| PENNICHUCK CORP Item 1A RISK FACTORS There are various risks involved in investing in the Company, some of which are described below |
| Investors should carefully consider each of the following factors and all of the other information in this annual report, including information that is incorporated in this annual report by reference |
| Risks Related to Our Water Utilities The City of Nashuaapstas use of the power of eminent domain to acquire a significant portion of our water utility assets creates uncertainty and may result in material, adverse consequences for us and our shareholders |
| We are involved in ongoing proceedings with the City of Nashua regarding the Cityapstas desire to acquire all or a significant portion of the water utility assets of Pennichuck Water, our principal subsidiary |
| The City is pursuing such acquisition pursuant to its power of eminent domain under New Hampshire law |
| Whether the City will ultimately be permitted to acquire our assets and, if so, the compensation that the City would have to pay us for those assets are highly uncertain |
| Moreover, the Cityapstas eminent domain proceeding has involved, and will likely continue to involve, what has been and is likely to continue to be protracted proceedings before the New Hampshire PUC Our board of directors and shareholders would not have the right to approve a forced sale of Pennichuck Water assets to the City in an eminent domain proceeding or the amount of damages that the City would have to pay to us as a consequence of such a taking |
| If the New Hampshi re PUC authorizes the City to use eminent domain to acquire any or all of Pennichuck Waterapstas assets, the City would not be bound to proceed with the acquisition, and could decide not to proceed |
| Given the highly integrated nature of our businesses, a forced sale of a significant portion of our water related assets may result in increased costs and operating inefficiencies borne by our remaining assets |
| Additionally, Service Corporationapstas ability to service its existing contracts, as well as pursue additional operating contracts, could be impaired |
| The existence of a pending eminent domain proceeding also could adversely affect Pennichuck Waterapstas future prospects and result in the loss of one or more key employees |
| The Company may not have the opportunity to contract to operate for the City all or any portion of the Pennichuck Water system that the City may acquire in an eminent domain proceeding |
| According to the Cityapstas filings with the New Hampshire PUC, if the City acquires all or any portion of the Pennichuck Water system in an eminent domain proceeding, the City intends to enter into an Operation, Maintenance and Management Agreement with Veolia Water North America - Northeast LLC to operate that water system, although the City has indicated that it has not yet entered into a binding contract with Veolia |
| According to the Cityapstas filings, Veolia is a wholly owned subsidiary of Veolia Environment (which formerly was known as Vivendi Environnement) |
| Our vigorous opposition to the City of Nashuaapstas efforts to acquire our assets by eminent domain has had, and will likely continue to have, a material adverse effect on our operating results and has been, and will continue to be, a significant distraction to our management |
| We have vigorously opposed the City of Nashuaapstas efforts to acquire our assets by eminent domain and intend to continue to do so, although we have publicly stated our desire to work with the City toward a fair and equitable solution |
| Our eminent domain related expenses have been, and are expected to continue to be, significant |
| For 2005, those expenses, net of taxes, were approximately dlra1dtta4 million, or $ |
| The Cityapstas eminent domain case now is in the discovery stage and is scheduled for hearing before the New Hampshire PUC in January 2007, and we expect that the total amount of our 2006 eminent domain related expenses will be in the range of dlra2dtta0 million pre-tax, or dlra1dtta2 million net of taxes |
| A substantial portion of our President and Chief Executive Officerapstas attention has been and will continue to be devoted to coordinating various aspects of our response to the Cityapstas eminent domain initiative |
| In addition, we expect that from time to time one or more other senior officers have participated and will participate significantly in various aspects of our response to the Cityapstas eminent domain efforts |
| We cannot assure you that managementapstas 15 attention to the Cityapstas eminent domain initiative will not adversely affect their oversight of other aspects of our business |
| Our water utility business requires significant capital expenditures, and the rates we charge our customers are subject to regulation |
| If we are unable to obtain government approval of our requests for rate relief, or if approved rate relief is untimely or inadequate to cover our investments, our operating results would suffer |
| Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers |
| These rates are subject to approval by the New Hampshire PUC We file rate relief requests, from time to time, to recover our investments in utility plant and expenses |
| The water utility business is capital intensive |
| We typically spend significant sums each year for additions to or replacement of property, plant and equipment |
| Once we file a rate relief petition with the New Hampshire PUC, the ensuing administrative and hearing process may be lengthy and costly |
| The timing of our rate relief requests are therefore partially dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate relief to the extent approved |
| We can provide no assurances that any future rate relief request will be approved by the New Hampshire PUC; and, if approved, we cann ot guarantee that this rate relief will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate relief |
| The relatively large magnitude of the future rate relief that we expect to request in order to earn a return on our projected 2006 to 2009 capital expenditures may adversely affect our ability to obtain timely and adequate rate relief and therefore could adversely affect our ability to service the debt that we expect to incur to finance such projects |
| During the 2006 to 2009 period, our capital expenditures will be particularly large as we upgrade our water treatment plant to meet more stringent federally mandated water quality standards, undertake various water distribution, storage, supply, maintenance, rehabilitation and replacement projects and conduct a pilot project for a proposed radio-based meter reading system |
| Our estimated capital expenditures for our water utilities during the 2006 to 2009 period are expected to total dlra52dtta3 million in current dollars |
| By comparison, for the four year period 2002 to 2005, our capital expenditures were dlra35dtta5 million |
| Given the relatively large magnitude of our construction program, we expect that our future rate relief requests will be significant |
| We intend to submit one or more requests for rate relief in anticipation of significant components of our capital projects being placed into service |
| There can be no assurance that the New Hampshire PUC will approve future rate relief in a timely or sufficient manner to cover our investments and expenses during the 2006 to 2009 period |
| Our ability to service the debt that we expect to incur to finance our 2006 to 2009 construction program would be adversely affected if we were unable to obtain timely and adequate rate relief relating to the capital expenditures incurred during that program |
| Our financial flexibility may be limited during the next several years, as our long-term debt and our ratio of total debt to total capitalization will likely increase significantly as a consequence of our intended funding of projected capital expenditures for the 2006 to 2009 period |
| We estimate that only 25prca to 30prca of our projected dlra52dtta3 million of capital expenditures during 2006-2009 will be financed from internal cash flow |
| We intend to finance the balance primarily through long-term indebtedness, augmented by dlra17dtta4 million of additional equity that we raised in a 2005 public offering of common stock |
| We expect to increase our long-term debt primarily by borrowing the proceeds of the dlra49dtta5 million of bonds issued in October 2005 through the New Hampshire Business Finance Authority |
| Our balance sheet at December 31, 2005 reflects the dlra12dtta1 million that we initially borrowed through the Business Finance Authority |
| We expect to meet the balance of our external funding needs by borrowing the remaining dlra37dtta4 million portion of the October 2005 bond offering which initially was placed in escrow for the sole benefit of bondholders and therefore not recorded as a liability at December 31, 2005 |
| As we require funds over the 2006-2009 time frame, we intend to draw down funds from escrow and record the associated debt as a long-term liability |
| 16 At December 31, 2005 our total common equity and total debt were dlra45dtta6 million and dlra41dtta4 million, respectively, resulting in a total debt to total capitalization ratio of 47dtta6prca |
| We project that towards the end of our projected 2006-2009 capital expenditures program our total debt (net of mandatory and discretionary debt re-financings) will be in the range of dlra75 million and our total debt to total capitalization (net of cash balances, if any) will be in the range of 60prca |
| The projected increase in our total debt and in our ratio of total debt to total capitalization may limit our ability to fund our operations, to pay dividends on our common stock, and to pursue acquisitions |
| These projected increases may also limit our ability to renew our revolving credit facility which we increased to dlra16 million in 2005 and which will expire on December 31, 2007, or otherwise adversely affect our access to long-term debt at reasonable costs and terms |
| We may not be able to maintain our existing indebtedness or to incur additional indebtedness under our existing long-term and revolving debt facilities, if our future credit ratios do not satisfy the requirements under those facilities |
| Our ability to borrow any or all of the dlra37dtta4 million of proceeds available to be drawn under our October 2005 bond offering is subject to us satisfying certain financial ratios at the time of such borrowing (ie, debt incurrence tests) |
| Similarly, our ability to access funds under our revolving credit facility is subject to maintaining certain financial ratios (ie, maintenance tests) |
| These ratios limit the amount of long-term debt relative to net plant and the amount of total debt to total capitalization, and also specify minimum amounts of earnings and cash flow available to pay interest and fixed charges as a percentage of such interest and fixed charge amounts |
| We were in compliance with such tests as of December 31, 2005 |
| Our ability to continue to satisfy these tests depends, among other factors, on receipt of timely and adequate rate relief |
| Should we be unable to borrow the remaining proceeds of the October 2005 bond offering described above, to borrow under our revolving credit facility or otherwise to access long-term debt at reasonable costs and terms, our ability to finance our 2006-2009 capital expenditures program on a timely basis could be materially impaired |
| In such event, we may need to seek other forms of capital at less favorable costs and terms or defer or reduce some of our capital expenditures |
| Any delay in implementing capital improvements could adversely affect our ability to request and receive rate relief from the New Hampshire PUC relating to capital expenditures incurred by us |
| 17 If we are unable to pay the principal and interest on our indebtedness as it comes due or we default under certain other provisions of our loan documents, our indebtedness could be accelerated and our operating results, financial condition and cash flows could be adversely affected |
| Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance |
| Our performance is affected by many factors, some of which are beyond our control |
| We believe that our cash flow from operations and, if necessary, borrowings under our existing revolving credit facility, will be sufficient to enable us to make our debt payments as they become due |
| If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may be on terms that are not favorable to us |
| No assurance can be given that any refinancing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms |
| In addition, our failure to comply with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a default under these documents, which could result in an acceleration of our indebtedness |
| We expect that all or substantially all of our then outstanding indebtedness would be accelerated if the City of Nashua were to acquire a significant portion of our assets; such acceleration could adversely affect our financial condition, operating results and cash flows |
| An eminent domain taking or temporary use by any governmental body of all or substantially all of the tangible property of Pennichuck Water used or useful in its business as a water company would result in a mandatory redemption of all of the tax-exempt bonds described above as well as our other bond indebtedness outstanding at December 31, 2005 |
| We expect that any taking of Pennichuck Waterapstas assets by the City of Nashua in the eminent domain matter now pending before the New Hampshire PUC would represent the taking of substantially all of Pennichuck Waterapstas tangible property used or useful in its business as a water company and would therefore trigger mandatory redemption of those bonds |
| Similarly, our dlra16dtta0 million revolving credit facility with Bank of America provides that any indebtedness outstanding under the facility would be due upon the City of Nashua acquiring all or a material portion of Pennichuck Waterapstas assets in an eminent do main proceeding |
| Also, no new borrowings would be permitted under such facility |
| Such an acceleration could adversely affect our financial condition and operating results if we are unable to repay such indebtedness at that time or to refinance the indebtedness on equally favorable terms and conditions or to incur new borrowings |
| If we are unable to manage the construction phases of our 2006 to 2009 capital expenditure program successfully, so that we are unable to complete the upgrade of our water treatment plant on a timely basis, our operating results could be adversely affected and the total amount of capital expenditures may exceed our projected capital resources |
| Our significant projected capital expenditures for the 2006 to 2009 period result primarily from our need to upgrade our water treatment plant to meet federally mandated standards |
| The water treatment plant project will be constructed in stages |
| The initial stage began in the second half of 2005, and we expect that the project will be completed in early 2009 |
| The cost of the entire water treatment plant project is currently estimated at approximately dlra38 million |
| The following are principal risks that we believe are associated with our water treatment plant construction project: * The price of steel, which is a significant portion of the overall cost of the water treatment plant project, may increase substantially from our current estimates, which risk we expect to bear under the terms of the construction contracts |
| * There may be cost overruns resulting from change orders or other factors not linked to the price of steel that we may have to bear under the terms of the construction contracts |
| * One or more significant contractors or subcontractors may encounter financial difficulties and be unable to complete their obligations under the construction contracts on a timely basis or at all |
| 18 * Capital investment cannot be included in rate relief until the project is in service |
| Therefore, the timing of rate relief will be adversely affected if construction problems or other factors delay the operation of new plant components |
| If we are unable to successfully manage the construction phases of our 2006 to 2009 capital expenditure program, so that we are unable to complete the upgrade of our water treatment plant on time to comply with federal standards, our operating results could be adversely affected, and the total amount of capital expenditures during the period may exceed our projected capital resources |
| If mismanagement is determined to have resulted in cost overruns, then the New Hampshire PUC may not allow recovery for all of the costs associated with the project |
| We have restrictions on our ability to pay dividends |
| There can also be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends |
| The terms of our debt instruments impose conditions on our ability to pay dividends |
| Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate relief, will determine both our ability to pay dividends on our common stock and the amount of those dividends |
| We have paid dividends on our common stock each year since 1856, but there can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to dividends that we have paid in recent periods |
| The loss of a significant commercial or industrial customer can and has adversely affected our operating results and cash flows |
| Our revenues will decrease, and such decrease may be material, if a significant commercial or industrial customer terminates or materially reduces its use of our water |
| Approximately dlra3dtta9 million, or 18dtta6prca, of our 2005 water utility revenues was derived from commercial and industrial customers |
| Our largest customer is an Anheuser Busch ( "e AB "e ) bottling plant located in Merrimack, New Hampshire |
| If AB or any other large commercial or industrial customer reduces or ceases its consumption of our water, we may seek New Hampshire PUC approval to increase the rates of our remaining customers to recover any lost revenues |
| There can be no assurance, however, that the New Hampshire PUC would approve such a rate relief request, and even if it did approve such a request , it would not apply retroactively to the date of the reduction in consumption |
| The delay between such date and the effective date of the rate relief may be significant and adversely affect our operating results and cash flows |
| We are subject to federal, state and local regulation that may impose significant limitations and restrictions on the way we do business |
| Various federal, state and local authorities regulate many aspects of our business |
| Among the most important of these regulations are those relating to the quality of water we supply our customers |
| These laws require us to obtain various environmental permits from environmental regulatory agencies for our operations and to perform water quality tests that are monitored by the US Environmental Protection Agency, or EPA, and the New Hampshire Department of Environmental Services, or DES, for the detection of certain chemicals and compounds in our water |
| We could be fined or otherwise sanctioned by regulators for non-compliance with these laws, regulations and permits |
| In addition, government authorities continually review these regulations, particularly the drinking water quality regulations and may propose new or more restrictive requirements in the future |
| If new or more restrictive limitations on permissible levels of substances and conta minants in our water are imposed, we may not be able to adequately predict the costs necessary to meet regulatory standards |
| If we are unable to recover the cost of implementing new water treatment procedures in response to more restrictive water quality regulations through the rates we charge our customers, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition and operating results |
| 19 An important element of our growth strategy is the acquisition of water systems |
| Any pending or future acquisitions we decide to undertake will involve risks |
| The acquisition and integration of water systems is an important element in our growth strategy |
| This strategy depends on identifying suitable acquisition opportunities and reaching mutually agreeable terms with acquisition candidates |
| The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and resources |
| Further, acquisitions may result in dilution for the owners of our common stock, our incurrence of debt and contingent liabilities and fluctuations in quarterly results |
| In addition, the businesses and other assets we acquire may not achieve the financial results that we expected |
| The current concentration of our business in southern and central New Hampshire makes us susceptible to any adverse development in local regulatory, economic, demographic, competitive and weather conditions |
| Our core service area, which accounted for 64prca of our 2005 consolidated revenues, comprises Pennichuck Waterapstas franchise in the City of Nashua, New Hampshire and portions of the surrounding towns of Amherst, Hollis and Merrimack |
| Our revenues and operating results are therefore subject to local regulatory, economic, demographic, competitive and weather conditions in that area |
| A change in any of these conditions could make it more costly or difficult for us to conduct our business |
| In addition, any such change would have a disproportionate effect on us, compared to water utility companies that do not have such a geographic concentration |
| Weather conditions and overuse may interfere with our sources of water, demand for water services and our ability to supply water to our customers |
| We depend primarily on surface water from the Pennichuck Brook and, to a lesser extent, the Merrimack River in Nashua, New Hampshire to meet the present and future demands of our customers |
| Unexpected conditions may interfere with our water supply sources |
| Drought and overuse may limit the availability of surface water |
| These factors might adversely affect our ability to supply water in sufficient quantities to our customers and our revenues and operating results may be adversely affected |
| Additionally, cool and wet weather, as well as drought restrictions and our customers &apos conservation efforts, may reduce consumption demands, also adversely affecting our revenues and operating results |
| Furthermore, freezing weather may also contribute to water transmission interruptions caused by pipe and main breakage |
| If we experience an interruption in our water supply, it could have a material adverse effect on our operating results, financial conditio n and cash flows |
| Contamination of our water supply may cause disruption in our services and adversely affect our operating results, financial condition and cash flows |
| Our water supply is subject to contamination from the migration of naturally occurring substances in groundwater and surface systems, as well as pollution resulting from man-made sources |
| In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source through our interconnected transmission and distribution facilities |
| In addition, we may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities or development of new treatment methods |
| Our inability to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective or timely manner, may have an adverse effect on our operating results, financial condition and cash flows |
| The necessity for increased security has and may continue to result in increased operating costs |
| In the wake of the September 11, 2001 terrorist attacks and the ensuing attention to threats to the nationapstas health and security, we have expended resources to increase security measures at our facilities and heighten employee awareness of threats to our water supply |
| We have also incurred expenses to tighten our security measures regarding the delivery and handling of certain chemicals used in our business |
| We will continue to bear 20 increased costs for security precautions to protect our facilities, operations and supplies |
| We are not aware of any specific threats to our facilities, operations or supplies |
| However, it is possible that we would not be in a position to control the outcome of such events should they occur |
| Damage to, or an upgrade of, any of our dams may adversely affect our financial condition, revenues, operating results and cash flows |
| Pennichuck Water owns eight dams, including four impounding dams which are situated on the Nashua and Merrimack border |
| A failure of any of those dams could result in injuries and property damage downstream for which we may be liable and which may adversely affect our financial condition, revenues and operating results |
| The failure of a dam would also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition, revenues, operating results and cash flows |
| The cost of such repairs can be and has been material |
| In 2004, we incurred approximately dlra1 million to upgrade the spillways and earthen embankments of our Supply and Harris Pond dams |
| In January 2004, the New Hampshire DES issued a letter to Pennichuck Water setting forth certain deficiencies with regard to the Merrimack Village dam |
| At that time, Pennichuck Water obtained an extension of the time in which to complete the necessary repairs, and was considering whether to sell, demolish or repair the dam |
| The Company has not yet concluded its assessment regarding the future sale, demolition or repair of the dam |
| In the event that the Company decides to demolish the dam, it is estimated that the cost to complete the demolition will be between dlra150cmam000 and dlra200cmam000 |
| The success of our acquisition strategy depends significantly on the services of the members of our senior management team, and the departure of any of those persons could cause our operating results to suffer |
| The success of our acquisition strategy depends significantly on the continued individual and collective contributions of our senior management team |
| If we lose the services of any member of our senior management or are unable to hire and retain experienced management personnel, it could harm our operating results |
| We announced on March 20, 2006 that Donald L Correll, our President and Chief Executive Officer, would be resigning effective in mid-April 2006 to become the President and Chief Executive Officer of a larger water company |
| Our Board of Directors has appointed Hannah M McCarthy, who has been a director since 1994, to become interim Chief Executive Officer upon Mr |
| Correllapstas departure |
| The Board also established an executive search committee to seek a replacement for Mr |
| Correll as Chief Executive Officer |
| Correllapstas successor or whether the uncertainty regarding our management succession plan during the interim will adversely affect us |
| Risks Related to Our Water Management Business Our water management subsidiaryapstas revenue growth depends on our ability to enter into new operating contracts and maintain our existing contracts with municipalities, communities and non-transient, non-community water systems |
| In our target market of southern and central New Hampshire and nearby portions of Maine, Massachusetts and Vermont, municipalities and communities own and operate the majority of water systems |
| A significant portion of Service Corporationapstas marketing and sales efforts is spent demonstrating the benefits of contract operations to elected officials and municipal authorities |
| Employee unions and certain "e public interest "e groups generally oppose the principle of outsourcing these services to companies like us and are active opponents in this process |
| The political environment means that decisions are made based on many factors, not just economic factors |
| There can be no assurance that we can maintain or expand our water management business |
| 21 Our water management subsidiaryapstas business depends on trained, qualified employees |
| State regulations set the staff training, experience and staff qualification standards required for Service Corporationapstas employees to operate specific water facilities |
| We must recruit, retain and develop qualified employees, maintain training programs and support employee advancement |
| We must provide the proper management and operational staff of state-certified and qualified employees to support the operation of water facilities |
| Failure to do so could put us at risk, among other things, for operational errors at the facilities, which would have an adverse effect on our water management business |
| Our water management subsidiaryapstas business is subject to environmental and water quality risks |
| Clients of Service Corporation are owners of the facilities that we operate under contract |
| The facilities must be operated in accordance with various federal and state water quality standards |
| We also handle certain hazardous materials at these facilities, for example, sodium hydroxide |
| Any failure of our operation of the facilities, including noncompliance with water quality standards, hazardous material leaks and spills, and similar events, could expose us to environmental liabilities, claims and litigation costs |
| We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect on our future results of operations |
| Risks Related to Our Real Estate Activities The cost of obtaining development permits and other land use approvals, as well as fluctuations in interest rates, construction costs and economic conditions prevailing in the Nashua/Merrimack area and the supply of investment capital for commercial real estate and related assets, could adversely affect the value of our undeveloped land |
| Primarily through our Southwood subsidiary, we own or control several parcels of developable land in Nashua and Merrimack, New Hampshire, comprising approximately 510 acres |
| During the next several years, we expect to pursue the permitting and other land use approvals necessary to realize some or all of the value of those parcels |
| We will undertake those efforts either alone or in concert with others |
| The value we realize for our undeveloped land will depend primarily on whether development permits and other land use approvals can be obtained in a timely, cost-effective manner |
| The process of obtaining such permits and approvals is inherently uncertain, lengthy and expensive |
| The value of our undeveloped land will also be affected by fluctuations in interest rates, construction costs and economic conditions prevailing in the Nashua/Merrimack area and the supply of investment capital for commercial real estate and related assets |
| Write-offs related to real estate development decisions could adversely affect our operating results, and the disposition of a single significant real estate investment could increase fluctuations in our operating results and cash flows |
| A change in economic or other conditions may make certain development projects less viable, and we may decide to abandon or delay such projects |
| Our future operating results may be adversely affected by write-offs of costs that have been capitalized in connection with potential development projects that we subsequently determine not to pursue |
| The disposition of a single significant Southwood investment can affect our financial performance in any period, and therefore our real estate investment activities could increase (and have historically increased) fluctuations in our operating results and cash flows |
| The cost of capital improvements to office space and low occupancy levels or rental rates for commercial office space could adversely affect our real estate development subsidiaryapstas operating results |
| Southwood has a 50prca ownership interest in three separate joint ventures owning commercial office buildings located in Merrimack, New Hampshire and a 50prca interest in another nearby parcel of land that is approved for the construction of commercial office space |
| From time to time, a Southwood joint venture may 22 need to make significant capital improvements to its property in order to remain competitive |
| Such additional investment could adversely affect our return on a project |
| Any expiration, default or termination of a lease may adversely affect Southwoodapstas revenues |
| A reduction in demand for the joint venture properties may cause us to continue to incur operating costs without offsetting income |
| The combined vacancy rate for the Southwood joint venture projects was approximately 22prca as of March 1, 2006 |
| Commercial building occupancies and rental rates typically decline in an economic downturn |
| Southwoodapstas share of the net operating income (or loss, if any) from leases associated with those buildings could be adversely impacted by a downturn in the local economy and commercial real estate market |
| Southwoodapstas investment in one or more joint ventures may be jeopardized if the debt financing secured by the properties of those joint ventures cannot be refinanced or otherwise satisfied on acceptable terms |
| Southwood holds a 50prca interest in four joint ventures, each of which owns land and three of which own a commercial office building, subject to a mortgage note with various financial institutions |
| The mortgage notes, totaling approximately dlra9dtta8 million, are not included in our consolidated balance sheets |
| Each of the notes is secured by the underlying real property |
| In addition, Southwood is contingently liable on one-half of the outstanding balance of two of the mortgage notes, and as such, it has issued a guarantee to the mortgagee for its share of the guaranteed indebtedness |
| Southwoodapstas investment in one or more joint ventures may be jeopardized if the debt financing secured by the properties of those joint ventures cannot be refinanced or otherwise satisfied on acceptable terms |
| Other Risks When we become subject to SEC requirements under Section 404 of the Sarbanes-Oxley Act of 2002, if our internal control reports disclose significant deficiencies or material weaknesses, our shareholders and lenders could lose confidence in our financial reporting, which would likely harm the trading price of our stock, our access to additional capital, and our liquidity |
| We are not an "e accelerated filer "e under the federal securities laws, and therefore SEC requirements under Section 404 of the Sarbanes-Oxley Act of 2002 did not require us to and we did not prepare a management report on our internal control over financial reporting or obtain an attestation on that report from our auditors in connection with our most recent consolidated financial statements included with this annual report |
| Under current SEC regulations, because the value of our common stock held by non-affiliates did not exceed dlra75 million as of June 30, 2005, our annual report for the year ending December 31, 2005 was not required to include the internal control reports described above |
| If such value exceeds dlra75 million as of June 30, 2006, such internal control reports will be required for the fiscal year ending December 31, 2006 |
| During the past several years, various accelerated filers, when first providing internal control reports, disc losed significant deficiencies or material weaknesses in their internal control over financial reporting |
| When we become subject to SEC requirements under Section 404, if our internal control reports disclose significant deficiencies or material weaknesses, our shareholders and lenders could lose confidence in our financial reporting, which would likely harm the trading price of our stock, our access to additional capital, and our liquidity |
| There is a limited trading market for our common stock; you may not be able to resell your shares at or above the price you pay for them |
| Although our common stock is listed for trading on the Nasdaq National Market, the trading in our common stock has substantially less liquidity than many other companies quoted on the Nasdaq National Market |
| A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common stock at any given time |
| This presence in turn depends on the individual decisions of investors and general economic and market conditions over which we have no control |
| As a consequence of the limited volume of trading in our common stock, a sale of a significant number of shares of our common stock in the open market could cause our stock price to decline |
| We are subject to anti-takeover measures that may be used by existing management to discourage, delay or prevent changes of control that might benefit non-management shareholders |
| 23 Classified Board of Directors |
| We have a classified board of directors, which means only one-third of the directors are elected each year |
| A classified board can make it harder for an acquirer to gain control by voting its candidates onto the board of directors and may also deter merger proposals and tender offers |
| At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of the board |
| Authorized Shares |
| Our Articles of Incorporation authorize the issuance of 11cmam500cmam000 shares of common stock and 115cmam000 shares of preferred stock |
| The shares of common stock and preferred stock were authorized in an amount greater than intended to be issued to provide our board of directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock option grants |
| However, these additional authorized shares may also be used by the board of directors to deter future attempts to gain control of us |
| The board of directors has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences |
| As a result of the ability to fix voting rights for a series of preferred stock, the board has the power to issue a series of preferred stock that would have the effect of di scouraging or blocking a post-tender offer merger or other transaction by a third party |
| Shareholder Rights Plan |
| Our board of directors has adopted a shareholder rights plan |
| The rights plan is intended to improve the bargaining position of our board of directors in the event of an unsolicited offer to acquire our outstanding common stock |
| Under the terms of the rights plan, a preferred stock purchase right is attached to each share of our outstanding common stock that is currently outstanding or becomes outstanding before the rights become exercisable, are redeemed or expire |
| The rights will become exercisable only if an individual or group has acquired or obtained the right to acquire or announced a tender or exchange offer that if consummated would result in such individual or group acquiring beneficial ownership of 10prca or more of our outstanding common stock |
| Upon the occurrence of a triggering event, the rights will entitle every holder of our common stock, other than the acquiror, to purchase our stock or stock of our successor on terms that would likely be economically dilutive to the acquiror |
| Our board of directors, however, has the power to amend the rights plan so that it does not apply to a particular acquisition proposal or to redeem the rights for a nominal value before they become exercisable |
| We believe these features will likely encourage an acquiror to negotiate with our board of directors before commencing a tender offer or to condition a tender offer on the board taking action to prevent the rights from becoming exercisable |
| Supermajority Shareholder Approval May be Required for Fundamental Transactions with an "e Interested Shareholder "e |
| Our Articles of Incorporation require that certain fundamental transactions must be approved by the holders of two-thirds of each class of stock entitled to vote and two-thirds of the total number of shares entitled to vote, unless a majority of "e disinterested directors "e has approved the transaction and other specified conditions are satisfied, in which case the required shareholder approval will be the minimum approval required by applicable law |
| The transactions that are subject to this provision are various fundamental transactions between us and an "e interested shareholder "e or an affiliate of that shareholder |
| These transactions include certain sales or other dispositions of our assets, certain issuances of our capital stock, certain transactions involving our merger, consolidation, division, reorganization, dissolution , liquidation or winding up or certain amendments of our Articles of Incorporation or bylaws |
| We believe that the interested shareholder provision will likely encourage an acquiror to negotiate with the board of directors before commencing a tender offer |
| Approval of the New Hampshire PUC would be required for any acquisition of us, and the New Hampshire PUC would consider factors other than what is in the best interest of our shareholders |
| Our water utility subsidiaries are regulated by the New Hampshire PUC The New Hampshire PUC takes the position that under New Hampshire law, water utility holding companies may not be acquired unless and until there is an order of the New Hampshire PUC approving the acquisition |
| In practice, companies acquiring water utility holding companies in New Hampshire have typically sought New Hampshire PUC approval as a condition of any transaction |
| The New Hampshire PUC may approve an acquisition only if it determines that the acquisition will not have an adverse effect on rates, terms, service or operation of the utilities and is lawful, proper and in the public interest |