Artesian Resources Corporation (Exact name of registrant as specified in its charter) Class A Non-voting Common Stock (I'itle of class)

Transcription

1 FORM10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended....:.d~e=c.:.tem~be=r--=3~1-'-._19::;...:9;.::::5;... Commission file number Artesian Resources Corporation (Exact name of registrant as specified in its charter) Delaware State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 664 Churchmans Road, Newark, DE (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code --~(~3~0=.2)4,&...:..1;::5~3~-6""'9;..:,:0;,.::::0 Securities registered pursuant to Section 12(b) of the Act: ---~N~o;&:n::.e Securities registered pursuant to section 12(g) of the Act: Class A Non-voting Common Stock (I'itle of class) 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. 181 Yes o No Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 1 0-K. 181 The aggregate market value of the voting stock held by non-affiliates of the registrant at February 23, 1996 was$ 5,377,446. As of February 23, 1996, 543,017 shares and 499,720 shares of Class A Non-Voting Common Stock and Class B Voting Common Stock, respectively, were outstanding. Page 1 of71

2 PART I Item 1. - Business. Artesian Resources Corporation (uartesian Resources'') operates as the parent holding company of Artesian Water Company, Inc. (uartesian Water''), a public utility, and several nonregulated subsidiaries, which collectively employed 158, 158, and 149 persons at December 31, 1995, 1994, and 1993, respectively. Artesian Water Company was organized in 1927 as the successor to the Richardson Park Water Company, founded in In 1984, the name of Artesian Water Company was changed to Artesian Resources Corporation and the utility assets were contributed to a newly formed subsidiary, Artesian Water. In 1985, Artesian Laboratories, Inc. ("Artesian Laboratories") was organized as the principal non-regulated subsidiary of Artesian Resources. In Apri11993, the rental operations of the County Commerce Office Park ("CCOP"), previously conducted under Artesian Resources, were reorganized and are conducted under Artesian Development, Corporation ("Artesian Development"), a non-regulated land development subsidiary of Artesian Resources, which was organized in None of the operations of the subsidiaries is considered seasonal. On October 16, 1995, an agreement was reached for the sale of Artesian Developmenfs rental office building and 4.27 acres of land at the CCOP. The rental office building and land, with a net book value of$2,658,000, was sold to an unrelated third party on March 13, 1996 for $2,050,000. On December 21, 1995, the Board of Directors of Artesian Resources authorized the disposal of substantially all the assets of Artesian Laboratories. Management is currently pursuing the sale of this portion of a business segment. Artesian Water provides water utility service to customers within its established service territory in portions of New Castle County, Delaware, pursuant to rates filed with and approved by the Delaware Public Service Commission. As of December 31, 1995, Artesian Water was serving 56,672 customers. In 1993, Artesian Water began acquiring service territory in southern New Castle County south of the C&D Canal, comprising its southern system. Since that time the southern system has expanded and presently comprises 15 square miles of service area and has accounted for a 15% increase in Artesian Water's total service area. This area has experienced substantial residential development in the past five years. In addition, the state is constructing a new limited access highway running north and south through southern New Castle Cpunty, portions of which are open to traffic. A substantial portion of southern New Castle County remains to be developed and. is not presently covered by Certificates of Public Convenience and Necessity (CPCN) or served by public water systems, presenting significant expansion opportunities for Artesian Water. as development continues. The pursuit of additional service area in the State of Delaware south of the C&D Canal is competitive. Artesian Water currently holds 24 CPCN' s for service area totaling approximately 15 square miles in southern New Castle and northern Kent Counties. One of the most recent service areas awarded to Artesian Water is the Town of Townsend in southern New Castle County. Artesian Water began managing Townsend's water system in June 1995 and subsequently purchased the water system's assets and right to serve its customers. Another water company is contesting several of Artesian Water's CPCN applications in southern New Castle County. 2

3 However, Artesian Water prevailed in all appeals related to these CPCN's before the Department of Natural Resources and Environmental Control (DNREC) and the Environmental Appeals Board (EAB). The decision of the EAB may be appealed by the other water company to the Delaware Superior Court and then the Delaware Supreme Court. The principal source of Artesian Water's water supply is the Potomac aquifer, which, together with certain smaller formations, is currently capable of supplying a peak capacity of approximately 21.8 million gallons a day. The Potomac aquifer covers a large area beneath northern Delaware and Maryland. Artesian Water has several well sites on land it owns or leases within its existing and proposed service territory. Access to the aquifer is not exclusive; however, any significant withdrawals from the aquifer require state regulatory approvals. Artesian Water also obtains water supply through interconnections with several neighboring utilities which increases peak capacity to approximately 39.6 million gallons a day. In 1995, the Company's highest daily consumption was 27.7 million gallons and average daily consumption was 18.0 million gallons. The quality of water distributed by the ~ystem is subject to the rules of federal and state environmental regulatory agencies. ALI provides testing services of water, waste water and solid wastes principally to third parties as well as to Artesian Water. It is permitted to conduct testing in the states of Delaware, Maryland, Pennsylvania and New Jersey and has served 286 customers during the. year ended December 31, The customer breakdown by state is 174 in Delaware, 83 in Maryland, 24 in Pennsylvania, and 5 in New Jersey. Maryland Environmental Services extended its contract with ALI to three years beginning July 1993 which will produce total revenues of approximately $585,000. Also, several smaller contracts totaling approximately $166,000 and $243,000 were awarded to ALI in 1994 and 1995, respectively. Management believes that there are no material effects that compliance with existing federal, state or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment may have upon the Company. Item 2. - Properties. Artesian Resources' corporate headquarters is located at 664 Churchmans Road, Newark, Delaware. In addition, corporate headquarters for Artesian Water is also located at the aforementioned address. The property is leased from White Clay Realty by Artesian Water through March 1, See Item 13, Certain Relationships and Related Transactions, for further disclosures. The lease may be extended at the lessee's option for three successive five-year renewal terms subject to the terms set forth in the lease. Artesian Resources owns various parcels of land in New Castle County, Delaware. Artesian Water owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities within its New Castle County, Delaware service territory and leases certain parcels of land for its w~ter supplies. Substantially all of Artesian Water's utility plant, except utility plant within the town of Townsend, Delaware, is pledged as security for First Mortgage Bonds. Artesian Development owned property on which one office building had been constructed at 630 Churchmans Road, Newark, Delaware and in which space was leased to various tenants. Of the total40,365 rentable square feet, 8,294 square feet is leased to Artesian Laboratories and 3,675 square feet is leased to Artesian Water for its computer facilities. These two subsidiaries own or 3

4 lease equipment and furniture located in their respective facilities. On March 13, 1996 Artesian Development's office building and 4.27 acres of land were sold to an unrelated third party. Artesian Water and Artesian Laboratories will continue to lease space in the building. See Note 14 to the 1995 Consolidated Financial Statements at Item 8 for disclosure of the lease terms. All Artesian Water's existing facilities suitably and adequately meet current necessary productive capacities and current levels of utilization. Item 3. - Leeal Proceedin~:s. None. Item 4. - Submission of Matters to a Vote of Security Holders. None. PART II Item 5. - Market for Company's Common Equity and Related Stockholder Matters. As of February 23, 1996 there were 501 shareholders of record of Class A Stock and 257 shareholders of record of Class B Stock. Artesian Resources' Class A and Class B Stock is thinly traded. Each such class is traded over the NASDAQ Bulletin Board. In 1994, a number of ~s became bulletin board market makers including Artesian Resources' primary market maker, Rutherford,,Brown and Catherwood First Quarter Second Quarter Third Quarter Fourth Quarter Class A Non-Voting Common Stock Dividend High Low Per Share $ $ Class B Voting Common Stock Dividend High Low Per Share $13.50 $ $ First Quarter Second Quarter Third Quarter Fourth Quarter $13.25 $ $ $16.50 $ $

5 Artesian Resources paid cash dividends of 15 cents per share in each of the first three quarters in 1995 and 18 cents per share in the fourth quarter of Artesian Resources paid a cash dividend of 15 cents per share in each quarter of Artesian Resources paid cash dividends of 5, 5, 10, and 15 cents per share in the first through fourth quarters of 1993, respectively. At the annual meeting held on May 23, 1995, the proposal to amend Article Fourth of the Restated Certificate of Incorporation of Artesian Resources eliminating the preemptive rights that existed for the Class A Stock and affirmatively denying preemptive rights to the holders of Class B Stock was approved. Also, the proposal to amend Article Fourth of the Restated Certificate of Incorporation of Artesian Resources increasing the authorized number of shares of Class A Stock from 1,000,000 to 3,500,000 and the number of shares of Class B Stock from 520,000 to 1,040,000 and changing the Class A Stock from no par stock to stock with a par value of $1 per share was approved. The purpose of the increase in authorized shares is to provide additional shares of common stock that could be issued for corporate purposes without further stockholder approval unless required by applicable law or regulation. Future purposes for the additional shares could include paying stock dividends, subdividing outstanding shares through stock splits, effecting acquisitions of other businesses or properties and securing additional financing for the operation of Artesian Resources through the issuance of additional shares. At the annual meeting to be held on April30, 1996, the Directors will seek approval of a proposal to amend the 1992 Non-qualified Stock Option Plan by increasing to 100,000 shares of Artesian Resources' Class A Stock, the number of shares authorized to be issued under the plan. Without such increase Artesian Resources would be unable to continue to grant options to attract and retain key officers and employees. The 1992 Non-qualified Stock Option Plan originally provided for the granting of options under the plan up to a maximum of 50,000 shares of Artesian Resources' Class A Stock. Also, the Stockholders will be asked to approve a proposal to adopt an Incentive Stock Option Plan to reward the executive officers and key personnel of Artesian Resources with a proprietary interest in Artesian Resources for their efforts which result in increased long-term shareholder value. The shares issued under the plan will be shares of Artesian Resources' Class A Stock. The maximum number of shares which shall be made available for sale under all options granted under this plan is 100,000 shares, subject to certain adjustments. 5

6 Item 6 - Selected Financial Data SUMMARY OF FIVE YEARS OF OPERATION * 1993* 1992*.l22.l * Operating revenues $ $ $ $ $ Operating expenses Operation & maintenance 13,384,812 13,014,014 12,417,723 11,687,289 11,897,795 Depreciation 2,239,909 1,985,783 1,955,249 1,979,623 1,833,825 State & federal income taxes 791, , , , ,669 Write-down on rental building 783,600 Loss on disposal of Artesian Laboratories 127,771 Other taxes Q Operating income 3,933,358 3,814,160 3,823,295 3,088,567 2,723,971 Other (expense) income-net J2s~!!S ~.896 (14.332) (89.Z82l Total income before interest charges Interest charges Long-term debt 2,249,907 2,252,449 2,286,235 1,820,254 1,875,219 Short-term debt 462,626 28,396 55, , ,407 Amortization of debt expense 26,428 26,493 68,436 26,032 26,033 Other 12s5J!f J.8J~ 1~ ~~7~B~~2S 2.JJ J4.Q ~ Income before cumulative effect of changes in accounting principles 1,207,428 1,485,778 1,374, , ,765 Cumulative effect of changes in accounting principles Net income $ $ $ $ $ Per share: Income before cumulative effect of changes in accounting principles $ 1.06 $ 1.34 $ 1.25 $.63 $.27 Cumulative effect of changes in accounting principles $.25 Net income $ $ 1.34 $ 1.50 $.63 $.27 Dividends per share of common stock $.63 $.60 $.30 $.05 $.22 Utility plant at year-end, cost $104,434,261 $92,684,238 $84,560,729 $80,637,313 $78,236,115 Total assets $ 96,841,166 $87,453,236 $81,926,810 $76,482,455 $73,469,937 Long-term obligations and redeemable preferred stock $ 18,802,500 $26,044,928 $25,844,984 $19,026,368 $19,439,529 Total capitalization at year-end $ 34,198,399 $40,772,731 $39,917,564 $31,766,778 $31,581,214 Average water sales per customer $ 365 $ 344 $ 347 $ 326 $ 321 Water pumped (millions of gallons) 6,561 6,506 6,409 6,208 6,043 Number of customers served at year-end 56,672 55,097 53,599 52,014 50,865 Miles of water main at year-end Prior year balances have been reclassified to coriform with current year presentation. 6

7 Item 7 - Manaz:ement's Discussion and Analysis of Operations and Financial Condition Results of Operations Overview For the year ended December 31, 1995, Artesian Resources Corporation (Artesian Resources) and its subsidaries realized 90.7% of its total revenue from the sale of water by its water utility subsidiary, Artesian Water Company, Inc. (Artesian Water), and 8.4% from services performed by its non-regulated subsidiaries, Artesian Laboratories, Inc. (Artesian Laboratories), and Artesian Development, Corporation (Artesian Development). In late 1995, the Board of Directors of Artesian Resources decided to focus on the water utility business and authorized the sale of the net assets of Artesian Laboratories and the office building owned by Artesian Development. Artesian Resources recorded net income of $1,207,428 for the year ended December 31, 1995, compared to net income of $1,485,778 for The decrease in net income is attributable to the recognition of losses related to the planned disposition of the assets of its non-regulated subsidiaries. Artesian Resources recognized a pre-tax loss in 1995 of $784,000 related to the sale of the office building owned by Artesian Development which was consummated on March 13, As a condition of the sale of the building, Artesian Water and Artesian Laboratories entered into ten-year lease extensions with the new owner at rental rates which escalate with changes in the Consumer Price Index. See Note 14 to Notes to Consolidated Financial Statements. In addition, in late 1995 the Board of Directors authorized management to undertake the disposition of the net assets of Artesian Laboratories, resulting in an estimated loss on disposal, before tax, of approximately $128,000 in Artesian Water posted a $413,000 increase in its net earnings primarily due to a decrease in the ratio of operating and maintenance expenses to total sales from 60.5% in 1994 to 57.0% in This improvement occurred, in part, through cost reduction programs which included the reduction of water purchased from neighboring utilities, and a 7.49% increase in rates approved on May 9, 1995 by the Delaware Public Service Commission. For the third consecutive year, Artesian Resources has been able to reduce its margin of increase in operating expenses. Operating expenses increased 2.8% in 1995 compared to The increase from 1993 to 1994 was 4.8%, and the increase from 1992 to 1993 was 6.2%. 7

8 ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF INCOME ASAPERCENTAGEOFREVENUE December 31, 122i Operating Revenues Water Sales 90.7% 89.1% 90.3% Other Utility Operating Revenue 0.9% 1.0% 0.8% Non-Utility Operating Revenue 8.4% 9.9% 8.2% 100.0% 100.0% 100.0% Operating Expenses Utility Operating Expenses 50.9% 53.1% 52.5% Non-Utility Operating Expenses 7.1% 7.6% 7.4% Related Party Expenses 1.1% 1.2% 1.2% Depreciation 9.9% 9.5% 9.4% State and Federal Taxes 3.5% 4.6% 4.7% Property and Other 6.1% 5.9% 6.0% Write-Down on Rental Office Building 3.5% Loss on Disposal of Artesian Laboratories 0.6% 82.7% 81.9% 81.2% Operating Income 17.3% 18.1% 18.8% Other Income, Net 0.1% 0.1% 17.4% 18.2% 18.8% Interest Charges 12.2% 11.0% 12.0% Income Before Cumulative Effect of Changes in Accounting Principles 5.2% 7.2% 6.8% Cumulative Effect of Changes in Accounting Principles 1.2% Net Income 5.2% 7.2% 8.0% Dividends on Preferred Stock 0.5% 0.6% 0.7% Earnings Applicable to Common Stock 4.7% 6.6% 7.3% 8

9 1995 Compared to 1994 Utility Revenues. Revenue from the sale of water increased $1,805,293, or 9.2%, primarily as a result of a 7.49% increase in rates approved May 9, 1995 by the Delaware Public Service Commission and a 2.8% increase in the number of customers from 55,097 in 1994 to 56,672 in 1995, offset in part by a 1.1% decrease in customer consumption. The rate increase of 7.49% provided approximately $1.4 million in total additional revenue for Customers' average billed consumption decreased slightly to 276 gallons per day in 1995 compared to 283 gallons per day in The decrease was primarily due to mandatory water use restrictions ordered by the State of Delaware due to drought conditions experienced by water utilities in northern New Castle County relying on surface sources of supply, as well as continuing effects of Artesian Water's conservation education efforts. Artesian Water's water supplies were not significantly affected by the drought, and Artesian Water was able to supplement the water supplies of neighboring utilities during this period. However, the customers of Artesian Water reduced their consumption during this period pursuant to the mandatory water use restrictions. The approximately $23,000, or 1 0.4%, decrease in other utility revenues is attributable to a reduction in miscellaneous charges other than water sales. These revenues include late payment fees, frozen meter repairs, flow tests and charges to developers. Utility Operating Expense. The expense for water purchased from neighboring utilities decreased approximately $225,000, or 8.3%. The decrease in purchased water expense is due to the 22% decrease in wate.r purchased in 1995 from neighboring utilities. In 1995, Artesian Water constructed and put into production in the third quarter three new wells producing a combined 3.0 million gallons per day of self supply. The new facilities allowed Artesian Water to decrease its need for purchased supplies to the minimum level required under its contract arrangements with certain neighboring utilities. However, this reduction in expense was partially offset by an increase in the minimum monthly purchase requirements from the Chester Water Authority (Chester Water) which increased from 75.0 million gallons to 91.6 million gallons effective October Effective October 1995, the minimum monthly purchase requirement increased to million gallons and will increase to million gallons per month in October 1996 and continue at that level until the agreement expires in In addition, the City of Wilmington, with which Artesian Water also has a take-or-pay arrangement totaling 300 million gallons per year, increased its rate for bulk water sales by nearly 44%, from $0.87 per thousand gallons to $1.25 per thousand gallons in Repair and maintenance expenses decreased approximately $69,000 in 1995 due to the postponement of the painting of certain water tanks as a result of drought conditions, which are now scheduled for painting in the spring of 1996, and a reduction in the use of outside vendors for repairing pumping equipment. Administrative Expenses. Administrative expenses increased approximately $85,000, or 4.3%. Expenses associated with professional services required by Artesian Resources increased due to the recognition in 1995 of amortization related to an environmental impact study for the location of a new reservoir and expenses related to the Class A Stock proxy solicitation and banking services. The environmental impact study was jointly financed by several utilities, New Castle County and the State of Delaware and the amortization of the expense has been allowed in rates by the Delaware Public Service Commission. These increases were partially offset by a reduction in Artesian Water's regulatory expenses related to the amortization of rate case expenses. 9

10 Payroll and Related Expenses. Payroll and related expenses for Artesian Resources and its subsidiaries in<?reased approximately $480,000, or 8.1 %, primarily due to wage rate increases related to annual salary adjustments, promotions, and bonuses paid during 1995 of approximately 5.2%. The pension expense increased $29,000, or 2.5%, reflecting the increase in Artesian Resources' matching contribution for employee participation in the 401(k) plan. In addition, Artesian Water recorded an increase of$162,000 in expenses, from 1994 to 1995, related to its supplemental retirement plan due to the recognition of a full year of expense. Artesian Water implemented its supplemental retirement plan on October 1, Depreciation and Amortization. Depreciation and amortization increased approximately $254,000, or 12.8%. The increase is due to the overall increase in utjlity plant assets in service at December 31, Taxes. Income tax expense decreased approximately $210,000, or 21.0%, reflecting the loss associated with the disposition of non-utility assets discussed above in "Overview." See Notes 1 and 3 to Notes to Consolidated Financial Statements and Schedule of Income Tax Expense. Property and other taxes rose approximately $140,000 from 1994 to Local real estate property taxes increased approximately $68,000 as a result of two separate local tax increases. In addition, the total property on which Artesian Resources is assessed increased from 1994 to 1995 as a result of property additions which include land and miles of water main. Payroll taxes increased approximately $72,000 as a result of the overall increase in Artesian Resources' payroll expense. The total income tax effective rate for 1995 was 39.7% as compared to 39.3% for Other Income. Allowance for funds used during construction (AFUDC) increased approximately $176,000, primarily due to two construction projects commenced and completed in 1995 at a cost of approximately $5 million and financed by Artesian Water. See Note 1 to Notes to Consolidated Financial Statements for a complete discussion relating to the calculation of AFUDC. Partially offsetting the increase in other income is the increase in other miscellaneous expenses of approximately $150,000. The increase is primarily attributable to the settlement of an employee litigation matter in Interest Charges. The increase of $434,000 in short term debt interest expense is primarily due to increased usage of Artesian Water's short term lines of credit to finance capital investments. At December 31, 1995, there was approximately $9.2 million in loans outstanding on Artesian Water's $15 million lines of credit. See Note 7 to Notes to Consolidated Financial Statements Compared to 1993 Utility Revenues. Revenue from the sale of water increased $359,000, or 2.0%, primarily as a result of a 2.8% increase in the number of customers served from 53,599 in 1993 to 55,097 in Customers' average billed consumption remained constant for 1994, as compared to 1993, at 283 gallons per day.... The increase in other utility revenue from $171,112 in 1993 to $217,132 in 1994 was primarily attributable to purchase discounts for the early payment of invoices associated with purchases of water from Chester Water. Utility Operating Expenses. The expense for water purchased from neighboring utilities increased approximately $227,000, or 9.1 %. The increase was due to minimum monthly purchase requirements from Chester Water which increased from 58.3 million gallons to 75.0 million gallons effective October

11 In addition, effective October 1994, the minimwn monthly purchase requirement increased to 91.6 million gallons. Chester Water also increased its rate for water 21.7% effective October Administrative Expenses. Administrative expenses increased approximately $216,000, or 12.1 %, primarily due to an increase in legal expenses of$85,000 related to the efforts of Artesian Water to expand its service area, general corporate matters and litigation involving a former employee of Artesian Water. Other general administrative expenses increased approximately $63,000 due to increased employee recruitment expenses, leasing expenses for new software and certain regulatory expenses. Payroll and Related Expenses. Payroll and related benefit expenses increased approximately $204,000, or 3.6%, primarily due to wage rate increases of approximately 2.5%, due to annual salary adjustments. In addition, Artesian Water implemented its supplemental retirement plan in 1994, and supplemental plan expenses for that year were approximately $59,000. See Note 11 to Notes to the Consolidated Financial Statements. Depreciation and Amortization. Depreciation and amortization expenses increased $31,000, or 1.6%, due to the overall increase in utility plant assets in service at December 31, Taxes. Income tax expense increased approximately $48,000, or 5.1 %, from 1993 to 1994 reflecting an increase in income before tax. See Notes 1 and 3 to Notes to Consolidated Financial Statements and Schedule of Income Tax Expense. The total income tax effective rate for 1994 was 39.3% as compared to 40.0% for Interest Charges. The decrease in interest expense of approximately $100,000, or 4.1 %, was due primarily to the $65,420 early redemption premiwn which was recorded on debt retired in In addition, amortization of debt expense also decreased approximately $42,000 primarily due to the write-off of unamortized issuance expenses related to debt retired in There were no similar expenses recorded in Non-Utility Revenues and Expenses Non-utility revenues, primarily from Artesian Laboratories and Artesian Development, totaled $1,911,219,$2,074,868 and $1,807,994 in.1995, 1994, and 1993, respectively. The decrease in non-utility revenues in 1995 is primarily attributable to a decline in sales revenues from Artesian Laboratories. Sales revenue for Artesian Laboratories decreased approximately $170,000, or 9.5%, in 1995 from the revenue recorded for this subsidiary in 1994 as a result of decreased contract work from existing customers. In 1994, Artesian Laboratories had experienced an increase in contract work and recorded a $257,000, or 16.8%, gain in sales revenue compared to Non-utility expenses, primarily from Artesian Laboratories and Artesian Development, totaled $1,613,865, $1,605,578 and $1,502,832 in 1995, 1994 and 1993, respectively. These expenses relate primarily to administrative expenses, payroll and related expenses which are discussed above with respect to the consolidated results of operations for Artesian Resources.. 11

12 Liquidity & Capital Resources Overview Artesian Resources' sources of liquidity are cash flow from operations, funds from Artesian Water's lines of credit and other external sources of funding discussed below. Cash flow from operating activities is primarily provided by the operations of Artesian Water and is impacted by operation and maintenance expenses, the timeliness and adequacy of rate increases, and weather conditions, such as the 1995 drought referred to above. ' Artesian Resources relies on its sources of liquidity for investments in its facilities and to meet its various payment obligations. The total amount of Artesian Resources' obligations for 1996 related to the dividend and sinking fund payments on preferred stock, principal and interest payments on indebtedness, rental payments and water service interconnection agreements is anticipated to be approximately $12.2 million. Artesian Water currently estimates that its aggregate investments in its facilities in.1996 will be approximately $11.7 million. Investment in Facilities Utility plant financed by Artesian Water rose sharply from approximately $7.2 million in 1994 to approximately $9.8 million in In addition, developers fmanced $2.2 million for the installation of water mains and hydrants serving their developments, pursuant to agreements. Artesian Water continued significant efforts to locate and develop additional sources of supply in its current service area investing nearly $3.3 million in 1995 in a new treatment station and two new wells located on its Old County Road property and by drilling another well on its Buena Vista property. Approximately $2.5 million was invested in a new 2.0 million gallon elevated storage facility and related water main in a developing area of Artesian Water's service area north of the Chesapeake and Delaware Canal (the "C&D Canal). To maintain pressures and flow, Artesian Water previously had relied on nearby pumping stations and interconnections with neighboring utilities. This new facility allows Artesian Water to reduce significantly the need for the interconnections and to rely less on the peak pumping capabilities of the pumping stations. Artesian Water invested approximately $1.1 million in 1995 in test wells and treatment facilities for future sources of supply in areas south of the C&D Canal in southern New Castle County where Artesian Water either has been granted service area or for which Artesian Water holds a landowner/developer contract for rights to serve the property. Artesian Water intends to continue its attempts to increase self supply and system reliability in 1996, and expects to invest approximately $11.7 million in new plant and equipment. The most significant effort to attain new self supply will occur in Artesian Water's service area south of the C&D Canal, where new residential developments require water service. Four new residential developments, requiring four separate water supply systems at a total cost of approximately $1.6 million, are scheduled for construction in 1996 in Artesian Water's southern system. In addition, in 1996, approximately $2.3 million is projected for the relocation of water mains as a result of plans to widen or relocate several roa.ds within Artesian Water's service area by the Delaware Department of Transportation. The largest single project proposed by the state requires Artesian Water to relocate a segment of its water main at a cost of $1.5 million. This project is expected to commence in April1996 and is projected to be completed by year-end. Six other highway relocation projects are scheduled for 1996 totaling $767,000. Nearly $2.3 million has been budgeted to install new transmission and distribution mains in Of the $2.3 million, approximately $400,000 is budgeted for the first off site transmission main to be installed in Artesian Water's service area south of the 12

13 C&D Canal in an effort to utilize current water supply and begin to interconnect a larger regional system. Replacement and renewal of older mains which require high maintenance is expected to total nearly $1.5 million in The two largest projects, located in Wilmington Manor and the town of Townsend, are expected to last three years at an annual cost of $505,000 and $664,000, respectively. Finally, Artesian Water anticipates capital expenditures for other general facilities such as fleet vehicles, data processing equipment, safety equipment, security, communications equipment and leasehold improvements, which will total approximately $825,000 in With the exception of the state highway relocation projects, Artesian Water may exercise some discretion in the exact timing of a significant portion of these expenditures. Financing Activities Artesian Resources utilizes several sources of liquidity to finance its investment in utility plant and other fixed assets. Developer advances and contributions in aid of construction are used for the installation of mains and hydrants in new developments. As discussed below, capital expenditures in 1996 will require Artesian Resources to utilize other sources of liquidity beyond those provided by developers and by the operations of Artesian Water. For the three-year period ending December 31, 1998, Artesian Resources estimates that 74.7% of its capital expenditures will be financed by Artesian Water and external sources, including a combination of capital contributions, the proceeds from the sale by Artesian Water of long-term debentures and from tax-exempt Delaware Economic Development Authority bonds, and short-term borrowings by Artesian Water under its revolving credit agreement discussed below. At December 31, 1995, Artesian Resources had a working capital deficit of approximately $17 million. This deficit resulted from net borrowings under Artesian Water's lines of credit totaling $7.7 million, the approximate $2 million mortgage for the building previously owned by Artesian Development, due April15, 1996, and the Series J First Mortgage Bond issued by Artesian Water due December 1, Artesian Water has two lines of credit totaling $15 million to meet its temporary cash requirements. These revolving credit facilities are unsecured and carry no restrictions or covenants. As of February 29, 1996, Artesian Water had $5.2 million of available unused funds under these lines. The interest rate is tied to the London Interbank Offering Rate (LIBOR) plus 1.50% or the banks' National Credit Rates (NCR), at Artesian Water's discretion. Both facilities are reviewed annually by the respective banks for renewal. The proceeds from a proposed $10 million equity issuance contemplated by Artesian Resources and projected to be contributed to Artesian Water as paid in capital will be used to repay a portion of the short-term borrowings under these credit lines. In addition, Artesian Water anticipates that when its $5 million 9.55% Series J First Mortgage Bond comes due on December 1, 1996, it will refinance the $5 million long term debt facility and issue an additional $5 million in First Mortgage Bond debt. Artesian Water will continue to have available its two lines of credit totaling $15 million to support future investmej?.t in its facilities. Artesian Resources anticipates cash flows from operations and Artesian Water's available lines of credit following issuance of the Class A Stock noted above, and the funds received from the long term debt refinancing discussed above, to be sufficient to fund its projected capital expenditures through Artesian Development utilized the $2,050,000 proceeds from the sale of its office building to repay the mortgage on that property of $2,003,000 outstanding on March 13, 1996 and related closing costs. Proceeds from the sale of the assets of Artesian Laboratories will be reinvested in the water utility operations. 13

14 Item 8 - Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS ASSETS Utility plant, at original cost less accumulated depreciation Current assets Cash and cash equivalents Accounts receivable Unbilled operating revenues Materials and supplies- at cost on first-in, first-out basis State and federal income taxes receivable Prepaid property taxes Prepaid expenses and other Other assets Non-utility property (less accumulated depreciation 1995-$2,108,835; 1994-$1,821,430) Deferred income taxes Other deferred assets Regulatory assets LIABILITIES AND CAPITAL Capitalization Common stock Additional paid-in capital Retained earnings Total common stockholders' equity Preferred stock-mandatorily redeemable Preferred stock Long-term debt, net of current portion Current liabilities Notes payable Current portion of long-term debt Accounts payable Overdraft payable State and federal income taxes Deferred income taxes Interest accrued Customer deposits Other Deferred credits and other liabilities Net advances for construction Postretirement benefit obligation Deferred investment tax credits Commitments and contingencies (Note 14) Net contributions in aid of construction 1995 $ ,704 2,133,217 1,332, , , ,952,676 1,764, i713 $ $1,037,494 8,041, , ,225,000 7,345,154 2,735, , , , , , L ,492,568 1,772,960 1,060, $ December 31, 1994 $ ,673 1,916,760 1,070, ,136 20, , ,788,205 1,897, ,823 $87, $ 4,135,610 4,714, , ,803 1,120, ,700 1,391, , ,525, ,722 3,570, , , , , ,122,733 1,797,079 1,097, , ,990 $

15 The notes and schedules are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENT OF OPERATIONS Operating revenues Water sales Other utility operating revenue Non-utility operating revenue (Note 8) Operating expenses Utility operating expenses Non-utility operating expenses (Note 8) Related party expenses (Note 9) Depreciation and amortization Taxes State and federal income Currently payable Deferred Property and other Write-down on rental office building Loss on disposal of Artesian Laboratories For the Year Ended December 31, * 1993* $20,525, ,479 1s911s219 22s63L283 11,526,523 1,613, ,424 2,239, , ,431 1,370, , s $18,720, , ,164,912 1,605, ,524 1,985,783 1,169,438 (205,924) 1,234, $18,361, , ,672,362 1,502, ,529 1,955,249 1,074,245 (160,148) 1,229, Operating income 3s Other (expense) income-net Allowance for funds used during construction Miscellaneous 232,096 (192s531) ,695 (491729) ,839 (281171) (14332) Income before interest charges 3s965s Interest charges Long-term debt Short-term debt Amortization of debt expense Other Income before cumulative effect of changes in accounting principles Cumulative effect of changes in accounting principles Net income Dividends on preferred stock Net income applicable to common stock 2,249, ,626 26, ~34 2s ,207,428 1,207, s189 $1s088s239 2,252,449 28,396 26, ,485,778 1,485, $ ,286,235 55,543 68, A ,374, ,625, $ 1A89~714 Per share: Income before cumulative effect of changes in accounting principles Cumulative effect of changes in accounting principles Net income Cash dividends per share of common stock $ 1.06 $.====1-=06= $====0-=63= $ 1.34 $.====1=3=4 $======0=.6=0 $ $ =====1=.5=0 $ 0.30 I The notes and schedules are an integral part of the consolidated financial statements. *Prior year balances have been reclassified to conform with current year presentation.

16 CONSOLIDATED STATEMENT OF RETAINED EARNINGS For the Year Ended December 31, Balance, beginning of year $5,877,661 $5,128,450 $3,937,772 Net income ~ 7,085,089 6,614,228 5,563,587 Dividends Balance, end of year $ $ $ The notes and schedules are an integral part of the consolidated financial statements. 16

17 CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Allowance for funds used during construction Write-down on rental office building Loss on disposal of Artesian Laboratories Tax gross-up component of CIAC Changes in assets and liabilities: Accounts receivable Unbilled operating revenues Materials and supplies State and federal income taxes Prepaid property taxes Prepaid expenses and other Deferred income taxes, net Other deferred assets Regulatory assets Postretirement benefit obligation Accounts payable Interest accrued Customer deposits and other, net Net cash provided by operating activities Cash flows used in investing activities Capital expenditures (net of AFUDC) Proceeds from sale of assets Net cash used in investing activities Cash flows from financing activities Net borrowings (repayments) under line of credit agreements Overdraft payable Net advances and contributions in aid of construction Proceeds from issuance of long-term debt Retirement of long-term debt Repayments on term note Proceeds from issuance of common stock Dividends Principal payments under capital1ease obligations Principal payments under long-term debt obligations Redemption of preferred stock Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosures of Cash Flow Itifonnation: Interest paid Income taxes paid Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred For the Year Ended December 31, * 1993* $1,207,428 $1,485,778 $1,625,815 2,082,309 1,835,570 1,806,233 (232,096) (55,695) (13,839) 783, ,771 (137,668) (216,457) (247,727) (246,535) (262,000) 131,000 (109,300) (4,538) (91,183) (75,634) 160, ,199 (371,052) (32,144) (25,265) (44,729) (187,116) 42,759 56, ,374 (439,146) 828, , , ,795 (58,890) 159,607 (2,409,376) (24,119) 195,808 1,601,271 (835,527) 1,291, ,322 38,170 2, , ) (11,992, 730) (8,290,309) (3,908,085) Cl l ( ) ( ) 7,700,000 1,475,000 (5,550,000) 164, ,493 (353,651) 1,873,547 1,677,974 1,746, ,206 53,238 12,000,000 (5,277,389) (300,000) 228, , ,474 (767,867) (736,567) (435,137) (292,435) (234,738) (236,117) (71,672) (66,672) (98,448) ( } (41.500) (46.500) 81833J (79,969) (882,565) 1,077, $ $ $ $2,693,897 $2,305,673 $2,102,575 $ 555,000 $ 895,000 $1,445,000 $ 114,405 $ 301,786 $ 339,239 The notes and schedules are an integral part of the consolidated financial statements. Prior year balances have been reclassified to conform with current year presentation. 17

18 SCHEDULE OF CAPITAL STOCK AND DIVIDENDS Par Value of Shares Cash Shares Outstanding Dividends PREFERRED STOCK 7% Prior Preferred - $25 Par Value Authorized and Outstanding at December 31, 1995, 1994, & ,868 $271,700 $19,020 Mandatorily Redeemable Cumulative Prior Preferred Authorized 80,000 Outstanding at December 31: 9 5/8% Series $15,000 $1, ,200 30,000 3, ,800 45,000 4, /2% Series ,500 $37,500 $3, ,000 50,000 4, ,500 62,500 5, /8% Series $20,000 $2, ,600 40,000 5, ,400 60,000 7, % Series ,000 $900,000 $92, ,000 1,000,000 99, ,000 1,000,000 99,600 COMMON STOCK Class A Non-Voting- $1 Par Value (No Par Value at December 31, 1994 & 1993), Authorized 1995 (1,000,000 authorized in 1994 and 1993) 3,500,000 Outstanding at December 31: ,559 $538,559 $334, ,613 3,637, , ,925 3,517, ,229 Class B Voting - $1 Par Value Authorized 1995, (520,000 authorized in 1994, and 1993) 1,040,000 Outstanding at December 31: ,935 $498,935 $314, , , , , , ,808 18

19 SCHEDULE OF INCOME TAX EXPENSE State Income Taxes Current Deferred - current Property taxes Deferred - non-current Accelerated depreciation Rate case expenses Taxable contractor advances and contributions in aid of construction Other For the Year Ended December 31, $140,716 3, ,781 8,268 (119,793) $ 235,103 2, ,072 (13,152) (134,007) $ 259,730 3, ,316 (15,702) (163,935) (3.650) Total State Income Tax Expense $ $ $ Federal Income Taxes Current Deferred - current Property taxes Deferred non-current Alternative minimum tax Accelerated depreciation Rate case expenses Taxable contractor advances and contributions in aid of construction Amortization of investment tax credits Write-down on rental building and Artesian Laboratories Amortization of regulatory asset for deferred taxes Other $527,291 9, ,145 29,501 (427,426) (36,455) (309,882) 15, $934,335 7,884 (130,417) 470,797 (46,928) (478,141) (37,257) $814,515 13, ,008 (56,025) (584,929) (38,040) (7.776) Total Federal Income Tax Expense $ $ $ Reconciliation of Effective Tax Rate Income before federal and state income taxes and cumulative effect of changes in accounting principles; less amortization of deferred investment tax credits Amount computed at'statutory rate 1995 Amount Ofo $ $679, Amount % $ $832, = Amount $ $778,264 % Reconciling items State income tax-net of federal tax benefit Allowance for funds used during construction not treated as income for tax purposes Other Total Income Tax Expense and Effective Rate 175,719 (78,913) $ (3.9) ,158 (18,936) (1.467) $ (0.8) ffi.:.ll 152,698 (4,705) ) $ (0.2) (!Ul 19

20 NOTE1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation - The consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly-owned subsidiaries (Artesian Resources), including its principal operating company, Artesian Water Company, Inc. (Artesian Water). Appropriate eliminations have been made of all material intercompany transactions and account balances. Utility subsidiary accounting- The accounting records of Artesian Water are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission (PSC). Artesian Water follows the provisions of Statement offinancial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation," which provides guidance for companies in regulated industries. Utility plant and capitalized leases -All additions to plant are recorded at cost. Cost includes direct labor, materials, and indirect charges for such items as transportation, supervision, pension and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the cost of retired property, together with any cost associated with retirement and less any salvage value or proceeds received, is charged to accumulated depreciation. Maintenance, repairs and replacement of minor items of plant are charged to expense. In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction (AFUDC). AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's weighted average cost of debt and the rate of return on equity authorized by the PSC. Plant comprises: December 31, Utility plant, at original cost Utility plant in service Intangible plant Source of supply plant Pumping and water treatment plant Transmission and distribution plant General plant Property held for future use Construction work in progress Less - accumulated depreciation $ 100,536 3,121,095 8,338,940 81,412,640 8,701,957 1,200, ,434, $ $ 100,536 2,365,510 4,573,706 74,614,620 8,290, , ,995 92,684, $73,

21 Non-utility property primarily comprises an office building, laboratory equipment, and furniture and equipment of the non-utility subsidiaries. Depreciation and amortization expense of this property aggregated approximately $294,300, $348,900, and $297,200 in 1995, 1994, and 1993, respectively. Depreciation and amortization- For fmancial reporting purposes, depreciation is provided using the straight-line method at rates based on estimated economic useful lives which range from 3 to 80 years. Composite depreciation rates for utility plant were 2.12%, 2.25%, and 2.16% as of December 31, 1995, 1994, and 1993, respectively. In rate orders issued by the PSC, Artesian Water was directed effective May 28, 1991 and August 25, 1992 to offset depreciation on utility property funded by Contributions in Aid of Construction (CIAC) and Advances for Construction (Advances), respectively, against CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives which range from 2 to 10 years. The expense which would result from depreciating Artesian Water's leased office building and shop complex on a straight-line basis over the lease term is not an allowable cost of service. Thus, depreciation of the leased property has been modified so that the total interest on the lease obligation and depreciation of the leased property is equal to the rental expense that is allowed for rate m~g purposes. Regulatory assets - Certain expenses, which are recoverable through rates as permitted by the PSC, are deferred and amortized during future periods using various methods. Expenses related to rate proceedings are amortized on a straight-line basis over 3 years. The post retirement benefit obligation, which is being amortized over 20 years is adjusted for the difference between the net periodic post retirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customer reverse. Regulatory assets at December 31, net of amortization, comprise: Post retirement benefit obligation Deferred income taxes recoverable in future rates Expense of rate proceedings $1,772, , $ $ 1,797, , ,381 $ Income taxes- Beginning in 1993, deferred income taxes are provided in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) on all differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The effects of adopting SF AS 1 09 are explained in more detail inn ote 3. The difference between state income tax at the statutory rate of8.7% and the effective rate of 13.3%, 9.2%, and 10.2% in 1995, 1994, and 1993, respectively, is primarily attributable to Artesian Resources filing a separate state tax return for each of its subsidiaries as required, whereby current year losses of certain subsidiaries can not be offset against taxable income of others. 21

22 The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income to Artesian Water. For Advances, Artesian Water was directed by the PSC to pay the related taxes and collect amounts equal to the taxes paid from the developer. For CIAC, Artesian Water was directed to pay the taxes instead of the developer contributing the taxes. Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets. Earnings per share - Per share earnings applicable to common stock are calculated on the basis of weighted average number of shares outstanding as follows: ,030,559; ,010,351; ,766. Revenue recognition and unbilled revenues - Water service revenue for fmancial statement purposes includes amounts billed to customers on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period. The accrual for unbilled revenue is reduced by the unearned portion of charges for water service billed in advance. Cash and cash equivalents - For purposes of the Statement of Cash Flows, Artesian Resources considers all temporary cash investments with a maturity of three months or less to be cash equivalents. Artesian Water utilizes its bank's controlled disbursement product to reduce the use of its line of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding but not yet funded exceed the cash balance on Artesian Water's books, the net liability is recorded as a current liability on the balance sheet in the "overdraft payable" account. Use of estimates in the preparation of consolidated f"mancial statements - The consolidated fmancial statements were prepared in conformity with generally accepted accounting principles, which require management to make estimates that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimate. NOTE2 SFAS 107 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Current assets and liabilities - For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments. 22

23 Long term financial liabilities- The fair value of Artesian Resources' long term debt and mandatorily redeemable preferred stock as of December 3I, I995, determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities, are as follows: Long term debt Mandatorily redeemable preferred stock Carrying Amount $ I7,558,000 $ 972,500 Estimated Fair Value $ 20,I68,000 $ 629,000 The fair value of advances for construction cannot be reasonably estimated due to the inability to accurately estimate future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. Future refunds expected to be paid would have to be estimated on a per contract basis using the past history of refund payments. The fair value of advances for construction would be less than the carrying amount because these financial instruments are non-interest bearing. NOTE3 CHANGES IN ACCOUNTING PRINCIPLES Effective January I, I993, Artesian Resources adopted the provisions of SFAS I09, "Accounting for Income Taxes," on a prospective basis. The Statement requires deferred income taxes to be provided on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. SF AS I 09 requires rate regulated enterprises to provide deferred taxes on all temporary differences including those not previously recognized when the tax effects of the difference are, at the discretion of the regulator, flowed through to customers. Regulated enterprises are also required to recognize regulatory assets and liabilities for the effect on revenue expected to be realized as the tax effects of temporary differences previously flowed through to the customer reverse. In I993, Artesian Resources recognized a one-time benefit of approximately $II3,000 associated with the effects of adopting SF AS I 09, related to its non-regulated subsidiaries. Effective January I, I993, Artesian Water changed its method of accounting to recognize amounts received from the tax gross-up on CIAC in I987 and I988 as income. Arte~ian Water received a tax gross-. up from developers on CIAC contracts in I987 and I988 only. Prior to this change in its method of accounting, the tax gross-up remained in CIAC even though it was not a reduction in rate base for regulatory purposes. The cumulative effect of this change in accounting policy was a $I38,000 increase to net income for the year ended December 3I, I

24 NOTE4 INCOME TAXES Deferred tax assets (liabilities) are comprised of the following: December 31, Property, plant and equipment basis differences $ 1,477,858 $1,962,855 State operating loss and federal tax credit carry forwards 1,154, ~027 Gross deferred tax assets 2,632,343 2,786,882 Valuation allowance (802,316) (528~505) 1,830, Taxes recoverable in future rates (197,458) (197,458) Expenses of rate proceedings (67,336) (29,567) Other 128,928 (63~422) Deferred tax liabilities (65,726) ( ) Net noncurrent deferred tax asset $ $ Current deferred tax liability - property taxes $ ( ) $ ( ) For state income tax purposes, net operating losses generated by the non-regulated subsidiaries can be carried forward through the year ending December 31, Artesian Resources has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of the state net operating loss carry forwards. The valuation allowance increased from $598,505 in 1994 to $802,313 in 1995 as a result of increased state net operating loss carry forwards. See the Schedule of Income Tax Expense. NOTES PREFERRED STOCK Artesian Resources has two classes of preferred stock outstanding. The 7% Prior Preferred stock (on which dividends are cumulative) is redeemable at Artesian Resources' option at $30 per share plus accrued dividends. The Cumulative Prior Preferred stock has annual mandatory redemption requirements and is redeemable at Artesian Resources' option at various declining prices ranging from $25.18 through January 31, 1996, to $25.00 after February 1, Under mandatory sinking fund provisions, redemptions will aggregate $147,500 (5,900 shares) in 1996; $112,500 (4,500 shares) in 1997 and 1998; and $100,000 (4,000 shares) in 1999 and The Company also has 100,000 shares of$1 par value Series Preferred stock authorized but unissued. See the Schedule of Capital Stock and Dividends. 24

25 NOTE6 COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL On May 23, 1995, $3,215,718 was reclassified on the balance sheet between common stock and additional paid in capital, including $97,505 for stock options exercised and dividends reinvested in the first quarter of The reclassification was the result of shareholder approval of changing the Class A Stock from no par stock to stock with a par value of $1.00 per share. As part of Artesian Water's 1992 rate increase settlement agreement, Artesian Resources' cash dividends were limited to 50% of earnings per share until May 9, 1995 when the 1994 rate increase application was approved by the PSC. Contributions to the Tax Reduction Act Employees' Stock Ownership Plan (P A YSOP) by Artesian Resources for the purchase of its Class B Common stock on behalf of employees were limited to dividend reinvestments in 1995, 1994, and Under Artesian Resources' dividend reinvestment plan, stockholders were issued 9,863, 10,552 and 5,938 shares at fair market value for the reinvestment of $145,076, $128,342 and $60,406 of their cash dividends for the years 1995, 1994 and 1993, respectively. Additional paid-in capital was increased by the excess of the market value, or exercise price in the case of stock options, over the par value of the Class B Common and Class A Non-Voting Common Stock issued as follows: Balance at beginning of year Par value adjustment on Class A Non-Voting Common Stock Stock options exercised Dividend reinvestment Treasury Stock purchased Balance at end of year $4,714,532 $4,661,452 $4,630,022 3,118, ,837 2,505 14, ,213 50,575 16,726 (36.612) $ $ $ See the Schedule of Capital Stock and Dividends. NOTE7 DEBT Artesian Water has available unsecured lines of credit, with no financial covenant restrictions, totaling $15,000,000 at December 31, 1995 which are renewable annually at the banks' discretion. 25

26 Borrowings under the lines of credit bear interest based on the London Interbank Offering Rate (LIBOR) plus 1.5% for 30, 60, 90, or 180 days or the banks' National Credit Rate (NCR), at the option of Artesian Water. Artesian Water had $9,200,000 and $1,500,000 outstanding under these lines at December 31, 1995 and 1994, respectively. Artesian Water had no outstanding borrowings under these lines at December 31, The maximum amount outstanding was $9,500,000, $1,700,000 and $5,350,000 in 1995, 1994, and 1993, respectively. The average amount outstanding was approximately $5,350,000, $750,000, and $2,763,000, at weighted average annual interest rates of7.8%, 7.4%, and 6.0% in 1995, 1994, and 1993, respectively. Artesian Laboratories has a line of credit with a bank totaling $75,000 at December 31, 1995, secured by equipment and accounts receivable, and guaranteed by Artesian Resources and its subsidiaries other than Artesian Water. Artesian Laboratories had $25,000 outstanding under this line at December 31, 1995 and 1994, and $50,000 outstanding at December 31, Borrowings under this line of credit bear interest at the bank's NCR plus 0.50%. On February 16, 1993 and with approval of the PSC, Artesian Water issued $10 million of8.03% Series L First Mortgage Bonds. The funds were used to retire Artesian Water's outstanding Series E, F, G, and H First Mortgage Bonds (Bonds) totaling $3,311,000 with higher interest rates ranging fr()m 8-1/2% to 10-7/8%. In addition, the funds were used to repay Artesian Water's borrowings outstanding under its line of credit totaling $5,400,000. The remaining funds were used to finance capital expenditures. Since the Bonds listed above were all retired prior to their stated maturity, Artesian Water was required to pay a call premium ranging from 1.417% to 2.566% of the outstanding principal amount. The total premium paid was $65,420. With the issuance of the Series L First Mortgage Bonds and the retirement of the Series E, F, G, and H First Mortgage Bonds, required principal repayments over the next five years consist of a $5,000,000 payment in December 1996 for the retirement of the Series J First Mortgage Bonds. No other repayments or sinking fund deposits are required during this period. As of December 31, 1995 and 1994 substantially all of Artesian Water's utility plant was pledged as security for the First Mortgage Bonds. In addition, the trust indentures contain covenants which limit long-term debt, including the current portion thereof, to 66 2/3% of total capitalization including the current portion of the long-term debt, and which, in certain circumstances, could restrict the payment of cash dividends. As ofdecember 31, 1995, however, no dividend restrictions were imposed under these covenants. On April13, 1993, Artesian Development refinanced the 10.1% Economic Development Bond and the 10% Building Mortgage Bond which were originally used to finance the construction of the County Commerce Office Park (CCOP). Payments on this $2,000,000,7.9% mortgage bond are based on a 30-year amortization period with level principal payments of $5,556 for 36 months beginning May 15, 1993, with a balloon payment of approximately $1,800,000 due April 15, Artesian Development's annual principal and interest payments for this mortgage will total approximately $1,867,000 for Beginning in November 1994, Artesian Development financed heating and air conditioning improvements at the CCOP with a $200,000 second mortgage. Payments on the $200,000, 8.3% mortgage, are based on a 30-year amortization period with level principal payments of$556 for 16 months beginning December 15, 1994, with a balloon payment of approximately $191,111 due April15, Artesian Development's building mortgages, with a principal balance of$2,017,000 at December 31, 1995, are secured by a building with a net book value, after the loss write-down, of approximately $1,874,000 at December 31, 1995, as well as by an option by the Bank to have a blanket assignment of all leases and rents entered into at the CCOP and 26

27 a third lien assignment of any dividends payable from Artesian Water to Artesian Development. Both of Artesian Development's building mortgages will be paid in full in March 1996 when the rental office building will be sold (see Note 12.) Long-term debt consists of: First mortgage bonds Series J, 9.5 5%, due December 1, 1996 Series K, 10.17%, due March 1, 2009 Series L, 8.03%, due February 1, 2003 Capitalized lease obligations Building mortgage on non-utility property, 7.90%, due April15, 1996 Building mortgage on non-utility property, 8.30%, due April 15, 1996 Less current maturities December 31, 1995 ~ $ 5,000,000 $ 5,000,000 7,000,000 7,000,000 10,000,000 1o.ooo.ooo 22,000,000 22,000, ,803 1,064,832 1,823,873 1,888, , ,903,454 25,006, , $ $ NOTES NON-UTILITY OPERATING REVENUE AND EXPENSES Non-utility operating revenue consists of environmental testing revenue received by Artesian Laboratories and rental income received by Artesian Resources and Artesian Development as follows: Artesian Laboratories (1) Artesian Development (2) Artesian Resources Total 1995 $1,616, ,145 $ $1,785, , $ l22l $1,528, , $ Non-utility operating expenses are as follows: Artesian Laboratories (1) Artesian Development (2) Artesian Resources Total 1995 $1,365, ,649 6,374 $ $1,338, , $ $1,229, , $ (/) See discussion in footnote 13. (2) See discussion in footnote

28 Effective April 1, 1993, the rental operations for the CCOP, previously conducted under Artesian Resources, were reorganized and are conducted under Artesian Development. All operating revenues and expenses associated with the CCOP are reflected under Artesian Development for the nine months ended December 31, 1993 and for the years ended December 31, 1994 and This reorganization occurred in conjunction with the refinancing of the mortgage bonds, discussed in Note 7, which were originally used to finance the construction of CCOP. NOTE9 RELATED PARTY TRANSACTIONS The office building and shop complex utilized by Artesian Water are leased at an aggregate annual rental of $204,052 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The lease expires in 1997, with provisions for renewals for three five year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building are generally comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities. (See Note 14). Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly owned by Ellis D. Taylor, Director and -Chairman Emeritus of Artesian Resources, at an annual rental of approximately $40,000. The initial term of the lease was for ten years ending September 30, 1995 and, thereafter, renewal is automatic from year to year unless 60 days written notice was given by either party before the end of the year's lease. The annual rental is adjusted each year by the consumer price index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by giving 60 days written notice should the water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely affect its interest in the lease. Expenses associated with related party transactions are as follows: White Clay Realty Glendale Enterprises Total s 204, $ $204,052 39,472 $ $204, $ NOTElO STOCK OPTION PLANS Artesian Resources has a stock option plan under which options to purchase shares of Class B Common Stock may be granted to directors, officers, and employees of Artesian Resources at prices not less than 85% of the estimated fair market value at the date of the grant. Options so granted extend for a period of five years, are exercisable after six months of service from date of initial grant and after one year of service to Artesian Resources, and are adjusted for stock dividends and splits. At December 31, 1995 and 1994, no shares of Class B Common Stock were available for future grants. 28

29 On February 26, 1992, the Board of Directors adopted the 1992 Non-qualified Stock Option Plan (the Plan), under which options may be granted to purchase up to 50,000 shares, subject to certain adjustments, of Artesian Resources' Class A Non-Voting Common Stock. Options to purchase shares of Class A Non Voting Common Stock may be granted to employees at prices not less than 85% of the fair market value on the date of grant. Employees who participate and who are not executive officers or directors of Artesian Resources may receive options to purchase up to 1,000 shares. Each director or officer who participates in any year receives an option to purchase 3,000 shares of stock. The option price for directors and officers of Artesian Resources is 90% of the fair market value on the date of grant. Options granted under this plan extend for a period of one year, are exercisable after six months of service from the date of initial grant, after one year of service to Artesian Resources, and are adjusted for stock dividends and splits. No more than 34 Directors, officers and employees are permitted to participate in the Plan each year. The following summary reflects changes in shares under option: Options outstanding at beginning of year (1995 & $12.75; $13.88 to $12.75) Class B Option Shares ,574 Exercised (1995 & $12.75; $13.88 to $12.75) Options reverting back to the plan during the year Options outstanding and exercisable at end of year (1994 & $12.75) (179) (172) (1,013) (441) (1.769) Class A 012tion Shares Options outstanding at beginning of year (1995, 1994 & $8.55 to $8.08) Granted (1995- $11.26 to $12.49, 1994 & 1993-$8.55 to $8.08) Exercised (1995- $8.08 to $11.26, $8.55 to $8.08) Options reverting back to plan during the year Options outstanding and exercisable at end of year (1995- $11.26 to $12.49, 1994 & $8.55 to $8.08) 18,231 12,648 24,710 25,450 18,200 12,790 (12,467) (4,917) (6,849) (6.151) (7.700) (18.003) ~231 12~648 29

30 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which requires disclosure regarding the fair value based method of accounting for stock-based employee compensation arrangements, and encourages the use of the fair value based method to determine compensation expense. SF AS 123 allows for continued use of the intrinsic value based method of Opinion 25. The disclosure requirements of SFAS 123 are effective for fmancial statements for fiscal years beginning after December 15, Artesian Resources will adopt SFAS 123 in 1996, and estimates that SFAS 123 will not have a material effect on Artesian Resources' financial position or results of operation. NOTEll EMPLOYEE BENEFIT PLANS 40l(k) Plan- Artesian Resources has a defmed contribution 401(k) Salary Reduction Plan which covers substantially all employees. Under the terms of the Plan, Artesian Resources contributes 2% of eligible salaries and wages and matches employee contributions up to 6% of gross pay at a rate of 50%. Artesian Resources may, at its option, make additional contributions of up to 3% of eligible salaries and wages. For 1993, Artesian Resources contributed an additional $45,069 representing 1% of eligible salaries and wages. No such additional contributions were made in 1995 and Plan expenses, which include company contributions and administrative fees, for the years 1995, 1994, and 1993 (including the additional 1% discussed above), were approximately $239,000, $260,000, and $283,000, respectively. Postretirement Benefit Plan - Artesian Resources provides medical and life insurance benefits to certain retired employees. Prior to the amendment of the plan, as described below, substantially all employees could become eligible for these benefits if they reached retirement age while still working for Artesian Resources. In the first quarter of 1993, Artesian Resources adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). The Statement requires Artesian Water to accrue the expected cost of providing postretirement health care and life insurance benefits as employees render the services necessary to earn the benefits. Artesian Water elected to defer recognition and amortize its approximately $3,080,000 transition obligation over twenty years, ofwhich $154,000 was recognized at December 31,_1993. In February of 1994, Artesian Water amended its Plan effective January 1, 1993 to reduce eligibility under the Plan. As a result of the amendment, only current retirees and certain "grandfathered" active employees are eligible for benefits. The amendment had the effect of reducing the unrecognized obligation by approximately $1,460,000 to $1,620,000, and eligible participants by 108 to 23. The amendment also had the effect of curtailing the Plan. This curtailment resulted in a curtailment loss of approximately $1,450,000. This loss, when added to the 1993 amortization of $154,000 increased the Company's recorded liability with respect to F AS 106 to approximately $1,600,

31 At December 31, 1993, 1994, and 1995 Artesian Water recognized an offsetting regulatory asset with respect to the F AS 1 06 liability. This asset is recorded based on the PSC order which permits Artesian Water to continue recovery of postretirement health care and life insurance expense on a pay-as-you-go basis for the remaining eligible employees. Artesian Water anticipates liquidating its FAS 106 obligation and substantially recovering the expenses in mtes over a period of approximately 20 years (based on the age and life expectancy of the remaining eligible participants). Further, expense recovery as a percentage of rates is expected to remain constant over the initial years, and then decline until the obligation is liquidated. Amounts charged to expense were $105,300,$107,500, and $99,100, for 1995, 1994 and 1993 respectively. Plan: The following table sets forth the amount recognized in Artesian Resources' balance sheet for the Status of the Plan as of December 31, Accumulated Postretirement Benefit Obligation Retirees Actives fully eligible Total Accumulated Postretirement Benefit Obligation Unrecognized: Transition obligation Net gain from changes in assumptions Postretirement benefit obligation $(1,175,129) ( ) (1,404,109) 153,000 ( ) $( ) $(1,040,262) ( ) (1,278,771) 161,500 ( ) $( ) Net Periodic Postretirement Benefit Cost for: Interest cost Amortization of transition obligation Total Net Periodic Postretirement Benefit Cost Amounts charged to expense Increase in Regulatory Asset $103, , $ $120, , $ For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 5% through the year 2006 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase in the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $115,552 and the interest cost component of net periodic postretirement benefit cost for the year then ended by $7,560. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 8.5% for the years ended December 31, 1995 and 1994, respectively. 31

32 Supplemental Pension Plan -Effective October 1, 1994, Artesian Water established a Supplemental Pension Plan to provide additional retirement benefits to full time employees hired prior to April 26, The purpose of the Supplemental Plan is to help employees save for future retiree medical costs, which will be paid by employees. The Supplemental Plan accomplishes this objective by providing additional cash resources to employees upon a termination of employment or retirement, to meet the cost of future medical expenses. Artesian Water has established a contribution based upon each employee's years of service ranging from 2% to 6% of eligible salaries and wages. Artesian Water also provides additional benefits to individuals who were over age 50 as of January 1, These individuals are referred to as the "Transition Group". Effective November 1, 1994, individuals eligible for the Transition Group had the opportunity to defer compensation to the Supplemental Plan, and to receive a Transition Matching Contribution for 5 years. Each $1 of eligible salaries and wages deferred by the Transition Group is matched with $3, $4, or $5 by Artesian Water based on the employee's years of service subject to certain limitations under the federal tax rules. Plan expenses for 1995 and 1994 were approximately $221,000 and $59,000, respectively. I NOTE 12 DISPOSAL OF NON-UTILITY ASSETS In October 1995, Artesian Development entered into an agreement with an unrelated third party for the sale of its rental office building and 4.27 acres of land with a net book value of$2,658,000 at December 31, 1995 for $2,050,000, resulting in a loss of $784,000. The loss reflects the difference between the net book value and the selling price, and also includes $176,000 in expenses associated with completing the sale. The loss on disposal of this building, net of tax benefit, reduced earnings per share by $0.50 for the year ended December 31, The sale of this rental office building is expected to be complete in March NOTE13 DISPOSAL OF NON-UTILITY BUSINESS In December 1995, the Board of Directors of Artesian Resources authorized the disposal of substantially all of the net assets of Artesian Laboratories, resulting in an estimated pre-tax loss of$128,000 recorded as an operating expense in The loss reflects the difference between the projected sales price and the net book value of substantially all the assets and liabilities of the business, and also includes estimated operating losses through the anticipated disposal date of $13 7,000 and estimated additional expenses associated with completing the sale. The estimated loss, net of tax benefit, associated with the disposal of Artesian Laboratories, reduced earnings per share by $0.08 for the year ended December 31,

33 NOTE14 COMMITMENTS The office building and shop complex are leased at an aggregate annual rental of $204,052 from a partnership, White Clay Realty (See Note 9). Artesian Water may terminate the lease at any time by purchasing the leased facilities for (1) 8:11 amount equal to the sum of any mortgage on such facilities and any accrued rental tq date or (2) its fair market value, whichever is higher. This lease is accounted for as a capital lease; accordingly, the present value of all future payments for the leased property at the inception of the lease ($1,870,000) was recorded in General Plant and in Capitalized Lease Obligations. Artesian Water 1 and Artesian Laboratories have entered into several three-year and five-year leases for computer and laboratory equipment which have also been recorded as capital leases. Future minimum annual rental payments under these capitalized lease obligations for the five years subsequent to 1995 and the present value of the minimum lease payments as ofdecember 31, 1995, are as follows: Artesian Water Office Building Artesian Water Computer Equipment Artesian Laboratories Laboratory Equipment( I) $204, ,052 $57,770 57,770 57,770 48, $165, ,313 67,407 23, Minimum lease payments Less amount representing interest Present value of minimum lease payments 408, $ , $ , $ (1) See discussion in footnote 13. Artesian Water entered an agreement for a water service interconnection with the Chester Water Authority (Chester Water) which provides an average daily supply of four million gallons. Construction of the interconnection was completed during September Artesian Water paid Chester 50% of the shared costs of the interconnection, as defined in the agreement. Artesian Water's total cost incurred for this project was $1,527,416. Chester Water will annually refund 10% of the actual purchased water charges paid by Artesian Water during the frrst five years the interconnection is in operation, not to exceed the total shared costs of the work actually paid by Artesian Water. The agreement also requires that Artesian Water make specified minimum annual purchases during an initial ten-year term. Subject to extension of the supply permits by the appropriate regulatory authorities, and Chester Water's right to terminate the 33

34 agreement at the end of each renewal period beyond December 31, 2002 by giving sixty days notice, the agreement is renewable for successive one-year terms beyond December 31, Artesian Water also has two other water service interconnection agreements with a neighboring utility which require minimum annual purchases. Rates charged under all agreements are subject to change. The minimum annual purchase commitments for all interconnection agreements for 1996 through 2000 and the aggregate total for the two years 2001 through 2002, at current rates, are as follows: & thereafter $2,357,357 2,306,051 2,433,946 2,433,946 2,433, $ Payments for purchased water made under all interconnection agreements were $2,491,433, $2,716,188 and $2,489,039 for the years ended December 31, 1995, 1994, and 1993, respectively. Budgeted mandatory utility plant expenditures expected to be incurred in 1996 through 2000, due to planned state highway projects which require the relocation of Artesian Water's water service mains are as follows: $2,300,000 1,100, ,000 1,500, $ The exact timing and extent of these relocation projects is controlled by the Delaware Department of Transportation. 34

35 Following the sale of Artesian Development's County Commerce Office Park rental office building in March 1996, Artesian Water and Artesian Laboratories will have ten year lease commitments. The minimum lease commitments for 1996 through 2000 and the aggregate total for the five years 2001 through 2006, at current rates, are as follows: & thereafter Artesian Water $ 50,762 62,315 63,995 65,676 67, $ Artesian Laboratories. Inc. $ 92, , , , , $1, GEOGRAPIDC CONCENTRATION OF CUSTOMERS Artesian Water provides water utility service to customers within its established service territory in portions ofnew Castle County, Delaware, pursuant to rates filed with and approved by the Delaware Public Service Commission. As ofdecember 31, 1995, Artesian Water is serving 56,672.customers. Artesian Laboratories provides environmental testing services of water, waste water and solids principally to third parties as well as to Artesian Water. Artesian Laboratories is permitted to conduct business in the states of Delaware, Maryland, Pennsylvania and New Jersey and is serving approximately 286 customers as of December 31, The customer breakdown by state is approximately 174 in Delaware, 83 in Maryland, 24 in Pennsylvania, and 5 in New Jersey. 35

36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Artesian Resources Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, retained earnings, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1995 and 1994 consolidated fmancial statements referred to above present fairly, in all material respects, the financial position of Artesian Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Wilmington, DE February 15, 1996 l~fjmfr PJM~vi:_Lt_f/ KPMG PEAT MARWICK LLP 36

37 Report of Independent Accountants To the Board of Directors and Stockholders of Artesian Resources Corporation In our opinion, the accompanying consolidated statements of operations, of retained earnings and of cash flows present fairly, in all material respects, the results of operations and cash flows of Artesian Resources Corporation and its subsidiaries for the year ended December31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Artesian Resources Corporation and its subsidiaries for any period subsequent to December 31, As discussed in Notes 3 and 11 to the financialstatements, effective January 1, 1993, the Company changed its method of accounting for income taxes, contributions in aid of construction and post retirement benefits other than pensions. fj~w~lv PRICE WATERHOUSE LLP Philadelphia, PA February 15,

38 PART III Item Directors and Executive Officers of the Rer:istrant. Position Dian C. Taylor Ellis D. Taylor Kenneth R. Biederman William C. Wyer John R. Eisenbrey, Jr. Peter N. Johnson David. B. Spacht Joseph A. DiNunzio Bruce P. Kraeuter Keith A. Hausknecht Director, Chair of the Board, Chief Executive Officer and President of Artesian Resources Corporation, Artesian Water Company, Inc., and Artesian Development, Corporation Director, Chairman Emeritus Director Director Director Senior Vice President and Chief Operating Officer of Artesian Water Company, Inc. Vice President, Chief Financial Officer and Treasurer of Artesian Resources Corporation and Subsidiaries Vice President and Secretary of Artesian Resources Corporation and Subsidiaries Vice President and Chief Engineer of Artesian Water Company, Inc. President of Artesian Laboratories, Inc. In accordance with the provisions of Artesian Resources' certificate of incorporation and bylaws, Artesian Resources Board of Directors is divided into three classes. Members of each class serve for three years, and one class is elected each year to serve a term until his or her successor shall have been elected and qualified or until earlier resignation or removal. The terms of Dian C. Taylor and John R. Eisenbrey, Jr. will expire at the 1996 annual meeting at which time Ms. Taylor and Mr. Eisenbrey, Jr. will be nominees for reelection. The term of Kenneth R. Biederman will expire at the 1997 annual meeting. The terms of Ellis D. Tayl.or and William C. Wyer will expire at the 1998 annual meeting. Dian C. Taylor has served as Chair of the Board since July 1993, and as President and Chief Executive Officer of Artesian Resources Corporation and Subsidiaries since September Ms. Taylor served as Vice President of Corporate Development of Artesian Resources from August 1991 through April 1992, and Executive Vice President from April 1992 through September She was formerly a consultant to the Small Business Development Center at the University of Delaware from February 1991 to August 1991 and Owner/President of Achievement Resources, Inc from 1985 to Achievement 38

39 Resources, Inc. specialized in employee training and small business consulting. Ms. Taylor is the niece of Ellis D. Taylor and the aunt of John R. Eisenbrey, Jr. Ellis D. Taylor is Chairman Emeritus of the Company since August 1991, and has served as a Director since He served as President from 1958 until November 1990 and as Chief Executive Officer from November 1990 until August He is presently a Trustee of the Medical Center of Delaware Christiana Hospital. Mr. Taylor is the uncle of Dian C. Taylor. Kenneth R. Biederman has served as a Director since July 18, Mr. Biederman is currently Dean of the College of Business and Economics of the University of Delaware, and has served as Director of Chase Manhattan Bank USA since November He was formerly a financial and banking consultant from 1989 to 1990, and served as President of Gibraltar Bank from 1987 to William C. Wyer has served as a Director since July 18, Mr. Wyer is currently President of AllNation Life Insurance and Senior Vice President of Blue Cross/Blue Shield of Delaware. Mr. Wyer was Managing Director of Wilmington 2000, a private organization seeking to revitalize the city of Wilmington, Delaware, from May 1993 to September He was President ofwyer Group, Inc. from 1991 to 1993 and Commerce Enterprise Group from 1989 to 1991, management consulting firms specializing in operations reviews designed to increase productivity, cut overhead and increase competitiveness. Mr Wyer served as President of the Delaware State Chamber of Commerce from 1978 to John R. Eisenbrey, Jr. has served as a Director since July He is the Owner/President of Bear Industries, Inc., a privately held mechanical contracting fmn specializing in fire protection, for more than ten years. Mr. Eisenbrey is the nephew of Dian C. Taylor. Peter N. Johnson has served as Senior Vice President and Chief Operating Officer of Artesian Water Company, Inc. since August 9, Mr. Johnson served as Senior Vice President and General Manager of Artesian Water Company, Inc. from 1979 to David B. Spacht was appointed Vice President, Treasurer and Chief Financial Officer of Artesian Resources Corporation and Subsidiaries in January Mr. Spacht previously served as Treasurer and Chief Financial Officer of Artesian Resources Corporation and Subsidiaries since July Mr. Spacht formerly held the positions of Assistant Secretary, Assistant Treasurer and Controller of Artesian Resources Corporation and Subsidiaries and has been employed by the Company for sixteen years. Joseph A. DiNunzio was appointed Vice President and Secretary of Artesian Resources Corporation and Subsidiaries in January Mr. DiNunzio previously served as Secretary of Artesian Resources Corporation and Subsidiaries since July Mr. DiNunzio formerly held the positions of Assistant Secretary and Manager of Budgeting and Financial Planning. Prior to joining the Company in 1989, Mr. DiNunzio was employed by Price Waterhouse since Bruce P. Kraeuter was appointed Vice President and Chief Engineer of Artesian Water Company, Inc. in January Mr. Kraeuter formerly held the position of Manager of Engineering since February 1994 and has been employed by Artesian Water Company, Inc. as an engineer since July Prior to 39

40 joining Artesian Water Company, Inc., Mr. Kraeuter served as Senior Engineer with the Water Resources Agency for New Castle County, Delaware since Keith A. Hausknecht has served as President of Artesian Laboratories, Inc. since January 1, Mr. Hausknecht formerly served as Vice President of Artesian Laboratories, Inc. from April 1992 to January Mr. Hausknecht was formerly President of NET-Atlantic (a subsidiary of National Environmental Testing) from 1988 to Officers are currently elected annually by the Board of Directors and hold office until their successor has been chosen and qualified, or until death, resignation or removal by the Board of Directors. Item Executive Compensation. The name and cash compensation paid to those executive officers of Artesian Resources whose total direct remuneration exceeded $100,000 for the year ended December 31, 1995 is as follows: SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION ~arne and Princigal Position Year Other Annual Salarv Bonus Comgensation Number of Securities Underlying Ootions Awarded All Other Comgensation Dian C. Taylor, Chair, CEO & President $116,359 $7,500(1) $21,620 (3) $110,160 $16,338 (3) $80,350 $44,366(2) $15,863 (3) 3,000 3,000 3,000 $8,368 (4) $5,204 (4) $4,810 (4) Peter N. Johnson, Senior Vice President & Chief Operating Officer $109,244 $9,528 (1) $108,360 $105,648 $9,317 (2) $2,219 $2,619 $2,168 3,000 $5,408 (4) $4,414 (4) $5,465 (4) David B. Spacht, 1995 Vice President, Treasurer & 1994 Chief Financial Officer 1993 $89,128 $11,572 (1) $80,160 $75,340 $7,986 (2) $1,979 $1,189 $1,069 3,000 3,000 $8,279 (4) $3,877 (4) $2,606 (4) Joseph A. DiNunzio, 1995 Vice President & Secretary $89,128 $13,886 (1) $80,160 $67,340 $7,986 (2) $706 $169 $1,547 $6,234 (4) $4,431 (4) $3,360 (4) 40

41 (1) The Executive Committee of the Board of Directors approved cash bonus compensation to Ms. Taylor in the amount of$7,500 at its meeting held on December 13, The Committee also approved a stock and cash bonus under the Cash and Stock Bonus Compensation Plan previously approved by the shareholders to Messrs. Johnson, Spacht, and DiNunzio at its meeting held on December 13, The bonus was paid in January Mr. Johnson received 400 shares of Class A Non-Voting Common Stock and $3,958 in cash. Mr. Spachtreceived 500 shares of Class A Non-Voting Common Stock and $4,947 in cash. Mr. DiNunzio received 600 shares of Class A Non-Voting Common Stock and $5,936 in cash. The cash portion of the bonus was issued to cover each individuals tax liability associated with the stock bonus issued. The fair market value of the Class A Non-Voting Common Stock issued was $ (2) The Personnel, Compensation and Benefits Committee of the Board of Directors approved cash bonus compensation to Ms. Taylor and Messrs. Johnson, Spacht, and DiNunzio, as well as several other management personnel, at its meeting held on December 16, The bonus was paid, as directed by the Committee, in January (3) Ms. Taylor received $17,900 in 1995, $13,200 in 1994, and $15,650 in 1993 as compensation for attendance at meetings of the Board and its committees. ( 4) Artesian Resomces contributes two percent of an eligible employee's gross earnings to the 401 (k) Deferred Compensation Retirement Plan. In addition, employees can contribute up to twelve percent, and the Company will match fifty percent of the first six percent of the employees' gross earnings. Ms. Taylor received $6,042, $4,612 and $4,810 in company contributions to the 401(k) Deferred Compensation Retirement Plan in 1995, 1994 and 1993, respectively. Mr. Johnson received $5,408, $4,414, and $5,465 in company contributions to the 401(k) Deferred Compensation Retirement Plan in 1995, 1994 and 1993, respectively. Mr. Spacht received $3,817, $2,800 and $2,606 in company contributions to the 401(k) Deferred Compensation Plan in 1995, 1994 and 1993, respectively. Mr. DiNl.inZio received $4,453, $4,000 and $3,360 in company contributions to the 401(k) Deferred Compensation Plan in 1995, 1994 and 1993, respectively. In addition, effective October 1, 1994 Artesian Resources established a supplementa1401(k) retirement plan. All employees hired before April 26, 1994 and under the age of sixty are eligible for the supplementa1401(k) retirement plan. Employees over the age of sixty waived participation in the plan in order to receive company paid medical, dental and life insurance benefits upon retirement. Such benefits will not be provided by Artesian Resources to any other current or future employees. Contributions are made by Artesian Resources to the supplemental401(k) retirement plan based upon an eligible employee's years of service. Ms. Taylor received $2,326 and $592 in company contributions to the supplemental 401(k)retirementplanin 1995 and 1994,respectively. Mr. Spachtreceived$4,453 and$1,077 in company contributions to the supplemental401(k) retirement plan in 1995 and 1994, respectively. Mr. DiNunzio received $1,781 and $431 in company contributions to the supplementa1401(k) retirement plan in 1995 and 1994, respectively. 41

42 Option/SAR Grants in Last Fiscal Year Individual Grants Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option term Number of Securities Underlying Options/SARS Granted %of Total Options/SARS Granted to Employees in Fiscal Year Market Price on Date of Qmn! Exercise or Base Price per Expiration Share Date 10% ($) Dian C. Taylor 3,000 (1) 11.8% $ $ /10/96 $6, $8, PeterN. Johnson 3,000 (1) 11.8% $ $ /10/96 $6, $8, David B. Spacht 3,000 (1) 11.8% $ $ /10/96 $6, $8, Joseph A. DiNunzio (1) Option granted for Class A Non-Voting Common Stock. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values Name Share( s) Acquired On Exercise Value Realized Number of Securities Underlying Unexercised Options/SARS at Fiscal Year End -All Exercisable- Value of Unexercised In-the-Money Options/SAR at Fiscal Year End -All Exercisable- Dian C. Taylor 3,000(1) $2,850 3,000 (1) $2,280 Peter N. Johnson 3,000 (1) $2,280 David B. Spacht 3,000 (1) $2,280 Joseph A. DiNunzio (1) Class A Non-Voting Common Stock 42

43 Outside Directors receive an annual retainer fee of $3,200 paid in advance. Each Director receives $800 for each board meeting attended, $350 for each committee meeting held on the day of a regular board meeting and $700 for each committee meeting attended on any other day. The chair of each committee, who is also an outside Director, also receives an annual retainer of$1,000. The office building and shop complex are leased by Artesian Water, Artesian Resources' regulated water utility subsidary, at an annual rental of approximately $204,000 from White Clay Realty, a partnership which includes Ellis D. Taylor, Patia Ziegler (daughter of Mr. Taylor), Dian C. Taylor, Louisa Welcher (sister of Ms. Taylor), and a trust in which John R. Eisenbrey, Jr., and Virginia Rettig (sister of Mr. Eisenbrey) are trustees and in which they have a beneficial interest. The initial term of the lease expires in 1997 with provisions for renewals by Artesian Water for three five-year periods thereafter. The lease may be terminated at any time by Artesian Water through the purchase of the leased facilities for (1) an amount equal to the sum of any mortgage on such facilities and any accrued rental to date of (2) fair market value of the facilities, whichever is higher. Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, at an annual rental of approximately $40,400. The initial term of the lease was for ten years ending September 30, 1995 and, thereafter, renewal is automatic from year to year unless 60 days written notice is given by either party before the end of the year's lease term. The annual rental is adjusted each year by the consumer price index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by giving 60 days written notice to Glendale Enterprises Limited should water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely affect its interest in the lease. Artesian Resources has an Officer's Medical Reimbursement Plan which reimburses officers for certain medical expenses not covered under the Company's medical insurance plan. Artesian Resources has a Cash and Stock Bonus Compensation Plan for Officers. The purpose of this Plan is to compensate the Officers of Artesian Resources Corporation and Artesian Water Company, Inc., as appointed by the Board of Directors, for their contributions to the long-term growth and prosperity of the companies in the form of cash or shares of the Class A Stock of Artesian Resources Corporation. Compensation in the form of a bonus of the Class A Stock of Artesian Resources also serves to increase their proprietary interest in the companies. 43

44 Item Security Ownership of Directors. Executive Officers and Certain Other Beneficial Owners The following table sets forth the beneficial ownership of the equity securities of Artesian Resources for each director and nominee for director, each executive officer of Artesian Resources earning in excess of $100,000, each beneficial owner of more than 5% of the outstanding shares of any class of stock, and all directors and executive officers earning in excess of$100,000 as a group as of March 4, 1996, based in each case on information furnished to Artesian Resources. NAME BENEFICIAL OWNERSHIP (1) CLASS A CLASS B CO~ON CO~ON NON-VOTING (2) (2) 7%. PREFERRED (2) Ellis D. Taylor (3) 212 Washington Avenue Newport, Delaware , % 127, % % Dian C. Taylor 664 Churchmans Road Newark, DE , % 44, % John R. Eisenbrey, Jr. (4) P. 0. Box 9174 Newark, DE , % 15, % Kenneth R. Biederman 14 Hayden Way Newark, Delaware , % William C. Wyer 1980 Superfme Lane Apt. 501 Wilmington, Delaware , % Peter N. Johnson ( 5) 664 Churchmans Rd. Newark, Delaware , David B. Spacht (6) 664 Churchmans Rd. Newark, Delaware , Joseph A. DiNunzio 664 Churchmans Rd. Newark, Delaware Norman H. Taylor, Jr. (7) 1597 Porter Road Bear, Delaware ,664 96, % 44

45 NAME BENEFICIAL OWNERSIDP (1) CLASS A CLASS B COMMON COMMON NON-VOT~G (2) (2) 7% PREFERRED (2) Louisa Taylor Welcher (8) 219 Laurel A venue Newark, Delaware Hilda Taylor 4 East Green Valley Circle Newark, Delaware Directors and Executive Officers as a Group (9 Individuals) 7, % 38, % 32, % 40, % 83, % 187, % % % (1) The nature of ownership consists of sole voting and investment power unless otherwise indicated. The amount also includes all shares issuable to such person or group upon the exercise of options held by such person or group to the extent such options are exercisable within 60 days of March 4, At March 4, 1996, Messrs. Taylor, Eisenbrey, Jr., Biederman, Wyer, Ms. Taylor, Mr. Peter N. Johnson, Senior Vice President and Chief Operating Officer, and Mr. David B. Spacht, Vice President, Chief Financial Officer and Treasurer, each held options for 3,000 shares of Class A Non-Voting Common Stock. (2) The percentage of the total number of shares ofthe class outstanding is shown where that percentage is one percent or greater. Percentages for each person or group are based on the aggregate number of shares outstanding as of March 4, 1996, and all shares issuable to such person or group upon the exercise of options held by such person or group, to the extent such options are exercisable within 60 days of that date. (3) Includes 690 shares of Class B Stock, 12,380 shares of Class A Stock and 898 shares of7% Preferred Stock owned by a trust of which Mr. Taylor is a trustee and in which he has a beneficial interest, and 2,500 shares of Class B Stock held by a Company wholly owned by Mf. Taylor. (4)- Includes 312 shares of Class B Stock owned by a trust ofwhich Mr. Eisenbrey, Jr. is a trustee and in which he has a beneficial ownership interest. (5) Includes 284 shares of Class B Stock held by the Trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer. (6) Includes 48 shares of Class B Stock held by the Trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer. (7) Includes 305 shares of Class B Stock held by the Trustees under Artesian Resources' Employee Stock Ownership Plan which are subject to restrictions on transfer and 347 shares of Class B Stock owned by Mr. Taylor's wife to which Mr. Taylor disclaims beneficial ownership. (8) Includes 53 shares of Class B Stock held jointly by Ms. Welcher's husband and son, 103 shares of Class A Stock owned by each Ms. Welcher's husband and son and 103 shares owned by Ms. Welcher's son, to which Ms. Welcher disclaims beneficial ownership. 45

46 Based solely on its review of the copies of beneficial ownership statements received by it, or written representations from certain reporting persons that no beneficial ownership statements were required for those persons, Artesian Resources believes that during 1995 all beneficial ownership statements under Section 16(a) ofthe Exchange Act which were required to be filed by Executive Officers and Directors of Artesain Resources in their personal capacities were filed in a timely manner. Item Certain Relationships and Related Transactions. Artesian Water rents an office building and shop complex at an aggregate annual rental of $204,052 from White Clay Realty, a partnership in which Ellis D. Taylor, Patia Ziegler (daughter of Mr. Taylor), Dian C. Taylor, Louisa Welcher (sister of Ms. Taylor), and a trust in which John R. Eisenbrey, Jr. and Virginia Rettig (sister of Mr. Eisenbrey) are trustees and in which they have a beneficial interest, are partners. The lease expires in 1997, with provisions for renewals for three five year periods thereafter. Artesian Water may terminate the lease at any time by purchasing the leased facilities for (1) an amount equal to the sum of any mortgage on such facilities and any accrued rental to date or (2) its fair market value, whichever is higher. Management believes that payments made to White Clay Realty are generally comparable to what would be paid to unaffijiated parties for similar facilities. Artesian Water leases certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor. These water production wells provide a portion of Artesian Water's source of supply. The initial term of the lease was for the ten years ended September 30, 1995 with automatic year to year renewal thereafter unless sixty days written notice is given by either party prior to the end of the lease year. The annual rental was $40,372 in 1995 and is adjusted each year by the Consumer Price Index as of June 30 of the preceding year. Artesian Water has the right to terminate this lease by providing sixty days written notice to Glendale Enterprises Limited should water supply be exhausted or other conditions beyond the control of Artesian Water materially and adversely affect its interest in the lease. The terms of transactions with related parties are determined on a basis that management believes is comparable to terms which could be negotiated with non-affiliates. 46

47 Item Exhibits, Financial Statement Schedules, and Reports on Form 8-K. PART IV Page(s)* a) The following documents are filed as part of this report: (1) Financial Statements: Consolidated Balance Sheet at December 31, 1995 and Consolidated Statements of Operations and Retained Earnings for the three years ended December 31, Consolidated Statement of Cash Flows for the three years ended December 31, Schedules Accompanying Financial Statements Notes to Consolidated Financial Statements Reports of Independent Accountants KPMG Peat Marwick LLP 36 Price Waterhouse LLP 37 (2) Financial Statement Schedules: Description Reports of Independent Accountants on Financial Statement Schedules KPMG Peat Marwick LLP 52 Price Waterhouse LLP 53 Schedule V: Valuation and Qualifying Accounts 71 Page number shown refers to page number in this Report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits: b) Reports on Form 8-K. The Exhibits listed in the accompanying Index to Exhibits on Page 50 are filed as part of, or incorporated by reference into, this Form 10-K Annual Report. During the last quarter of the period covered by this Report on Form 1 0-K, Artesian Resources filed no reports on Form 8-K. 47

48 SIGNATURES Pursuant to the requirements of Section 13 or 15( d) of the Securities Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARTESIAN RESOURCES CORPORATION David B. Spacht, Vice P esident, Chief Financial Officer and Treasurer Pursuant to the requirements of the Secwities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Principal Executive Officer: Q,~~ (!~ ~ President and Chief Executive Officer Dian c. Taylor Principal Financial and Accounting Officer: Vice President, Chief Financial Officer and Treasurer 48

49 Directors: ~e.~ Dian C. Taylor A(;i(L Kenneth R. Biederman 49

50 ARTESIAN RESOURCES CORPORATION FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1995 INDEX TO EXHIBITS Exhibit Number Description 3 Articles of Incorporation and By-Laws Page* (a) (b) (c) Restated Certificate of Incorporation of the Company effective May 26, 1995 including Certificate of Amendment Restated Certificate of Incorporation of the Company effective April 26, 1994 including Certificate of Correction. By-Laws ofthe Company effective April27, (h) (f) (d) 4 Instruments Defining the Rights of Security Holders. Including Indentures (a) (b) (c) (d) Twelfth Supplemental Indenture dated as of December 5, 1995 between Artesian Water Company, Inc. subsidiary of Artesian Resources Corporation, and Wilmington Trust Company. 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. Tenth Supplemental Indenture dated as of Aprill, 1989 between Artesian Water Company, Inc., subsidiary of Artesian Resources Corporation, and Wilmington Trust Company, as Trustee. 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. 54 (c) (a) (a) * See footnote explanation on page

51 (a) (b) (c) (d) (e) 10 Material Contracts Artesian Resources Corporation Non-Qualified Stock Option Plan. Lease dated as of March 1, 1972 between White Clay Realty Company and Artesian Water Company Artesian Resources Corporation Non-Qualified Stock Option Plan. Artesian Resources Corporation Cash and Stock Bonus Compensation Plan for Officers. Artesian Resources Corporation Incentive Stock Option Plan 11 Computation of Earnings per Common Share 16 Letter re Change in Certifying Accountants 22 Subsidiaries. Subsidiaries ofthe Company as of December 31, (a) (a) (b) (e) (g) 70 (a) (b) (c) (d) (e) (t) (g) (h) Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Registration Statement on Form 10 filed April30, 1990 and as amended on June 19, 1990 by Form 8 filed. Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Annual Report on Form 10-K for the year ended December 31, Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Annual Report on Form 1 0-K for the year ended December 31, Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 8-K filed April 27, Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Annual Report on form 10-K for the year ended December 31, Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 10-Q for the quarter ended March 31, Incorpot:ated by reference to the exhibit filed with the Artesian Resources Corporation Form 8-K filed July 5, Incorporated by reference to the exhibit filed with the Artesian Resources Corporation Form 10-Q for the quarter ended June 30,

52 Report of Independent Accountants on Financial Statement Schedules To the Board of Directors of Artesian Resources Corporation: Our audits of the Consolidated financial statements referred to in our report dated February 15, 1996 appearing on page 36 of this Annual Report on Form 10-K also included audits of the Financial Statement Schedules for the years ended December 31, 1995 and 19941isted in Item 14(a) of this Form 10-K. The Financial Statement Schedules for the year ended December 31, 1993 were audited by other auditors whose report thereon dated February 15, 1994, expressed an unqualified opinion on those statements, modified for a change in the method of accounting for income taxes, contributions in aid of construction, and postretirement benefits other than pensions. In our opinion, these Financial Statement Schedules for the years ended December 31, 1995 and 1994 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Wilmington, DE February 15, 1996 KPMG PEAT MARWICK LLP 52

53 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors Artesian Resources Cm:pomtion Our audit of the consolidated financial statements of Artesian Resources Corpomtion and its subsidiaries referred to in our report dated February 15, 1994 appearing on page 37 of this Annual Report on Fonn 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Fonn 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. ~W~LL.fJ PRICE WATERHOUSE LLP Philadelphia, PA February 15,

54 BK2022PG0035 Exhibit 4 Tax Parcel Nos & Prepared by: MORRIS, NICHOLS, ARSHT & TUNNELL ATTN: David Ley Hamilton 1201 North Market Street Wilmington, Delaware ARTESIAN WATER COMPANY, INC. TO As Trustee WILMINGTON TRUST COMPANY, TWELFTH SUPPLEMENTAL INDENTURE Dated as of Decmber 5, 1995 Supplemental to Indenture of Mortgage Dated as of July 1,

55 36 THIS TWELFTH SUPPLEMENTAL INDENTURE, is made and entered into as of December 5, 1995 by and between ARTESIAN WATER COMPANY, INC., a Delaware corporatiqn (the "Company"), and WILMINGTON TRUST COMPANY, a Delaware corporation, having its principal office and place of business at Tenth and Market Streets, in the City of Wilmington, Delaware, as Trustee under the Indenture hereinafter referred to (the "Trustee"). WHEREAS, the Company and the Trustee have entered into an Indenture of Mortgage dated as of July 1, 1961 (the "Original Indenture"), as supplemented by first through eleventh Supplemental Indentures thereto (as supplemented, the "Indenture"); and WHEREAS, the Original Indenture was duly recorded in the Recorder's Office at Wilmington, in Mortgage Record A, Volume 56, Page 1 etc., on the 13th day of November, A.D., 1961; and WHEREAS, the Company has entered into a Sale of Assets Agreement (the "Sale Agreement") dated as of April21, 1995 with the Town of Townsend, a public corporation organized and operating under an Act of the General Assembly, Chapter 174, Volume 23, Laws of Delaware, as Amended, pursuant to which the Company will acquire certain assets used in connection with the business of providing water service to customers living in the Town of Townsend, Delaware through the operation of a water distribution system, as described in Article I, paragraphs 1.1 (a) through (f) of the Sale Agreement (the "Townsend Assets"); and, WHEREAS, pursuant to Granting Clause V ("Other and AfterAcquired Property") of the Indenture, all of the Company's after

56 BK2022PG0037 acquired property, other than Excepted Property (as defined in the Indenture), is subject to the lien of the Indenture ; and WHEREAS, to facilitate the transactions contemplated by the Sale Agreement, the Company and all of the holders of the bonds issued and outstanding under the Indenture (the "Bondholders") have determined to exclude the Townsend Assets from the lien created under the Indenture; and WHEREAS, in accordance with the provisions of Section ("Consents of Bondholders") of the Indenture, the Bondholders have duly taken certain action and duly adopted resolutions to exclude the Townsend Assets from the lien created under the Indenture (the "Bondholders' Resolution"); and WHEREAS, in accordance with the provisions of Article XIV ("Meetings and Consents of Bondholders") of the Indenture, the Company has duly adopted a resolution approving the Bondholders' Resolution (the "Company's Resolution"); and WHEREAS, the Trustee has consented to the Bondholders' Resolution and the Company's Resolution; and WHEREAS, pursuant to the provisions of the Indenture, the Company has duly resolved and determined to make, execute and deliver to the Trustee this Twelfth Supplemental Indenture for the purpose of modifying and altering the Indenture and the rights and obligations of the Company and the holders of the Bonds (as defined in the Indenture) and coupons issued under the Indenture in order to exclude the Townsend Assets from the lien created under the Indenture; 56

57 Bk2022PG0038 NOW, THEREFORE THIS INDENTURE WITNESSETH THAT, in consideration of the premises and of One Dollar to the Company duly paid by the Trustee at or before the ensealing and delivery of these presents, the Company, for itself and its successors, intending to be legally bound hereby, does hereby covenant to and agree with the Trustee and its successors in the trust, for the benefit of the Bondholders, as follows: 1. Exclusion of Townsend Assets. The Townsend Assets shall not be subject to the lien of the Indenture, shall not be Mortgaged Property (as defined in the Indenture) and shall not be granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company unto the Trustee in trust for the benefit and security of those who hold or own bonds and coupons issued and to be issued under the Indenture; provided, however, that these same Townsend Assets shall not be further encumbered by the Company subsequent to the date of this Twelfth Supplemental Indenture except with the written consent of either the Trustee or all of the Bondholders. 2. Trustee Acceptance. The Trustee hereby accepts the trust hereby declared and provided and agrees to perform the same upon the terms set forth in the Indenture as further supplemented by this Twelfth Supplemental Indenture. 3. Construction and Ratification. This instrument shall be construed as an indenture supplemental to the Indenture, and shall form a part thereof. The Indenture is hereby ratified and confirmed. 3 57

58 BK 2022PG Counterparts. This Twelfth Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which when so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the Company has caused these presents to be signed in its corporate name by its President or one of its Vice Presidents and sealed with its corporate seal, attested by its Secretary or one of its Assistant Secretaries, and the Trustee has caused these presents to be signed in its corporate name by one of its Vice Presidents and sealed with its corporate seal, attested by one of its Assistant Secretaries, all as of the day and year first above written. ARTESIAN WATER COMPANY, INC. By: [Dian C. Taylor] [SEAL] Title: President & Chief Executive Officer Attest: [Joseph A. DiNunzio] Secretary WILMINGTON TRUST COMPANY, As Trustee, Name: [SEAL] Vice President Attest: Assistant Secretary 4 58

59 STATE OF DELAWARE COUNTY OF NEW CASTLE SS.: On this, the 5th day of December!, 1995 before me, the undersigned, notary public, personally appeared Dian C. Taylor, who acknowledged herself/himself to be the President and CEO of Artesian Water Company, Inc., a corporation organized under the laws of the State of Delaware, and that he as such officer, being authorized to do so, executed the foregoing Twelfth Supplemental Indenture for the purposes therein contained by signing the name of Artesian Water Company, Inc. by herself/himself as President and CEO. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public Wilmington, New Castle County my Commission Expires 3/30/98 DAVID B. SPACHT NOTARY PUBLIC STATE OF DELAWARE my commission expires 3/30/98 59

60 BK2022 PG0041 STATE OF DELAWARE COUNTY OF NEW CASTLE SS.: On this the 23 day of November, 1995, before me, the undersigned, notary public, personally appeared Mary C., who acknowledged herself/himself to be a Vice President of Wilmington Trust Company, a corporation organized under the laws of the State of Delaware, and that he as such officer, being authorized to do so, executed the foregoing Twelfth Supplemental Indenture for the purposes therein contained py signing the name of Wilmington Trust Company by herself/himself as Vice President. I certify that I am not an officer or director of said trust company. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public Wilmington, New Castle County my commission Expires PATRICIA W. ZINK NOTARY PUBLIC My commission expires June 12,

61 ARTESIAN RESOURCES CORPORATION INCENTIVE STOCK OPTION PLAN Exhibit 10 The purpose of the Artesian Resources Corporation Incentive Stock Option Plan (the '"Plan") is to provide designated officers (including officers who are also directors) and other key employees of Artesian Resources Corporation and its subsidiaries (hereinafter collectively referred to as the "Company") with the opportunity to receive grants of incentive stock options. The Company believes that the Plan will cause the participants to contribute materially to the growth of the Company, thereby benefitting the Company's stockholders and will Artesian Laboratoriesgn the economic interests of the participants with those of the stockholders. I. AdnruUri~tion The Plan shall be administered and interpreted by a committee (the "Committee") consisting of not less than two persons appointed by the Board of Directors of the Company, all of whom shall be "disinterested persons" as defined under Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange.Act") and "outside directors" as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and related Treasury regulations. The Committee shall have the sole authority to determine (i) the key employees to whom options shall be granted under the Plan, (ii) the size and terms of the options to be granted to each such individual, (iii) the time when the options will be granted and the duration of the exercise period, including the criteria for vesting and the acceleration of vesting, and (iv) any other matters arising under the Plan. The Committee shall have full power and authority to adnruurister and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interests in the Plan or in any awards granted hereunder. 11. CJrants Incentives under the Plan shall consist of incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Code (also referred to as "Stock Options"). All Stock Options shall be subject to the terms and conditions set forth herein and to those other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the employee (the "Grant Letter"). The Committee shall approve the form and provisions of each CJrant Letter to an employee. Grants under a particular Section of the Plan need not be uniform as among the employees. 61

62 iii. Shares Subject to the Plan (a) Subject to the adjustment specified below, the aggregate number of shares of Class A Non-Voting Stock of the Company ("Company Stock") that have been or may be issued or transferred under the Plan is 100,000 shares. The maximum aggregate number of shares of Company Stock that shall be subject to options under the Plan to any single individual during the term of the Plan shall be 50% of the aggregate number of shares specified in the preceding sentence. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares repurchased by the Company on the open market. If and to the extent options granted under the Plan terminate, expire, or cancel without having been exercised, the shares subject to such option shall again be available for purposes of the Plan. (b) If there is any change in the number or kind of shares of Company Stock issuable under the Plan through the declaration of stock dividends, or through a recapitartesian Laboratorieszation, stock splits, or combinations or exchanges of such shares, or merger, reorganization or consolidation of the Company, reclassification or change in par value or by reason of any other extraordinary or unusual events affecting the outstanding Company Stock as a class without the Company's receipt of consideration, the maximum number of shares of Company Stock available for Stock Options, the maximum number of shares of Company Stock for which any one individual participating in the Plan may be granted over the term of the Plan, the number of shares covered by outstanding Stock Options, and the price per share or the applicable market value of such Stock Options, shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number or kind of issued shares of Company Stock to preclude the enlargement or dilution of rights and benefits under such Stock Options; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. The adjustments determined by the Committee shall be final, binding and conclusive. Notwithstanding the foregoing, no adjustment shall be authorized or made pursuant to this Section to the extent that such authority or adjustment would cause any incentive stock option to fail to comply with Section 422 of the Code. iv. Eligibility for Participation All individuals employed by the Company or a subsidiary ("Employees") (including Employees who are officers or members of the Board) who hold positions of responsibility and whose performance, in the judgment of the Committee, can have a significant effect on the long-term success of the Company shall be eligible to participate in the Plan. The Committee shall select the Employees to receive Stock Options (the "Optionees") and determine the number of shares of Company Stock subject to a particular Stock Option in such manner as the Committee determines. Nothing contained in this Plan shall be construed to limit the right of the Company to grant options otherwise in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including options granted to employees thereof who become employees of the Company, or for other proper corporate purpose. 62

63 v. Granting of Options (a) Number of Shares. Subject to Section 3(a), the Committee, in its sole discretion, shall determine the number of shares of Company Stock that will be subject to each option grant. (b) Type of Option and Price. Subject to the provisions of Section S(h), the Committee may only grant Incentive Stock Options in accordance with the terms and conditions set forth herein. Subject to the provisions of Section S(h), the purchase price of Company Stock subject to a Stock Option shall be equal to the Fair Market Value (as defined below) of a share of such Stock on the date such Stock Option is granted. If the Company Stock is traded in a public market, then the Fair Market Value per share shall be, if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or the latest preceding date upon which a sale was reported, or, if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices thereof on the relevant date, as reported on Nasdaq (or, if applicable, by the exchange, if there was no reported sale on the relevant date) or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not traded in a public market or subject to reported transactions or "bid" or "ask" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Exercise Period. The Committee shall determine the option exercise period of each Stock Option. The exercise period shall not exceed ten years from the date of grant. (d) vesting of Options. The Stock Options shall vest in accordance with the terms and conditions determined by the Committee, in its sole discretion, and specified in the Grant Letter. (e) Manner of Exercise. An Optionee may exercise a Stock Option by delivering a notice of exercise to the Committee with accompanying payment of the option price in accordance with (g) below. Such notice may instruct the Company to deliver shares of Company Stock due upon the exercise of the Stock Option to any registered broker or dealer designated by the Company ("Designated Broker") in lieu of delivery to the Optionee. Such instructions must designate the account into which the shares are to be deposited. The Optionee may tender this notice of exercise, which has been properly executed by the Optionee, and the aforementioned delivery instructions to any Designated Broker. (f) Termination of Employment. Disability or Death. (1) In the event the Optionee during the Optionee's lifetime ceases to be an employee of the Company for any reason other than death, "disability" (as defined below) or "termination for cause" (as defined below) by the 63

64 Company, any Stock Option which is otherwise exercisable by the Optionee shall terminate unless exercised within 90 days of the date on which the Optionee ceases to be an employee (or within such other shorter period of time as may be specified in the Grant Letter), but in any event no later than the date of expiration of the exercise period. Any of the Optionee's Stock Options which are not otherwise exercisable as of the date on which the Optionee ceases to be an employee shall terminate as of such date (except as the Committee may otherwise provide). (2) In the event of the death of the Optionee while he is an employee of the Company or within not more than 90 days of the date on which he ceases to be an employee for any reason other than a "termination for cause" (as defined herein) by the Company (or within such other period of time as may be specified in the Grant Letter), any Stock Option which is otherwise exercisable by the Optionee on the date on which the Optionee ceases to be an employee shall terminate unless exercised by the Optionee's personal representative within one year of the date on which the Optionee ceases to be an employee (or within such other period of time as may be specified in the Grant Letter), but in any event no later than the date of the expiration of the option exercise period. (3) In the event the Optionee ceases to be an employee of the Company on account of becoming disabled within the meaning of section 22( e )(3) of the Code, any Stock Option which is otherwise exercisable by the Optionee on the date on which the Optionee ceases to be an employee shall terminate unless exercised within one year of the date on which the Optionee ceases to be an employee (or within such other period of time as may be specified in the Grant Letter), but in any event no later than the date of the expiration of the option exercise period. ( 4) In the event the Optionee ceases to be an employee of the Company on account of a "termination for cause" by the Company, as determined in accordance with the personnel policies of the Company in effect before any Change in Control of the Company, as defmed in Section 7, any Stock Option held by the Optionee shall terminate as of the date the Optionee ceases to be an employee (except as the Committee may otherwise provide in the Grant Letter). (g) Satisfaction of Option Price. The Optionee shall pay the option price (i) in cash, (ii) with the approval of the Committee, by delivering shares of Company Stock owned by the Optionee including Company Stock acquired in connection with the exercise of a particular Stock Option and having a Fair Market Value on the date of exercise equal to the option price or with a combination of cash and shares, (iii) if shares of Company Stock may not be sold immediately following the exercise of a Stock Option, with the approval of the Committee, with the proceeds of a promissory note payable by the Optionee to the Company, but only in accordance with the provisions of a Loan Program established by the Company, or any successor program as in effect from time to time, (A) in a principal amount of up to 100% of the payment due upon the exercise of the Stock Option, or such applicable lower percentage as may be specified by the Committee pursuant to the Loan Program, and (B) bearing interest at a rate not less than the applicable Federal rate prescribed by Section 1274 of the Code, or such higher rate as may be specified by the Committee pursuant to the Loan Program or (iv) through any combination of (i), (ii) or (iii). The Optionee shall pay the option price and the amount of withholding tax due, if any, at the time of exercise. Shares of Company Stock shall not be issued or transferred upon exercise of a Stock Option until the option price is fully paid. 64

65 (h) Additional Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that if the aggregate Fair Market Value of the Company Stock on the date of the grant with respect to which Incentive Stock Options are exercisable f9r the first time by an Optionee during any calendar year under the Plan or any other stock option plan of the Company exceeds $100,000, then such option shall be treated as a non-quartesian Laboratoriesfied stock option. An Incentive Stock Option shall not be granted to any Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or parent of the Company, unless the option price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant and the option exercise period is not more than five years from the date of grant. 6. Transferability of Options Only an Optionee or his or her authorized legal representative may exercise rights under a Stock Option. Such persons may not transfer those rights except by will or by the laws of descent and distribution. When an Optionee dies, the personal representative or other person entitled to succeed to the rights of the Optionee ("Successor Optionee") may exercise such rights. A Successor Optionee must furnish proof satisfactory to the Company of his or her right to receive the Stock Option under the Optionee's will or under the applicable laws of descent and distribution. 7. Certain Corporate Changes (a) Sale or Exchange of Assets. Dissolution or Liquidation. or Merger or Consolidation Where the Company Survives. If all or substantially all of the assets of the Company are to be sold or exchanged, the Company is to be dissolved or liquidated, or the Company is a party to a merger or consolidation with anqther corporation in which the Company will be the surviving corporation, then, each Optionee with any outstanding Stock Options shall have the right to exercise in full any installments of such Stock Options not previously exercised (whether or not the right to exercise such installments has accrued pursuant to such Stock Options), unless the Committee, in its sole discretion, determines not to accelerate such Stock Options upon such transaction. In the event that options are accelerated pursuant to this Section, if a termination of such Stock Options would not affect the accounting treatment of any such transaction, any options not exercised shall thereafter terminate and cease to remain outstanding. In addition, if a cash out of such Stock Options would not affect the pooling of interest accounting treatment under APB No. 16 of any such transaction, the Committee may, in its sole discretion, require (i) that the Company purchase such Stock Options for a cash payment equal to the excess over the purchase price of the then Fair Market Value of the shares of Company Stock subject to the Optionee's outstanding Stock Options or (ii) that the Optionee surrender all or part of such outstanding Stock Options in exchange for a transfer of Company Stock with a Fair Market Value equal to the cash payment described in (i). (b) Merger or Consolidation Where the Company Does Not Survive. If the Company is a party to a merger or consolidation in which the Company will not be the surviving corporation, then any Optionee with any outstanding Stock Options shall have the right to exercise in full any installments of such Stock Options not previously exercised (whether or not the right to exercise such installments has accrued pursuant to such Stock Options). In the event that options are accelerated pursuant to this Section, if a termination of such Stock Options would not affect the accounting treatment of any such transaction, any options not exercised shall thereafter 65

66 terminate and cease to remain outstanding. In addition, if a cashout or substitution of such Stock Options would not affect the pooling of interest accounting treatment under APB No. 16 of any such transaction, the Committee may, in its sole discretion, require (i) that the Company purchase such Stock Options for a cash payment equal to the excess over the purchase price of the then Fair Market Value of the shares of Company Stock subject to the Optionee's outstanding Stock Options, (ii) that the surviving company replace the Stock Options with options to purchase common stock of the surviving company having comparable value and terms as determined, in its sole discretion, by the Committee, or (iii) that the Optionee surrender all or part of such outstanding Stock Options in exchange for a transfer of Company Stock with a Fair Market Value equal to the cash payment described in (i). (c) Other Events. If an event occurs which is a business combination with an interested stockholder described in Section 203 of the Delaware General Corpomtion Law which is not described in (a) or (b), above, then each Optionee with any outstanding Stock Options shall have the right to exercise in full any installments of such Stock Options not previously exercised (whether or not the right to exercise such installments has accrued pursuant to such Stock Options). (d) The occurrence of any event described in (a), (b), of (c), above shall be deemed to be a "Change in Control" of the Company for purposes of the Plan. 8. Amendment and Termination of the Plan (a) Amendment. The Board of Directors of the Company, by written resolution, may amend or terminate the Plan at any time; provided, however, that the Board of Directors shall not amend the Plan without shareholder approval if such approval is required by Rule 16b-3 of the Exchange Act or Section 162(m) of the Code and provided, further, that the Board of Directors shall not amend the Plan if such amendment would cause the Plan or the exercise of an Incentive Stock Option under the Plan to fail to comply with the requirements of Section 422 of the Code. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date unless terminated earlier by the Board of Directors of the Company or unless extended by the Board with the approval of the stockholders. (c) Termination and Amendment of Outstanding Stock Options. A termination or amendment of the Plan that occurs after a Stock Option is made shall not result in the termination or amendment of the Stock Option unless the Optionee consents or unless the Committee acts under Section 17(a) of the Plan. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Stock Option. Whether or not the Plan has terminated, an outstanding Stock Option may be terminated or amended under Section 17(a) or may be amended by agreement ofthe Company and the Optionee consistent with the Plan. 9. Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Stock Options under this Plan. In no event shall interest be paid or accrued on any Stock Option, including unpaid installments of Stock Options. 66