UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or __ TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to Commission file number 0-18516 ARTESIAN RESOURCES CORPORATION (exact name of registrant as specified in its charter) State or other jurisdiction of incorporation or organization: Delaware I.R.S. Employer Identification Number: 51-0002090 Address of principal executive officers: 664 Churchmans Road, Newark, Delaware Zip Code: 19702 Registrant's telephone number, including area code: (302) 453-6900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No As of November 4, 1999, 1,603,803 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding. ARTESIAN RESOURCES CORPORATION INDEX TO FORM 10-Q Part I - Financial Information: Page(s) Item 1 - Financial Statements Consolidated Balance Sheet - September 30, 1999 and December 31, 1998 3 Consolidated Statement of Income for the quarters ended September 30, 1999 and 1998 4 Consolidated Statement of Income for the nine months ended September 30, 1999 and 1998 5 Consolidated Statement of Retained Earnings for the nine months ended September 30, 1999 and 1998 5 Consolidated Statement of Cash Flows for the nine months ended September 30, 1999 and 1998 6 Notes to the Consolidated Financial Statements 7-10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 14 Part II - Other Information: Item 1 - Legal Proceedings 14 Item 2 - Changes in Securities 14 Item 3 - Defaults Upon Senior Securities 14 Item 4 - Submission of Matters to a Vote of Security Holders 14 Item 5 - Other Information 14 Item 6 - Exhibits and Reports on Form 8-K 14-16 Signatures 17 Part I - Financial Information Item I - Financial Statements ARTESIAN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEET (In thousands) Unaudited September 30, 1999 December 31, 1998 ASSETS Utility plant, at original cost less accumulated depreciation $119,312 $109,780 Current assets Cash and cash equivalents 279 114 Accounts receivable, net 2,598 1,968 Unbilled operating revenues 2,299 1,981 Materials and supplies-at cost on FIFO basis 623 617 Prepaid property taxes 876 552 Prepaid expenses and other 265 327 6,940 5,559 Other assets Non-utility property (less accumulated depreciation 1999-$157;1998-$152) 275 280 Other deferred assets 1,017 1,071 1,292 1,351 Regulatory assets, net 2,392 2,686 $129,936 $119,376 LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' equity Common stock $ 2,148 $ 1,806 Additional paid-in capital 24,069 18,073 Retained earnings 5,578 7,785 Treasury Stock (153) (3) Preferred stock 272 272 Total stockholders' equity 31,914 27,933 Preferred stock-mandatorily redeemable, net of current portion 400 500 Long-term debt, net of current portion 35,125 32,053 67,439 60,486 Current liabilities Notes payable 7,452 7,704 Current portion of long-term debt 1,138 43 Current portion of mandatorily redeemable preferred stock 100 100 Accounts payable 2,582 3,148 Overdraft payable 134 635 State and federal taxes 770 --- Deferred income taxes --- 190 Interest accrued 906 940 Customer deposits 365 388 Dividends payable 17 --- Reserve for temporary rate increase 434 --- Other 777 903 14,675 14,051 Deferred credits and other liabilities Net advances for construction 18,719 18,337 Postretirement benefit obligation 1,562 1,627 Deferred investment tax credits 972 994 Deferred income taxes 2,220 1,471 23,473 22,429 Net contributions in aid of construction 24,349 22,410 $129,936 $119,376 See notes to the consolidated financial statements. ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF INCOME Unaudited (In thousands, except share and per share amounts) For the Quarter Ended September 30, 1999 1998 OPERATING REVENUES Water sales $ 7,265 $ 6,632 Other utility operating revenue 100 90 Non utility revenue 9 --- 7,374 6,722 OPERATING EXPENSES Utility operating expenses 3,589 3,721 Non-utility operating expenses 6 --- Related party expenses 45 57 Depreciation and amortization 624 553 State and federal income taxes 761 494 Property and other taxes 413 370 5,438 5,195 OPERATING INCOME 1,936 1,527 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION 26 31 OTHER INCOME (EXPENSE), NET 13 15 INCOME BEFORE INTEREST CHARGES 1,975 1,573 INTEREST CHARGES 832 825 NET INCOME $ 1,143 $ 748 DIVIDENDS ON PREFERRED STOCK 17 20 NET INCOME APPLICABLE TO COMMON STOCK $ 1,126 $ 728 INCOME PER COMMON SHARE: Basic $ .56 $ .40 Diluted $ .55 $ .40 CASH DIVIDEND PER COMMON SHARE $ .27 $ .255 AVERAGE COMMON SHARES OUTSTANDING Basic 1,994,478 1,798,781 Diluted 2,031,007 1,819,195 See notes to the consolidated financial statements. ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF INCOME Unaudited (In thousands, except share and per share amounts) For the Nine Months Ended September 30, 1999 1998 OPERATING REVENUES Water sales $ 19,808 $ 18,747 Other utility operating revenue 285 267 Non utility revenue 14 --- 20,107 19,014 OPERATING EXPENSES Utility operating expenses 11,021 10,487 Related party expenses 159 170 Non-utility operating expenses 25 7 Depreciation and amortization 1,789 1,632 State and federal income taxes 1,475 1,387 Property and other taxes 1,207 1,116 15,676 14,799 OPERATING INCOME 4,431 4,215 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION 106 149 OTHER INCOME (EXPENSE), NET 39 39 INCOME BEFORE INTEREST CHARGES 4,576 4,403 INTEREST CHARGES 2,362 2,314 NET INCOME 2,214 2,089 DIVIDENDS ON PREFERRED STOCK 71 62 NET INCOME APPLICABLE TO COMMON STOCK $ 2,143 $ 2,027 INCOME PER COMMON SHARE: Basic $ 1.10 $ 1.13 Diluted $ 1.08 $ 1.12 CASH DIVIDEND PER COMMON SHARE $ 0.79 $ 0.715 AVERAGE COMMON SHARES OUTSTANDING Basic 1,948,306 1,795,150 Diluted 1,981,962 1,812,765 See notes to the consolidated financial statements. CONSOLIDATED STATEMENT OF RETAINED EARNINGS Unaudited (In thousands) For the Nine Months Ended September 30, 1999 1998 Balance, beginning of period $ 7,785 $ 6,887 Net income 2,214 2,089 9,999 8,976 Less: Dividends 1,634 1,363 Common stock reacquired 2,787 --- Balance, end of period $ 5,578 $ 7,613 See notes to the consolidated financial statements. ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited (In thousands) For the Nine Months Ended September 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 2,214 $ 2,089 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,697 1,516 Deferred income taxes, net 537 192 Allowance for funds used during construction (106) (149) Changes in Assets and Liabilities: Accounts receivable (630) 23 Unbilled operating revenue (318) (307) Materials and supplies (6) 27 Accrued state and federal income taxes 770 788 Prepaid property taxes (324) (274) Prepaid expenses and other 62 39 Other deferred assets 54 80 Regulatory assets 294 33 Postretirement benefit obligation (65) (46) Accounts payable (566) 671 Interest accrued (34) (630) Customer deposits and other, net 285 282 NET CASH PROVIDED BY OPERATING ACTIVITIES 3,864 4,334 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (net of AFUDC) (11,496) (12,375) Proceeds from sale of assets 6 14 NET CASH USED IN INVESTING ACTIVITIES (11,490) (12,361) CASH FLOW FROM FINANCING ACTIVITIES Net(repayments)borrowings under line of credit agreement (252) 7,820 Overdraft payable (501) 86 Net advances and contributions in aid of construction 2,694 1,338 Net proceeds from stock transactions 7,887 380 Dividends (1,617) (1,343) Repayment of long-term debt (278) --- Principal payments under capital lease obligations (42) (40) Retirement of preferred stock (100) (112) NET CASH PROVIDED BY FINANCING ACTIVITIES 7,791 8,129 NET INCREASE IN CASH AND CASH EQUIVALENTS 165 102 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 114 146 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 279 $ 248 Supplemental Disclosures of Cash Flow Information: Interest paid $ 2,371 $ 1,663 Income taxes paid $ 156 $ 480 See Notes to the consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL The unaudited financial statements of Artesian Resources Corporation and its wholly-owned subsidiaries (the Company or Artesian Resources), including its principal operating company, Artesian Water Company, Inc. (Artesian Water), presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures prescribed by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. The accompanying consolidated financial statements have not been examined by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management such consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly summarize the Company's financial position and results of operations. The results of operations for the quarter and nine months ended September 30, 1999 may not be indicative of the results that may be expected for the year ending December 31, 1999. NOTE 2 - REGULATORY ASSETS Certain expenses, which are recoverable through rates as permitted by the State of Delaware Public Service Commission (PSC), are deferred and amortized during future periods using various methods. Expenses related to rate proceedings are amortized on a straight-line basis over a period of two to five years. The post retirement benefit obligation, which is being amortized over twenty years is adjusted for the difference between the net periodic post retirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customer reverse. Regulatory assets, net of amortization, comprise: September 30, 1999 December 31,1998 (in thousands) Postretirement benefit obligation $1,562 $1,627 Deferred income taxes recoverable in future rates 684 695 Expense of rate proceedings 146 364 $2,392 $2,686 NOTE 3 - DEBT On April 29, 1999, Artesian entered into an agreement with Helena C. Taylor and Ellis D. Taylor (the "Taylors") for the purpose of repurchasing 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock ("the Stock") owned by the Taylors. On May 4, 1999, Artesian executed a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock. The Note is payable quarterly, on a calendar basis, over a four year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylors would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect increases in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to the quarterly payment. At September 30, 1999, Artesian had $4,171,900 outstanding under this promissory note. NOTE 4 - NON-UTILITY OPERATING EXPENSES On December 19, 1996, Artesian Wastewater Management, Inc. (Artesian Wastewater) was created as an additional non-regulated subsidiary of Artesian Resources. Artesian Wastewater plans to provide wastewater treatment services in Delaware. On March 12, 1997, Artesian Wastewater became a one-third owner in AquaStructure Delaware, L.L.C.,which intends to develop and market various proposals to provide wastewater treatment services. Artesian Wastewater began operating a small wastewater treatment spray irrigation facility owned by a municipality in Southern New Castle County Delaware. Artesian Wastewater is paid a lump sum fee to maintain operations at the facility. NOTE 5 - RELATED PARTY TRANSACTIONS The office building and shop complex utilized by Artesian Water are leased at the 1999 annual rental of $182,000 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The annual rent decreases each year to the year 2002 by approximately $2,000 per year. The lease expires in December, 2002, with provisions for renewals for two five-year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building and shop complex are comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities. Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, Chairman Emeritus of Artesian Resources, at an annual rental of $45,000. Artesian Water has received notice that Glendale Enterprises Limited would like to discontinue the lease for the well sites. Artesian Water is currently negotiating with Glendale Enterprises Limited to purchase the land rights for the well sites associated with the Glendale Lease. On April 29, 1999, Artesian entered into an agreement with Helena C. Taylor and Ellis D. Taylor (the "Taylors") for the purpose of repurchasing 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock ("the Stock") owned by the Taylors. On May 4, 1999, Artesian executed a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock. The Note is payable quarterly, on a calendar basis, over a four year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylors would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect changes in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to the quarterly payment. At September 30, 1999, Artesian had $4,171,900 outstanding under this promissory note. Expenses associated with related party transactions are as follows: For the Quarter Ended For the Nine Months September 30, Ended September 30, 1999 1998 1999 1998 (in thousands) (in thousands) White Clay Realty $ 45 $ 46 $136 $138 Glendale Enterprises - 11 22 32 Repurchase of Stock $ 37 $ - $ 37 $ - $ 82 $ 57 $195 $170 NOTE 6 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding and potentially dilutive effect of employee stock options. The following table summarizes the shares used in computing basic and diluted net income per share: For the Quarter For the Nine Months Ended September 30, Ended September30, 1999 1998 1999 1998 (in thousands) (in thousands) Average common shares outstanding during the period for Basic computation 1,994 1,799 1,948 1,795 Dilutive effect of employee stock options 37 20 34 18 Average common shares outstanding during the period for Diluted computation 2,031 1,819 1,982 1,813 Equity per common share was $15.85 and $15.23 at September 30, 1999 and 1998, respectively. These amounts were computed by dividing common stockholders' equity, excluding preferred stock, by the number of shares of common stock outstanding on September 30, 1999 and 1998, respectively. NOTE 7 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. We implemented this statement in the first quarter of 1998 and it did not have a material impact on our financial condition or results of operations. In June 1998, FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and hedging activities. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," moving the effective date for this standard from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. We plan to adopt this statement effective January 1, 2001. Our adoption of this statement will not have a material impact on our financial condition or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". This statement is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statement have not been issued. We implemented this statement in the first quarter of 1999 and it did not have a material impact on our financial condition or results of operations. NOTE 8 - RATE PROCEEDINGS On April 30, 1999, Artesian Water filed a petition with the Delaware Public Service Commission to implement new rates to meet a requested increase in revenue of approximately 10.35%, or $2.7 million on an annualized basis. On September 30, 1999 Artesian Water filed a supplemental rate increase request which reduced the Company's increase from $2.7 million to approximately $2.5 million. Artesian Water is permitted to collect a temporary increase not in excess of $2.5 million on an annualized basis, under bond, until the level of permanent rates are decided by the Delaware Public Service Commission. The temporary rates became effective on July 1, 1999. Of the amount collected $434,000 was reserved, pending the final outcome of the rate proceeding. ITEM 2 ARTESIAN RESOURCES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30,1999 RESULTS OF OPERATIONS Overview Artesian Water, our principal subsidiary, is the oldest and largest regulated public water utility in the State of Delaware and has been providing water within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. As of September 30, 1999, we had approximately 62,000 metered customers and served a population of approximately 200,000, representing approximately 27% of Delaware's total population. We believe that we have a reputation for providing water and service of superior quality to our customers. The Delaware Public Service Commission regulates Artesian Water's rates charged for water service, the sale and issuance of securities, mergers and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues, although such increases have been offset slightly by reductions in customers' individual usage. We continue our efforts to contain expenses and improve efficiencies which contribute to increases in our operating income. Our business is also subject to seasonal fluctuations and the effects of weather. Operating Revenues We realized 98.5% of our total revenue in the nine months of 1999 from the sale of water. Water sales revenue increased $633,000, or 9.5%, for the quarter ended September 30, 1999 compared to the third quarter of 1998. For the nine months ended September 30, 1999, water sales revenue increased $1,061,000, or 5.7%, as compared to the same period in 1998. The increase was primarily due to a growth in the number of customers served, increased usage due to dry weather conditions and implementation of temporary rates related to a pending rate proceeding. Operating Expenses Operating and maintenance expenses decreased $138,000 for the quarter ended September 30, 1999, primarily due to decreased purchased water expense and increased $541,000 for the nine months ended September 30, 1999, primarily due to increased payroll and benefits, as compared to the same periods in 1998. In addition, the nine month period ended September 30, 1999 includes a $165,000 write-off related to the unamortized portion of rate case expenses from PSC Docket No. 97-66 and 97-340. The write-off resulted from the implementation of temporary rates and the amortization of costs associated with the rate increase request filed on April 30, 1999. The ratio of operating and maintenance expense to total revenue was 55.7% for the nine months ended September 30, 1999 as compared to 56.1% for the same period in 1998. Payroll and benefit expenses increased $139,000, or 8.6%, and $535,000 or 11.4%, respectively, for the quarter and nine months ended September 30, 1999 primarily due to the addition of new employees and increases in annual merit and incentive compensation and an approximately 20% increase in medical insurance premiums effective beginning the third quarter of 1998. Depreciation and amortization expense increased $71,000 and $157,000, or 13% and 10%, respectively, in the quarter and first nine months of 1999, compared to the comparable periods of the prior year, due to capital additions. Income tax expense increased $267,000, or 54.0% and $88,000, or 6.3%, respectively, for the quarter and nine months ended September 30, 1999. Our total effective income tax rate for the nine months ended September 30, 1999 and 1998 was 40.0%. Interest Charges Interest charges increased $7,000 or .9% for the third quarter, compared to the third quarter of 1998. Interest charges increased $48,000, or 2.1% for the nine months ended September 30, 1999 as compared with the same period in 1998 due to higher average borrowings on the lines of credit incurred to finance investment in utility plant. Average borrowings for the first nine months of 1999 and 1998 were $7.0 million and $5.2 million, respectively. Net Income For the quarter ended September 30, 1999, Artesian Resources recorded net income of $1,143,000 which represents a $395,000, or a 52.8%, increase as compared to earnings of $748,000 for the quarter ended September 30, 1998. This increase was due to the dry weather conditions affecting usage combined with decreased purchased water expense. These factors will not be present in the fourth quarter and therefore, normal seasonal earnings are expected for the fourth quarter. Net income for the nine months ended September 30, 1999 was $2,214,000, an increase of $125,000 or 6.0%, compared to earnings of $2,089,000 for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity for the first nine months of 1999 were $3.9 million provided by cash flow from operating activities and the $7.5 million resulting from the issuance of 325,000 shares of Class A Non-Voting Common Stock on April 13, 1999. Cash flow from operating activities was primarily provided by our utility operations, and was impacted by operating and maintenance expenses, the timeliness and adequacy of rate increases and weather conditions. We rely on our sources of liquidity for investments in our utility plant and systems and to meet our various payment obligations. We currently estimate that our aggregate investments in our utility plant and systems for the remainder of 1999 will be approximately $825,000. These investments will be financed by our operations and short-term borrowings under our revolving credit agreements. Our total obligations related to dividend and sinking fund payments on preferred stock, interest payments on indebtedness, rental payments and water service interconnection agreements for the remainder of 1999 are anticipated to be approximately $1.9 million and will be financed with cashflow from our operating activities. On May 4, 1999, we purchased from Ellis and Helena Taylor 24,165 shares of Class A Non-Voting Common Stock for $604,125 and 126,353 shares of Class B Common Stock for $3,845,875, payable in equal quarterly installments over a four year period and bearing interest at a rate equal to the amount that the sellers would have received in dividends on the shares as to which the principal amount has not yet been paid. On a quarterly basis, the consideration paid is subject to adjustments based upon changes in our book value per common share. We anticipate that this obligation will be financed by our cashflow from operations and external sources including our short-term lines of credit and the anticipated sale of land owned by Artesian Development Company. Developer advances and contributions in aid of construction are used for the installation of mains and hydrants in new developments. An additional $551,000 of capital expenditures will be financed by developers during the remainder of 1999. At September 30, 1999, we had a working capital deficit of $7.7 million mainly due to borrowings on our lines of credit incurred to finance investment in utility plant. At September 30, 1999, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of September 30, 1999, we had $27.5 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or, at our discretion, the bank's federal funds rate plus 1.0%. All the facilities are reviewed annually by each bank for renewal. On April 13, 1999, Artesian Resources issued 325,000 shares of Class A Non-Voting Common Stock at $25.00 per share in an underwritten public offering, and the net proceeds of approximately $7.5 million were used to reduce Artesian Water's borrowing on the lines of credit incurred to finance investment in utility plant. YEAR 2000 COMPLIANCE Our management has completed an assessment of all our information and non-information technology systems and implemented a company-wide program which continues to test and correct all of our critical systems to ensure Year 2000 compliance. We have dedicated the financial, technical and management resources required to achieve Year 2000 compliance. We identified the critical systems for our operations and are compliant as of September 30, 1999. Additionally, in 1998, we adopted management practices which require that any new systems or system upgrades be Year 2000 compliant prior to their purchase and implementation. In 1998, we undertook a comprehensive program to assess providers of critical services for the purpose of identifying and minimizing exposure to Year 2000 risks that are not under our direct control. Contingency plans have been developed which include, but are not limited to, the installation of back-up generators in case of power loss; increasing inventory levels in late 1999 for crucial materials and supplies, including gasoline, diesel fuel and water treatment chemicals; and identifying alternate providers in case our primary providers cannot meet delivery requirements. We are completing our Year 2000 compliance program in the normal course of business and do not anticipate a material impact on our business, results of operations, liquidity or capital resources. As a result of our corporate automation plan developed in 1994, we capitalized $395,000 during the year ended December 31, 1998 on new computer software and hardware, some of which replaced software and hardware which was not Year 2000 compliant. No capital expenditures for computer software and hardware were made during the first nine months of 1999, and we do not anticipate any significant capital expenditures for the remainder of 1999 for the purpose of achieving Year 2000 compliance. CAUTIONARY STATEMENT Statements in this Quarterly Report on Form 10-Q which express our "belief", "anticipation" or "expectation", as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Certain factors, such as developments in our current rate proceeding, competitive market pressures, material changes in demand from larger customers, changes in weather, availability of labor, failure of critical suppliers to meet Year 2000 compliance, changes in government policies and changes in economic conditions, could cause results to differ materially from those in the forward-looking statements. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On April 30, 1999, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 10.35%, or $2.7 million on an annualized basis. On September 30, 1999 Artesian Water filed a supplemental rate increase request which reduced the Company's increase from $2.7 million to approximately $2.5 million. Artesian Water is permitted to collect a temporary increase not in excess of $2.5 million on an annualized basis, under bond, until permanent rates are approved by the PSC. Such temporary rates became effective July 1, 1999. There are no other material legal proceedings pending at this date. ITEM 2 - CHANGES IN SECURITIES Not applicable. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5 - OTHER INFORMATION Not applicable. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K No reports on Form 8-K were filed for the quarter ended September 30, 1999. INDEX TO EXHIBITS Exhibit Number Description 3 Articles of Incorporation and By-Law (3.1) Restated Certificate of Incorporation of the Company effective May 26, 1995 incorporated by reference to the exhibit filed with Artesian Resources Corporation Form 10-Q for the quarter ended June 30, 1995. (3.2) Restated Certificate of Incorporation of the Company effective April 26, 1994 including Certificate of Correction incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 10-Q for the quarter ended March 31, 1994. (3.3) By-Laws of the Company effective April 27, 1993 incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 8-K filed April 27, 1993. 4 Instruments Defining the Rights of Security Holders, Including Indentures (4.1) Thirteenth and Fourteenth Indentures dated as of June 17, 1997 between Artesian Water Company, Inc., subsidiary of Artesian Resources Corporation, and Wilmington Trust Company, as Trustee. Incorporated by reference to the exhibits filed with Artesian Resources Corporation Form 10-Q for the quarter ended June 30, 1997. (4.2) Twelfth Supplemental Indenture dated as of December 5, 1995 between Artesian Water Company, Inc. subsidiary of Artesian Resources Corporation, and Wilmington Trust Company, as Trustee. Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Annual Report on Form 10-K for the year ended December 31, 1995. (4.3) Eleventh Supplemental Indenture dated as of February 16, 1993 between Artesian Water Company, Inc., subsidiary of Artesian Resources Corporation, and Principal Mutual Life Insurance Company. Incorporated by reference to the exhibit filed with Artesian Resources Corporation Annual Report on Form 10-K for the year ended December 31, 1992. (4.4) Tenth Supplemental Indenture dated as of April 1, 1989 between Artesian Water Company, Inc., subsidiary of Artesian Resources Corporation, and Wilmington Trust Company, as Trustee. Incorporated by reference to the exhibit filed with Artesian Resources Corporation Registration Statement on Form 10 filed April 30, 1990 and as amended by Form 8 filed on June 19, 1990. (4.5) Other Supplemental Indentures with amounts authorized less than ten percent of the total assets of the Company and its subsidiaries on a consolidated basis will be furnished upon request. Incorporated by reference to the exhibit filed with Artesian Resources Corporation Registration Statement on Form 10 filed April 30, 1990 and as amended by Form 8 filed on June 19, 1990. 10 Material Contracts (10.1) Amended and Restated Artesian Resources Corporation 1992 Non-Qualified Stock Option Plan, as amended, filed herewith. (10.2) Lease dated as of March 1, 1972 between White Clay Realty Company and Artesian Water Company, Inc. incorporated by reference to the exhibit filed with Artesian Resources Corporation Registration Statement on Form 10 filed April 30, 1990 and as amended by Form 8 filed on June 19, 1990. (10.3) Artesian Resources Corporation Cash and Stock Bonus Compensation Plan for Officers incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 10-K for the year ended December 31, 1993. (10.4) Artesian Resources Corporation Incentive Stock Option Plan incorporated by reference to the exhibit filed with the Artesian Resources Corporation Annual Report on Form 10-K for the year ended December 31, 1995. (10.5) Share Repurchase Agreement dated April 28, 1999 and related Promissary Note dated May 4, 1999.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARTESIAN RESOURCES CORPORATION 11/12/99 /s/ Dian C. Taylor Dian C. Taylor President, CEO, and Chair of the Board Artesian Resources Corporation and Subsidiaries 11/12/99 /s/ David B. Spacht David B. Spacht Vice President, Chief Financial Officer, and Treasurer Artesian Resources Corporation and Subsidiaries