accounting Officer;
CFO, VP - Finance, Treasurer and Secretary
/s/ LINDA J. MATLICK March 26, 1999
- --------------------------------------------
Linda J. Matlick
Controller - Southern California Water Company
/s/ JAMES L. ANDERSON March 26, 1999
- ---------------------------------------
James L. Anderson, Director
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64
/s/ JEAN E. AUER . March 26, 1999
- -------------------------------------------------
Jean E. Auer, Director
/s/ N. P. DODGE, JR. . March 26, 1999
- -------------------------------------------------
N. P. Dodge, Jr., Director
/s/ ANNE M. HOLLOWAY . March 26, 1999
- ----------------------------------------
Anne M. Holloway, Director
/s/ ROBERT F. KATHOL . March 26, 1999
- ------------------------------------------
Robert F. Kathol, Director
/s/ LLOYD E. ROSS . March 26, 1999
- -----------------------------------------------
Lloyd E. Ross, Director
61
1
EXHIBIT 3.2
BYLAWS
for the regulation, except
as otherwise provided by statute or
its Restated Articles of Incorporation,
of
Southern California Water Company
(a California corporation)
ARTICLE I. Offices.
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive
office of the corporation shall be fixed and located at such place as the Board
of Directors (herein called the "Board") shall determine. The Board is hereby
granted full power and authority to change said principal executive office from
one location to another.
Section 2. OTHER OFFICES. Branch or subordinate offices may at
any time be established by the Board at any place or places.
ARTICLE II. Meetings of Shareholders.
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be
held either at the principal executive office of the corporation or at any other
place within or without the State of California which may be designated either
by the Board or by the written consent of all persons entitled to vote thereat,
given either before or after the meeting and filed with the Secretary.
Section 2. ANNUAL MEETINGS. The annual meetings of shareholders
shall be held on such date and at such time as may be fixed by the Board.
Section 3. SPECIAL MEETINGS. Special meetings of the
shareholders, for any purpose or purposes whatsoever, may be called at any time
by the Board, the Chairman of the Board, the President, or by the holders of
shares entitled to cast not less than ten percent of the votes at such meeting.
2
ARTICLE III. Directors.
Section 1. POWERS. Subject to limitations of the Articles, these
Bylaws and of the California General Corporation Law as to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board.
Section 2. NUMBER OF DIRECTORS. The authorized number of
directors shall be eight (8).
ARTICLE IV. Officers.
Section 1. OFFICERS. The officers of the corporation shall be a
President, a Secretary, and a Chief Financial Officer. The corporation may also
have, at the discretion of the Board, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as the Board may from time to time
determine.
Section 2. PRESIDENT. The President shall be the general manager
and chief executive officer of the corporation and has, subject to the control
of the Board, general supervision, direction and control of the business and
officers of the corporation. The President shall preside at all meetings of the
shareholders and at all meetings of the Board. The President has the general
powers and duties of management usually vested in the office of president and
general manager of a corporation and has such other powers and duties as may be
prescribed by the Board.
Section 3. SECRETARY. The Secretary shall keep or cause to be
kept, at the principal executive office or such other place as the Board may
order, a book of minutes of all meetings of the shareholders, the Board and its
committees, and a share register or a duplicate share register.
The Secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the Board and any committees thereof
required by the Bylaws or by law to be given, shall keep the seal of the
corporation in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board.
Section 4. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
is the chief financial officer of the corporation and shall keep and maintain,
or cause to be kept and maintained, adequate and correct accounts of the
properties and business transactions of the corporation, and shall send or cause
to be sent to the shareholders of the corporation such financial statements and
reports as are by law or these Bylaws required to be sent to them. The books of
account shall at all times be open to inspection by any director.
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The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board. The Chief Financial Officer
shall disburse the funds of the corporation as may be ordered by the Board,
shall render to the President and the directors, whenever they request it, an
account of all transactions as Treasurer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board.
ARTICLE V. Other Provisions.
Section 1. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly waived, but nothing herein shall be interpreted as prohibiting
the Board from issuing annual or other periodic reports to shareholders.
Section 2. CONSTRUCTION AND DEFINITIONS. Unless the context
otherwise requires, the general provisions, rules of construction and
definitions contained in the General Provisions of the California Corporations
Code and in the California General Corporation Law shall govern the construction
of these Bylaws.
ARTICLE VI. Amendments.
These Bylaws may be amended or repealed either by approval of the
outstanding shares (as defined in Section 152 of the California General
Corporation Law) or by the approval of the Board; provided, however, that after
the issuance of shares, a bylaw specifying or changing a fixed number of
directors or the maximum or minimum number or changing from a fixed to a
variable number of directors or vice versa may be adopted only by approval of
the outstanding shares, and a bylaw reducing the fixed number or the minimum
number of directors to a number less than five shall be subject to the
provisions of Section 212(a) of the California General Corporation Law.
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CERTIFICATE OF SECRETARY
of
Southern California Water Company
(a California corporation)
I hereby certify that I am the duly elected and acting Secretary
of said corporation and that the foregoing Bylaws, comprising 3 pages,
constitute the Bylaws of said corporation as duly adopted by unanimous written
consent of the Board of Directors on January 25, 1999.
------------------------------
McClellan Harris III,
Secretary
1
EXHIBIT 3.3.1
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
AMERICAN STATES WATER COMPANY
(A CALIFORNIA CORPORATION)
Floyd E. Wicks and McClellan Harris III certify that:
1. They are the duly elected and acting President and Secretary,
respectively of Southern California Water Company (the "Corporation").
2. The Amended and Restated Articles of Incorporation of the Corporation
shall be amended by striking in its entirety the first full paragraph of Article
IV of the Amended and Restated Articles of Incorporation which now reads:
"This Corporation is authorized to issue three classes of stock
to be designated, respectively, "New Preferred Shares",
"Preferred Shares", and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
30,233,200; 150,000 shares are to be New Preferred Shares with no
par value and a stated value of $100 per share and an aggregate
stated value of $15,000,000; 83,200 shares are to be Preferred
Shares with a par value of $25 per share and an aggregate par
value of $2,080,000; and 30,000,000 shares are to be Common
2
Shares with no par value and a stated value of $2.50 per share
and an aggregate par value of $75,000,000."
and substituting therefore the following paragraph to read in full as follows:
"This Corporation is authorized to issue three classes of stock
to be designated, respectively, "New Preferred Shares",
"Preferred Shares", and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
30,231,600; 150,000 shares are to be New Preferred Shares with no
par value and a stated value of $100 per share and an aggregate
stated value of $15,000,000; 81,600 shares are to be Preferred
Shares with a par value of $25 per share and an aggregate par
value of $2,040,000; and 30,000,000 shares are to be Common
Shares with no par value and a stated value of $2.50 per share
and an aggregate par value of $75,000,000."
3. The Restated Articles of Incorporation of the Corporation shall be
further amended by striking in its entirety paragraph (ii) of Section 15 of
Article IV of the Amended and Restated Articles of Incorporation which now
reads:
"(ii) Number of Shares. The authorized number of shares
constituting said Preferred Shares, 5% Series, shall be 19,200."
and substituting therefore the following paragraph to read in full as follows:
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"(ii) Number of Shares. The authorized number of shares
constituting said Preferred Shares, 5% Series, shall be 17,600."
4. The foregoing amendment set forth in paragraph 3 of this Certificate,
as well as the portion of the amendment in Article IV, Section 7, paragraph (ii)
that relates to the "Preferred Shares," are each amendments that may be adopted
by the Board of Directors alone (and which were so adopted) because the
amendments are required by Section 510 of the California General Corporation Law
to reflect the reacquisition of a portion of the Corporation's Preferred Shares,
5% Series, $25 par value, in accordance with the sinking fund provisions
thereof. Such reacquired Preferred Shares cannot be reissued.
5. The foregoing amendments have been duly approved by the Board of
Directors as required by Section 905(b) of the California General Corporation
Law.
We further declare, under penalty of perjury under the laws of the State
of California, that the matters set forth in this Certificate of Amendment are
true and correct.
IN WITNESS WHEREOF, the undersigned have executed this Certificate in
San Dimas, California on this 25th day of August, 1998.
------------------------------------
FLOYD E. WICKS, President
------------------------------------
McCLELLAN HARRIS III, Secretary
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August 25, 1998
Office of the Secretary of State
State of California
Attn: Certification Unit
1500 - 11th Street
Sacramento, CA 95814
Ladies and Gentlemen:
RE: American States Water Company
Corporate No. 137226
Please find enclosed herewith for filing two (2) originals of a Certificate of
Amendment of Restated Articles of Incorporation of American States Water
Company, a California Corporation. One original should be filed with your office
and the other is to be date stamped and returned to me in the enclosed
self-addressed, prepaid envelope.
In addition, please find the Corporation's check for $30.00, which represents
the filing fee.
Any questions regarding this matter should be directed to the undersigned person
at (909) 394-3600, extension 705.
Sincerely,
McClellan Harris III
Vice President - Finance,
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Chief Financial Officer,
Treasurer and Secretary
Enclosure(s)
1
EXHIBIT 4.1
AMENDED AND RESTATED RIGHTS AGREEMENT
BETWEEN
AMERICAN STATES WATER COMPANY
AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
as RIGHTS AGENT
_____________, 1999
2
TABLE OF CONTENTS
PAGE
Section 1. Certain Definitions......................................................1
Section 2. Appointment of Rights Agent.............................................5
Section 3. Issuance of Right Certificates..........................................5
Section 4. Form of Right Certificates..............................................6
Section 5. Countersignature and Registration.......................................7
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates.................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...........8
Section 8. Cancellation and Destruction of Right Certificates.....................10
Section 9. Reservation and Availability of Shares; Registration...................11
Section 10. Record Date............................................................11
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.....12
Section 12. Certification of Adjusted Purchase Price or Number of Shares...........19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...19
Section 14. Fractional Rights and Fractional Shares................................22
Section 15. Rights of Action.......................................................23
Section 16. Agreement of Right Holders.............................................23
Section 17. Right Certificate Holder Not Deemed a Shareholder......................24
Section 18. Concerning the Rights Agent............................................24
Section 19. Merger or Consolidation or Change of Name of Rights Agent..............25
Section 20. Duties of Rights Agent.................................................25
Section 21. Change of Rights Agent.................................................27
Section 22. Issuance of New Right Certificates.....................................28
Section 23. Redemption.............................................................28
Section 24. Notice of Proposed Actions.............................................28
Section 25. Notices................................................................29
Section 26. Supplements and Amendments.............................................30
-i-
3
TABLE OF CONTENTS (CONTINUED)
PAGE
Section 27. Exchange...............................................................30
Section 28. Successors.............................................................31
Section 29. Determination and Actions Taken by the Board of Directors..............31
Section 30. Benefits of this Agreement.............................................32
Section 31. Governing Law..........................................................32
Section 32. Counterparts...........................................................32
Section 33. Section Headings.......................................................32
Section 34. Severability...........................................................32
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AMENDED AND RESTATED RIGHTS AGREEMENT
AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of January 25,
1999 (the "Agreement") between American States Water Company, a California
corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has authorized and
declared the distribution of one right for (i) each share of Common Shares of
the Company ("Common Stock") outstanding at the Close of Business (as
hereinafter defined) on September 22, 1998 (the "Rights Record Date"), each
right representing the right to purchase one Unit consisting, initially, of one
one-thousandth of a share of Junior Participating Preferred Stock, and (ii) each
additional share of Common Stock which shall become outstanding between the
Rights Record Date and the earliest of the Distribution Date, the Expiration
Date (as such terms are hereinafter defined) and the date, if any, on which such
rights may be redeemed, all upon the terms and subject to the conditions
hereinafter set forth (each such right being hereinafter referred to as a
"Right");
NOW, THEREFORE, the parties agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
(a) For purposes of this Agreement, the following terms have the
meanings indicated:
"Acquiring Person" shall mean any Person who or which,
alone or together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner (within the meaning of
Section 1(b)) of a Substantial Block of Voting Stock, but shall
not include (i) an Exempt Person or (ii) any Person who or which
acquires a Substantial Block of Voting Stock in connection with a
transaction or series of transactions approved prior to such
transaction or transactions by the Board of Directors of the
Company; provided that no person shall become an Acquiring Person
solely as a result of a reduction in the number of shares of
Voting Stock outstanding, unless and until such Person shall
thereafter become the Beneficial Owner of additional shares
constituting 1% or more of the general voting power of the
Company. If the Directors determine in good faith that a Person
who would otherwise be an Acquiring Person has become such
inadvertently, and such Person divests as promptly as practicable
a sufficient number of shares so that such Person would no longer
be an Acquiring Person as herein defined, then such Person shall
not be deemed
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5
to be an Acquiring Person unless and until such Person shall
become the Beneficial Owner of additional shares constituting 1%
or more of the general voting power of the Company.
"Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act, as in effect as of
the date hereof.
"Business Day" shall mean any day other than a Saturday,
Sunday or day on which banking institutions in the State of
California are authorized or obligated by law or executive order
to close.
"Close of Business" on any given date shall mean 5:00
p.m., Los Angeles time, on such date; provided, however, that if
such date is not a Business Day it shall mean 5:00 p.m., Los
Angeles time, on the next succeeding Business Day.
"Common Stock" shall have the meaning assigned to it in
the preamble; and "common stock" when used with reference to
Persons other than the Company shall mean: (i) in the case of
Persons organized in corporate form, the capital stock or equity
security with the greatest voting power of such Person or, if
such Person is a Subsidiary of another Person, of the Person or
Persons which ultimately control such first-mentioned Person; and
(ii) in the case of Persons not organized in corporate form, the
units of beneficial interest which (A) represent the right to
participate generally in the profits and losses of such Person
(including without limitation any flow-through tax benefits
resulting from an ownership interest in such Person) and (B) are
entitled to exercise the greatest voting power of such Person or,
in the case of a limited partnership, shall have the power to
remove the general partner or partners.
"Distribution Date" shall have the meaning assigned to it
in Section 3(a).
"Equivalent Stock" shall have the meaning assigned to it
in Section 7(a).
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
"Exempt Person" shall mean the Company, any Subsidiary of
the Company and any employee benefit plan or employee stock plan
of the Company or of any Subsidiary of the Company, or any trust
or other entity organized, established or holding shares of
Common Stock by, for or pursuant to, the terms of any such plan.
2
6
"Expiration Date" shall have the meaning assigned to it in
Section 7(a).
"Offer Date" shall have the meaning assigned to it in
Section 3(a).
"Person" shall mean any individual, firm, corporation,
partnership, trust or other entity and shall include any
successor by merger (or otherwise) of any of the foregoing.
"Principal Party" shall have the meaning assigned to it in
Section 13(b).
"Purchase Price" shall mean the price payable for one Unit
upon exercise of a Right.
"Qualified Offer" shall mean a tender or exchange offer
for all outstanding Common Stock at a price and on terms
determined to be adequate and otherwise in the best interests of
the Company and its shareholders (other than the Person or an
Affiliate or Associate thereof on whose behalf the offer is made)
by at least a majority of the Directors who are not
representatives of or affiliated with the Person making such
offer or any Affiliate or Associate of such Person.
"Redemption Price" shall have the meaning assigned to it
in Section 23(a).
"Right" shall have the meaning assigned to it in the
preamble.
"Rights Record Date" shall have the meaning assigned to it
in the preamble.
"Subject Shares" shall mean the class or series of shares
then issuable on exercise of the Rights.
"Stock Acquisition Date" shall mean the date of the first
public announcement by the Company or an Acquiring Person that an
Acquiring Person has become such.
"Subsidiary" shall mean, with respect to any Person, a
corporation or other entity the securities or other ownership
interests of which having ordinary voting power sufficient to
elect a majority of the board of directors or other persons
performing similar functions are at the time directly or
indirectly owned by such Person and any Affiliate of such Person.
"Substantial Block" shall mean a number of shares of
Voting Stock having in the aggregate 15 percent or more of the
general voting power.
3
7
"Trading Day" shall have the meaning assigned to it in
Section 11(d).
"Unit" shall mean the shares or other securities issuable
upon exercise of one Right, initially one one-thousandth of a
share of Junior Participating Preferred Stock of the Company
having the rights and preferences set forth in Exhibit C, before
any adjustment pursuant to Section 11(a)(ii) or Section 13.
"Voting Stock" shall mean shares of the Company's capital
stock the holders of which have general voting power.
(b) For purposes of this Agreement, a Person shall be deemed the
"Beneficial Owner" of any securities:
(i) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly, for purposes of
Section 13(d) of the Exchange Act and Rule 13d-3 promulgated under the
Exchange Act, in each case as in effect on the date hereof;
(ii) which such Person or any of such Person's Affiliates
or Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (whether or not in writing)
or upon the exercise of any conversion, exchange or purchase rights
(other than the Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of
securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for payment or exchange; or
(B) the right to vote or to direct the voting of, pursuant to any
agreement, arrangement or understanding (whether or not in writing); or
(C) the right to dispose or to direct the disposition of, pursuant to
any agreement, arrangement or understanding (whether or not in writing);
or
(iii) which are Beneficially Owned, directly or
indirectly, by any other Person with which such Person or any of
such Person's Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any securities of the Company;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, any security if the agreement, arrangement or understanding
to vote such security (1) arises solely from the grant of a revocable proxy or
consent given to such Person in connection with a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations under the Exchange Act, and
4
8
(2) is not also then reportable on Schedule 13D (or any comparable or successor
report) under the Exchange Act; provided, further, that a Person engaged in
business as an underwriter of securities shall not be deemed the "Beneficial
Owner" of securities acquired through such person's participation in good faith
in a firm commitment underwriting until the expiration of the 40-day period
immediately following the date of such acquisition.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby
appoints the Rights Agent to act as agent for the Company and the Rights Agent
hereby accepts such appointment. The Company may from time to time appoint such
Co-Rights Agent or Agents as it may deem necessary or desirable and determine
the respective duties of the Rights Agent and the Co-Rights Agents.
SECTION 3. ISSUANCE OF RIGHT CERTIFICATES.
(a) Until the Close of Business on the earlier of (i) the tenth
Business Day after a Stock Acquisition Date or (ii) the tenth Business Day (or
such later date as the Company's Board of Directors shall determine) after the
date of the commencement by any Person (other than an Exempt Person) of, or the
date of the first public announcement (such commencement date or announcement
date being herein referred to as the "Offer Date") of the intent of any Person
(other than an Exempt Person) to commence, a tender or exchange offer upon the
successful consummation of which such Person, together with its Affiliates and
Associates, would be the Beneficial Owner of 15 percent or more of the then
outstanding Voting Stock (irrespective of whether any shares are actually
purchased pursuant to such offer) (the tenth Business Day after the first to
occur of a Stock Acquisition Date or an Offer Date being herein referred to as
the "Distribution Date"),
(i) the Rights will automatically attach to, and be
evidenced by, the certificates for Common Stock registered in the names
of the holders of Common Stock (which certificates for Common Stock
shall be deemed also to be Right Certificates) and not by separate Right
Certificates, and
(ii) each Right will be transferable only in connection
with the transfer of the underlying shares of Common Stock.
As soon as practicable after the Distribution Date, the Rights
Agent will mail, by first-class, insured, postage prepaid mail, to each record
holder of Common Stock as of the Close of Business on the Distribution Date, as
shown by the records of the Company at the Close of Business on the Distribution
Date, at the address of such holder shown on such records, a Right Certificate,
in substantially the form of Exhibit A hereto, evidencing one Right for each
share of Common Stock so held.
(b) As soon as practicable after the Rights Record Date, the
Company will send a copy of a Summary of Rights, in substantially the form
attached hereto as Exhibit B, by first-class mail, postage prepaid, to each
record holder of Common Stock as
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9
of the Close of Business on the Rights Record Date, at the address of such
holder shown on the records of the Company.
(c) The Company will cause certificates for Common Stock issued
after the Rights Record Date (including replacement certificates for shares of
Common Stock outstanding on or prior to the Rights Record Date), but prior to
the earliest of (i) the Distribution Date, (ii) the Expiration Date and (iii)
the date, if any, on which the Rights may be redeemed, to have impressed on,
printed on, written on or otherwise affixed to them the following legend:
This certificate also entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between the Company
and ChaseMellon Shareholder Services L.L.C., as Rights Agent, as
the same shall be amended from time to time (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal
executive offices of the Company. Under certain circumstances, as
set forth in the Rights Agreement, such Rights will be evidenced
by separate certificates and will no longer be evidenced by this
certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued
to, or held by, any Person who is, was or becomes an Acquiring
Person or any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement) or certain transferees of any
thereof, whether currently held by or on behalf of such Person or
by any subsequent holder, may be limited as provided in Section
7(f) of the Rights Agreement.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with Common Stock represented by such
certificates shall be evidenced by such certificates alone, and the surrender
for transfer of any such certificates shall also constitute the transfer of the
Rights associated with the Common Stock represented by such certificate.
(d) Until the Distribution Date, the surrender for transfer of
any of the certificates for Common Stock outstanding on or after the Rights
Record Date, with or without a copy of the Summary of Rights attached thereto
and with or without the legend set forth in subsection (c) above, shall also
constitute the transfer of the Rights associated with such Common Stock. After
the Distribution Date, the Rights will be evidenced solely by the Right
Certificates.
SECTION 4. FORM OF RIGHT CERTIFICATES.
(a) The Right Certificates (and the forms of assignment and
certification and of election to purchase shares to be printed on the reverse
thereof) shall be in substantially the form of Exhibit A hereto and may have
such marks of
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10
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Rights may from time to time be
listed, or to conform to usage.
(b) Any Right Certificate issued pursuant to Section 3(a) or
Section 22 that represents Rights Beneficially Owned by: (i) an Acquiring Person
or any Associate or Affiliate of any Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights, or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 7(f), and any Right Certificate
issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement
or adjustment of any other Right Certificate referred to in this sentence, shall
contain (to the extent feasible and reasonably identifiable as such) the
following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement) or certain transferees thereof.
Accordingly, under certain circumstances as provided in the Rights
Agreement, this Right Certificate and the Rights represented hereby may
be limited as provided in Section 7(f) of such Agreement.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any of its Vice
Presidents, either manually or by facsimile signature, and have affixed thereto
the Company's seal or a facsimile thereof which shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent,
issued and delivered with the same force and effect as though the person who
signed such Right Certificates had not ceased to be such officer of the Company;
and any Right Certificate may be signed on behalf of the Company by any person
who, at the actual date of the execution of such
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11
Right Certificate, shall be a proper officer (as specified above) of the Company
to sign such Right Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep
or cause to be kept books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Right Certificates, the number of Rights evidenced
on its face by each Right Certificate, the date of each Right Certificate and
the number of each Right Certificate.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of Section 4(b), Section 7(f) and
Section 14, at any time after the Close of Business on the Distribution Date,
and prior to the Close of Business on the Expiration Date or the day prior to
the day, if any, on which the Rights are to be redeemed pursuant to Section 23,
any Right Certificate or Certificates may be transferred, split up, combined or
exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase such number of Units as the Right Certificate or
Right Certificates surrendered then entitled such holder to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Right
Certificate shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate(s) to be transferred, split up,
combined or exchanged, with the form of assignment on the reverse side(s)
thereof duly completed and executed, at the stock transfer office of the Rights
Agent. Thereupon the Rights Agent shall countersign and deliver to the persons
entitled thereto the Right Certificate(s) requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates. Notwithstanding the foregoing, neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Right Certificate unless and until the
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Right Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate, if
mutilated, the Company will execute and deliver a new Right Certificate of like
tenor to the Rights Agent for delivery to the registered owner in lieu of the
Right Certificate so lost, stolen, destroyed or mutilated.
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SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE
OF RIGHTS.
(a) Subject to Section 7(f), and unless earlier redeemed as
provided in Section 23, the registered holder of any Right Certificate may
exercise the Rights evidenced thereby in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly completed and executed, to
the Rights Agent at the stock transfer office of the Rights Agent, together with
payment of the Purchase Price for each Unit as to which the Rights are
exercised, at or prior to the Close of Business on the tenth anniversary of the
Rights Record Date or such other date to which the Rights may be extended as
provided in this Agreement (the latest of such dates being herein referred to as
the "Expiration Date"). If at any time after the Distribution Date but prior to
the Expiration Date the Company is unable, under its Articles of Incorporation,
to issue the number and class of shares required to be issued upon the exercise
of all of the outstanding Rights, the Company may issue upon exercise of any of
the Rights shares of capital stock or other securities of the Company of
equivalent value to the shares so required to be issued ("Equivalent Stock"), as
determined by the Board of Directors.
(b) The Purchase Price for each Unit pursuant to the exercise of
a Right shall initially be $120.00, shall be subject to adjustment from time to
time as provided in Sections 11 and 13 and shall be payable in lawful money of
the United States of America.
(c) Upon receipt of a Right Certificate, with the form of
election to purchase duly executed, accompanied by payment of the Purchase Price
for the Units to be purchased and an amount equal to any applicable transfer tax
in cash, or by certified check, bank draft or money order payable to the order
of the Company, the Rights Agent shall thereupon promptly (i) requisition from
the Company or any transfer agent of the Company a certificate for the number of
shares to be purchased and the Company will comply, and hereby irrevocably
authorizes its transfer agent to comply, with all such requests, (ii)
requisition from the Company the amount of cash to be paid in lieu of issuance
of a fractional share, when appropriate, in accordance with Section 14, and
(iii) promptly after receipt of such certificate from any such transfer agent,
cause the same to be delivered to or upon the order of the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder, and, when appropriate, after receipt promptly deliver such cash in
lieu of a fractional share to or upon the order of the registered holder of such
Right Certificate; provided, however, that in the case of the purchase, in
connection with the exercise of a Right, of securities other than shares of
stock, the Rights Agent shall promptly take the appropriate actions with respect
thereto as shall as nearly as practicable correspond to the actions described in
the foregoing clauses (i) through (iii).
(d) The Company shall not be required to pay any transfer tax
which may be payable in respect of any transfer involved in the transfer or
delivery of Right
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Certificates, or the issuance or delivery of certificates in a name other than
that of the registered holder of the Right Certificate evidencing Rights
surrendered for exercise, or to issue or deliver any certificates upon the
exercise of any Rights, until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's satisfaction that no such tax
is due.
(e) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14.
(f) Notwithstanding any provision of this Agreement to the
contrary, upon the occurrence of any of the events described in any of clauses
(A), (B), (C) or (D) of Section 11(a)(ii), the adjustment provided for under
Section 11(a)(ii) shall not apply with respect to any Rights that are at the
time of the occurrence of such event Beneficially Owned by (i) an Acquiring
Person or by any Associate or Affiliate of such Acquiring Person (which
Acquiring Person or Affiliate or Associate engages in, or realizes the benefit
of, one or more of the transactions described in clause (A) or clause (B) of
Section 11(a)(ii), realizes the benefits set forth in clause (C) of Section
11(a)(ii) or, alone or together, become the Beneficial Owner(s) of a number of
shares of Voting Stock which equals or exceeds the percentage of the general
voting power as provided in clause (D) of Section 11(a)(ii), as the case may
be), or (ii) a transferee of an Acquiring Person or of any Associate or
Affiliate of such Acquiring Person (which Acquiring Person or Associate or
Affiliate engages in, or realizes the benefit of, one or more of the
transactions described in clause (A) or clause (B) of Section 11(a)(ii),
realizes the benefits set forth in clause (C) of Section 11(a)(ii) or, alone or
together with such Acquiring Person or any such Associate or Affiliate, become
the Beneficial Owner(s) of a number of shares of Voting Stock which equals or
exceeds the percentage of the general voting power as provided in clause (D) of
Section 11(a)(ii), as the case may be) (A) who becomes a transferee after the
Acquiring Person becomes such, or (B) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (1) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom such Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (2) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(f). Upon the exercise of such Rights, the holders
thereof shall be entitled to receive, upon payment of the Purchase Price, the
number of Units issuable upon exercise of such Rights without giving effect to
the adjustment provided for under Section 11(a)(ii). The Company shall use all
reasonable efforts to insure that the provisions of this Section 7(f) and
Section 4(b) are complied with, but shall have no liability to any holder of
Right Certificates or other Person as a
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result of its making or failing to make any determinations with respect to an
Acquiring Person or its Affiliates, Associates or transferees hereunder.
(g) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Right Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by this Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel and retire,
any other Right Certificate purchased or acquired by the Company otherwise than
upon the exercise thereof. The Rights Agent shall deliver all cancelled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF SHARES; REGISTRATION.
(a) The Company covenants and agrees that it shall (i) on or
prior to the Rights Record Date, take all such action as shall be necessary to
cause to be reserved and kept available out of its authorized and unissued
capital stock, the number, class and series of shares that will be sufficient to
permit the exercise in full of all Rights to be outstanding as of the Rights
Record Date, (ii) no later than promptly following the Distribution Date, take
all such action as shall be necessary to cause to be reserved and kept available
out of its authorized and unissued capital stock, the number of additional
shares that will, from time to time, be sufficient to permit the exercise in
full of all Rights from time to time outstanding, (iii) take all such action as
may be necessary to insure that all shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such shares (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable, and (iv) pay when due and payable any and all
federal and state transfer taxes and charges which may be payable in respect of
the issuance or delivery of the Right Certificates or of any shares upon the
exercise of Rights (except as otherwise provided in Section 7(d)).
(b) The Company agrees to take all such action, from and after
the Distribution Date, as may be necessary or appropriate to permit the issuance
of shares in
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connection with the exercise of the Rights, including any required registration
under (i) the Securities Act of 1933, as amended from time to time (the
"Securities Act"), and (ii) the securities or "blue sky" laws of the various
states. The Company may temporarily suspend, for a period of time not to exceed
90 days, the exercisability of the Rights in order to prepare and file a
registration statement or statements for the purpose of effecting any such
registration and permit such statement(s) to become effective. At the
commencement and termination of any such suspension, the Company shall issue a
public announcement and shall provide written notice to the Rights Agent,
stating that the exercisability of the Rights has been temporarily suspended, or
that such suspension has terminated, as the case may be.
(c) If and so long as the stock issuable upon the exercise of
Rights is listed on any national securities exchange, the Company shall use its
reasonable efforts to cause all shares reserved for issuance upon exercise of
Rights to be listed on such exchange upon official notice of issuance upon such
exercise.
SECTION 10. RECORD DATE. Each Person in whose name any stock
certificate is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares represented thereby on,
and such certificate shall be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made. Prior to the exercise of the
Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a shareholder of the Company with respect to shares
for which the Rights shall be exercisable, including without limitation the
right to vote or to receive dividends or other distributions, and such holder
shall not be entitled to receive any notice of any proceedings of the Company,
except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR
NUMBER OF Rights. The Purchase Price, the number and kind of shares or other
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date
of this Agreement (A) declare and pay a dividend on the shares which are
subject to the Rights ("Subject Shares") payable in shares of stock of
the Company, (B) subdivide or split the Subject Shares, (C) combine or
consolidate the Subject Shares into a smaller number of shares or effect
a reverse stock split of the Subject Shares or (D) issue any shares of
its capital stock in a reclassification of the Subject Shares (including
any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation), then,
and in each such event, except as otherwise provided in this Section
11(a), the number and kind of the Subject Shares or other securities
issuable upon the exercise of a Right on such date shall be
proportionately adjusted so that the holder of any Right exercised on or
after such time shall be
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entitled to receive upon the exercise thereof and payment of the
Purchase Price, the aggregate number and kind of shares of capital stock
or other property, as the case may be, that if such Right had been
exercised immediately prior to such date and at a time when such Right
was exercisable and the transfer books of the Company were open, such
holder would have owned upon such exercise and would have been entitled
to receive by virtue of such dividend, subdivision, split, reverse
split, combination, consolidation or reclassification. If an event
occurs that would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this
Section 11(a)(i) shall be in addition to, and shall be made prior to,
any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event that at any time after the date of this
Agreement
(A) any Acquiring Person, or any Associate or
Affiliate of any Acquiring Person, directly or indirectly (1)
shall merge into the Company or any of its Subsidiaries or
otherwise combine with the Company or any of its Subsidiaries and
the Company or such Subsidiary shall be the continuing or
surviving corporation of such merger or combination and the
Common Stock shall remain outstanding and the outstanding shares
thereof shall not be changed into or exchanged for stock or other
securities of the Company or of any other Person or cash or any
other property, or (2) shall sell or otherwise transfer in one or
more transactions, assets to the Company or any of its
Subsidiaries in exchange for 25 percent or more of the shares of
any class of capital stock of the Company or any of its
Subsidiaries, and the Common Stock shall remain outstanding and
unchanged, or
(B) directly or indirectly, any Acquiring Person,
or any Associate or Affiliate of any Acquiring Person, shall (1)
in one or more transactions, transfer any assets to the Company
or any of its Subsidiaries in exchange (in whole or in part) for
shares of any class of capital stock of the Company or any of its
Subsidiaries or for securities exercisable for or convertible
into shares of any class of capital stock of the Company or any
of its Subsidiaries or otherwise obtain from the Company or any
of its Subsidiaries, with or without consideration, any
additional shares of any class of capital stock of the Company or
any of its Subsidiaries or other securities exercisable for or
convertible into shares of any class of capital stock of the
Company or any of its Subsidiaries (other than as part of a pro
rata distribution by the Company or such Subsidiary to all
holders of Common Stock), (2) sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise dispose (in one or more
transactions), to, from or with, as the case may be, the Company
or any of its Subsidiaries, assets on terms and conditions less
favorable to the Company or such Subsidiary
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than the Company or such Subsidiary would be able to obtain in
arm's-length negotiation with an unaffiliated third party, (3)
receive any compensation from the Company or any of the Company's
Subsidiaries other than compensation for full-time employment as
a regular employee, or fees for serving as director, at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (4) receive the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance
provided by the Company or any of its Subsidiaries, on terms and
conditions less favorable to the Company or such Subsidiary than
the Company or such Subsidiary would be able to obtain in
arm's-length negotiation with an unaffiliated third party, or
(C) during any such time as there is an Acquiring
Person, there shall be any reclassification of securities
(including any reverse stock split), or recapitalization of the
Company, or any merger or consolidation of the Company with any
of its Subsidiaries or any other similar transaction or series of
transactions involving the Company or any of its Subsidiaries
(whether or not with or into or otherwise involving an Acquiring
Person or any Affiliate or Associate of such Acquiring Person)
which has the effect, directly or indirectly, of increasing by
more than one percent the proportionate share of the outstanding
shares of any class of equity securities, or of securities
exercisable for or convertible into equity securities, of the
Company or any of its Subsidiaries which is directly or
indirectly owned by any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, or
(D) any Person shall become an Acquiring Person
otherwise than pursuant to a Qualified Offer, then, and in each
such case, but subject to the provisions of Section 27, proper
provision shall be made so that each holder of a Right, except as
provided below and in Section 7(f), shall, on and after the later
of (I) the date of the occurrence of an event described in clause
(A), (B), (C) or (D) of this Section 11(a)(ii), or (II) the date
of the expiration of the period within which the Rights may be
redeemed pursuant to Section 23 (as the same may have been
amended as provided in Section 26), have the right to receive,
upon exercise thereof at the then current Purchase Price, such
number of shares of Common Stock as shall equal the result
obtained by (x) multiplying the then current Purchase Price by
the then number of Units for which a Right is then exercisable
and dividing that product by (y) 50 percent of the current market
price per share of Common Stock (determined in accordance with
Section 11(d)) on the date of the occurrence of the relevant
event listed above in clause (A), (B), (C) or (D) of this
subparagraph (ii); provided, however, that if the transaction
that would otherwise give rise to the foregoing adjustment is
also subject to the provisions of Section 13, then
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only the provisions of Section 13 shall apply and no adjustment
shall be made pursuant to this Section 11(a)(ii). The Company
shall not consummate any such merger, combination, transfer or
transaction referred to in any of such clauses (A), (B) and (C)
unless prior thereto there shall be sufficient authorized but
unissued Common Stock to permit the exercise in full of the
Rights in accordance with the foregoing sentence, unless the
Board of Directors has determined to issue Equivalent Stock in
accordance with Section 7(a); provided, however, that in no case
may the Company consummate any such merger, combination, transfer
or transaction if at the time of or immediately after such
transaction there are any rights, warrants or other instruments
or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights.
In the event that the Company issues Equivalent Stock upon the
exercise of any Rights pursuant to the immediately preceding paragraph, then,
upon any such exercise, proper provision shall be made so that the holder of a
Right (except as provided in Section 7(f)) shall have the right to receive, upon
such exercise at the then current Purchase Price, such number of shares or other
units of Equivalent Stock of the Company as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the number of Units for which
a Right is then exercisable and dividing that product by (y) 50 percent of the
current market price per share or other unit of the Equivalent Stock of the
Company (determined on substantially the same basis as is prescribed by Section
11(d) with respect to the valuation of Common Stock) on the date of occurrence
of the relevant event listed above in clause (A), (B), (C) or (D) of this
subparagraph (ii). In the event that at any time the Company should be
prohibited by law, by any provision of its Articles of Incorporation, or by any
instrument or agreement to which the Company is a party or by which it is bound,
from issuing, or should be unable under its Articles of Incorporation to issue,
sufficient Equivalent Stock to permit the exercise of all outstanding Rights in
accordance with the foregoing sentence, then, in lieu of issuing such Equivalent
Stock upon such exercise, the Company shall pay to each holder of a Right
(except as provided in Section 7(f)) upon surrender of the Right as provided
herein but without payment of the Purchase Price, an amount in cash for each
Right equal to the Purchase Price.
(b) In case the Company shall at any time after the Rights Record
Date fix a record date for the issuance of rights or warrants to all holders of
Common Stock or Subject Shares entitling them for a period expiring within 45
calendar days after such record date to subscribe for or purchase Common Stock
or Subject Shares or securities convertible into Common Stock or Subject Shares
at a price per share (or having a conversion price per share, if a security
convertible into Common Stock) less than the current market price per share
(determined in accordance with Section 11(d)) on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the total number of shares of Common
Stock
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and Subject Shares outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares so
to be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price and of
which the denominator shall be the total number of shares of Common Stock and
Subject Shares outstanding on such record date plus the number of additional
shares to be offered for subscription or purchase (or into which the convertible
securities to be offered are initially convertible). In case such subscription
or purchase price may be paid, in whole or in part, in a form other than cash,
the value of such consideration shall be as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent. Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed, and in the event that such rights or warrants are not so issued,
the Purchase Price shall be adjusted to be the Purchase Price which would then
be in effect if such record date had not been fixed.
(c) In case the Company shall at any time after the Rights Record
Date fix a record date for the making of a distribution on the shares of Common
Stock or the Subject Shares, whether by way of a dividend, distribution,
reclassification of stock, recapitalization, reorganization or partial
liquidation of the Company or otherwise (and including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation), of subscription rights or warrants (excluding those
referred to in Section 11(b)), evidences of indebtedness or other assets (other
than (i) regular periodic cash dividends, (ii) a dividend payable in Common
Stock or (iii) a distribution which is part of or is made in connection with a
transaction to which Section 11(a)(ii) or Section 13 applies), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the current market price per share of
Common Stock (determined in accordance with Section 11(d)) on such record date,
less the fair market value applicable to one share of Common Stock (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
such assets or evidences of indebtedness or of such subscription rights or
warrants so to be distributed, and of which the denominator shall be such
current market price per share of Common Stock. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) For the purpose of any computation hereunder, the "current
market price" per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; provided, however, that
in the event that the current market price per share of Common Stock is
determined during a period following the announcement by the issuer of such
Common Stock of a dividend or distribution on such
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Common Stock payable in shares of such Common Stock or securities convertible
into shares of Common Stock (other than the Rights), and prior to the expiration
of 30 Trading Days after the ex-dividend date for such dividend or distribution,
then, and in each such case, the current market price shall be appropriately
adjusted to reflect the current market price per share of Common Stock in
connection with ex-dividend trading. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the shares of Common Stock are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc., Automated Quotation System ("NASDAQ").
If on any such date the shares of Common Stock are not quoted by any such
organization, the fair market value of such shares on such date as determined in
good faith by the Board of Directors of the issuer of such Common Stock shall be
used. Any such determination of current market price shall be described in a
statement filed with the Rights Agent.
For the purpose of any computation hereunder, the "current market
price" of a Unit shall be deemed to be equal to the current market price per
share of Common Stock, and the "current market price" of a Subject Share shall
be deemed to be equal to the current market price per share of Common Stock
divided by the number of Subject Shares which comprise a Unit.
For purposes of this Agreement, the term "Trading Day" shall mean
a day on which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common Stock are not listed or admitted to trading
on any national securities exchange, a Business Day.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least one percent in
such Price; provided, however, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 shall be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be. Notwithstanding the proviso to the first sentence of this
Section 11(e), any adjustment required by this Section 11 shall be made no later
than the earlier of (i) three years from the date of the transaction which gives
rise to such adjustment or (ii) the date of the expiration of the right to
exercise any Rights.
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(f) In the event that at any time, as a result of an adjustment
made pursuant to Section 11(a), the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock of the Company
other than shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Right shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions, with respect to such shares, contained in Sections 11(a) through
(c), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect
to the shares of Common Stock shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall represent the right to
purchase, at the adjusted Purchase Price, the number of shares purchasable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
shares (calculated to the nearest one-hundredth) obtained by (i) multiplying (x)
the number of shares covered by a Right immediately prior to such adjustment by
(B) the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares purchasable upon the exercise of each Right.
Each of the Rights outstanding after such adjustment of the number of Rights
shall be exercisable for the number of Units for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-hundredth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i) the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14, the additional Rights to which such holders shall be entitled as
a result of such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for the
Right
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Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Right Certificates evidencing
all the Rights to which such holders shall be entitled after such adjustment.
Right Certificates so to be distributed shall be issued, executed and
countersigned in the manner provided for herein (and may bear, at the option of
the Company, the adjusted Purchase Price) and shall be registered in the names
of the holders of record of Right Certificates on the record date specified in
the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of shares issuable upon the exercise of the Rights, the
Right Certificates theretofore and thereafter issued may continue to express the
Purchase Price per share and the number of shares which were expressed in the
initial Right Certificates issued hereunder.
(k) In any case in which this Section 11 requires that an
adjustment in the Purchase Price be made effective as of the record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the additional shares or securities of the Company, if any, issuable as a
consequence of such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares or securities upon the
occurrence of such event.
(l) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such adjustments in the number of shares
which may be acquired upon exercise of the Rights, and such adjustments in the
Purchase Price, in addition to those adjustments expressly required by the other
subsections of this Section 11, as and to the extent that the Company, in its
sole discretion, shall determine to be advisable, in order that, in the event of
(i) any reclassification, consolidation or subdivision of the Common Stock, (ii)
any reorganization or partial liquidation of the Company or similar transaction,
(iii) any issuance wholly for cash of any Common Stock at less than the current
market price, (iv) any issuance wholly for cash of Common Stock or securities
which by their terms are convertible into or exchangeable for Common Stock, (v)
any stock dividends or (vi) any issuance of rights, options or warrants,
hereafter made by the Company to holders of its Common Stock as provided
herein-above in this Section 11, (A) the holders of the Rights in any such event
shall be treated equitably and in accordance with the purpose and intent of this
Agreement, and (B) to the extent reasonably possible, such event shall not, in
the opinion of counsel for the Company, result in the shareholders of the
Company being subject to any United States federal income tax liability by
reason thereof.
SECTION 12. CERTIFICATION OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in Section 11 or 13, the
Company shall (i) promptly prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (ii) promptly
file with the Rights Agent and
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with each transfer agent for the Common Stock a copy of such certificate, and
(iii) mail a brief summary thereof to each holder of a Right Certificate in
accordance with Section 25. Notwithstanding the foregoing sentence, the failure
of the Company to give such notice shall not affect the validity of, or the
force or effect of, the requirement for such adjustment.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS
OR EARNING POWER.
(a) In the event that, at any time after an Acquiring Person has
become such,
(i) the Company shall consolidate with, or merge with and
into, any other Person and the Company shall not be the continuing or
surviving corporation of such consolidation or merger,
(ii) any other Person(s) shall consolidate or merge with
and into the Company, the Company shall be the continuing or surviving
corporation of such merger and, in connection with such consolidation or
merger, all or part of the Common Stock shall be changed into or
exchanged for stock or other securities of the Company or of any other
Person or cash or any other property, or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one or
more transactions, assets or earning power aggregating more than 50
percent of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person, (other than a pro
rata distribution by the Company of assets (including securities) of the
Company or any of its Subsidiaries to all holders of the Company's
Common Stock),
then, on and after the later of (I) the date of the occurrence of an event
described in clause (i), (ii) or (iii) of this Section 13(a), or (II) the date
of the expiration of the period within which the Rights may be redeemed pursuant
to Section 23 (as the same may have been amended as provided in Section 26):
(A) proper provision shall be made so that each
holder of a Right shall thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price,
such number of shares of common stock of the Principal Party as
shall be equal to the result obtained by (x) multiplying the then
current Purchase Price by the number of Units for which a Right
is then exercisable and dividing that product by (y) 50 percent
of the current market price per share of the common stock of the
Principal Party (determined in the same manner as the current
market price of Common Stock is determined under Section 11(d))
on the date of consummation of such consolidation, merger, sale
or transfer;
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(B) the Principal Party shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger,
sale or transfer, all the obligations and duties of the Company
pursuant to this Agreement, and proper provision shall be made
for the foregoing, provided that the Principal Party shall, prior
to the first occurrence of an event described in clause (i), (ii)
or (iii) of this Section 13(a), have caused to be reserved out of
its authorized and unissued shares of common stock, for issuance
pursuant to this Agreement, the number of shares of common stock
that will be sufficient to permit the exercise in full of the
Rights after the occurrence of such event;
(C) the term "Company" wherever used in this
Agreement shall thereafter be deemed to refer to such Principal
Party; and
(D) the Principal Party shall, in addition to the
reservation of shares of its common stock as provided in the
proviso to clause (B) above, take such steps (including without
limitation compliance with the Company's other obligations as set
forth in Section 9) in connection with such consummation as may
be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in
relation to the shares of its Common Stock thereafter deliverable
upon the exercise of the Rights; provided, however, that, upon
the subsequent occurrence of any merger, consolidation, sale of
all or substantially all assets, recapitalization,
reclassification of shares, reorganization or other extraordinary
transaction in respect of such Principal Party, each holder of a
Right shall thereupon be entitled to receive, upon exercise of a
Right and payment of the Purchase Price, such cash, shares,
rights, warrants and other property which such holder would have
been entitled to receive had such holder, at the time of such
transaction, owned the shares of common stock of the Principal
Party purchasable upon the exercise of a Right, and such
Principal Party shall take such steps (including, but not limited
to, reservation of shares of stock) as may be necessary to permit
the subsequent exercise of the Rights in accordance with the
terms hereof for such cash, shares, rights, warrants and other
property.
(b) For purposes of this Agreement, "Principal Party" shall mean
(i) in the case of any transaction described in clause (i)
or (ii) of Section 13(a), (A) the Person that is the issuer of the
securities into which shares of Common Stock are converted in such
merger or consolidation, or, if there is more than one such issuer, the
issuer of the common stock of which has the greatest market value, or
(B) if no securities are so issued, (x) the Person that is the other
party to the merger or consolidation and that survives said merger or
consolidation, or, if there is more than one such Person, the Person the
common
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stock of which has the greatest market value or (y) if the Person that
is the other party to the merger or consolidation does not survive the
merger or consolidation, the Person that does so survive (including the
Company if it survives); and
(ii) in the case of any transaction described in clause
(iii) of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions, or, if each Person that is a party to
such transaction or transactions receives the same portion of the assets
or earning power so transferred or if the Person receiving the greatest
portion of the assets or earning power cannot be determined, whichever
of such Persons is the issuer of common stock having the greatest market
value of shares outstanding;
provided, however, that in any such case, (1) if the common stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another corporation the common stock of which
is and has been so registered, "Principal Party" shall refer to such other
corporation; (2) if the common stock of such Person is not and has not been so
registered and such Person is not a direct or indirect Subsidiary of another
corporation the common stock of which is and has been so registered, "Principal
Party" shall refer to the corporation which ultimately controls such Person; (3)
in case such Person is a Subsidiary, directly or indirectly, of more than one
corporation, the common stocks of all of which are and have been so registered,
"Principal Party" shall refer to whichever of such corporations is the issuer of
common stock having the greatest market value of shares held by the public; and
(4) if the common stock of such Person is not and has not been so registered and
such Person is owned, directly or indirectly, by a joint venture formed by two
or more Persons that are not owned, directly or indirectly, by the same Person,
the rules set forth in clauses (1), (2) and (3) above shall apply to each of the
chains of ownership having an interest in such joint venture as if such Person
were a "Subsidiary" of both or all of such joint venturers and the Principal
Party in each such chain shall bear the obligations set forth in this Section 13
in the same ratio as its direct or indirect interests in such Person bear to the
total of such interests.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless prior thereto the Company and the Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement making valid provision for the results described in clause (A) of
Section 13(a) and confirming that the Principal Party will perform its
obligations under this Section 13(a); provided, however, that in no case may the
Company consummate any such consolidation, merger, sale or transfer if (i) at
the time of or immediately after such transaction there are any rights, warrants
or other instruments or securities outstanding or agreements in effect which
would substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (ii) prior to, simultaneously with or immediately
after such transaction, the shareholders of the Person which constitutes, or
would constitute, the Principal Party
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for purposes of this Section 13 shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and Associates.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. This Section
13 shall not be applicable to a transaction described in Subparagraphs (i), (ii)
or (iii) of Subsection (a) of this Section if (i) such transaction is
consummated with a Person or Persons who acquired Common Stock pursuant to a
Qualified Offer (or a wholly owned subsidiary of any such Person or Persons),
(ii) the price per share of Common Stock offered in such transaction or
distributable to shareholders upon conclusion of such transaction is not less
than the price per share of Common Stock paid to all holders of Common Stock
whose shares were purchased pursuant to such Qualified Offer and (iii) the form
of consideration being offered to the remaining holders of Common Stock pursuant
to such transaction or distributable to shareholders upon conclusion of such
transaction is the same as the form of consideration paid pursuant to such
Qualified Offer. Upon conclusion of any transaction described in the foregoing
sentence, all Rights shall expire.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. If
the Company shall elect not to issue such fractional Rights, in lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such Fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the average
of the high bid and low asked prices in the over-the-counter market, as reported
by NASDAQ. If on any such date the Rights are not quoted by any such
organization, the fair value of the Rights on such date as determined in good
faith by the Board of Directors of the Company shall be used. Any such
determination of current market value shall be described in a statement filed
with the Rights Agent.
(b) The Company shall not be required to issue fractions of
shares upon exercise of a Right or to distribute certificates which evidence
fractional shares. In lieu of fractional shares, the Company shall pay to the
registered holders of Right
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Certificates at the time such Right Certificates are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of a share of Common Stock. For purposes of this Section 14, the current
market value of a share of Common Stock shall be the closing price of a share of
Common Stock (as determined pursuant to the second sentence of Section 11(d))
for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance thereof expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right.
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Right
Certificates (and prior to the Distribution Date, the registered holders of the
Common Stock), and any registered holder of any Right Certificate (or, prior to
the Distribution Date, any registered holder of the Common Stock), without the
consent of the Rights Agent or of the holder of any other Right Certificate (or,
prior to the Distribution Date, any other registered holder of the Common
Stock), may, on his own behalf and for his own benefit, enforce, and may
institute and maintain, any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) on and after the Distribution Date, the Right Certificates
will be transferable only on the registry books of the Rights Agent and then if
surrendered at the stock transfer office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
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SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and reasonable legal fees
and other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense incurred, without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises. In no case will the Rights Agent be liable for
special, indirect, incidental or consequential loss or damages of any kind
whatsoever (including but not limited to lost profits) even if the Rights Agent
has been advised of the possibility of damages.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or Certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it, acting with reasonable care, to be genuine and
to be signed, executed and, where necessary, verified or acknowledged, by the
proper person or persons.
If and for so long as the Rights are listed on the New York Stock
Exchange or the American Stock Exchange, the Rights Agent, if its principal
offices are located outside New York City, shall maintain in the New York City
area facilities for the servicing of the Rights in the area of Manhattan located
south of Chambers Street. Such facilities may consist of either an office or
agency where transactions in the Rights are serviced directly or a "drop" where
Common Stock certificates, Right Certificates, and other instruments relating to
transactions in Rights may be received for redelivery to an
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office or agency outside New York City, all in accordance with the applicable
rules of the stock exchange on which the Rights are listed.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned,
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned, and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name, and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or
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matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the President, any Vice President, or the Secretary of the
Company and delivered to the Rights Agent, and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof), nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate,
nor shall it be responsible for any adjustment required under the provisions of
Section 11 or 13 or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment), nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of stock to be issued pursuant to
this Agreement or any Right Certificate or as to whether any shares of stock
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performance by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
President, any Vice President or the Secretary of the Company, and to apply to
such officers for advice or instructions in connection with its duties, and it
shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which
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the Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first obtaining the Company's approval.
SECTION 21. CHANGE OF RIGHTS AGENT. Unless the Company and the
Rights Agent agree to a shorter time period, the Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 15 days' notice in writing mailed to the Company and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. Unless the Company and the Rights Agent agree
to a shorter time period, the Company may remove the Rights Agent or any
successor Rights Agent upon 15 days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 15 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be
either (a) a corporation organized and doing business under the laws of the
United States or of the State of California (or of any other state of the United
States so long as such corporation is authorized to do business as a banking
institution in the State of California) in good standing, having a stock
transfer office in the State of California, which is authorized under such laws
to exercise stock transfer powers and is subject to supervision or examination
by federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $100,000,000, or (b) an
affiliate of such a corporation. After appointment, the successor Rights Agent
shall be vested
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with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed, but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
Common Stock and mail a notice thereof in writing to the registered holders of
the Right Certificates. Failure to give any notice provided for in this Section
21, however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Expiration Date, the Purchase Price per share or the number or
kind or class of shares of stock or other securities or property purchasable
under the Right Certificates made in accordance with the provisions of this
Agreement.
SECTION 23. REDEMPTION.
(a) The Board of Directors of the Company may, at its option and
as provided herein, and notwithstanding the provisions of Sections 11 and 13 of
this Agreement, elect to redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, appropriately
adjusted to reflect any stock split, stock dividend, reclassification or similar
transaction occurring after the date hereof (such redemption price being herein
referred to as the "Redemption Price") at any time up to the Close of Business
on a Stock Acquisition Date.
(b) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights, the Company shall make a public
announcement thereof, and from and after the date of such announcement, without
any further action and without any further notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. As soon as practicable after the
election of the Board of Directors to redeem the Rights, the Company shall give
notice of such redemption to the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
SECTION 24. NOTICE OF PROPOSED ACTIONS. In case the Company,
after the Rights become exercisable, shall propose (i) to pay any dividend
payable in stock of any
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class to the holders of its Common Stock or the Subject Shares or to make any
other distribution to the holders of its Common Stock or Subject Shares (other
than a regular periodic cash dividend), or (ii) to offer to the holders of its
Common Stock or Subject Shares rights or warrants to subscribe for or to
purchase any additional shares of Common Stock or shares of stock of any class
or any other securities, rights or options, or (iii) to effect any
reclassification of its Common Stock or Subject Shares (other than a
reclassification involving only the subdivision of outstanding shares of Common
Stock) or any recapitalization or reorganization of the Company, or (iv) to
effect any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50 percent of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to, any other Person, or (v) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Right, in accordance with Section 25, a notice of such proposed
action, which shall specify the record date for the purposes of such dividend,
distribution of rights or warrants, or the date on which such reclassification,
recapitalization, reorganization, consolidation, merger, sale, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of Common Stock and/or Subject Shares, if
any such date is to be fixed, and such notice shall be so given in the case of
any action covered by clause (i) or (ii) above at least twenty days prior to the
record date for determining holders of the Common Stock and/or Subject Shares
for purposes of such action, and in the case of any such other action, at least
twenty days prior to the date of the taking of such proposed action or the date
of participation therein by the holders of Common Stock and/or Subject Shares,
whichever shall be the earlier. The failure to give notice required by this
Section 24 or any defect thereon shall not affect the legality or validity of
the action taken by the Company or the vote upon any such action.
SECTION 25. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
American States Water Company
630 East Foothill Boulevard
San Dimas, California 91773
Attention: McClellan Harris III
Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
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ChaseMellon Shareholder Services
400 South Hope Street, Fourth Floor
Los Angeles, California 90071
Attention: Ray Torres
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to or on the holder of any Right Certificate shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
SECTION 26. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order (i)
to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder, or (iv) to change or
supplement the provisions hereof in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Right Certificates; provided, however, this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iii) of this sentence,
(A) a time period relating to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period, unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
26, the Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary: (1) no supplement or
amendment shall be made which changes the Redemption Price, the Purchase Price
or the number of shares or Units for which a Right is exercisable; and (2) the
duration of the Rights may not be shortened without the written consent of the
registered holders thereof (other than by a redemption of the Rights pursuant to
Section 23). Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Stock.
SECTION 27. EXCHANGE.
(a) The Board of Directors of the Company may, at its option, at
any time after any Person becomes an Acquiring Person, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights that
have become subject to the provisions of Section 7(f) hereof) for Common Stock
at an exchange ratio
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35
of one share of Common Stock per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as the "Exchange
Ratio").
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice shall
not affect the validity of such exchange. The Company promptly shall mail a
notice of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become subject to the provisions of
Section 7(f) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient authorized
Common Stock to permit an exchange of Rights as contemplated in accordance with
this Section, the Company shall take all such action as may be necessary to
authorize additional Common Stock or Equivalent Stock for issuance upon exchange
of the Rights.
SECTION 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 29. DETERMINATION AND ACTIONS TAKEN BY THE BOARD OF
DIRECTORS. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock (or other applicable securities hereunder) outstanding at
any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock (or other securities) of
which any Person is the Beneficial Owner, shall be made in accordance with the
last sentence of Rule 13d-3(d)(1)(i) (as in effect on the date of this
Agreement) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to such Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including without limitation the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including,
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36
for purposes of clause (B) below, all omissions with respect to the foregoing)
which are done or made by the Board in good faith, shall (A) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (B) not subject the Board to any liability to
the holders of the Rights.
SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the holders of Common Stock) any legal or equitable right,
remedy or claim under this Agreement. This Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the holders of
Common Stock).
SECTION 31. GOVERNING LAW. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State. The rights and obligations of
the Rights Agent under this Agreement shall be governed by and construed in
accordance with the laws in effect in such state.
SECTION 32. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
SECTION 33. SECTION HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 34. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, illegal, or unenforceable, (i) such invalid,
illegal or unenforceable term, provision, covenant or restriction shall
nevertheless be valid, legal and enforceable to the extent, if any, provided by
such court or authority, and (ii) the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
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37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
AMERICAN STATES WATER COMPANY:
By: _____________________________
Name:
Title:
By: _____________________________
Name:
Title:
THE RIGHTS AGENT:
By: _____________________________
Name:
Title:
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Exhibit A
[Form of Right Certificate]
Certificate No. R- _____ Rights
NOT EXERCISABLE AFTER PUBLIC ANNOUNCEMENT OF
REDEMPTION IS MADE. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT
$.01 PER RIGHT ON THE TERMS SET FORTH IN THE
AGREEMENT. IN THE EVENT THAT THE RIGHTS
REPRESENTED BY THIS CERTIFICATE ARE ISSUED TO
A PERSON WHO IS AN ACQUIRING PERSON OR AN ASSOCIATE
OR AFFILIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT) OR CERTAIN TRANSFEREES
THEREOF, THIS RIGHT CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BE SUBJECT TO CERTAIN
LIMITATIONS IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7 OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
This certifies that _______________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the
Amended and Restated Rights Agreement, dated as of ___________, 1999 (the
"Rights Agreement"), between American States Water Company, (the "Company"), and
ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"), to purchase from
the Company, unless the Rights have been previously redeemed, at any time after
the Distribution Date (as such term is defined in the Rights Agreement) and
prior to the Expiration Date (as such term is defined in the Rights Agreement),
or the date, if any, on which the Rights evidenced by this Certificate may be
redeemed, at the stock transfer office of the Rights Agent, or its successors as
Rights Agent, one one-thousandth of a fully paid and nonassessable share of
Junior Participating Preferred Stock, at a purchase price of $120 (the "Purchase
Price"), upon presentation and surrender of this Right Certificate with the Form
of Election to Purchase duly completed and executed. The number of Rights
evidenced by this Right Certificate as set forth above (and the number of shares
which may be purchased upon exercise thereof), and the Purchase Price set forth
above, are the number and Purchase Price as of the date of the Rights Agreement
based on the shares of
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Common Stock (as such term is defined in the Rights Agreement) of the Company as
constituted at such date.
Upon the occurrence of an event described in clause (A), (B), (C)
or (D) of Section 11(a)(ii) of the Rights Agreement, the holder of any Rights
that are, or were, beneficially owned by an Acquiring Person or an Associate or
Affiliate thereof (as such terms are defined in the Rights Agreement) or certain
transferees thereof which engaged in, or realized the benefit of, an event or
transaction or transactions described in clause (A), (B), (C) or (D) of such
Section 11(a)(ii), shall not be entitled to the benefit of the adjustment
described in such Section 11(a)(ii).
As provided in the Rights Agreement, the Purchase Price and the
number and class of shares which may be purchased upon the exercise of the
Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and at the principal office of the Company.
This Right Certificate, with or without other Right Certificates,
upon surrender at the stock transfer office of the Rights Agent set forth above,
may be exchanged for another Right Certificate or Right Certificates of like
tenor and date evidencing Rights entitling the holder to purchase such number of
shares as the Rights evidenced by the Right Certificate or Right Certificates
surrendered shall have entitled such holder to purchase. If this Right
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Right Certificate or Right Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right.
No fractional shares will be issued upon the exercise of any
Rights evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares or of any
other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything
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40
contained in the Rights Agreement or herein be construed to confer upon the
holder hereof, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate shall have been exercised as provided in the
Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signatures of the proper officers of the
Company. Dated as of ____________, _____.
By: _______________________________
Title:
_______________________________
Secretary
Countersigned:
_____________________________
By: _________________________
Authorized Signature
41
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________________________ hereby sells,
assigns and transfers unto ____________________ (Please print name and address
of transferee) this Right Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
____________________ Attorney to transfer the within Right Certificate on the
books of the within-named Corporation, with full power of substitution.
Dated: ____________, ____ __________________________
Signature
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the
best knowledge of the undersigned) by checking the appropriate boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the Rights
evidenced by this Right Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Date: ______________, ___ __________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
42
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To the Company and the Rights Agent:
The undersigned hereby irrevocably elects to exercise
_________________ Rights represented by this Right Certificate and to purchase
the shares issuable upon the exercise of such Rights and requests that
certificates for such shares be issued in the name of:
Please insert social security or other identifying number _____________________
Please print name and address: _________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number: _____________________
Please print name and address: _________________________________________________
Dated: ______________, _____
Signature: ______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of this Right Certificate)
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the
best knowledge of the undersigned) by checking the appropriate boxes that:
1
================================================================================
EXHIBIT 10.7
LOAN AGREEMENT
Between
CALIFORNIA POLLUTION CONTROL FINANCING AUTHORITY
And
SOUTHERN CALIFORNIA WATER COMPANY
---------------------------
Dated as of December 1, 1996
---------------------------
relating to
$8,000,000
California Pollution Control Financing Authority
Water Distribution Facilities Revenue Bonds
(Southern California Water Company Project)
1996 Series A
================================================================================
2
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITION OF TERMS............................................................2
SECTION 1.2. NUMBER AND GENDER..............................................................2
SECTION 1.3. ARTICLES, SECTIONS, ETC........................................................2
ARTICLE II
REPRESENTATIONS
SECTION 2.1. REPRESENTATIONS OF THE AUTHORITY...............................................2
SECTION 2.2. REPRESENTATIONS OF THE BORROWER................................................3
ARTICLE III
CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS
SECTION 3.1. AGREEMENT TO CONSTRUCT THE PROJECT.............................................5
SECTION 3.2. AGREEMENT TO ISSUE BONDS; APPLICATION OF BOND PROCEEDS.........................6
SECTION 3.3. DISBURSEMENTS FROM THE CONSTRUCTION FUND.......................................6
SECTION 3.4. ESTABLISHMENT OF COMPLETION DATE; OBLIGATION OF
BORROWER TO COMPLETE...........................................................7
SECTION 3.5. INVESTMENT OF MONEYS IN FUNDS..................................................7
SECTION 3.6. SPECIAL TAX CERTIFICATIONS.....................................................8
ARTICLE IV
LOAN OF PROCEEDS; REPAYMENT PROVISIONS
SECTION 4.1. LOAN OF BOND PROCEEDS..........................................................8
SECTION 4.2. REPAYMENT AND PAYMENT OF OTHER AMOUNTS PAYABLE.................................8
SECTION 4.3. UNCONDITIONAL OBLIGATION......................................................10
SECTION 4.4. ASSIGNMENT OF AUTHORITY'S RIGHTS..............................................10
SECTION 4.5. AMOUNTS REMAINING IN FUNDS....................................................10
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Page
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ARTICLE V
SPECIAL COVENANTS AND AGREEMENTS
SECTION 5.1. POWER TO ESTABLISH CHARGES AND COLLECT AMOUNTS................................11
SECTION 5.2. RIGHT OF ACCESS TO THE PROJECT................................................11
SECTION 5.3. THE BORROWER'S MAINTENANCE OF ITS EXISTENCE;
ASSIGNMENTS...................................................................11
SECTION 5.4. RECORDS AND FINANCIAL STATEMENTS OF BORROWER..................................13
SECTION 5.5. MAINTENANCE AND REPAIR; TAXES; UTILITY AND OTHER
CHARGES; INSURANCE.............................................................14
SECTION 5.6. TAX-EXEMPT STATUS OF BONDS....................................................14
SECTION 5.7. NOTICE AND CERTIFICATES TO TRUSTEE............................................15
SECTION 5.8. CONTINUING DISCLOSURE.........................................................15
SECTION 5.9. QUALIFICATION IN CALIFORNIA ..................................................16
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.............................................................16
SECTION 6.2. REMEDIES ON DEFAULT...........................................................17
SECTION 6.3. AGREEMENT TO PAY ATTORNEY'S FEES AND EXPENSES.................................18
SECTION 6.4. NO REMEDY EXCLUSIVE...........................................................18
SECTION 6.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER....................................18
ARTICLE VII
PREPAYMENT
SECTION 7.1. REDEMPTION OF BONDS WITH PREPAYMENT MONEYS....................................18
SECTION 7.2. OPTIONS TO PREPAY INSTALLMENTS................................................19
SECTION 7.3. MANDATORY PREPAYMENT..........................................................19
SECTION 7.4. AMOUNT OF PREPAYMENT..........................................................19
SECTION 7.5. NOTICE OF PREPAYMENT..........................................................19
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Page
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ARTICLE VIII
NON-LIABILITY OF AUTHORITY; EXPENSES; INDEMNIFICATION
SECTION 8.1. NON-LIABILITY OF AUTHORITY....................................................20
SECTION 8.2. EXPENSES......................................................................20
SECTION 8.3. INDEMNIFICATION...............................................................20
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. NOTICES.......................................................................21
SECTION 9.2. SEVERABILITY..................................................................22
SECTION 9.3. EXECUTION OF COUNTERPARTS.....................................................22
SECTION 9.4. AMENDMENTS, CHANGES AND MODIFICATIONS.........................................22
SECTION 9.5. GOVERNING LAW.................................................................22
SECTION 9.6. AUTHORIZED BORROWER REPRESENTATIVE............................................22
SECTION 9.7. TERM OF THE AGREEMENT.........................................................22
SECTION 9.8. BINDING EFFECT................................................................23
EXHIBIT A DESCRIPTION OF THE PROJECT..................................................A-1
iii
5
THIS LOAN AGREEMENT, dated as of December 1, 1996, by and between the
CALIFORNIA POLLUTION CONTROL FINANCING AUTHORITY, a public instrumentality and
political subdivision of the State of California (the "Authority"), and SOUTHERN
CALIFORNIA WATER COMPANY, a corporation organized and existing under the laws of
the State of California (the "Borrower"),
WITNESSETH
WHEREAS, the Authority is a public instrumentality and political
subdivision of the State of California, organized and existing under the
California Pollution Control Financing Authority Act, being Division 27 of the
California Health and Safety Code, as amended and supplemented (the "Act"); and
WHEREAS, the Act authorizes the Authority to issue its revenue bonds for
the purpose of paying all or any part of the costs of a "project" as defined in
the Act; and
WHEREAS, the Borrower has requested that the Authority issue bonds to
finance certain water distribution facilities located throughout the State of
California, as more particularly described in Exhibit A hereto (the "Project"),
which qualify as a "project" under the Act; and
WHEREAS, the Authority after due investigation and deliberation has
adopted its resolution approving said request and authorizing the making of a
loan to the Borrower for the payment of the Cost of the Project (as defined in
the Indenture); and
WHEREAS, the Authority proposes to issue its California Pollution
Control Financing Authority Water Distribution Facilities Revenue Bonds
(Southern California Water Company Project) 1996 Series A (the "Bonds"), in the
aggregate principal amount of $8,000,000 upon the terms and conditions set forth
herein; and
WHEREAS, the Authority will enter into an Indenture of Trust dated as of
December 1, 1996 (the "Indenture"), with Chemical Trust Company of California,
as trustee thereunder pursuant to which the Bonds will be issued;
WHEREAS, payment of the Bonds is secured by the Municipal Bond Insurance
Policy specified in the Indenture;
NOW, THEREFORE, in consideration of the premises and the respective
representations and covenants herein contained, the parties hereto agree as
follows:
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ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITION OF TERMS. Unless the context otherwise requires,
the terms used in this Agreement shall have the meanings specified in Section
1.01 of the Indenture, as originally executed or as they may from time to time
be supplemented or amended as provided therein.
SECTION 1.2. NUMBER AND GENDER. The singular form of any word used
herein, including the terms defined in Section 1.01 of the Indenture, shall
include the plural, and vice versa. The use herein of a word of any gender shall
include all genders.
SECTION 1.3. ARTICLES, SECTIONS, ETC. Unless otherwise specified,
references to Articles, Sections and other subdivisions of this Agreement are to
the designated Articles, Sections and other subdivisions of this Agreement as
originally executed. The words "hereof," "herein," "hereunder" and words of
similar import refer to this Agreement as a whole. The headings or titles of the
several articles and sections, and the table of contents appended to copies
hereof, shall be solely for convenience of reference and shall not affect the
meaning, construction or effect of the provisions hereof.
ARTICLE II
REPRESENTATIONS
SECTION 2.1. REPRESENTATIONS OF THE AUTHORITY. The Authority makes the
following representations as the basis for its undertakings herein contained:
(a) The Authority is a public instrumentality and political subdivision
of the State. Under the provisions of the Act, the Authority has the power to
enter into the transactions contemplated by this Agreement and to carry out its
obligations hereunder. By proper action, the Authority has been duly authorized
to execute, deliver and duly perform this Agreement.
(b) To pay the Cost of the Project, the Authority will issue the Bonds,
which will mature, bear interest and be subject to redemption as provided in the
Indenture.
(c) The Bonds will be issued under and secured by the Indenture,
pursuant to which the Authority's interest in this Agreement (except certain
rights of the Authority to payment for expenses and indemnification) will be
pledged to the Trustee as security for payment of the principal of, premium, if
any, and interest on the Bonds.
(d) The Authority has not pledged and will not pledge its interest in
this Agreement for any purpose other than to secure the Bonds under the
Indenture.
2
7
(e) The Authority is not in default under any of the provisions of the
laws of the State of California which default would affect its existence or its
powers referred to in subsection (a) of this Section 2.1.
(f) The Authority has found and determined and hereby finds and
determines that all requirements of the Act with respect to the issuance of the
Bonds and the execution of this Agreement have been complied with and that
paying the Cost of the Project by issuing the Bonds and entering into this
Agreement will be in furtherance of the purposes of the Act.
(g) On October 30, 1995, the Authority adopted its resolution approving
the issuance of the Bonds, and a public hearing with respect to the Bonds and
the Project was held in accordance with the provisions of the Code. The meetings
of the Authority on such date were held in accordance with the applicable
provisions of Article 9 of Chapter 1 of Division 3 of Title 2 of the California
Government Code, as amended.
(h) The Authority has taken proper action to allocate to the Bonds a
share of the State of California ceiling on private activity bonds for the 1995
calendar which is available to the Authority pursuant to Section 146 of the
Code, in an amount at least equal to the $8,000,000 aggregate principal amount
of the Bonds. Issuance of the Bonds will not violate any provisions of Section
146 of the Code.
(i) No member, officer or other official of the Authority has any
interest whatsoever in the Borrower or in the transactions contemplated by this
Agreement.
SECTION 2.2. REPRESENTATIONS OF THE BORROWER. The Borrower makes the
following representations as the basis for its undertakings herein contained:
(a) The Borrower is a corporation duly formed under the laws of the
State, is in good standing in said State and has the corporate power to enter
into and has duly authorized, by proper corporate action, the execution and
delivery of this Agreement, the contract of purchase executed by it in
connection with the sale of the Bonds (the "Contract of Purchase"), and all
other documents contemplated hereby to be executed by the Borrower.
(b) This Agreement and the Contract of Purchase have been duly
authorized, executed and delivered by the Borrower and constitute legal, valid
and binding obligations of the Borrower, enforceable in accordance with its
terms, except as limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws or judicial decisions affecting the rights of creditors
generally and by judicial discretion in the exercise of equitable remedies.
(c) Neither the execution and delivery of this Agreement and the
Contract of Purchase, the consummation of the transactions contemplated hereby
and thereby, nor the fulfillment of or compliance with the terms and conditions
hereof and thereof, conflict with or result in a breach of any of the terms,
conditions or provisions of the Borrower's articles of incorporation or bylaws
or of any corporate actions or of any agreement or instrument to which the
Borrower is now a party or by which it is bound, or constitute a default (with
due notice or the passage of time or both) under any of the foregoing, or result
in the creation or imposition of any prohibited lien, charge or encumbrance
3
8
whatsoever upon any of the property or assets of the Borrower under the terms of
any instrument or agreement to which the Borrower is now a party or by which it
is bound.
(d) The Borrower has not been served with and, to the knowledge of the
Borrower there is no action, suit, proceeding, inquiry or investigation by or
before any court, governmental agency or public board or body pending or
threatened against the Borrower which (i) affects or seeks to prohibit, restrain
or enjoin the issuance, sale or delivery of the Bonds or the loaning of the
proceeds of the Bonds to the Borrower or the execution and delivery of this
Agreement and the Contract of Purchase or the Indenture, (ii) affects or
questions the validity or enforceability of the this Agreement and the Contract
of Purchase, the Bonds or the Indenture, (iii) questions the exclusion of
interest on the Bonds from gross income for federal income tax purposes, (iv)
questions the power or authority of the Borrower to carry out the transactions
contemplated by, or to perform its obligations under, this Agreement, the
Contract of Purchase, the Bonds or the Indenture, or the powers of the Borrower
to own, acquire, equip or operate the Project, or (v) which, if adversely
determined, would materially impair its right to carry on business substantially
as now conducted or as now contemplated to be conducted, or would materially
adversely affect its financial condition.
(e) The Borrower is not in default under any document, instrument or
commitment to which the Borrower is a party or to which it or any of its
property is subject which default would or could affect the ability of the
Borrower to carry out its obligations under this Agreement and the Contract of
Purchase.
(f) Any certificate signed by the Borrower or an Authorized Borrower
Representative and delivered pursuant to this Agreement or the Contract of
Purchase or the Indenture shall be deemed a representation and warranty by the
Borrower to the Authority and the Trustee as to the statements made therein.
(g) The estimated Cost of the Project is as set forth in Exhibit A
hereto and has been determined in accordance with sound engineering principles
and generally accepted accounting principles.
(h) The Project consists of those facilities described in Exhibit A
hereto and the Borrower shall make no changes to the Project or to the operation
thereof which would adversely affect the qualification of the Project under the
Act or impair the Tax-exempt status of the Bonds. In particular, the Borrower
has complied and shall comply with all requirements set forth in the Tax
Certificate which is hereby incorporated by reference herein. The Borrower
intends to utilize the Project as water distribution facilities until the
principal of, the premium, if any, and the interest on the Bonds shall have been
paid.
(i) The Project consists of water mains and related water distribution
facilities as described in the Tax Certificate.
(j) The economic useful life of the Project is as set forth in the Tax
Certificate.
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(k) To the best knowledge of the Borrower, no member, officer or other
official of the Authority has any interest whatsoever in the Borrower or in the
transactions contemplated by this Agreement.
(l) The Borrower has and will have title to the Project sufficient to
carry out the purposes of this Agreement.
(m) At the time of submission of an application to the Authority for
financial assistance in connection with the Project and on the date on which the
Authority took action on such application, permanent financing for the Project
had not otherwise been obtained or arranged.
(n) All certificates, approvals, permits and authorizations with respect
to the construction of the Project of agencies of applicable local governments,
the State of California and the federal government, which are required to be
obtained as of the date of this Agreement, have been obtained, and the Borrower
has no reason to believe that any other such certificates, approvals, permits or
authorizations with respect to the construction of the Project will not be
obtained in due course.
(o) No event has occurred and no condition exists which would constitute
an Event of Default or which, with the passing of time or with the giving of
notice or both. would become such an Event of Default.
ARTICLE III
CONSTRUCTION OF THE PROJECT; ISSUANCE OF THE BONDS
SECTION 3.1. AGREEMENT TO CONSTRUCT THE PROJECT. The Borrower agrees
that it will acquire, construct and install, or complete or cause the completion
of the acquisition, construction and installation of the Project, and will
acquire, construct and install or cause the acquisition, construction and
installation of all other facilities and real and personal property deemed
necessary for the operation of the Project, substantially in accordance with the
plans and specifications prepared therefor by the Borrower and approved by the
Authority, including any and all supplements, amendments and additions or
deletions thereto or therefrom, it being understood that the approval of the
Authority shall not be required for changes in such plans and specifications
which do not materially alter the purpose and description of the Project as set
forth in Exhibit A hereto.
In the event that the Borrower desires to amend or supplement the
Project, and such amendment or supplement materially alters the purpose and
description of the Project as described in Exhibit A hereto, and the Authority
approves of such amendment or supplement, which approval will not be
unreasonably withheld, the Authority will enter into, and will instruct the
Trustee to consent to, such amendment or supplement upon receipt of:
(i) a certificate of the Authorized Borrower Representative describing
in detail the proposed changes and stating that they will not have the effect of
disqualifying the Project as a facility that may be financed pursuant to the
Act;
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(ii) a copy of the proposed form of amended or supplemented Exhibit A
hereto; and
(iii) an opinion of Bond Counsel that such proposed changes will not
affect the Tax-exempt status of interest on the Bonds.
SECTION 3.2. AGREEMENT TO ISSUE BONDS; APPLICATION OF BOND PROCEEDS. To
provide funds to finance the Cost of the Project, the Authority agrees that it
will issue under the Indenture, sell and cause to be delivered to the purchasers
thereof, the Bonds, bearing interest and maturing as provided in the Indenture,
subject to the Borrower's final approval of the interest rates. The Authority
will thereupon deposit the proceeds received from the sale of the Bonds as
provided in the Indenture.
SECTION 3.3. DISBURSEMENTS FROM THE CONSTRUCTION FUND. (a) The Borrower
will authorize and direct the Trustee, upon compliance with Section 3.03 of the
Indenture, to disburse the moneys in the Construction Fund to or on behalf of
the Borrower only for the following purposes, subject to the provisions of
Section 3.5 hereof.
(i) Payment to the Borrower of such amounts, if any, as shall be
necessary to reimburse the Borrower in full for all advances and payments made
by it, at any time prior to or after the delivery of the Bonds, in connection
with (A) the preparation of plans and specifications for the Project (including
any preliminary study or planning of the Project or any aspect thereof) and ~)
subject to any limitation imposed by subsection ~) hereof, the acquisition,
construction and installation of the Project.
(ii) Payment for labor, services, materials and supplies used by or
furnished to the Borrower to improve the site and to acquire and construct the
Project, as provided in the plans, specifications and work orders therefor;
payment of the costs of acquiring, constructing and installing utility services
or other related facilities; payment of the costs of acquiring all real and
personal property deemed necessary to construct the Project; and payment of the
miscellaneous expenses incidental to any of the foregoing items.
(iii) Payment of the fees, if any, of architects, engineers, legal
counsel and supervisors expended in connection with the acquisition and
construction of the Project.
(iv) Payment of taxes, including property taxes, assessments and other
charges, if any, payable during the period of construction with respect to the
Project, or reimbursement thereof, if paid by the Borrower.
(v) Payment of expenses incurred in seeking to enforce any remedy
against any contractor or subcontractor in respect of any default under a
contract relating to the acquisition, construction or installation of the
Project.
(vi) Interest paid during the Construction Period and properly allocable
to the Project, to the extent of the portion of the Project which has not been
completed as of the date of accrual of any such interest costs and other
interest paid in respect of the Bonds.
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(vii) Payment of any other Cost of the Project permitted by the Tax
Certificate but not including any Costs of Issuance).
(b) All moneys remaining in the Construction Fund after the Completion
Date and after payment or provision for payment of all other items provided for
in the preceding subsection (a) of this Section, shall be used in accordance
with Section 3.03 of the Indenture.
Each of the payments referred to in this Section 3.3 shall be made upon
receipt by the Trustee of a written requisition in the form prescribed by
Section 3.03 of the Indenture, signed by the Authorized Borrower Representative.
SECTION 3.4. ESTABLISHMENT OF COMPLETION DATE; OBLIGATION OF BORROWER TO
COMPLETE. As soon as the Project is completed, the Authorized Borrower
Representative, on behalf of the Borrower, shall evidence the Completion Date by
providing a certificate to the Trustee and the Authority stating the Cost of the
Project and further stating that (i) construction of the Project has been
completed substantially in accordance with the plans, specifications and work
orders therefor, as such may be amended or supplemented from time to time as
provided for herein, and all labor, services, materials and supplies used in
construction have been paid for, and (Ii) all other facilities necessary in
connection with the Project have been acquired, constructed and installed in
accordance with the plans and specifications and work orders therefor and all
costs and expenses incurred in connection therewith have been paid.
Notwithstanding the foregoing, such certificate may state that it is given
without prejudice to any rights of the Borrower against third parties for the
payment of any amount not then due and payable which exist at the date of such
certificate or which may subsequently exist.
At the time such certificate is delivered to the Trustee, moneys
remaining in the Construction Fund (other than moneys relating to provisional
payments permitted by Section 3.3), including any earnings resulting from the
investment of such moneys, shall be used as provided in Section 3.03 of the
Indenture.
In the event the moneys in the Construction Fund available for payment
of the Cost of the Project should be insufficient to pay the costs thereof in
full, the Borrower agrees to pay directly, or to deposit in the Construction
Fund moneys sufficient to pay, any costs of completing the Project in excess of
the moneys available for such purpose in the Construction Fund. The Authority
makes no express or implied warranty that the moneys deposited in the
Construction Fund and available for payment of the Cost of the Project, under
the provisions of this Agreement, will be sufficient to pay all the amounts
which may be incurred for the Project. The Borrower agrees that if, after
exhaustion of the moneys in the Construction Fund, the Borrower should pay, or
deposit moneys in the Construction Fund for the payment of, any portion of the
Cost of the Project pursuant to the provisions of this Section, it shall not be
entitled to any reimbursement therefor from the Authority, from the Trustee or
from the holders of any of the Bonds, nor shall it be entitled to any diminution
of the amounts payable under Section 4.2 hereof.
SECTION 3.5. INVESTMENT OF MONEYS IN FUNDS. Any moneys in any fund held
by the Trustee shall, at the written request of the Authorized Borrower
Representative, be invested or
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reinvested by the Trustee as provided in the Indenture. Such investments shall
be held by the Trustee and shall be deemed at all times a part of the fund from
which such investments were made, and the interest accruing thereon, and any
profit or loss realized therefrom, except as otherwise provided in the Indenture
shall be credited or charged to such fund.
SECTION 3.6. SPECIAL TAX CERTIFICATIONS. The Borrower confirms the
representations set forth in, and covenants that it will comply with the
requirements and conditions of, the Tax Certificate, incorporated in its
entirety herein by reference. The Borrower covenants and agrees that it will not
use or permit the use by any person of any of the funds provided by the
Authority hereunder or any other of its funds, directly or indirectly, or direct
the Trustee to invest any funds held by it under the Indenture or this
Agreement, in such manner as would, or enter into, or allow any 1'related
person" (as defined in Section 144(a)(3) of the Code) to enter into, any
arrangement, formal or informal, that would, cause any Bond to be an "arbitrage
bond" within the meaning of Section 148(a) of said Code. The Borrower
acknowledges having read Sections 5.07 and 6.06~of the Indenture and agrees to
perform all duties imposed upon it by such Sections 5.07 and 6.06 of the
Indenture and by the Tax Certificate. Insofar as said Sections 5.07 and 6.06 of
the Indenture and the Tax Certificate impose duties and responsibilities on the
Borrower, they are specifically incorporated herein by reference, except to the
extent that they may be amended or modified upon the Opinion of Bond Counsel
that any such amendment or modification will not adversely affect the Tax-exempt
status of the Bonds.
ARTICLE IV
LOAN OF PROCEEDS; REPAYMENT PROVISIONS
SECTION 4.1. LOAN OF BOND PROCEEDS. The Authority covenants and agrees,
upon the terms and conditions in this Agreement, to make a loan to the Borrower
for the purpose of financing the Cost of the Project. Pursuant to said covenant
and agreement, the Authority will issue the Bonds upon the terms and conditions
contained in this Agreement and the Indenture and will cause the Bond proceeds
to be applied as provided in Article III of the Indenture. Such proceeds shall
be disbursed in accordance with the Indenture and Section 3.3 hereof.
SECTION 4.2. REPAYMENT AND PAYMENT OF OTHER AMOUNTS PAYABLE. To secure
and provide for the repayment of the loan made hereunder, the Borrower hereby
agrees to make the payments required by this Section as Repayment Installments
on such loan.
(a) The Borrower covenants and agrees to pay to the Trustee as a
Repayment Installment on the loan to the Borrower from Bond proceeds pursuant to
Section 4.1 hereof, on each date provided in or pursuant to the Indenture for
the payment of principal (whether at maturity or upon redemption or
acceleration) of, premium, if any, and/or interest on the Bonds, until the
principal of, premium, if any, and interest on the Bonds shall have been fully
paid or provision for the payment thereof shall have been made in accordance
with the Indenture, in immediately available funds, for deposit in the Bond
Fund, a sum equal to the amount payable on such interest or principal payment or
redemption or acceleration date as principal of (whether at maturity or upon
redemption or acceleration), premium, if any, and interest on the Bonds as
provided in the Indenture.
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Each payment made pursuant to this Section 4.2(a) shall at all times be
sufficient to pay the total amount of interest and principal (whether at
maturity or upon redemption or acceleration) and premium, if any, payable on the
Bonds on the date of payment of principal or interest, as the case may be;
provided that any amount held by the Trustee in the Bond Fund on any due date
for a Repayment Installment hereunder shall be credited against the installment
due on such date to the extent available for such purpose; and provided further
that, subject to the provisions of this paragraph, if at any time the Borrower
determines that amounts held by the Trustee in the Bond Fund are sufficient to
pay all of the principal of and interest and premium, if any, on the Bonds as
such payments become due, the Borrower shall be relieved of any obligation to
make any further payments under the provisions of this Section. Notwithstanding
the foregoing, if on any date the amount held by the Trustee in the Bond Fund is
insufficient to make any required payments of principal of (whether at maturity
or upon redemption or acceleration) and interest and premium, if any, on the
Bonds as such payments become due, the Borrower shall forthwith pay such
deficiency as a Repayment Installment hereunder.
In addition, the Borrower agrees to provide for the issuance of, and
cause to be delivered to the Trustee on the Issue Date, the Bond Insurance
Policy to secure the payment of principal of and interest on the Bonds as set
forth in the Indenture. If at any time after the Bonds are issued, the Borrower
does not intend or will be unable to make a Repayment Installment due hereunder,
it shall notify the Bond Insurer of its failure or inability to make such
payment not less than two (2) days prior to the date on which such payment is
due.
(b) The Borrower also agrees to pay to the Trustee until the principal
of, premium, if any, and interest on the Bonds shall have been fully paid or
provision for the payment thereof shall have been made as required by the
Indenture, in accordance with the letter proposal of the Trustee presented and
agreed to by the Borrower prior to the issuance of the Bonds, (i) the annual fee
of the Trustee for its ordinary services rendered as trustee, and its ordinary
expenses incurred under the Indenture, as and when the same become due, (ii) the
reasonable fees, charges and expenses of the Trustee, as registrar, as provided
in the Indenture, as and when the same become due, (iii) the reasonable fees,
charges and expenses of the Trustee, as paying agent, for the necessary
extraordinary services rendered by it and extraordinary expenses incurred by it
under the Indenture, as and when the same become due, (iv) the cost of printing
any Bonds required to be furnished by the Authority, expenses of collection,
just and reasonable compensation to the Trustee for its services and the
services of counsel, agents and employees by it properly engaged and employed,
and all other expenses and liabilities reasonably incurred in connection with
the Bonds and the Project, and (v) any amounts required to be deposited in the
Rebate Fund to comply with the provisions of Section 3.6 hereof and Sections
5.07 and 6.06 of the Indenture. The Trustee shall submit written invoices to the
Borrower regarding all of the foregoing fees and expenses of the Trustee.
(c) The Borrower also agrees to pay, (i) at the time of Bond closing,
all expenses required to be paid by the Borrower under the terms of the Contract
of Purchase, including the premium and all costs related to the Bond Insurance
Policy, and the Authority's administrative fee in the amount of one-half of one
percent of the original principal amount of the Bonds (less any amounts
previously paid by the Borrower to the Authority); (ii) on or after the date of
Bond closing, on the request of the Authority, the Authority's Small Business
Assistance Fund fee pursuant to Section 44548(a) of the
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California Health and Safety Code, in the amount calculated by the Authority;
and (~) all reasonable expenses of the Authority related to the Project which
are not otherwise required to be paid by the Borrower under the terms of this
Agreement; provided that the Authority shall have obtained the prior written
approval of the Authorized Borrower Representative for any expenditures other
than those provided for herein or in the Contract of Purchase.
(d) In the event the Borrower should fall to make any of the payments
required by subsections (a) through (c) of this Section, such payments shall
continue as obligations of the Borrower until such amounts shall have been fully
paid. The Borrower agrees to pay overdue payments under subsection (a) above,
together with interest thereon until paid, to the extent permitted by law, at
the rate of interest per annum borne by the Bonds or, if less, at the maximum
rate permitted by law. Interest on overdue payments required under subsection
(a) above shall be paid to Bondholders as provided in the Indenture.
SECTION 4.3. UNCONDITIONAL OBLIGATION. The obligations of the Borrower
to make the payments required by Section 4.2 hereof and to perform and observe
the other agreements on its part contained herein shall be absolute and
unconditional, irrespective of any defense or any rights of set-off, recoupment
or counterclaim it might otherwise have against the Authority, and during the
term of this Agreement, the Borrower shall pay absolutely net the payments to be
made on account of the loan as prescribed in Section 4.2 and all other payments
required hereunder, free of any deductions and without abatement, diminution or
set-off. Until such time as the principal of, premium, if any, and interest on
the Bonds shall have been fully paid, or provision for the payment thereof shall
have been made as required by the Indenture, the Borrower (i) will not suspend
or discontinue any payments provided for in Section 4.2 hereof; (;1) will
perform and observe all of its other covenants contained in this Agreement; and
(ill) except as provided in Article VII hereof, will not terminate this
Agreement for any cause, including, without limitation, failure to complete the
Project, the occurrence of any act or circumstances that may constitute failure
of consideration, destruction of or damage to the Project, commercial
frustration of purpose, any change in the tax or other laws of the United States
of America or of the State of California or any political subdivision or either
of these, or any failure of the Authority or the Trustee to perform and observe
any covenant, whether express or implied, or any duty, liability or obligation
arising out of or connected with this Agreement or the Indenture, except to the
extent permitted by this Agreement.
SECTION 4.4. ASSIGNMENT OF AUTHORITY'S RIGHTS. As security for the
payment of the Bonds, the Authority will assign to the Trustee the Authority's
rights under this Agreement, including the right to receive payments hereunder
(except the right of the Authority to receive certain payments, if any, with
respect to expenses and indemnification under Sections 4.2~) and (c), 6.3, 8.2
and 8.3 hereof), and the Authority hereby directs the Borrower to make the
payments required hereunder (except such payments for expenses and
indemnification) directly to the Trustee. The Borrower hereby assents to such
assignment and agrees to make payments directly to the Trustee without defense
or set-off by reason of any dispute between the Borrower and the Authority or
the Trustee.
SECTION 4.5. AMOUNTS REMAINING IN FUNDS. It is agreed by the parties
hereto that after payment in full of (i) the Bonds, or after provision for such
payment shall have been made as provided in the Indenture, (ii) the fees,
charges and expenses of the Trustee, paying agents and the
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Authority in accordance with the Indenture and (ill) all other amounts required
to be paid under this Agreement and the Indenture including, without limitation,
amounts required to be paid from the Rebate Fund, any amounts remaining in any
fund held by the Trustee under the Indenture shall belong to the Borrower and be
paid to the Borrower by the Trustee.
ARTICLE V
SPECIAL COVENANTS AND AGREEMENTS
SECTION 5.1. POWER TO ESTABUSH CHARGES AND COLLECT AMOUNTS. The Borrower
has, and shall maintain as long as any Bonds are Outstanding, the lawful power
to establish charges and cause to be collected amounts with respect to the
Project.
SECTION 5.2. RIGHT OF ACCESS TO THE PROJECT. The Borrower agrees that
during the term of this Agreement the Authority, the Trustee and the duly
authorized agents of either of them shall have the right at all reasonable times
during normal business hours, upon reasonable notice to the Borrower, to enter
upon the site of the Project to examine and inspect the Project; provided,
however, that this right is subject to federal and State laws and regulations
applicable to the site of the Project and may be exercised only for the purpose
of carrying out the duties of the Authority and the Trustee, respectively,
hereunder and under the Indenture. The rights of access hereby reserved to the
Authority and the Trustee may be exercised only after such agent shall have
executed release of liability and secrecy agreements if requested by the
Borrower in the form then currently used by the Borrower, and nothing contained
in this Section or in any other provision of this Agreement shall be construed
to entitle the Authority or the Trustee to any information or inspection
involving the confidential know-how of the Borrower.
SECTION 5.3. THE BORROWER'S MAINTENANCE OF ITS EXISTENCE; ASSIGNMENTS.
(a) To the extent permitted or required by law and its articles of
incorporation, the Borrower agrees that during the term of this Agreement it
will maintain its existence as a corporation, will continue to maintain its
status as a corporation in good standing in the State, will not dissolve or
otherwise dispose of all or substantially all of its assets and will not combine
or consolidate with or merge into another person or permit one or more persons
to consolidate with or merge into it; provided, however, that if the Borrower
has obtained the prior written consent of the Authority, which consent shall not
be unreasonably withheld, the Borrower may so combine, consolidate with, or
merge into another person legally existing under the laws of one of the states
of the United States, or permit one or more persons to consolidate with or merge
into it, or sell or otherwise transfer to another person all or substantially
all of its assets as an entity and thereafter dissolve. The consent of the
Authority shall be given within 30 days after written evidence acceptable to the
Authority is provided by the Borrower to demonstrate that (i) the surviving,
resulting or transferee person, as the case may be, assumes and agrees in
writing to pay and perform all of the obligations of the Borrower hereunder,
(ii) the surviving, resulting or transferee person, as the case may be,
qualifies to do business in the State, (iii) the resulting or transferee person
shall have a net worth (as determined in accordance with generally accepted
accounting principles) immediately after such consolidation, merger, sale or
transfer greater than or equal to 95 % of the net worth of the Borrower at the
end of the fiscal quarter immediately preceding the effective date of
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such consolidation, merger, sale or transfer, and (iv) the credit rating on the
Bonds, as determined by the bond rating service then rating the Bonds, shall
remain at the same rating level, or a higher rating level, as the rating level
of the Bonds immediately prior to the effective date of such consolidation,
merger, sale or transfer. If the Authority does not act within 30 days after
such written evidence is received, such consent shall be deemed to be given.
Within 10 business days of the consummation of the merger (other than a
merger involving the Borrower and any wholly-owned subsidiary of the Borrower)
or other transaction, the Borrower shall provide the Authority with counterpart
copies of the merger instruments, or other documents constituting the
transaction, including (A) copies of the instruments of assumption referred to
in (i) above, and (B) evidence of qualification as referred to in (ii) above.
The Borrower shall also at such time provide the Authority with an opinion of
counsel satisfactory to the Authority that the Borrower has complied with all of
the provisions of this Section 5.3(a). In the case of a merger involving the
Borrower and any wholly-owned subsidiary of the Borrower, the Borrower shall
send the Authority a notice of such merger within 10 business days after its
completion, together with an opinion of counsel as described in the preceding
sentence. The Borrower shall provide the Authority with at least 30 days'
written notice prior to the consummation of any merger or other transaction
described in (iii) above. At such time the Borrower shall provide the Authority
with drafts of the documents of assumption and the legal opinion referred to
above, and with copies of pro forma financial statements showing expected
compliance with the requirements of (iii) above. The Borrower agrees to provide
such other information as the Authority may reasonably request in order to
assure compliance with this Section 5.3(a).
Notwithstanding any other provisions of this Section 5.3(a), the
Borrower need not comply with any of the provisions of Section 5.3(a) above if,
at the time of such merger, combination, sale of assets, dissolution or
reorganization, the Bonds will be defeased as provided in Article X of the
Indenture.
(b) The rights and obligations of the Borrower under this Agreement may
be assigned by the Borrower to any person m whole or in part, subject, however,
to each of the following conditions:
(i) No assignment other than pursuant to subsection (a) of this
Section shall relieve the Borrower from primary liability for any of its
obligations hereunder, and in the event of any assignment not pursuant
to subsection (a) of this Section the Borrower shall continue to remain
primarily liable for the payments specified in Section 4.2 hereof and
for performance and observance of the other agreements on its part
herein provided to be performed and observed by it.
(ii) Any assignment from the Borrower shall retain for the
Borrower such rights and interests as will permit it to perform its
obligations under this Agreement, and any assignee from the Borrower
shall assume in writing the obligations of the Borrower hereunder to the
extent of the interest assigned.
(iii) The Borrower shall give the Authority thirty-days notice
of any assignment, (other than pursuant to subsection (a) above) and
shall, within thirty days after delivery of any assignment, furnish or
cause to be furnished to the Authority and the Trustee a true and
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complete copy of each such assignment together with an instrument of
assumption, and an Opinion of Counsel satisfactory to the Authority that
the Borrower has complied with the provisions of this Section 5.3(b).
SECTION 5.4. RECORDS AND FINANCIAL STATEMENTS OF BORROWER. The Borrower
shall deliver to the Trustee and, to the extent requested in writing, to the
Authority, the following:
(a) As soon as available, but in no event more than one-hundred and
twenty (120) days after the end of each fiscal year, copies of the Borrower's
statements of operation for such fiscal year, financial statements of cash flows
for such fiscal year, all prepared in accordance with generally accepted
accounting principles applicable to the Borrower, and setting forth in each case
in comparative form the figures for the previous fiscal year. All financial
statements shall be certified by independent certified public accountants of
national standing, showing the financial condition of the Borrower at the close
of such fiscal year and the results of Project operations during such fiscal
year;
(b) Simultaneously with the delivery of each set of financial statements
referred to in clause (a) above, a certificate of an Authorized Borrower
Representative stating whether there exists on the date of such certificate any
circumstance known to the Borrower that, with the passage of time or the giving
of notice constitutes or would constitute an Event of Default and, if any
circumstance known to the Borrower that, with the passage of time or the giving
of notice constitutes or would constitute an Event of Default exists, setting
forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto (this certificate shall always be
delivered to the Authority);
(c) Simultaneously with the delivery of each set of financial statements
referred to in clause (a) above, a statement (for so long as such statements are
routinely provided by the independent public accountant certifying the financial
statements in Section 5.4(a) to its clients) of the firm of independent public
accountants which reported on such statements advising that nothing has come to
their attention to cause them to believe that there existed on the date of such
statements any Event of Default; provided, that failure to obtain and deliver
such a certificate shall not be a default under Article VI;
(d) Forthwith upon the occurrence of any circumstance known to the
Borrower that, with the passage of time or the giving of notice, constitutes or
would constitute an Event of Default, a certificate of an Authorized Borrower
Representative setting forth the details thereof and the action which the
Borrower is taking or proposes with respect thereto; provided that a cure of any
occurrence for which notice pursuant to this clause should be given will cure
any failure of the notice provisions of this clause;
(e) From time to time, such additional information regarding the
financial position or business operations of the Borrower, as the Trustee or the
Authority may reasonably request; and
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(f) At the same time as the financial statements are delivered pursuant
to clause (a) above, a certificate of an Authorized Borrower Representative
stating that all routine and major maintenance to the Project has been
performed.
SECTION 5.5. MAINTENANCE AND REPAIR; TAXES; UTILITY AND OTHER CHARGES;
INSURANCE. The Borrower agrees to maintain, to the extent permitted or required
by applicable law and regulation, the Project, or cause the Project to be so
maintained, during the term of this Agreement (i) in as reasonably safe
condition as its operations shall permit and (ii) in good repair and in good
operating condition, ordinary wear and tear excepted, mailing from time to time
all necessary repairs thereto and renewals and replacements thereof.
The Borrower agrees to pay or cause to be paid during the term of this
Agreement all taxes, governmental charges of any kind lawfully assessed or
levied upon the Project or any part thereof, including any taxes levied against
the Project which, if not paid, will become a charge on the receipts from the
Project prior to or on a parity with the charge thereon and the pledge or
assignment thereof to be created therefrom or under this Agreement, all utility
and other charges incurred in the operation, maintenance, use, occupancy and
upkeep of the Project and all assessments and charges lawfully made by any
governmental body for public improvements that may be secured by a lien on the
Project, provided that with respect to special assessments or other governmental
charges that may lawfully be paid in installments over a period of years, the
Borrower shall be obligated to pay only such installments as are required to be
paid during the term of this Agreement. The Borrower may, at the Borrower's
expense and in the Borrower's name, in good faith, contest any such taxes,
assessments and other charges and, in the event of any such contest, may permit
the taxes, assessments or other charges so contested to remain unpaid during
that period of such contest and any appeal therefrom unless by such nonpayment
the Project or any part thereof will be subject to loss or forfeiture.
The Borrower agrees that it will keep, or cause to be kept (i) the
Project insured against such risks and in such amounts and for such occurrences
as similar properties are usually insured by companies similarly situated
against loss or damage of the kinds usually insured against by companies
similarly situated, either by means of policies issued by reputable insurance
companies or, at Borrower's election, partially or wholly by means of an
adequate self-insurance program, and (ii) insurance against all direct or
contingent loss or liability for personal injury, death or property damage
occasioned by the operation of the Project, which insurance may be a part of the
policy or policies of insurance customarily maintained by the Borrower in
connection with its general property and liability insurance upon all of the
plants and properties operated by it (including such deductibles as may be
provided in said policies).
SECTION 5.6. TAX-EXEMPT STATUS OF BONDS. It is the intention of the
parties hereto that interest on the Bonds shall be and remain Tax-exempt and to
that end the covenants and agreements of the Authority and the Borrower in this
Section are for the benefit of the Trustee and each and every holder of the
Bonds.
The Borrower represents and warrants that substantially all of the
proceeds of the Bonds will be used with respect to the Project as more
specifically set forth in the Tax Certificate.
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The Authority covenants and agrees that it has not taken and will not
take any action which results in interest paid on the Bonds not being Tax-exempt
to the holders of the Bonds, and the Borrower covenants and agrees that it has
not taken or permitted to be taken and will not take or permit to be taken any
action which will cause the interest on the Bonds not to be Tax-exempt to the
holders thereof; provided that neither the Borrower nor the Authority shall have
violated these covenants if the interest on any of the Bonds becomes taxable to
a person solely because such person is a "substantial user" of the Project or a
"related person" within the meaning of Section 147(a) of the Code; and provided
further that none of the covenants and agreements herein contained shall require
either the Borrower or the Authority to enter an appearance or intervene in any
administrative, legislative or judicial proceeding in connection with any
changes in applicable laws, rules or regulations or in connection with any
decisions of any court or administrative agency or other governmental body
affecting the taxation of interest on the Bonds.
SECTION 5.7. NOTICE AND CERTIFICATES TO TRUSTEE. The Borrower hereby
agrees to provide the Trustee with the following:
(a) On or before the fifth business day following June 30 and December
31 of each year (commencing June 30, 1997) in which any of the Bonds are
outstanding a certificate of an officer of the Borrower that: (i) all payments
required under this Agreement have been made and (ii) any applicable third party
credit support will continue in full force during the succeeding twelve months,
or explaining why not;
(b) Within one hundred twenty (120) days of the end of the fiscal year
of the Borrower, (i) a certificate of an officer of the Borrower to the effect
that to the best of such officer's knowledge, there exists no event of default
or potential default (which exists or which has previously occurred) and (ii)
the audited annual report of the Borrower;
(c) Upon knowledge of an Event of Default under this Agreement or the
Indenture, notice of such Event of Default, such notice to include a description
of the nature of such event and what steps are being taken to remedy such Event
of Default; and
(d) At the time of filing the certificates referred to in (a) above, a
written disclosure of any significant change known to the Borrower that occurs
which would adversely impact the Trustee's ability to perform its duties under
the Indenture, or of any conflicts which may result because of other business
dealings between the Trustee and the Borrower.
SECTION 5.8. CONTINUING DISCLOSURE. The Borrower hereby covenants and
agrees that it will comply with and carry out all of the provisions of the
Continuing Disclosure Agreement. Notwithstanding any other provision of this
Loan Agreement, failure of the Borrower to comply with the Continuing Disclosure
Agreement shall not be considered an Event of Default hereunder; however, the
Trustee shall at the request of any Participating Underwriter (as defined in the
Continuing Disclosure Agreement) or the Holders of at least 25 % aggregate
principal amount in Outstanding Bonds (upon receipt of satisfactory
indemnification), or any Bondholder or Beneficial Owner may take such actions as
may be necessary and appropriate, including seeking specific performance by
court order, to cause the Borrower to comply with its obligations under this
Section. For purposes of this Section, "Beneficial Owner" means any person which
has the power, directly or
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indirectly, to vote or consent with respect to, or to dispose of ownership of,
any Bonds (including persons holding Bonds through nominees, depositories or
other intermediaries).
SECTION 5.9. QUALIFICATION IN CALIFORNIA. The Borrower agrees that
throughout the term of this Agreement it, or any successor or assignee as
permitted by Section 5.3, will be qualified to do business in the State.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT. Any one of the following which occurs
and continues shall constitute an Event of Default:
(a) failure by the Borrower to pay any amounts required to be paid under
Section 4.2(a) hereof which failure causes an Event of Default under the
Indenture;
(b) failure of the Borrower to observe and perform any covenant,
condition or agreement on its part required to be observed or performed by this
Agreement, other than making the payments referred to in (a) above, which
continues for a period of 30 days after written notice, which notice shall
specify such failure and request that it be remedied, given to the Borrower by
the Authority or the Trustee, unless the Authority and the Trustee shall agree
in writing to an extension of such time; provided, however, that if the failure
stated in the notice cannot be corrected within such period, the Authority and
the Trustee will not unreasonably withhold their consent to an extension of such
time if corrective action is instituted within such period and diligently
pursued until the default is corrected; or
(c) an Act of Bankruptcy of the Borrower.
The provisions of subsection (b) of this Section are subject to the
limitation that the Borrower shall not be deemed in default if and so long as
the Borrower is unable to carry out its agreements hereunder by reason of
strikes, lockouts or other industrial disturbances; acts of public enemies;
orders of any kind of the government of the United States or of the State of
California or any of their departments, agencies or officials, or any civil or
military authority; insurrections; riots; epidemics; landslides; lightning;
earthquake; fife; hurricanes; storms; floods; washouts; droughts; arrests;
restraint of government and people; civil disturbances; explosions; breakage or
accident to machinery, transmission pipes or canals; partial or entire failure
of utilities; or any other cause or event not reasonably within the control of
the Borrower; it being agreed that the settlement of strikes, lockouts and other
industrial disturbances shall be entirely within the discretion of the Borrower,
and the Borrower shall not be required to make settlement of strikes, lockouts
and other industrial disturbances by acceding to the demands of the opposing
party or parties when such course is, in the judgment of the Borrower,
unfavorable to the Borrower. This limitation shall not apply to any default
under subsections (a) or (c) of this Section.
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SECTION 6.2. REMEDIES ON DEFAULT. Whenever any Event of Default shall
have occurred and shall continue:
(a) The Trustee, by written notice to the Borrower, shall declare the
unpaid balance of the loan payable under Section 4.2(a) of this Agreement to be
due and payable immediately, if concurrently with or prior to such notice the
unpaid principal amount of the Bonds shall have been declared to be due and
payable. Upon any such declaration such amount shall become and shall be
immediately due and payable as set forth in Section 7.01 of the Indenture.
(b) The Trustee may have access to and may inspect, examine and make
copies of the books and records and accounts, data and federal income tax and
other tax returns of the Borrower.
(c) The Authority or the Trustee may take whatever action at law or in
equity as may be necessary or desirable to collect the payments and other
amounts then due and thereafter to become due or to enforce performance and
observance of any obligation, agreement or covenant of the Borrower under this
Agreement. Nothing in Section 4.4 of this Agreement shall be deemed to limit the
rights of the Authority under this Section 6.2(c); provided that, the Authority
will not exercise any remedies, with respect to any of the Authority's rights
assigned to the Trustee pursuant to Section 4.4 of this Agreement unless, in the
Authority's reasonable judgment and after written request to the Trustee, the
Trustee has failed to enforce such rights.
In case the Trustee or the Authority shall have proceeded to enforce its
rights under this Agreement and such proceedings shall have been discontinued or
abandoned for any reason or shall have been determined adversely to the Trustee
or the Authority, then, and in every such case, the Borrower, the Trustee and
the Authority shall be restored respectively to their several positions and
rights hereunder, and all rights, remedies and powers of the Borrower, the
Trustee and the Authority shall continue as though no such action had been
taken.
The Borrower covenants that, in case an Event of Default shall occur
with respect to the payment of any Repayment Installment payable under Section
4.2(a) hereof, then, upon demand of the Trustee, the Borrower will pay to the
Trustee the whole amount that then shall have become due and payable under said
Section, with interest, to the extent permitted by law, on the amount then
overdue at the rate of interest per annum borne by the Bonds until such amount
has been paid.
In case the Borrower shall fall forthwith to pay such amounts upon such
demand, the Trustee shall be entitled and empowered to institute any action or
proceeding at law or in equity for the collection of the sums so due and unpaid,
and may prosecute any such action or proceeding to judgment or final decree, and
may enforce any such judgment or final decree against the Borrower and collect
in the manner provided by law the moneys adjudged or decreed to be payable.
In case proceedings shall be pending for the bankruptcy or for the
reorganization of the Borrower under the federal bankruptcy laws or any other
applicable law, or in case a receiver or trustee shall have been appointed for
the property of the Borrower or in the case of any other similar judicial
proceedings relative to the Borrower, or the creditors or property of the
Borrower, then the Trustee shall be entitled and empowered, by intervention in
such proceedings or otherwise, to file and prove a claim or claims for the whole
amount owing and unpaid pursuant to this Agreement and,
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in case of any judicial proceedings, to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee allowed in such judicial proceedings relative to the Borrower,
its creditors or its property, and to collect and receive any moneys or other
property payable or deliverable on any such claims, and to distribute such
amounts as provided in the Indenture after the deduction of its charges and
expenses. Any receiver, assignee or trustee in bankruptcy or reorganization is
hereby authorized to make such payments to the Trustee, and to pay to the
Trustee any amount due it for compensation and expenses, including expenses and
fees of counsel incurred by it up to the date of such distribution.
SECTION 6.3. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In the event
the Borrower should default under any of the provisions of this Agreement and
the Authority or the Trustee should employ attorneys or incur other expenses for
the collection of the payments due under this Agreement or the enforcement of
performance or observance of any obligation or agreement on the part of the
Borrower herein contained, the Borrower agrees to pay to the Authority or the
Trustee the reasonable fees of such attorneys and such other expenses so
incurred by the Authority or the Trustee.
SECTION 6.4. NO REMEDY EXCLUSIVE. No remedy herein conferred upon or
reserved to the Authority or the Trustee is intended to be exclusive of any
other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or now or hereafter existing at law or in equity or by statute. No
delay or omission to exercise any right or power accruing upon any default shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right and power may be exercised from time to time and as often as may
be deemed expedient. In order to entitle the Authority or the Trustee to
exercise any remedy reserved to it in this Article, it shall not be necessary to
give any notice, other than such notice as may be herein expressly required.
Such rights and remedies as are given the Authority hereunder shall also extend
to the Trustee, and the Trustee and the holders of the Bonds shall be deemed
third party beneficiaries of all covenants and agreements herein contained.
SECTION 6.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event
any agreement or covenant contained in this Agreement should be breached by the
Borrower and thereafter waived by the Authority or the Trustee, such waiver
shall be limited to the particular breach so waived and shall not be deemed to
waive any other breach hereunder.
ARTICLE VII
PREPAYMENT
SECTION 7.1. REDEMPTION OF BONDS WITH PREPAYMENT MONEYS. By virtue of
the assignment of the rights of the Authority under this Agreement to the
Trustee as is provided in Section 4.4 hereof, the Borrower agrees to and shall
pay directly to the Trustee any amount permitted or required to be paid by it
under this Article VII. The Trustee shall use the moneys so paid to it by the
Borrower to redeem the Bonds on the date set for such redemption pursuant to
Section 7.5 hereof.
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SECTION 7.2. OPTIONS TO PREPAY INSTALLMENTS. The Borrower shall have the
option to prepay the amounts payable under Section 4.2 hereof with respect to
the Bonds, in whole or in part, by paying to the Trustee, for deposit in the
Bond Fund, the amount set forth in Section 7.4 hereof, under circumstances set
forth in Section 4.01(a) of the Indenture. The Borrower shall notify the Trustee
and the Authority in writing of its election to prepay the amounts payable
hereunder and direct the Trustee to cause the Bonds to be redeemed on a date
specified, which shall be at least 45 days after the date of such notice.
SECTION 7.3. MANDATORY PREPAYMENT. The Borrower shall have and hereby
accepts the obligation to prepay Repayment Installments with respect to the
Bonds to the extent mandatory redemption of the Bonds is required pursuant to
Section 4.01(1,) of the Indenture and upon the occurrence of any of the
following events:
(i) all or substantially all of the properties of the Borrower shall be
sold or taken through the exercise of the right of eminent domain or the right
to purchase by any municipal or governmental body or agency; or
(ii) a Determination of Taxability.
In the case of any of the events stated in this Section 7.3, the
Borrower must satisfy its obligation by prepaying within 180 days after such
event, such prepayment date to be specified in writing by the Borrower to the
Trustee and the Authority at least 45 days in advance.
The amount payable by the Borrower m the event of a prepayment required
by this Section shall be determined as set forth in Section 7.4 and shall be
deposited in the Bond Fund.
SECTION 7.4. AMOUNT OF PREPAYMENT. In the case of a prepayment of the
entire amount due hereunder with respect to the Bonds pursuant to Section 7.2 or
7.3 hereof, the amount to be paid shall be a sum sufficient, together with other
funds and the yield on any securities deposited with the Trustee and available
without reinvestment for such purpose, to pay (1) the principal of all Bonds
outstanding on the redemption date specified in the notice of redemption, plus
interest accrued and to accrue to the payment or redemption date of the Bonds,
plus premium, if any, required pursuant to the Indenture, (2) all reasonable and
necessary fees and expenses of the Authority, the Trustee and any paying agent
accrued and to accrue through final payment of the Bonds and (3) all other
liabilities of the Borrower accrued and to accrue with respect to the Bonds
under this Agreement.
In the case of partial prepayment of the Repayment Installments, the
amount payable shall be a sum sufficient, together with other funds deposited
with the Trustee and available without reinvestment for such purpose, to pay the
principal amount of and premium, if any, and accrued interest on the Bonds to be
redeemed, as provided in the Indenture, and to pay the expenses of redemption of
the Bonds.
SECTION 7.5. NOTICE OF PREPAYMENT. To exercise an option granted in or
to perform an obligation required by this Article VII, the Borrower shall give
written notice at least fifteen (15) days prior to the last day by which the
Trustee is permitted to give notice of redemption pursuant to
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Section 4.03 of the Indenture to the Authority and the Trustee specifying the
date upon which any prepayment will be made. If the Borrower fails to give such
notice of a prepayment required by this Section 7.5, such notice may be given by
the Authority, by the Trustee or by any holder or holders of 10% or more in
aggregate principal amount of the Bonds outstanding. The Authority and the
Trustee, at the request of the Borrower or any such Bondholder, shall forthwith
take all steps necessary under the applicable provisions of the Indenture
(except that neither the Authority nor the Trustee shall be required to make
payment of any money required for such redemption) to effect redemption of all
or part of the then outstanding Bonds, on the earliest practicable date
thereafter on which such redemption may be made under applicable provisions of
the indenture.
ARTICLE VIII
NON-LIABILITY OF AUTHORITY; EXPENSES; INDEMNIFICATION
SECTION 8.1. NON-LIABILITY OF AUTHORITY. The Authority shall not be
obligated to pay the principal of, or premium, if any, or interest on the Bonds,
except from Revenues. The Borrower hereby acknowledges that the Authority's sole
source of moneys to repay the Bonds will be provided by the payments made by the
Borrower pursuant to this Agreement, together with other Revenues, including
investment income on certain funds and accounts held by the Trustee under the
Indenture, and hereby agrees that if the payments to be made hereunder shall
ever prove insufficient to pay all principal of, and premium, if any, and
interest on the Bonds as the same shall become due (whether by maturity,
redemption, acceleration or otherwise), then upon written notice from the
Trustee, the Borrower shall pay such amounts as are required from time to time
to prevent any deficiency or default in the payment of such principal, premium,
if any, or interest, including, but not limited to, any deficiency caused by
acts, omissions, nonfeasance or malfeasance on the part of the Trustee, the
Borrower, the Authority or any third party.
SECTION 8.2. EXPENSES. The Borrower covenants and agrees to pay and to
indemnify the Authority and the Trustee against all costs and charges, including
reasonable fees and disbursements of attorneys, accountants, consultants and
other experts, incurred in good faith in connection with this Agreement, the
Bonds or the Indenture.
SECTION 8.3. INDEMNIFICATION. The Borrower releases the Authority and
the Trustee from, and covenants and agrees that neither the Authority nor the
Trustee shall be liable for, and covenants and agrees, to the extent permitted
by law, to indemnify and hold harmless the Authority and the Trustee and their
directors, officers, employees and agents from and against, any and all losses,
claims, damages, liabilities or expenses, of every conceivable kind, character
and nature whatsoever arising out of, resulting from or in any way connected
with (1) the Project, or the conditions, occupancy, use, possession, conduct or
management of, or work done in or about, or from the planning, design,
acquisition, installation or construction of the Project or any part thereof;
(2) the issuance of any Bonds or any certifications, covenants or
representations made in connection therewith and the carrying out of any of the
transactions contemplated by the Bonds and this Agreement; (3) the Trustee's
acceptance or administration of the trusts under the Indenture, or the exercise
or performance of any of its powers or duties under the Indenture; or (4) any
untrue statement or alleged untrue statement of any material fact or omission or
alleged omission to state a
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material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading, in any continuing
disclosure documents, official statement or other offering circular utilized by
the Authority or any underwriter or placement agent in connection with the sale
of any Bonds; provided that such indemnity shall not be required for damages
that result from negligence or willful misconduct on the part of the party
seeking such indemnity. The indemnity required by this Section shall be only to
the extent that any loss sustained by the Authority or the Trustee exceeds the
net proceeds the Authority or the Trustee receives from any insurance carried
with respect to the loss sustained. The Borrower further covenants and agrees,
to the extent permitted by law, to pay or to reimburse the Authority and the
Trustee and their officers, employees and agents for any and all costs,
reasonable attorneys fees, liabilities or expenses incurred in connection with
investigating, defending against or otherwise in connection with any such
losses, claims, damages, liabilities, expenses or actions, except to the extent
that the same arise out of the negligence or willful misconduct of the party
claiming such payment or reimbursement. The provisions of this Section shall
survive the retirement of the Bonds or the removal or resignation of the
Trustee.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. NOTICES. All notices, certificates or other communications
shall be deemed sufficiently given on the second day following the day on which
the same have been mailed by certified mall, postage prepaid, addressed to the
Authority, the Borrower or the Trustee as the case may be, as follows:
To the Authority: California Pollution Control Financing Authority
915 Capitol Mall, Suite 466
Sacramento, California 95814
Attention: Executive Director
To the Borrower: Southern California Water Company
630 East Foothill Boulevard
San Dimas, CA 91773
Attention: Treasurer
To the Trustee: Chemical Trust Company of California
101 California Street, Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
A duplicate copy of each notice, certificate or other communication
given hereunder by either the Authority or the Borrower to the other shall also
be given to the Trustee and the Bond Insurer. The Authority, the Borrower and
the Trustee may, by notice given hereunder, designate any different addresses to
which subsequent notices, certificates or other communications shall be sent.
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SECTION 9.2. SEVERABILITY. If any provision of this Agreement shall be
held or deemed to be, or shall in fact be, illegal, inoperative or
unenforceable, the same shall not affect any other provision or provisions
herein contained or render the same invalid, inoperative, or unenforceable to
any extent whatever.
SECTION 9.3. EXECUTION OF COUNTERPARTS. This Agreement may be
simultaneously executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument;
provided, however, that for purposes of perfecting a security interest in this
Agreement to the Trustee under Article 9 of the California Uniform Commercial
Code, only the counterpart delivered, pledged and assigned to the Trustee shall
be deemed the original.
SECTION 9.4. AMENDMENTS, CHANGES AND MODIFICATIONS. Except as otherwise
provided in this Agreement or the Indenture, subsequent to the initial issuance
of Bonds and prior to their payment in full, or provision for such payment
having been made as provided in the Indenture, this Agreement may not be
effectively amended, changed, modified, altered or terminated by the Authority
and the Borrower without the written consent of the Trustee and the Bond
Insurer.
Notice of any such amendment to this Agreement or the Indenture shall be
promptly delivered to any rating agency then maintaining a rating on the Bonds.
SECTION 9.5. GOVERNING LAW. This Agreement shall be governed exclusively
by and construed in accordance with the applicable laws of the State. This
Agreement shall also be enforceable in the State and any action arising out of
this Agreement shall be filed and maintained in the Sacramento County Superior
Court, Sacramento, California; provided that the Authority may waive the
requirement of venue. The parties agree that the terms and conditions of this
Agreement supersede those of all previous agreements between the parties with
respect to the subject matter hereto, and that this Agreement, together with the
documents refereed to in this Agreement, contains the entire agreement between
the parties hereto. In the event of a dispute between the parties under this
Agreement, the losing party in such dispute shall pay all costs and expenses
incurred by the prevailing party in connection therewith, including but not
limited to attorneys fees.
SECTION 9.6. AUTHORIZED BORROWER REPRESENTATIVE. Whenever under the
provisions of this Agreement the approval of the Borrower is required or the
Borrower is required to take some action at the request of the Authority, such
approval or such request shall be given on behalf of the Borrower by the
Authorized Borrower Representative, and the Authority and the Trustee shall be
authorized to act on any such approval or request and neither party hereto shall
have any complaint against the other or against the Trustee as a result of any
such action taken.
SECTION 9.7. TERM OF THE AGREEMENT. This Agreement shall be in full
force and effect from the date hereof and shall continue in effect as long as
any of the Bonds are outstanding or the Trustee holds any moneys under the
Indenture, whichever is later provided, however, that the rights of the Trustee
and the Authority under Sections 8.2 and 8.3 hereof shall survive the
termination of this Agreement, the retirement of the Bonds and the removal or
resignation of the
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Trustee. All representations and certifications by the Borrower as to all
matters affecting the Tax-exempt status of the Bonds shall survive the
termination of this Agreement.
SECTION 9.8. BINDING EFFECT. This Agreement shall inure to the benefit
of and shall be binding upon the Authority, the Borrower and their respective
successors and assigns; subject, however, to the limitations contained in
Section 5.3 hereof.
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IN WITNESS WHEREOF, the California Pollution Control Financing Authority
has caused this Agreement to be executed in its name and its seal to be hereunto
affixed and attested by its duly authorized officers, and Southern California
Water Company has caused this Agreement to be executed in its name and its seal
to be hereunto affixed by its duly authorized officers, all as of the date first
above written.
CALIFORNIA POLLUTION CONTROL
FINANCING AUTHORITY
By Matt Fong, Chairman
By:_________________________________
[SEAL]
Attest:
_______________________________
Executive Director
SOUTHERN CALIFORNIA WATER
COMPANY
By:_________________________________
Vice President and Treasurer
[SEAL]
Attest:
_______________________________
Secretary
29
IN WITNESS WHEREOF, the California Pollution Control Financing Authority
has caused this Agreement to be executed in its name and its seal to be hereunto
affixed and attested by its duly authorized officers, and Southern California
Water Company has caused this Agreement to be executed in its name and its seal
to be hereunto affixed by its duly authorized officers, all as of the date first
above written.
CALIFORNIA POLLUTION CONTROL
FINANCING AUTHORITY
By Matt Fong, Chairman
By:_________________________________
[SEAL]
Attest:
_______________________________
Executive Director
SOUTHERN CALIFORNIA WATER
COMPANY
By:_________________________________
Vice President and Treasurer
[SEAL]
Attest:
_______________________________
Secretary
30
EXHIBIT A
DESCRIPTION OF THE PROJECT
The Project includes the acquisition, construction and installation of
water mains facilities and appurtenances thereto, situated at the following
locations throughout the State and acquired at the following respective costs:
Location
- --------
(a) in Bell, Los Angeles County, California; facilities located at:
1,200 feet of water mains on Atlantic, from Florence to Brompton,
3,100 feet of water mains on Gage, from Wilcox to Atlantic,
3,800 feet of water mains on Gage, from Atlantic to California,
(b) in Culver City, Los Angeles County, California; facilities located at:
810 feet of water mains on Jefferson, from Dobson to Sepulveda,
850 feet of water mains on Berryman, from McDonald to Port,
864 feet of water mains on Berryman, from McDonald to Port,
(c) in Walnut Park, Los Angeles County, California; facilities located at:
1,075 feet of water mains on Hickory, from Firestone to 83rd Street,
(d) in South Gate, Los Angeles County, California; facilities located at:
900 feet of water mains on Harding, from alley to Center,
(e) in Artesia, Los Angeles County, California; facilities located at:
300 feet of water mains in the alley east of Gridley, south of Ashworth
TOTAL $8,000,000
A-1
1
EXHIBIT 13
Strength
Growth
Strategy
AMERICAN STATES WATER COMPANY
1998 Annual Report
COVER
AWR offers long-term, income-oriented investors an attractive total return
potential.
Table of Contents
Corporate Profile 1
Selected Financial Data 3
Letter to Shareholders 4
Strategy and Operating Review 6
William V. Caveney: A Tribute 12
Management's Discussion and Analysis 13
Financial Statements 19
Report of Management 32
Report of Independent Public Accountants 32
Shareholder Information 32
Statistical Review 1998-1989 34
Customer Service Areas 36
Corporate Information IBC
INSIDE FRONT COVER
CORPORATE PROFILE
American States Water Company (NYSE:AWR) is a holding company for Southern
California Water Company (SCW) and American States Utility Services, Inc.
(ASUS).
SCW is a public utility company engaged principally in the delivery of water
service. SCW operates 41 separate water systems within 75 communities in 10
counties in the State of California and provides water service to over 1 million
people, or 1 out of every 30 Californians. In addition, SCW provides electric
service to approximately 21,000 customers.
SCW focuses on customers by providing water and electric services at affordable
rates approved by the California Public Utilities Commission (CPUC). Providing
over one-half of the water it sells from its own wells, SCW complies with state
environmental regulations and the federal Safe Drinking Water Act.
SCW has no mortgage debt and its unsecured debt rating of "A+" allows ample
access to finance its capital expansion programs.
ASUS engages in non-regulated business activities through long-term leases or
operation and maintenance contracts with municipally owned water and wastewater
systems. ASUS meets the needs and challenges facing municipalities throughout
the country, by offering cost effective alternatives to higher water rates and
diminishing water supplies.
AWR offers long-term, income-oriented investors an attractive total return
potential. AWR has paid dividends on its common shares every year since 1931 and
has increased dividends paid out annually since 1953. AWR has a corporate rating
of "A" and has no outstanding mortgage debt.
AWR's philosophy is to continue to implement long-term strategies through its
subsidiaries, to increase shareholder value by earning the authorized rate of
return for its utility operations, and to increase overall earnings through
selective non-regulated activities.
1929:
The Company's predecessor, American States Public Service Company of California
incorporated; serving 42,000 customers
1
2
HIGHLIGHTS
[3 GRAPHS P. 2]
2
3
1930:
First Shareholder
Meeting of American States
Public Service Company
of California
1936:
Official name change
to Southern California
Water Company
and the corporate merging of
Bear Valley Utility
Company into Southern
California Water Company
SELECTED FINANCIAL DATA
(dollars in thousand, expect per share 1998 1997 1996 1995 1994
amounts)
---- ---- ---- ---- ----
Income Statement Information
Total Operating Revenues $148,060 $153,755 $151,529 $129,813 $122,675
Total Operating Expenses 122,999 130,297 128,100 108,425 103,745
Operating Income 25,061 23,458 23,429 21,388 18,930
Other Income 769 758 531 336 236
Interest Charges 11,207 10,157 10,500 9,559 7,828
Net Income 14,623 14,059 13,460 12,165 11,338
Preferred Dividends 90 92 94 96 98
Earnings Available for Common 14,533 13,967 13,366 12,069 11,240
Shareholders
Basic Earnings per Common Share $ 1.62 $ 1.56 $ 1.69 $ 1.54 $ 1.43
Dividends Declared per Common Share $ 1.26 $ 1.25 $ 1.23 $ 1.21 $ 1.20
Balance Sheet Information
Total Assets $484,671 $457,074 $430,922 $406,255 $383,627
Net Utility Plant 414,753 383,623 357,776 334,968 317,879
Common Shareholders' Equity 154,299 151,053 146,766 121,576 118,962
Long-Term Debt 120,809 115,286 107,190 107,455 92,891
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred Shares-Subject to Mandatory
Redemption 400 440 480 520 560
Total Capitalization $277,108 $268,379 $256,036 $231,151 $214,013
Book Value per Common Share $ 17.23 $ 16.86 $ 16.52 $ 15.50 $ 15.16
Average Shares Outstanding 8,957 7,891 7,845 7,842
8,958
Other Information
Ratio of Earnings to Fixed Charges 3.21% 3.35% 3.26% 3.19% 3.58%
Ratio of Earnings to Total Fixed Charges 3.17% 3.30% 3.21% 3.14% 3.50%
Return on Average Common Equity 9.6% 9.5% 10.7% 10.3% 9.7%
3
4
LETTER TO SHAREHOLDERS
1998 was an eventful year in the history of your Company. On July 1, 1998,
American States Water Company was formed as the result of approvals received
from shareholders and the California Public Utilities Commission (CPUC). On that
date, shares of American States Water Company initiated trading on the New York
Stock Exchange under the symbol "AWR".
As part of this restructuring, Southern California Water Company became a
wholly-owned subsidiary and a new subsidiary, American States Utility Services,
Inc. was formed to engage in selective non-regulated operations. We believe the
Company is organizationally, operationally and financially poised to meet future
challenges in the water utility industry.
FINANCIAL RESULTS
We are pleased to report that for the year ended December 31, 1998, total
earnings available for common shareholders were $14.5 million, or $1.62 per
common share, as compared to total earnings recorded last year of $14.0 million,
or $1.56 per common share.
The abnormally wet winter weather experienced during the first half of 1998
significantly impacted water sales volumes at the Company's SCW subsidiary and,
accordingly, revenues from water and electric operations were $148.1 million,
down by 3.7% from the $153.8 million recorded in 1997. However, offsetting this
decline in revenues, total operating expenses for 1998 decreased by 5.6% to
$123.0 million, primarily reflecting reduced supply costs due to the increase in
total water supplied from Company-owned pumped sources.
The Company's stock market performance continued to reward management's efforts.
Based on performance measures set forth by the Securities and Exchange
Commission, a $10,000 investment in the common shares of American States Water
Company on December 31, 1993, assuming all dividends were reinvested in
additional common shares, would have increased in value to approximately
$16,800, a 68% increase in five years.(1)
REGULATORY MATTERS
The Company's subsidiary, SCW received an order from the CPUC increasing rates
covering approximately 65% of its water customers. The new rates were effective
January 1, 1999 and are based on a 10% return on common equity. In February
1999, SCW filed for rate increases in four additional water customer service
areas. When approved, new rates will likely be effective on January 1, 2000.
(1) Past performance is no guarantee of future results. Share values and
returns fluctuate and gain or loss may occur when shares are sold.
4
5
1936:
First Public Offering of Southern California Water Company
1939-1947:
The War Years, Southern California Water Company prepares for any eventuality
by partnering with various utilities for mutual aid in the event of enemy attack
1960:
State Water Project authorized by voters, project bringing a second source of
imported water supply to Southern California
WATER QUALITY AND WATER SUPPLY ISSUES
The Company's SCW subsidiary made its compliance filing with the CPUC, pursuant
to its Order Instituting Investigation into water quality. A final order in that
proceeding is anticipated during 1999. The CPUC maintains that it has primary
jurisdiction over water quality matters of the utilities it regulates and has
notified the courts of same in the lawsuits faced by the Company.
The California Department of Water Resources (DWR) recently released a report
detailing the explosive growth in population anticipated for California and the
state's current ability to meet water needs. DWR's plans for meeting these needs
include a combination of reduced water usage and the development of additional
water supplies. SCW currently meets the water needs of its customers through its
own wells and through purchased water. The increased availability of water
supplies coupled with enhanced conservation measures will play an important role
in the Company's future.
IN CLOSING
At the start of this letter, we discussed the formation of American States Water
Company and as you read this Annual Report you will note significant milestones
in the 70 year history of your Company. However, one thing has not changed over
the years - dedication to meeting our mission of providing safe and reliable
water and electric service to our customers and providing growth and return on
the investment made by our shareholders. American States Water Company is
positioned as a leader for the future, founded on the heritage of the past.
Sincerely,
/s/ Floyd E. Wicks
Floyd E. Wicks
President and Chief Executive Officer
/s/W.V. Caveney
William V. Caveney
Chairman of the Board
[PHOTO P. 5]
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6
"with total assets in excess of $484,000,000, AWR operates the second largest
private water utility in the state of California."
[TABLE P. 6]
6
7
[GRAPH P. 7]
STRENGTH
Effective July 1, 1998, American States Water Company (AWR) became the parent
company of Southern California Water Company (SCW). The American States name is
an integral part of the strength and history of your Company. In 1929, American
States Water Services Company of California commenced operations with the
acquisition of 34 water systems, an electric utility and a telephone service
provider at an original cost of $5.7 million. In 1936 the name was changed to
Southern California Water Company. AWR today, with total assets in excess of
$484 million, operates the second largest private water utility in the state of
California, providing water service to over one million people, or 1 out of
every 30 Californians.
AWR's historical and continuing objective to improve shareholder value is
indicative of its strength. Since 1953, AWR has paid shareholders annual
increases in dividends. The Company continues to implement strategies and pursue
opportunities to grow earnings and dividends through rate base additions,
acquisitions and the provision of services through leases and/or contracts.
Because of this, AWR offers long-term, income oriented investors an attractive
total return potential.
With a credit rating of "A/A2" from Standard & Poor's and Moody's Investor
Services, respectively, AWR is prepared to move into the future by investing in
the needs of both the regulated and non-regulated water industry. SCW also
continues to maintain its healthy "A+/A2" ratings from Standard & Poor's and
Moody's Investor Services, respectively, which provides the financial strength
necessary to meet operating and capital expenses.
On August 3, 1998, the Board of Directors adopted a Shareholder Rights Plan. The
Plan was designed to address the issue of unilateral actions by hostile
acquirers, who would attempt to deprive the Board and shareholders of the
ability to determine the company's destiny and receive fair value.
AWR continues to aggressively pursue growth opportunities related to the
acquisition and/or operation of municipally-owned water and wastewater systems.
A new subsidiary, American States Utility Services, Inc., offers the financial
strength and technically trained personnel necessary to secure and provide
maintenance and operations under lease, purchase, or specific service contracts.
7
8
1994:
SCW organized into regions; Northridge earthquake (6.8 on the Richter Scale);
City of Simi Valley and the CPUC recognize SCW for restoring service to 90% of
its affected customers within 18 hours
GROWTH
1998 was an eventful year for AWR, with new contracts secured with the Cities of
Tustin, Bell Gardens, Goleta and Calipatria for various types of utility
services. On the regulated side, rates in three of SCW's districts were
increased in January 1998 with rates increased in six other districts in January
1999. Working towards stability of rates for customers, SCW filed an application
to combine tariff schedules among several of its districts into rates applicable
on a regional basis. Long-term rate stability is crucial to each district as
costs of operation and infrastructure replacement continue to increase. During
1998, the CPUC approved the Direct Access Implementation Plan of SCW's Bear
Valley Electric service area and also excluded any requirement to freeze rates
or reduce rates.
One of SCW's many strengths lies in its customer service. In addition to the
improved on-line access to the Customer Service Center, further strides were
made for Bear Valley electric customers when ATM, credit card and bank by phone
payment options were introduced in 1998.
One of the most challenging areas of providing water service continues to be
quality assurance. In 1998, SCW completed a comprehensive review of 25 years of
water quality records in its response to the CPUC-initiated Order Instituting
Investigation (OII) to determine if existing standards and policies regarding
drinking water quality adequately protect the public health and if those
standards and policies are being uniformly complied with by water utilities. The
OII notes the constitutional and statutory jurisdiction of the CPUC and the
Department of Health Services (DOHS) to establish and enforce adherence to water
quality standards for water delivered by utilities to their customers.
Continuing the Company's efforts in staff development, AWR's corporate
university achieved certification by the International Association for
Continuing Education and Training in 1998. The Employee Development University
is a unique training opportunity for employees and continues to deliver value to
its students and ultimately the Company.
8
9
[5 PHOTOS P. 9]
commitment
purity
dependable
community
confidence
9
10
[GRAPH P. 10]
1996:
Employee
Development University
established
1998:
Creation of
American States Water
Company and American States Utility
Services Company
1999:
First Annual
Meeting of Shareholders of
American States Water Company
STRATEGY
The water utility industry has historically attracted individual investors,
rather than institutional owners or sell-side analysts who follow companies and
make recommendations to investors on selected companies. This trend is changing
as the general turmoil within the regulated utility industry has left water
utilities uniquely possessing many of the characteristics which originally
attracted portfolio managers and analysts to the regulated industries: relative
safety of principal and income generation through dividends. Even within the
water utility industry, however, a number of events are changing the landscape.
Increased regulatory oversight, water quality and supply concerns, mergers and
acquisitions, and financial pressures are interacting to change the manner in
which water service is priced and provided.
AWR is well positioned to face these challenges and turn them into
opportunities. With good management, a proven earnings record, appropriate
valuation and growth potential, AWR ranks high on the key investment criteria
used by analysts and portfolio managers to evaluate a company. As one of the
largest investor-owned, publicly-traded companies in the U.S. water industry,
AWR is financially and technically positioned to meet the significant and
ongoing regulatory demands for high quality water service. Through the resources
and management of its subsidiaries, AWR can further capitalize on growth
opportunities in both the public/private market and the acquisition of other
water utility companies.
Management is committed to focus on AWR's four long-term growth strategies:
provide safe, reliable water and electric service to customers; earn the return
on equity authorized by the CPUC; increase earnings through selected
non-regulated, water related activities; acquire utility assets through purchase
or merger. Management believes that equal emphasis on all four strategies will
best serve the long-term interests of shareholders.
10
11
[GRAPH P. 11]
progress o partnering
opportunity
[GRAPH P. 11]
11
12
We all honor Bill for
his many years of service
and wish him a very
fulfilled future.
WILLIAM V. CAVENEY - A TRIBUTE
The 1999 Annual Meeting of Shareholders marks an end to a long and distinguished
career of a vital force in the Company's 69 year history. When William V.
Caveney, Chairman of the Board, retires on April 27, 1999, a 30 year chapter of
dedication to the shareholders and employees of the Company draws to a close.
His career will be remembered as one of conservative and loyal leadership by a
modest and friendly man.
Bill Caveney joined Southern California Water Company in 1968 as manager of the
Rate and Valuation Department. His prior 15 years of experience with the staff
of the California Public Utilities Commission regulating energy, communications
and water utilities assisted him well in leading the department.
Twelve years later his stewardship heightened when, in 1980, he was elected
President of Southern California Water Company. This occurred at a time when the
water industry was touting the benefits of the Peripheral Canal and the future
of importing water to Southern California seemed uncertain. Regardless of the
politics or uncertainties, this Company, under Bill's leadership, was poised for
a significant period of growth in new water and electric services. Two years
later Bill was elected to the position of Chief Executive Officer and, in 1990,
was also elected Chairman of the Board.
Bill's unwavering dedication to the success of your Company has been etched in
many ways. His guidance, counsel, evenhanded management and, humor will be
missed. We all honor Bill for his many years of contributions and wish him a
very fulfilled future.
[PHOTO P. 12]
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MANAGEMENT"S DISCUSSION AND ANALYSIS
In April 1998, shareholders of Southern California Water Company (SCW) voted to
approve formation of a holding company. The formation process was completed on
July 1, 1998 at which time American States Water Company (AWR) became the parent
company. As a result, SCW became one of AWR's two operating subsidiaries. SCW
will continue as a public utility engaged principally in the purchase,
distribution and sale of water and also the distributor of electricity in
several mountain communities. SCW is regulated by the California Public
Utilities Commission (CPUC) as to its water and electric business including
properties, rates, services, facilities and other matters. The other subsidiary,
American States Utility Services, Inc. (ASUS) is a new company which will
perform non-regulated, water related services and operations. AWR and ASUS are
not regulated by the CPUC. Unless specifically noted, the following discussion
and analysis provides information on AWR's (the Company) consolidated operations
and assets.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including the documents incorporated
herein by reference) are forward-looking statements intended to qualify for the
"safe harbor" from liability established by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can generally be identified
as such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe the Company's future plans, objectives,
estimates or goals are also forward-looking statements. Such statements address
future events and conditions concerning capital expenditures, earnings,
litigation, rates, water quality and other regulatory matters, adequacy of water
supplies, liquidity and capital resources, opportunities related to operations
of municipally-owned water systems and accounting matters. Actual results in
each case could differ materially from those currently anticipated in such
statements, by reason of factors such as utility restructuring, including
ongoing local, state and federal activities; future economic conditions,
including changes in customer demand; future climatic conditions; legislative,
regulatory and other circumstances affecting anticipated revenues and costs; and
abilities of other companies to remain or become year 2000 ready.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Basic earnings per common share in 1998 increased by 3.8 % to $1.62 per share as
compared to $1.56 per share for the comparable period last year. Although wet
weather significantly impacted revenues in 1998, lower supply costs and modest
increases in other operating expenses partially offset the decline in revenues.
Water operating revenues decreased by 4.3% in 1998 to $134.9 million from the
$141.0 million reported in 1997. Water sales volumes in 1998 were 9.9% lower
than last year due to extremely wet weather during the first half of the year.
The decrease in sales was partially offset by rate increases effective during
1998.
Electric operating revenues of $13.2 million were 3.4% higher in 1998 as
compared to last year due to the impact of a general rate increase effective
January 1998 as well as a 2.0% increase in kilowatt-hour sales.
Purchased water costs decreased in 1998 to $30.8 million as compared to $38.3
million in 1997 due to a 20.8% decrease in volumes purchased and refunds
received from the Company's wholesale water supplier during 1998 of
approximately $1.4 million. Refunds of $20.0 million were received in 1997.
Costs of power purchased for pumping decreased by 7.2% to $7.0 million in 1998
chiefly as the result of the reduced energy costs from the Company's suppliers.
Costs of power purchased for resale in 1998 decreased by 3.4% to $5.0 million
from the $5.2 million recorded in 1997 due to reduced costs from the Company's
energy providers which partially offset the effects of increased kilowatt-hour
sales volumes recorded during the year.
Groundwater production assessments increased 10.5% to $7.6 million in 1998 from
$6.8 million in 1997 due to the increased amounts of pumped water in the
Company's resource mix as well as additional assessments associated with
increased pumping in the Company's Metropolitan and Orange County customer
service areas.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. Conversely, a negative
entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. In 1998, recovery of
previously under-collected supply costs was lower in 1998 than 1997 due to the
expiration in
13
14
January 1998 of a surcharge designed to recover those costs. It is anticipated
that the new rates, effective January 1999, will increase collection of these
under-collected costs. The balancing account mechanism insulates earnings from
changes in the unit cost of supply costs which are outside of the immediate
control of the Company. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Other operating expenses increased by 10.6% from the $13.1 million recorded in
1997 due to employee time charged to this category. Reversals in 1997 of costs
associated with recovery of water quality expenditures through the CPUC's
memorandum account mechanism also contributed to the increase. There were no
such reversals of equal magnitude in 1998.
Administrative and general expenses decreased slightly by 0.7% to $22.0 million
in 1998 from the $22.1 million recorded in 1997. The decrease is due to
stability in costs associated with health insurance, post-retirement medical
benefits, pension and 401(k) plan costs and to a reduction of time charge by
employees to this category.
In 1998, maintenance expense remained at approximately the $7.3 million level
recorded in 1997 due principally to the wet weather conditions during the first
part of the year that hampered planned maintenance activity.
Depreciation expense in 1998 increased by 14.5% to $12.5 million reflecting the
effects of recording approximately $38 million in net plant additions during
1997, depreciation on which began in 1998. In addition, amortization of start-up
and organizational costs associated with the formation of AWR is reflected in
1998 and there were no similar amortization costs in 1997.
Taxes on income increased by approximately 3.1% to $10.1 million in 1998 as
compared to the $9.8 million last year due to a 5.7% increase in operating
income partially offset by a lower effective tax rate.
Property and other taxes decreased by 2.5% in 1998 to $6.1 million due primarily
to reduced franchise tax payments directly attributable to reduced revenues.
Other income increased by 1.5% in 1998 due principally to the flow-through of
tax benefits related to refinancing of long-term debt which was partially offset
by an increase in reserves against costs associated with the Company's
non-regulated joint venture.
Interest expense increased by 10.3% to $11.2 million primarily due to increased
short-term bank borrowing and the issuance of $15 million in long-term debt in
March 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Basic earnings per common share in 1997 decreased by 7.7% to $1.56 per share as
compared to $1.69 per share for the comparable period last year, directly
attributable to significantly increased supply costs during the first eight
months of 1997.
Water operating revenues increased by 0.7% in 1997 to $141.0 million from the
$140.0 million reported in 1996. Although water sales volumes were 2.7% higher
in 1997, in 1996 SCW began recovery of previously incurred supply costs, in
accordance with rules of the CPUC. In 1997, recovery of these costs was
completed in several customer service areas and rates were accordingly reduced,
partially offsetting rate increases effective during 1997 in other customer
service areas.
Electric operating revenues of $12.8 million were 10.7% higher in 1997 as
compared to last year due to the impact of a general rate increase effective
January 1997 as well as a 3.6% increase in kilowatt-hour sales.
Purchased water costs remained relatively the same at $38.3 million in 1997 as
compared to $38.4 million in 1996, despite a 6.4% increase in volumes purchased,
due to refunds received from SCW's wholesale water supplier during 1997 of
approximately $2.0 million, which reduced recorded purchased water costs. There
were no such refunds received during 1996.
Costs of power purchased for pumping decreased by 2.0% to $7.6 million in 1997,
chiefly as the result of the reduced amounts of water produced from pumped
sources in SCW's resource mix. During 1997, SCW had several wells out of service
due to water quality issues which significantly affected its ability to fully
utilize its groundwater resources.
14
15
Costs of power purchased for resale in 1997 decreased by 10.9% to $5.2 million
from the $5.8 million recorded in 1996 due to reduced costs from SCW's energy
provider which partially offset the effects of increased kilowatt-hour sales
volumes recorded during the year.
Groundwater production assessments increased 15.2% to $6.8 million in 1997 from
$5.9 million in 1996 due to additional assessments associated with increased
pumping in SCW's San Gabriel Valley and San Dimas customer service areas.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. Conversely, a negative
entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The positive entry for
1997 is a result of approval by the CPUC of rate increases sufficient to recover
previously under-collected purchased supply costs, as well as refunds received
during 1997 from wholesale suppliers. The balancing account mechanism insulates
earnings from changes in the unit costs of supply costs which are outside of the
immediate control of SCW. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Administrative and general expenses increased by 7.7% to $22.1 million in 1997
from the $20.5 million recorded in 1996. This increase reflects higher labor
costs. In addition, during 1997 SCW incurred costs for consulting on water
quality litigation for which there was no corresponding amount in 1996.
In 1997, maintenance expense decreased by 5.7% to $7.3 million from $7.7 million
recorded in 1996 due principally to increased emphasis being placed on SCW's
meter replacement and capital improvement program which partially offset
increased maintenance on SCW's water supply sources.
Depreciation expense in 1997 increased by 8.4% to $11.0 million reflecting the
effects of recording approximately $31.0 million in net plant additions during
1996, depreciation on which began in 1997.
Taxes on income decreased by approximately 4.4% to $9.8 million in 1997 as
compared to the $10.3 million in 1996 as a result of lower pre-tax income. Other
taxes increased by 3.0% in 1997 to $6.3 million due primarily to increased
property taxes resulting from higher valuation assessments in 1997.
Other income increased by 42.7% in 1997 due principally to an increase in
billings to the City of Folsom for the lease of a portion of SCW's water rights
in the American River.
Interest expense decreased by 3.3% to $10.2 million primarily due to reduced
short-term bank borrowing and the lower borrowing rates experienced during 1997.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses, dividends on its outstanding Common and
Preferred Shares and makes its mandatory sinking fund payments principally
through dividends from SCW. AWR has filed a Registration Statement with the
Securities and Exchange Commission (SEC) for issuance, from time to time, of up
to $60 million in Common Shares, Preferred Shares and/or debt securities. The
proceeds will be used primarily for investment in its subsidiaries.
SCW funds the majority of its operating expenses, interest payments on its debt
and dividends on its outstanding Common Shares through internal sources. SCW
continues to rely on external sources, including short-term bank borrowing,
contributions-in-aid-of-construction, advances for construction and
install-and-convey advances, to fund the majority of its construction
expenditures.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of December 31, 1998 of which a
total of $38 million was outstanding. SCW routinely employs short-term bank
borrowing as an interim financing source prior to executing either a long-term
debt or equity issue. SCW issued long-term debt totaling $15.0 million in March
1998. The funds were used initially to repay short-term bank borrowings, after
which construction expenditures were funded.
15
16
SCW has filed a Registration Statement with the SEC for issuance, from time to
time, of up to $60 million in long-term debt with the net proceeds being used to
repay short-term bank borrowings and fund construction needs. In January 1999,
SCW issued $40 million of long-term debt pursuant to this Registration
Statement, all of which was used to reduce bank borrowing.
The Company has no derivative financial instruments, financial instruments with
significant off-balance sheet risks or financial instruments with concentrations
of credit risk.
CONSTRUCTION PROGRAM
SCW's construction program is designed to ensure its customers high quality
service. A program for water pipeline replacement is on-going throughout the 22
customer service areas, based on priority of leaks detected, fire protection
enhancements and reflection of the underlying replacement schedule. In addition,
general upgrades in SCW's water supply facilities are anticipated to be
on-going. SCW's Board of Directors has approved anticipated net capital
expenditures of $42.1 million in 1999. Neither AWR nor ASUS have material
capital requirements.
REGULATORY MATTERS
SCW is subject to regulation by the CPUC, which has broad powers with respect to
service and facilities, rates, classifications of accounts, valuation of
properties, the purchase, disposition and mortgaging of properties necessary or
useful in rendering public utility service, the issuance of securities, the
granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters. AWR and ASUS are not
regulated by the CPUC.
The 22 customer service areas of SCW are grouped into 16 water districts and one
electric district for ratemaking purposes. Water rates vary among the 16
ratemaking districts due to differences in operating conditions and costs. SCW
monitors operations on a regional basis in each of these districts so that
applications for rate changes may be filed, when warranted. Under the CPUC's
practices, rates may be increased by three methods: general rate case increases
(GRC's), offsets for certain expense increases and advice letter filings related
to certain plant additions. GRC's are typically for three-year periods, which
include step increases for the second and third year. Rates are based on
forecasted expenses and capital costs. GRC's have a typical regulatory lag of
one year. Offset rate increases typically have a two to four month regulatory
lag.
New water rates were implemented in three of SCW's customer service areas in
January 1, 1998 to recover costs associated with capital projects in those
areas. Step increases in rates were effective in April 1998 in Barstow and in
May 1998 in Santa Maria. Increased rates for six additional water ratemaking
districts and recovery of costs associated with SCW's general office functions
were effective January 1, 1999.
Applications to increase water rates were filed for four water ratemaking
districts in February 1999. The new rates, if authorized in total or in part by
the CPUC, would be effective January 1, 2000.
SCW has filed an application with the CPUC to combine tariff schedules into
regional rates over a six year phase-in plan for the customer service areas that
make up SCW's Region III. A final decision from the CPUC is anticipated by the
fourth quarter of 1999.
Hearings were held before the CPUC in November 1998 on SCW's filing seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project. SCW
is continuing to pursue alternative forms of recovery of its investment in the
Project, which will require CPUC approval. A final order from the CPUC is
anticipated in 1999. See Note 8 to the Notes to Financial Statements.
In March 1998, the CPUC issued an Order Instituting Investigation (OII) to
regulated water utilities in the state of California, including SCW. The purpose
of the OII is to determine whether existing standards and policies regarding
drinking water quality adequately protect the public health and whether those
standards and policies are being uniformly complied with by those water
utilities. The OII delineates the constitutional and statutory jurisdiction of
the CPUC and the DOHS in establishing and enforcing adherence to water quality
standards. The CPUC's jurisdiction provides for the establishment of rates which
permit water utilities to furnish safe water meeting the established water
quality standards at prices
16
17
which are both affordable and allow the utility to earn a reasonable return on
its investment. SCW has provided its response to a series of questions dealing
with the adequacy of current drinking water standards, compliance by water
utilities with such standards, appropriate remedies for failure to comply with
safe drinking water standards and whether increased enforcement and additional
drinking water standards are necessary. SCW anticipates a final decision by the
CPUC on this matter in 1999. See Note 8 to the Notes to Financial Statements.
See Note 8 to the Notes to Financial Statements.
ENVIRONMENTAL MATTERS
The 1996 amendments to the Safe Drinking Water Act (SDWA) revised the 1986
amendments to the SDWA with a new process for selecting and regulating
contaminants. The Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and if regulated the regulation would
provide "a meaningful opportunity for health risk reduction." The EPA has
published a list of contaminants for possible regulation and must update that
list every five years. In addition, every five years, the EPA must select at
least five contaminants on that list and determine whether to regulate them. The
new law allows the EPA to bypass the selection process and adopt interim
regulations for contaminants in order to address urgent health threats. Current
regulations, however, remain in place and are not subject to the new
standard-setting provisions. The California Department of Health Services,
acting on behalf of the EPA, administers the EPA's program in California.
The 1996 SDWA amendments allow the EPA, for the first time, to base primary
drinking water regulations on risk assessment and cost/benefit considerations
and on minimizing overall risk. The EPA must base regulations on the best
available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
(MCL's), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
SCW currently tests its wells and water systems for more than 90 contaminants,
currently covering all contaminants listed in the SDWA, except for those from
which SCW has received an exemption. Water from wells found to contain levels of
contaminants above or near the established MCL's is treated before it is
delivered to customers.
Since the SDWA became effective, SCW has experienced increased operating costs
for testing to determine the levels, if any, of the constituents in SCW's
sources of supply and additional expense to lower the level of any such
contaminants in order to meet the MCL standards. Such costs and the costs of
controlling any other contaminants may cause SCW to experience additional
capital costs as well as increased operating costs. The ratemaking process
provides SCW with the opportunity to recover prudently incurred capital and
operating costs associated with water quality.
There have been no environmental matters that have materially affected or are
currently materially affecting the Company's Bear Valley Electric customer
service area. The construction of a proposed 115kv line to serve the Bear Valley
Electric customer service area is subject to an Environmental Impact Statement
(EIS). Delays in approval of the EIS could impact SCW's ability to meet electric
load growth in the future until the project is completed.
WATER SUPPLY
During 1998, the Company supplied a total of 179,927 acre feet of water. Of this
amount, approximately 61% came from pumped sources and 39% was purchased from
others, principally the Metropolitan Water District of Southern California
(MWD). The remaining amount was supplied by the Bureau of Reclamation (the
"Bureau") under a no-cost contract. During 1997, the Company produced 199,146
acre feet of water, 54% of which came from pumped sources, 45% was purchased and
the remainder was supplied by the Bureau.
The MWD is a water district organized under the laws of the State of California
for the purpose of delivering imported water to areas within its jurisdiction.
The Company has 52 connections for the water distribution facilities of MWD and
other municipal water agencies. MWD imports water from two principal sources:
the Colorado River and the State Water Project (SWP). Available water supplies
from the Colorado River and the SWP have historically been sufficient to meet
most of MWD's requirements and MWD's supplies from these
17
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sources are anticipated to remain adequate through 1999. However, MWD has taken
a number of steps to secure additional storage capacity and increase available
water supplies, including effecting transfers of water rights from other
sources.
The 1997-1998 water year, which ended September 1998, was labeled a "wet one" by
the California Department of Water Resources. The outlook for water supply in
1999 remains favorable. In those customer services areas of SCW which pump
groundwater, overall groundwater conditions remain at adequate levels. However,
certain of SCW's groundwater supplies have been affected to varying degrees by
various forms of contamination which, in some cases, has caused increased
reliance on purchased water in its resource mix.
WATER-RELATED OPPORTUNITIES
SCW anticipates terminating its Golden State Water Company joint venture in
1999. In its place, American States Utility Services Inc. was formed to pursue
opportunities such as long-term leases, and operation and maintenance contracts
of government or municipally owned water and wastewater systems.
YEAR 2000 READINESS
The Company has been actively assessing its Year 2000 (Y2K) readiness since
early 1997 and has inventoried its significant computer hardware and software
programs. All major upgrades to these systems have been completed and were
operational at year-end 1998. In addition to work being done on internal
systems, the Company has sought compliance certification from external vendors
and service providers. The Company has initiated due diligence with those
external vendors upon which the Company is significantly dependent, such as
energy and telecommunication companies and wholesale water suppliers. In the
event that such suppliers might be adversely affected by Y2K, the Company has
prepared a contingency plan, which is anticipated to be completed by the second
quarter of 1999. See Note 13 of the Notes to Financial Statements for more
information.
To date, there have been no significant costs associated with Y2K readiness that
have not been approved by the CPUC for recovery through rates. The Company
believes that future costs associated with Y2K, which are prudently incurred,
will be allowed for recovery through rates.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and displaying of comprehensive income and its components, such as
minimum pension liability, in a full set of general-purpose financial
statements. Adoption of this statement, effective for fiscal years beginning
after December 15, 1997, did not have a significant impact on the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the method
of reporting information about operating segments in annual financial statements
and in interim reports issued to shareholders. Adoption of this statement,
effective for fiscal years beginning after December 15, 1997, did not have a
significant impact on disclosure of segment related information.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends SFAS No. 87 and SFAS
No. 109 and revises employers' disclosure concerning pension and other
postretirement benefits plans. Adoption of this statement, effective for fiscal
years beginning after December 15, 1997, did not have a significant impact the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for
accounting for derivative and hedging activities, and supersedes and amends a
number of existing standards. Adoption of this statement, effective for fiscal
years beginning after June 15, 1999, will not have a significant impact on
financial position or results of operation.
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19
Balance Sheets
For the years ended December 31,
(dollars in thousands) 1998 1997
--------- ---------
Assets
Utility Plant, at cost
Water $ 482,989 $ 446,605
Electric 35,171 34,137
--------- ---------
518,160 480,742
Less - Accumulated depreciation (138,423) (125,020)
--------- ---------
379,737 355,722
Construction work in progress 35,016 27,901
--------- ---------
Net utility plant 414,753 383,623
--------- ---------
Other Property and Investments 1,077 1,355
--------- ---------
Current Assets
Cash and cash equivalents 620 4,186
Accounts receivable-Customers, less reserves of $403 in 1998;
$466 in 1997 7,626 8,544
Other 5,301 3,614
Unbilled revenue 9,303 9,106
Materials and supplies, at average cost 994 1,299
Supply cost balancing accounts 4,300 4,286
Prepayments 5,988 7,676
Accumulated deferred income taxes - net 5,156 5,783
--------- ---------
Total current assets 39,288 44,494
--------- ---------
Deferred Charges
Regulatory tax-related assets 21,506 22,337
Other 8,047 5,265
--------- ---------
Total deferred charges 29,553 27,602
--------- ---------
Total Assets $ 484,671 $ 457,074
========= =========
Capitalization and Liabilities
Capitalization
Common shareholders' equity $ 154,299 $ 151,053
Preferred shares 1,600 1,600
Preferred shares - mandatory redemption 400 440
Long-term debt 120,809 115,286
--------- ---------
Total capitalization 277,108 268,379
--------- ---------
Current Liabilities
Notes payable to banks 38,000 26,000
Long-term debt and preferred shares - current 260 231
Accounts payable 10,218 11,770
Taxes payable 5,900 9,115
Accrued interest 1,405 1,868
Other 7,985 7,196
--------- ---------
Total current liabilities 63,768 56,180
--------- ---------
Other Credits
Advances for construction 54,743 55,574
Contributions in aid of construction 36,530 28,467
Accumulated deferred income taxes - net 46,902 42,984
Unamortized investment tax credits 3,155 3,246
Regulatory tax-related liability 1,906 1,950
Other 559 294
--------- ---------
Total other credits 143,795 132,515
--------- ---------
Total Capitalization and Liabilities $ 484,671 $ 457,074
========= =========
The accompanying notes are an integral part of these financial statements
19
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Statements Of Capitalization
For the years ended December 31,
(dollars in thousands) 1998 1997
--------- ---------
Common Shareholders' Equity:
Common shares, $2.50 stated value--
Authorized 30,000,000 shares
Outstanding 8,957,671 in 1998 and 1997 $ 22,394 $ 22,394
Additional paid-in capital 74,937 74,937
Earnings reinvested in the business 56,968 53,722
--------- ---------
154,299 151,053
--------- ---------
Preferred Shares: $25 par value
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800 800
Outstanding 32,000 shares, 4 1/4 % Series 800 800
--------- ---------
1,600 1,600
--------- ---------
Preferred Shares Subject to Mandatory Redemption
Requirements: $25 par value
Authorized and outstanding 17,600 shares in 1998 and 440 480
19,200 shares in 1997, 5% Series
Less: Preferred shares to be redeemed within one year (40) (40)
--------- ---------
400 440
--------- ---------
Long-Term Debt
5.82% notes due 2003 12,500 12,500
10.10% notes due 2009 -- 10,000
6.64% notes due 2013 1,100 1,100
6.80% notes due 2013 2,000 2,000
8.50% fixed rate obligation due 2013 1,882 1,947
Variable rate obligation due 2014 6,000 6,000
Variable rate obligation due 2018 630 --
6.87% notes due 2023 5,000 5,000
7.00% notes due 2023 10,000 10,000
7.55% notes due 2025 8,000 8,000
7.65% notes due 2025 22,000 22,000
5.50% notes due 2026 8,000 8,000
6.81% notes due 2028 15,000 --
9.56% notes due 2031 28,000 28,000
Other 917 930
--------- ---------
121,029 115,477
Less: Current maturities (220) (191)
--------- ---------
120,809 115,286
========= =========
Total Capitalization $ 277,108 $ 268,379
========= =========
The accompanying notes are an integral part of these financial statements
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21
Statements Of Income
(dollars in thousands, except per share amounts) For the years ended December 31,
1998 1997 1996
--------- --------- ---------
Operating Revenues
Water $ 134,859 $ 140,988 $ 139,997
Electric 13,201 12,767 11,532
--------- --------- ---------
Total operating revenues 148,060 153,755 151,529
--------- --------- ---------
Operating Expenses
Water purchased 30,833 38,318 38,355
Power purchased for resale 5,013 5,188 5,825
Power purchased for pumping 7,009 7,554 7,711
Groundwater production assessment 7,567 6,847 5,946
Supply cost balancing accounts 28 2,813 2,064
Other operating expenses 14,459 13,074 13,421
Administrative and general expenses 21,987 22,138 20,549
Depreciation 12,538 10,952 10,102
Maintenance 7,311 7,301 7,745
Taxes on income 10,130 9,830 10,283
Property and other taxes 6,124 6,282 6,099
--------- --------- ---------
Total operating expenses 122,999 130,297 128,100
--------- --------- ---------
Operating Income 25,061 23,458 23,429
--------- --------- ---------
Other Income
Total other income - net 769 758 531
--------- --------- ---------
Income before interest charges 25,830 24,216 23,960
--------- --------- ---------
Interest Charges
Interest on long-term debt 9,612 8,821 8,551
Other interest and amortization of debt expense 1,595 1,336 1,949
--------- --------- ---------
Total interest charges 11,207 10,157 10,500
--------- --------- ---------
Net Income 14,623 14,059 13,460
Dividends on Preferred Shares (90) (92) (94)
Earnings Available For Common Shareholders $ 14,533 $ 13,967 $ 13,366
Basic Earnings Per Common Share $ 1.62 $ 1.56 $ 1.69
Weighted Average Number of Common Shares Outstanding 8,958 8,957 7,891
The accompanying notes are an integral part of these financial statements
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22
Statements Of Changes In Common Shareholders' Equity
Earnings
(dollars in thousands) Common Shares Additional Reinvested
Number of Paid-in in the
Shares Amount Capital Business
------- ------- ------- -------
Balances at December 31, 1995 7,845 $19,613 $54,753 $47,210
Add:
Net Income 13,460
Issuance of Common Shares
for public offering 1,000 2,500 18,090
under Dividend Reinvestment and 401(k) 41 102 802
Plans
Deduct:
Dividends on Preferred Shares 94
Dividends on Common Shares - $1.225 per share 9,670
------- ------- ------- -------
Balances at December 31, 1996 8,886 $22,215 $73,645 $50,906
Add:
Net Income 14,059
Issuance of Common Shares for public offering 72 179 1,292
Deduct:
Dividends on Preferred Shares 92
Dividends on Common Shares - $1.245 per share 11,151
------- ------- ------- -------
Balances at December 31, 1997 8,958 $22,394 $74,937 $53,722
Add:
Net Income 14,623
Deduct:
Dividends on Preferred Shares 90
Dividends on Common Shares - $1.26 per share 11,287
------- ------- ------- -------
Balances at December 31, 1998 8,958 $22,394 $74,937 $56,968
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements
22
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Statements Of Cash Flows
(dollars in thousands) For the years ended December 31,
1998 1997 1996
-------- -------- --------
Cash Flows From Operating Activities:
Net income 14,623 $ 14,059 $ 13,460
Adjustments for non-cash items:
Depreciation and amortization 12,929 11,387 10,389
Deferred income taxes and investment tax credits 5,241 826 577
Other - net 2,036 (1,426) (1,660)
Changes in assets and liabilities:
Customer receivables 918 (673) 368
Supply cost balancing accounts (14) 1,987 1,800
Accounts payable (1,552) (1,095) 6,026
Taxes payable (3,215) 3,338 215
Other - net 438 341 122
-------- -------- --------
Net cash provided 31,404 28,744 31,297
-------- -------- --------
Cash Flows from Investing Activities:
Construction expenditures (41,826) (34,717) (31,953)
-------- -------- --------
Net cash used (41,826) (34,717) (31,953)
-------- -------- --------
Cash Flows from Financing Activities:
Issuance of Common Shares -- 1,472 21,494
Issuance of long-term debt and lease obligations 15,000 8,000 --
Receipt of advances for and contributions in aid of 3,381 1,302 2,462
construction
Refunds on advances for construction (2,651) (2,957) (2,088)
Retirement or repayments of long-term debt and (9,488) (198) (15,447)
redemption of preferred shares - net
Net change in notes payable to banks 12,000 10,000 7,500
Common and preferred dividends paid (11,386) (11,243) (9,825)
-------- -------- --------
Net cash provided 6,856 6,376 4,096
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (3,566) 403 3,440
Cash and Cash Equivalents, Beginning of Year 4,186 3,783 343
-------- -------- --------
Cash and Cash Equivalents, End of Year 620 4,186 $ 3,783
-------- -------- --------
Taxes and Interest Paid:
Income taxes paid $ 5,430 $ 6,338 $ 10,767
Interest paid $ 11,391 9,451 10,128
-------- -------- --------
Non-Cash Transactions:
Property installed by developers and conveyed to
Company $ 1,797 $ 2,082 $ 957
======== ======== ========
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NOTES TO FINANCIAL STATEMENTS
In April 1998, shareholders of Southern California Water Company (SCW) voted to
approve formation of a holding company. The formation process was completed on
July 1, 1998 at which time American States Water Company (AWR) became the parent
company. As a result of the holding company formation, SCW became one of AWR's
two operating subsidiaries. SCW will continue to be a public utility engaged
principally in the purchase, production, distribution and sale of water and also
the distributor of electricity in several mountain communities. SCW is regulated
by the California Public Utilities Commission (CPUC) as to its water and
electric business including properties, rates, services, facilities and other
matters. The other subsidiary, American States Utility Services, Inc. (ASUS) is
a new company which will perform non-regulated, water related services and
operations. The consolidated financial statements include the accounts of SCW
which comprise virtually all of AWR's assets and revenues.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of American States
Water Company and its wholly-owned subsidiaries, Southern California Water
Company and American States Utility Services, Inc., collectively referred to as
the Company. Inter-company transactions and balances have been eliminated.
The accounting records for SCW are maintained in accordance with the Uniform
System of Accounts prescribed by the California Public Utilities Commission. The
preparation of these financial statements required the use of certain estimates
by management in determining the company's assets, liabilities, revenues and
expenses.
Property and Depreciation - The Company capitalizes as utility plant the cost of
additions and replacements of retirement units. Such cost includes labor,
material and certain indirect charges. Depreciation is computed on the
straight-line, remaining-life basis. For the years 1998, 1997 and 1996, the
aggregate provisions for depreciation approximated 2.79%, 2.77% and 2.71% of
beginning of the year depreciable plant, respectively.
Interest - Interest is generally not capitalized for financial reporting
purposes as such procedure is usually not followed for rate-making purposes.
Revenues - Revenues include amounts billed to customers and an amount of
unbilled revenue representing amounts to be billed for usage from the last meter
reading date to the end of the accounting period.
Basic Earnings Per Common Share - Basic Earnings per Common Share are based upon
the weighted average number of Common Shares outstanding and net income after
deducting preferred dividend requirements. There are no dilutive securities.
Accordingly, diluted earnings per share is not calculated.
Supply Cost Balancing Accounts - As permitted by the CPUC, the Company maintains
water and electric supply cost balancing accounts to account for
under-collections and over-collections of revenues designed to recover such
costs. Recoverability of such costs is recorded in income and charged to
balancing accounts when such costs are incurred. The balancing accounts are
reversed when such costs are recovered through rate adjustments. The Company
accrues interest on its supply cost balancing accounts at the rate prevailing
for 90-day commercial paper.
Debt Issue Expense and Redemption Premiums - Original debt issue expenses are
amortized over the lives of the respective issues. Premiums paid on the early
redemption of debt which is reacquired through refunding are deferred and
amortized over the life of the debt issued to finance the refunding. The
redemption premium on debt reacquired without refunding is amortized over the
remaining period the debt would have been outstanding.
Other Credits - Advances for construction represent amounts advanced by
developers which are generally refundable at either a rate of 22% of the revenue
received from the installations for which funds were advanced or in equal annual
installments over a 40-year period. Contributions in aid of construction are
similar to advances, but require no refunding and are amortized over the useful
lives of the related property.
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25
Cash and Cash Equivalents - For purposes of the Statements of Cash Flows, cash
and cash equivalents include short-term cash investments with an original
maturity of three months or less.
Financial Instrument Risk - The Company does not carry any financial instruments
with off-balance sheet risk nor does its operations result in concentrations of
credit risk.
Fair Value of Financial Instruments - The table below estimates the fair value
of each represented class of financial instrument. For cash and cash
equivalents, accounts receivable and short-term debt, the carrying amount is
used. Otherwise, rates available to the Company at December 31, 1998 and 1997
for debt with similar terms and remaining maturities were used to estimate fair
value for long-term debt. Changes in the assumptions will produce differing
results.
1998 1997
------------------------------- -------------------------------
(dollars in thousands) Carrying amount Fair value Carrying amount Fair value
--------------- ---------- --------------- ----------
Financial assets:
Cash $ 620 $ 620 $ 4,186 $ 4,186
Accounts receivable 22,230 22,230 21,264 21,264
Financial liabilities:
Short-term debt 38,000 38,000 26,000 26,000
Long-term debt 120,809 135,092 115,326 126,930
-------- -------- -------- --------
NOTE 2 - CAPITAL STOCK
All of the series of Preferred Shares outstanding at December 31, 1998 are
redeemable at the option of the Company. At December 31, 1998, the redemption
price per share for each series of $25 Preferred Shares was $27.00, $26.50 and
$25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption
prices must be added accrued and unpaid dividends to the redemption date.
The $25 Preferred Shares, 5% Series, are subject to mandatory redemption
provisions of 1,600 shares per year. The annual aggregate mandatory redemption
requirements for this Series for the five years subsequent to December 31, 1998
is $40,000 each year.
In 1996, the Company issued 1,000,000 Common Shares through a secondary public
offering. In January 1997, the Company issued 71,500 Common Shares through a
secondary public offering. The net proceeds from this sale were used to repay a
portion of short-term debt then outstanding.
For the years ended December 31, 1998 and December 31, 1997, all shares issued
under the Company's Common Share Purchase and Dividend Reinvestment Plan (DRP)
and the 401(k) Plan were purchased on the open market. For the year ended
December 31, 1996, the Company issued 20,228 and 20,851 Common Shares,
respectively, under the DRP and the 401(k) programs. There are 89,226 and 71,408
Common Shares reserved for issuance under the DRP and the 401(k) Plan,
respectively, at December 31, 1998. Shares reserved for the 401(k) Plan are in
relation to Company matching contributions and for investment purposes by
participants.
As of December 31, 1998 there were no retained earnings restricted as to the
payment of cash dividends on Common Shares.
In August 1998, the Board of Directors adopted a Shareholder Rights Plan (Rights
Plan) and authorized a dividend distribution of one right (a Right) to purchase
1/1000th share of Junior Participating Preferred Stock for each outstanding
share of Common Stock. The Rights became effective in September 1998 and will
expire in September 2008. The Rights Plan is designed to provide shareholders'
protection and to maximize shareholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/1000th of Junior Participating
Preferred Stock at the price of $120, subject to adjustment (the Purchase
Price). Each share of Junior Participating Preferred Stock is entitled to
receive a dividend equal to 1000 times any dividend paid on common stock and 100
votes per share in any shareholder election. The Rights become exercisable upon
occurrence of a Distribution Date. A Distribution Date event occurs if (i) any
person accumulates 15% of the then outstanding Common stock, (ii) any person
presents a tender offer which caused the person's ownership level to exceed 15%
and the Board determines the tender offer not to be fair to AWR's shareholders,
or (iii) the Board determines that a shareholder maintaining a 15% interest in
the Common stock could have an adverse impact on AWR or could attempt to
pressure AWR to repurchase the holder's shares at a premium.
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26
Until the occurrence of a Distribution Date, each Right trades with the Common
Stock and is not separately transferable. When a Distribution Date occurs, AWR
would distribute separately Rights Certificates to Common Shareholders and the
Rights would subsequently trade separate from the Common Stock and each holder
of a Right, other than the acquiring person whose Rights will thereafter be
void, will have the right to receive upon exercise at its then current Purchase
Price that number of shares of Common Stock having a market value of two times
the Purchase Price of the Right. If AWR merges into the acquiring person or
enters into any transaction that unfairly favors the acquiring person or
disfavors AWR's other shareholders, the Right becomes a right to purchase Common
Stock of the acquiring person having market value of two times the Purchase
Price.
The Board of Directors may determine that in certain circumstances a proposal
which would cause a Distribution Date is in the best interest of AWR's
shareholders. Therefore, the Board of Directors may, at its option, redeem the
Rights at a redemption price of $0.01 per Right.
NOTE 3 - COMPENSATING BALANCES AND BANK DEBT
At December 31, 1998, SCW maintained $47.0 million in aggregate borrowing
capacity with three commercial banks with no compensating balances required. Of
this amount, $38.0 million was outstanding at year-end. Loans can be obtained at
the option of SCW and bear interest at rates based on floating prime borrowing
rates or at money market rates.
Short-term borrowing activities for the last three years were as follows:
December 31,
-------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
------- ------- -------
Balance Outstanding at December 31, $38,000 $26,000 $16,000
Interest Rate at December 31, 5.86% 6.39% 6.17%
Average Amount Outstanding 19,309 $15,678 $26,109
Weighted Average Annual Interest Rate 6.78% 6.27% 5.97%
Maximum Amount Outstanding $39,000 $32,000 $36,000
------- ------- -------
NOTE 4 - LONG TERM DEBT
In December 1996, SCW sold $8 million in tax-exempt debt that was issued through
the California Pollution Control Financing Authority. The funds were deposited
with a trustee and were used during 1997 to finance water main replacements.
In March 1998, SCW sold the remaining $15 million under its Series B Medium Term
Note Program and in December 1998, SCW redeemed all of its outstanding 10.10%
Notes. In January 1999, $40 million of Series C Medium Term Notes were sold. The
funds were used initially to repay short-term bank borrowings and, after that,
fund construction expenditures. The Company has no mortgage debt, and leases and
other similar financial arrangements are not material.
SCW has posted an Irrevocable Letter of Credit, which expires July 31, 1999, in
the amount of $797,979 as security for its self-insured workers' compensation
plan. SCW has also provided an Irrevocable Letter of Credit in the amount of
$6,296,000 to a trustee with respect to the variable rate obligation issued by
the Three Valleys Municipal Water District.
Annual maturities of all long-term debt, including capitalized leases, amount to
$220,139, $227,277, $236,167, $230,383 and $199,841 for the 5 years ending
December 31, 1999 through 2003, respectively.
NOTE 5 - TAXES ON INCOME
The Company provides deferred income taxes for temporary differences under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) for certain transactions which are recognized for income
tax purposes in a period different from that in which they are reported in the
financial statements. The most significant items are the tax effects of
accelerated depreciation, the supply cost balancing accounts and advances for
and contributions in aid of construction. SFAS No. 109 also requires that
rate-regulated enterprises record deferred income taxes for temporary
differences accorded flow-through treatment at the direction of a regulatory
commission. The resulting deferred tax assets and liabilities are recorded at
the expected cash flow to be reflected in future rates. Since the CPUC has
consistently permitted the recovery of pre-
26
27
viously flowed-through tax effects, SCW has established regulatory liabilities
and assets offsetting such deferred tax assets and liabilities.
Deferred investment tax credits are being amortized to other income ratably over
the lives of the property giving rise to the credits.
The significant components of deferred tax assets and deferred tax liabilities,
as reflected in the balance sheets, and the accumulated net deferred income tax
liabilities at December 31, 1998 and 1997 were:
December 31,
------------------------
(dollars in thousands) 1998 1997
-------- --------
Deferred tax assets:
Balancing accounts $ 33 $ 27
State tax effect 5,123 5,756
-------- --------
5,156 5,783
-------- --------
Deferred tax liabilities
Depreciation (43,442) (40,822)
Advances and contributions 16,694 17,005
Other property related (11,488) (9,602)
Other non-property related (8,666) (9,565)
-------- --------
(46,902) (42,984)
-------- --------
Accumulated deferred income taxes - net $(41,746) $(37,201)
-------- --------
The current and deferred components of income tax expense are as follows:
December 31,
--------------------------------------
(dollars in thousands) 1998 1997 1996
-------- -------- --------
Current
Federal $ 5,219 $ 7,205 $ 7,224
State 1,727 2,287 2,452
-------- -------- --------
Total current tax expense 6,946 9,492 9,676
-------- -------- --------
Deferred - Federal and State:
Accelerated depreciation 3,319 2,996 3,175
Balancing accounts 6 (871) (798)
State Water Project -- -- 296
Advances and contributions -- (210) (894)
California privilege year franchise tax (544) (617) (683)
Adjustments to prior year provision -- -- 410
Other (398) (566) (732)
-------- -------- --------
Total deferred tax expense 2,383 732 774
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Income taxes included in operating expenses $ 10,130 $ 9,830 $ 10,283
Income taxes included in other income and
expenses - net (801) 394 167
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Additional information regarding taxes on income is set forth in the following
table:
December 31,
----------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
-------- -------- --------
Federal taxes on pre-tax income at statutory rates $ 8,470 $ 8,451 $ 8,368
Increase (decrease) in taxes resulting from:
State income tax expense 1,654 1,864 2,051
Depreciation 944 853 716
Federal benefit of state taxes (579) (652) (718)
Adjustments to prior years' provisions (97) (143) 254
Payment of premium on redemption (813) -- --
Other - net (250) (149) (221)
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Pre-tax income $ 24,201 $ 24,145 $ 23,910
-------- -------- --------
Effective income tax rate 38.5% 42.3% 43.7%
-------- -------- --------
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company maintains a pension plan (the Plan) which provides eligible
employees (those age 21 and older, with one year of service) monthly benefits
upon retirement based on average salaries and length of service. The normal
retirement benefit is equal to 2% of the five highest consecutive years average
earnings multiplied by the number of years of credited service, up to a maximum
of 40 years, reduced by a percentage of primary social security benefits. There
is also an early retirement option. Annual contributions are made to the Plan
which comply with the funding requirements of the Employee Retirement Income
Security Act (ERISA). At December 31, 1998, the Company had 431 employees
participating in the Plan, 69 of these employees are covered by collective
bargaining agreements, the earliest of which expires in 1999.
The Company also provides all active employees medical, dental and vision care
benefits through a medical insurance plan. Eligible employees who retired prior
to age 65, and/or their spouses, were able to retain the benefits under the
active plan until reaching age 65. Upon reaching age 65, and for those employees
retiring at or after age 65, and/or their spouses, continued coverage was
provided through a Medicare supplement insurance policy paid for by the Company.
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28
The CPUC has issued a decision which provides for the recovery in rates of
tax-deductible contributions made to a separately trusteed fund. In accordance
with that decision, SCW established two separate trusts in 1995, one for those
retirees who were subject to a collectively bargained agreement and another for
all other retirees. The company's funding policy is to contribute annually an
amount at least equal to the revenues authorized to be collected through rates
for post-retirement benefit costs. Post-retirement benefit costs for 1993, 1994
and 1995 were estimated at a total of $1.6 million and have been recorded as a
regulatory asset for recovery over a 20 year period.
The following table sets forth the Plan's funded status and amounts recognized
in the company's balance sheets and the components of net pension cost and
accrued post-retirement liability at December 31, 1998 and 1997:
Pension Benefits Other Benefits
------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
-------- -------- ------- -------
Change in Benefit Obligation:
Benefit Obligation at beginning of year $ 33,410 $ 28,733 $ 4,503 $ 4,013
Service Cost 1,597 1,351 112 120
Interest Cost 2,278 2,112 283 295
Actuarial Loss/(Gain) 2,514 2,373 (368) 225
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- ------- -------
Benefit Obligation at end of year $ 38,572 $ 33,410 $ 4,363 $ 4,503
Changes in Plan Assets:
Fair Value of Plan Assets at beginning
of year $ 33,433 $ 29,240 $ 1,104 $ 548
Actual Return of Plan Assets 6,051 4,065 44 49
Employer Contributions 1,284 1,287 461 656
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- ------- -------
Fair Value of Plan Assets at end of year $ 39,541 $ 33,433 $ 1,442 $ 1,103
Reconciliation of Funded Status:
Funded Status $ 969 $ 23 $(2,921) $(3,399)
Unrecognized Transition Obligation 114 171 6,707 7,126
Unrecognized Net Loss/(Gain) 677 1,538 (1,860) (1,644)
Unrecognized Prior Service Cost 400 444 (3,427) (3,627)
-------- -------- ------- -------
Prepaid/(Accrued) Pension Cost $ 2,160 $ 2,176 $(1,501) $(1,544)
Weighted-Average Assumptions as of
December 31:
Discount Rate 6.50% 7.00% 6.50% 7.00%
Long-term Rate of Return 8.00% 8.00% 8.00% 8.00%
Salary Assumption 4.00% 4.00% -- --
A sliding scale for assumed health care cost increases was used for both
periods, starting at 11% in 1996 declining 1% per year for five years and then
remaining at 6% thereafter. The components of net periodic post-retirement
benefits cost for 1998 and 1997 are as follows:
Pension Benefits Other Benefits
---------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
------- ------- ----- -----
Components of Net Periodic Benefits
Cost
Service Cost $ 1,597 $ 1,351 $ 112 $ 120
Interest Cost 2,278 2,112 283 294
Actual Return on Plan Assets (6,051) (4,065) (44) (48)
Net Amortization 3,476 1,873 67 140
------- ------- ----- -----
Net Periodic Pension Cost $ 1,300 $ 1,271 $ 418 $ 506
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
(dollars in thousands) Increase Decrease
------------------ ------------------
Effect on Total of Service and Interest Cost $ 13 $ (11)
Components
Effect on Postretirement Benefit Obligation 206 (180)
The Company has a 401(k) Investment Incentive Program under which employees may
invest a percentage of their pay, up to a maximum investment prescribed by law,
in an investment program managed by an outside investment manager. Company
contributions to the 401(k) are based upon a percentage of individual employee
contributions and, for 1998, 1997 and 1996, totaled $874,113, $785,687, and
$839,000, respectively.
NOTE 7 - BUSINESS RISKS AND CONCENTRATION OF SALES
The Company's utility operations are engaged in supplying water and electric
service to the public. The Company is required to provide service and grant
credit to customers within its defined service areas. Although the Company has a
diversified base of residential, industrial and other customers, revenues
derived from commercial and residential water customers accounted for
approximately 91% and 93% of total water revenues in 1998 and 1997. The Company
faces additional risks associated with weather conditions,
28
29
adequacy and quality of water supplies, regulatory decisions, pronouncements and
laws, water-related litigation, general business conditions and condemnation.
Approximately 39% of the Company's water supply is purchased from wholesalers of
imported water, with the remainder produced from Company-owned wells. The long
term availability of imported water supplies is dependent upon, among other
things, drought conditions throughout the state, increases in population, water
quality standards and legislation that may potentially reduce water supplies.
The Company does not anticipate any constraints on its imported water supplies
in 1999.
NOTE 8 - CONTINGENCIES
In 1998, ASUS was formed to pursue non-regulated opportunities such as long-term
leases, and operation and maintenance contracts of governmentally-owned water
and wastewater systems. As a result, the Company anticipates terminating its
Golden State Water Company joint venture during 1999. Accordingly, the Company
reserved approximately $336,000 against future losses and capital account
adjustments.
Hearings were held before the CPUC in November 1998 on SCW's filing seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project. In
February 1999, the Administrative Law Judge in this proceeding issued his
proposed decision that denied rate recovery of SCW's costs in the project. A
final order from the CPUC is anticipated in 1999. SCW is unable to predict if
the CPUC will authorize recovery of all or any of the costs associated with its
participation in the project. Alternate forms of recovery are also being pursued
including assessment of costs to new construction based on an equivalent
dwelling unit charge or other applicable unit of measurement, which assessment
will require CPUC approval prior to implementation or, failing that, sale of
SCW's participation in the project.
SCW has been named as a defendant in seven lawsuits which allege that the SCW
delivered contaminated water to its customers. Plaintiffs in these actions seek
damages, including general, special, and punitive damages, according to proof of
trial, as well as attorney's fees on certain causes of action, costs of suit,
and other unspecified relief. Stays have been issued by the respective courts in
five of these cases pending the outcome of the CPUC's investigation into water
quality discussed below. One action has been dismissed against SCW and SCW has
petitioned for dismissal in the remaining case. Most activity related to these
lawsuits has ceased due to the stays although SCW anticipates that plaintiff's
attorneys will petition the courts to reconsider their prior decisions. In light
of the breadth of plaintiff's claims, the lack of factual information regarding
plaintiff's claims and injuries, if any, the fact that no discovery has yet been
completed, SCW is unable to determine at this time what, if any, potential
liability it may have with respect to these claims. SCW intends to vigorously
defend itself against these allegations. Management can not predict the outcome
of these proceedings and if SCW is found liable, SCW would pursue recovery
through its insurance coverage providers.
In response to those lawsuits and similar actions, in March 1998 the CPUC issued
an Order Instituting Investigation (OII) directed to all Class A and B water
utilities in the state of California, including SCW, into whether existing
standards and policies regarding drinking water quality adequately protect the
public health and whether those standards and policies are being uniformly
complied with by those water utilities. The OII notes the constitutional and
statutory jurisdiction of the CPUC and the DOHS to establish and enforce
adherence to water quality standards for water delivered by utilities to their
customers and, in the case of the CPUC, to establish rates which permit water
utilities to furnish safe water, meeting the established water quality standards
at prices which are both affordable and that allow the utility to earn a
reasonable return on its investment. SCW has made its filing in this proceeding
on a series of questions dealing with the safety of current drinking water
standards, compliance by water utilities with such standards, appropriate
remedies for failure to comply with safe drinking standards and whether stricter
or additional safety drinking water standards are required. The Water Division
of the CPUC has issued its report based on these filings by the utilities.
Although the OII leaves open the possibility of evidentiary hearings and further
action by the CPUC, SCW is currently unable to predict the outcome of this
proceeding.
29
30
Management believes that proper insurance coverage and reserves are in place to
insure against anticipated property, general and product liability and workers'
compensation claims.
NOTE 9 - CONSTRUCTION PROGRAM
SCW's 1999 construction budget provides for gross expenditures of approximately
$46.5 million of which $4.4 million is anticipated to be obtained from
developers and others. AWR and ASUS have no material capital expenditure
programs.
NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The table below presents SCW's provision for doubtful accounts charged to
expense and accounts written off, net of recoveries for the last three years.
December 31,
---------------------------------
(dollars in thousands) 1998 1997 1996
----- ----- -----
Balance at beginning of year $ 466 $ 387 $ 648
Provision charged to expense 631 707 571
Accounts written off, net of recoveries (694) (628) (832)
----- ----- -----
Balance at end of year $ 403 $ 466 $ 387
----- ----- -----
Neither AWR nor ASUS have established any provision for doubtful accounts.
NOTE 11 - BUSINESS SEGMENTS
The Company has no material operations other than its SCW subsidiary. The tables
below set forth information relating to SCW's operating segments. SCW manages
its operations on a regional basis using the five categories below as
broad-level measures of profitability. In addition to the amounts set forth,
certain assets have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.
(dollars in thousands) Year Ended December 31, 1998
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- --------- --------- --------
Operating revenues $24,927 $ 76,304 $ 33,552 $13,211
Operating income before income 6,799 15,615 9,261 3,847
taxes
Identifiable assets 97,463 176,832 115,475 26,719
Depreciation expense 2,551 4,755 3,324 1,640
Capital additions $13,206 $ 20,650 $ 9,714 $ 1,699
------- -------- -------- -------
(dollars in thousands) Year Ended December 31, 1997
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- -------- ---------- --------
Operating revenues $24,340 $ 81,200 $ 35,436 $12,779
Operating income before income 5,897 13,032 10,270 4,089
taxes
Identifiable assets 87,039 162,037 109,436 25,095
Depreciation expense 2,306 4,483 3,162 1,001
Capital additions $10,065 $ 18,882 $ 8,139 $ 2,140
------- -------- -------- -------
(dollars in thousands) Year Ended December 31, 1996
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- --------- ---------- --------
Operating revenues $23,536 $ 81,474 $ 34,980 $11,540
Operating income before income 4,705 14,813 10,776 3,418
taxes
Identifiable assets 79,974 148,078 104,390 25,333
Depreciation expense 2,109 4,131 2,939 924
Capital additions $ 5,975 $ 19,370 $ 6,537 $ 2,492
------- -------- -------- -------
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial information presented below is unaudited. The business
of the Company is of a seasonal nature and it is management's opinion that
comparisons of earnings for the quarter periods do not reflect overall trends
and changes in the Company's operations.
Operating Operating Earnings
Revenues Income Net Income per Share
-------------------- ------------------ ------------------ --------------
(in thousands, except
per share amounts) 1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- ------- ------- ------- ------- ----- -----
First Quarter $ 29,955 $ 32,206 $ 4,382 $ 3,738 $ 1,843 $ 1,312 $0.20 $0.14
Second Quarter 35,001 39,343 5,586 5,372 2,767 3,080 0.31 0.34
Third Quarter 47,002 45,700 9,432 8,385 6,374 6,044 0.71 0.67
Fourth Quarter 36,102 36,506 5,661 5,963 3,639 3,623 0.40 0.41
-------- -------- ------- ------- ------- ------- ----- -----
Year $148,060 $153,755 $25,061 $23,458 $14,623 $14,059 $1.62 $1.56
-------- -------- ------- ------- ------- ------- ----- -----
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31
NOTE 13 - YEAR 2000 READINESS
The Company continues to evaluate its exposure to the Year 2000 (Y2K) problem
that arises from the fact that many existing computer systems may contain date
sensitive embedded technology that uses only two digits to identify a year in
the date field. Based on the assumption that the first two digits of the date
field are always "19", such systems may misinterpret dates after December 31,
1999. Because the Company is dependent upon the proper functioning of these
computer systems and other equipment containing date sensitive technology, a
failure of these systems could have a material and adverse affect on the Company
resulting in business interruption or shutdown, financial loss, regulatory
citations and legal liability.
The Company has been actively assessing its Y2K readiness since early 1997 and
has inventoried its significant computer hardware and software programs. Since
the Company is dependent upon its management information and customer service
systems, upgrades to these systems have been a priority. The Company has, since
1995, been in the process of replacing and/or upgrading as necessary its core
business information and operating systems with newer technologies, all of which
will be Y2K ready. All major upgrades to these systems are completed and were
operational at year-end 1998. Costs associated with the implementation and
upgrade of major management information and customer service software systems,
as well as upgrades to mainframe hardware systems, have been approved by the
CPUC and are being recovered through rates.
In addition to work being done on its internal systems, the Company has sought
compliance certification from external vendors and service providers. Testing on
the Company's interface with financial and other institutions with which it does
business is being conducted to ensure Y2K readiness. In order to more fully
address Y2K readiness of its field equipment, major vendors and service
providers, the Company engaged the services of a nationally-recognized business
consulting firm and has completed its written plan to address the Y2K issue. The
Company has established a Year 2000 Task Force consisting of senior management
and operating personnel which will complete the inventory of computer systems
and other devices with embedded technology, as well as other considerations
potentially not revealed in preliminary internal analyses.
The Company's general process for addressing the Y2K issue is (i) to inventory
all systems that may have a potential Y2K impact, (ii) to determine the
materiality of these non-Y2K ready systems, (iii) to replace and test, correct
and test, or prepare for the failure of material items that have been determined
to be non-Y2K ready, and (iv) to prepare contingency plans. Some, less critical
systems may not be fully Y2K ready, but are not anticipated to materially affect
the Company's operations.
The Company is significantly dependent on third party suppliers, such as energy
and telecommunication companies and wholesale water suppliers. In order to
conduct its business, the Company has initiated due diligence with certain of
its major service providers to address their Y2K readiness. In the event that
such suppliers might be adversely affected by Y2K, the Company is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems, the use
of electric generators capable of providing power during a black-out. The
Company does not have, and may never fully have, sufficient information about
the Y2K exposure or remediation plans of these third parties to adequately
predict the risks posed by them to the Company. If the third parties have Y2K
problems that are not remedied, resulting problems could include loss of utility
services and disruption of water supplies.
To date, there have been no significant costs associated with Y2K readiness that
have not been approved by the CPUC for recovery through rates. The Company
estimates that it may incur up to $800,000 in costs depending on the results of
on-going tests, to make critical systems Y2K ready. The Company believes that
the future costs, which are prudently incurred, will also be allowed for
recovery through rates. The CPUC has notified all utilities under its
jurisdiction, including the Company, that it will review their Y2K preparations.
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REPORT OF MANAGEMENT
The financial statements contained in this annual report were prepared by the
management of American States Water Company, which is responsible for their
integrity and objectivity. The financial statements were prepared in accordance
with generally accepted accounting principles and include, where necessary,
amounts based upon management's best estimates and judgments. All other
financial information in the annual report is consistent with the financial
statements and is also the responsibility of management.
The Company maintains systems of internal control which are designed to help
safeguard the assets of the Company and provide reasonable assurance that
accounting and financial records can be relied upon to generate accurate
financial statements. These systems include the hiring and training of qualified
personnel, appropriate segregation of duties, delegation of authority and an
internal audit function which has reporting responsibility to the Audit
Committee of the Board of Directors.
The Audit Committee, composed of three outside directors, exercises oversight of
management's discharge of its responsibilities regarding the systems of internal
control and financial reporting. The committee periodically meets with
management, the internal auditor and the independent accountants to review the
work and findings of each. The committee also reviews the qualifications of, and
recommends to the Board of Directors, a firm of independent accountants.
The independent accountants, Arthur Andersen LLP, have performed an audit of the
financial statements in accordance with generally accepted auditing standards.
Their audit gave consideration to the company's system of internal accounting
control as a basis for establishing the nature, timing and scope of their work.
The result of their work is expressed in their Report of Independent Public
Accountants.
/s/ Floyd E. Wicks /s/ McClellan Harris III
Floyd E. Wicks McClellan Harris III
President, Chief Executive Officer Chief Financial Officer,
Vice President - Finance,
Treasurer and Corporate Secretary
February 8, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of American States Water Company:
We have audited the balance sheets and statements of capitalization of American
States Water Company (a California corporation) as of December 31, 1998 and 1997
and the related statements of income, changes in common shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American States Water Company
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Anderson
Arthur Andersen LLP
Los Angeles, California
February 8, 1999
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SHAREHOLDER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
All shareholders are invited to attend the Annual Meeting of Shareholders which
will be held on Tuesday, April 27, 1999, beginning at 10:00 am, at the Industry
Hills Sheraton, One Industry Hills Parkway, City of Industry, California 91744.
Notice of meeting and proxy materials will be mailed.
STOCK LISTING
Common Shares of American States Water Company are traded on the New York Stock
Exchange under the symbol AWR. The high and low sales prices and dividends paid
on the Common Shares for the past two years were:
1998 High Low Dividends Paid
------- ------- --------------
First Quarter $26 $23 1/16 $0.315
Second Quarter 27 1/8 21 1/8 0.315
Third Quarter 27 23 1/4 0.315
Fourth Quarter 29 1/4 24 7/8 0.315
------- ------- ------
$1.260
1997
First Quarter $23 $20 5/8 $0.310
Second Quarter 24 1/2 20 1/4 0.310
Third Quarter 24 5/8 20 1/2 0.310
Fourth Quarter 25 5/8 21 1/2 0.315
------- ------- ------
$1.245
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Arthur Andersen LLP
633 West Fifth Street
Los Angeles, CA 90071
CORPORATE REPORTS
Shareholders with questions, or who wish to obtain a copy of the Company's
reports to the Securities and Exchange Commission without charge, should
contact:
AMERICAN STATES WATER COMPANY
Attn: Corporate Secretary
630 East Foothill Boulevard
San Dimas, CA 91773
Phone: (909) 394-3600
Fax: (909) 394-1382
SHAREHOLDER ASSISTANCE
Shareholders with questions about replacement of dividend checks, transferring
stock, replacing lost or stolen certificates or other matters related to their
ownership of stock, should contact:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(888) 816-6998
http://www.cmssonline.com
DIVIDEND REINVESTMENT AND COMMON SHARE PURCHASE PLAN
The Company has a Dividend Reinvestment and Common Share Purchase Plan that
offers shareholders of record a convenient way to increase their holdings by
reinvesting all or part of their cash dividends in additional Common Shares of
the Company. A prospectus and enrollment form may be obtained from ChaseMellon
Shareholder Services, L.L.C. or from the Company.
1999 DIVIDEND SCHEDULE
The following schedule shows the anticipated Common and Preferred Share record
and payment dates for 1999:
Record Dates Payment Dates
February 8 March 1
May 10 June 1
August 9 September 1
November 8 December 1
INTERNET ADDRESS
http://www.aswater.com
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STATISTICAL REVIEW
(dollars in thousands, except per share and per
customer amounts) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Financial Information
Revenues by Classification
Residential and Commercial $123,271 $131,007 $126,456 $106,480 $100,796
Industrial 1,917 1,998 1,847 1,674 1,459
Fire Service 1,329 1,319 1,269 1,211 1,181
Other 8,342 6,664 10,425 9,557 8,651
Total Water 134,859 140,988 139,997 118,922 112,087
Electric 13,201 12,767 11,532 10,891 10,588
Total operation revenues 148,060 153,755 151,529 129,813 122,675
Net Income 14,623 14,059 13,460 12,165 11,338
Earnings available for common shareholders 14,533 13,967 13,366 12,069 11,240
Earnings per common share 1.62 1.56 1.69 1.54 1.43
Dividends declared per common share 1.26 1.25 1.23 1.21 1.20
Book value per common share 17.23 16.86 16.52 15.50 15.16
Total assets 484,671 457,074 430,922 406,255 383,627
Net Utility plant 414,753 383,623 357,776 334,968 317,879
Capital additions 45,269 39,226 34,374 28,761 30,307
Long-term debt 120,809 115,286 107,190 107,455 92,891
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred shares -- mandatory redemption 400 440 480 520 560
Investment per customer $ 2,099 $ 1,900 $ 1,808 $ 1,688 $ 1,578
Operation Information
Water sold by Classification (mg)
Residential and Commercial 49,302 54,623 52,843 49,641 51,084
Industrial 832 899 828 802 818
Fire Service 649 417 831 130 308
Other 4,201 5,070 4,932 4,706 4,537
Total Water 54,984 61,009 59,434 55,279 56,747
Total electric sales (mwh) 123,791 121,315 117,139 111,519 110,234
Customers by Classification
Residential and Commercial 237,157 236,270 235,244 233,920 232,879
Industrial 332 331 333 326 323
Fire Service 3,112 2,964 2,925 2,909 2,896
Other 2,033 2,016 2,046 1,807 1,807
Total Water 242,634 241,581 240,548 238,962 237,905
Electric 20,865 20,698 20,437 20,475 20,331
Total company 263,499 262,279 260,985 259,437 258,236
Water Production by Source (mg)
Purchased 22,885 28,894 27,147 24,356 25,940
Pumped -- electric 35,596 34,531 35,216 34,105 33,337
Pumped -- gas 75 316 40 218 198
Gravity and Surface 74 1,147 932 979 967
Total Supply 58,630 64,888 63,335 59,658 60,442
Miles of Main in Service 2,768 2,638 2,603 2,587 2,567
Number of Employees 470 467 463 448 467
-------- -------- -------- -------- --------
mg=Millions of Gallons mwh=Mega-Watt Hours
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35
(dollars in thousands, except per share and per
customer amounts) 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
Financial Information
Revenues by Classification
Residential and Commercial $ 86,918 $ 82,112 $ 68,063 $ 69,161 $ 67,404
Industrial 1,134 1,110 1,019 1,021 1,074
Fire Service 1,149 1,067 927 954 785
Other 8,954 6,336 8,273 5,150 4,909
Total Water 98,155 90,625 78,282 76,286 74,172
Electric 10,351 10,035 12,378 11,054 10,043
Total operation revenues 108,506 100,660 90,660 87,340 84,215
Net Income 12,026 12,142 15,363 8,907 8,730
Earnings available for common shareholders 11,926 12,040 15,259 8,801 8,622
Earnings per common share 1.66 1.82 2.34 1.40 1.38
Dividends declared per common share 1.19 1.15 1.10 1.08 1.04
Book value per common share 14.92 13.28 12.59 11.31 10.97
Total assets 358,533 312,491 293,444 268,028 254,346
Net Utility plant 294,990 277,525 258,558 235,713 214,465
Capital additions 28,626 26,975 32,472 27,078 25,726
Long-term debt 84,621 84,195 82,634 67,246 67,767
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred shares -- mandatory redemption 600 640 680 720 760
Investment per customer $ 1,480 $ 1,388 $ 1,297 $ 1,213 $ 1,125
Operation Information
Water sold by Classification (mg)
Residential and Commercial 48,033 47,541 44,528 51,696 51,841
Industrial 679 699 737 937 966
Fire Service 33 23 11 50 25
Other 4,019 3,890 3,807 4,511 4,635
Total Water 52,764 52,153 49,083 57,194 57,467
Total electric sales (mwh) 106,234 105,346 101,923 103,376 97,583
Customers by Classification
Residential and Commercial 231,966 230,956 230,175 221,888 220,876
Industrial 322 330 347 376 385
Fire Service 2,877 2,846 2,779 2,610 2,562
Other 1,820 1,795 1,812 1,819 1,813
Total Water 236,985 235,927 235,113 226,693 225,636
Electric 20,131 20,039 19,780 19,559 19,215
Total company 257,116 255,966 254,893 246,252 244,851
Water Production by Source (mg)
Purchased 25,156 24,377 23,221 31,021 32,189
Pumped -- electric 32,056 30,406 28,640 28,923 29,733
Pumped -- gas 195 177 245 270 306
Gravity and Surface 658 1,249 1,046 1,255 361
Total Supply 58,065 56,209 53,152 61,469 62,589
Miles of Main in Service 2,560 2,549 2,535 2,517 2,488
Number of Employees 486 445 422 410 388
-------- -------- -------- -------- --------
mg=Millions of Gallons mwh=Mega-Watt Hours
35
36
[MAP P. 36]
CUSTOMER SERVICE AREAS SERVED BY SOUTHERN CALIFORNIA WATER COMPANY
Number of Customers
Region I
Northern District
Arden-Cordova 13,700
Bay Point 4,900
Clearlake 2,000
Coastal District
Los Osos 3,100
Ojai 2,800
Santa Maria 12,600
Simi Valley 12,500
Region II
Central District
Central Basin East 19,600
Central Basin West 19,300
Culver City 9,300
Orange County District
Los Alamitos 26,200
Placentia 14,400
Southwest District 49,300
Region III
Foothill District
Claremont 10,400
San Dimas 15,600
San Gabriel Valley 11,800
Mountain/Desert District
Apple Valley 2,300
Barstow 8,400
Calipatria 1,100
Morongo Valley 800
Wrightwood 2,500
Total Water 242,600
Bear Valley Electric 20,900
Total Customers 263,500
36
37
CORPORATE INFORMATION
Board of Directors of American States Water Company, Southern California Water
Company and American States Utility Services, Inc.
W. V. Caveney (72,18)(a,c)
Chairman of the Board
Floyd E. Wicks (55,9)(c,d)
President, Chief Executive Officer
James L Anderson (57,2)(a,c)
Senior Vice President
Americo Life Inc.
Laguna Hills, California
Jean E. Auer (62,3)(a,b,c,d)
Consultant and member of the
Board of Directors of the Water
Education Foundation
Vice Mayor of the
Town of Hillsborough, California
N. P. Dodge, Jr. (62,8)(a,b)
President, N.P. Dodge Company
Omaha, Nebraska
Anne M. Holloway (45,1)(a,c)
Vice President, Peterson Worldwide, LLP
Atherton, California
Robert F. Kathol (57,3)(a,b)
Executive Vice President
Kirkpatrick, Pettis, Smith, Polian Inc.
Omaha, Nebraska
Lloyd E. Ross (57,3)(a,c,d)
Managing Partner, Invermex L.P.
Irvine, California
ELECTED OFFICERS
W. V. Caveney (72,30)(e)
Chairman of the Board
Floyd E. Wicks (55,11)(e)
President, Chief Executive Officer
McClellan Harris III (47,8)(e)
Chief Financial Officer, Vice President-Finance,
Treasurer and Corporate Secretary
Joel A. Dickson (46,8)(f)
Vice President-Business Development
Donald K. Saddoris (55,31)(g)
Vice President-Customer Service, Region I
Randell J. Vogel (63,6)(g)(h)
Vice President-Customer Service, Region II
James B. Gallagher (44,11)(g)
Vice President-Customer Service, Region III
Joseph F. Young (53,21)(g)
Vice President-Government Affairs
Denise L. Kruger (34,6)(g)
Vice President-Water Quality
Susan L. Conway (37,10)(g)
Vice President-Regulatory Affairs
(age, years of service as a Board member)
(a) Member - Compensation Committee
(b) Member - Audit Committee
(c) Member - Business Opportunities Committee
(d) Member - Nominating Committee
(e) Holds same title in Southern California Water Company and American
States Utility Services, Inc.
(f) Holds same title in American States Utility Services, Inc. and holds
title of Vice President - Customer and
Operations Support in Southern California Water Company
(g) Officer of Southern California Water Company only
(h) Mr. Vogel retired in February 1999
38
[PHOTO P. IBC]
IBC
39
AMERICAN STATES WATER COMPANY
630 East Foothill Boulevard, San Dimas, California 91773-1212
(909) 394-3600
www.aswater.com
BACK COVER
40
APPENDIX
Page 2
Three graphical representations displaying Book Value per Common Share, Basic
Earnings per Common Share and Dividends Declared per Common Share from 1994
through 1998. Book Value per Share was $15.16 in 1994, $15.50 in 1995, $16.52 in
1996, $16.86 in 1997 and $17.23 in 1998. Basic Earnings per Common Share was
$1.43 in 1994, $1.54 in 1995, $1.69 in 1996, $1.56 in 1997 and $1.62 in 1998.
Dividends Declared per Common Share was $1.20 in 1994, $1.21 in 1995, $1.23 in
1996, $1.25 in 1997 and 1.26 in 1998.
Page 5
A 2 by 2 inch photograph of W. V. Caveney, Chairman and Floyd E. Wicks,
President and Chief Executive Officer.
Page 6
A table reflecting asset growth from 1929-1998. At the end of the first 48 years
of the Company's existence between 1929 and 1977, Total Assets equaled $102.0
million. At the end of the period 1977 through 1986, a period of 9 years, Total
Assets equaled $209.0 million. At the end of the period 1986 through 1992, a
period of 6 years, Total Assets equaled $313.0 million. At the end of the period
1992 through 1995, a period of 3 years, Total Assets equaled $406.0 million. At
the end of the period 1995 through 1998, a 3 year period, Total Assets equaled
$485.0 million
Page 7
Graphical representation of Total Assets for the period 1994 through 1998. Total
Assets equaled $383,627,000 in 1994, $406,255,000 in 1995, $430,922,000 in 1996,
$457,074 in 1997, and $484,671 in 1998.
Page 9
Five pictorial representations including: Family of three with drinking glasses,
active lawn sprinklers, man reading newspaper while sitting next to a fountain,
children in swimming pool talking with adult male on edge of pool, and an aerial
view of a residential development.
Page 10
Graphical representation of Net Income for the period of 1994 through 1998. Net
Income was $11,338,000 in 1994, $12,165,000 in 1995, $13,460,000 in 1996,
$14,059,000 in 1997 and $14,623,000 in 1998.
Page 11
Graphical representation of Total Capitalization and Net Utility Plant for the
period 1994 through 1998. Total Capitalization was $214,013,000 in 1994,
$231,151,000 in 1995, $256,036,000 in 1996, $268,379,000 in 1997, and
$277,108,000 in 1998. Net Utility Plant was $317,879,000 in 1994, $334,968,000
in 1995, $357,776,000 in 1996, $383,623,000 in 1997, and $414,753,000 in 1998.
Page 12
A 2 by 1 1/2 inch photograph of W.V. Caveney, Chairman of the Board.
Page 36
A topographical map, with altitude legend, of the state of California with
bullet points marking all of Southern California Water Company's Customer
Service Areas.
Page IBC
A 3 3/8 by 2 1/2 inch photograph of the Board of Directors of American States
Water Company, Southern California Water Company and American States Utility
Services, Inc. From the left, seated, are Lloyd E. Ross and James L. Anderson.
From the left, standing, are Anne M. Holloway, W. V. Caveney, Jean E. Auer,
Robert F. Kathol, N. P. Dodge, Jr., Floyd E. Wicks.
1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
1.0 American States Water Company (Commission File No. 333-47647)
1.1 Southern California Water Company
1.2 American States Utility Services, Incorporated
2.0 Southern California Water Company (Commission File No. 000-01121)
2.1 No material subsidiaries
1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated March 26, 1999
in the American States Water Company and Southern California Water Company
Registration Statements below. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1998.
Registration Form Registration No. Effective Date
S - 3 33-42218 August 22, 1991
S - 8 33-71226 November 4, 1993
S - 3 333-68201 December 16, 1998
S - 3 333-68299 December 22, 1998
s/ ARTHUR ANDERSEN LLP
- ----------------------------
Los Angeles, California
March 26, 1999
UT
0001056903
SOUTHERN CALIFORNIA WATER COMPANY
1,000
YEAR
DEC-31-1998
JAN-01-1998
DEC-31-1998
PER-BOOK
414,753
1,077
39,288
29,553
0
484,671
22,394
74,937
56,968
154,299
440
1,600
120,112
38,000
1
0
95
40
916
125
169,564
484,671
148,060
10,130
112,869
122,999
25,061
769
25,830
11,207
14,623
90
14,533
11,296
0
31,404
1.62
1.62
