-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pbt4UiwJ5HZB7kxTse0ybAWWNipcMOPDyQtqESSg3CkvBPxUqXKdIdNuxlAge5WJ 37G/+jeLr62Im2oU2wHTrg== 0000912057-00-014913.txt : 20000331 0000912057-00-014913.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014913 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMINGUEZ SERVICES CORP CENTRAL INDEX KEY: 0000860673 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 330391161 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-71957 FILM NUMBER: 586446 BUSINESS ADDRESS: STREET 1: 21718 S ALAMEDA ST CITY: LONG BEACH STATE: CA ZIP: 90810 BUSINESS PHONE: 3108342625 MAIL ADDRESS: STREET 1: 21718 SOUTH ALAMEDA ST STREET 2: 21718 SOUTH ALAMEDA ST CITY: LONG BEACH STATE: CA ZIP: 90810 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended DECEMBER 31, 1999 Commission file number 0-18677 DOMINGUEZ SERVICES CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) California 33-0391161 - ------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer identification no.) incorporation or organization) 21718 South Alameda Street, Long Beach, California 90810 - ------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code) Registrant's telephone number, including area code (310) 834-2625 ---------------------------- Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- NONE The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: Common Shares, $1 Par Value --------------------------- (Title 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. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes X No ----- ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant: Common Shares average bid price of $32.875 on March 27, 2000. Aggregate Market Value $34,621,550 ---------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: March 27, 2000 - 1,563,779 Shares --------------------------------- (There are 50 pages in this 10-K) 1 PART I ITEM 1. BUSINESS. FORWARD-LOOKING STATEMENTS In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), the Dominguez Services Corporation (the Company) is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements (as defined in the Reform Act) made by or on behalf of the Company in this Annual Report. Any statements that express such statements are often, but not always, expressed with phrases such as expectations, beliefs, plans, objectives, assumptions, or future events or performance, through the use of words or phrases such as "anticipate," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will likely result," and "will continue." Such statements are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptions, and uncertainties and are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond the control of the Company, and could cause actual results to differ materially from those contained in forward-looking statements: - prevailing governmental policies and regulatory actions, including those of the California Public Utilities Commission ( the Commission), with respect to allowed rates of return, authorization of regulated rates, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of balancing account, and present or prospective competition; - economic and geographic factors including political and economic risks; - changes in and compliance with environmental and safety laws and policies; - water supply and weather conditions; - customer growth rate; - merger issues: - delays or change in anticipated closing date; - likelihood of approval by regulatory agencies; - changes in tax rates or policies or in rates of inflation; - unanticipated changes in operating expenses and capital expenditures; - emergency preparedness; - capital market conditions; - competition for non-regulatory opportunities; and - legal and administrative proceedings and settlements that influence the business and profitability of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of any such factor on the business, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. 2 GENERAL Dominguez Services Corporation is a holding company formed in 1990 through an Agreement of Merger with Dominguez Water Company. The Company's principal business is the ownership of all the common stock of Dominguez Water Company. The holding company structure provides operational and financial flexibility and allows the Company to engage in non-regulated activities. The Company has two wholly-owned subsidiaries: Dominguez Water Company and its operating subsidiaries (Dominguez), which are involved in regulated water supply and distribution, and DSC Investments, which is involved in non-regulated, water-related services and investments. A detailed description of the regulated and non-regulated businesses is contained in Item 8, Financial Statements and Supplementary Data, Note 17. Dominguez is regulated by the Commission and, as such, must obtain the Commission's approval to increase water rates to recover increases in operating expenses and authorization to include reinvested capital in ratebase. Most variations in revenues are due to weather conditions and the water usage of major industrial customers. Dominguez is comprised of its principal division, (the South Bay Division,) and its operating subsidiaries, the Kern River Valley Water Company, the Antelope Valley Water Company and the Redwood Valley Water Company Division (collectively referred to as the "Subsidiaries"). The South Bay Division has been providing water service for more than 88 years. Currently, the South Bay Division serves approximately 32,637 customers in a 35 square mile area including most of Carson, one-quarter of Torrance, and parts of Compton, Long Beach, Los Angeles, Los Angeles County, and Harbor City. The Kern River Valley Water Company and the Antelope Valley Water Company provide water service to approximately 4,096 and 1,271 customers, respectively. In 1998, Dominguez formed the Redwood Valley Water Company Division to acquire certain water companies located in northern California. Redwood Valley Water Company Division serves approximately 1,912 customers in six service areas. DSC Investments is primarily engaged in the transfer of water right leases between third parties. Income from the transfer of water right leases may significantly vary from year to year due to demands for groundwater by major pumpers in the West and Central Groundwater Basins. FINANCIAL PERFORMANCE AND OPERATIONS Financial results in 1999 improved significantly over 1998, primarily due to 1998 results including higher non-recurring costs associated with the Company's merger with California Water Service Group. Earnings per share for 1999 rose to $1.31, compared to $.61 in the same period in 1998, revenues increased to $28,497,000 from $25,267,000 in the same period last year, and net income reached $2,052,000, compared to $924,000 at year-end in 1998. Other factors having a positive impact on 1999 financial results were customer growth and higher sales. The Company completed the purchase of Lucerne Water Company, serving 1,242 customers and Armstrong Valley Water Company, serving 382 customers, in January; Hawkins Water Company, serving 51 customers, in August; and Coast Springs Water Company, serving 237 customers, in December. All four are located in northern California and are operated by the Company's newest subsidiary, Redwood Valley Water Company Division. Sales also increased both to business and residential customers. In 1999, Dominguez supplied 13,579 million gallons of water to 39,916 customers, compared to 12,412 million gallons of water to 37,882 customers in 1998. Although Dominguez South Bay has a diversified customer base, a substantial portion (51% in 1999 and 50% in 1998) of sales were derived from business and industrial usage. Furthermore, a single customer, a refinery, accounted for 38% of the business and industrial sales in 1999 and for 34% in 1998. The Company experienced no interruptions in service or operations as a result of the Year 2000 (Y2K). Precautionary measures taken by the Company in anticipation of computer problems that could have been caused by Y2K included: assessing computer software used in monitoring water and performing business functions such as billing; making necessary upgrades; working with vendors and outside service providers to ascertain their level of preparedness; and having teams on-site in all of the service areas to address any issues arising with the year change. THE MERGER 3 On November 13, 1998, the Company executed an Agreement and Plan of Reorganization (the Merger Agreement) to merge with California Water Service Group (CWSG), the parent of California Water Service Company (Cal Water) and CWS Utility Services. Under the terms of the November 1998 Merger Agreement, each share of the Company's common stock issued and outstanding on the closing date would be converted into the right to receive 1.18 shares of CWSG common stock. The Company's Board of Directors (Board) received the opinion of its financial advisor, PaineWebber Inc., that this exchange ratio would be fair to the shareholders of the Company's common stock from a financial point of view. And, the Company expected that the proposed merger will be treated as a tax-free transaction under the applicable provisions of the Internal Revenue Code. Shares of CWSG common stock are traded under the symbol "CWT" on the New York Stock Exchange. CWSG operations provide water utility services to over 1.5 million people in 58 California communities. On March 16, 1999, the Company announced that it had received an unsolicited proposal from American States Water Company (ASWC) offering to acquire all of the Company's outstanding common stock in a stock-for-stock merger. Under the ASWC proposal, each share of the Company's common stock would have been converted into the right to receive a number of ASWC shares intended to provide $32.50 of value for each of the Company's shares. The ASWC proposal also provided for a collar pursuant to which the minimum and maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company share. The Company's financial advisor advised the Company's Board that this proposal was more favorable to the Company's shareholders than the terms of the Merger Agreement. On March 22, 1999, the Company and CWSG executed an amendment to the November 1998 Merger Agreement which provides that each share of the Company's common stock will be converted into the right to receive a number of CWSG shares intended to provide $33.75 of value for each of the Company's shares. The amendment to the Merger Agreement also provides that the minimum and maximum conversion ratios will be 1.25 and 1.49 CWSG shares for each Company share. At a special meeting on May 12, 1999, Company shareholders overwhelmingly approved the Merger Agreement as amended. All regulatory approvals have been received, with the exception of that of the Commission. In its initial report filed in October 1999, the Commission staff recommended disapproval of the merger. Subsequently, CWSG and the Company issued a guarantee that customer rates would not increase as a result of the merger, expressing confidence that synergies achieved by the merger would offset merger costs. In succeeding discussions with Commission's Ratepayer Representation Branch (RRB), Cal Water and Dominguez proposed an enhanced guarantee, which included provisions that customer rates would not increase as a result of the merger, that Dominguez customers would continue to receive financial benefit of water rights currently owned by Dominguez, and that a portion of operating synergies achieved over those needed to offset merger costs be returned to customers. RRB of the Commission staff testified to its support of the merger, with the enhanced guarantee, on December 7, 1999. In a proposed decision issued in February 2000, the Administrative Law Judge recommended approval of the merger with certain conditions, many of which were proposed by Cal Water and Dominguez in the enhanced guarantee. Oral arguments were scheduled for March 2000, with a decision expected in the second quarter. Pursuant to the Merger Agreement, if regulatory approval is not received or if either the Company or CWSG decides not to complete the merger, certain payments are required under the terms of the Merger Agreement. WATER SUPPLY Dominguez obtains its water supplies from its own groundwater wells, a surface water source plus two water wholesalers of imported water. All Dominguez service areas, except for the Lucerne service area (Lucerne) of Redwood Valley Water Company Division, obtain either a portion or all of their supply from groundwater wells. Lucerne has a surface water treatment plant. The quantity that the South Bay Division is allowed to pump over a year's time is fixed by court adjudication. The adjudication established distinct groundwater basins that are managed by a court-appointed watermaster. The groundwater management fixes the safe yield of the basins and ensures the replenishment of the basins by utilizing impounded storm water, treated recycled water and treated purchased water when necessary. Groundwater basins have not been adjudicated in the Subsidiaries. 4 In December 1997, Dominguez entered into a recycled water agreement with the West Basin Municipal Water District (West Basin) and ARCO. Under the terms of the agreement, Dominguez will sell ARCO recycled water purchased from West Basin for the same cost margin that Dominguez would otherwise have received providing ARCO with potable water. Dominguez expects to invest up to $2,000,000 in recycled water facilities for its South Bay Division service area, in exchange for which Dominguez will receive the recycled water at reduced rates. The recycled water plant was completed in December of 1999, and became fully operational in January 2000. Dominguez began supplying recycled water from West Basin to its largest customer from West Basin in December 1999. Having access to recycled water will reduce the South Bay Division's demand for imported potable water, the availability of which may be uncertain in the future. Reduced imported water supplies and annual population growth could create future drought conditions in Southern California; however, Dominguez believes that the availability of recycled water will significantly mitigate the impact of future droughts in the South Bay Division service area. In 1998, the Water Replenishment District of Southern California (WRD), a water district responsible for the oversight and management of the West and Central Groundwater Basins, awarded a grant to Dominguez of $1,820,000, which was to be paid in two equal installments. Dominguez received the first of its two payments for $910,000 in 1998, and received the second payment for $910,000 in 1999. Dominguez has earmarked $1,150,000 to fund its investment in recycled water facilities. The South Bay Division and Leona Valley service area of Antelope Valley Water Company purchase water from wholesalers to supplement groundwater. The South Bay Division purchases imported water from the Metropolitan Water District (MWD) of Southern California through West Basin. The Leona Valley service area purchases its imported water from the Antelope Valley - East Kern Water Agency (AVEK). Both of these wholesale suppliers obtain water from the California State Water Project (SWP), and MWD also obtains water from the Colorado River. Long-term imported water supplies depend upon several factors. Dominguez' future dependency on imported water will be subject to the availability and usage of recycled water in the region as well as customers' long-term water conservation efforts. Dominguez has and will continue to promote long-term water conservation efforts and will advance the use of recycled water. 5 Legislative actions continue to play a role in the long-term availability of water for Southern California. The amount of SWP water available from northern California and water imported from the Colorado River may be significantly reduced in the future. Even with the use of recycled water and continuing conservation efforts, future drought conditions may require water rationing by all California water agencies and purveyors, including Dominguez. WATER QUALITY Dominguez is subject to water quality regulations promulgated by the United States Environmental Protection Agency (EPA) and the California Department of Health Services (DHS). Both groundwater and purchased water are subject to extensive analysis and testing. With occasional minor exceptions, Dominguez meets all current primary water standards. Beginning in mid-1997, Dominguez participated, along with many other large water companies throughout the United States, in an 18-month water sampling data acquisition program known as the Information Collection Rule. Data collected will be used by the EPA to establish future drinking water standards. Under the Federal Safe Drinking Water Act, the EPA is required to continue to establish new maximum levels for additional chemicals. The costs of future compliance are unknown, but Dominguez could be required to perform more quality testing and treatment. Management believes the Company's financial reserves will be sufficient to meet these anticipated requirements. During 1999, Dominguez expended $1,786,000 on water supply improvements. In 2000, Dominguez anticipates spending $2,622,000 for water supply capital improvements. REGULATORY AFFAIRS In March 1998, the Commission instituted its own proceeding (Investigation 98-03-013) to investigate whether existing standards and policies of the Commission regarding drinking water quality adequately protect the public health and safety with respect to contaminants such as Volatile Organic Compounds, Perchlorate, and MTBE, and whether those standards and policies are being uniformly complied with by Commission-regulated utilities. On February 1, 2000, the Administrative Law Judge issued a draft decision finding all Class A regulated water utilities (including Dominguez) satisfactorily complied with DHS regulations and testing requirements. The Company can not predict the outcome of this proceeding but does not anticipate any financial impact on the Company. In October 1997, the Commission instituted its own proceeding to set rules and provide guidelines for the acquisition and merger of water companies. This proceeding was initiated to develop guidelines necessary to implement a new law, referred to as Senate Bill 1268, requiring the Commission to use the standard of fair-market value when establishing the ratebase value for the acquired distribution system assets of a public water system. On October 22, 1999, the Commission issued its decision adopting the settlement agreement reached between RRB and the California Water Association. The settlement agreement sets forth guidelines regarding the regulatory approval process, establishing purchase price and incentives to encourage the acquisition of troubled small water companies. The Company believes that the decision will facilitate the acquisition of small troubled water companies in the future. In October 1997, the Commission also instituted its own rulemaking proceeding to develop rules for public-private partnerships. Dominguez participated with the Commission staff in workshops; however, all participants failed to reach a settlement and develop necessary guidelines. On February 1, 2000, the Administrative Law Judge issued a draft decision imposing a number of accounting and procedural requirements for regulated water utilities to engage in the sale of non-tariff goods or services. If the proposed draft decision is adopted, water utilities will be discouraged from and reluctant to offer non-tariff goods or services due to the imposed requirements. In the first quarter of 1999, Dominguez filed a joint application with Cal Water to approve the merger of their regulated utility companies (see "THE MERGER" above). In February 1999, Dominguez filed general rate increase applications for the South Bay Division and its subsidiaries, Antelope Valley Water Company and Kern River Valley Water Company. The Commission consolidated the applications into a single proceeding. In December 1999, the Company and RRB filed settlement agreements to increase rates by $1,416,000 for test year 2000, $336,000 for test year 2001 and $113,000 for attrition year 2002. In January 2000, the Leona Valley Town Council filed its opposition to the settlement agreement filed in the Antelope 6 Valley Water Company (AVWC) application. The Administrative Law Judge granted an evidentiary hearing in the proceeding, limiting issues to the AVWC application, for March 1, 2000, and scheduled briefs to be filed on March 20, 2000. Because all the applications were consolidated into a single proceeding, the Commission has postponed its decision on the Dominguez South Bay and Kern River Valley Water Company rate applications. Dominguez anticipates that a Commission decision approving all settlement agreements will be ordered by June 2000. In July 1999, Dominguez received the Commission's approval to acquire the assets of Hawkins Water Service, serving 51 customers, for $50,000 cash. The ratebase for the acquired assets was set at $51,000 and the acquisition became effective on August 6, 1999. Dominguez also received the Commission's approval in 1999 to acquire the assets of Coast Springs Water Company, serving 237 customers, for $180,000 cash. The ratebase for the acquired assets was set at $179,000 and the acquisition became effective on December 8, 1999. NON-UTILITY SUBSIDIARY OPERATIONS DSC Investments invested $350,000 in Chemical Services Corporation (CSC) on December 20, 1996, and acquired a twenty percent equity ownership with the option to acquire an additional forty percent through the year 2001. Under the investment agreements, the Company was obligated to provide working cash and long-term financing to CSC for the leasing of chlorine generators, subject to the financial condition of CSC. In April 1999, a contract was drafted pursuant to which DSC Investments would sell back its equity ownership to CSC at a premium of $250,000, $160,000 of which would be applied to Dominguez' purchase of chlorine generation equipment from CSC. Both parties signed the contract in December of 1999 and payment was received from CSC in January 2000. During 1999, DSC Investments facilitated transfers of water right leases between third parties, adding $718,000 to the Company's revenue. The future income from the transfer of water right leases will depend upon the demands for groundwater by major industrial users and water purveyors in the West and Central Groundwater Basins. EMPLOYEE RELATIONS As of December 31, 1999, the Company had a total of 70 employees in utility and non-utility operations. None of the employees is represented by a labor organization, and there has never been a work stoppage or interruption due to a labor dispute. In general, wages, hours, and conditions of employment are equivalent to those found in the industry. All employees receive paid time off. Dominguez provides and pays the cost of group life, disability, medical and dental insurance, as well as pensions, for its employees. Throughout 1999, a significant effort has been made to communicate with employees about issues related to the merger with CWSG (see above). Pursuant to the Merger Agreement, all Dominguez employees were offered equivalent employment with Cal Water in December 1999. 7 ENVIRONMENTAL MATTERS Dominguez' operations are subject to pollution control and water quality control as discussed in the "Water Quality" section. Other state and local environmental regulations apply to Dominguez operations and facilities. These regulations are primarily related to the handling, storage and disposal of hazardous materials. Dominguez is currently in compliance with all other state and local regulations. 8 ITEM 2. PROPERTIES. The Company's general administrative and executive offices are located at 21718 South Alameda Street in Carson, California. The South Bay Division has prior rights to lay distribution mains and for other uses on much of the public and private lands in its service area. Dominguez' claim of prior rights is derived from the original Spanish land grant covering the Dominguez service area. For this reason, Dominguez, unlike most other public utilities, generally receives compensation from the appropriate public authority when the relocation of its facilities is necessitated by the construction of roads or other projects. It is common for public utilities to bear the entire cost of such relocation. Primarily, the Company is comprised of facilities to pump and distribute both groundwater and purchased water to residential, commercial, and industrial customers. As of December 31, 1999, the Company has invested $8,531,000 in water supply, $34,492,000 in distribution, and $11,322,000 in other operating facilities. The Company believes that its current facilities are adequate to meet customer demand, subject to the addition of capital facilities, as the system requires. Substantially all of the property of Dominguez is subject to the lien of the Trust Indenture dated August 1, 1954, as supplemented and amended, to Chase Manhattan Bank and Trust Company, N.A., as Trustee, securing the two outstanding series of Dominguez' First Mortgage Bonds. 9 ITEM 3. LEGAL PROCEEDINGS. The Company is routinely involved in legal actions. The Company does not believe these matters will have a material adverse effect, if any, on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET PRICE FOR COMMON SHARES
1999 High Low ---- --- First Quarter $31.500 $26.250 Second Quarter 31.000 27.000 Third Quarter 34.250 28.063 Fourth Quarter 35.000 27.750 1998 High Low ---- --- First Quarter $23.125 $18.500 Second Quarter 19.500 17.000 Third Quarter 23.500 17.500 Fourth Quarter 31.250 21.250
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES The Nasdaq Stock Market maintenance standards require that Nasdaq National Market companies have at least 400 shareholders of round lots. As of December 31, 1999, the Company complied with the standard with 291 common shareholders of record and more than 779 beneficial shareholders, who have elected to hold their shares in street name. (c) DIVIDENDS DECLARED
Dividend Declared 1999 1998 ---- ---- First Quarter $0.2400 $0.2300 Second Quarter 0.2400 0.2300 Third Quarter 0.2400 0.2300 Fourth Quarter 0.2400 0.2300
(d) DIVIDEND RESTRICTION The Company's available dividends to its shareholders are substantially dependent on the availability of dividends from Dominguez to the Company. Under the terms of its long-term debt agreements, Dominguez is limited in its payment of dividends (other than stock dividends) on all classes of stock to the net income accrued subsequent to December 31, 1992, plus the sum of $3,000,000. The approximate unrestricted earnings available for dividend payments amounted to $7,052,000 as of December 31, 1999. 11 (e) NEW SHARES ISSUED DURING 1999 In January 1999, the Company issued 54,467 shares of its common stock in connection of its acquisition of certain water companies. The Company stock issued was exempted from registration under the Security Act of 1933 pursuant to Sec. 5(2) of the Act and or regulation D promulgated under the Act. In December 1999, the Company issued 2,800 shares of its common stock in connection with stock options that were exercised by an executive. 12 ITEM 6. SELECTED FINANCIAL DATA. ELEVEN YEAR STATISTICAL REVIEW
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: (DOLLARS IN THOUSANDS) Operating revenue $ 28,497 $ 25,267 $ 26,818 $ 24,703 $ 25,486 Operating expenses (before taxes) 24,273 22,128 22,652 20,745 21,376 Other taxes 583 566 552 448 455 Other expenses 130 66 40 33 7 Other income (1,134) (718) (590) (475) (165) Interest cost 964 870 758 659 683 Income taxes 1,439 932 1,385 1,314 1,177 Income before extraordinary item 2,242 1,423 2,021 1,981 1,953 Extraordinary item, net of tax 190 499 -- -- -- Net income 2,052 924 2,021 1,981 1,953 Dividends paid 1,498 1,386 1,306 1,247 1,170 Reinvested in the business 554 (462) 715 734 783 PER COMMON SHARE DATA: * Earnings-Before extraordinary item $ 1.43 $ 0.94 $ 1.34 $ 1.31 $ 1.29 Earnings-Basic and diluted $ 1.31 $ 0.61 $ 1.34 $ 1.31 $ 1.29 Dividends $ 0.96 $ 0.92 $ 0.87 $ 0.83 $ 0.77 Payout percentage 73.28% 150.82% 64.68% 63.00% 60.00% Book value $ 11.13 $ 10.54 $ 10.85 $ 10.37 $ 9.89 Return on common equity (average) 12.31% 5.70% 12.60% 13.00% 13.40% Year end market price $ 30.25 $ 28.00 $ 21.50 $ 15.00 $ 12.33 Market to book ratio at yearend 271.80% 265.60% 198.20% 144.60% 124.70% Number shares outstanding 1,563,779 1,506,512 1,506,512 1,506,512 1,506,512 BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Gross utility plant $ 75,334 $ 68,701 $ 63,510 $ 60,069 $ 57,271 Net utility plant 54,345 49,724 46,020 43,544 41,358 Non-utility plant -- 101 110 49 67 Total assets 57,889 52,635 51,661 46,875 45,295 CAPITALIZATION: (Dollars in Thousands) Long-term debt $ 12,294 $ 11,217 $ 11,194 $ 7,036 $ 7,273 Preferred stock -- -- -- -- 98 Common equity 17,402 15,879 16,341 15,626 14,896 Total capitalization 29,696 27,096 27,535 22,662 22,267 Interim debt 400 450 -- 800 -- CAPITALIZATION RATIOS: Long-term debt 41.40% 41.40% 40.65% 31.00% 32.70% Preferred stock --% -- -- -- 0.40% Common equity 58.60% 58.60% 59.35% 69.00% 66.90% Total 100.00% 100.00% 100.00% 100.00% 100.00% OTHER UTILITY STATISTICS: Customers at year-end 39,916 37,882 37,636 36,882 36,739 Water sales (millions of gallons) 13,013 11,569 12,362 11,481 12,371 Average revenue per customer $ 684.99 $ 650.22 $ 688.10 $ 650.07 $ 665.70 Utility employees 70 70 73 77 78 FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: (DOLLARS IN THOUSANDS) Operating revenue $ 23,569 $ 22,193 $ 21,813 $ 18,706 $ 19,139 Operating expenses (before taxes) 19,419 18,139 18,327 15,677 15,869 Other taxes 432 406 397 323 321 Other expenses 29 20 17 32 41 Other income (297) (353) (85) (73) (186) Interest cost 714 732 586 606 633 Income taxes 1,340 1,243 1,031 807 1,087 Income before extraordinary item 1,932 2,006 1,540 1,334 1,374 Extraordinary item, net of tax -- -- -- -- -- Net income 1,932 2,006 1,540 1,334 1,374 Dividends paid 1,110 1,070 1,009 989 965 Reinvested in the business 822 936 531 345 409 PER COMMON SHARE DATA: * Earnings-Before extraordinary item $ 1.28 $ 1.33 $ 1.02 $ 0.88 $ 0.91 Earnings-Basic and diluted $ 1.28 $ 1.33 $ 1.02 $ 0.88 $ 0.91 Dividends $ 0.73 $ 0.71 $ 0.67 $ 0.65 $ 0.64 Payout percentage 57.50% 53.50% 65.40% 74.20% 70.10% Book value $ 9.35 $ 8.82 $ 8.19 $ 7.85 $ 7.60 Return on common equity (average) 14.10% 15.60% 12.80% 11.40% 12.20% Year end market price $ 11.17 $ 14.00 $ 10.83 $ 10.00 $ 9.50 Market to book ratio at yearend 119.40% 158.70% 132.20% 127.40% 125.00% Number shares outstanding 1,506,512 1,506,512 1,506,512 1,506,512 1,497,555 BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Gross utility plant $ 55,406 $ 52,260 $ 51,037 $ 50,161 $ 46,710 Net utility plant 40,022 37,977 37,511 33,793 31,713 Non-utility plant 67 51 105 105 104 Total assets 44,652 42,662 40,275 39,596 37,477 CAPITALIZATION: (Dollars in Thousands) Long-term debt $ 7,326 $ 7,493 $ 7,657 $ 3,829 $ 3,766 Preferred stock 98 98 98 98 98 Common equity 14,092 13,284 12,348 11,817 11,383 Total capitalization 21,516 20,875 20,103 15,744 15,275 Interim debt -- -- -- 3,375 2,725 CAPITALIZATION RATIOS: Long-term debt 34.00% 35.90% 38.10% 24.30% 24.70% Preferred stock 0.50% 0.50% 0.50% 0.60% 0.80% Common equity 65.50% 63.60% 61.40% 75.10% 74.50% Total 100.00% 100.00% 100.00% 100.00% 100.00% OTHER UTILITY STATISTICS: Customers at year-end 36,371 36,107 36,043 35,949 34,444 Water sales (millions of gallons) 12,071 11,359 11,731 10,906 12,957 Average revenue per customer $ 619.90 $ 561.27 $ 481.35 $ 423.35 $ 490.32 Utility employees 76 75 69 71 64 FOR THE YEARS ENDED DECEMBER 31, 1989 - ----------------------------------------------------------------- SUMMARY OF OPERATIONS: (DOLLARS IN THOUSANDS) Operating revenue $ 20,359 Operating expenses (before taxes) 16,885 Other taxes 330 Other expenses 18 Other income (38) Interest cost 577 Income taxes 1,110 Income before extraordinary item 1,507 Extraordinary item, net of tax -- Net income 1,507 Dividends paid 940 Reinvested in the business 567 PER COMMON SHARE DATA: * Earnings-Before extraordinary item $ 0.98 Earnings-Basic and diluted $ 0.98 Dividends $ 0.61 Payout percentage 62.60% Book value $ 7.32 Return on common equity (average) 14.00 Year end market price $ 9.83 Market to book ratio at yearend 134.30% Number shares outstanding 1,497,555 BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Gross utility plant $ 45,205 Net utility plant 31,233 Non-utility plant 101 Total assets 36,513 CAPITALIZATION: (Dollars in Thousands) Long-term debt $ 4,059 Preferred stock 142 Common equity 10,968 Total capitalization 15,169 Interim debt 950 CAPITALIZATION RATIOS: Long-term debt 26.80% Preferred stock 0.90% Common equity 72.30% Total 100.00% OTHER UTILITY STATISTICS: Customers at year-end 34,189 Water sales (millions of gallons) 13,339 Average revenue per customer $ 501.95 Utility employees 56
* Adjusted to reflect 3-for-2 stock split effected January, 1998. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENT In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), the Dominguez Services Corporation (the Company) is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements (as defined in the Reform Act) made by or on behalf of the Company in this Annual Report. Any statements that express such statements are often, but not always, expressed with phrases such as expectations, beliefs, plans, objectives, assumptions, or future events or performance, through the use of words or phrases such as "anticipate," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will likely result," and "will continue." Such statements are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptions, and uncertainties and are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond the control of the Company, and could cause actual results to differ materially from those contained in forward-looking statements: - prevailing governmental policies and regulatory actions, including those of the California Public Utilities Commission ( the Commission), with respect to allowed rates of return, authorization of regulated rates, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of balancing account, and present or prospective competition; - economic and geographic factors including political and economic risks; - changes in and compliance with environmental and safety laws and policies; - water supply and weather conditions; - customer growth rate; - merger issues: - delays or change in anticipated closing date; - likelihood of approval by regulatory agencies; - changes in tax rates or policies or in rates of inflation; - unanticipated changes in operating expenses and capital expenditures; - emergency preparedness; - capital market conditions; - competition for non-regulatory opportunities; and - legal and administrative proceedings and settlements that influence the business and profitability of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of any such factor on the business, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. 14 GENERAL The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and with the Eleven-Year Statistical Review in this report. A description of the regulated and non-regulated businesses is contained in Note 17 of Notes to Consolidated Financial Statements. The Company has two wholly-owned subsidiaries: Dominguez Water Company and its operating subsidiaries (Dominguez), which are involved in regulated water supply and distribution, and DSC Investments, which is involved in non-regulated, water-related services and investments. Dominguez is regulated by the Commission and, as such, must obtain the Commission's approval to increase water rates to recover increases in operating expenses and authorization to include reinvested capital in ratebase. Most variations in revenues are due to weather conditions and the water usage of major industrial customers. Dominguez is comprised of its principal division, (the South Bay Division), and its operating subsidiaries, the Kern River Valley Water Company, the Antelope Valley Water Company and Redwood Valley Water Company Division (collectively referred to as the "Subsidiaries"). The South Bay Division has been providing water service for more than 88 years to its customers. Currently, the South Bay Division serves approximately 32,637 customers in a 35 square mile area including most of Carson, one-quarter of Torrance, and parts of Compton, Long Beach, Los Angeles, Los Angeles County, and Harbor City. The Kern River Valley Water Company and the Antelope Valley Water Company provide water service to approximately 4,096 and 1,271 customers, respectively. In 1998, Dominguez formed the Redwood Valley Water Company Division to acquire certain water companies located in northern California. Redwood Valley Water Company Division serves approximately 1,912 customers in six service areas. DSC Investments is primarily engaged in the transfer of water right leases between third parties. Income from the transfer of water right leases may significantly vary from year to year due to demands for groundwater by major pumpers in the West and Central Groundwater Basins. THE MERGER On November 13, 1998, the Company executed an Agreement and Plan of Reorganization (the Merger Agreement) to merge with California Water Service Group (CWSG), the parent of California Water Service Company (Cal Water) and CWS Utility Services. Under the terms of the November 1998 Merger Agreement, each share of the Company's common stock issued and outstanding on the closing date would be converted into the right to receive 1.18 shares of CWSG common stock. The Company's Board of Directors (Board) received the opinion of its financial advisor, PaineWebber Inc., that this exchange ratio would be fair to the shareholders of the Company's common stock from a financial point of view. And, the Company expected that the proposed merger will be treated as a tax-free transaction under the applicable provisions of the Internal Revenue Code. Shares of CWSG common stock are traded under the symbol "CWT" on the New York Stock Exchange. CWSG operations provide water utility services to over 1.5 million people in 58 California communities. On March 16, 1999, the Company announced that it had received an unsolicited proposal from American States Water Company (ASWC) offering to acquire all of the Company's outstanding common stock in a stock-for-stock merger. Under the ASWC proposal, each share of the Company's common stock would have been converted into the right to receive a number of ASWC shares intended to provide $32.50 of value for each of the Company's shares. The ASWC proposal also provided for a collar pursuant to which the minimum and maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company share. The Company's financial advisor advised the Company's Board that this proposal was more favorable to the Company's shareholders than the terms of the Merger Agreement. 15 On March 22, 1999, the Company and CWSG executed an amendment to the November 1998 Merger Agreement which provides that each share of the Company's common stock will be converted into the right to receive a number of CWSG shares intended to provide $33.75 of value for each of the Company's shares. The amendment to the Merger Agreement also provides that the minimum and maximum conversion ratios will be 1.25 and 1.49 CWSG shares for each Company share. At a special meeting on May 12, 1999, Company shareholders overwhelmingly approved the Merger Agreement as amended. All regulatory approvals have been received, with the exception of that of the Commission. In its initial report filed in October 1999, the Commission staff recommended disapproval of the merger. Subsequently, CWSG and the Company issued a guarantee that customer rates would not increase as a result of the merger, expressing confidence that synergies achieved by the merger would offset merger costs. In succeeding discussions with Commission's Ratepayer Representation Branch (RRB), Cal Water and Dominguez proposed an enhanced guarantee, which included provisions that customer rates would not increase as a result of the merger, that Dominguez customers would continue to receive financial benefit of water rights currently owned by Dominguez, and that a portion of operating synergies achieved over those needed to offset merger costs be returned to customers. RRB of the Commission staff testified to its support of the merger, with the enhanced guarantee, on December 7, 1999. In a proposed decision issued in February 2000, the Administrative Law Judge recommended approval of the merger with certain conditions, many of which were proposed by Cal Water and Dominguez in the enhanced guarantee. Oral arguments were scheduled for March 2000, with a decision is expected in the second quarter. Pursuant to the Merger Agreement, if regulatory approval is not received or if either the Company or CWSG decide not to complete the merger, certain payments are required under the terms of the Merger Agreement. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Operating revenue totaled $28,497,000 for 1999; an increase of $3,230,000, or 12.8%, from the $25,267,000 recorded for 1998. Revenue growth in 1999 was attributable to higher sales and the acquisition of Redwood Valley Water Company Division. Consumption by residential and multi-family customers increased by 9.1% and by business-industrial customers by 15.4%. Redwood brought in $643,000 in sales. Operating expenses before taxes increased by $2,145,000, or 9.69%, compared to 1998. Operating expenses are comprised of several different components, including purchased and pumped water costs, operations and maintenance expenses and depreciation expense. Pumped and purchased water cost increases are primarily attributed to the higher sales. During the year the Company increased its pumping capacity by the completion of the well rehabilitation program which contributed to increased margin. Operations and maintenance expenses, and depreciation expense decreased in 1999 by $67,000, or 1.0%, and increased by $293,000, or 4.2% in 1998. Other income increased by $416,000, or 58%, due to increased activity in the transfer of water right leases and operating contracts. Interest costs increased by $94,000, or 11%. Additional interest costs came from loans absorbed from the newly acquired water companies during 1999. The extraordinary item related to merger expenses totaled $290,000 with a tax effect of $100,000 during 1999, comparing to merger expenses of $814,000 during 1998 with the tax effect of the extraordinary item $315,000. Net income increased by $1,128,000, or 122%, due to the reasons mentioned above. Earnings per share increased to $1.31 from $.61. The Company raised its annual dividend to common shareholders to $.96 in 1999 from $.92 in 1998, an increase of 4.4%. 16 RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Operating revenue totaled $25,267,000 for 1998, a decrease of $1,551,000, or 5.8%, from the $26,818,000 recorded for 1997. The decrease in revenue is due to a reduction in water sales. Consumption by residential and multi-family customers decreased by 6.2% and by business-industrial customers by 5.0%. Operating expenses before taxes decreased by $524,000, or 2.3%, compared to 1997. Operating expenses are comprised of several different components, including purchased and pumped water costs, operations and maintenance expenses and depreciation expense. Operations and maintenance expenses, and depreciation expense, increased in 1998 by $293,000, or 4.2%, and $98,000, or 7.3%, respectively. However, the cost to pump and purchase water decreased by a combined total of $915,000, or 6.4%. This is primarily attributed to lower sales and a resulting decrease in production costs. During 1998, the Company received a grant from the Water Replenishment District of Southern California (WRD), a water district responsible for the oversight and management of the West and Central Groundwater Basins, of which approximately $390,000 was applied to production costs. The reduction in cost would have been greater if several wells had not been out of service for rehabilitation. While the wells were not in service, higher priced purchased water was supplied to our customers. Other income increased by $102,000, or 19%, due to increased activity in the transfer of water right leases and operating contracts. Interest costs increased by $112,000, or 15%, due to a new bond issuance in December 1997. The extraordinary item related to merger expenses totaled $814,000. The tax effect of the extraordinary item is $315,000. Net income before the extraordinary item decreased by $598,000, or 29.6%, due to the reasons mentioned above. Earnings per share before the extraordinary item on common equity decreased from $1.34 to $.94. The Company raised its annual dividend to common shareholders to $.92 in 1998 from $.87 in 1997, an increase of 5.8%. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Operating revenue totaled $26,818,000 for 1997, an increase of $2,113,000, or 8.6%, over the $24,705,000 recorded for 1996. The increased revenue is due to higher sales to industrial customers and higher rates in the South Bay Division to cover the higher cost of imported water. Industrial sales increased by $1,419,000, or 13.8%. Operating expenses before taxes increased by $1,907,000, or 9.2%, primarily due to an increase in the cost of water. Additional water was purchased from West Basin to cover the increased water sales. The overall margin on water sales decreased from 52% to 47% due to additional water purchased. Operations and maintenance costs decreased by $476,000, or 6.3%. Other income increased by $108,000, or 24%, due to increased activity in the transfer of water right leases. Interest costs increased by $99,000, or 15%, due to additional borrowings for capital improvements during 1997. Net income increased $40,000, or 2%, due to the reasons mentioned above. Earnings per share on common equity increased from $1.31 to $1.34. The Company raised its annual dividend to common shareholders to $.87 in 1997 from $.83 in 1996, an increase of 4.8%. Effective January 2, 1998, the Company split its common stock three-for-two for shareholders of record on December 15, 1997. The Company paid cash in lieu of issuing fractional shares based on the closing price as of December 15, 1997. The par value of the common stock remained unchanged. Financial data in this report is adjusted to reflect the change. LIQUIDITY AND CAPITAL RESOURCES The Company's continuing operations provided sufficient cash in 1999 to cover operating expenses, interest and dividends. In 1999, Dominguez invested $3,450,000 in utility plant improvements. Approximately $264,000 was contributed or advanced by developers. 17 The Company has available $4,500,000 under a revolving credit facility with Bank of America. As of December 31, 1999 and 1998, short-term borrowing under the facility totaled $400,000 and $450,000 respectively. If the Merger does not close, the Company will renew the credit facility when it expires in June 2000. The Company's 2000 capital budget is $4,274,000. Budgeted improvements include $2,622,000 for water production facilities and storage, an $850,000 investment to accommodate a regional recycled water treatment plant, and $433,000 for pipeline replacements. The Company will fund budgeted improvements from earnings available for reinvestment and short-term borrowings, if necessary. In December 1997, Dominguez entered into a recycled water agreement with the West Basin Municipal Water District (West Basin) and ARCO. Under the terms of the agreement, Dominguez will sell ARCO recycled water purchased from West Basin for the same cost margin that Dominguez would otherwise have received providing ARCO with potable water. The recycled water plant was completed in December of 1999, and became fully operational in January 2000. Having access to recycled water will reduce the South Bay Division's demand for imported water, the availability of which may be uncertain in the future. Reduced imported water supplies and annual population growth could create future drought conditions in Southern California; however, Dominguez believes that the availability of recycled water will significantly mitigate the impact of future droughts in the South Bay Division service area. In 1998, WRD awarded a grant to Dominguez of $1,820,000. Dominguez received the first of its two payments for $910,000 in 1998 and received the second payment for $910,000 in 1999. Dominguez used approximately $670,000 to offset the cost of purchasing higher-priced imported water in lieu of pumping its groundwater rights. The balance of the funds, approximately $1,150,000, will be used to meet Dominguez' expected $2,000,000 commitment in recycled water facilities, leaving a balance of $850,000 to be funded by Dominguez. REGULATORY AFFAIRS In March 1998, the Commission instituted its own proceeding (Investigation 98-03-013) to investigate whether existing standards and policies of the Commission regarding drinking water quality adequately protect the public health and safety with respect to contaminants such as Volatile Organic Compounds, Perchlorate, and MTBE, and whether those standards and policies are being uniformly complied with by Commission-regulated utilities. On February 1, 2000, the Administrative Law Judge issued a draft decision finding all Class A regulated water utilities (including Dominguez) satisfactorily complied with DHS regulations and testing requirements. The Company can not predict the outcome of this proceeding but does not anticipate any financial impact on the Company. In October 1997, the Commission instituted its own proceeding to set rules and provide guidelines for the acquisition and merger of water companies. This proceeding was initiated to develop guidelines necessary to implement a new law, referred to as Senate Bill 1268, requiring the Commission to use the standard of fair-market value when establishing the ratebase value for the acquired distribution system assets of a public water system. On October 22, 1999, the Commission issued its decision adopting the settlement agreement reached between RRB and the California Water Association. The settlement agreement sets forth guidelines regarding the regulatory approval process, establishing purchase price and incentives to encourage the acquisition of troubled small water companies. The Company believes that the decision will facilitate the acquisition of small troubled water companies in the future. In October 1997, the Commission also instituted its own rulemaking proceeding to develop rules for public-private partnerships. Dominguez participated with the Commission staff in workshops; however, all participants failed to reach a settlement and develop necessary guidelines. On February 1, 2000, the Administrative Law Judge issued a draft decision imposing a number of accounting and procedural requirements for regulated water utilities to engage in the sale of non-tariff goods or services. If the proposed draft decision is adopted, water utilities will be discouraged, from and reluctant to offer non-tariff goods or services due to the imposed requirements. In the first quarter of 1999, Dominguez filed a joint application with Cal Water to approve the merger of their regulated utility companies (see "THE MERGER" above). In February 1999, Dominguez filed general rate increase applications for the South Bay Division and its subsidiaries, Antelope Valley Water Company and Kern River Valley Water Company. The Commission consolidated the applications into a single proceeding. In December 1999, the Company and RRB filed settlement agreements to increase rates by $1,416,000 for test year 2000, $336,000 for test year 2001 and $113,000 for attrition year 2002. In 18 January 2000, the Leona Valley Town Council filed its opposition to the settlement agreement filed in the Antelope Valley Water Company (AVWC) application. The Administrative Law Judge granted an evidentiary hearing in the proceeding, limiting issues to the AVWC application, for March 1, 2000, and scheduled briefs to be filed on March 20, 2000. Because all the applications were consolidated into a single proceeding, the Commission has postponed its decision on the Dominguez South Bay and Kern River Valley Water Company rate applications. Dominguez anticipates that a Commission decision approving all settlement agreements will be ordered by June 2000. In July 1999, Dominguez received the Commission's approval to acquire the assets of Hawkins Water Service, serving 51 customers, for $50,000 cash. The ratebase for the acquired assets was set at $51,000 and the acquisition became effective on August 6, 1999. Dominguez also received the Commission's approval in 1999 to acquire the assets of Coast Springs Water Company, serving 237 customers, for $180,000 cash. The ratebase for the acquired assets was set at $179,000 and the acquisition became effective on December 8, 1999. NON-UTILITY SUBSIDIARY OPERATIONS DSC Investments invested $350,000 in Chemical Services Corporation (CSC) on December 20, 1996, and acquired a twenty percent equity ownership with the option to acquire an additional forty percent through the year 2001. Under the investment agreements, the Company was obligated to provide working cash and long-term financing to CSC for the leasing of chlorine generators, subject to the financial condition of CSC. In April 1999, a contract was drafted pursuant to which DSC Investments would sell back its equity ownership to CSC at a premium of $250,000, $160,000 of which would be applied to Dominguez' purchase of chlorine generation equipment from CSC. Both parties signed the contract in December of 1999 and payment was received from CSC in January 2000. During 1999, DSC Investments facilitated transfers of water right leases between third parties, adding $718,000 to the Company's revenue. The future income from the transfer of water right leases will depend upon the demand for groundwater by major industrial users and water purveyors in the West and Central Groundwater Basins. ENVIRONMENTAL MATTERS Dominguez is subject to water quality regulations promulgated by the United States Environmental Protection Agency (EPA) and the California Department of Health Services (DHS). Both groundwater and purchased water are subject to extensive analysis and testing. With occasional minor exceptions, Dominguez meets all current primary water standards. Beginning in mid-1997, Dominguez participated, along with many other large water companies throughout the United States, in an 18-month water sampling data acquisition program known as the Information Collection Rule. Data collected will be used by the EPA to establish future drinking water standards. Under the Federal Safe Drinking Water Act, the EPA is required to continue to establish new maximum levels for additional chemicals. The costs of future compliance are unknown, but Dominguez could be required to perform more quality testing and treatment. Management believes the Company's financial reserves will be sufficient to meet these anticipated requirements. During 1999, Dominguez expended $1,786,000 on water supply improvements. In 2000, Dominguez anticipates spending $2,622,000 for water supply capital improvements. WATER SUPPLY Dominguez obtains its water supplies from its own groundwater wells, a surface water source plus two water wholesalers of imported water. All Dominguez' service areas, except for the Lucerne service area (Lucerne) of Redwood Valley Water Company Division, obtain either a portion or all of their supply from groundwater wells. Lucerne has a surface water treatment plant. The quantity that the South Bay Division is allowed to pump over a year's time is fixed by court adjudication. The adjudication established distinct groundwater basins that are managed by a court-appointed watermaster. The groundwater management fixes the safe yield of the basins and ensures the replenishment of the basins by utilizing impounded storm water, treated recycled water and treated purchased water when necessary. Groundwater basins have not been adjudicated in the Subsidiaries. 19 The South Bay Division and Leona Valley service area of Antelope Valley Water Company purchase water from wholesalers to supplement groundwater. The South Bay Division purchases imported water from the Metropolitan Water District (MWD) of Southern California through West Basin. The Leona Valley service area purchases its imported water from the Antelope Valley - East Kern Water Agency (AVEK). Both of these wholesale suppliers obtain water from the California State Water Project (SWP), and MWD also obtains water from the Colorado River. Long-term imported water supplies depend upon several factors. Dominguez' future dependency on imported water will be subject to the availability and usage of recycled water in the region as well as customer's long-term water conservation efforts. Dominguez has and will continue to promote long-term water conservation efforts and will advance the use of recycled water. Legislative actions continue to play a role in the long-term availability of water for southern California. The amount of SWP water available from northern California and water imported from the Colorado River may be significantly reduced around the beginning year 2000. Even with the use of recycled water and continuing conservation efforts, future drought conditions may require water rationing by all water agencies and purveyors, including Dominguez. 20 ACCOUNTING STANDARDS The Company currently applies accounting standards that recognize the economic effects of rate regulation and records regulatory assets and liabilities related to water distribution operations. If rate recovery of water-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, these accounting standards may no longer apply. This change could result in the write-off of costs in an amount that could be material. However, based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, management believes that its regulatory assets will likely be recovered in the future. In 1998, the Financial Accounting Stands Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is to be adopted by 2001. The Statement establishes new accounting and reporting standards for derivative financial instruments and hedging activities. The Company does not expect the adoption of the Standard to have a material impact on the Company's results of operations or financial statements. YEAR 2000 The Company successfully transitioned from 1999 to 2000 without technology or customer service disruptions as a result of preparation efforts by our employees. Year 2000 (Y2K) project teams were assembled to ensure the Company's Y2K preparedness. The estimated cost for Y2K preparedness was approximately $36,000. The Company has existing contingency plans in place for events such as extreme heat, storms, equipment failures, and accidents. Y2K contingency plans were based on the framework of existing emergency management system preparation and scenario development, and addressed the most reasonably likely worst case scenarios that could occur in the event that various Y2K issues are not resolved in a timely manner. Contingency planning is an ongoing process, which the Company continues to perform. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR) DECEMBER 31, 1999 1998 ---- ---- ASSETS: PROPERTY, PLANT AND EQUIPMENT UTILITY PLANT $ 72,786 $ 66,402 NON-UTILITY PLANT - 101 -------------------- 72,786 66,503 LESS: ACCUMULATED DEPRECIATION 26,298 23,949 -------------------- 46,488 42,554 LAND AND LAND RIGHTS 1,016 964 WATER RIGHTS AND OTHER INTANGIBLE ASSETS 611 544 CONSTRUCTION WORK IN PROGRESS 921 791 -------------------- TOTAL PROPERTY, PLANT AND EQUIPMENT 49,036 44,853 CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH OF $724 IN 1999 AND $542 IN 1998 942 709 ACCOUNTS RECEIVABLE CUSTOMERS, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $304 IN 1999 AND $301 IN 1998 1,800 1,348 UNBILLED REVENUES 1,054 1,009 OTHER 1,395 162 MATERIALS AND SUPPLIES, AT AVERAGE COST 18 30 PREPAYMENTS AND OTHER 964 1,322 PRODUCTION COST BALANCING ACCOUNT 5 5 INCOME TAXES RECEIVABLE 204 281 DEFERRED TAX ASSETS 174 127 -------------------- TOTAL CURRENT ASSETS 6,556 4,993 -------------------- NOTES RECEIVABLE 137 113 INVESTMENT IN AND LOAN TO CHEMICAL SERVICES COMPANY - 450 PREPAID TAXES AND OTHERS 1,010 1,076 DEFERRED CHARGES 341 341 INCOME TAX RELATED DEFERRED CHARGES 809 809 -------------------- TOTAL ASSETS $ 57,889 $ 52,635 ====================
The accompanying notes are an integral part of these statements. 22 CAPITALIZATION AND LIABILITIES: COMMON SHAREHOLDERS' EQUITY COMMON SHARES: PAR VALUE $1 AUTHORIZED: 4,000,000 SHARES ISSUED: 1,563,779 SHARES $ 1,564 $ 1,506 PAID-IN CAPITAL 2,917 2,006 RETAINED EARNINGS 12,921 12,367 -------------------- TOTAL COMMON SHAREHOLDERS' EQUITY 17,402 15,879 LONG-TERM DEBT 12,294 11,217 -------------------- TOTAL CAPITALIZATION 29,696 27,096 CURRENT MATURITIES OF LONG-TERM DEBT 96 56 CURRENT PORTION OF ADVANCES FOR CONSTRUCTION 164 169 ACCOUNTS PAYABLE 3,041 3,115 INTERIM DEBT 400 450 OTHER ACCRUED EXPENSES 2,021 1,367 -------------------- TOTAL CURRENT LIABILITIES 5,722 5,157 -------------------- ADVANCES FOR CONSTRUCTION 5,401 5,487 CONTRIBUTIONS IN AID OF CONSTRUCTION 6,262 6,220 DEFERRED INCOME TAXES 4,369 4,054 UNAMORTIZED INVESTMENT TAX CREDIT 254 265 ACCRUED PENSION COST 1,642 1,343 DEFERRED CREDITS 4,543 3,013 -------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 57,889 $ 52,635 ====================
The accompanying notes are an integral part of these statements. 23 CONSOLIDATED STATEMENTS OF INCOME AND COMMON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 ---- ---- ---- OPERATING REVENUE $28,497 $ 25,267 $ 26,818 ------------------------------------ OPERATING EXPENSES: PURCHASED WATER 11,644 10,580 10,235 OTHER PRODUCTION COSTS 3,918 2,770 4,030 OPERATIONS 6,250 6,312 6,060 MAINTENANCE 1,017 1,027 986 DEPRECIATION 1,444 1,439 1,341 PROPERTY TAXES 362 321 298 OTHER TAXES 221 245 254 INCOME TAXES 1,439 932 1,385 ------------------------------------ TOTAL OPERATING EXPENSES 26,295 23,626 24,589 ------------------------------------ OPERATING INCOME 2,202 1,641 2,229 OTHER INCOME (EXPENSES): INTEREST AND AMORTIZATION OF DEBT EXPENSE (964) (870) (758) WATER RIGHTS 718 549 438 OTHER 286 103 112 ------------------------------------ NET INCOME BEFORE EXTRAORDINARY ITEM 2,242 1,423 2,021 ------------------------------------ EXTRAORDINARY ITEM, NET OF TAXES IN THE AMOUNTS OF $100 AND $315 (190) (499) - ------------------------------------ NET INCOME $ 2,052 $ 924 $ 2,021 ==================================== EARNINGS PER COMMON SHARE, BEFORE EXTRAORDINARY ITEM $ 1.43 $ 0.94 $ 1.34 ------------------------------------ EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ 1.31 $ 0.61 $ 1.34 ------------------------------------ CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY COMMON SHARES: BEGINNING BALANCE $ 1,506 $ 1,506 $ 1,506 STOCK ISSUANCE 58 - - ------------------------------------ ENDING BALANCE 1,564 1,506 1,506 ------------------------------------ PAID-IN-CAPITAL: BEGINNING BALANCE 2,006 2,006 2,006 STOCK ISSUANCE 911 - - ------------------------------------ ENDING BALANCE 2,917 2,006 2,006 ------------------------------------ RETAINED EARNINGS: BEGINNING BALANCE 12,367 12,829 12,114 NET INCOME 2,052 924 2,021 CASH DIVIDENDS, COMMON 1999 - $0.96 PER SHARE (1,498) - 1998 - $0.92 PER SHARE - (1,386) - 1997 - $0.87 PER SHARE - - (1,306) ------------------------------------ ENDING BALANCE 12,921 12,367 12,829 ------------------------------------ TOTAL COMMON SHAREHOLDERS' EQUITY $17,402 $ 15,879 $ 16,341 ====================================
The accompanying notes are an integral part of these statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 2,052 $ 924 $ 2,021 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 1,444 1,439 1,355 DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS 304 230 186 GAIN ON SALE OF CHEMICAL SERVICES COMPANY (250) - - CHANGES IN ASSETS AND LIABILITIES: CUSTOMER RECEIVABLE, NET (452) 749 (469) OTHER RECEIVABLE (884) 162 (145) RECEIVABLE FROM CSC 250 - - MATERIALS AND SUPPLIES 12 9 7 NOTES RECEIVABLE (24) 9 8 INCOME TAX RELATED DEFERRED CHARGES - 30 (1) ACCOUNTS PAYABLE (74) (42) 896 INCOME TAXES 77 (415) (102) ACCRUED PENSION COST 299 343 40 OTHER, NET 1,693 (304) 344 ----------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,449 3,134 4,140 ----------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (4,026) (5,183) (3,580) PURCHASE OF WATER PROPERTIES (80) - - PURCHASE OF CHEMICAL SERVICES COMPANY - - (312) ----------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (4,106) (5,183) (3,892) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM ADVANCES FOR CONSTRUCTION 45 235 347 PROCEEDS FROM CONTRIBUTIONS IN AID OF CONSTRUCTION 219 326 170 REPAYMENT OF ADVANCES FOR CONSTRUCTION (154) (179) (189) ISSUANCE OF COMMON STOCK 46 - - ISSUANCE OF FIRST MORTGAGE BOND - - 5,000 REPAYMENT OF LONG-TERM DEBT (78) (52) (2,090) WORKING CASH (LOAN TO) REPAYMENT FROM CHEMICAL SERVICES COMPANY 450 300 (400) PROCEEDS FROM THE DEPARTMENT OF WATER RESOURCES LOAN - - 463 WRD GRANT 910 910 - PROCEEDS FROM (REPAYMENT OF) INTERIM DEBT (50) 450 (800) DIVIDENDS PAID (1,498) (1,386) (1,306) ----------------------------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES $ (110) $ 604 $ 1,195 ----------------------------------- NET INCREASE (DECREASE) IN CASH 233 (1,445) 1,433 CASH AT BEGINNING OF YEAR 709 2,154 711 ----------------------------------- CASH AT END OF YEAR $ 942 $ 709 $ 2,154 ===================================
The accompanying notes are an integral part of these statements. 25 Notes to Consolidated Financial Statements as of December 31, 1999 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Dominguez Services Corporation (the "Company"), Dominguez Water Company ("Dominguez") and its subsidiaries. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These principles also require disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company operates in the water services industry. All significant intercompany transactions have been eliminated. Dominguez maintains its accounts in accordance with the uniform system of accounts prescribed by the California Public Utilities Commission (the Commission). ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. REVENUES: Water service revenues are recognized on an accrual basis. Unbilled revenue accrual is based on estimated usage from the latest meter reading to the end of the accounting period. PROPERTY, PLANT AND EQUIPMENT: Utility plant is carried at historical cost with subsequent additions at cost or donor's basis, which approximates cost, less cost of retirements, sales, and abandonments. Water rights are stated at the nominal amount of $1 plus purchased water rights at cost and past expenditures in connection with litigation in defense thereof. Depreciation of utility plant for financial statement purposes is computed using the Commission's remaining life accrual method. Under this method, composite straight-line depreciation rates are determined by periodic estimates of average remaining life of all utility plant assets. Costs of abandonment and salvages are charged or credited to accumulated depreciation. The effective composite depreciation rate was 2.5% in 1999 and 2.9% in 1998. Costs of maintenance and repairs are charged to operations; renewals and betterments are generally capitalized in the property accounts. PREPAID TAXES AND OTHERS: From 1987 through 1997, contributions in aid of construction and advances for construction were taxable for federal and state income tax purposes. The Company has paid these taxes and recorded deferred taxes in these consolidated financial statements. These taxes will be recovered over the tax life of the assets for contributions and the life of the contracts for advances. DEFERRED CHARGES: Debt expense on bonds is being amortized based on the percentage of the principal amount outstanding over the term of the debt. PRODUCTION COST BALANCING ACCOUNT: The Company records over- or under-collections of production costs when incurred in its books of accounts and financial statements based on the regulatory treatment afforded these costs. As of December 31, 1999 and 1998, the balancing account reflected an under-collection of $5,000. INVESTMENTS: The Company assumes all investments with maturities of three months or less to be cash equivalents. Investments in entities that are 50% or less owned are accounted for by the equity method. 26 INCOME TAXES: The Company provides deferred income taxes for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. Investment Tax Credits (ITC) have been deferred and are being amortized as reductions to income tax expense proportionately over the lives of the properties giving rise to the credits. REGULATORY ASSETS: The Company currently applies accounting standards that recognize the economic effects of rate regulation and records regulatory assets and liabilities related to water distribution operations. If rate recovery of water-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, these accounting standards may no longer apply. This change could result in the write-off of costs in an amount that could be material. However, based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, management believes that its regulatory assets will likely be recovered in the future. RESTRICTED CASH: Restricted cash represents surcharge proceeds plus interest earned, which is restricted to the payment of principal and interest on the California Safe Drinking Water Bonds. RECLASSIFICATIONS: The 1999 and 1998 consolidated financial statements include certain reclassifications necessary to conform to current year presentation. NOTE 2 CAPITAL STRUCTURE The Company has authorized issuance of up to 4,000,000 shares of common stock with par value of $1.00. As of December 31, 1999, 1,563,779 shares of stock were issued and outstanding and 40,740 options were granted with a weighted average exercise price of $16.94. At December 31, 1999, 2,800 options were exercised and 13,835 options were exercisable. As described in Note 15, the Company has executed a Merger Agreement to be acquired by CWSG. The Merger Agreement provides that all options become exercisable prior to the closing date. Effective January 2, 1998, the Company split its common stock three-for-two for shareholders of record on December 15, 1997. The Company paid cash in lieu of issuing fractional shares based on the closing price as of December 15, 1997. The par value of the common stock remained unchanged. Share information and the capital accounts in the consolidated financial statements have been retroactively restated to reflect the change. This restatement resulted in the transfer of $502,000 from paid-in-capital to common shares equity. NOTE 3 RESTRICTIONS ON DIVIDENDS The Company's available dividends to its shareholders are substantially dependent on the availability of dividends from Dominguez to the Company. Under the terms of its long-term debt agreements, Dominguez is limited in its payment of dividends (other than stock dividends) on all classes of stock to the net income accrued subsequent to December 31, 1992, plus the sum of $3,000,000. The approximate unrestricted earnings available for dividend payments amounted to $7,052,000 as of December 31, 1999. 27 NOTE 4 LONG-TERM DEBT Under a trust indenture dated August 1, 1954, and twelve supplemental indentures, the Company pledged substantially all its property, water rights, and materials and supplies as collateral under the bonds. At December 31, 1999 and 1998, long-term debt outstanding was:
Carrying Amount (Dollars in Thousands) 1999 1998 ---- ---- First Mortgage Bonds Series J, 8.86%, due 2023 $4,000 $4,000 Series K, 6.94%, due 2012 5,000 5,000 ------------------------- Total First Mortgage Bonds $9,000 $9,000 ------------------------- Small Business Administration Loan 4% - due 2000 $4 $15 ------------------------- Department of Water Resources Loan: Under the California Safe Drinking Water Bond Act 7.4% - due 2020 $453 $463 7.4% - due 2011 266 272 7.4% - due 2013 187 190 3.0% - due 2032 801 831 3.4% - due 2027 485 502 7.4% - due 2011 176 - 7.4% - due 2007 72 - 7.4% - due 2016 59 - 7.4% - due 2019 38 - 7.4% - due 2021 699 - ------------------------- Total Bonds & Notes $12,240 $11,273 ------------------------- Other notes 150 - Less : Current Maturities 96 56 ------------------------- Total Long Term Debt $12,294 $11,217 =========================
Aggregate maturities for the five years commencing with 2000 are approximately $96,000 (2000), $113,000 (2001), $131,000 (2002), $140,000 (2003), and $349,000 (2004). NOTE 5 INTERIM DEBT The Company maintained an available line of credit of $4,500,000 in 1999 and 1998 with Bank of America. At the end of 1999 and 1998, the Company had $400,000 and $450,000 outstanding, respectively. Borrowing bears interest at the preference lending rate. 28 NOTE 6 ADVANCES FOR CONSTRUCTION Advances for construction of main extensions are primarily refundable to depositors over a 20- or 40- year period. Refund amounts under the 20-year contracts are based on annual revenues from the extension. Balances at the end of the contract period are refunded in five equal annual installments. Beginning in June 1982, contracts provided for full refund at a 2-1/2% rate per year for 40 years. Estimated refunds for 2000 for all main extension contracts are $164,000. NOTE 7 CONTRIBUTIONS IN AID OF CONSTRUCTION Contributions in aid of construction are donations or contributions in cash, services or property from governmental agencies or individuals for the purpose of constructing utility facilities. Depreciation applicable to such plants is charged to the contributions in aid account rather than to depreciation expense. The charges continue until the cost applicable to such properties has been fully depreciated or the asset has been retired.
(DOLLARS IN THOUSANDS) 1999 1998 ---- ---- Beginning balance $ 6,220 $ 6,118 Add net contributions during the year 206 308 Deduct depreciation for the year charged on plant acquired through donations (164) (206) -------------------------- Ending balance $ 6,262 $ 6,220 ==========================
NOTE 8 EMPLOYEE BENEFITS PENSION PLAN: The Company provides a qualified defined benefit pension plan for all its full-time employees. Benefits under this plan reflect the employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. Pension costs are determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, including the use of the projected unit credit actuarial cost method. For ratemaking purposes, the Company recovers pension expense based on the method in place prior to SFAS No. 87. In 1998, the Company implemented SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," which standardizes disclosure requirements but does not affect the measurement of plan obligations. Prior periods have been restated to conform to the current year presentation. 29 The components of the 1999 and 1998 provisions are summarized below:
(DOLLARS IN THOUSANDS) 1999 1998 ---- ---- CHANGE IN BENEFIT OBLIGATION: BENEFIT OBLIGATION AT BEGINNING OF YEAR $11,462 $10,155 SERVICE COST 560 500 INTEREST COST 745 736 ACTUARIAL (GAIN)/LOSS (1,522) 613 BENEFITS PAID (468) (542) BENEFIT OBLIGATION AT END OF YEAR $10,777 $11,462 -------------------------------------- CHANGE IN PLAN ASSETS: FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $12,104 $11,726 ACTUAL RETURN ON PLAN ASSETS 1,343 1,046 EMPLOYER CONTRIBUTION - (126) BENEFITS PAID (468) (542) FAIR VALUE OF PLAN ASSETS AT END OF YEAR $12,980 $12,104 -------------------------------------- FUNDED STATUS: $2,203 $642 UNRECOGNIZED NET ACTUARIAL GAIN (3,872) (1,968) UNRECOGNIZED PRIOR SERVICE COST 143 158 UNRECOGNIZED NET INITIAL ASSETS (117) (175) ACCRUED BENEFIT COST $(1,642) $(1,343) -------------------------------------- WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31: DISCOUNT RATE 7.50% 6.50% EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50% RATE OF COMPENSATION INCREASE 4.50% 4.00% COMPONENTS OF NET PERIODIC BENEFIT COST: SERVICE COST $560 $500 INTEREST COST 745 736 EXPECTED RETURN ON PLAN ASSETS (908) (879) AMORTIZATION OF PRIOR SERVICE COST 14 14 RECOGNIZED ACTUARIAL GAIN (55) (96) RECOGNIZED NET INITIAL ASSETS (58) (58) NET PERIODIC BENEFIT COST $299 $217 --------------------------------------
30 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The Company charges the costs associated with its postretirement benefits other than pensions to expense during the employee's years of service. The Company is amortizing its $588,000 transition obligation related to prior service over 20 years. The Company provides health care benefits for retired employees until both the employee and his/her spouse have reached 65 years of age. Health care benefits are subject to deductibles, co-payment provisions and other limitations. The Company funds the plan up to tax-deductible limits, in accordance with ratemaking practices. Differences between expense determined under the new standard and amounts authorized for rate recovery are not expected to be material and are charged to earnings. The components of postretirement benefits other than pensions are summarized below:
(DOLLARS IN THOUSANDS) 1999 1998 ---- ---- CHANGE IN BENEFIT OBLIGATION: BENEFIT OBLIGATION AT BEGINNING OF YEAR $679 $654 SERVICE COST 42 35 INTEREST COST 43 46 ACTUARIAL GAIN (74) (32) BENEFITS PAID (28) (24) BENEFIT OBLIGATION AT END OF YEAR $662 $679 ------------------------- CHANGE IN PLAN ASSETS: FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $509 $471 ACTUAL RETURN ON PLAN ASSETS 70 38 EMPLOYER CONTRIBUTION 28 24 BENEFITS PAID (28) (24) FAIR VALUE OF PLAN ASSETS AT END OF YEAR $579 $509 ------------------------- FUNDED STATUS: $(83) $(170) UNRECOGNIZED NET ACTUARIAL GAIN (408) (317) UNRECOGNIZED NET INITIAL OBLIGATION 369 397 ACCRUED BENEFIT COST $(122) $(90) ------------------------- WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31: DISCOUNT RATE 7.50% 6.50% EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50% RATE OF MEDICAL TREND 6.00% 6.00% COMPONENTS OF NET PERIODIC BENEFIT COST: SERVICE COST $42 $35 INTEREST COST 43 46 EXPECTED RETURN ON PLAN ASSETS (37) (34) RECOGNIZED ACTUARIAL GAIN (16) (14) RECOGNIZED NET INITIAL OBLIGATION 28 28 NET PERIODIC BENEFIT COST $60 $61 -------------------------
31 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
(DOLLARS IN THOUSANDS) 1-PERCENTAGE-POINT 1-PERCENTAGE-POINT 1999 INCREASE DECREASE -------- -------- EFFECT ON SERVICE AND INTEREST COST COMPONENTS $14 $(10) EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 66 (56) 1998 INCREASE DECREASE -------- -------- EFFECT ON SERVICE AND INTEREST COST COMPONENTS $14 $(10) EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 73 (62)
The Company also offers its employees a 401(k) plan. Employees make all contributions under the plan. STOCK-BASED COMPENSATION PLANS: The Company's 1997 Stock Incentive Plan (the Plan) was adopted by the Board on February 25, 1997, and contains provisions for four types of awards: (i) stock options to purchase shares of the Company's common stock, (ii) payment of awards earned under the Company's Annual Incentive Plan (AIP) in shares of stock, (iii) issuance of restricted stock, and (iv) payment of dividend equivalents which, at the discretion of the compensation committee, may be granted in conjunction with stock options or restricted stock awards to provide cash payments prior to the time the option is exercised or the shares are vested. SFAS No. 123, "Accounting for Stock-Based Compensation," if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of the accounting requirements under SFAS No. 123 is optional; however, pro forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for stock options awarded under this plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have reflected the following pro forma amounts:
(Dollars in Thousands, except per share data) 1999 1998 ---- ---- Net income: As reported $2,052 $924 Pro forma 2,052 914 Earnings per share, basic and diluted: As reported $1.31 $0.61 Pro forma 1.31 0.61
The Company may grant up to 75,000 options under the Plan. The Company has granted 40,740 through December 31, 1999. The options are issued at fair market value with exercise prices equal to the Company's stock price at the date of grant. Options vest over a four-year period, are exercisable in whole or in installments, and expire ten years from date of grant. In accordance with the Plan and the granted option agreements as of December 31, 1999, vesting of options granted will be accelerated so such options will be exercisable prior to a change in control of the Company. 24 A summary of the status of the Company's stock option plan at December 31, 1999 and 1998, and changes during the years then ended, are presented in the table and narrative below:
1999 1998 Wtd Avg Wtd Avg Shares Ex Price Shares Ex Price -------- ---------- -------- ---------- Outstanding at beginning of year 40,740 $16.94 25,800 $16.33 Granted - - 14,940 18.00 Exercised 2,700 $16.33 - N/A 100 $18.00 Forfeited/Expired - N/A - N/A -------- ---------- -------- ---------- Outstanding at the end of year 37,940 16.99 40,740 16.94 ======== ========== ======== ========== Exercisable at end of year 13,835 16.33 6,450 16.33 ======== ========== ======== ========== Weighted average fair value of options granted 1.94 1.94 ========== ==========
Amounts shown reflect the 3-for-2 stock split effected January 1998. 14,840 options outstanding at December 31, 1999, have an exercise price of $18.00 and a weighted average remaining contractual life of 9.54 years. The remaining 23,100 options have an exercise price of $16.33 and a weighted average remaining contractual life of 8.48 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions used for the grants in fiscal 1998: weighted average risk-free interest rate of 5.67%; weighted average volatility of 18.46%; expected life of 10 years; and a weighted average dividend yield of 6.36%. 33 NOTE 9 INCOME TAXES The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred taxes for all temporary differences between book and tax income. CURRENT AND DEFERRED TAXES: Income tax expense includes the current tax liability from operations and the change in deferred income taxes during the year. Investment tax credits are amortized over the life of related properties. The components of the net accumulated deferred income tax liabilities are:
(Dollars in Thousands) 1999 1998 ---- ---- Deferred tax assets: Pension plan $794 $626 Other 27 148 ------------------------- Total deferred tax assets $821 $774 ------------------------- Deferred tax liabilities: Depreciation $4,083 $3,814 Property-related 1,110 1,110 Other (176) (223) ------------------------- Total deferred tax liabilities $5,017 $4,701 ------------------------- Net accumulated deferred income taxes $4,196 $3,927 Classification of accumulated deferred income taxes: Included in current assets 174 127 ------------------------- Included in deferred taxes $4,369 $4,054 -------------------------
The current and deferred components of income tax expense are:
(Dollar in Thousands) 1999 1998 1997 ---- ---- ---- Current income tax expenses: Current federal $904 $555 $814 Current state 231 177 266 Investment tax credit (11) (11) (10) ---------------------------------------- 1,124 721 1,070 Tax benefit of extraordinary item (100) (315) - ---------------------------------------- Total current taxes expenses $1,024 $406 $1,070 ---------------------------------------- Deferred income tax expenses: Depreciation $345 $316 $296 Pensions (165) (136) - Other 135 31 19 ---------------------------------------- Total deferred tax expenses $315 $211 $315 ----------------------------------------
34 A reconciliation of the federal statutory income tax rate to the effective rate is presented below:
1999 1998 1997 ---- ---- ---- Expected income tax expense 34% 34% 34% State income taxes 5% 5% 5% Other (1)% 2% 2% Total 38% 41% 41%
The Company has no net operating loss carryforward at December 31, 1999. NOTE 10 NEW BUSINESS AND DISPOSITIONS BUSINESS INVESTMENTS: DSC Investments invested $350,000 in Chemical Services Corporation (CSC) on December 20, 1996, and acquired a twenty percent equity ownership with the option to acquire an additional forty percent through the year 2001. Under the investment agreements, the Company was obligated to provide working cash and long-term financing to CSC for the leasing of chlorine generators, subject to the financial condition of CSC. In April 1999, a contract was drafted pursuant to which DSC Investments would sell back its equity ownership to CSC at a premium of $250,000, $160,000 of which would be applied to Dominguez' purchase of chlorine generation equipment from CSC. Both parties signed the contract in December of 1999 and payment was received from CSC in January 2000. In December 1997, Dominguez entered into a recycled water agreement with the West Basin Municipal Water District (West Basin) and ARCO. Under the terms of the agreement, Dominguez will sell ARCO recycled water purchased from West Basin for the same cost margin that Dominguez would otherwise have received providing ARCO with potable water. The recycled water plant was completed in December of 1999, and became fully operational in January 2000. Having access to recycled water will reduce the South Bay Division's demand for imported water, the availability of which may be uncertain in the future. Reduced imported water supplies and annual population growth could create future drought conditions in Southern California; however, Dominguez believes that the availability of recycled water will significantly mitigate the impact of future droughts in the South Bay Division service area. In 1998, the Water Replenishment District of Southern California (WRD), a water district responsible for the oversight and management of the West and Central Groundwater Basins, awarded a grant to Dominguez of $1,820,000. Dominguez received the first of its two payments for $910,000 in 1998 and received the second payment for $910,000 in 1999. Dominguez used approximately $670,000 to offset the cost of purchasing higher-priced imported water in lieu of pumping its groundwater rights. The balance of the funds, approximately $1,150,000, will be used to meet Dominguez' expected $2,000,000, commitment in recycled water facilities, leaving a balance of $850,000 to be funded by Dominguez. ACQUISITIONS: During 1998, Dominguez received the Commission's approval to acquire the assets of the Lucerne Water Company, an investor-owned water system serving 1,242 customers, in exchange for 42,092 shares of the Company's common stock. This acquisition, effective January 1, 1999, was accounted for using the purchase method. Ratebase for the acquired assets was set at $713,000, resulting in an additional credit of $262,000 recorded in paid in capital. 35 Also in 1998, Dominguez received Commission approval to acquire the assets of the Rancho del Paradiso and Armstrong Valley Water Companies, investor-owned water systems serving 60 and 322 customers respectively, in exchange for 12,375 shares of the Company's common stock. This acquisition, effective January 1, 1999, was accounted for using the purchase method. Ratebase for the acquired assets was set at $188,000, resulting in an additional credit of $55,000 recorded in paid in capital. In July 1999, Dominguez received the Commission's approval to acquire the assets of Hawkins Water Service, serving 51 customers, for $50,000 cash. The ratebase for the acquired assets was set at $51,000 and the acquisition became effective on August 6, 1999. Dominguez also received the Commission's approval in 1999 to acquire the assets of Coast Springs Water Company, serving 237 customers, for $180,000 cash. The ratebase for the acquired assets was set at $179,000 and the acquisition became effective on December 8, 1999. NOTE 11 BUSINESS RISKS AND CONCENTRATION OF SALES Forty-six percent of the Company's water supply comes from its own groundwater wells, and fifty-four percent comes from wholesalers of imported water. The long-term availability of imported water supplies is dependent upon several factors. Drought conditions throughout the state, increases in population, tightening of water quality standards, and legislation may reduce water supplies. At this time, the Company does not anticipate any constraints on its imported water supplies due primarily to above-average precipitation in recent years. The Company is taking steps to reduce its dependence on imported water supplies, including working with the West Basin to bring recycled water into its South Bay Division service area. The Company continues to drill new wells in order to enable it to utilize its total adjudicated groundwater rights. Dominguez is subject to water quality regulations promulgated by the United States Environmental Protection Agency (EPA) and the California Department of Health Services (DHS). Both groundwater and purchased water are subject to extensive analysis and testing. With occasional minor exceptions, Dominguez meets all current primary water standards. Beginning in mid-1997, Dominguez participated, along with many other large water companies throughout the United States, in an 18-month water sampling data acquisition program known as the Information Collection Rule. Data collected will be used by the EPA to establish future drinking water standards. Under the Federal Safe Drinking Water Act, the EPA is required to continue to establish new maximum levels for additional chemicals. The costs of future compliance are unknown, but Dominguez could be required to perform more quality testing and treatment. Management believes the Company's financial reserves will be sufficient to meet these anticipated requirements. During 1999, Dominguez expended $1,786,000 on water supply improvements. In 2000, Dominguez anticipates spending $2,622,000 for water supply capital improvements. The Company's utility operations are performed under the purview of the Commission. Thus, the Company has no unilateral flexibility with regards to water charge for its utility products or services. Most variations are due primarily to weather conditions and the usage of major industrial customers. The Company is required to provide service to customers within its defined service territories. Although the Company has a diversified base of residential, business-industrial and public authority customers, a substantial portion of water consumption, 51% in 1999 and 50% in 1998, is attributable to business-industrial customers. One single refinery was responsible for 38% of this business-industrial consumption in 1999, and for 34% in 1998. 36 Revenue details for 1999, 1998 and 1997 are as follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997 ---- ---- ---- Residential - Multi-Family $12,492 $11,473 $11,964 Business - Industrial 12,775 11,174 11,698 Public Authority 1,382 1,286 1,537 All Other 1,848 1,334 1,619 -------------------------------------- Total $28,497 $25,267 $26,818 ======================================
NOTE 12 SUPPLEMENTAL CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS) 1999 1998 1997 ---- ---- ---- CASH PAID FOR: Interest, net $896 $603 $774 Income taxes $650 $650 $1,000
(DOLLARS IN THOUSANDS) 1999 ------ SUMMARY OF NON-CASH TRANSACTIONS: Stock issued in acquisition of assets $923 Debt assumed in acquisition of assets $1,108 Note received for sale of investment in CSC $350
NOTE 13 RELATED PARTY TRANSACTIONS Dominguez annually refunds a portion of revenue received from several water mains for which Watson Land Company, Carson Estate Company, and Dominguez Properties advanced the construction funds to Dominguez. The refunds to Watson Land Company were $14,922 in 1999 and $17,250 in 1998. The refunds to Carson Estate Company were $1,110 in 1999 and $1,339 in 1998. The refunds to Dominguez Properties were $6,176 in 1999 and $6,176 in 1998. Dominguez also leases sites used for wells from Watson Land Company, Carson Estate Company, and Dominguez Properties. The rental costs for Watson Land Company were $40,735 in 1999 and 1998. The rental costs to Carson Estate Company were $21,095 in 1999 and $19,674 in 1998. The rental costs for Dominguez Properties were $3,846 in 1999 and 1998. Dominguez provides water service to these entities to the extent that they have property within it's division. 37 NOTE 14 SUBSEQUENT EVENTS In February 1999, Dominguez filed general rate increase applications for the South Bay Division and its subsidiaries, Antelope Valley Water Company and Kern River Valley Water Company. The Commission consolidated the applications into a single proceeding. In December 1999, the Company and RRB filed settlement agreements to increase rates by $1,416,000 for test year 2000, $336,000 for test year 2001 and $113,000 for attrition year 2002. In January 2000, the Leona Valley Town Council filed its opposition to the settlement agreement filed in the Antelope Valley Water Company (AVWC) application. The Administrative Law Judge granted an evidentiary hearing in the proceeding, limiting issues to the AVWC application, for March 1, 2000, and scheduled briefs to be filed on March 20, 2000. Because all the applications were consolidated into a single proceeding, the Commission has postponed its decision on the Dominguez South Bay and Kern River Valley Water Company rate applications. Dominguez anticipates that a Commission decision approving all settlement agreements will be ordered by June 2000. NOTE 15 THE MERGER On November 13, 1998, the Company executed an Agreement and Plan of Reorganization (the Merger Agreement) to merge with California Water Service Group (CWSG), the parent of California Water Service Company (Cal Water) and CWS Utility Services. Under the terms of the November 1998 Merger Agreement, each share of the Company's common stock issued and outstanding on the closing date would be converted into the right to receive 1.18 shares of CWSG common stock. The Company's Board of Directors (Board) received the opinion of its financial advisor, PaineWebber Inc., that this exchange ratio would be fair to the shareholders of the Company's common stock from a financial point of view. And, the Company expected that the proposed merger will be treated as a tax-free transaction under the applicable provisions of the Internal Revenue Code. Shares of CWSG common stock are traded under the symbol "CWT" on the New York Stock Exchange. CWSG operations provide water utility services to over 1.5 million people in 58 California communities. On March 16, 1999, the Company announced that it had received an unsolicited proposal from American States Water Company (ASWC) offering to acquire all of the Company's outstanding common stock in a stock-for-stock merger. Under the ASWC proposal, each share of the Company's common stock would have been converted into the right to receive a number of ASWC shares intended to provide $32.50 of value for each of the Company's shares. The ASWC proposal also provided for a collar pursuant to which the minimum and maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company share. The Company's financial advisor advised the Company's Board that this proposal was more favorable to the Company's shareholders than the terms of the Merger Agreement. On March 22, 1999, the Company and CWSG executed an amendment to the November 1998 Merger Agreement which provides that each share of the Company's common stock will be converted into the right to receive a number of CWSG shares intended to provide $33.75 of value for each of the Company's shares. The amendment to the Merger Agreement also provides that the minimum and maximum conversion ratios will be 1.25 and 1.49 CWSG shares for each Company share. At a special meeting on May 12, 1999, Company shareholders overwhelmingly approved the Merger Agreement as amended. All regulatory approvals have been received, with the exception of that of the Commission. In its initial report filed in October 1999, the Commission staff recommended disapproval of the merger. Subsequently, CWSG and the Company issued a guarantee that customer rates would not increase as a result of the merger, expressing confidence that synergies achieved by the merger would offset merger costs. 38 In succeeding discussions with Commission's Ratepayer Representation Branch (RRB), Cal Water and Dominguez proposed an enhanced guarantee, which included provisions that customer rates would not increase as a result of the merger, that Dominguez customers would continue to receive financial benefit of water rights currently owned by Dominguez, and that a portion of operating synergies achieved over those needed to offset merger costs be returned to customers. RRB staff testified to its support of the merger, with the enhanced guarantee, on December 7, 1999. In a proposed decision issued in February 2000, the Administrative Law Judge recommended approval of the merger with certain conditions, many of which were proposed by Cal Water and Dominguez in the enhanced guarantee. Oral arguments were scheduled for March 2000, with a decision expected in the second quarter. Pursuant to the Merger Agreement, if regulatory approval is not received or if either the Company or CWSG decide not to complete the merger, certain payments are required under the terms of the Merger Agreement by the terminating party. NOTE 16 EARNINGS PER SHARE The following table reconciles basic and diluted earnings per share calculations. Shares in the table below have been restated to reflect the Company's stock split in January 1998 (See Note 2).
INCOME (DOLLARS IN THOUSANDS) SHARES PER-SHARE AMOUNT FOR YEAR ENDED DECEMBER 31, 1999 Basic Earnings Per Share: Net income available to common shareholders, weighted average $2,052 1,561,096 $1.31 Options issued to executives 9,982 Diluted Earnings Per Share: Net income available to common shareholders $2,052 1,571,078 $1.31 =================================================== FOR YEAR ENDED DECEMBER 31, 1998 Basic Earnings Per Share: Net income available to common shareholders $924 1,506,512 $0.61 Options issued to executives 4,838 Diluted Earnings Per Share: Net income available to common shareholders $924 1,511,350 $0.61 =================================================== FOR YEAR ENDED DECEMBER 31, 1997 Basic Earnings Per Share: Net income available to common shareholders $2,021 1,506,512 $1.34 Options issued to executives 361 Diluted Earnings Per Share: Net income available to common shareholders $2,021 1,506,873 $1.34 ================================================
39 NOTE 17 BUSINESS SEGMENTS In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company is a diversified water resource management company specializing in the delivery of high quality water supplies and has operations in two business segments, "Regulated" and "Non-Regulated," as well as general corporate charges. "Other" captures extraordinary items related to the merger with CWSG. The Regulated business segment is comprised of water utilities, the largest of which is Dominguez Water Company, serving 100,000 people in the South Bay area of Los Angeles County. The Company's other water utilities, all located in California, are: Kern River Valley Water Company in Kern County, Antelope Valley Water Company in northern Los Angeles and Kern Counties, and Redwood Valley Water Company Division in Lake, Sonoma and Marin County. These subsidiaries in aggregate serve an additional 20,000 people. In the area of Non-Regulated water-related business segments, the Company in 1998 and 1997 held a twenty percent equity stake in Chemical Services Company, the developer, manufacturer, and marketer of proprietary chlorine generation and treatment products. The Company accounted for the CSC investment under the equity method. In 1999, the Company sold its investment in CSC. The Company is also active in water rights brokerage and water supply and system operation contracts. See note 10 for additional information. Income from water right brokerage is derived from the selling and purchasing of leased water rights to pump groundwater located from the central and west basins located in Los Angeles County. Profits and assets for each segment are presented below:
REGULATED NON-REGULATED OTHER TOTAL --------- ------------- ----- ----- 1999 (Dollars in Thousands) Operating revenue $28,497 $- $- $28,497 Other income 36 1,098 - 1,134 Interest revenue 3 25 - 28 Interest and amortization expense 900 64 - 964 Depreciation 1,444 - - 1,444 Extraordinary item, net of tax - - 190 190 Segment net income 1,723 519 (190) 2,052 Segment assets 56,220 1,669 - 57,889 1998 (Dollars in Thousands) Operating revenue $25,267 $- $- $25,267 Inter-segment revenues (expenses) 275 (275) - - Other income 34 639 - 673 Interest revenue 17 29 - 46 Interest and amortization expense 804 66 - 870 Depreciation 1,439 - - 1,439 Extraordinary item, net of tax - - 499 499 Segment net income 1,119 304 (499) 924 Segment assets 51,575 1,060 - 52,635 1997 (Dollars in Thousands) Operating revenue $26,818 $- $- $26,818 Other income 57 496 - 553 Interest revenue 8 49 - 57 Interest and amortization expense 673 85 - 758 Depreciation 1,341 - - 1,341 Segment net income 1,779 242 - 2,021 Segment assets 50,782 879 - 51,661
40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Dominguez Services Corporation: We have audited the accompanying consolidated balance sheets of Dominguez Services Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dominguez Services Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP - ---------------------------------- Arthur Andersen LLP Los Angeles, California March 24, 2000 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names and ages of all directors and executive officers, indicating the positions and offices presently held by each.
NAME, PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR POSITION AND OFFICE AGE AND ALL OTHER POSITIONS WITH THE COMPANY SINCE - ------------------- --- ---------------------------------------- ----- Dwight C. Baum 87 Senior Vice President of Paine Webber Incorporated (and 1962 Director Predecessors), a brokerage house. Brian J. Brady 51 President, Chief Executive Officer, and Chairman of the Board 1995 Director, of the Company since May 1996; President and Chief Executive Chief Executive Officer and Officer of the Company since November 1995; Director, Irvine President Ranch Water District, since 1998; prior, Assistant General Manager Public Utilities, City of Anaheim, since 1992; prior, Vice President and General Manager, Energy Services, Inc., a Subsidiary of Southern California Edison, since 1988. Richard M. Cannon 58 Chief Executive Officer and President of Watson Land Company, 1991 Director a privately held developer and owner of industrial centers and buildings, since 1994; prior, President of Watson Land Company, since 1989. Terrill M. Gloege 64 Senior Vice President, Chief Financial Officer of Carson Estate 1991 Director Company and affiliated entities, a privately held investment company since 1989. Thomas W. Huston 38 Director of Leasing and Asset Management for Watson Land 1995 Director Company since 1995; prior, Assistant Director of Leasing and Asset Management; prior, Leasing Agent for Watson Land Company. James D. Flynn 42 President of Carson Estate Company since 1999: prior, Managing 1999 Director Director of AEW Capital Management, L.P. Langdon W. Owen 69 President of Don Owen & Associates since 1973; Consulting 1994 Director Engineer and Financial Advisor. Charles W. Porter 69 Business Consultant since January 1996; prior, President, Chief 1977 Director Executive Officer of the Company since 1980. Debra L. Reed 43 President, Energy Distribution Services and Chief Financial 1995 Director Officer, Southern California Gas Company, since 1998; prior, Senior Vice President of Southern California Gas Company, since 1995; prior, Vice President, Southern California Gas Company since 1988. John S. Tootle 46 Vice President of Finance and Chief Financial Officer of the NA Chief Financial Officer, Company since April 1987. Vice President of Finance, Treasurer and Secretary
There is no "family relationship" between any of the executive officers. 43 ITEM 11. EXECUTIVE COMPENSATION. Set for below is certain information with respect to each of the Company's executive officers. All officers have served at the discretion of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY YEARS AS OFFICER ---- --- ------------------------- ---------------- Brian J. Brady 51 President, Chief Executive Officer, and 4 Chairman of the Board John S. Tootle 46 Chief Financial Officer, Vice President of 13 Finance, Treasurer and Secretary
SUMMARY COMPENSATION TABLE The following table sets forth the compensation paid by the Company and options and long-term incentive plans awarded in 1999 and its two prior fiscal years to the Company's Chief Executive Officer and five other executive officers of the Company whose total annual salary and bonus exceeded $90,000 in 1999.
AUTO & OTHER NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ------------------------- ---- ------ ---- ------------ Brian J. Brady 1999 $178,551.75 $- $5,754.33 President & Chief Executive Officer 1998 158,226.29 26,402.00 3,600.00 1997 150,009.60 16,200.00 3,920.54 John S. Tootle 1999 118,397.73 - 46,139.39 Chief Financial Officer, Treasurer, Vice 1998 113,834.92 15,295.00 4,275.00 President of Finance, Secretary 1997 113,297.61 8,800.00 4,140.23 John R. Foth 1999 97,275.67 - 1,255.17 Director of Operation 1998 90,126.88 7,435.00 1,446.02 1997 90,105.60 6,600.00 906.01 Daniel C. Howell 1999 99,307.75 - 1,320.67 Director of Operation 1998 54,085.98 - 22,721.42 1997 - - - Susan L. Leone 1999 93,584.48 - 1,678.97 Director of Integrated Services 1998 88,237.36 11,815.00 6,503.50 1997 87,721.66 - 6,672.71 Terry H. Witthoft 1999 94,138.14 - 1,642.73 Director of Resource Development 1998 90,771.15 12,015.00 660.00 1997 90,232.02 6,900.00 660.00
44 OPTIONS AND LONG-TERM INCENTIVE PLANS
Number of Securities Underlying Performances or Other Period Until Expiration Date Year Name Options Maturation or Payout - -------------------------------------------------------------------------------------------------------- 1998 Brian J. Brady 4,500 1,125 options exercisable and 1,125 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- John S. Tootle 2,700 675 options exercisable and 675 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- John R. Foth 2,100 525 options exercisable and 525 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- Daniel C. Howell 1,400 350 options exercisable and 350 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- Susan L. Leone 2,100 525 shares exercisable and 525 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- Terry H. Witthoft 2,100 525 shares exercisable and 525 July 14, 2008 options every year for the next three years. - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- 1997 Brian J. Brady 9,000 4,500 options exercisable and 2,250 June 23, 2007 options every year for the next two years. - -------------------------------------------------------------------------------------------------------- John S. Tootle 5,400 2,700 options exercisable and 1,350 June 23, 2007 options every year for the next two years. - -------------------------------------------------------------------------------------------------------- John R. Foth 4,200 2,100 options exercisable and 1,050 June 23, 2007 options every year for the next two years. - -------------------------------------------------------------------------------------------------------- Susan L. Leone 3,000 1,500 options exercisable and June 23, 2007 750 options every year for the next two years. - -------------------------------------------------------------------------------------------------------- Terry H. Witthoft 4,200 2,100 options exercisable and 1,050 June 23, 2007 options every year for the next two years. - --------------------------------------------------------------------------------------------------------
In accordance with the Plan and the granted option agreements as of December 31, 1999, vesting of options granted will be accelerated so such options will be exercisable prior to a change in control of the Company. 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as of March 24, 2000, with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to own beneficially five percent or more of any class of the Company's outstanding common stock, (ii) each director nominee and named executive officer, and (iii) all directors and executive officers as a group. Each shareholder has sole voting and investment power with respect to such shares unless otherwise indicated.
Number of Shares and Nature of Percent of Name and Address of Beneficial Owner Beneficial Ownership Common Stock ------------------------------------ --------------------- ------------ Carson Estate Company 148,293 9.4% 18710 South Wilmington, Suite 200 Rancho Dominguez, CA 90220 Carson Dominguez Real Estate Corporation 159,364 10.1% 18710 South Wilmington, Suite 200 Rancho Dominguez, CA 90220 Watson Land Company 132,894 8.5% 515 South Figueroa Street, Suite 1910 Los Angeles, CA 90071 Dwight C. Baum 33,750(1) 2.2% 200 South Los Robles Avenue, Suite 645 Pasadena, CA 91101-2431 Richard M. Cannon 132,894(2) 8.5% 22010 South Wilmington Avenue, Suite 400 Carson, CA 90745 Terrill M. Gloege 160,864(3) 10.2% 18710 South Wilmington Avenue, Suite 200 Rancho Dominguez, CA 90220 Thomas W. Huston 750 * 22010 South Wilmington Avenue, Suite 400 Carson, CA 90745 James D. Flynn 307,657(4) 19.6% 18710 South Wilmington Avenue, Suite 200 Rancho Dominguez, CA 90220 Langdon W. Owen 10,450 * 1300 Bristol North, Suite 290 Newport Beach, CA 92660 Charles W. Porter 8,491 * 400 Paseo Dorado Long Beach, CA 90803 Debra L. Reed 239 * 555 West 5th Street Los Angeles, CA 90013 Brian J. Brady 7,755(5) * 21718 South Alameda Street Long Beach, CA 90810 John S. Tootle 7,166(6) * 21718 South Alameda Street Long Beach, CA 90810 All Directors and Officers as a group, (10 persons) 510,652(6) 32.5%
*Less than one percent 1) All of such shares are owned by Mr. Baum as trustee of the Dwight C. Baum and Hildagarde E. Baum Trust. Mr. Baum has voting and investment powers with respect to such shares 2) All of such shares are owned by Watson Land Company, of which Mr. Cannon is president, chief executive officer, and a director. Mr. Cannon shares voting and investing powers with respect to such shares with the other directors of Watson Land Company. 3) 159,364 of such shares are owned by the Carson Dominguez Real Estate Corporation, of which Mr. Gloege is a director. Mr. Gloege shares voting and investing powers with respect to such shares with the other directors of Carson Dominguez Real Estate Corporation. The remaining 1,500 shares are owned by Mr. Gloege individually. 4) 148,293 of such shares are owned by the Carson Estate Company, of which Mr. Flynn is president and a director. Mr. Flynn shares voting and investing powers with respect to such shares with the other directors of Carson Estate Company. 159,364 of such shares are owned by the Carson Dominguez Real Estate Corporation, of which Mr. Flynn is president and a director. Mr. Flynn shares voting and investing powers with respect to such shares with the other directors of Carson Dominguez Real Estate Corporation. 5) This includes 2,130 shares owned by Mr. Brady individually and 5,625 currently exercisable options held by Mr. Brady. 6) This includes 6,591 shares owned by Mr. Tootle individually and 575 currently exercisable options held by Mr. Tootle. 7) Includes shares described in footnotes (2), (3) and (4) above, and includes 5,625 currently exercisable options held by Mr. Brady and 575 currently exercisable options held by Mr. Tootle. 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Dominguez annually refunds a portion of revenue received from several water mains for which Watson Land Company, Carson Estate Company, and Dominguez Properties advanced the construction funds to Dominguez. The refunds to Watson Land Company were $14,922 in 1999 and $17,250 in 1998. The refunds to Carson Estate Company were $1,110 in 1999 and $1,339 in 1998. The refunds to Dominguez Properties were $6,176 in 1999 and $6,176 in 1998. Dominguez also leases sites used for wells from Watson Land Company, Carson Estate Company, and Dominguez Properties. The rental costs for Watson Land Company were $40,735 in 1999 and 1998.. The rental costs to Carson Estate Company were $21,095 in 1999 and $19,674 in 1998. The rental costs for Dominguez Properties were $3,846 in 1999 and 1998. Dominguez provides water service to these entities to the extent that they have property within its divisions. 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K. None 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMINGUEZ SERVICES CORPORATION: By /s/ Brian J. Brady ---------------------------------- Brian J. Brady, Chief Executive Officer By /s/ John S. Tootle ---------------------------------- John S. Tootle, Chief Financial Officer, Treasurer, Secretary By /s/ Cynthia C. Chu ---------------------------------- Cynthia C. Chu, Corporate Controller Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. DIRECTORS: /s/ B. J. Brady 3/27/00 ---------------------------- ------------------- B. J. Brady, Chairman Date /s/ D. C. Baum 3/27/00 ---------------------------- ------------------- D. C. Baum Date /s/ R. M. Cannon 3/27/00 ---------------------------- ------------------- R. M. Cannon Date /s/ T. M. Gloege 3/27/00 ---------------------------- ------------------- T. M. Gloege Date /s/ T. W. Huston 3/27/00 ---------------------------- ------------------- T. W. Huston Date /s/ J. D. Flynn 3/27/00 ---------------------------- ------------------- J. D. Flynn Date /s/ L. W. Owen 3/27/00 ---------------------------- ------------------- L. W. Owen Date /s/ C. W. Porter 3/27/00 ---------------------------- ------------------- C. W. Porter Date /s/ D. L. Reed 3/27/00 ---------------------------- ------------------- D. L. Reed Date
49 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR THE PERIOD ENDING DECEMBER 31, 1999. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 942,307 0 3,157,943 (303,882) 18,244 6,378,563 74,387,031 26,298,422 57,685,383 6,967,125 12,294,212 0 0 1,563,779 15,838,300 57,685,383 16,649,283 28,496,762 15,561,914 24,857,178 0 0 963,772 3,680,125 1,438,726 2,241,399 0 189,687 0 2,051,712 1.31 1.31
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