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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. 001-15065
AZURIX CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0589114
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 CLAY STREET
SUITE 1000
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 646-6001
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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT AUGUST 13, 1999
Common Stock 117,100,000
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AZURIX CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three months and six months ended
June 30, 1999 (unaudited).............................................................................. 2
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited)........................ 3
Consolidated Statement of Cash Flows for the six months ended June 30, 1999 (unaudited).................. 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................................................... 26
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AZURIX CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
------------ ----------
<S> <C> <C>
Operating revenues ...................................... $ 131.3 $ 248.2
Operating expenses:
Operations and maintenance ............................ 37.5 68.7
General and administrative ............................ 32.0 55.2
Depreciation and amortization ......................... 24.1 47.4
-------- --------
Total operating expenses ...................... 93.6 171.3
-------- --------
Operating income ........................................ 37.7 76.9
-------- --------
Other income (expense):
Equity in earnings of unconsolidated affiliates ....... 0.3 0.5
Interest expense, net ................................. (15.4) (30.3)
-------- --------
Income before income taxes and extraordinary item ....... 22.6 47.1
-------- --------
Income tax expense ...................................... 2.4 10.8
-------- --------
Income before extraordinary item ........................ 20.2 36.3
-------- --------
Extraordinary loss, net of income tax benefit of $3.0 ... 6.8 6.8
-------- --------
Net income .............................................. $ 13.4 $ 29.5
======== ========
Earnings per share of common stock:
Basic and diluted:
Before extraordinary item ........................ $ 0.19 $ 0.36
Extraordinary item ............................... (0.06) (0.07)
-------- --------
Basic and diluted earnings per share ............. $ 0.13 $ 0.29
======== ========
Weighted-average shares outstanding:
Basic ............................................ 104.1 102.1
======== ========
Diluted .......................................... 104.6 102.4
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
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AZURIX CORP.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 5.3 $ 25.3
Restricted cash and cash equivalents (Note 3) .................... -- 396.0
Trade receivables (net of allowance for doubtful accounts
of $6.3 and $8.9, respectively) ............................... 63.7 74.5
Unbilled receivables ............................................. 24.3 24.3
Other ............................................................ 38.5 48.6
-------- --------
Total current assets ..................................... 131.8 568.7
-------- --------
Property, plant and equipment, at cost ............................. 2,271.1 2,307.0
Less accumulated depreciation ...................................... (16.7) (50.9)
-------- --------
Property, plant and equipment, net ....................... 2,254.4 2,256.1
-------- --------
Investments in and advances to unconsolidated affiliates ........... 74.3 103.7
Goodwill, net ...................................................... 877.6 911.8
Other assets ....................................................... 20.2 516.6
-------- --------
Total Assets ............................................. $3,358.3 $4,356.9
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable and accruals .................................... $ 143.4 $ 176.8
Accounts payable - affiliates .................................... 20.0 5.5
Deferred income .................................................. 71.0 42.1
Short-term debt .................................................. -- 819.7
Current maturities of long-term debt ............................. 27.0 34.7
-------- --------
Total current liabilities ................................ 261.4 1,078.8
-------- --------
Long-term debt ..................................................... 912.1 827.3
Long-term debt - affiliates ........................................ 121.4 136.0
Deferred income taxes .............................................. 404.4 406.6
Other long-term liabilities ........................................ 13.5 16.5
-------- --------
Total liabilities ........................................ 1,712.8 2,465.2
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized ... -- --
Common stock, $0.01 par value, 500,000,000 shares authorized,
100,000,000 shares and 117,100,000 shares issued and
outstanding, respectively .................................... 1.0 1.2
Additional paid-in capital ....................................... 1,671.0 1,971.3
Retained earnings ................................................ 10.2 39.7
Cumulative foreign currency translation adjustment ............... (36.7) (120.5)
-------- --------
Total stockholders' equity ............................... 1,645.5 1,891.7
-------- --------
Total Liabilities and Stockholders' Equity ............... $3,358.3 $4,356.9
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
AZURIX CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1999
--------
<S> <C>
Operating Activities:
Net income .................................................................................. $ 29.5
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ........................................................... 47.4
Accretion and amortization of debt expenses and write-off of deferred financing costs ... 10.5
Deferred income taxes ................................................................... 6.1
Equity in earnings of unconsolidated affiliates ......................................... (0.5)
Changes in operating assets and liabilities:
Decrease in trade receivables and other current assets ............................ 7.2
Decrease in accounts payable and accruals ......................................... (14.7)
Decrease in accounts payable - affiliates ......................................... (17.5)
Increase in other assets .......................................................... (40.2)
Increase in other long-term liabilities ........................................... 2.4
--------
Net cash provided by operating activities ........................................................ 30.2
--------
Investing Activities:
Capital expenditures ........................................................................ (139.8)
Investments in and advances to unconsolidated affiliates .................................... (29.1)
Business acquisitions, net of cash acquired ................................................. (545.9)
Other ....................................................................................... (0.7)
--------
Net cash used by investing activities ............................................................ (715.5)
--------
Financing Activities:
Proceeds from long-term borrowings .......................................................... 474.1
Repayments of long-term borrowings .......................................................... (225.5)
Proceeds from short-term borrowings ......................................................... 394.0
Deposit to restricted cash and cash equivalent collateral account ........................... (395.7)
Net proceeds from revolving credit facilities ............................................... 137.9
Issuance of common stock .................................................................... 300.5
Advances from affiliates .................................................................... 97.0
Repayments to affiliates .................................................................... (71.1)
--------
Net cash provided by financing activities ........................................................ 711.2
--------
Effect of exchange rate changes on cash .......................................................... (5.9)
--------
Change in cash and cash equivalents .............................................................. 20.0
--------
Cash and cash equivalents, beginning of period ................................................... 5.3
--------
Cash and cash equivalents, end of period ......................................................... $ 25.3
========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated interim financial statements and disclosures
are unaudited and have been prepared by Azurix Corp. pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
statements reflect all normal recurring adjustments necessary for a fair
presentation, in all material respects, of the results for the interim periods.
The results of operations for the periods ended June 30, 1999 are not
necessarily indicative of results to be expected for the full year. Certain
information and notes normally included in financial statements, prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations, although Azurix believes that
the disclosures are adequate to make the information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in Azurix's Registration
Statement on Form S-1, which was declared effective on June 9, 1999.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the 1998 amounts to conform with
the 1999 presentation. "Azurix" is used from time to time herein as a collective
reference to Azurix Corp. and its subsidiaries and affiliates.
Azurix was incorporated on January 29, 1998, however, substantially all of
Azurix's 1998 results of operations, cash flows and equity transactions occurred
during the fourth quarter of 1998, subsequent to the Wessex Water Plc
acquisition (see Note 2). Interim financial statements for the periods ended
June 30, 1998 are not presented because Azurix did not have results of
operations or cash flows during those periods.
NOTE 2 - BUSINESS ACQUISITIONS
On May 18, 1999, Azurix acquired 100% of the stock of Canadian-incorporated
Philip Utilities Management Corporation for $107.4 million, including estimated
transaction costs. Philip Utilities is a water and wastewater services company
that provides operations and management, engineering, residuals management and
underground infrastructure development services for municipal water and
wastewater facilities in the U.S. and Canada.
The purchase method of accounting was utilized, and accordingly, the assets
and liabilities of Philip Utilities have been recorded at their estimated fair
values on the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired has been recorded as goodwill, and is
being amortized on a straight-line basis over 40 years. The results of
operations of Philip Utilities have been included in the consolidated financial
statements since the date of acquisition. The allocation of the purchase price
to the net assets acquired is preliminary because Azurix is in the process of
finalizing its assessment of the related fair values. Azurix does not believe
the final evaluation of these assessments will materially affect the allocation
of the purchase price.
On October 2, 1998, Azurix, through its indirect wholly owned subsidiary,
Azurix Europe Ltd, acquired over 90% of the outstanding ordinary share capital
of Wessex. Azurix completed the acquisition of the ordinary share capital of
Wessex in November 1998. The cost of the Wessex acquisition, including
transaction costs, was $2.4 billion. The purchase method of accounting was
utilized and the results of operations of Wessex have been included in the
consolidated financial statements since the date of acquisition.
5
<PAGE> 7
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma information summarizes consolidated
results of operations of Azurix as if the Wessex acquisition had occurred as of
the beginning of the earliest period presented:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1998
------------ ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Operating revenues ..................... $ 115.9 $ 226.9
Net income ............................. 24.6 45.3
Basic and diluted earnings per share ... 0.25 0.45
</TABLE>
These unaudited pro forma results of operations have been prepared for
illustrative purposes only and include adjustments in addition to the
pre-acquisition historical results of Wessex, such as additional amortization
expense as a result of goodwill, increased depreciation expense resulting from
allocation of fair market value to fixed assets acquired, increased interest
expense on acquisition debt and preference share redemption and the sale of
Wessex's interest in Wessex Waste Management Ltd. The unaudited pro forma
financial information is not necessarily indicative of the results of operations
that would have occurred had the Wessex acquisition occurred on the date
indicated, and should not be viewed as indicative of operations in future
periods.
During the second quarter of 1999, Azurix was the successful bidder in a
tender for a 30-year concession to operate the water and wastewater systems in
two regions of the Province of Buenos Aires, Argentina, previously operated by
Administracion General de Obras Sanitarias Buenos Aires. On June 30, 1999,
Azurix, through Azurix Buenos Aires S.A., an indirect wholly owned subsidiary,
entered into a concession contract with the provincial government covering the
two regions and paid the government $438.6 million (see Note 4). On July 1,
1999, Azurix assumed operation of the water and wastewater systems and risk of
ownership of the concession.
In connection with the funding of this acquisition, Azurix made an equity
investment in Azurix Buenos Aires of $45.0 million, and Azurix Buenos Aires
borrowed $394.0 million under a new credit agreement. This loan is secured by
cash and other short-term liquid investments which Azurix deposited into a cash
collateral account and pledged as security for the loan (see Note 3). Azurix
used $230.6 million of the proceeds from its initial public offering, $208.0
million in funds drawn under the senior credit facility of its indirect wholly
owned subsidiary Azurix Europe Ltd, and interest on those funds and other funds
of Azurix, to fund the equity investment in Azurix Buenos Aires and its deposit
into the cash collateral account. A 10% interest in Azurix Buenos Aires is
required to be transferred to the employees of Administracion General de Obras
Sanitarias Buenos Aires who became employees of the concession company under the
concession contract.
NOTE 3 - RESTRICTED CASH
At June 30, 1999, Azurix had restricted cash and cash equivalents of $396.0
million. This amount is on deposit in a cash collateral account that secures the
$394.0 million loan to an Azurix subsidiary that was used to fund the Buenos
Aires concession acquisition (see Note 2). The amount payable under the loan is
included in "Short-term debt" on the consolidated balance sheet (see Note 5).
6
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AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - OTHER ASSETS
Included in "Other assets" is $438.6 million that was paid on June 30, 1999
for the Buenos Aires concession acquisition (see Note 2). Azurix was required to
pay the funds to the Province of Buenos Aires on June 30, 1999. Azurix assumed
operation of the water and wastewater systems and risk of ownership of the
concession on July 1, 1999.
NOTE 5 - SHORT-TERM DEBT
On May 10, 1999, Azurix Europe entered into a revolving credit facility. At
June 30, 1999, the maximum capacity of the facility was $670.0 million. Of this
amount, $378.4 million may be used to fund acquisitions and the remaining amount
may be used to refinance existing Azurix indebtedness. A portion of the unused
borrowing capacity secures outstanding loan notes of $111.1 million (see Note
6). Borrowings outstanding at June 30, 1999 consisted of approximately $74.1
million used to repay all of the remaining indebtedness outstanding on its
former senior credit facility and fees and expenses related to this facility,
$107.0 million primarily used to fund the purchase of Philip Utilities and
$208.0 million used in connection with the funding of the Buenos Aires
concession acquisition (see Note 2). As of June 30, 1999, there was available
borrowing capacity of $63.4 million under this facility to fund acquisitions, of
which $22.5 million is expected to be used to purchase 49% of the capital stock
of Industrias del Agua S.A. de C.V., a water and wastewater services company in
Mexico, which is expected to close during the third quarter of 1999 (see Note
14).
The revolving credit facility bears interest at the London interbank offered
rate plus 0.75% or 1.0%, depending on the level of utilization of the borrowing
capacity. Azurix incurs commitment fees of 0.375% on the unused borrowing
capacity of this facility. The funds were borrowed under the revolving credit
facility for a period of less than twelve months. The facility terminates on May
10, 2002, but contains a subjective material adverse change clause that enables
the facility to be terminated before expiration. As a result, amounts
outstanding under this facility have been classified as short-term debt. Azurix
is in the process of refinancing, on a long-term basis, the borrowings under
this facility that were used to fund acquisitions and anticipates consummation
of the refinancing before the end of 1999. The facility contains restrictive
covenants that include limitations on borrowings, maintenance of financial
ratios such as interest coverage and debt to equity and contracts to perform or
refrain from undertaking certain acts. The facility includes standard events of
default, including non-payment, cross-defaults and insolvency. Azurix is
currently in compliance with these covenants.
As of June 30, 1999, Azurix, through a wholly owned subsidiary of Wessex,
had $118.2 million outstanding under committed credit facilities with major
commercial banks. Interest accrues on the committed credit facilities based on
the London interbank offered rate plus 0.275%. The interest rate as of June 30,
1999 was 5.69%. Azurix pays commitment fees of 0.15% on the unused portion of
committed lines of credit. The facilities expire in April 2002. The borrowings
under these facilities have been reclassified as long-term debt based on the
ability to re-borrow these funds under the facilities beyond one year and
Azurix's intent to maintain such borrowings in excess of one year (see Note 6).
In connection with the funding of the Buenos Aires concession acquisition
(see Note 2), Azurix, through its subsidiary Azurix Buenos Aires S.A., entered
into a credit agreement on June 24, 1999, and borrowed $394.0 million on June
29, 1999. The agreement is among Azurix Buenos Aires, Westdeutsche Landesbank
Girozentrale, a German bank, as the agent, and a group of non-U.S. lenders. The
loan is secured by cash and other short-term liquid investments in the aggregate
amount of $396.0 million as of June 30, 1999, which Azurix deposited into a cash
collateral account, including interest earned on amounts deposited, and pledged
as security for the loan (see Note 3). The loan matures on June 22, 2000, or at
an earlier time prior to such date if the direct or indirect ownership by Enron
Corp. of the outstanding voting stock of Azurix falls below 25%, and Azurix
Buenos Aires does not arrange for the assignment of the lenders' rights and
7
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AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
obligations under the credit agreement to a new group of lenders. The interest
rate on amounts outstanding under this credit agreement as of June 30, 1999 was
5.36%.
As of June 30, 1999, Azurix had $31.4 million outstanding on credit
facilities with major commercial banks on an uncommitted basis. Interest accrues
on the uncommitted facilities based on the market rate plus a negotiated margin.
The interest rate on the uncommitted bank borrowings outstanding as of June 30,
1999 was 5.36%.
Azurix, through its indirect wholly owned subsidiary Philip Utilities, has
agreements with banks for additional lines of credit up to $6.8 million, of
which $5.2 million was outstanding as of June 30, 1999. The weighted-average
interest rate on these short-term bank borrowings outstanding as of June 30,
1999 was 6.89% on U.S. dollar borrowings and 5.95% on Canadian dollar
borrowings. Borrowings under these agreements are secured by pledges of certain
assets.
NOTE 6 - LONG-TERM DEBT
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Amounts reclassified from short-term debt .... $ 424.0 $ 118.2
Senior credit facility ....................... 219.5 --
Senior unsecured bonds ....................... -- 467.4
Loan notes ................................... 117.2 111.1
European Investment Bank credit facilities ... 68.7 62.6
Capital lease obligations .................... 109.7 94.4
Other ........................................ -- 8.3
------- -------
939.1 862.0
Less current maturities ...................... (27.0) (34.7)
------- -------
Total long-term debt ............... $ 912.1 $ 827.3
======= =======
</TABLE>
At December 31, 1998, Azurix's senior credit facility consisted of a term
loan facility of $322.6 million and a revolving credit facility of $575.3
million bearing interest at a rate of the London interbank offered rate plus
0.625%. The amounts outstanding at December 31, 1998, were $211.2 million and
$8.3 million, under the term loan facility and the revolving credit facility,
respectively. During the second quarter of 1999, Azurix used proceeds from
credit facilities and its revolving credit facility entered into in May 1999, to
retire the outstanding borrowings under its former senior credit facility. The
former senior credit facility was subsequently terminated.
On March 30, 1999, Azurix, through a wholly owned subsidiary of Wessex,
issued U.K. pounds sterling denominated senior unsecured bonds with a face value
of $473.0 million as of June 30, 1999. The net proceeds were primarily used to
refinance the short-term bank borrowings that were outstanding on that date. The
bonds mature on March 30, 2009 and bear interest at a rate of 5.875% payable
annually.
8
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AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1999
----------
(IN MILLIONS)
(UNAUDITED)
<S> <C>
Income taxes .................................... $ 13.4
Interest expense (net of amounts capitalized) ... 31.2
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Azurix is involved in various claims and lawsuits incidental to its
business. Although no assurances can be given, Azurix believes that the ultimate
resolution of such items will not have a material effect on its results of
operations or financial position.
Azurix is subject to extensive federal, foreign, state and local
environmental laws and regulations. Azurix anticipates future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.
A substantial portion of Azurix's revenues are subject to governmental
regulation of the rates that it may charge to its customers. On July 27, 1999,
the U.K. water regulator, the Director General of Water Services, announced new
price limits for U.K. water companies for the period April 1, 2000 through 2005.
Wessex was notified of a preliminary determination of a 13.5% price cut from
1999-2000 to 2000-2001. The announcement included level prices for the following
two years with annual price increases in 2003-2004 and 2004-2005 of 2.0% and
3.1%, respectively. A final determination is expected in November 1999 after
consultation between Wessex and the Director General. Wessex's regulated
operating revenues represented over 85% of Azurix's total operating revenues for
the six months ended June 30, 1999, and the preliminary price cut, if
implemented, would be expected to materially reduce earnings. However, Azurix
does not expect this would have a material adverse effect on its financial
position.
NOTE 9 - EARNINGS PER SHARE
The numerators in the basic and diluted earnings per share calculations are
equal. A reconciliation of the denominators is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
------------ ----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Denominator:
Weighted-average shares - basic ..... 104.1 102.1
Effect of dilutive securities:
Stock options .................... 0.5 0.3
----- -----
Weighted-average shares - diluted ... 104.6 102.4
===== =====
</TABLE>
9
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AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 - STOCKHOLDERS' EQUITY
On June 9, 1999, Azurix's Registration Statement on Form S-1 relating to
its initial public offering was declared effective. The offering of 36.6 million
shares of common stock was priced at $19.00 per share. Azurix sold 17.1 million
shares and Atlantic Water Trust, the former 100% parent of Azurix, sold 19.5
million shares. The proceeds to Azurix, after deducting expenses associated with
the offering, were $300.5 million. The proceeds were used to repay an advance
from Enron, which holds a 50% voting interest in Atlantic Water Trust, and to
partially fund the Buenos Aires concession acquisition (see Note 2). As of June
30, 1999, approximately 68.7% of Azurix's common stock was held by Atlantic
Water Trust and the remaining 31.3% was held by the public (see Note 15).
NOTE 11 - INCOME TAXES
During 1998, Azurix recorded a valuation allowance on a deferred tax asset
of approximately $5.1 million related to losses incurred in the U.S. As of June
30, 1999, Azurix has determined that the available evidence attributable to the
increased level of 1999 business activities (including consideration of the
proceeds generated from the initial public offering and available U.S. tax
planning strategies) indicates that it is more likely than not that the deferred
tax asset associated with the 1998 U.S. losses will be realized. Accordingly,
the valuation allowance of approximately $5.1 million has been reversed in the
second quarter of 1999.
NOTE 12 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes the following for the periods
indicated:
<TABLE>
<CAPTION>
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
-------- --------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Net income .................................... $ 13.4 $ 29.5
Other comprehensive income (loss):
Foreign currency translation adjustment ... (36.9) (83.8)
------- -------
Comprehensive income (loss) ................... $ (23.5) $ (54.3)
======= =======
</TABLE>
NOTE 13 - EXTRAORDINARY LOSS
In May 1999, Azurix retired borrowings under its former senior credit
facility and terminated the facility prior to its maturity (see Note 6).
Unamortized deferred financing fees related to this facility of $9.8 million
($6.8 million net of tax benefit) were charged to income as an extraordinary
loss.
NOTE 14 - PENDING ACQUISITION
Azurix entered into an agreement on May 28, 1999 to purchase 49% of the
capital stock of Industrias del Agua, S.A. de C.V., a water and wastewater
services company based in Monterrey, Mexico. Through a subsidiary, Industrias
del Agua provides metering, billing, collections, operations and maintenance
services for one quarter of the Federal District within Mexico City, a service
area that includes approximately two million people. In addition to holding an
equity interest in Industrias del Agua, Azurix will serve as a technical
participant under the Federal District contract. Industrias del Agua has
provided these services since 1993, when it signed a ten year contract with the
Water Commission of the Federal District. The transaction is subject to
administrative and regulatory approvals. Azurix will pay $22.5 million in
connection with the transaction, which is expected to close during the third
quarter of 1999.
10
<PAGE> 12
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 - SUBSEQUENT EVENT
On July 8, 1999, the underwriters exercised their over-allotment option in
connection with the initial public offering of Azurix's common stock. As a
result, Atlantic Water Trust sold an additional 1,963,468 shares of Azurix's
common stock, reducing its ownership percentage in Azurix to approximately
67.1%.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the information
contained in the Consolidated Financial Statements of Azurix and related notes
thereto, contained herein, as well as Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Azurix's Registration
Statement on Form S-1, which was declared effective on June 9, 1999.
BUSINESS ACQUISITIONS
On May 18, 1999, Azurix acquired 100% of the stock of Canadian-incorporated
Philip Utilities Management Corporation for $107.4 million, including estimated
transaction costs. Philip Utilities is a water and wastewater services company
that provides operations and management, engineering, residuals management and
underground infrastructure development services for municipal water and
wastewater facilities in the U.S. and Canada.
During the second quarter of 1999, Azurix was the successful bidder in a
tender for a 30-year concession to operate the water and wastewater systems in
two regions of the Province of Buenos Aires, Argentina, previously operated by
Administracion General de Obras Sanitarias Buenos Aires. On June 30, 1999,
Azurix, through Azurix Buenos Aires S.A., an indirect wholly owned subsidiary,
entered into a concession contract with the provincial government covering the
two regions and paid the government $438.6 million. On July 1, 1999, Azurix
assumed operation of the water and wastewater systems and risk of ownership of
the concession.
In connection with the funding of this acquisition, Azurix made an equity
investment in Azurix Buenos Aires of $45.0 million, and Azurix Buenos Aires
borrowed $394.0 million under a new credit agreement. This loan is secured by
cash and other short-term liquid investments, which Azurix deposited into a cash
collateral account and pledged as security for the loan. Azurix used $230.6
million of the proceeds from its initial public offering, $208.0 million in
funds drawn under the senior credit facility of its indirect wholly owned
subsidiary Azurix Europe Ltd, and interest on those funds and other funds of
Azurix, to fund the equity investment in Azurix Buenos Aires and its deposit
into the cash collateral account. A 10% interest in Azurix Buenos Aires is
required to be transferred to the employees of Administracion General de Obras
Sanitarias Buenos Aires who became employees of the concession company under the
concession contract. On a consolidated basis, the funding of the acquisition
resulted in an increase in the short-term debt of Azurix of $602.0 million
(representing $394.0 million drawn by Azurix Buenos Aires under the credit
agreement and $208.0 million drawn by Azurix Europe under the senior credit
facility) and a corresponding increase in the current assets of Azurix of $395.7
million (representing the amount deposited into the cash collateral account,
excluding interest earned thereon).
PENDING ACQUISITION
Azurix entered into an agreement on May 28, 1999 to purchase 49% of the
capital stock of Industrias del Agua, S.A. de C.V., a water and wastewater
services company based in Monterrey, Mexico. Through a subsidiary, Industrias
del Agua provides metering, billing, collections, operations and maintenance
services for one quarter of the Federal District within Mexico City, a service
area that includes approximately two million people. In addition to holding an
equity interest in Industrias del Agua, Azurix will serve as a technical
participant under the Federal District contract. Industrias del Agua has
provided these services since 1993, when it signed a ten year contract with the
Water Commission of the Federal District. The transaction is subject to
administrative and regulatory approvals. Azurix will pay $22.5 million in
connection with the transaction, which is expected to close during the third
quarter of 1999.
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<PAGE> 14
RECENT DEVELOPMENTS
On July 27, 1999, the U.K. water regulator, the Director General of Water
Services, announced new price limits for U.K. water companies for the period
April 1, 2000 through 2005. Wessex was notified of a preliminary determination
of a 13.5% price cut from 1999-2000 to 2000-2001. The announcement included
level prices for the following two years with annual price increases in
2003-2004 and 2004-2005 of 2.0% and 3.1%, respectively. A final determination is
expected in November 1999 after consultation between Wessex and the Director
General. Wessex's regulated operating revenues represented over 85% of Azurix's
total operating revenues for the six months ended June 30, 1999, and the
preliminary price cut, if implemented, would be expected to materially reduce
earnings. However, Azurix does not expect this would have a material adverse
effect on its financial position. The pending rate review was considered by
Azurix in its valuation of Wessex at the time of acquisition.
RESULTS OF OPERATIONS
Azurix had no operations as of June 30, 1998 and as a result, the following
discussion is limited to results of operations for the three months and six
months ended June 30, 1999. All of its 1998 operating income occurred during the
fourth quarter of 1998 following the Wessex acquisition.
THREE MONTHS ENDED JUNE 30, 1999
Operating revenues of $131.3 million for the three months ended June 30,
1999 included $115.8 million derived from Wessex and $14.6 million derived from
Philip Utilities. Approximately 94% of the revenues from Wessex related to the
sale of measured and unmeasured water and wastewater services. Wessex's
remaining revenues were derived from SC Technology and its unregulated
activities, which accounted for 2% and 4% of operating revenues from Wessex,
respectively.
Operations and maintenance expenses for the three months ended June 30, 1999
were $37.5 million. Of this amount, $22.4 million related to Wessex's cost of
supplying water and treating wastewater, including the costs of maintaining and
operating plant and equipment used in these processes, and $3.6 million related
to the costs of the plants being installed by SC Technology. The remaining $11.5
million was incurred by Philip Utilities.
General and administrative expenses of $32.0 million for the three months
ended June 30, 1999 included $22.3 million primarily related to the pursuit of
acquisitions and development projects and $8.4 million related to Wessex's
operations.
Depreciation and amortization expenses of $24.1 million for the three months
ended June 30, 1999 included $17.8 million derived from depreciation on the
property, plant and equipment of Wessex as well as goodwill amortization expense
at Wessex of $5.3 million.
The effective tax rate before extraordinary item for the period was 10.6%.
The difference between the effective tax rate and the U.S. statutory rate of 35%
is primarily related to the reversal of a $5.1 million deferred tax valuation
allowance that was recorded during 1998 relating to losses incurred in the U.S.
As of June 30, 1999, Azurix has determined that the available evidence
attributable to the increased level of 1999 business activities (including
consideration of the proceeds generated from the initial public offering and
available U.S. tax planning strategies) indicates that it is more likely than
not that the deferred tax asset associated with the 1998 U.S. losses will be
realized. Accordingly, the valuation allowance has been reversed in the second
quarter of 1999.
In May 1999, Azurix retired borrowings under its former senior credit
facility and terminated the facility prior to its maturity. Unamortized deferred
financing fees related to this facility of $9.8 million ($6.8 million net of tax
benefit) were charged to income as an extraordinary loss during the three months
ended June 30, 1999.
13
<PAGE> 15
SIX MONTHS ENDED JUNE 30, 1999
Operating revenues of $248.2 million for the six months ended June 30, 1999
included $232.7 million derived from Wessex and $14.6 million derived from
Philip Utilities. Approximately 92% of the revenues from Wessex related to the
sale of measured and unmeasured water and wastewater services. SC Technology
operating revenues, and operating revenues from Wessex's unregulated activities,
accounted for 4% each of Wessex's operating revenues.
Operations and maintenance expenses for the six months ended June 30, 1999
were $68.7 million. Of this amount, $47.5 million related to Wessex's cost of
supplying water and treating wastewater, including the costs of maintaining and
operating plant and equipment used in these processes, and $9.7 million related
to the costs of the plants being installed by SC Technology. The remaining $11.5
million was incurred by Philip Utilities.
General and administrative expenses of $55.2 million for the six months
ended June 30, 1999 included $35.1 million primarily related to the pursuit of
acquisitions and development projects and $17.8 million related to Wessex's
operations.
Depreciation and amortization expenses of $47.4 million for the six months
ended June 30, 1999 included $35.6 million derived from depreciation on the
property, plant and equipment of Wessex as well as goodwill amortization expense
at Wessex of $10.7 million.
The effective tax rate before extraordinary item for the period was 22.9%.
The difference between the effective tax rate and the U.S. statutory rate of 35%
is primarily related to the reversal of a $5.1 million deferred tax valuation
allowance that was recorded during 1998 relating to losses incurred in the U.S.
As of June 30, 1999, Azurix has determined that the available evidence
attributable to the increased level of 1999 business activities (including
consideration of the proceeds generated from the initial public offering and
available U.S. tax planning strategies) indicates that it is more likely than
not that the deferred tax asset associated with the 1998 U.S. losses will be
realized. Accordingly, the valuation allowance has been reversed in the second
quarter of 1999.
In May 1999, Azurix retired borrowings under its former senior credit
facility and terminated the facility prior to its maturity. Unamortized deferred
financing fees related to this facility of $9.8 million ($6.8 million net of tax
benefit) were charged to income as an extraordinary loss during the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Azurix's cash provided by operating activities for the six months ended June
30, 1999 was $30.2 million. Cash used by investing activities for the period was
$715.5 million and was comprised primarily of business acquisitions of $545.9
million and capital expenditures of $139.8 million. Cash provided by financing
activities for the period was $711.2 million and was comprised of a net increase
in borrowings of $806.4 million, a deposit of $395.7 million into a restricted
cash and cash equivalents collateral account that secures the Buenos Aires
concession acquisition loan and net proceeds from the initial public offering of
Azurix's common stock of $300.5 million.
As of June 30, 1999, Azurix had a working capital deficit of $510.1 million,
compared to a working capital deficit of $129.6 million at December 31, 1998.
The increase in the working capital deficit is primarily related to $389.1
million of funds borrowed on an existing revolving credit facility. The proceeds
were primarily used to fund the acquisitions of Philip Utilities and the Buenos
Aires concession and to refinance $66.2 million of Azurix's debt borrowed under
a former credit facility that was classified as long-term. The funds were
borrowed under the existing credit facility for a period of less than twelve
months. The existing revolving credit facility terminates in 2002, and amounts
currently borrowed may be re-borrowed under the facility. The borrowings under
this facility are classified as short-term as a result of accounting rules
issued by the Financial Accounting Standards Board that restrict a company from
reclassifying short-term debt as long-term utilizing existing borrowing capacity
under a long-term loan agreement, if that agreement contains a subjectively
determinable or measurable clause that could
14
<PAGE> 16
result in the lender's right not to loan funds. Under the terms of the existing
revolving credit facility, the banks are not required to loan funds to Azurix if
banks that represent at least two-thirds of the then outstanding loan balance
reasonably determine that Azurix cannot meet its payment obligations under the
facility. Azurix is in the process of refinancing, on a long-term basis, $315.0
million in borrowings under this facility that were used to fund acquisitions
and anticipates consummation of the refinancing before the end of 1999.
In addition, at June 30, 1999, $42.1 million of the working capital deficit
relates to funds received from customers in advance of providing services that
is reflected on the Consolidated Balance Sheet as deferred income. This
component of the working capital deficit does not require the use of cash, but
is recognized in income over the period in which the services are provided. The
remaining working capital deficit is related to the timing of cash payments.
Excess cash, including funds received in advance of providing services, is used
to repay short-term revolving bank credit facilities. The funds are re-borrowed
under these credit facilities when needed to pay current obligations.
At December 31, 1998, Azurix, through Azurix Europe, had in place a senior
credit facility consisting of a term loan facility of $322.6 million and a
revolving credit facility of $575.3 million. The amounts outstanding at December
31, 1998 were $211.2 million under the term loan facility and $8.3 million under
the revolving credit facility. As a result, at December 31, 1998 Azurix had
total availability under the senior credit facility of $678.4 million,
consisting of $567.0 million under the revolving credit facility and $111.4
million under the term loan facility. Of the $567.0 million under the revolving
credit facility, $91.5 million was permitted, if required, to fund the working
capital deficit that existed at year end. The term loan capacity was used to
secure a substantial portion of acquisition loan notes issued to Wessex
shareholders in lieu of cash consideration for their shares. During the second
quarter of 1999, Azurix used proceeds from bank credit facilities and its
revolving credit facility entered into in May 1999, to retire the outstanding
borrowings under its former senior credit facility. The former senior credit
facility was subsequently terminated.
On May 10, 1999, Azurix Europe entered into a revolving credit facility. At
June 30, 1999, the maximum capacity of the facility was $670.0 million. Of this
amount, $378.4 million can be used to fund acquisitions and the remaining amount
may be used to refinance existing Azurix indebtedness. A portion of the unused
borrowing capacity secures outstanding loan notes of $111.1 million. Borrowings
outstanding at June 30, 1999 consisted of approximately $74.1 million used to
repay all of the remaining indebtedness outstanding under its former senior
credit facility and fees and expenses related to this facility, $107.0 million
primarily used to fund the purchase of Philip Utilities and $208.0 million used
in connection with the funding of the Buenos Aires concession acquisition. As of
June 30, 1999, there was available borrowing capacity of $63.4 million under
this facility to fund acquisitions, of which $22.5 million is expected to be
used to purchase 49% of the capital stock of Industrias del Agua in Mexico,
which is expected to close during the third quarter of 1999.
Azurix's credit agreement with Enron provides $180 million of liquidity to
fund general, administrative and operating expenses through December 2001. As of
June 30, 1999, $20.9 million was outstanding under this credit agreement. The
principal amount outstanding under the credit agreement is limited to no more
than $60 million, $120 million and $180 million at any time during calendar
years 1999, 2000 and 2001, respectively.
As discussed above, Azurix is currently evaluating various financing
strategies to raise additional capital to support further its business strategy
of growth through acquisitions and development projects. Funds raised combined
with cash flows from assets acquired will be used by Azurix to fund potential
future acquisitions and privatizations. There can be no assurance that Azurix
will be successful in securing any financing arrangements.
Azurix's liquidity could be impacted by the potential interruption of the
capital markets due to the Year 2000 problem. See Year 2000 for discussion of
potential problems and Azurix's Year 2000 plan.
15
<PAGE> 17
FINANCIAL RISK MANAGEMENT
Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Azurix engages in
hedging programs aimed at limiting the impact of significant and sudden
fluctuations, but there can be no assurance that such an approach will be
successful. Factors that could impact the effectiveness of its hedging programs
include the accuracy of revenue forecasts, volatility of the currency and
interest rate markets and the availability of hedging instruments. Azurix
utilizes swap contracts to manage interest rate risk. Currency exchange rate
risk is the result of transactions that are denominated in a currency other than
the functional currencies in which Azurix operates. The primary purpose of
Azurix's foreign currency hedging activities is to manage the volatility
associated with currency exchange rates. Azurix manages these risks by utilizing
derivative financial instruments for non-trading purposes. Azurix enters into
currency or interest rate contracts for the sole purpose of hedging an existing
or anticipated exposure, not for speculation. Azurix's accounting policies for,
and the significant terms of, derivative financial instruments are described in
Note 1 and Note 8, respectively, to the Consolidated Financial Statements
included in Azurix's Registration Statement on Form S-1.
Azurix uses J.P. Morgan's RiskMetrics(TM) system to estimate the
value-at-risk of its financial instruments. Value-at-risk is a statistical
estimate of the loss that would result from changes in market prices.
Value-at-risk is based on volatility and correlation data provided by J.P.
Morgan, a statistical confidence level and an estimate of the time period
required to liquidate the positions in the various financial instruments. The
value-at-risk estimate was based on normal market conditions, a 95% confidence
level and a liquidation period between 30 days and 60 months, depending on the
type of financial instrument. At December 31, 1998, the value-at-risk estimate
for foreign currency and interest rate exposure was $0.7 million and $0.9
million, respectively. The value-at- risk estimate includes only the risk
related to the financial instruments that serve as hedges and does not include
the related underlying hedged item. Judgment is required in interpreting market
data and the use of different market assumptions or estimation methodologies
that will affect the estimated value-at-risk amount.
YEAR 2000
The Year 2000 problem results from the use in computer hardware and software
of two digits rather than four digits to define the applicable year. The use of
two digits was a common practice for decades when computer storage and
processing was much more expensive than today. When computer systems must
process dates both before and after January 1, 2000, two-digit year "fields" may
create processing ambiguities that can cause errors and system failures. For
example, computer programs that have date-sensitive features may recognize a
date represented by "00" as the year 1900, instead of 2000, or may not recognize
the date February 29, 2000, as there was no February 29 in 1900. These errors or
failures may have limited effects, or the effects may be widespread, depending
on the computer chip, system or software, and its location and function.
The effects of the Year 2000 problem are exacerbated by the interdependence
of computer and telecommunications systems in the United States and throughout
the world. This interdependence applies to Azurix and Azurix's suppliers,
trading partners and customers, as well as for governments of countries around
the world where Azurix does business. This interdependence also applies to Enron
Corp., on which Azurix relies in part for services that involve computer
processing.
STATE OF READINESS
Azurix's Board of Directors has been briefed about the Year 2000 problems
generally and as they may affect Azurix. The Board has adopted the Enron Year
2000 plan (the "Plan") covering all of Azurix's business units. The aim of the
Plan is to take reasonable steps to prevent Azurix's mission-critical functions
from being impaired due to the Year 2000 problem. "Mission-critical" functions
are those critical functions whose loss would cause significant injury to
persons or tangible property or an immediate stoppage of or significant
impairment to major business areas (a major business area is one of material
importance to Azurix's business).
16
<PAGE> 18
Azurix is implementing the Plan under the supervision of a Year 2000 Project
Director. The Project Director coordinates the implementation of the Plan among
Azurix's business units. As part of the overall Plan, each business unit in turn
has developed, and is implementing, a Year 2000 plan specific to it. Azurix also
has engaged outside consultants, technicians and other external resources to aid
in formulating and implementing the Plan.
Azurix will modify the Plan as events warrant. Under the Plan, Azurix will
continue to inventory its mission-critical computer hardware and software
systems and embedded chips, i.e., computer chips with date-related functions,
contained in a wide variety of devices, that in turn are installed in a wide
variety of equipment and that may fail to function or that may function
improperly before, on or after January 1, 2000; assess the effects of Year 2000
problems on the mission-critical functions of Azurix's business units; remedy,
to the extent practicable, systems software and embedded chips in an effort to
avoid material disruptions or other material adverse effects on mission-critical
functions, processes and systems; verify and test the mission-critical systems
to which remediation efforts have been applied; and attempt to limit the adverse
effects of Year 2000 problems that are not remediated by January 1, 2000,
including the development of contingency plans to cope with the mission-critical
consequences of Year 2000 problems that have not been identified or remediated
by that date.
The Plan recognizes that central information systems, such as large
mainframes and midsize computer systems and desktop or personal computers and
computer networks, can be vulnerable to Year 2000 problems. In addition, devices
with embedded chips, such as flow controllers and controllers for automated
pumps, are vulnerable to Year 2000 problems. Devices with embedded chips may be
used for many purposes, and finding all of them may be difficult, even with a
careful inventory and remediation process.
The Plan recognizes that the computer, telecommunications and other systems
("Outside Systems") of outside entities ("Outside Entities") have the potential
for major, mission-critical, adverse effects on the conduct of Azurix's
business. Azurix does not have control of these Outside Entities or Outside
Systems. In some cases, Outside Entities are foreign governments or businesses
located in foreign countries. However, Azurix's Plan includes an ongoing process
of identifying and contacting Outside Entities whose systems, in Azurix's
judgment, have or may have a substantial effect on Azurix's ability to continue
to conduct the mission-critical aspects of its business without disruption from
Year 2000 problems. The Plan envisions Azurix attempting to inventory and assess
the extent to which these Outside Systems may not be "Year 2000 ready" or "Year
2000 compatible." This refers to the ability of a system to process data
reliably, both before and after January 1, 2000, without disruption due to an
inability to process date information reliably. This is distinguished from "Year
2000 compliant," which implies that a system will work properly, both before and
after January 1, 2000, even if outside systems fail to operate properly. Azurix
will attempt reasonably to coordinate with these Outside Entities in an ongoing
effort to obtain assurance that the Outside Systems that are mission-critical to
Azurix will be Year 2000 compatible well before January 1, 2000. Consequently,
Azurix will work prudently with Outside Entities in a reasonable attempt to
inventory, assess, analyze, convert where necessary, test and develop
contingency plans for Azurix's connections to these mission-critical Outside
Systems and to ascertain the extent to which they are, or can be made to be,
Year 2000 ready and compatible with Azurix's mission-critical systems.
The Plan requires Outside Entities to be ranked as mission-critical,
important or ordinary. The Azurix teams are expected to maintain contact and
receive status updates from the mission-critical Outside Entities throughout
1999 and, if necessary, into 2000. Non-mission-critical Outside Entities are to
be addressed as time permits.
It is important to recognize that the processes of inventorying, assessing,
analyzing, converting, where necessary, testing and developing contingency plans
for mission-critical items in anticipation of the Year 2000 are necessarily
iterative processes. That is, the steps are repeated as Azurix learns more about
the Year 2000 problem and its effects on Azurix's internal systems and on
Outside Systems, and about the effects that embedded chips may have on Azurix's
systems and Outside Systems. As the steps are repeated, it is likely that new
problems will be identified and addressed. Azurix anticipates that it will
continue with these processes through January 1, 2000 and, if necessary based on
experience, into the year 2000 in order to assess and remediate problems that
reasonably can be identified only after the start of the new century.
17
<PAGE> 19
The Plan calls for most business units to have completed initial rounds of
inventory, assessment, remediation and validation testing by June 30, 1999. At
Azurix, that deadline has been met for the most part. Many systems were found to
be Year 2000 ready. However, that does not guarantee that these systems do not
continue to contain hidden Year 2000 defects in computer code or in embedded
devices.
As of June 30, 1999, Azurix and all of its business units were at various
stages in implementation of the Plan, as shown in the following tables. The
first table deals with the Azurix business units' mission-critical internal
systems, including embedded chips, and the second deals with the business units'
mission-critical Outside Systems of Outside Entities. Any notation of "complete"
conveys the fact only that the initial iteration of this phase has been
substantially completed. Azurix does not have operational control of the Mendoza
concession. The information included in the following tables relating to the
Mendoza concession is based on information provided to Azurix by SAUR, the
operator of the concession.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year 2000 Plan Readiness by Azurix Business Unit as of June 30, 1999
(Mission-Critical Internal Items)
---------------------------------------------------------------------------------------------------------
Y2K- Contingency
Inventory Assessment Analysis Conversion Testing Ready Plan
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Buenos Aires, IP IP IP IP IP IP IP
Argentina
---------------------------------------------------------------------------------------------------------
Cancun C C C IP IP IP IP
---------------------------------------------------------------------------------------------------------
Obras C C C IP IP IP IP
Sanitarias
Mendoza
---------------------------------------------------------------------------------------------------------
Philip C C IP IP IP IP IP
Utilities
---------------------------------------------------------------------------------------------------------
Wessex C C C C C C C
---------------------------------------------------------------------------------------------------------
</TABLE>
Legend: C = Complete IP= In Process TBI = To be Initiated
18
<PAGE> 20
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year 2000 Plan Readiness by Azurix Business Unit as of June 30, 1999
(Mission-Critical Outside Entities)
---------------------------------------------------------------------------------------------------------
Y2K- Contingency
Inventory Assessment Analysis Conversion Testing Ready Plan
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Buenos Aires, IP IP IP IP TBI TBI IP
Argentina
---------------------------------------------------------------------------------------------------------
Cancun C C C IP IP IP IP
---------------------------------------------------------------------------------------------------------
Obras C C C C IP IP IP
Sanitarias
Mendoza
---------------------------------------------------------------------------------------------------------
Philip C IP IP IP IP IP IP
Utilities
---------------------------------------------------------------------------------------------------------
Wessex C C C C C C C
---------------------------------------------------------------------------------------------------------
</TABLE>
Legend: C = Complete IP= In Process TBI = To be Initiated
The following tables show, by business unit, historical and estimated
completion dates, as applicable, for the initial iteration of various stages of
the Plan. The first table deals with the Azurix business units' mission-critical
internal systems including embedded chips and the second deals with the business
units' mission-critical Outside Systems of Outside Entities.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year 2000 Completion Dates by Azurix Business Unit as of June 30, 1999
(Mission-Critical Internal Items)
---------------------------------------------------------------------------------------------------------
Y2K- Contingency
Inventory Assessment Analysis Conversion Testing Ready Plan
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Buenos Aires, 7/99 8/99 8/99 9/99 9/99 10/99 9/99
Argentina
---------------------------------------------------------------------------------------------------------
Cancun n/a n/a n/a 7/99 7/99 8/99 8/99
---------------------------------------------------------------------------------------------------------
Obras n/a n/a n/a 7/99 8/99 10/99 9/99
Sanitarias
Mendoza
---------------------------------------------------------------------------------------------------------
Philip n/a n/a 7/99 8/99 11/99 11/99 9/99
Utilities
---------------------------------------------------------------------------------------------------------
Wessex n/a n/a n/a 6/99 6/99 6/99 6/99
---------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year 2000 Completion Dates by Azurix Business Unit as of June 30, 1999
(Mission-Critical Outside Entities)
---------------------------------------------------------------------------------------------------------
Y2K- Contingency
Inventory Assessment Analysis Conversion Testing Ready Plan
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Buenos Aires, 7/99 8/99 8/99 9/99 9/99 9/99 9/99
Argentina
---------------------------------------------------------------------------------------------------------
Cancun n/a n/a n/a 7/99 7/99 8/99 8/99
---------------------------------------------------------------------------------------------------------
Obras n/a n/a n/a n/a 7/99 8/99 9/99
Sanitarias
Mendoza
---------------------------------------------------------------------------------------------------------
Philip 6/99 7/99 7/99 8/99 8/99 9/99 9/99
Utilities
---------------------------------------------------------------------------------------------------------
Wessex n/a n/a n/a 5/99 5/99 6/99 6/99
---------------------------------------------------------------------------------------------------------
</TABLE>
n/a = Not applicable (work completed before Azurix involvement)
Azurix will continue to closely monitor work under the Plan and to revise
estimated completion dates for the initial iteration of each listed process.
Because Azurix's Year 2000 Plan treats Year 2000 effort as an iterative process,
Azurix will commence additional cycles of inventory, assessment, remediation and
validation testing, which will be conducted in parallel, and in coordination,
with Azurix's Year 2000 contingency planning.
PENDING ACQUISITION
We have made initial inquiries and made some preliminary examinations
regarding the Year 2000 readiness status of the mission-critical internal
information systems, devices with embedded chips and external dependencies at
Industrias del Agua, S.A. de C.V. in Monterrey, Mexico. We have concluded that
there are likely to be significant Year 2000 problems with mission-critical
internal information systems, embedded devices and external dependencies.
Consequently, promptly upon assuming responsibility for operations, Azurix will
start implementing the Plan. At this time it is too early for us to make
estimates about when the initial cycle of work will be completed at each
location for the stages of inventory, assessment, conversion, testing,
implementation and contingency planning. We also cannot estimate the costs for
the Year 2000 work involved in each of these stages or overall, at each
location. However, we believe that we will complete an initial estimate of these
costs no later than October or November of 1999, and we presently anticipate
that the costs for doing so will not be material. However, unforeseen
circumstances could arise during the implementation of the Plan that could
adversely affect the location and its mission-critical facilities, thereby
disrupting or materially adversely affecting its business.
We are pursuing additional concessions, outsourcing contracts and other
water and wastewater projects. We expect that we will adapt the Plan to cover
our additional operations.
20
<PAGE> 22
COSTS TO ADDRESS YEAR 2000 ISSUES
Under the Plan and otherwise, Azurix has not incurred material historical
costs for Year 2000 awareness, inventory, assessment, analysis, conversion,
testing or contingency planning. Further, Azurix anticipates that its future
costs for these purposes, including those for implementing its Year 2000
contingency plans, will not be material.
Azurix continues to be concerned with hidden defects in computer code,
including recoding errors in remediated code, sabotage of remediated code,
embedded devices with Year 2000 defects and the potential failure of
mission-critical Outside Entities, both domestic and international and including
foreign governments. Azurix is developing reasonable contingency plans to
prepare to the extent practicable to avoid substantial Year 2000-related
disruptions that may have a material adverse effect on Azurix and its business.
Because of the nature of potential Year 2000 deficiencies, their impact cannot
be quantified. None of these problems is unique to Azurix.
Although management believes that its estimates are reasonable, there can be
no assurance, for the reasons stated in the "Summary" section below, that the
actual costs of implementing the Plan will not differ materially from the
estimated costs or that Azurix will not be materially adversely affected by Year
2000 issues.
YEAR 2000 RISK FACTORS
Regulatory requirements. Certain of Azurix's business units operate in
industries that are regulated by governmental authorities. Azurix expects to
satisfy these regulatory authorities' requirements for achieving Year 2000
readiness. If Azurix's reasonable expectations in this regard are in error, and
if a regulatory authority should order the temporary cessation of Azurix's
operations in one or more of these areas, the adverse effect on Azurix could be
material. Outside Entities could face similar problems that materially adversely
affect Azurix.
Shortage of resources. Between now and Year 2000, there will be increased
competition for people with the technical and managerial skills necessary to
deal with the Year 2000 problem. While Azurix is taking precautions to recruit
and retain sufficient people skilled in dealing with the Year 2000 problem and
has hired consultants who bring additional skilled people to deal with the Year
2000 problem as it affects Azurix, Azurix could face shortages of skilled
personnel or other resources, such as Year 2000-ready computer chips or other
components. These shortages might delay or otherwise impair Azurix's progress
towards making its mission-critical systems Year 2000 ready. Outside Entities
could face similar problems that materially adversely affect Azurix. Azurix
believes that the possible impact of the shortage of skilled people is not, and
will not be, unique to Azurix.
Potential shortcoming. Azurix estimates that its mission-critical systems,
domestic and international, will be Year 2000-ready before January 1, 2000.
However, there is no assurance that the Plan will succeed in accomplishing its
purposes or that unforeseen circumstances will not arise during implementation
of the Plan that would materially and adversely affect Azurix.
Cascading effect. Azurix and its business units are taking reasonable steps
to identify, assess and, where appropriate, replace devices that contain
embedded chips. Despite these reasonable efforts, Azurix anticipates that it
will not be able to find and replace all devices with embedded chips in Azurix's
systems. Further, Azurix anticipates that Outside Entities on which Azurix
depends also will not be able to find and remediate all devices with embedded
chips. Some of the embedded chips that fail to operate or that produce improper
results may create system disruptions or failures. Some of these disruptions or
failures may spread from the systems in which they are located to other systems.
These cascading failures may have adverse effects upon Azurix's ability to
maintain safe operations and may also have adverse effects upon Azurix's ability
to serve its customers, to comply with environmental statutes and regulations
and otherwise to fulfill contractual and other legal obligations. The embedded
chip problem is widely recognized as one of the more difficult aspects of the
Year 2000 problem across industries and throughout the world. Azurix believes
that the possible adverse impact of the embedded chip problem is not, and will
not be, unique to Azurix.
21
<PAGE> 23
Outside Entities. Azurix intends to meet with some of the Outside Entities
that are mission-critical to Azurix for Year 2000 purposes. The Outside Entities
Azurix is contacting include suppliers, customers, financial institutions and
governmental entities. However, Azurix cannot in any way ensure that these
Outside Entities will be Year 2000 ready, nor can Azurix place complete reliance
on assurances, written or oral, from these Outside Entities that they expect to
be Year 2000 ready. These Outside Entities are subject to failure resulting from
the problems of embedded chips, re-coding errors in remediated code and the
effects of possible sabotage, as well as the failure of entities external to
them. Because of this potential for disruption and material adverse
consequences, Azurix never considers an external entity to be "Year 2000
compliant" or "Year 2000 ready." Instead, Azurix and Enron will deal with the
possibility that mission-critical Outside Entities will not be Year 2000 ready
by developing reasonable contingency plans.
Azurix cannot assure that suppliers upon which it depends for essential
goods and services will convert and test their mission-critical systems and
processes in a timely and effective manner. Failure or delay to do so by all or
some of these Outside Entities, including U.S. federal, state or local
governments and foreign governments, could create substantial disruptions having
a material adverse affect on Azurix's business.
Although Azurix relies on Enron for computer processing services at its
headquarters in Houston and London, Azurix's systems at its operating
subsidiaries function independently of Enron's systems. Azurix relies on Enron's
mainframe system used for functions such as accounting and human resources.
Enron has advised Azurix that it believes that its mission-critical systems will
be Year 200 ready substantially before January 1, 2000. However, unforeseen
circumstances could arise during the implementation of the Plan that could
adversely effect Enron's mission-critical functions, thereby disrupting Azurix's
business. Azurix does not believe that such disruptions would have a material
adverse effect on Azurix.
U.S. Y2K Act. Azurix may face additional risk as a result of the
uncertainties and probable additional litigation, resulting from the enactment
of the U.S. federal "Y2K Act." Because experience with this recently enacted
legislation is very limited, Azurix cannot at this time quantify the financial
impact or potential business disruption that may result from this legislation.
However, the adverse impact on Azurix's business might be material.
CONTINGENCY PLANS
As part of the Plan, Azurix is developing contingency plans that deal with
two aspects of the Year 2000 problem: (1) that Azurix, despite its good-faith,
reasonable efforts, may not have satisfactorily remediated all of its internal
mission-critical systems and (2) that Outside Systems may not be Year 2000
ready, despite Azurix's good-faith, reasonable efforts to work with Outside
Entities. Azurix's contingency plans are being designed to minimize the
disruptions or other adverse effects resulting from Year 2000 incompatibilities
regarding these mission-critical functions or systems, and to facilitate the
early identification and remediation of mission-critical Year 2000 problems that
first manifest themselves after January 1, 2000.
Azurix's contingency plans will include an assessment of all its
mission-critical internal information technology systems and its internal
operational systems that use computer-based controls. This process will commence
in the early minutes of January 1, 2000, and continue for hours, days or weeks
as circumstances require. Further, Azurix will in that time frame assess any
mission-critical disruptions due to Year 2000-related failures that are external
to Azurix. The assessment process will cover, for example, loss of electrical
power from utilities, telecommunications services from carriers or building
access, security or elevator service in facilities occupied by Azurix. The
contingency plans will also include events such as failure of the delivery of
chemicals for water and wastewater treatment or events of sabotage.
22
<PAGE> 24
Azurix's contingency plans include the creation of teams that will be
standing by on the evening of December 31, 1999, prepared to respond rapidly and
otherwise as necessary to mission-critical Year 2000-related problems as soon as
they become known. The composition of teams that are assigned to deal with Year
2000 problems will vary according to the nature, mission-criticality and
location of the problem. Because Azurix operates internationally, some of its
Year 2000 contingency teams will be stationed at Azurix's mission-critical
facilities overseas.
WORST CASE SCENARIO
The Securities and Exchange Commission requires that public companies
forecast the most reasonably likely worst case Year 2000 scenario. Analysis of
the most reasonably likely worst case Year 2000 scenarios Azurix may face leads
to contemplation of the following possibilities which, though unlikely in some
or many cases, must be included in any consideration of worst cases: widespread
failure of electrical, gas and similar supplies by utilities serving Azurix
domestically and internationally; widespread disruption of the services of
communications common carriers domestically and internationally; similar
disruption to transportation services for Azurix and its employees, contractors,
suppliers and customers; significant disruption to Azurix's ability to gain
access to, and remain working in, office buildings and other facilities; the
failure of substantial numbers of Azurix's mission-critical information
(computer) hardware and software systems, including both internal business
systems and systems (such as those with embedded chips) controlling operational
facilities such as water and wastewater treatment plants, domestically and
internationally; and the failure, domestically and internationally, of Outside
Systems, the effects of which would have a cumulative material adverse impact on
Azurix's mission-critical systems. If electrical power is unavailable to a water
or wastewater facility for a period greater than several hours, Azurix might not
be able to keep the facility functioning and, as a result, untreated or
improperly treated water might be discharged into the distribution system and
wastewater might be discharged into waterways. Among other things, Azurix could
face substantial claims by governments, governmental authorities or customers,
or loss of revenues, due to service interruptions, inability to fulfill
contractual obligations, inability to account for certain revenues or
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation, harm to persons or to tangible property,
stabilization of operations following mission-critical failures and the
execution of contingency plans. Azurix could also experience an inability by
customers, traders and others to pay, on a timely basis or at all, obligations
owed to Azurix. Under these circumstances, the adverse effect on Azurix and the
diminution of Azurix's revenues would be material, although not quantifiable at
this time. Further, in this scenario, the cumulative effect of these failures
could have a substantial adverse effect on the economy, domestically and
internationally. The adverse effect on Azurix and the diminution of Azurix's
revenues from a domestic or global recession or depression, also are likely to
be material, although not quantifiable at this time.
Azurix will continue to monitor business conditions with the aim of
assessing and minimizing adverse effects, if any, that result or may result from
the Year 2000 problem.
SUMMARY
Azurix has a plan to deal with the Year 2000 challenge and believes that it
will be able to achieve substantial Year 2000 readiness with respect to the
mission-critical systems that it controls. However, from a forward-looking
perspective, the extent and magnitude of the Year 2000 problem as it will affect
Azurix, both before and for some period after January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among these are: the difficulty of
locating "embedded" chips that may be in a great variety of mission-critical
hardware used for process or flow control, environmental, transportation,
access, communications and other systems; the difficulty of inventorying,
assessing, remediating, verifying and testing Outside Systems; the difficulty in
locating all mission-critical software (computer code) internal to Azurix that
is not Year 2000 compatible, or that may be subject to re-coding errors or
sabotage; and the unavailability of certain necessary internal or external
resources, including but not limited to trained hardware and software engineers,
technicians and other personnel to perform adequate remediation, verification
and testing of mission-critical Azurix systems or Outside Systems. Accordingly,
there can be no assurance that all of Azurix's systems and all Outside Systems
will be adequately remediated so that they are Year 2000 ready by January 1,
2000, or by some earlier date, so as not to create a material disruption to
Azurix's business. If, despite Azurix's reasonable efforts under its Year 2000
Plan, there are mission-critical Year 2000-related failures that create
substantial disruptions to Azurix's business, the adverse impact on Azurix's
business
23
<PAGE> 25
could be material. Additionally, while Azurix's Year 2000 costs are not expected
to be material, such costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, the impact of tests of
Outside Systems and similar events. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite Azurix's
implementation of the Plan.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although Azurix believes our
expectations reflected in these forward-looking statements are based on
reasonable assumptions, no assurance can be given that these expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements include, among other things:
o Political developments in foreign countries
o The ability to enter new water and wastewater markets in the United
States and in other jurisdictions
o The timing and extent of deregulation of water and wastewater markets in
the United States and in other countries
o Regulatory developments in the United States and in other countries,
including tax legislation and regulations
o The extent of efforts by governments to privatize water and wastewater
industries
o The timing and extent of changes in non-U.S. currencies and interest
rates
o The extent of success in acquiring water and wastewater assets and
developing and managing water resources, including the ability to
qualify for and win bids for water and wastewater infrastructure
projects
o The ability of counterparties to financial risk management instruments
and other contracts with us to meet their financial commitments to us
o The effectiveness of our Year 2000 plan and the Year 2000 readiness of
Outside Entities, including foreign governments
o Our ability to access the debt and equity markets during the periods
covered by the forward-looking statements, which will depend on general
market conditions and our credit ratings for our debt obligations
We undertake no obligation to update or revise our forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed herein might not occur.
24
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 15, Azurix filed a Registration Statement on Form S-1 (File No.
333-74379) relating to an initial public offering of its common stock for a
proposed maximum aggregate offering price of $862.5 million. On June 9, 1999,
Azurix's Registration Statement on Form S-1 relating to its initial public
offering was declared effective. Azurix sold 17.1 million shares, and Atlantic
Water Trust, the former 100% parent of Azurix, sold 19.5 million shares of
Azurix's common stock in the offering, which closed on June 15, 1999. The public
offering price was $19.00 per share of common stock, and the underwriting
discount was $1.14 per share of common stock. The proceeds from the offering,
after deducting the underwriting discount but before deducting expenses
associated with the offering, to Azurix were $305.4 million. The proceeds, after
deducting the underwriting discount but before deducting expenses, to Atlantic
Water Trust were $348.3 million. The net offering proceeds to Azurix, after
deducting the underwriting discount and expenses, were $300.5 million.
On June 30, 1999, Azurix, through Azurix Buenos Aires S.A., an indirect
wholly owned subsidiary of Azurix, entered into a concession contract with the
provincial government covering two regions in the Province of Buenos Aires and
paid the government $438.6 million. In connection with the funding of this
acquisition, Azurix made an equity investment in Azurix Buenos Aires of $45.0
million, and Azurix Buenos Aires borrowed $394.0 million under a new credit
agreement dated as of June 24, 1999. This loan is secured by cash and other
short-term liquid investments in the aggregate amount of $396.0 million, which
Azurix has on deposit in a cash collateral account and pledged as security
for the loan. Azurix used $230.6 million of the net proceeds from its initial
public offering, $208.0 million in funds drawn under the senior credit facility
of its indirect wholly owned subsidiary Azurix Europe Ltd, and interest on those
funds and other funds of Azurix, to fund the equity investment in Azurix Buenos
Aires and its deposit into the cash collateral account. Azurix used the
remaining net proceeds to repay an advance to Azurix from Enron, which holds a
50% voting interest in Atlantic Water Trust.
On July 8, 1999, the underwriters for the offering exercised the
over-allotment option granted to them by Atlantic Water Trust in connection with
the offering. On July 12, 1999, Atlantic Water Trust sold an additional
1,963,468 shares of Azurix's common stock. Azurix did not receive any proceeds
from the sale of common stock by Atlantic Water Trust.
The managing underwriters for the offering in the United States and Canada
were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation,
PaineWebber Incorporated, BT Alex. Brown Incorporated and Banc of America
Securities LLC. The managing underwriters for the offering outside the United
States and Canada were Merrill Lynch International, Credit Suisse First Boston
(Europe) Limited, Donaldson, Lufkin & Jenrette International, PaineWebber
International (U.K.) Ltd., ABN AMRO Rothschild and HSBC Investment Bank plc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999, Atlantic Water Trust, then the sole stockholder of Azurix,
executed a written consent of sole stockholder in lieu of meeting that approved
the Restated Certificate of Incorporation of Azurix. A copy of this Restated
Certificate of Incorporation was filed as Exhibit 3.1 to Azurix's Registration
Statement on Form S-1, which was declared effective on June 9, 1999.
25
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
10.1 U.S. $394,000,000 Credit Agreement, dated as of June
24, 1999, among Azurix Buenos Aires S.A., as
Borrower, and the Initial Lenders named therein, as
Initial Lenders, and Westdentsche Landestank
Girozentrale, as Agent.
10.2 Cash Collateral Agreement, dated as of June 25, 1999,
among Azurix, as Pledgor, and The Chase Manhattan
Bank, as Collateral Agent and Collateral Securities
Intermediary and the other parties named therein.
10.3 Concession Contract dated June 30, 1999, between the
Executive Authorities of the Province of Buenos Aires
and Azurix Buenos Aires S.A. ( to be filed by
amendment as an exhibit to Azurix's Form 8-K dated
June 30, 1999).
27 Financial Data Schedule (included only in the
electronic filing of this document).
(b) Reports on Form 8-K:
A Form 8-K dated June 30, 1999 was filed with respect to Azurix's
acquisition of a concession to operate water and wastewater systems in regions
of the Province of Buenos Aires, Argentina.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZURIX CORP.
Date: August 16, 1999 By: /s/ Rodney L. Faldyn
-------------------------------------
Rodney L. Faldyn
Chief Accounting Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
27
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 U.S. $394,000,000 Credit Agreement, dated as of June 24, 1999, among
Azurix Buenos Aires S.A., as Borrower, and the Initial Lenders named
therein, as Initial Lenders, and Westdentsche Landestank Girozentrale,
as Agent.
10.2 Cash Collateral Agreement, dated as of June 25, 1999, among Azurix, as
Pledgor, and The Chase Manhattan Bank, as Collateral Agent and
Collateral Securities Intermediary and the other parties named therein.
10.3 Concession Contract dated June 30, 1999, between the Executive
Authorities of the Province of Buenos Aires and Azurix Buenos Aires
S.A. ( to be filed by amendment as an exhibit to Azurix's Form 8-K
dated June 30, 1999).
27 Financial Data Schedule (included only in the electronic filing of this
document).
</TABLE>
<PAGE> 1
EXECUTION COPY
U.S.$394,000,000
CREDIT AGREEMENT
Dated as of June 24, 1999
Among
AZURIX BUENOS AIRES S.A.
as Borrower
and
THE INITIAL LENDERS NAMED HEREIN
as Initial Lenders
and
WESTDEUTSCHE LANDESBANK GIROZENTRALE
as Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms.....................................................................1
SECTION 1.02. Computation of Time Periods..............................................................13
SECTION 1.03. Accounting Terms.........................................................................13
ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. The Advances.............................................................................13
SECTION 2.02. Making the Advances......................................................................13
SECTION 2.03. Fees.....................................................................................14
SECTION 2.04. Repayment................................................................................15
SECTION 2.05. Interest.................................................................................15
SECTION 2.06. Interest Rate Determination..............................................................16
SECTION 2.07. Prepayments..............................................................................16
SECTION 2.08. Increased Costs..........................................................................17
SECTION 2.09. Illegality...............................................................................18
SECTION 2.10. Payments and Computations................................................................18
SECTION 2.11. Taxes....................................................................................19
SECTION 2.12. Sharing of Payments, Etc.................................................................21
SECTION 2.13. Use of Proceeds..........................................................................21
ARTICLE III CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01....................................21
SECTION 3.02. Conditions Precedent to Each Borrowing and Capitalization of Interest....................23
SECTION 3.03. Determinations Under Section 3.01........................................................24
ARTICLE IV REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower...........................................24
SECTION 4.02. Representations and Warranties of the Lenders............................................26
ARTICLE V COVENANTS OF THE BORROWER SECTION
5.01. Affirmative Covenants............................................................................26
ARTICLE VI EVENTS OF DEFAULT
SECTION 6.01. Events of Default........................................................................27
ARTICLE VII THE AGENT
SECTION 7.01. Authorization and Action.................................................................29
SECTION 7.02. Agent's Reliance, Etc....................................................................29
SECTION 7.03. WestLB and Affiliates....................................................................30
SECTION 7.04. Lender Credit Decision...................................................................30
SECTION 7.05. Indemnification..........................................................................30
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C>
SECTION 7.06. Successor Agent..........................................................................31
ARTICLE VIII MISCELLANEOUS
SECTION 8.01. Amendments, Etc..........................................................................31
SECTION 8.02. Notices, Etc.............................................................................32
SECTION 8.03. No Waiver; Remedies......................................................................32
SECTION 8.04. Costs and Expenses.......................................................................32
SECTION 8.05. Right of Set-off.........................................................................33
SECTION 8.06. Binding Effect...........................................................................34
SECTION 8.07. Assignments and Participations...........................................................34
SECTION 8.08. Governing Law............................................................................37
SECTION 8.10. Execution in Counterparts................................................................37
SECTION 8.11. Jurisdiction, Etc........................................................................37
</TABLE>
iii
<PAGE> 4
Schedules
Schedule I - List of Lending Offices
Exhibits
Exhibit A - Form of Promissory Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Assignment and Acceptance
Exhibit D - Form of Cash Collateral Agreement
Exhibit E - Form of Opinion of Argentine Counsel to the Borrower
Exhibit F - Form of Opinion of New York Counsel to the Borrower and the Pledgor
Exhibit G - Form of Opinion of Counsel for the Pledgor
iv
<PAGE> 5
CREDIT AGREEMENT
Dated as of June 24, 1999
Credit Agreement (said Agreement, as it may hereafter be amended or
otherwise modified from time to time, being this "Agreement") among Azurix
Buenos Aires S.A., a company organized under the laws of Argentina (the
"Borrower"), the banks, financial institutions and other institutional lenders
(the "Initial Lenders") listed on the signature pages hereof and Westdeutsche
Landesbank Girozentrale ("WestLB"), as agent (the "Agent") for the Lenders (as
hereinafter defined).
PRELIMINARY STATEMENTS:
1. The Borrower has requested that the Lenders make Advances (as
hereinafter defined) to the Borrower on the terms and subject to the conditions
set forth herein.
2. The Lenders are willing to make Advances to Borrower, on the terms
and subject to the conditions set forth herein.
3. The Borrower wishes to enter into the transactions contemplated
hereby for significant commercial purposes associated with its ongoing
operations.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this
Agreement, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):
"Accrued Required Collateral Amount" means, as of any date of
determination, the sum of (a) the outstanding principal amount of the
Advances plus any amount of interest to be capitalized as notified by the
Borrower to the Lender (including any amounts added to such principal amount
pursuant to Section 2.05(c)) and (b) the amount of interest accrued and
unpaid through such date on the outstanding principal amount of such
Advances, as determined by the Agent (which determination shall be
conclusive absent manifest error).
<PAGE> 6
"Advance" means an advance by a Lender to the Borrower
pursuant to Article II, and refers to a Base Rate Advance or a
Eurodollar Rate Advance (each of which shall be a "Type" of Advance).
"Affiliate" means, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common
control with such Person or is a director or officer of such Person.
For purposes of this definition, the term "control" (including the
terms "controlling", "controlled by" and "under common control with")
of a Person means the possession, direct or indirect, of the power to
vote 5% or more of the Voting Stock of such Person or to direct or
cause the direction of the management and policies of such Person,
whether through the ownership of Voting Stock, by contract or
otherwise.
"Agent" has the meaning given such term in the preamble of
this Agreement.
"Agent's Account" means the account of the Agent maintained by
the Agent at The Chase Manhattan Bank, ABA 021000021 for the account of
the Agent, Account No. 001-1-352275.
"Agreement" has the meaning given such term set forth in the
preamble to this Agreement.
"Applicable Margin" means, as of any date, a percentage per
annum equal to 0.0% with respect to Base Rate Advances and 0.15% with
respect to Eurodollar Rate Advances.
"Argentina" means the Republic of Argentina.
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an Eligible Assignee, and accepted by the
Agent, in substantially the form of Exhibit C hereto.
"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be
equal to the higher of:
(a) the rate of interest announced publicly by the
Agent in Dusseldorf, Germany, from time to time, as the
Agent's base rate; and
(b) 1/2 of one percent per annum above the Federal
Funds Rate.
"Base Rate Advance" means an Advance that bears interest as
provided in Section 2.05(a)(i).
<PAGE> 7
"Base Rate Period" means, as of any date of determination, the
lesser of the next succeeding one-month period and the period from such
date of determination until June 22, 2000.
"Borrower" has the meaning given such term in the preamble of
this Agreement.
"Borrowing" means a borrowing consisting of Advances of the
same Type made on the same day by the Lenders.
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in New York, New York or
Dusseldorf, Germany and, if the applicable Business Day relates to any
Eurodollar Rate Advances, on which dealings are carried on in the
London interbank market.
"Cash Collateral Account" has the meaning set forth in the
Cash Collateral Agreement.
"Cash Collateral" has the meaning given such term in the Cash
Collateral Agreement.
"Cash Collateral Agreement" means the Cash Collateral
Agreement attached hereto as Exhibit D.
"Collateral Agent" has the meaning given such term in the
preamble of the Cash Collateral Agreement.
"Commitment" has the meaning specified in Section 2.01.
"Concession" means the concession to provide water and waste
services in the Province of Buenos Aires, Argentina pursuant to the
Concession Agreement.
"Concession Agreement" means the Concession Agreement relating
to the water and sewage services in the Province of Buenos Aires to be
entered into between the Borrower and the Province of Buenos Aires.
"Confidential Information" means any information furnished by
any Loan Party to any Agent or Lender in a writing designated as
confidential but does not include any such information that is or
becomes generally available to any Agent or Lender from a source other
than such Loan Party that is not, to such Agent's or Lender's
knowledge, acting in violation of a confidentiality agreement with such
Loan Party.
"Consolidated" refers to the consolidation of accounts in
accordance with GAAP.
7
<PAGE> 8
"Convert", "Conversion" and "Converted" each refers to a
conversion of Advances of one Type into Advances of the other Type
pursuant to Section 2.02, 2.06 or 2.09 .
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
"Effective Date" has the meaning specified in Section 3.01.
"Eligible Assignee" means (i) a Lender organized under the
laws of Germany; (ii) an Affiliate of a Lender organized under the laws
of Germany; (iii) a commercial bank organized under the laws of
Germany, or any subdivision thereof, and having total assets in excess
of $150,000,000,000; (iv) a savings and loan association or savings
bank organized under the laws of Germany, or any subdivision thereof,
and having total assets in excess of $150,000,000,000; (v) a German
finance company, insurance company or other financial institution or
fund (whether a corporation, partnership, trust or other entity) that
is engaged in making, purchasing or otherwise investing in commercial
loans in the ordinary course of its business and having total assets in
excess of $150,000,000,000; provided, however, in the case of clauses
(i) through (v) above, that amounts owing by an Argentine borrower to
any such Person referred to hereinabove would qualify for a tax
withholding rate under applicable Argentine law not in excess of the
tax withholding rate applicable to amounts owing by the Borrower to the
Initial Lenders on the date of any transfer permitted under Section
8.07, and such Person has delivered certification as to the reduced
rate of withholding tax on payments pursuant to this Agreement in
accordance with Section 2.11(e); (vi) any other Person approved by the
Agent and the Pledgor; provided, however, that neither any Loan Party
nor an Affiliate of a Loan Party, nor any competitor of the Borrower or
the Pledgor, shall qualify as an Eligible Assignee and (vii) any Person
solely for purposes of an assignment of 100% of the Lenders rights and
obligations under this Agreement and the Note pursuant to clause (b) of
the definition of "Maturity Date" and Section 2.07(b)(i).
"Eurocurrency Liabilities" has the meaning assigned to that
term in Regulation D of the Board of Governors of the Federal Reserve
System, as in effect from time to time.
"Eurodollar Rate" means, for any Interest Period for each
Eurodollar Rate Advance comprising part of the same Borrowing, an
interest rate per annum equal to the rate per annum obtained by
dividing (a) the rate per annum at which deposits in U.S. dollars are
offered by the principal office of WestLB in London, England to prime
banks in the London interbank market at 11:00 A.M. (London time) two
Business Days before the first day of such Interest Period in an amount
substantially equal to WestLB's Eurodollar Rate Advance comprising part
of such Borrowing to be outstanding during such Interest Period and for
a period equal to such Interest Period by (b) a percentage equal to
100% minus the Eurodollar Rate Reserve Percentage for such Interest
Period.
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"Eurodollar Rate Advance" means an Advance that bears interest
as provided in Section 2.05(a)(ii).
"Eurodollar Rate Reserve Percentage" for any Interest Period
for all Eurodollar Rate Advances comprising part of the same Borrowing
means the reserve percentage applicable two Business Days before the
first day of such Interest Period under regulations issued from time to
time by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement (including,
without limitation, any emergency, supplemental or other marginal
reserve requirement) with respect to liabilities or assets consisting
of or including Eurocurrency Liabilities (or with respect to any other
category of liabilities that includes deposits by reference to which
the interest rate on Eurodollar Rate Advances is determined) having a
term equal to such Interest Period and applying to amounts funded by a
Lender under this Agreement.
"Events of Default" has the meaning specified in Section 6.01.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Fee Letter" has the meaning set forth in Section 2.03.
"Initial Lenders" has the meaning given such term in the
preamble of this Agreement.
"Interest Period" means, for each Eurodollar Rate Advance
comprising part of the same Borrowing, the period commencing on the
date of such Eurodollar Rate Advance or the date of the Conversion of
any Base Rate Advance into such Eurodollar Rate Advance and ending on
the last day of the period selected by the Borrower pursuant to the
provisions below and, thereafter, each subsequent period commencing on
the last day of the immediately preceding Interest Period and ending on
the last day of the period selected by the Borrower pursuant to the
provisions below. The duration of each such Interest Period shall be
one, three or six months, as the Borrower may, upon notice received by
the Agent not later than 11:00 A.M. (Dusseldorf time) on the third
Business Day prior to the first day of such Interest Period, select;
provided, however, that:
(a) the Borrower may not select any Interest Period
that ends after the Maturity Date;
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(b) Interest Periods commencing on the same date for
Eurodollar Rate Advances comprising part of the same Borrowing
shall be of the same duration;
(c) whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided, however, that, if
such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding
Business Day;
(d) whenever the first day of any Interest Period
occurs on a day of an initial calendar month for which there
is no numerically corresponding day in the calendar month that
succeeds such initial calendar month by the number of months
equal to the number of months in such Interest Period, such
Interest Period shall end on the last Business Day of such
succeeding calendar month; and
(e) subject to clause (a) above in which case Section
2.06(c) shall apply, if the Borrower has failed to notify the
Agent with respect to the duration of any Interest Period, the
duration of such Interest Period shall be one month.
"Lenders" means the Initial Lenders and each Person that shall
become a party hereto pursuant to Section 8.07.
"Lending Office" means, with respect to any Lender, the office
of such Lender specified as its "Lending Office" opposite its name on
Schedule I hereto or in the Assignment and Acceptance pursuant to which
it became a Lender, or such other office of such Lender as such Lender
may from time to time specify to the Borrower and the Agent.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance
on title to real property.
"Loan Document" means each of this Agreement, the Notes, the
Cash Collateral Agreement, and the Fee Letter.
"Loan Party" means the Borrower and the Pledgor.
"Material Adverse Change" means (a) a material impairment of
the ability of any Loan Party to perform any of its obligations under
any Loan Document or (b) a material
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adverse effect upon the legality, validity, binding effect or
enforceability against any Loan Party of any Loan Document to which it
is a party.
"Material Adverse Effect" means (a) a material impairment of
the ability of any Loan Party to perform any of its obligations under
any Loan Document or (b) a material adverse effect upon the legality,
validity, binding effect or enforceability against any Loan Party of
any Loan Document to which it is a party.
"Maturity Date" means the earlier of (a) June 22, 2000 and (b)
the last day of the then-current Interest Period following any date
upon which the direct or indirect ownership by Enron Corp. of the
outstanding Voting Stock of the Pledgor shall fall below 25% of the
total issued and outstanding Voting Stock of the Pledgor; provided,
however, that if the Borrower has given the Lenders prior written
notice that the Borrower shall arrange for the assignment and purchase
of all of the rights and obligations of the Lenders under this
Agreement and within 30 days following such date on which such Voting
Stock ownership is reduced all of the rights and obligations of the
Lenders are assigned pursuant to an Assignment and Acceptance to
another Person for a purchase price equal to the amount of principal,
accrued interest and all other amounts, if any, owing to the Lenders,
clause (b) above shall not apply to any such assignee under such
Assignment and Acceptance.
"Monthly Date" means the last Business Day of each calender
month following the Effective Date.
"Note" means a promissory note of the Borrower payable to the
order of any Lender, in substantially the form of Exhibit A, evidencing
the aggregate indebtedness of the Borrower to such Lender resulting
from the Advances made by such Lender.
"Notice of Borrowing" has the meaning specified in Section
2.02.
"Obligation" means, with respect to any Person, any payment,
performance or other obligations of such Person of any kind, including,
without limitation, any liability of such Person on any claim, whether
or not the right of any creditor to payment in respect of such claim is
reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, disputed, undisputed, legal, equitable, secured or unsecured,
and whether or not such claim is discharged, stayed or otherwise
affected by any proceeding referred to in Section 6.01(d). Without
limiting the generality of the foregoing, the Obligations of the
Borrower under the Loan Documents include (a) the obligation to pay
principal, interest, charges, expenses, fees, attorneys' fees and
disbursements, indemnities and other amounts payable by the Borrower
under any Loan Document and (b) the obligation of Borrower to reimburse
any amount in respect of any of the foregoing that any Lender, in its
sole discretion, may elect to pay or advance on behalf of the Borrower.
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"Other Taxes" has the meaning specified in Section 2.11(b).
"Permitted Investments" means, to the extent owned by the
Pledgor free and clear of all Liens other than Liens created under the
Cash Collateral Agreement and having a maturity of not greater than 180
days from the date of acquisition thereof, readily marketable direct
obligations of the Government of the United States or any agency or
instrumentality thereof or obligations unconditionally guaranteed by
the full faith and credit of the Government of the United States.
"Person" means an individual, partnership, corporation
(including a business trust), joint stock company, trust,
unincorporated association, joint venture, limited liability company or
other entity, or a government or any political subdivision or agency
thereof.
"Pledgor" means Azurix Corp., a Delaware corporation.
"Register" has the meaning specified in Section 8.07(c).
"Required Collateral Amount" means, as of any date of
determination, the sum of (a) the outstanding principal amount of the
Advances plus the amount of interest to be capitalized as notified by
the Borrower to the Agent (including any amounts added to such
principal amount pursuant to Section 2.05(c)) and (b) the projected
amount of interest payable on the outstanding principal amount of such
Advances for the next succeeding Interest Period, (or in the case of
Base Rate Advances, the projected amount of interest payable for the
Base Rate Period) as determined by the Agent (which determinations
shall be conclusive absent manifest error).
"Required Lenders" means at any time Lenders owed at least a
majority in interest of the then aggregate unpaid principal amount of
the Advances owing to Lenders, or, if no such principal amount is then
outstanding, Lenders having at least a majority in interest of the
Commitments.
"Subsidiary" of any Person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or
in which) more than 50% of (a) the issued and outstanding Voting Stock
having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether at the time
capital stock of any other class or classes of such corporation shall
or might have voting power upon the occurrence of any contingency), (b)
the interest in the capital or profits of such limited liability
company, partnership or joint venture or (c) the beneficial interest in
such trust or estate is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries.
"Taxes" has the meaning specified in Section 2.11(a).
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"Treaty" means the treaty between Argentina and the Republic
of Germany for the avoidance of double taxation (as approved by
Argentine law 22.025).
"Type" has the meaning given such term in the definition of
"Advance" hereto.
"U.S. dollar" and the sign "$" each mean the lawful currency
of the United States.
"Voting Stock" means capital stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the
election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the
happening of such a contingency.
"WestLB" has the meaning given such term in the preamble of
this Agreement.
SECTION 1.02. Computation of Time Periods. In this Agreement
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding".
SECTION 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles consistent with those applied in the preparation
of the financial statements referred to in Section 3.01(c) ("GAAP").
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. The Advances. Each Lender severally agrees, on
the terms and conditions hereinafter set forth, to make one Advance to the
Borrower on or before June 30, 1999 in an aggregate amount not to exceed at any
time outstanding the amount set forth opposite such Lender's name on the
signature pages hereof (such Lender's "Commitment"). The Borrowing shall consist
of Advances of the same Type made on the same day by the Lenders ratably
according to their respective Commitments. Amounts borrowed hereunder and repaid
or prepaid may not be reborrowed.
SECTION 2.02. Making the Advances. (a) The Borrowing shall be
comprised of Eurodollar Rate Advances and shall be made on notice, given not
later than 11:00 A.M. (Dusseldorf time) one Business Day prior to the date of
the proposed Borrowing to the Agent (the "Notice of Borrowing") which shall be
by telephone, confirmed immediately in writing, or telecopier or telex, in
substantially the form of Exhibit B hereto, specifying therein the requested (i)
date of such Borrowing, (ii) the aggregate amount of such Borrowing and (iii)
the applicable Interest Periods. Each Lender shall, before 11:00 A.M.
(Dusseldorf time) on the date of such Borrowing, make
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available for the account of its Lending Office to the Agent at the Agent's
Account, in same day funds, such Lender's ratable portion of such Borrowing.
After the Agent's receipt of such funds and upon fulfillment of the applicable
conditions set forth in Article III, the Agent will make such funds available to
the Borrower at the Agent's address referred to in Section 8.02.
(b) The Notice of Borrowing shall be irrevocable and binding
on the Borrower. In the case of any Borrowing that the related Notice
of Borrowing specifies is to be comprised of Eurodollar Rate Advances,
the Borrower shall indemnify each Lender against any loss, cost or
expense incurred by such Lender as a result of any failure to fulfill
on or before the date specified in such Notice of Borrowing for such
Borrowing the applicable conditions set forth in Article III,
including, without limitation, any loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds
acquired by such Lender to fund the Advance to be made by such Lender
as part of such Borrowing when such Advance, as a result of such
failure, is not made on such date.
(c) Unless the Agent shall have received notice from a Lender
prior to the date of any Borrowing that such Lender will not make
available to the Agent such Lender's ratable portion of such Borrowing,
the Agent may assume that such Lender has made such portion available
to the Agent on the date of such Borrowing in accordance with
subsection (a) of this Section 2.02 and the Agent may, in reliance upon
such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Lender shall not
have so made such ratable portion available to the Agent, such Lender
and the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for
each day from the date such amount is made available to the Borrower
until the date such amount is repaid to the Agent, at (i) in the case
of the Borrower, the interest rate applicable at the time to Advances
comprising such Borrowing and (ii) in the case of such Lender, the
Federal Funds Rate. If such Lender shall repay to the Agent such
corresponding amount, such amount so repaid shall constitute such
Lender's Advance as part of such Borrowing for purposes of this
Agreement.
(d) The failure of any Lender to make the Advance to be made
by it as part of any Borrowing shall not relieve any other Lender of
its obligation, if any, hereunder to make its Advance on the date of
such Borrowing, but no Lender shall be responsible for the failure of
any other Lender to make the Advance to be made by such other Lender on
the date of any Borrowing.
(e) Borrowings used to pay accrued and unpaid interest when
due may only be made on the day such interest is due and payable, for
the amount of such interest.
SECTION 2.03. Fees. The Borrower agrees to pay to the Agent
the fees set forth in the Fee Letter dated June 24, 1999 (the "Fee Letter").
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SECTION 2.04. Repayment. The Borrower shall repay to the Agent
for the ratable account of the Lenders on the Maturity Date the aggregate
principal amount of the Advances then outstanding. Five Business Days prior to
the Maturity Date, the Borrower may instruct the Agent in writing to instruct
the Collateral Agent to deliver to Agent the aggregate amount of cash in the
Cash Collateral Account to be applied toward the repayment of the Advances and
interest accrued thereon and other amounts payable hereunder in accordance with
Section 6(b) of the Cash Collateral Agreement.
SECTION 2.05. Interest. (a) Scheduled Interest. The Borrower
shall pay interest on the unpaid principal amount of each Advance owing to each
Lender from the date of such Advance until such principal amount shall be paid
in full, at the following rates per annum:
(i) Base Rate Advances. During such periods as such
Advance is a Base Rate Advance, a rate per annum equal at all
times to the sum of (x) the Base Rate in effect from time to
time plus (y) the Applicable Margin in effect from time to
time, payable in arrears quarterly on the last day of each
September, December, March and June during such periods and on
the date such Base Rate Advance shall be Converted or paid in
full.
(ii) Eurodollar Rate Advances. During such periods as
such Advance is a Eurodollar Rate Advance, a rate per annum
equal at all times during each Interest Period for such
Advance to the sum of (x) the Eurodollar Rate for such
Interest Period for such Advance plus (y) the Applicable
Margin in effect from time to time, payable in arrears on the
last day of such Interest Period and, if such Interest Period
has a duration of more than three months, on each day that
occurs during such Interest Period every three months from the
first day of such Interest Period and on the date such
Eurodollar Rate Advance shall be Converted or paid in full.
(b) Default Interest. Upon the occurrence and during the
continuance of an Event of Default, the Borrower shall pay interest on
(i) the unpaid principal amount of each Advance owing to each Lender,
payable in arrears on the dates referred to in clause (a)(i) or (a)(ii)
above, at a rate per annum equal at all times to 2% per annum above the
rate per annum required to be paid on such Advance pursuant to clause
(a)(i) or (a)(ii) above and (ii) to the fullest extent permitted by
law, the amount of any interest, fee or other amount payable hereunder
that is not paid when due, from the date such amount shall be due until
such amount shall be paid in full, payable in arrears on the date such
amount shall be paid in full and on demand, at a rate per annum equal
at all times to 2% per annum above the rate per annum required to be
paid on Base Rate Advances pursuant to clause (a)(i) above.
(c) Capitalized Interest. The Borrower may notify the Agent at
least five Business Days prior to the date of any payment otherwise
required under this Section 2.05 (the "Applicable Interest Payment
Date") other than any such payment required to be paid
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on the Maturity Date, that the amount of interest payable on such
Applicable Interest Payment Date shall be added to the principal amount
of the Advances. So long as on the date of such notice and the
Applicable Interest Payment Date no Default or Event of Default has
occurred and is continuing, the amount of such interest shall be added
to the outstanding principal amount of the Advances on the Applicable
Interest Payment Date and for all purposes shall be deemed to
constitute part of the principal amount of the Advances as of such
date.
SECTION 2.06. Interest Rate Determination. (a) The Agent shall
give prompt notice to the Borrower and the Lenders of the applicable interest
rate determined by the Agent for purposes of Section 2.05(a)(i) or (ii).
(b) If, with respect to any Eurodollar Rate Advances, the
Required Lenders notify the Agent that the Eurodollar Rate for any
Interest Period for such Advances will not adequately reflect the cost
to such Required Lenders of making, funding or maintaining their
respective Eurodollar Rate Advances for such Interest Period, the Agent
shall forthwith so notify the Borrower and the Lenders, whereupon (i)
each Eurodollar Rate Advance will automatically, on the last day of the
then existing Interest Period therefor, Convert into a Base Rate
Advance, and (ii) the obligation of the Lenders to make, or to Convert
Advances into, Eurodollar Rate Advances shall be suspended until the
Agent shall notify the Borrower and the Lenders that the circumstances
causing such suspension no longer exist.
(c) If the Borrower shall fail to select the duration of any
Interest Period for any Eurodollar Rate Advances in accordance with the
provisions contained in the definition of "Interest Period" in Section
1.01 and there shall be less than one month between the date of such
failure and the Maturity Date, the Agent will forthwith so notify the
Borrower and the Lenders and such Advances will automatically, on the
last day of the then existing Interest Period therefor, Convert into
Base Rate Advances.
(d) On the date on which the aggregate unpaid principal amount
of Eurodollar Rate Advances comprising any Borrowing shall be reduced,
by payment or prepayment or otherwise, to less than $5,000,000, such
Advances shall automatically Convert into Base Rate Advances.
(e) Upon the occurrence and during the continuance of any
Event of Default, (i) each Eurodollar Rate Advance will automatically,
on the last day of the then existing Interest Period therefor, Convert
into a Base Rate Advance and (ii) the obligation of the Lenders to
make, or to Convert Advances into, Eurodollar Rate Advances shall be
suspended.
SECTION 2.07. Prepayments. (a) Optional. The Borrower may,
upon at least three Business Days' notice to the Agent stating the proposed date
and aggregate principal amount of the
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prepayment, and if such notice is given the Borrower shall, prepay the
outstanding principal amount of the Advances comprising part of the same
Borrowing in whole or ratably in part, together with accrued interest to the
date of such prepayment on the principal amount prepaid; provided, however, that
(x) each partial prepayment shall be in an aggregate principal amount of
$5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in
the event of any such prepayment of a Eurodollar Rate Advance, the Borrower
shall be obligated to reimburse the Lenders in respect thereof pursuant to
Section 8.04(c).
(b) Mandatory. The Borrower shall, at the option of the
Required Lenders and upon not less than 30 Business Days prior written
notice from the Required Lenders, either (i) cause all of the rights
and obligations of the Lenders under this Agreement to be assigned to
and purchased by another Person pursuant to an Assignment and
Acceptance for a purchase price equal to the amount of principal,
accrued interest and all other amounts, if any, owing to the Lenders,
or (ii) prepay the outstanding principal amount of the Advances
comprising part of the same Borrowing in whole or ratably in part,
together with accrued interest to the date of such prepayment on the
principal amount prepaid, on each date on which the Borrower receives
any net cash proceeds from any other financing of indebtedness in an
amount equal to the amount by which such net cash proceeds; provided,
however, that (A) the amount of Advances to be prepaid may be reduced
by the amounts required to be paid in connection with such prepayment
pursuant to Section 2.11, (B) the foregoing shall not apply to up to
$75,000,000 received by the Borrower from financings for the Borrower
provided that (x) the proceeds of such financings are used for working
capital purposes and capital expenditures of the Borrower or (y) such
financing consists of indebtedness (not to exceed U.S.$5,000,000)
incurred by the Borrower from one or more of its shareholders and (C)
in the event that any day that such proceeds are required to prepay the
Advances pursuant to this Section is not the last day of an Interest
Period, the Borrower shall set aside and hold in trust such amount
until the last day of the next succeeding Interest Period at which time
such amount shall be applied to prepay the Advances.
SECTION 2.08. Increased Costs. (a) If, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other governmental authority (whether or not having the force of law),
there shall be any increase in the cost to any Lender of agreeing to make or
making, funding or maintaining Eurodollar Rate Advances (excluding for purposes
of this Section 2.08 any such increased costs resulting from (i) Taxes or Other
Taxes (as to which Section 2.11 shall govern) and (ii) changes in the basis of
taxation of overall net income or overall gross income by the United States or
by the foreign jurisdiction or state under the laws of which such Lender is
organized or has its Lending Office or any political subdivision thereof), then
the Borrower shall from time to time, upon demand by such Lender (with a copy of
such demand to the Agent), pay to the Agent for the account of such Lender
additional amounts sufficient to compensate such Lender for such increased cost.
A certificate as to the amount of such increased cost, submitted to the Borrower
and the Agent by such Lender, shall be conclusive and binding for all purposes,
absent manifest error.
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(b) If any Lender determines that compliance with any law or
regulation or any guideline or request from any central bank or other
governmental authority (whether or not having the force of law) affects
or would affect the amount of capital required or expected to be
maintained by such Lender or any corporation controlling such Lender
and that the amount of such capital is increased by or based upon the
existence of such Lender's commitment to lend hereunder and other
commitments of this type, then, upon demand by such Lender (with a copy
of such demand to the Agent), the Borrower shall pay to the Agent for
the account of such Lender, from time to time as specified by such
Lender, additional amounts sufficient to compensate such Lender or such
corporation in the light of such circumstances, to the extent that such
Lender reasonably determines such increase in capital to be allocable
to the existence of such Lender's commitment to lend hereunder. A
certificate as to such amounts submitted to the Borrower and the Agent
by such Lender shall be conclusive and binding for all purposes, absent
manifest error.
SECTION 2.09. Illegality. Notwithstanding any other provision
of this Agreement, if any Lender shall notify the Agent that the introduction of
or any change in or in the interpretation of any law or regulation makes it
unlawful, or any central bank or other governmental authority asserts that it is
unlawful, for any Lender or its Lending Office to perform its obligations
hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar
Rate Advances hereunder, (i) each Eurodollar Rate Advance will automatically,
upon such demand, Convert into a Base Rate Advance and (ii) the obligation of
the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall
be suspended until the Agent shall notify the Borrower and the Lenders that the
circumstances causing such suspension no longer exist.
SECTION 2.10. Payments and Computations. (a) The Borrower
shall make each payment hereunder and under the Notes not later than 11:00 A.M.
(Dusseldorf time) on the day when due in U.S. dollars to the Agent at the
Agent's Account in same day funds. The Agent will promptly thereafter cause to
be distributed like funds relating to the payment of principal or interest or
facility fees ratably (other than amounts payable pursuant to Section 2.08, 2.11
or 8.04(c)) to the Lenders for the account of their respective Lending Offices,
and like funds relating to the payment of any other amount payable to any Lender
to such Lender for the account of its Lending Office, in each case to be applied
in accordance with the terms of this Agreement. Upon its acceptance of an
Assignment and Acceptance and recording of the information contained therein in
the Register pursuant to Section 8.07(d), from and after the effective date
specified in such Assignment and Acceptance, the Agent shall make all payments
hereunder and under the Notes in respect of the interest assigned thereby to the
Lender assignee thereunder, and the parties to such Assignment and Acceptance
shall make all appropriate adjustments in such payments for periods prior to
such effective date directly between themselves.
(b) The Borrower hereby authorizes each Lender, if and to the
extent payment owed to such Lender is not made when due hereunder or
under the Note held by such
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Lender, to charge from time to time against any or all of the
Borrower's accounts with such Lender any amount so due.
(c) All computations of interest based on the Base Rate shall
be made by the Agent on the basis of a year of 365 or 366 days, as the
case may be, and all computations of interest based on the Eurodollar
Rate or the Federal Funds Rate and of facility fees shall be made by
the Agent on the basis of a year of 360 days, in each case for the
actual number of days (including the first day but excluding the last
day) occurring in the period for which such interest or facility fees
are payable. Each determination by the Agent of an interest rate
hereunder shall be conclusive and binding for all purposes, absent
manifest error.
(d) Whenever any payment hereunder or under the Notes shall be
stated to be due on a day other than a Business Day, such payment shall
be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of
interest or facility fee, as the case may be; provided, however, that,
if such extension would cause payment of interest on or principal of
Eurodollar Rate Advances to be made in the next following calendar
month, such payment shall be made on the next preceding Business Day.
(e) Unless the Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Lenders
hereunder that the Borrower will not make such payment in full, the
Agent may assume that the Borrower has made such payment in full to the
Agent on such date and the Agent may, in reliance upon such assumption,
cause to be distributed to each Lender on such due date an amount equal
to the amount then due such Lender. If and to the extent the Borrower
shall not have so made such payment in full to the Agent, each Lender
shall repay to the Agent forthwith on demand such amount distributed to
such Lender together with interest thereon, for each day from the date
such amount is distributed to such Lender until the date such Lender
repays such amount to the Agent, at the Federal Funds Rate.
(f) The making of an Advance to the Borrower, and all payments
of principal and interest hereunder by the Borrower shall be made to or
by the Borrower in New York.
SECTION 2.11. Taxes. (a) Any and all payments by the Borrower
hereunder or under the Notes shall be made, in accordance with Section 2.10,
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender and the Agent, taxes
imposed on its overall net income, and franchise taxes imposed on it in lieu of
net income taxes, by the jurisdiction under the laws of which such Lender or the
Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Lender, taxes imposed on its overall net income, and
franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction
of such Lender's Lending Office or any political subdivision thereof (all such
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non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities in respect of payments hereunder or under the Notes being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder or under any
Note to any Lender or the Agent, (i) the sum payable shall be increased as may
be necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.11) such Lender or
the Agent (as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower shall make such
deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law.
(b) In addition, the Borrower shall pay any present or future
stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made hereunder or
under the Notes or from the execution, delivery or registration of,
performing under, or otherwise with respect to, this Agreement or the
Notes (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify each Lender and the Agent for
and hold it harmless against the full amount of Taxes or Other Taxes
(including, without limitation, taxes of any kind imposed by any
jurisdiction on amounts payable under this Section 2.11) imposed on or
paid by such Lender or the Agent (as the case may be) and any liability
(including penalties, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from
the date such Lender or the Agent (as the case may be) makes written
demand therefor.
(d) Within 30 days after the date of any payment of Taxes, the
Borrower shall furnish to the Agent, at its address referred to in
Section 8.02, the original or a certified copy of a receipt evidencing
such payment.
(e) Each Lender, from time to time as requested in writing by
the Borrower, shall provide the Borrower as soon as practicable, but
only if and to the extent such Lender is lawfully able to do so, with
such documents certificates, forms which the Borrower has supplied to
the Lender for completion and such other information as the Borrower
may reasonably request from time to time certifying that such Lender is
exempt from or entitled to a reduced rate of withholding tax on
payments pursuant to this Agreement or the Note or otherwise to
establish that such Lender is legally entitled to receive payments
under this Agreement free of any withholding Taxes and to what extent,
if any, such payments are subject to any withholding Taxes.
(f) For any period with respect to which a Lender has failed
to provide the Borrower with such appropriately completed forms or
other information as such Lender is lawfully able to provide and as may
be required under subsection (e) above, such Lender
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shall not be entitled to indemnification under Section 2.11(a) or (c)
with respect to Taxes that are imposed as a consequence of such
failure.
SECTION 2.12. Sharing of Payments, Etc. If any Lender shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Advances owing to it (other
than pursuant to Section 2.08, 2.11 or 8.04(c)) in excess of its ratable share
of payments on account of the Advances obtained by all the Lenders, such Lender
shall forthwith purchase from the other Lenders such participation in the
Advances owing to them as shall be necessary to cause such purchasing Lender to
share the excess payment ratably with each of them; provided, however, that if
all or any portion of such excess payment is thereafter recovered from such
purchasing Lender, such purchase from each Lender shall be rescinded and such
Lender shall repay to the purchasing Lender the purchase price to the extent of
such recovery together with an amount equal to such Lender's ratable share
(according to the proportion of (i) the amount of such Lender's required
repayment to (ii) the total amount so recovered from the purchasing Lender) of
any interest or other amount paid or payable by the purchasing Lender in respect
of the total amount so recovered. The Borrower agrees that any Lender so
purchasing a participation from another Lender pursuant to this Section 2.12
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off) with respect to such participation as fully as
if such Lender were the direct creditor of the Borrower in the amount of such
participation.
SECTION 2.13. Use of Proceeds. The proceeds of the Advances
shall be available (and the Borrower agrees that it shall use such proceeds)
solely to finance (a) a portion of the purchase price of the Concession, in the
case of the initial Borrowing, (b) interest payable to the Lenders hereunder, in
the case of any Borrowings other than the initial Borrowing and (c) any
transaction cost incurred by the Borrower in connection with this Agreement.
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness of Section
2.01. Section 2.01 of this Agreement shall become effective on and as of the
first date (the "Effective Date") on which the following conditions precedent
have been satisfied:
(a) There shall exist no action, suit, investigation,
litigation or proceeding affecting the Borrower pending or threatened
before any court, governmental agency or arbitrator that (i) could be
reasonably likely to have a Material Adverse Effect or (ii) purports to
affect the legality, validity or enforceability of this Agreement or
any Note or the consummation of the transactions contemplated hereby.
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(b) All governmental and third party consents and approvals
necessary in connection with the transactions contemplated hereby shall
have been obtained (without the imposition of any conditions that are
not acceptable to the Lenders) and shall remain in effect, and no law
or regulation shall be applicable in the reasonable judgment of the
Lenders that restrains, prevents or imposes materially adverse
conditions upon the transactions contemplated hereby.
(c) The Agent shall have received a copy of the Consolidated
balance sheet of the Pledgor and its Subsidiaries as at December 31,
1998, and the related Consolidated statements of income and cash flows
of the Pledgor and its Subsidiaries for the fiscal year then ended,
accompanied by an opinion of Arthur Andersen LLP, independent public
accountants, together with a certificate signed by an officer of the
Pledgor dated the Effective Date certifying that as of December 31,
1998, such documents fairly present in all material respects the
Consolidated financial condition of the Pledgor and its Subsidiaries as
at such date and the Consolidated results of the operations of the
Pledgor and its Subsidiaries for the year ended on December 31, 1998,
all in accordance with generally accepted accounting principles
consistently applied.
(d) On the Effective Date, the following statements shall be
true and the Agent shall have received for the account of each Lender a
certificate duly executed by a duly authorized officer of the Borrower,
dated the Effective Date, stating that:
(i) The representations and warranties contained in
Section 4.01 are correct on and as of the Effective Date, and
(ii) No event has occurred and is continuing that
constitutes a Default.
(e) The Agent shall have received on or before the Effective
Date the following, each dated such day, in form and substance
satisfactory to the Agent and (except for the Notes) in sufficient
copies for each Lender:
(i) The Notes to the order of the Lenders,
respectively.
(ii) The Cash Collateral Agreement duly executed by
the Pledgor.
(iii) Certified copies of the certificate of
incorporation and by-laws or the estatutos, as the case may
be, of each of the Borrower and the Pledgor as in effect on
the Effective Date.
(iv) Certified copies of the resolutions of the Board
of Directors of each of the Loan Parties and certified copies
of the resolutions of the shareholders of the Borrower
approving the Loan Documents to which it is a party, and of
all documents
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evidencing other necessary corporate action and governmental
approvals, if any, with respect to the Loan Documents.
(v) A certificate of the Secretary, an Assistant
Secretary, the President, Vice President or the Board of
Directors, as the case may be, of each of the Loan Parties
certifying the names and true signatures of the officers or
power of attorney, as the case may be, authorized to sign the
Loan Documents and the other documents to be delivered
hereunder.
(vi) A letter from CT Corporation System accepting
appointment as agent to the Borrower for service of process.
(vii) A favorable opinion of Hope, Duggan & Silva,
Argentine counsel for the Borrower, substantially in the form
of Exhibit E hereto and as to such other matters as any Lender
through the Agent may reasonably request.
(viii) A favorable opinion of Morrison & Foerster
LLP, New York counsel for the Loan Parties, substantially in
the form of Exhibit F hereto and as to such other matters as
any Lender through the Agent may reasonably request.
(ix) A favorable opinion of the general counsel for
the Pledgor, substantially in the form of Exhibit G hereto and
as to such other matters as any Lender through the Agent may
reasonably request.
(x) Acknowledgment copies or duly executed
file-stamped copies of UCC-1 statements with respect to the
Cash Collateral, filed in each office in each jurisdiction
that the Agent may deem necessary or appropriate to perfect
and protect a first-priority Lien on the Cash Collateral.
(f) The Borrower shall have paid, or shall pay with the
proceeds of the initial Advance, all accrued fees and expenses of the
Agent and the Lenders (including the accrued fees and expenses of
counsel to the Agent).
SECTION 3.02. Conditions Precedent to Each Borrowing and
Capitalization of Interest. The obligation of each Lender to make an Advance on
the occasion of each Borrowing or a deemed Advance in connection with Section
2.05(c) shall be subject to the conditions precedent that the Effective Date
shall have occurred and on the date of such Borrowing:
(a) The following statements shall be true (and each of the
giving of the applicable Notice of Borrowing and the acceptance by the
Borrower of the proceeds of such Borrowing shall constitute a
representation and warranty by the Borrower that on the date of such
Borrowing such statements are true):
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(i) the representations and warranties contained in
Section 4.01 are correct on and as of the date of such
Borrowing, before and after giving effect to such Borrowing
and to the application of the proceeds therefrom, as though
made on and as of such date, and
(ii) no event has occurred and is continuing, or
would result from such Borrowing or from the application of
the proceeds therefrom, that constitutes a Default.
(b) The U.S. dollar market value of the Cash Collateral shall
equal or exceed the Required Collateral Amount on such date.
(c) The Agent shall have received such other approvals,
opinions or documents as any Lender through the Agent may reasonably
request.
SECTION 3.03. Determinations Under Section 3.01. For purposes
of determining compliance with the conditions specified in Section 3.01, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with each document or other matter required thereunder to be consented
to or approved by or acceptable or satisfactory to the Lenders unless an officer
of the Agent responsible for the transactions contemplated by this Agreement
shall have received notice from such Lender prior to the date that the Borrower,
by notice to the Lenders, designates as the proposed Effective Date, specifying
its objection thereto. The Agent shall promptly notify the Lenders of the
occurrence of the Effective Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower.
The Borrower represents and warrants as follows:
(a) The Borrower is a "sociedad anonima" with a legal capital
that complies with Argentine law, and in the process of being
incorporated, is validly existing and is operating pursuant to Section
V, Chapter 2 of the Argentine Business Company Law (Law N. 19.550).
(b) The execution, delivery and performance by the Borrower of
this Agreement and the Notes, and the consummation of the transactions
contemplated hereby, are within the Borrower's corporate powers and
have been duly authorized by all necessary corporate action and do not
contravene (i) the Borrower's estatutos or (ii) any law or any
contractual restriction binding on or affecting the Borrower. The
execution, delivery and performance
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<PAGE> 25
by the Borrower of this Agreement and the Notes and the consummation of
the transactions contemplated hereby do not violate any law, rule,
regulation, order, writ, judgment, injunction, decree, or determination
of or made in Argentina.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery
and performance by the Borrower of this Agreement or the Notes.
(d) This Agreement has been, and each of the Notes when
delivered hereunder will have been, duly executed and delivered by the
Borrower. This Agreement is, and each of the Notes when delivered
hereunder will be, the legal, valid and binding obligation of the
Borrower enforceable against the Borrower in accordance with their
respective terms, subject to applicable bankruptcy, insolvency or other
similar laws affecting creditors' rights generally.
(e) There is no pending or, to the best of the Borrower's
knowledge, threatened action, suit, investigation, litigation or
proceeding affecting the Borrower before any court, governmental agency
or arbitrator that (i) could be reasonably likely to have a Material
Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement or any Note or the consummation of the
transactions contemplated hereby.
(f) The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the
Federal Reserve System), and no proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock.
(g) The Borrower is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for,
an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended. Neither the making of any Advances,
nor the application of the proceeds or repayment thereof by the
Borrower, nor consummation of the financing contemplated under the Loan
Documents, will violate any provision of such Act or any rule,
regulation or order of the Securities and Exchange Commission
thereunder.
(h) This Agreement, the Notes and the other Loan Documents are
in proper legal form under the law of Argentina for the enforcement
thereof against the Borrower under the law of Argentina, and to ensure
the legality, validity, enforceability or admissibility in evidence of
this Agreement, the Notes and the other Loan Documents in Argentina, it
is not necessary that this Agreement, the Notes or any other Loan
Document or any other document be filed or recorded with any court or
other authority in Argentina.
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SECTION 4.02. Representations and Warranties of the Lenders.
Each Lender party hereto represents and warrants (1) that it qualifies as a
German resident under the treaty between Argentina and the Republic of Germany
for the avoidance of double taxation (as approved by Argentine Law 22.025;
hereinafter the "Treaty"); (2) that such Lender does not have permanent
establishment in Argentina or does not perform in Argentina professional
services from a fixed base situated therein, and the Advances under this Credit
Agreement in respect of which interest shall be paid shall not be effectively
connected with such permanent establishment or fixed base; and (3) that in
accordance with applicable German Law, it qualifies as a bank under applicable
German Law in furtherance of Section 11(2)(a) of the Treaty.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any Advance
shall remain unpaid or any Lender shall have any Commitment hereunder, the
Borrower will:
(a) Compliance with Laws, Etc. Comply in all material
respects, with all applicable laws, rules, regulations and orders,
except for a noncompliance which would not have a Material Adverse
Effect.
(b) Preservation of Corporate Existence, Etc. Preserve and
maintain its corporate existence including maintaining required
capitalization under Argentine law, rights (charter and statutory) and
franchises; provided, however, that the Borrower shall not be required
to preserve any right or franchise if the Board of Directors of the
Borrower shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Borrower and that the
loss thereof is not disadvantageous in any material respect to the
Borrower or the Lenders. Notwithstanding anything else provided herein,
the Borrower shall, not later than the 60th day after the date hereof,
cause the Borrower to be registered as required under Argentine law in
accordance with paragraph four of Section 8.1 of the Bidding Terms of
the National and International Public Bid for the Concession of the
Water and Sewage Services in the Province of Buenos Aires provided that
the Borrower shall notify the Agent 30 days after the date hereof
indicating the status of such registrations, and otherwise from time to
time in the event that in the reasonable opinion of the Borrower such
registration may not be achieved as required hereunder.
(e) Reporting Requirements. So long as any Advance shall
remain unpaid or any Lender shall have any Commitment hereunder, the
Borrower will furnish to the Agent for distribution to the Lenders:
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(i) Default Notice. As soon as possible and in any
event within 5 days after the occurrence of each Default, a
statement of an officer of the Borrower setting forth details
of such Default and the action that the Borrower has taken and
proposes to take with respect thereto.
(ii) Other Financings. The Borrower shall notify the
Agent at least 10 days prior to any receipt of cash proceeds
from any other financing of indebtedness; the proceeds are of
the type which could be used to prepay the Advances pursuant
to Section 2.07(b).
(iii) Other Information. Within fifteen days of a
request by the Agent, such other information respecting the
business, condition (financial or otherwise), operations,
performance, properties or prospects of the Borrower as any
Lender (through the Agent) may from time to time reasonably
request.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any
Advance when the same becomes due and payable; or the Borrower shall
fail to pay any interest on any Advance or make any other payment of
fees or other amounts payable under this Agreement or any Note within
three days after the same becomes due and payable; or
(b) Any representation or warranty made by a Loan Party in any
Loan Document shall prove to have been incorrect in any material
respect when made; or
(c) (i) The Borrower shall fail to perform or observe any
term, covenant or agreement contained in Section 5.01(a), (b) or (e)(i)
of this Agreement or the Pledgor shall fail to perform any of its
obligations under the Cash Collateral Agreement, or (ii) any Loan Party
shall fail to perform or observe any other term, covenant or agreement
contained in any Loan Document on its part to be performed or observed
if such failure shall remain unremedied for 10 days after written
notice thereof shall have been given to the Borrower by the Agent or
any Lender; or
(e) Any Loan Party shall generally not pay its debts as such
debts become due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against any
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Loan Party seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, custodian or other similar official for it or
for any substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it), either
such proceeding shall remain undismissed or unstayed for a period of 60
days, or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or other similar official
for, it or for any substantial part of its property) shall occur; or
any Loan Party shall take any corporate action to authorize any of the
actions set forth above in this subsection (e); or
(f) Any judgment or order for the payment of money in excess
of $10,000,000 shall be rendered against any Loan Party and either (i)
enforcement proceedings shall have been commenced by any creditor upon
such judgment or order or (ii) there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in
effect; provided, however, that any such judgment or order shall not be
an Event of Default under this Section 6.01(e) if and for so long as
(i) the amount of such judgment or order is covered by a valid and
binding policy of insurance between the defendant and the insurer
covering payment thereof and (ii) such insurer, which shall be rated at
least "A" by A.M. Best Company, has been notified of, and has not
disputed the claim made for payment of, the amount of such judgment or
order; or
(g) Any non-monetary judgment or order shall be rendered
against the Borrower that could be reasonably expected to have a
Material Adverse Effect, and there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(h) The Cash Collateral Agreement after delivery thereof
pursuant to Section 3.01 shall for any reason cease to create a valid
and perfected first priority lien on and security interest in the
Collateral; or
(i) Any provision of any Loan Document after delivery thereof
pursuant to Section 3.01 shall for any reason cease to be valid and
binding on or enforceable against any Loan Party party to it, or any
such Loan Party shall so state in writing; or
(j) Commencing on July 30, 1999, the Concession Agreement or
any license, permit, authorization, consent or approval necessary for
the operation of the Concession is not executed, effected or given or
is withdrawn or is otherwise not in full force and effect; or
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then, and in any such event, the Agent (i) shall at the request, or may with the
consent, of the Required Lenders, by notice to the Borrower, declare the
obligation of each Lender to make Advances to be terminated, whereupon the same
shall forthwith terminate, and (ii) shall at the request, or may with the
consent, of the Required Lenders, by notice to the Borrower, declare the Notes,
all interest thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Notes, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Borrower; provided, however, that in the event of an actual or
deemed entry of an order for relief with respect to any Loan Party under
applicable bankruptcy laws, (A) the obligation of each Lender to make Advances
shall automatically be terminated and (B) the Notes, all such interest and all
such amounts shall automatically become and be due and payable, without
presentment, demand, protest or any notice of any kind, all of which are hereby
expressly waived by the Borrower.
ARTICLE VII
THE AGENT
SECTION 7.01. Authorization and Action. Each Lender hereby
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers and discretion under this Agreement as are delegated to
the Agent by the terms hereof, together with such powers and discretion as are
reasonably incidental thereto. As to any matters not expressly provided for by
this Agreement (including, without limitation, enforcement or collection of the
Notes), the Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding upon all Lenders
and all holders of Notes; provided, however, that the Agent shall not be
required to take any action that exposes the Agent to personal liability or that
is contrary to this Agreement or applicable law. The Agent agrees to give to
each Lender prompt notice of each notice given to it by the Borrower pursuant to
the terms of this Agreement.
SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any
of its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them under or in connection with this
Agreement, except for its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent: (i) may treat
the payee of any Note as the holder thereof until the Agent receives and accepts
an Assignment and Acceptance entered into by the Lender that is the payee of
such Note, as assignor, and an Eligible Assignee, as assignee, as provided in
Section 8.07; (ii) may consult with legal counsel (including counsel for the
Borrower), independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken in good faith by
it in accordance with the advice of such counsel, accountants or experts; (iii)
makes no warranty or representation to any Lender and shall not be responsible
to any
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Lender for any statements, warranties or representations (whether written or
oral) made in or in connection with this Agreement; (iv) shall not have any duty
to ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of this Agreement on the part of the Borrower or
to inspect the property (including the books and records) of the Borrower; (v)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of, or the
perfection or priority of any lien or security interest created or purported to
be created under or in connection with, this Agreement or any other instrument
or document furnished pursuant hereto; and (vi) shall incur no liability under
or in respect of this Agreement by acting upon any notice, consent, certificate
or other instrument or writing (which may be by telecopier, telegram or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 7.03. WestLB and Affiliates. With respect to its
Commitment, the Advances made by it and the Note issued to it, WestLB shall have
the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not the Agent; and the term "Lender" or
"Lenders" shall, unless otherwise expressly indicated, include WestLB in its
individual capacity. WestLB and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, accept investment banking
engagements from and generally engage in any kind of business with, the
Borrower, any of its Subsidiaries and any Person who may do business with or own
securities of the Borrower or any such Subsidiary, all as if WestLB were not the
Agent and without any duty to account therefor to the Lenders.
SECTION 7.04. Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon the Agent or any other
Lender and based on the financial statements referred to in Section 3.01 and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 7.05. Indemnification. The Lenders agree to indemnify
the Agent (to the extent not reimbursed by the Borrower), ratably according to
the respective principal amounts of the Notes then held by each of them (or if
no Notes are at the time outstanding or if any Notes are held by Persons that
are not Lenders, ratably according to the respective amounts of their
Commitments), from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever that may be imposed on, incurred by, or
asserted against the Agent in any way relating to or arising out of this
Agreement or any action taken or omitted by the Agent under this Agreement
(collectively, the "Indemnified Costs"), provided that no Lender shall be liable
for any portion of the Indemnified Costs resulting from the Agent's gross
negligence or willful misconduct. Without limitation of the foregoing, each
Lender agrees to reimburse the Agent promptly upon demand for its ratable share
of any out-of-pocket expenses (including counsel fees) incurred by the Agent in
connection with the
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<PAGE> 31
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
to the extent that the Agent is not reimbursed for such expenses by the
Borrower. In the case of any investigation, litigation or proceeding giving rise
to any Indemnified Costs, this Section 7.05 applies whether any such
investigation, litigation or proceeding is brought by the Agent, any Lender or a
third party.
SECTION 7.06. Successor Agent. The Agent may resign at any
time by giving written notice thereof to the Lenders and the Borrower and may be
removed at any time with or without cause by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Agent having a combined capital and surplus of at least
$150,000,000,000. If no successor Agent shall have been so appointed by the
Required Lenders, and shall have accepted such appointment, within 30 days after
the retiring Agent's giving of notice of resignation or the Required Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof and
having a combined capital and surplus of at least $150,000,000,000 and shall be
reasonably acceptable to the Pledgor. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, discretion, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under this Agreement. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this Article VII
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under this Agreement.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Notes, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Borrower and the Required Lenders, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given; provided, however, that no amendment, waiver
or consent shall, unless in writing and signed by all the Lenders, do any of the
following: (a) waive any of the conditions specified in Section 3.01, (b)
increase the Commitments of the Lenders or subject the Lenders to any additional
obligations, (c) reduce the principal of, or interest on, the Notes or any fees
or other amounts payable hereunder, (d) postpone any date fixed for any payment
of principal of, or interest on, the Notes or any fees or other amounts payable
hereunder, (e) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Notes, or the number of Lenders, that shall be
required for the Lenders or any of them to take any action hereunder, (f)
release any material portion of any collateral held to secure the obligations of
the Borrower and
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<PAGE> 32
the Pledgor under any of this Agreement, the Cash Collateral Agreement and the
Notes or (g) amend this Section 8.01; and provided further that no amendment,
waiver or consent shall, unless in writing and signed by the Agent in addition
to the Lenders required above to take such action, affect the rights or duties
of the Agent under this Agreement or any Note.
SECTION 8.02. Notices, Etc. All notices and other
communications provided for hereunder shall be in writing (including telecopier,
telegraphic or telex communication) and mailed, telecopied, telegraphed, telexed
or delivered, if to the Borrower, at its address at Avenida Madero 900, 18th
Floor, Buenos Aires, Argentina, Attention: President, with a copy to Azurix
Corp., 333 Clay Street, Suite 1000, Houston, Texas 77002, Attention: General
Counsel; if to any Initial Lender, at its Lending Office specified opposite its
name on Schedule I hereto; if to any other Lender, at its Lending Office
specified in the Assignment and Acceptance pursuant to which it became a Lender;
and if to the Agent, at its address at 1211 Avenue of the Americas, New York,
New York 10036, Attention: Richard Newman; or, as to the Borrower or the Agent,
at such other address as shall be designated by such party in a written notice
to the other parties and, as to each other party, at such other address as shall
be designated by such party in a written notice to the Borrower and the Agent.
All such notices and communications shall, when mailed, telecopied, telegraphed
or telexed, be effective when deposited in the mails, telecopied, delivered to
the telegraph company or confirmed by telex answerback, respectively, except
that notices and communications to the Agent pursuant to Article II, III or VII
shall not be effective until received by the Agent. Delivery by telecopier of an
executed counterpart of any amendment or waiver of any provision of this
Agreement or the Notes or of any Exhibit hereto to be executed and delivered
hereunder shall be effective as delivery of a manually executed counterpart
thereof.
SECTION 8.03. No Waiver; Remedies. No failure on the part of
any Lender or the Agent to exercise, and no delay in exercising, any right
hereunder or under any Note shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to
pay on demand all costs and expenses of the Agent in connection with the
preparation, execution, delivery, administration, modification and amendment of
this Agreement, the Notes, any other Loan Document and the other documents to be
delivered hereunder, including, without limitation, the reasonable fees and
expenses of counsel for the Agent with respect thereto and with respect to
advising the Agent as to its rights and responsibilities under this Agreement.
The Borrower further agrees to pay on demand all costs and expenses of the Agent
and the Lenders, if any (including, without limitation, reasonable counsel fees
and expenses), in connection with the enforcement (whether through negotiations,
legal proceedings or otherwise) of this Agreement, the Notes and the other
documents to be delivered hereunder, including, without limitation, reasonable
fees and expenses of counsel for the Agent and each Lender in connection with
the enforcement of rights under this Section 8.04(a).
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<PAGE> 33
(b) The Borrower agrees to indemnify and hold harmless the
Agent and each Lender and each of their Affiliates and their officers,
directors, employees, agents and advisors (each, an "Indemnified
Party") from and against any and all claims, damages, losses,
liabilities and expenses (including, without limitation, reasonable
fees and expenses of counsel) that may be incurred by or asserted or
awarded against any Indemnified Party, in each case arising out of or
in connection with or by reason of (including, without limitation, in
connection with any investigation, litigation or proceeding or
preparation of a defense in connection therewith) (i) the Notes, this
Agreement, any of the transactions contemplated herein or the actual or
proposed use of the proceeds of the Advances except to the extent such
claim, damage, loss, liability or expense is found in a final,
non-appealable judgment by a court of competent jurisdiction to have
resulted from such Indemnified Party's gross negligence or willful
misconduct. In the case of an investigation, litigation or other
proceeding to which the indemnity in this Section 8.04(b) applies, such
indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by the Borrower, its directors,
equityholders or creditors or an Indemnified Party or any other Person,
whether or not any Indemnified Party is otherwise a party thereto and
whether or not the transactions contemplated hereby are consummated.
The Borrower also agrees not to assert any claim against the Agent, any
Lender, any of their Affiliates, or any of their respective directors,
officers, employees, attorneys and agents, on any theory of liability,
for special, indirect, consequential or punitive damages arising out of
or otherwise relating to the Notes, this Agreement, any of the
transactions contemplated herein or the actual or proposed use of the
proceeds of the Advances.
(c) If any payment of principal of, or Conversion of, any
Eurodollar Rate Advance is made by the Borrower to or for the account
of a Lender other than on the last day of the Interest Period for such
Advance, as a result of a payment or Conversion pursuant to Section
2.07, 2.08, 2.09, acceleration of the maturity of the Notes pursuant to
Section 6.01 or for any other reason, the Borrower shall, upon demand
by such Lender (with a copy of such demand to the Agent), pay to the
Agent for the account of such Lender any amounts required to compensate
such Lender for any additional losses, costs or expenses that it may
reasonably incur as a result of such payment or Conversion, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by any
Lender to fund or maintain such Advance.
(d) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in Sections 2.09, 2.11 and 8.04 shall survive the
payment in full of principal, interest and all other amounts payable
hereunder and under the Notes.
SECTION 8.05. Right of Set-off. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request or the granting of the consent
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<PAGE> 34
specified by Section 6.01 to authorize the Agent to declare the Notes due and
payable pursuant to the provisions of Section 6.01, each Lender is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by such Lender to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
under this Agreement and the Note held by such Lender, whether or not such
Lender shall have made any demand under this Agreement or such Note and although
such obligations may be unmatured. Each Lender agrees promptly to notify the
Borrower after any such set-off and application, provided that the failure to
give such notice shall not affect the validity of such set-off and application.
The rights of each Lender under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) that such
Lender may have.
SECTION 8.06. Binding Effect. This Agreement shall become
effective (other than Section 2.01, which shall only become effective upon
satisfaction of the conditions precedent set forth in Section 3.01) when it
shall have been executed by the Borrower and the Agent and when the Agent shall
have been notified by each Initial Lender that such Initial Lender has executed
it and thereafter shall be binding upon and inure to the benefit of the
Borrower, the Agent and each Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights hereunder
or any interest herein without the prior written consent of the Lenders.
SECTION 8.07. Assignments and Participations. (a) Each Lender
may, subject to the consent of the Pledgor, assign to one or more Persons all or
a portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitment, the Advances owing to it and the
Note or Notes held by it); provided, however, that (i) each such assignment
shall be of a constant, and not a varying, percentage of all rights and
obligations under this Agreement, (ii) except in the case of an assignment to a
Person that, immediately prior to such assignment, was a Lender or an assignment
of all of a Lender's rights and obligations under this Agreement, the amount of
the Commitment or, if no Commitment is remaining, the Advances, of the assigning
Lender being assigned pursuant to each such assignment (determined as of the
date of the Assignment and Acceptance with respect to such assignment) shall in
no event be less than $10,000,000 or an integral multiple of $5,000,000 in
excess thereof, (iii) each such assignment shall be to an Eligible Assignee, and
(iv) the parties to each such assignment shall execute and deliver to the Agent,
for its acceptance and recording in the Register, an Assignment and Acceptance,
together with any Note subject to such assignment and a processing and
recordation fee of $3,000, payable by the assignor. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, (x) the assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, have the rights and
obligations of a Lender hereunder and (y) the Lender assignor thereunder shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and
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<PAGE> 35
Acceptance, relinquish its rights and be released from its obligations under
this Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of an assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto).
(b) By executing and delivering an Assignment and Acceptance,
the Lender assignor thereunder and the assignee thereunder confirm to
and agree with each other and the other parties hereto as follows: (i)
other than as provided in such Assignment and Acceptance, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement or the
execution, legality, validity, enforceability, genuineness, sufficiency
or value of, or the perfection or priority of any lien or security
interest created or purported to be created under or in connection
with, the Loan Documents or any other instrument or document furnished
pursuant hereto; (ii) such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of any Loan Party or the performance or observance by any
Loan Party of any of its obligations under any Loan Document or any
other instrument or document furnished pursuant hereto; (iii) such
assignee confirms that it has received a copy of the Loan Documents,
together with copies of the financial statements referred to in Section
4.01 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (iv) such assignee will, independently
and without reliance upon the Agent, such assigning Lender or any other
Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee
confirms that it is an Eligible Assignee; (vi) such assignee appoints
and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers and discretion under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers
and discretion as are reasonably incidental thereto; and (vii) such
assignee agrees that it will perform in accordance with their terms all
of the obligations that by the terms of this Agreement are required to
be performed by it as a Lender.
(c) The Agent shall maintain at its address referred to in
Section 8.02 a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and
addresses of the Lenders and the Commitment of, and principal amount of
the Advances owing to, each Lender from time to time (the "Register").
The entries in the Register shall be conclusive and binding for all
purposes, absent manifest error, and the Borrower, the Agent and the
Lenders may treat each Person whose name is recorded in the Register as
a Lender hereunder for all purposes of this Agreement. The Register
shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an assignee representing that it is an
Eligible Assignee, together with any Note
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<PAGE> 36
or Notes subject to such assignment, the Agent shall, if such
Assignment and Acceptance has been completed and is in substantially
the form of Exhibit C hereto, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Borrower. Within
five Business Days after its receipt of such notice, the Borrower shall
execute and deliver to the Agent in exchange for the surrendered Note a
new Note to the order of such Eligible Assignee in an amount equal to
the Commitment assumed by it pursuant to such Assignment and Acceptance
and, if the assigning Lender has retained a Commitment hereunder, a new
Note to the order of the assigning Lender in an amount equal to the
Commitment retained by it hereunder. Such new Note or Notes shall be in
an aggregate principal amount equal to the aggregate principal amount
of such surrendered Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially
the form of Exhibit A hereto.
(e) Each Lender may sell participations to one or more banks
or other entities in consultation with the Pledgor in or to all or a
portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Advances
owing to it and the Note or Notes held by it); provided, however, that
(i) such Lender's obligations under this Agreement (including, without
limitation, its Commitment to the Borrower hereunder) shall remain
unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii)
such Lender shall remain the holder of any such Note for all purposes
of this Agreement, (iv) the Borrower, the Agent and the other Lenders
shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this
Agreement and (v) no participant shall have the right to communicate
directly with the Borrower with respect to any amendment or waiver of
any provision of this Agreement or any Note, or any consent to any
departure by the Borrower therefrom.
(f) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this
Section 8.07, disclose to the assignee or participant or proposed
assignee or participant, any information relating to the Borrower
furnished to such Lender by or on behalf of the Borrower; provided
that, prior to any such disclosure, the assignee or participant or
proposed assignee or participant shall agree to preserve the
confidentiality of any Confidential Information relating to the
Borrower received by it from such Lender.
(g) Notwithstanding any other provision set forth in this
Agreement, any Lender may at any time create a security interest in all
or any portion of its rights under this Agreement (including, without
limitation, the Advances owing to it and the Note held by it) in favor
of any Federal Reserve Bank in accordance with Regulation A of the
Board of Governors of the Federal Reserve System.
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<PAGE> 37
SECTION 8.08. Governing Law. This Agreement and the Notes
shall be governed by, and construed in accordance with, the laws of the State of
New York.
SECTION 8.10. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 8.11. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, the Notes or any other Loan Document, or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such New York State
court or, to the extent permitted by law, in such federal court. Each of the
parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that any party may otherwise have to bring any action or
proceeding relating to this Agreement, the Notes or any other Loan Document in
the courts of any jurisdiction. The Borrower hereby irrevocably appoints CT
Corporation System (the "Process Agent"), with an office on the date hereof at
1633 Broadway, New York, New York 10019, United States, as its agent to receive
on its behalf and its property service of copies of the summons and complaint
and any other process which may be served in any such action or proceeding in
any such New York State or federal court. Such service may be made by mailing or
delivering a copy of such process to the Borrower, in care of the Process Agent
at the Process Agent's above address, and the Borrower hereby irrevocably
authorizes and directs the Process Agent to accept such service on its behalf.
As an alternative method of service, the Borrower also irrevocably consents to
the service of any and all process in any such action or proceeding by the
mailing of copies of such process to the Borrower at its address specified in
Section 8.02. The Borrower agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. In the case of any
legal action brought in Argentina, the Borrower hereby consents to the service
of any and all process in any such action or proceeding at its address specified
in Section 8.02. The Borrower irrevocably consents to the service of any and all
process in any such action or proceeding by sending copies of such process by
mail (by method requiring evidence of receipt) with a second copy to be sent to
the Borrower by courier at its address specified in Section 8.02.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter
37
<PAGE> 38
have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement, the Notes and any other Loan
Document in any New York State or federal court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such court.
(c) To the extent that the Borrower has or hereafter may
acquire any immunity from jurisdiction of any court or from any legal
process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise) with
respect to itself or its property, the Borrower hereby irrevocably
waives such immunity in respect of its obligations under this
Agreement, the Notes and any other Loan Document and, without limiting
the generality of the foregoing, agrees that the waivers set forth in
this subsection (c) shall have the fullest scope permitted under the
Foreign Sovereign Immunities Act of 1976 of the United States and are
intended to be irrevocable for purposes of such Act.
38
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
AZURIX BUENOS AIRES S.A.,
as Borrower
By /s/ Richard G. Jigarjian
Title: Authorized Representative
WESTDEUTSCHE LANDESBANK
GIROZENTRALE,
as Agent
By /s/ Richard R. Newman
Title: Director
By /s/ Duncan M. Robertson
Title: Vice President
<PAGE> 40
Initial Lenders
Commitment
- ----------
$394,000,000 WESTDEUTSCHE LANDESBANK
GIROZENTRALE
By /s/ Richard R. Newman
Title: Director
By /s/ Duncan M. Robertson
Title: Vice President
$394,000,000 Total of the Commitments
40
<PAGE> 41
SCHEDULE I
LENDING OFFICES
Name of Initial Lender Lending Office
---------------------- --------------
Westdeutsche Landesbank Girozentrale Herzogstr. 15, 40217
Dusseldorf, Germany
<PAGE> 42
EXHIBIT A - FORM OF
PROMISSORY NOTE
U.S.$394,000,000 Dated: June 25, 1999
FOR VALUE RECEIVED, the undersigned, Azurix Buenos Aires S.A.,
an Argentine sociedad anonima (the "Borrower"), HEREBY PROMISES TO PAY to the
order of Westdeutsche Landesbank Girozentrale (the "Lender") for the account of
its Lending Office on the Maturity Date (each as defined in the Credit Agreement
referred to below) the principal sum of U.S.$394,000,000 (plus any amounts of
interest capitalized pursuant to Section 2.05(c) of the Credit Agreement dated
as of June 24, 1999 among the Borrower, the Initial Lender and other Lenders
from time to time party thereto, and the Agent for the Initial Lenders and such
other Lenders, (as amended or modified from time to time, the "Credit
Agreement"; the terms defined therein being used herein as therein defined)) or,
if less, the aggregate principal amount of the Advances (plus any amounts of
interest capitalized pursuant to Section 2.05(c)) made by the Lender to the
Borrower pursuant to the Credit Agreement outstanding on the Maturity Date.
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such principal amount
is paid in full, at such interest rates, and payable at such times, as are
specified in the Credit Agreement.
Both principal and interest are payable in lawful money of the
United States of America to Westdeutsche Landesbank Girozentrale, as Agent, at
The Chase Manhattan Bank, ABA 021- 000-021 for the account of the Lender,
Account No. 001-1-352275, Reference: Azurix Buenos Aires, in same day funds. The
Advance owing to the Lender by the Borrower pursuant to the Credit Agreement,
and all payments made on account of principal thereof, shall be recorded by the
Lender and, prior to any transfer hereof, endorsed on the grid attached hereto
which is part of this Promissory Note.
This Promissory Note is one of the Notes referred to in, and
is entitled to the benefits of, the Credit Agreement. The Credit Agreement,
among other things, (i) provides for the making of the Advance by the Lenders to
the Borrower from time to time in an aggregate amount not to exceed at any time
outstanding the U.S. dollar amount first above mentioned plus any amounts of
interest capitalized pursuant to Section 2.05(c) of the Credit Agreement, the
indebtedness of the Borrower resulting from such Advance being evidenced by this
Promissory Note, and (ii) contains provisions for acceleration of the maturity
hereof upon the happening of certain stated events and also for prepayments on
account of principal hereof prior to the maturity hereof upon the terms and
conditions therein specified. The obligations of the Borrower under this
Promissory Note and the Credit Agreement are secured by the Cash Collateral as
provided in the Loan Documents.
Azurix Buenos Aires S.A.
By
----------------------------
Title:
<PAGE> 43
ADVANCES AND PAYMENTS OF PRINCIPAL
<TABLE>
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AMOUNT OF
AMOUNT OF PRINCIPAL PAID UNPAID PRINCIPAL NOTATION
DATE ADVANCE OR PREPAID BALANCE MADE BY
<S> <C> <C> <C> <C> <C>
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</TABLE>
<PAGE> 44
EXHIBIT B - FORM OF
NOTICE OF BORROWING
Westdeutsche Landesbank Girozentrale, as Agent
for the Lenders parties
to the Credit Agreement
referred to below
[Date]
Attention: ____________________
Ladies and Gentlemen:
The undersigned, Azurix Buenos Aires S.A., refers to the
Credit Agreement, dated as of June 24, 1999 (as amended or modified from time to
time, the "Credit Agreement", the terms defined therein being used herein as
therein defined), among the undersigned, certain Lenders parties thereto and
Westdeutsche Landesbank Girozentrale, as Agent for said Lenders and hereby gives
you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that
the undersigned hereby requests a Borrowing under the Credit Agreement, and in
that connection sets forth below the information relating to such Borrowing (the
"Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is June __,
1999.
(ii) The aggregate amount of the Proposed Borrowing is
$394,000,000.
The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the date of the Proposed
Borrowing:
(A) the representations and warranties contained in Section
4.01 of the Credit Agreement are correct, before and after giving
effect to the Proposed Borrowing and to the application of the proceeds
therefrom, as though made on and as of such date; and
<PAGE> 45
2
(B) no event has occurred and is continuing, or would result
from such Proposed Borrowing or from the application of the proceeds
therefrom, that constitutes a Default.
Very truly yours,
Azurix Buenos Aires S.A.
By
--------------------------
Title:
<PAGE> 46
EXHIBIT C - FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of June 24,
1999 (as amended or modified from time to time, the "Credit Agreement") among
Azurix Buenos Aires S.A., an Argentine corporation (the "Borrower"), the Lenders
(as defined in the Credit Agreement). Westdeutsche Landesbank Girozentrale, as
agent for the Lenders (the "Agent"). Terms defined in the Credit Agreement are
used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule I
hereto agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and
the Assignee hereby purchases and assumes from the Assignor, an
interest in and to the Assignor's rights and obligations under the
Credit Agreement as of the date hereof equal to the percentage interest
specified on Schedule 1 hereto of all outstanding rights and
obligations under the Credit Agreement. After giving effect to such
sale and assignment, the Assignee's Commitment and the amount of the
Advances owing to the Assignee will be as set forth on Schedule 1
hereto.
2. The Assignor (i) represents and warrants that it is the
legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any adverse
claim; (ii) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement or
the execution, legality, validity, enforceability, genuineness,
sufficiency or value of, or the perfection or priority of any lien or
security interest created or purported to be created under or in
connection with, the Credit Agreement or any other instrument or
document furnished pursuant thereto; (iii) makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of the Borrower or the performance or observance by the
Borrower of any of its obligations under the Credit Agreement or any
other instrument or document furnished pursuant thereto; and (iv)
attaches the Note held by the Assignor and requests that the Agent
exchange such Note for a new Note payable to the order of the Assignee
in an amount equal to the Commitment assumed by the Assignee pursuant
hereto or new Notes payable to the order of the Assignee in an amount
equal to the Commitment assumed by the Assignee pursuant hereto and the
Assignor in an amount equal to the Commitment retained by the Assignor
under the Credit Agreement, respectively, as specified on Schedule 1
hereto.
3. The Assignee (i) confirms that it has received a copy of
the Credit Agreement, together with copies of the financial statements
referred to in Section 4.01 thereof and such other documents and
information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance;
(ii) agrees
<PAGE> 47
2
that it will, independently and without reliance upon the Agent, the
Assignor or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under the
Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv)
appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers and discretion under the Credit
Agreement as are delegated to the Agent by the terms thereof, together
with such powers and discretion as are reasonably incidental thereto;
(v) agrees that it will perform in accordance with their terms all of
the obligations that by the terms of the Credit Agreement are required
to be performed by it as a Lender; and (vi) attaches any U.S. Internal
Revenue Service forms required under Section 2.13 of the Credit
Agreement.
4. Following the execution of this Assignment and Acceptance,
it will be delivered to the Agent for acceptance and recording by the
Agent. The effective date for this Assignment and Acceptance (the
"Effective Date") shall be the date of acceptance hereof by the Agent,
unless otherwise specified on Schedule 1 hereto.
5. Upon such acceptance and recording by the Agent, as of the
Effective Date, (i) the Assignee shall be a party to the Credit
Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and
(ii) the Assignor shall, to the extent provided in this Assignment and
Acceptance, relinquish its rights and be released from its obligations
under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and
after the Effective Date, the Agent shall make all payments under the
Credit Agreement and the Notes in respect of the interest assigned
hereby (including, without limitation, all payments of principal,
interest and facility fees with respect thereto) to the Assignee. The
Assignor and Assignee shall make all appropriate adjustments in
payments under the Credit Agreement and the Notes for periods prior to
the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the laws of the State of New York.
8. This Assignment and Acceptance may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of Schedule 1 to
this Assignment and Acceptance by telecopier shall be effective as
delivery of a manually executed counterpart of this Assignment and
Acceptance.
<PAGE> 48
3
IN WITNESS WHEREOF, the Assignor and the Assignee have caused
Schedule 1 to this Assignment and Acceptance to be executed by their officers
thereunto duly authorized as of the date specified thereon.
<PAGE> 49
Schedule 1
to
Assignment and Acceptance
Percentage interest assigned: ________%
Assignee's Commitment: $_______________
Aggregate outstanding principal amount of Advances assigned: $_______________
Principal amount of Note payable to Assignee: $_______________
Principal amount of Note payable to Assignor: $_______________
Effective Date: _______________, 199_
[NAME OF ASSIGNOR], as Assignor
By
----------------------------------
Title:
Dated: _______________, 199_
[NAME OF ASSIGNEE], as Assignee
By
----------------------------------
Title:
Lending Office:
[Address]
<PAGE> 50
Accepted and Approved this
__________ day of _______________, 199_
Westdeutsche Landesbank Girozentrale, as Agent
By
-----------------------------------
Title:
[Approved this __________ day of _______________, 199_
Azurix Corp.
By
-----------------------------------
Title:
<PAGE> 1
EXECUTION COPY
CASH COLLATERAL AGREEMENT
Dated as of June 25, 1999
Among
AZURIX CORP.
as Pledgor
and
THE CHASE MANHATTAN BANK
as Collateral Agent and Collateral Securities Intermediary
and
THE OTHER PARTIES NAMED HEREIN
<PAGE> 2
<TABLE>
<CAPTION>
T A B L E O F C O N T E N T S
SECTION PAGE
<S> <C> <C>
Section 1. Grant of Security.....................................................................................2
Section 2. Security for Obligations..............................................................................3
Section 3. Delivery of Cash Collateral...........................................................................3
Section 4. Maintaining the Cash Collateral Account...............................................................3
Section 5. The Collateral Securities Intermediary; Investments...................................................4
Section 6. Release of Amounts; Increase in Amounts...............................................................6
Section 7. Representations and Warranties........................................................................7
Section 8. Affirmative Covenants.................................................................................9
Section 9. Negative Covenants...................................................................................10
Section 10. Further Assurances...................................................................................10
Section 11. Place of Perfection; Records.........................................................................11
Section 12. Transfers and Other Liens............................................................................11
Section 13. Collateral Agent Appointed Attorney-in-Fact..........................................................11
Section 14. The Collateral Agent May Perform.....................................................................11
Section 15. Authorization and Action.............................................................................11
Section 16. Remedies.............................................................................................15
Section 17. Security Interest Absolute...........................................................................16
Section 18. Amendments; Waivers; Etc.............................................................................17
Section 19. Addresses for Notices................................................................................17
Section 20. Continuing Security Interest; Assignments Under the Credit Agreement.................................17
Section 21. Termination..........................................................................................18
Section 22. Governing Law; Terms.................................................................................18
Section 23. Jurisdiction; Venue..................................................................................18
Section 24. Subrogation..........................................................................................18
Section 25. Execution in Counterparts............................................................................19
Section 26. Severability.........................................................................................19
</TABLE>
Schedule
Schedule I - Notices
<PAGE> 3
CASH COLLATERAL AGREEMENT
CASH COLLATERAL AGREEMENT dated as of June 25, 1999, among
AZURIX CORP., a Delaware corporation with an office at 333 Clay Street, Suite
1000, Houston, Texas 77002 (the "Pledgor"), THE CHASE MANHATTAN BANK, as
collateral agent (the "Collateral Agent"), for the benefit of the Secured
Parties referred to below, and as securities intermediary (the "Collateral
Securities Intermediary") hereunder, WESTDEUTSCHE LANDESBANK GIROZENTRALE, as
agent (the "Agent" and, together with the Collateral Agent, the "Agents") for
the Lenders under the Credit Agreement referred to below, and WESTDEUTSCHE
LANDESBANK GIROZENTRALE, as the Initial Lender under the Credit Agreement.
PRELIMINARY STATEMENTS:
(1) Azurix Buenos Aires S.A., a company organized under the
laws of Argentina (the "Borrower"), has entered into the Credit Agreement dated
as of June 24, 1999 (as amended, supplemented or otherwise modified from time
to time, being the "Credit Agreement"; the terms defined therein and not
otherwise defined herein being used herein as therein defined), with the Agent
for the lenders (the "Lenders" and, together with the Agent, the "Secured
Parties") party thereto.
(2) Pursuant to Section 15, the Lenders have appointed the
Collateral Agent for purposes of maintaining the Cash Collateral Account and
performing certain actions with respect thereto (including, without limitation,
investing available amounts from time to time on deposit therein and
transferring or otherwise disbursing such amounts) subject to the terms of this
Agreement.
(3) The Pledgor has appointed Smith, Graham & Co. Asset
Managers, L.P. (the "Designee") in its capacity as an investment adviser under
an investment manager services agreement, solely for the purpose of making
investment decisions under Section 5 hereof.
(4) The Collateral Agent has opened a non-interest bearing
collateral securities account (the "Cash Collateral Account") in its name with
The Chase Manhattan Bank, Corporate Trust Group, 450 West 33rd Street, New
York, New York 10001, Attention: Pledged Asset Control Services, 10th Floor,
Account No. 323-341012, in the name of the Collateral Agent and under the sole
control and dominion of the Collateral Agent and subject to the terms of this
Agreement.
(5) Unless otherwise defined herein or in the Credit
Agreement, terms used in Article 8 or 9 of the Uniform Commercial Code in
effect in the State of New York (the "UCC")
<PAGE> 4
2
are used herein as therein defined. In addition, as used herein the following
terms have the following meanings: (i) "Book-Entry Securities" means securities
maintained in the form of entries (including, without limitation, the security
entitlements in such securities) in the commercial book-entry system of the
Federal Reserve Bank of New York; (ii) "entitlement holder" means an
"entitlement holder" as defined (A) in Section 8-102(a)(7) of the UCC and (B)
with respect to Book-Entry Securities governed by the Federal Book-Entry
Regulations, in 31 C.F.R. ss. 357.2; (iii) "Federal Book-Entry Regulations"
means (A) the federal regulations contained in Subpart B ("Treasury/Reserve
Automated Debt Entry System (TRADES)") governing Book-Entry Securities
consisting of U.S. Treasury bonds, notes and bills and Subpart D ("Additional
Provisions") of 31 C.F.R. Part 357, 31 C.F.R. ss. 357.10 through ss. 357.14 and
ss. 357.41 through ss. 357.44, including related defined terms in 31 C.F.R. ss.
357.2); and (B) to the extent substantially identical to the Federal Book-Entry
Regulations referred to in clause (A) above, the federal regulations governing
other Book-Entry Securities; (iv) "securities intermediary" has the meaning
specified (A) in Section 8-102(a)(14) of the UCC and (B) with respect to
Book-Entry Securities governed by the Federal Book-Entry Regulations, in 31
C.F.R. ss. 357.2; (viii) "security entitlement" has the meaning specified in
(A) Section 8-102(a)(17) of the UCC and (B) with respect to Book-Entry
Securities governed by the Federal Book-Entry Regulations, 31 C.F.R. ss. 357.2
(6) It is a condition precedent to the making of Advances by
the Lenders under the Credit Agreement that the Pledgor shall have granted the
assignment and security interest and made the pledge and assignment
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order
to induce the Lenders to make Advances under the Credit Agreement, the Pledgor
hereby agrees with the Collateral Agent for its benefit and the ratable benefit
of the other Secured Parties as follows:
SECTION 1. Grant of Security. The Pledgor hereby assigns and
pledges to the Collateral Agent for its benefit and the ratable benefit of the
other Secured Parties, and hereby grants to the Collateral Agent for its
benefit and the ratable benefit of the other Secured Parties, a first lien on
and prior perfected security interest in and to the following (collectively,
the "Cash Collateral"):
(a) all of the following:
(i) the Cash Collateral Account, all cash, financial
assets, investment property and other property from time to
time held therein and all certificates and instruments, if
any, from time to time representing or evidencing the Cash
Collateral Account
(ii) all Permitted Investments (as defined in the
Credit Agreement) from time to time held in the Cash
Collateral Account and all certificates and
<PAGE> 5
3
instruments, if any, from time to time representing or
evidencing the Permitted Investments;
(iii) all notes, certificates of deposit, deposit
accounts, checks and other instruments from time to time
hereafter delivered to or otherwise possessed by the
Collateral Agent for or on behalf of the Pledgor in
substitution for or in addition to any or all of the then
existing Cash Collateral;
(iv) all interest, dividends, cash, instruments and
other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or
all of the then existing Cash Collateral; and
(b) all proceeds (including cash proceeds) of any and all of
the foregoing Cash Collateral (including, without limitation, proceeds
that constitute property of the types described in clause (a) of this
Section 1).
SECTION 2. Security for Obligations. This Agreement secures
the payment of all obligations of the Borrower now or hereafter existing under
the Loan Documents, whether for principal, interest, fees, expenses, taxes or
otherwise (all such obligations being the "Secured Obligations"). Without
limiting the generality of the foregoing, this Agreement secures the payment of
all amounts that constitute part of the Secured Obligations and would be owed
by the Borrower to the Secured Parties under the Loan Documents but for the
fact that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving any Loan Party.
SECTION 3. Delivery of Cash Collateral. All certificates or
instruments representing or evidencing Cash Collateral shall be delivered to
and held by the Collateral Agent on its behalf and on behalf of the other
Secured Parties and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or assignment in
blank, all in form and substance satisfactory to the Collateral Agent. The
Collateral Agent shall have the right, at any time in its discretion and
without notice to the Pledgor, to transfer to or to register in the name of the
Collateral Agent or any of its nominees any or all of the Cash Collateral. In
addition, the Collateral Agent shall have the right at any time to exchange
certificates or instruments representing or evidencing Cash Collateral for
certificates or instruments of smaller or larger denominations. All Cash
Collateral credited to or held in the Cash Collateral Account shall be
registered in the name of the Collateral Agent and indorsed to the Collateral
Securities Intermediary or in blank.
SECTION 4. Maintaining the Cash Collateral Account. So long as
any Advance shall remain unpaid or any Lender shall have any Commitment under
the Credit Agreement:
<PAGE> 6
4
(a) The Collateral Agent will maintain the Cash Collateral
Account with the Collateral Securities Intermediary at its offices
referred to in the fourth preliminary statement to this Agreement.
(b) It shall be a term and condition of the Cash Collateral
Account, notwithstanding any term or condition to the contrary in any
other agreement relating to the Cash Collateral Account and except as
otherwise provided by the provisions of Sections 6, 16 and 21, that no
amount (including interest on Permitted Investments) shall be paid or
released to or for the account of, or withdrawn by or for the account
of, the Pledgor or any other Person from the Cash Collateral Account
without the written consent of the Agent upon prior written
instruction of the Lenders.
The Cash Collateral Account shall be subject to such applicable laws, and such
applicable regulations of the Board of Governors of the Federal Reserve System
and of any other appropriate banking or governmental authority, as may now or
hereafter be in effect.
SECTION 5. The Collateral Securities Intermediary; Investments.
(a) The Collateral Securities Intermediary represents and warrants to, and
agrees with, the Secured Parties that:
(i) It is a securities intermediary and is acting as such
with respect to the Cash Collateral Account and all assets, property
and items (including all security entitlements maintained or carried
in the Cash Collateral Account) from time to time transferred,
credited or deposited to or maintained or carried in the Cash
Collateral Account.
(ii) All assets, property and items held by the Collateral
Securities Intermediary for the account of the Collateral Agent are,
and will continue to be, credited to the Cash Collateral Account in
accordance with the provisions hereof, and all Cash Collateral
transferred or delivered to the Cash Collateral Account shall be
registered in the name of or payable to the order of the Collateral
Agent, and indorsed to the Collateral Securities Intermediary or in
blank.
(iii) The Cash Collateral Account is, and shall continue to
be, a securities account.
(iv) To the fullest extent permitted by applicable law, all
assets, property and other items from time to time carried in the Cash
Collateral Account (whether consisting of cash, investment property,
securities, security entitlements, instruments or other property,
assets or items) will be treated as "financial assets" within the
meaning of Section 8-102(a)(9) of the UCC.
(v) The Collateral Agent is the sole entitlement holder with
respect to the Cash Collateral Account and all financial assets from
time to time maintained therein,
<PAGE> 7
5
and the Collateral Securities Intermediary has identified, and will
continue to identify, in its records the Collateral Agent as the sole
person having a securities entitlement against the Collateral
Securities Intermediary with respect thereto.
(vi) In furtherance of clause (v) above, the Collateral
Securities Intermediary (A) shall comply with any and all entitlement
orders received by it from the Collateral Agent in respect of the Cash
Collateral Account or any assets, property or items from time to time
maintained therein without the consent of the Pledgor or any other
Person, and (B) except to the limited extent permitted under clause
(b) of this Section 5 with respect to the giving of instructions for
the investment in Permitted Investments of amounts on deposit in the
Cash Collateral Account to the extent permitted thereunder, it shall
not comply with the entitlement orders of any other Person.
(vii) The Collateral Securities Intermediary has not and will
not enter into any agreement permitting any third party to deliver or
originate entitlement orders with respect to the Collateral Account.
(viii) The "securities intermediary's jurisdiction" (within
the meaning of Section 8-110(e) of the UCC) of the Collateral
Securities Intermediary with respect to the Cash Collateral Account
is, and will continue to be for so long as this Agreement shall remain
in effect, the State of New York.
(b) If requested by the Pledgor or the Designee, the
Collateral Securities Intermediary will, subject to the provisions of
Section 6, 16 and 21 and so long as no Default or Event of Default has
occurred and is continuing, (i) invest amounts on deposit in the Cash
Collateral Account in such Permitted Investments in the name of the
Collateral Agent as the Pledgor or Designee may select and the Agent
may approve upon notice to the Collateral Agent and the Pledgor and
(ii) invest interest paid on the Permitted Investments referred to in
clause (i) above, and reinvest other proceeds of any such Permitted
Investments that may mature or be sold, in each case in such Permitted
Investments in the name of the Collateral Agent as the Pledgor or
Designee may select and the Agent may approve upon notice to the
Collateral Agent and the Pledgor. Interest and proceeds that are not
invested or reinvested in Permitted Investments as provided above
shall be deposited and held in the Cash Collateral Account. Cash not
invested in Permitted Investments shall not earn interest.
(c) Neither the Collateral Agent nor the Collateral
Securities Intermediary shall have any liability to the Pledgor, any
of the Secured Parties or any other Person for, or as a result of, any
losses suffered from any sale or liquidation of any Permitted
Investment prior to its stated maturity unless such losses result from
the Collateral Agent's or the Collateral Securities Intermediary's
gross negligence or wilful misconduct. The Collateral Securities
Intermediary shall have no obligation to invest or reinvest any
amounts held
<PAGE> 8
6
hereunder in the absence of written investment direction,
and in no event shall the Collateral Securities Intermediary be liable
for the selection of Permitted Investments or for investment losses
incurred thereon.
SECTION 6. Release of Amounts; Increase in Amounts. (a) Upon
instruction from the Agent and so long as no Default or Event of Default has
occurred or is continuing, one Business Day following the date on which
interest is due and payable under Section 2.05 of the Credit Agreement, the
Collateral Agent shall pay and release to an account of the Pledgor notified to
the Collateral Agent in writing by the Pledgor, the amount by which the
aggregate amount of cash and Permitted Investments then held or deposited in
the Cash Collateral Account exceeds the Required Collateral Amount calculated
two days prior to the applicable period. Such excess amount being determined by
the Agent, which determination shall be conclusive absent manifest error.
(b) The Collateral Agent will release, and the Pledgor hereby
authorizes the Collateral Agent to release, to the Agent amounts on
deposit in the Cash Collateral Account pursuant to Section 2.05 of the
Credit Agreement in order to repay the amounts outstanding under the
Credit Agreement on the Maturity Date.
(c) Upon the occurrence and the continuance of any Event of
Default, the Collateral Agent shall (upon instruction of the Required
Lenders) release, and the Pledgor hereby authorizes the Collateral
Agent to release, all amounts on deposit in the Cash Collateral
Account on such release date to be applied in accordance with Section
16(b) in order to repay the amounts outstanding under the Credit
Agreement on the date thereof.
(d) The Pledgor shall cause, through cash deposits to the
Cash Collateral Account:
(i) on the first day of each Interest Period, (x)
the U.S. dollar market value of the Cash Collateral to be
equal to or greater than (y) the Required Collateral Amount,
in each case, for such Interest Period and as determined in
accordance with the notices delivered below; and
(ii) on each Monthly Date, (x) the U.S. dollar
market value of the Cash Collateral to be equal to or greater
than (y) the Accrued Required Collateral Amount, in each
case, for such Monthly Date and as determined in accordance
with the notices delivered below; and
(iii) from time to time requested by the Agent, (x)
the U.S. Dollar market value of the Cash Collateral to be
equal to or greater than (y) the Accrued Required Collateral
Amount.
<PAGE> 9
7
(e) In connection with clause (d)(i) above with respect to
any Interest Period:
(i) In connection with clause (d)(i) above with
respect to any Interest Period, two Business Day's prior to
the last day of such Interest Period, the Collateral Agent
shall notify the Pledgor and the Agent in writing as to the
amount under (d)(i)(x) above and the Agent shall notify the
Collateral Agent and the Pledgor in writing as to the amount
under (d)(i)(y) above. Such amounts shall (i) be calculated
in good faith and with reasonable detail, (ii) in the case of
(d)(i)(x) be calculated based upon market value; and (iii)
shall be determinative absent manifest error.
(ii) In connection with clause (d)(ii) above with
respect to any Interest Period, two Business Day's prior to
the last day of each Monthly Period, the Collateral Agent
shall notify the Pledgor and the Agent in writing as to the
amount under (d)(ii)(x) above and the Agent shall notify the
Collateral Agent and the Pledgor in writing as to the amount
under (d)(ii)(y) above. Such amounts shall (i) be calculated
in good faith and with reasonable detail, (ii) in the case of
(d)(ii)(x) be calculated based upon market value; and (iii)
shall be determinative absent manifest error.
In the event that there are Base Rate Advances, the parties hereby agree that
references in this Section to Interest Periods shall include a reference to
Base Rate Periods, if any. For purposes of calculating projected interest for
any Base Rate Period, the rate applicable to the first day of such period will
be used for the calculation of projected interest for the entire Base Rate
Period. Notwithstanding anything else provided herein, the Agent shall notify
the Collateral Agent not later than four days prior to the date of the giving
of any notice to be provided by the Collateral Agent under (e)(i) and (e)(ii)
as to the relevant date of such notice.
SECTION 7. Representations and Warranties. The Pledgor
represents and warrants as follows:
(a) The Pledgor is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
(b) The execution, delivery and performance by the Pledgor of
this Agreement and the consummation of the transactions contemplated
hereby are within the Pledgor's corporate powers and have been duly
authorized by all necessary corporate action and do not contravene (i)
the Pledgor's charter or by-laws or (ii) any law or any contractual
restriction binding on or affecting the Pledgor.
<PAGE> 10
8
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body or any other third party is required for the due execution,
delivery and performance by the Pledgor of this Agreement.
(d) This Agreement has been duly executed and delivered by
the Pledgor. This Agreement is the legal, valid and binding obligation
of the Pledgor enforceable against the Pledgor in accordance with its
terms, subject to applicable bankruptcy, insolvency or other similar
laws affecting creditor's rights generally.
(e) There is no pending or threatened action, suit,
investigation, litigation or proceeding affecting the Pledgor or any
of its Subsidiaries before any court, governmental agency or
arbitrator that (i) could be reasonably likely to have a Material
Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement or the consummation of the
transactions contemplated hereby.
(f) The Consolidated balance sheet of the Pledgor and its
Subsidiaries as at December 31, 1998, and the related Consolidated
statements of income and cash flows of the Pledgor and its
Subsidiaries for the fiscal year then ended, fairly present in all
material respects the Consolidated financial condition of the Pledgor
and its Subsidiaries as at such date and the Consolidated results of
the operations of the Pledgor and its Subsidiaries for the year ended
on such date, all in accordance with generally accepted accounting
principles consistently applied. Since December 31, 1998, there has
been no Material Adverse Change.
(g) The Pledgor has, independently and without reliance upon
any Secured Party, and based on such documents and information as it
has deemed appropriate, made its own credit analysis and decision to
enter into this Agreement, and the Pledgor has established adequate
means of obtaining from any other Loan Party on a continuing basis
information pertaining to, and is now and on a continuing basis will
be familiar with, the financial condition, operations, properties and
prospects of such other Loan Party.
(h) The chief place of business and chief executive office of
the Pledgor and the office where the Pledgor keeps its records
concerning the Cash Collateral are located at the address first
specified above for the Pledgor.
(i) The Pledgor is the legal and beneficial owner of the Cash
Collateral free and clear of any Lien, except for the security
interest created by this Agreement. No effective financing statement
or other instrument similar in effect covering all or any part of the
Cash Collateral is on file in any recording office, except such as may
have been filed in favor of the Collateral Agent relating to this
Agreement. The Pledgor has no trade names.
<PAGE> 11
9
(j) This Agreement and the pledge and assignment of the
certificates representing the Cash Collateral pursuant hereto create a
valid and perfected first priority security interest in the Cash
Collateral, securing the payment of the Secured Obligations, and all
filings and other actions necessary or desirable to perfect and
protect such security interest have been duly taken.
(k) No consent of any other Person and no authorization,
approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body or other third party is
required either (i) for the grant by the Pledgor of the assignment and
security interest granted hereby, for the pledge by the Pledgor of the
Cash Collateral pursuant hereto or for the execution, delivery or
performance of this Agreement by the Pledgor, (ii) for the perfection
or maintenance of the pledge, assignment and security interest created
hereby (including the first priority nature of such pledge, assignment
or security interest) or (iii) for the exercise by the Collateral
Agent of its voting or other rights provided for in this Agreement or
the remedies in respect of the Cash Collateral pursuant to this
Agreement.
(l) The Pledgor is not an "investment company", as defined in
the Investment Company Act of 1940, as amended. Neither the making of
any Advances, nor any the application of the proceeds or repayment
thereof by the proceeds of the Cash Collateral Account, nor any
funding of the Cash Collateral Account, nor consummation of the
financing contemplated under the Loan Documents, will violate any
provision of such Act or any rule, regulation or order of the
Securities and Exchange Commission thereunder.
SECTION 8. Affirmative Covenants. The Pledgor covenants and
agrees that, so long as any part of the Secured Obligations shall remain unpaid
or any Lender shall have any Commitment, the Pledgor will, unless the Agent
shall otherwise consent in writing:
(a) Compliance with Laws, Etc. Comply in all material
respects, with all applicable laws, rules, regulations and orders,
except for a noncompliance which would not have a Material Adverse
Effect.
(b) Preservation of Corporate Existence, Etc. Preserve and
maintain its corporate existence, rights (charter and statutory) and
franchises; provided, however, that the Pledgor shall not be required
to preserve any right or franchise if the Board of Directors of the
Pledgor shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Pledgor, and that the
loss thereof is not disadvantageous in any material respect to the
Pledgor or the Lenders.
(c) Visitation Rights. At any reasonable time and from time
to time, permit any of the Secured Parties or any agents or
representatives thereof, to examine and make copies of and abstracts
from the records and books of account of, and visit the properties
<PAGE> 12
10
of, the Pledgor, and to discuss the affairs, finances and accounts of
the Pledgor with any of their officers or directors and with their
independent certified public accountants; provided, however, that such
records, books of account and properties so examined, copied,
abstracted or visited shall in the judgment of the Required Lenders be
relevant to any of the Loan Documents (including the rights and
remedies thereunder), and the transactions contemplated thereby.
(d) Required Collateral Amount. Maintain the Required
Collateral Amount in the Cash Collateral Account.
SECTION 9. Negative Covenants. The Pledgor covenants and
agrees that, so long as any part of the Secured Obligations shall remain unpaid
or any Lender shall have any Commitment, the Pledgor will not, without the
prior written consent of the Agent, create or suffer to exist any Lien on or
with respect to the Collateral, except for those created pursuant to the Loan
Documents.
SECTION 10. Further Assurances. (a) The Pledgor agrees that
from time to time, at the expense of the Pledgor, it will promptly execute and
deliver all further instruments and documents, and take all further action,
that may be necessary or desirable, or that any Agent may request, in order to
perfect and protect any pledge, assignment or security interest granted or
purported to be granted hereby or to enable such Agent or any Lender to
exercise and enforce its rights and remedies hereunder with respect to any Cash
Collateral. Without limiting the generality of the foregoing, the Pledgor will:
(i) mark conspicuously, at the request of the Collateral Agent, each of its
records pertaining to the Cash Collateral with a legend, in form and substance
satisfactory to the Agent, indicating that such Cash Collateral is subject to
the security interest granted hereby; (ii) if any Cash Collateral shall be
evidenced by a promissory note or other instrument, deliver and pledge to the
Collateral Agent hereunder such note or instrument duly indorsed and
accompanied by duly executed instruments of transfer or assignment, all in form
and substance satisfactory to the Agent; and (iii) execute and file such
financing or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as any Agent may
request, in order to perfect and preserve the pledge, assignment and security
interest granted or purported to be granted hereby.
(b) The Pledgor hereby authorizes the Collateral Agent to
file one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Cash Collateral without
the signature of the Pledgor where permitted by law. A photocopy or
other reproduction of this Agreement or any financing statement
covering the Cash Collateral or any part thereof shall be sufficient
as a financing statement where permitted by law.
(c) The Collateral Agent will furnish to the Agent monthly
statements and such other statements as the Agent may reasonably
request, together with schedules further
<PAGE> 13
11
identifying and describing the Cash Collateral and such other reports
in connection with the Cash Collateral as any Agent may reasonably
request, all in reasonable detail.
SECTION 11. Place of Perfection; Records. The Pledgor shall
keep its chief place of business and chief executive office and the office
where it keeps its records concerning the Cash Collateral, at the location
therefor specified in Section 8(h) or, upon 30 days' prior written notice to
the Agents, at such other locations in a jurisdiction where all actions
required by Section 10 shall have been taken with respect to the Cash
Collateral.
SECTION 12. Transfers and Other Liens. The Pledgor shall not
(a) sell, assign (by operation of law or otherwise) or otherwise dispose of, or
grant any option with respect to, any of the Cash Collateral, or (b) create or
suffer to exist any Lien upon or with respect to any of the Cash Collateral
except for the pledge, assignment and security interest created by this
Agreement.
SECTION 13. Collateral Agent Appointed Attorney-in-Fact. The
Pledgor hereby irrevocably appoints the Collateral Agent as the Pledgor's
attorney-in-fact, with full authority in the place and stead of the Pledgor and
in the name of the Pledgor or otherwise, from time to time, upon the occurrence
and during the continuation of an Event of Default, in the Collateral Agent's
discretion, to take any action and to execute any instrument that the Agent may
deem necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation:
(a) to ask for, demand, collect, sue for, recover,
compromise, receive and give acquittance and receipts for moneys due
and to become due under or in respect of any of the Cash Collateral,
(b) to receive, indorse and collect any drafts or other
instruments and documents in connection with clause (a) above, and
(c) to file any claims or take any action or institute any
proceedings that the Agent may deem necessary or desirable for the
collection of any of the Cash Collateral or otherwise to enforce the
rights of the Collateral Agent with respect to any of the Cash
Collateral.
SECTION 14. The Collateral Agent May Perform. If the Pledgor
fails to perform any agreement contained herein, the Collateral Agent may
itself perform, or cause performance of, such agreement, and the expenses of
the Collateral Agent incurred in connection therewith shall be payable by the
Pledgor under Section 15(e).
SECTION 15. Authorization and Action. (a) The Lender hereby
appoints and authorizes the Collateral Agent to take such action as agent on
its behalf and to exercise such powers and discretion under this Agreement as
are delegated to the Collateral Agent by the terms
<PAGE> 14
12
hereof, together with such powers and discretion as are reasonably incidental
thereto. As to any matters not expressly provided for by this Agreement
(including, without limitation, enforcement of the Cash Collateral), the
Collateral Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Lenders, and such instructions shall be binding upon all Secured Parties.
(b) The Collateral Agent may rely and shall be protected in
acting or refraining from acting upon any written notice, instruction
or request furnished to it hereunder and believed by it to be genuine
and to have been signed or presented by the proper party or parties.
The Collateral Agent shall be under no duty to inquire into or
investigate the validity, accuracy or content of any such document.
The Collateral Agent shall have no duty to solicit any payments which
may be due it hereunder. Notwithstanding anything else provided
herein, if the Collateral Agent receives instructions from the Pledgor
and the Designee, the Collateral Agent shall rely and shall be
protected in acting or refraining from acting upon any written
instruction solely of the Pledgor in accordance with this Section
15(b).
(c) The Collateral Agent shall not be liable to any Person
for any action taken or omitted by it in good faith unless a court of
competent jurisdiction determines that the Collateral Agent's willful
misconduct or gross negligence was a cause of any loss to such Person.
In the administration of any escrow account hereunder, if any, the
Collateral Agent may execute any of its powers and perform its duties
hereunder directly or through agents or attorneys and may, consult
with counsel, accountants and other skilled persons to be selected and
retained by it. Except as otherwise provided in the first sentence of
this Section 15(c), the Collateral Agent shall not be liable for
anything done, suffered or omitted in good faith by it in accordance
with the advice or opinion of any such counsel, accountants or other
skilled persons.
(d) The Collateral Agent may resign and be discharged from
its duties or obligations hereunder by giving notice in writing of
such resignation specifying a date when such resignation shall take
effect and may be removed at any time for cause by the Required
Lenders in their sole discretion. Upon such resignation and removal,
the Required Lenders shall have the right to appoint a successor agent
with the consent of the Pledgor (such consent not to be unreasonably
withheld or delayed). If no successor agent shall have been so
appointed, and shall have accepted such appointment, within 30 days
after the retiring Collateral Agent's giving notice of resignation or
the Required Lenders' removal of the retiring Collateral Agent, then
the retiring Collateral Agent may, on behalf of the Lenders, appoint a
successor agent, which shall be a commercial bank organized under the
laws of the United States or of any State thereof and having a
continued capital surplus of at least $1,000,000,000. Upon the
acceptance of any appointment as agent hereunder by a successor agent
and upon the execution and filing or recording of such
<PAGE> 15
13
financing statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as the
Required Lenders may request, in order to continue the perfection of
the Liens granted or purported to be granted by the Collateral
Documents, such successor agent shall succeed to and become vested
with all the rights, powers, discretion, privileges and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall be
discharged from its duties and obligations under this Agreement. After
any retiring Collateral Agent's resignation or removal hereunder as
Collateral Agent, the provisions of this Section 15 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it
was Collateral Agent under this Agreement. The Collateral Agent shall
have the right to withhold an amount equal to the amount due and owing
to the Collateral Agent, plus any costs and expenses the Collateral
Agent shall reasonably believe may be incurred by the Collateral Agent
in connection with the termination of the Cash Collateral Agreement.
(e) The Pledgor hereby agrees to (i) pay the Collateral
Agent upon execution of this Agreement reasonable compensation for the
services to be rendered hereunder, and (ii) pay or reimburse the
Collateral Agent upon request for all expenses, disbursement and
advances, including reasonable attorney's fees, incurred or made by it
in connection with the preparation, execution, performance, delivery
modification and termination of this Agreement.
(f) The Lenders shall indemnify (to the extent not reimbursed
by the Pledgor), ratably according to the respective principal amounts
of the Notes then held by each of them (or if no Notes are at the time
outstanding or if any Notes are held by Persons that are not Lenders,
ratably according to their respective Commitments), the Collateral
Agent from all loss, liability or expense (including the fees and
expenses of in house or outside counsel) arising out of or in
connection with (i) its execution and performance of this Agreement,
except to the extent that such loss, liability or expense is due to
the gross negligence or willful misconduct of the Collateral Agent, or
(ii) its following any instructions or other directions from the
Lenders, except to the extent that its following any such instruction
or direction is expressly forbidden by the terms hereof. Anything in
this agreement to the contrary notwithstanding, in no event shall the
Collateral Agent be liable for special, indirect or consequential loss
or damage of any kind whatsoever (including but not limited to lost
profits), even if the Collateral Agent has been advised of the
likelihood of such loss or damage and regardless of the form of
action.
(g) Each party hereto, except the Collateral Agent, shall, in
the notice section of this Agreement, provide the Collateral Agent
with their Tax Identification Number (TIN) as assigned by the Internal
Revenue Service, if any. All interest or other income earned under the
Cash Collateral Agreement shall be allocated and paid as provided
herein and reported by the recipient to the Internal Revenue Service
as having been so allocated and paid.
<PAGE> 16
14
(h) The duties and responsibilities of the Collateral Agent
hereunder shall be determined solely by the express provisions of this
Cash Collateral Agreement, and no other or further duties or
responsibilities shall be implied. The Collateral Agent shall not have
any liability under, nor duty to inquire into the terms and provisions
of any agreement or instructions, other than outlined in the
Agreement.
(i) In the event funds transfer instructions are given (other
than in writing at the time of execution of the Agreement), whether in
writing, by telecopier or otherwise, the Collateral Agent is
authorized to seek confirmation of such instructions by telephone
call-back to the person or persons designated in a writing reasonably
acceptable to and acknowledged by the Collateral Agent, and the
Collateral Agent may rely upon the confirmations of anyone purporting
to be the person or persons so designated. The persons and telephone
numbers for call-backs may be changed only in a writing actually
received and acknowledged by the Collateral Agent. The parties to this
Agreement acknowledge that such security procedure is commercially
reasonable.
(j) It is understood that the Collateral Agent and the
beneficiary's Bank in any funds transfer may rely solely upon any
account numbers or similar identifying number provided by either of
the other parties hereto to identify (i) the beneficiary, (ii) the
beneficiary's Bank, or (iii) an intermediary bank. The Collateral
Agent may apply any of the escrowed funds, if any, for any payment
order it executes using any such identifying number, even where its
use may result in a person other than the beneficiary being paid, or
the transfer of funds to a Bank other than the beneficiary's Bank, or
an intermediary Bank designated.
(k) The Collateral Agent shall not incur any liability to any
Person for following in good faith the instructions herein contained
or expressly provided for, or written instructions given by the
parties hereto, in each case unless a court of competent jurisdiction
determines that the Collateral Agent's gross negligence or wilful
misconduct was a cause of any loss to such Person.
(l) In the event that the Collateral Agent shall be uncertain
as to its duties or rights hereunder or shall receive instructions,
claims or demands from any party hereto which, in its opinion,
conflict with any of the provisions of this Agreement, it shall be
entitled to refrain from taking any action and its sole obligation
shall be to keep safely all property held in escrow until it shall be
directed otherwise in writing by all of the other parties hereto or by
a final order or judgment of a court of competent jurisdiction.
(m) Any corporation into which the Collateral Agent in its
individual capacity may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion
or consolidation to which the Collateral Agent in its
<PAGE> 17
15
individual capacity shall be a party, or any corporation to which
substantially all the corporate trust business of the Collateral Agent
in its individual capacity may be transferred, shall be the Collateral
Agent under this Cash Collateral Agreement without further act.
(n) This Agreement does not create any obligation of the
Securities Intermediary except for those expressly set forth in this
Agreement and in Part 5 of Article 8 of the UCC. In particular, the
Collateral Securities Intermediary need not investigate whether the
Secured Party is entitled under the Secured Party's agreements with
the Pledgor to give an entitlement order or other direction concerning
the Cash Collateral Account. The Collateral Securities Intermediary
may rely on notices and communications it believes given by the
appropriate party.
SECTION 16. Remedies. If any Event of Default shall have
occurred and be continuing:
(a) The Collateral Agent may exercise in respect of the Cash
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a
secured party upon default under the UCC at such time (whether or not
the UCC applies to the affected Cash Collateral) and also may (i)
require the Pledgor to, and the Pledgor hereby agrees that it will at
its expense and upon request of the Collateral Agent forthwith,
assemble all or part of the Cash Collateral as directed by the
Collateral Agent and make it available to the Collateral Agent at a
place to be designated by the Collateral Agent that is reasonably
convenient to both parties and (ii) without notice except as specified
below, sell the Cash Collateral or any part thereof at public or
private sale, at any of the Collateral Agent's offices or elsewhere,
for cash, on credit or for future delivery, and upon such other terms
as the Collateral Agent may deem commercially reasonable. The Pledgor
agrees that, to the extent notice of sale shall be required by law, at
least ten days' notice to the Pledgor of the time and place of any
public sale or the time after which any private sale is to be made
shall constitute reasonable notification. The Collateral Agent shall
not be obligated to make any sale of Cash Collateral regardless of
notice of sale having been given. The Collateral Agent may adjourn any
public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned.
(b) All cash proceeds received by the Collateral Agent in
respect of any sale of, collection from, or other realization upon all
or any part of the Cash Collateral shall be applied (after payment of
any amounts payable to the Collateral Agent hereunder) in whole or in
part by the Agent for the ratable benefit of the Lenders against, all
or any part of the Secured Obligations in such order as the Agent
shall elect. Any surplus of such cash or cash proceeds held by the
Collateral Agent and remaining after payment in full of
<PAGE> 18
16
all the Secured Obligations shall be paid over to the Pledgor or to
whomsoever may be lawfully entitled to receive such surplus.
(c) All payments received by the Pledgor under or in
connection with the Cash Collateral shall be received in trust for the
benefit of the Collateral Agent, shall be segregated from other funds
of the Pledgor and shall be forthwith paid over to the Collateral
Agent in the same form as so received (with any necessary
indorsement).
(d) The Collateral Agent may, without notice to the Pledgor
except as required by law and at any time or from time to time,
charge, set-off and otherwise apply all or any part of the Secured
Obligations against the Cash Collateral Account (including the
Permitted Investments) or any part thereof.
SECTION 17. Security Interest Absolute. The obligations of
the Pledgor under this Agreement are independent of the Secured Obligations,
and a separate action or actions may be brought and prosecuted against the
Pledgor to enforce this Agreement, irrespective of whether any action is
brought against the Borrower or whether the Borrower is joined in any such
action or actions. All rights of each of the Lenders and the Agents and the
pledge, assignment and security interest hereunder, and all obligations of the
Pledgor hereunder, shall be absolute and unconditional, irrespective of:
(a) any failure from time to time on the part of any Loan
Party to be duly organized and existing under the laws of each
applicable jurisdiction;
(b) any lack of validity or enforceability of any Loan
Document or any other agreement or instrument relating thereto;
(c) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Secured Obligations or any
other amendment or waiver of or any consent to any departure from any
Loan Document, including, without limitation, any increase in the
Secured Obligations resulting from the extension of additional credit
to the Pledgor or any of its subsidiaries or otherwise;
(d) any taking, exchange, release or nonperfection of any
other collateral, or any taking, release or amendment or waiver of or
consent to departure from any guaranty, for all or any of the Secured
Obligations;
(e) any manner of application of collateral, or proceeds
thereof, to all or any of the Secured Obligations, or any manner of
sale or other disposition of any collateral for all or any of the
Secured Obligations or any other assets of the Pledgor or any of its
subsidiaries;
<PAGE> 19
17
(f) any change, restructuring or termination of the
corporate structure or existence of the Pledgor or any of its
subsidiaries; or
(g) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, the Pledgor or a third party
Pledgor of a security interest.
SECTION 18. Amendments; Waivers; Etc. No amendment or waiver
of any provision of this Agreement, and no consent to any departure by the
Pledgor herefrom, shall in any event be effective unless the same shall be in
writing and signed by all of the parties hereto, and a copy of such document is
delivered to the Collateral Agent, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. No failure on the part of any of the Agents to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right.
SECTION 19. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing (including
telecopier, telegraphic, telex or cable communication) and, mailed,
telegraphed, telecopied, telexed, cabled or delivered to the Pledgor, the Agent
or the Collateral Agent, as the case may be, in each case addressed to it at
its address specified in Schedule I hereto or, as to either party, at such
other address as shall be designated by such party in a written notice to each
other party complying as to delivery with the terms of this Section. All such
notices and other communications shall, when mailed, telecopied, telegraphed,
telexed or cabled, respectively, be effective when deposited in the mails,
telecopied, delivered to the telegraph company, confirmed by telex answerback
or delivered to the cable company, respectively, addressed as aforesaid.
SECTION 20. Continuing Security Interest; Assignments Under
the Credit Agreement. This Agreement shall create a continuing security
interest in the Cash Collateral and shall (a) remain in full force and effect
until the later of the (i) payment in full in cash of the Secured Obligations
and (ii) the expiration or the termination of the Commitments under the Credit
Agreement, (b) be binding upon the Pledgor, its successors and assigns and (c)
inure, together with the rights and remedies of the Agents hereunder, to the
benefit of the Agent, the Lenders and their respective successors, transferees
and assigns. Without limiting the generality of the foregoing clause (c), any
Lender may assign or otherwise transfer all or any portion of its rights and
obligations under the Credit Agreement (including, without limitation, all or
any portion of its Commitment, the Advances owing to it and the Note or Notes
held by it) to any other Person, and such other Person shall thereupon become
vested with all the benefits in respect thereof granted to such Lender herein
or otherwise, in each case as provided in Section 8.07 of the Credit Agreement.
Neither this Cash Collateral Agreement nor any right or interest hereunder may
be assigned in whole or in part by any party without the prior consent of the
other parties.
<PAGE> 20
18
SECTION 21. Termination. Upon the later of (a) the payment in
full in cash of the Secured Obligations and (b) the expiration or the
termination of the Commitments under the Credit Agreement, the pledge,
assignment and security interest granted hereby shall terminate and all rights
to the Cash Collateral shall revert to the Pledgor. Upon any such termination,
the Collateral Agent will, at the Pledgor's expense, execute and deliver to the
Pledgor such documents as the Pledgor shall reasonably request to evidence such
termination.
SECTION 22. Governing Law; Terms. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without regard to its principles of conflicts of laws, except to the extent
that the validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Cash Collateral are governed by the
laws of a jurisdiction other than the State of New York.
SECTION 23. Jurisdiction; Venue. (a) The Pledgor hereby
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any New York State or Federal court (to the extent
such court has subject matter jurisdiction) sitting in New York City and any
appellate court from any thereof in any action or proceeding arising out of or
relating to this Agreement or for the recognition and enforcement of any
judgment, and the Pledgor hereby irrevocably and unconditionally agrees that
all claims in respect of such action or proceeding may be heard and determined
in such New York State court or in such Federal court. The Pledgor hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. The Pledgor hereto irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement in
any New York State or federal court. The Pledgor hereby irrevocably waives, to
the fullest extent it may effectively do so, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court or any
other similar grounds. The Pledgor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
applicable law.
(b) Nothing in this Section 23 shall affect the right of any
of the Secured Parties to serve legal process in any other manner
permitted by applicable law or affect any right which such Lender or
Agent would otherwise have to bring any action or proceeding against
the Pledgor or its property in the courts of any other jurisdiction.
SECTION 24. Subrogation. The Pledgor will not exercise any
rights that it may now or hereafter acquire against the Borrower that arise
from the existence, payment, performance or enforcement of the Pledgor's
obligations or the Secured Obligations under this Agreement or any other Loan
Document, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of the Collateral Agent or any other Secured
Party against the Borrower or any other insider pledgor
<PAGE> 21
19
or any Collateral, whether or not such claim, remedy or right arises in equity
or under contract, statute or common law, including, without limitation, the
right to take or receive from the Borrower or any other insider pledgor,
directly or indirectly, in cash or other property or by set-off or in any other
manner, payment or security on account of such claim, remedy or right, unless
and until all of the Pledgor's obligations or the Secured Obligations and all
other amounts payable under this Agreement shall have been paid in full in cash.
If any amount shall be paid to the Pledgor in violation of the preceding
sentence at any time prior to the later of the payment in full in cash of the
Secured Obligations and all other amounts payable under this Agreement, such
amount shall be held in trust for the benefit of the Collateral Agent and the
other Secured Parties and shall forthwith be paid to the Collateral Agent to be
credited and applied to the Secured Obligations and all other amounts payable
under this Agreement, whether matured or unmatured, in accordance with the terms
of the Loan Documents, or to be held as Collateral for any Secured Obligations
or other amounts payable under this Agreement thereafter arising.
SECTION 25. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 26. Severability. If any term or provision of this
Agreement is or shall become illegal, invalid or unenforceable in any
jurisdiction, all other terms and provisions of this Agreement shall remain
legal, valid and enforceable in such jurisdiction and such illegal, invalid or
unenforceable provision shall be legal, valid and enforceable in any other
jurisdiction.
* * * *
<PAGE> 22
IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
AZURIX CORP., as Pledgor
By /s/ Richard G. Jigarjian
---------------------------------------------
Name: Richard G. Jigarjian
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, as Agent
By /s/ Richard R. Newman
----------------------------------------------
Name: Richard R. Newman
Title: Director
By /s/ Duncan M. Robertson
-----------------------------------------------
Name: Duncan M. Robertson
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, as Lender
By /s/ Richard R. Newman
----------------------------------------------
Name: Richard R. Newman
Title: Director
By /s/ Duncan M. Robertson
----------------------------------------------
Name: Duncan M. Robertson
Title: Vice President
THE CHASE MANHATTAN BANK,
as Collateral Agent and as Collateral Securities
Intermediary
By /s/ Joseph Conti
---------------------------------------------
Name: Joseph Conti
Title: Vice President
<PAGE> 23
SCHEDULE I
NOTICES
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25
<SECURITIES> 396
<RECEIVABLES> 84
<ALLOWANCES> 9
<INVENTORY> 0
<CURRENT-ASSETS> 569
<PP&E> 2,307
<DEPRECIATION> 51
<TOTAL-ASSETS> 4,357
<CURRENT-LIABILITIES> 1,079
<BONDS> 963
0
0
<COMMON> 1
<OTHER-SE> 1,891
<TOTAL-LIABILITY-AND-EQUITY> 4,357
<SALES> 248
<TOTAL-REVENUES> 248
<CGS> 69
<TOTAL-COSTS> 171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 47
<INCOME-TAX> 11
<INCOME-CONTINUING> 36
<DISCONTINUED> 0
<EXTRAORDINARY> 7
<CHANGES> 0
<NET-INCOME> 30
<EPS-BASIC> .29
<EPS-DILUTED> .29
</TABLE>
