Exhibit 99.1
AQUA AMERICA, INC.
401(K) AND PROFIT SHARING PLAN
Financial Report
December 31, 2005
(With Report of Independent Registered Public Accounting Firm Thereon)
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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TABLE OF CONTENTS
DECEMBER 31, 2005 AND 2004
PAGE
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FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm 1
Statements of Net Assets Available for Benefits 2
Statements of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4
SUPPLEMENTARY SCHEDULES:
Schedule of Assets (Held at End of Year) 11
Schedule of Reportable Transactions 12
Schedule of Delinquent Participant Contributions 14
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Administrators
Aqua America, Inc. 401(k) and Profit Sharing Plan
We have audited the accompanying statements of net assets available for
benefits of the Aqua America, Inc. 401(k) and Profit Sharing Plan as of December
31, 2005 and 2004, and the related statements of changes in net assets available
for benefits for the years then ended. These financial statements are the
responsibility of the Plan'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 of the Public
Company Accounting Oversight Board (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. The Plan is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Plan's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of the Aqua
America, Inc. 401(k) and Profit Sharing Plan as of December 31, 2005 and 2004,
and the changes in net assets available for benefits for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplementary schedules of
assets (held at end of year) as of December 31, 2005 and reportable
transactions, and delinquent participant contributions for the year ended
December 31, 2005 are presented for the purpose of additional analysis and are
not a required part of the basic financial statements, but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. These supplementary schedules are the responsibility of the Plan's
management. The supplementary schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Reading, Pennsylvania
May 19, 2006
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AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
ASSETS
Investments, at fair value $7,202,336 $5,023,229
Employer contributions receivable 376,890 284,530
Participants' contributions receivable 17,938 0
---------- ----------
NET ASSETS AVAILABLE FOR BENEFITS $7,597,164 $5,307,759
========== ==========
See notes to financial statements.
2
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
INVESTMENT INCOME
Interest and dividends $ 257,168 $ 177,214
Net appreciation in fair value of investments 554,422 294,013
---------- ----------
TOTAL INVESTMENT INCOME 811,590 471,227
---------- ----------
CONTRIBUTIONS
Employer 670,424 475,958
Participants 892,559 580,772
Participant rollovers 247,257 3,281,522
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TOTAL CONTRIBUTIONS 1,810,240 4,338,252
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BENEFITS PAID TO PARTICIPANTS (330,469) (96,221)
---------- ----------
ADMINISTRATIVE EXPENSES (1,956) (2,710)
---------- ----------
NET INCREASE IN NET ASSETS AVAILABLE FOR BENEFITS 2,289,405 4,710,548
NET ASSETS AVAILABLE FOR BENEFITS - BEGINNING OF YEAR 5,307,759 597,211
---------- ----------
NET ASSETS AVAILABLE FOR BENEFITS - END OF YEAR $7,597,164 $5,307,759
========== ==========
3
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - DESCRIPTION OF PLAN
The following description of the Aqua America, Inc. 401(k) and Profit
Sharing Plan (the "Plan") is provided for general information purposes
only. Participants should refer to the Plan document for more complete
information.
GENERAL
The Plan, established August 1, 2003 (date of inception), is a
defined contribution plan sponsored by Aqua America, Inc. Direct
and indirect subsidiaries of Aqua America, Inc. that adopt the
Plan are participating employers. All participating employers are
referred to herein as the ("Company"). The Plan is designed to
conform to all the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and with the
applicable provisions of the Internal Revenue Code and the
regulations thereunder. Generally, employees of the Company who
were hired on or after April 1, 2003 are eligible to participate
in the Plan. Notwithstanding the foregoing, the following are
excluded: (i) bargaining unit employees unless their union
contract provides for participation in the Plan, (ii) leased
employees, (iii) nonresident aliens and (iv) persons performing
services who are classified by the Company as other common law
employees. If eligible, employees become participants in the Plan
on the January 1, April 1, July 1, or October 1 coinciding with
or next following the later of the completion of six months of
service or the date the employee becomes a member of an eligible
class of employees.
CONTRIBUTIONS
Participants may elect to contribute from 1% to 25% of their
pretax compensation pursuant to a salary deferral election, up to
a maximum of $14,000 in 2005 and $13,000 in 2004, which are
partially matched by the Company. Participants may also invest
from 1% to 10% of their after-tax compensation, which is not
matched by the Company. Additionally, participants who are age 50
or who will attain age 50 prior to the end of the plan year may
make an additional deferral contribution ("Catch-Up"), provided
the participant made the maximum amount of deferral contributions
permitted under the Plan. The maximum amount of allowable
catch-up contribution for 2005 and 2004 is $4,000 and $3,000,
respectively. Participants may also make transfers between funds
or suspend their contributions at any time, and may contribute
amounts representing distributions from other qualified defined
benefit or contribution plans ("Rollovers").
The Plan provides for employer contributions as follows:
Employer Matching Contributions
The Company will make a matching contribution equal to 50%
of the first 6% of a participant's compensation which is
contributed to the Plan on a pre-tax basis. Matching
contributions will be made to the Plan in the form of cash
that is used for the purchase of Aqua America, Inc. common
stock.
4
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - DESCRIPTION OF PLAN (CONTINUED)
CONTRIBUTIONS (CONTINUED)
Discretionary Contributions
The Company may make additional discretionary contributions
to the Plan for the benefit of active participants.
Discretionary contributions will be allocated to active
participant accounts on a pro-rated basis based on each
participant's compensation compared to the compensation of
all active participants. This discretionary contribution
will be made to the Plan in the form of cash that is used
for the purchase of Aqua America, Inc. common stock. The
Company did not make any discretionary contributions for
2005 or 2004.
Employer Profit Sharing Contributions
The Company may, at its discretion, make a profit sharing
contribution to the Plan to benefit all eligible employees
as of the last date of the Plan year. The profit sharing
contribution will be made in the form of cash. The Company
made profit sharing contributions during 2005 and 2004 of
$370,593 and $284,530, respectively.
Employer Performance Contributions
The Company may, at its discretion, make an employer
performance contribution on behalf of eligible participants
if certain established performance goals are achieved.
Performance contributions are to be made to the Plan in the
form of cash, Company stock, or any combination thereof. The
Company did not make any performance contributions during
2005 and 2004.
VESTING
Each participant will always be 100% vested in their pre-tax
contribution, after-tax contribution, rollover contribution and
performance contribution accounts. Participants become 100%
vested in their matching contribution account after three years
of service and in their profit sharing contribution account after
five years of service. A "year of service" for vesting purposes
means each plan year (the calendar year) in which the participant
is credited with 1,000 or more hours of service.
COMMON STOCK FUND
Matching contributions and discretionary contributions may be
made in cash or invested in Aqua America, Inc. common stock.
Participants who are 100% vested in this fund have an opportunity
to elect that any dividends with respect to Aqua America, Inc.
common stock held be paid in cash rather than being allocated to
their account to be invested in additional shares of Aqua
America, Inc. common stock.
5
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - DESCRIPTION OF PLAN (CONTINUED)
INVESTMENT OPTIONS
Participants can direct, at the time they enroll in the Plan,
that their salary deferral and voluntary contributions be
invested entirely in one of the funds offered by the Plan or
divided among the funds. The Plan currently offers fourteen
registered investment companies and one common/collective trust
fund. Subject to compliance with applicable state and federal
securities laws, the Plan also permits participants to acquire an
interest in Aqua America, Inc. common stock. Participants may
change their investment instructions and reinvest their
contributions in a different fund or funds at any time.
PAYMENT OF BENEFITS
Distributions from the Plan are normally made shortly after the
participant's retirement, death or disability. Prior to March 28,
2005, if the participant's account balance did not exceed $5,000,
the participant would receive a lump-sum distribution as soon as
practicable following termination of employment. Effective March
28, 2005, the $5,000 threshold was decreased to $1,000.
Withdrawals will be made in cash or shares of Aqua America, Inc.
common stock, to the extent permitted by law. Under certain
circumstances, a participant may withdraw all or a portion of the
employee contributions while still employed.
LOANS DUE FROM PARTICIPANTS
Participants may borrow funds from their account balance equal to
the lesser of $50,000 or 50% of their vested account balance for
a period not to exceed five years, unless the loan is used to
purchase the participant's principal residence. Repayment is made
through payroll deductions. All new loans are issued at an
interest rate of prime plus 1%.
PLAN FORFEITURES
Forfeited non-vested accounts are used first to restore any
non-vested amounts (if a participant received a distribution and
forfeited his non-vested account and resumed employment as a
covered employee and repays the full amount of the distribution)
then shall be applied as promptly as practicable to reduce
employer contributions. Contributions made by the Company are
netted against forfeited, non-vested amounts that accumulate
during the year. Employer contributions were reduced by $-0- and
$1,778 during 2005 and 2004, respectively, as a result of
forfeited nonvested accounts. The balance in the forfeiture
account was $15,599 and $186 as of December 31, 2005 and 2004,
respectively.
PLAN AMENDMENT OR TERMINATION
Although Aqua America, Inc. hopes to continue the Plan
indefinitely, it reserves the right to amend or terminate the
Plan at its discretion, subject to the provisions of ERISA. All
interests of the participants would be distributed to them in
accordance with applicable provisions of the Internal Revenue
Code.
6
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared using
the accrual basis.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Plan's management to use estimates and
assumptions that affect the accompanying financial statements and
disclosures. Actual results could differ from these estimates.
ADMINISTRATION
The Plan is administered by a committee (the "Committee")
consisting of three or more individuals selected by and who may
be removed at any time by the Board of Directors of Aqua America,
Inc. The Committee members may be employees of Aqua America, Inc.
and may be participants in the Plan. The Committee members
receive no compensation from the Plan for their services in such
capacity. The Committee has extensive administrative powers in
connection with the Plan, including authority to interpret the
provisions of the Plan, to adopt rules for its administration and
to make other decisions with respect to the Plan.
The trustee for the Plan's funds invests the funds as directed by
the participants. The principal duties of the trustee are to
receive all contributions made to the Plan and to make
investments and pay benefits.
Substantially all of the administrative expenses of the Plan are
paid by the Company.
INVESTMENT VALUATION
The Plan's investments are stated at fair value. Investments in
registered investment companies are valued at quoted market
prices which represents the net asset value of shares held by the
Plan. Common/ collective trust funds are valued at unit value,
which represents the fair value of the underlying assets.
Therefore, the value of common/collective trust funds are deemed
to be at estimated fair value. Aqua America, Inc. stock is valued
at its quoted market price. Loans to participants and cash are
valued at cost, which approximates fair value.
Investments of the Plan are exposed to various risks, such as
interest rate, market, and credit. Due to the level of risk
associated with certain investments and the level of uncertainty
related to changes in the value of investments, it is at least
reasonably possible that changes in risks in the near term would
materially affect investment assets reported in the statement of
net assets available for benefits and the statements of changes
in net assets available for benefits.
7
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION (CONTINUED)
Dividend income is recorded on the ex-dividend date and interest
income is recorded when earned. Realized gains and losses on the
sale of the Aqua America, Inc. stock are based on average cost of
the securities sold. Purchases and sales are recorded on a trade
date basis.
PAYMENTS OF BENEFITS
Benefits are recorded when paid.
NOTE 3 - INVESTMENTS
The following table presents the fair value of investments:
INVESTMENTS 2005 2004
- ------------------------------------------------------------- ---------- ----------
Investments at fair value, by reference to quoted market
prices:
Registered investment companies:
American Century Balanced Fund $ 386,566* $ 313,012*
American Century Diversified Bond Fund 297,486 281,165*
American Century Equity Index Fund 448,468* 373,284*
American Century Select Fund 458,570* 407,178*
American Century Strat. Alloc. Mod. Fund 456,535* 417,056*
American Century Value Fund 617,939* 589,651*
American Century Vista Fund 557,411* 448,775*
JP Morgan U.S. Small Company 494,544* 393,158*
Other registered investment companies 314,548 222,301
---------- ----------
TOTAL REGISTERED INVESTMENT COMPANIES 4,032,067 3,445,580
Stock:
Aqua America, Inc. Common Stock 2,100,442* 882,082*
---------- ----------
TOTAL INVESTMENTS AT FAIR VALUE, BY REFERENCE TO
QUOTED MARKET PRICES 6,132,509 4,327,662
---------- ----------
Investments at estimated fair value:
Common/Collective Funds
American Century Stable Asset Fund 711,381* 423,845*
---------- ----------
Investments at cost, which approximates fair value:
Loans due from participants 348,446 271,722
Uninvested cash 10,000 0
---------- ----------
TOTAL INVESTMENTS AT COST, WHICH APPROXIMATES FAIR
VALUE 358,446 271,722
---------- ----------
TOTAL INVESTMENTS $7,202,336 $5,023,229
========== ==========
* Investment represented 5% or more of the Plan's net assets available for
benefits in the respective plan year.
8
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 3 - INVESTMENTS (CONTINUED)
In August 2005, Aqua America's Board of directors declared a 4-for-3
common stock split effected in the form of a 33 1/3% stock distribution for
shareholders of record on November 17, 2005. The new shares were
distributed in December 2005.
The Plan's investments (including gains and losses on investments
bought and sold, as well as held during the year) appreciated in value
during the years ended December 31, 2005 and 2004 as follows:
2005 2004
-------- --------
Common stock $542,329 $126,318
Registered investment companies 12,093 167,695
-------- --------
TOTAL $554,422 $294,013
======== ========
NOTE 4 - NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets available for benefits as of December
31, 2005 and 2004 and the significant components of the changes in net
assets relating to the nonparticipant-directed investments for the years
ended December 31, 2005 and 2004 is as follows:
2005 2004
-------- --------
Net assets:
Aqua America, Inc. common stock $710,580 $264,274
Uninvested cash 10,000 0
-------- --------
720,580 264,274
Employer contributions receivable 6,297 0
-------- --------
TOTAL $726,877 $264,274
======== ========
Changes in net assets:
Contributions $299,831 $191,428
Interest and dividends 8,163 2,674
Net appreciation 180,312 32,306
Benefits paid to participants (25,703) (6,007)
-------- --------
TOTAL $462,603 $220,401
======== ========
9
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 5 - RELATED PARTY AND PARTY-IN-INTEREST TRANSACTIONS
Certain Plan investments are shares of registered investment companies
managed by J.P. Morgan Retirement Plan Services. J.P. Morgan Retirement
Plan Services is the trustee as defined by the Plan and, therefore, these
transactions qualify as party-in interest transactions.
Employer matching contributions are invested in common stock of the
Plan Sponsor. Participants may also elect to invest in Plan Sponsor common
stock. These transactions qualify as related party and party-in-interest
transactions. Total purchases at market value related to the stock for 2005
and 2004 were $829,090 and $657,934, respectively. Total sales at market
value related to the stock for 2005 and 2004 were $153,058 and $51,451,
respectively.
NOTE 6 - TAX STATUS
The Internal Revenue Service issued a determination letter dated
September 30, 2003, which stated that the Plan and related trust qualified
under applicable provisions of the Internal Revenue Code (IRC) and,
therefore, are exempt from federal income taxes. The Plan administrator and
the Plan's counsel believe that the Plan is designed and is currently being
operated in compliance with applicable requirements of the IRC. Therefore,
no provision for income taxes has been included in the Plan's financial
statements.
NOTE 7 - PLAN AMENDMENT
Effective June 1, 2004, as a result of an acquisition, the Plan was
amended to allow employees of Heater Utilities to participate in the Plan.
As a result of this amendment, funds totaling $2,849,624 were rolled into
the Plan during 2004.
Effective July 1, 2005, the Plan was amended to allow certain
employees of Hydraulics, Ltd. to become participants in the Plan and to
terminate their participation in the Aqua America, Inc. Employees 401(k)
Savings Plan and Trust. The amendment also allows the participants to
transfer their account balances in the Aqua America, Inc. Employees 401(k)
Savings Plan and Trust to the Plan. The transfer of assets has not taken
place as of December 31, 2005 and will take place as soon as the third
party administrators can provide for the transfer.
NOTE 8 - SUBSEQUENT EVENT
Effective May 1, 2006, the Hydraulics, Ltd. Retirement Plan, a frozen
plan sponsored by Aqua North Carolina, Inc. as successor to Hydraulics,
Ltd., was merged with and into the Plan. The transfer of assets and
liabilities from the Hydraulics, Ltd. Retirement Plan will take place as
soon as the third party administrators can provide for the transfer.
10
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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SCHEDULE OF ASSETS (HELD AT END OF YEAR)
FORM 5500 - SCHEDULE H - LINE 4I
EIN: 23-1702594
PN: 005
DECEMBER 31, 2005
CURRENT
(A) IDENTITY OF ISSUE (B) DESCRIPTION OF INVESTMENT (C) COST (D) VALUE (E)
- --------------------------------------------------------------------------------------------------------------------------
* American Century Balanced Fund Registered Investment Company N/A $ 386,566
* American Century Diversified Bond Fund Registered Investment Company N/A 297,486
* American Century Equity Index Fund Registered Investment Company N/A 448,468
* American Century International Growth Fund Registered Investment Company N/A 296,382
* American Century My Retirement Portfolio Registered Investment Company N/A 170
* American Century My Retirement Portfolio - 2015 Registered Investment Company N/A 2,169
* American Century My Retirement Portfolio - 2025 Registered Investment Company N/A 676
* American Century My Retirement Portfolio - 2035 Registered Investment Company N/A 589
* American Century My Retirement Portfolio - 2045 Registered Investment Company N/A 14,562
* American Century Select Fund Registered Investment Company N/A 458,570
* American Century Strategic Allocation Registered Investment Company
Moderate Fund N/A 456,535
* American Century Value Fund Registered Investment Company N/A 617,939
* American Century Vista Fund Registered Investment Company N/A 557,411
* JP Morgan U.S. Small Company Registered Investment Company N/A 494,544
* American Century Stable Asset Fund Common/Collective Fund N/A 711,381
* Aqua America, Inc. Common Stock $1,445,509 2,100,442
Uninvested cash Cash 10,000 10,000
Participant loans Participant Loans (interest rate 4.0% to
9.5%) 0 348,446
----------
$7,202,336
==========
* Represents a party-in-interest to the Plan.
N/A Historical cost has not been presented as investment is participant
directed.
11
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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SCHEDULE OF REPORTABLE TRANSACTIONS
FORM 5500 - SCHEDULE H - LINE 4J
EIN: 23-1702594
PN: 005
FOR THE YEAR ENDED DECEMBER 31, 2005
CURRENT VALUE
OF ASSET ON
PURCHASE SELLING TRANSACTION
IDENTITY OF PARTY INVOLVED (A) DESCRIPTION OF ASSET (B) PRICE (C) PRICE (D) COST (G) DATE (H) NET GAIN (I)
- ------------------------------ ------------------------ --------- --------- -------- ------------- ------------
Aqua America, Inc. * Common stock $829,090 $ 0 $829,090 $829,090 $ 0
153,058 118,233 153,058 34,825
* Represents a party-in-interest to the Plan.
12
AQUA AMERICA, INC. 401(K) AND PROFIT SHARING PLAN
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SCHEDULE OF DELINQUENT PARTICIPANT CONTRIBUTIONS
FORM 5500 - SCHEDULE H - LINE 4A
EIN: 23-1702594
PN: 005
YEAR ENDED DECEMBER 31, 2005
TOTAL THAT CONSTITUTE NONEXEMPT PROHIBITED TRANSACTIONS
-------------------------------------------------------
PARTICIPANT CONTRIBUTIONS TOTAL FULLY
CONTRIBUTIONS CONTRIBUTIONS PENDING CORRECTED UNDER
TRANSFERRED LATE CONTRIBUTIONS NOT CORRECTED OUTSIDE CORRECTION VFCP AND PTE
TO THE PLAN CORRECTED VFCP IN VFCP 2002-51
- ---------------- ------------------ ----------------- -------------- ---------------
$27,095 $0 $27,095 $0 $0
13