<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended DECEMBER 31, 1997 Commission file number 0-1121
SOUTHERN CALIFORNIA WATER COMPANY
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 95-1243678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 394-3600
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES, $2.50 PAR VALUE NEW YORK STOCK EXCHANGE
- ------------------------------- -----------------------------------------
Title of Each Class Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the total voting stock held by non-affiliates of
Registrant was approximately $218,784,000 on March 5, 1998. The closing price
per Common Share on that date, as quoted in the Western Edition of The Wall
Street Journal, was $24.375. Voting Preferred Shares, for which there is no
established market, were valued on March 5, 1998 at $1,462,000 based on a yield
of 5.69%. As of March 5, 1998, the number of Registrant's Common Shares, $2.50
Par Value, outstanding was 8,957,671.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders for the year
ended December 31, 1997 as to Part I, Items 1 and 2, and Part
II, Items 5, 6, 7 and 8, in each case, as specifically
referenced herein.
(2) Portions of the Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A
as to Part III, Items 10, 11, 12 and 13, in each case as
specifically referenced herein.
<PAGE> 2
SOUTHERN CALIFORNIA WATER COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I
Item 1: Business 1 - 8
Item 2: Properties 8 - 10
Item 3: Legal Proceedings 10 - 12
Item 4: Submission of Matters to a Vote of Security Holders 12
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6: Selected Financial Data 13
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operation 13
Item 8: Financial Statements and Supplementary Data 13
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 13
PART III
Item 10: Directors and Executive Officers of the Registrant 13
Item 11: Executive Compensation 14
Item 12: Security Ownership of Certain Beneficial Owners and Management 14
Item 13: Certain Relationships and Related Transactions 14
PART IV
Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 14
Exhibit Index 14 - 16
Signatures 17
</TABLE>
i.
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Southern California Water Company, hereinafter referred to as
Registrant, is a utility company engaged principally in the purchase,
production, distribution and sale of water (SIC No. 4941). Registrant also
distributes electricity in one community (SIC No. 4911). Registrant, regulated
by the California Public Utilities Commission, hereinafter referred to as the
CPUC, was incorporated in 1929 under the laws of the State of California as
American States Water Services Company of California as the result of the
consolidation of 20 water utility companies. From time to time, additional water
companies and municipal water districts have been acquired and properties in
limited service areas have been sold or the subject of condemnation proceedings.
Registrant's present name was adopted in 1936.
At December 31, 1997, Registrant was organized into three regions
operating within 75 communities in 10 counties located throughout the State of
California and provided water service in 21 separate customer service areas and
one electric customer service area. The total population of these service areas
on that date was approximately 1 million persons. For each of the years ended
December 31, 1997, 1996 and 1995, about 73% of Registrant's water customers were
located in the greater metropolitan areas of Los Angeles and Orange Counties.
Registrant provides electric service to the City of Big Bear Lake and
surrounding areas in San Bernardino County. Beginning in June, 1996, all
electric energy sold by Registrant to customers in its Bear Valley Electric
customer service area was purchased under an energy brokerage contract with
ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was purchased
from the Southern California Edison Company subsidiary of Edison International.
Registrant served 241,581 water customers and 20,698 electric customers
at December 31, 1997, or a total of 262,279 customers, compared with 260,985
total customers at December 31, 1996 and 259,437 total customers at December 31,
1995. For the years ended December 31, 1997, 1996 and 1995, approximately 92% of
Registrant's operating revenues were derived from water sales and approximately
8% were derived from the sale of electricity. Operating income before taxes on
income of the electric district was approximately 12%, 10% and 8% of
Registrant's total operating income before taxes for the years ended December
31, 1997, 1996 and 1995, respectively. The material contained in Note 11
Business Segments - of the Notes to Financial Statements in the 1997 Annual
Report to Shareholders provides additional information on business segments
while Note 12 - Selected Quarterly Financial Data (Unaudited) - of the Notes to
Financial Statements in the 1997 Annual Report to Shareholders provides
information regarding the seasonal nature of Registrant's business. The Notes to
Financial Statements contained in the 1997 Annual Report to Shareholders are
included herein by reference.
During 1997, Registrant supplied, from all sources, a total of 199,146
acre-feet of water compared to 194,397 acre-feet supplied in 1996 and 183,108
acre-feet in 1995. Of the total water supplied in 1997, approximately 45% was
purchased from others, principally from member agencies of the Metropolitan
Water District of Southern California ("MWD"). The remaining amount was
furnished by the Bureau of Reclamation under contract, at no cost, to
Registrant's Arden-Cordova customer service area and to Registrant's Clearlake
customer service area by prescriptive rights to water extracted from Clear Lake.
The remainder of water supplied was produced from Registrant's owned wells.
<PAGE> 4
MWD is organized to deliver imported water to areas within its
jurisdiction. Registrant has 52 connections to the water distribution facilities
of MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project ("SWP"). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to remain adequate through 1998. MWD's import of water from the
Colorado River is expected to decrease in future years due to the requirements
of the Central Arizona Project in the State of Arizona. In response, MWD has
taken steps to secure additional storage capacity and increase available water
supplies, including effecting transfers of water rights from other sources.
The recent storms during the 1997-1998 winter period provided
precipitation adequate to fill most of the state's reservoirs to near capacity
and the outlook for water supply in 1998 is favorable. In those districts of
Registrant which pump groundwater, overall groundwater conditions remain at
adequate levels allowing Registrant to use groundwater in its resource mix and
decrease its dependence on increasingly expensive purchased water. Registrant
believes that its water supplies from all sources are adequate to meet current
year projected demands.
COMPETITION
The business of Registrant is substantially free from direct and
indirect competition with other public utilities, municipalities and other
public agencies.
WATER-RELATED OPPORTUNITIES
Registrant continues to pursue strategic opportunities related to the
operation of municipally-owned water systems on both a stand-alone basis and as
part of a joint venture.
For example, in December, 1996, Registrant and U.S. Water, L.L.C., a
limited liability company owned by the Bechtel Group and by Northwest Water
Holdings, Inc., a subsidiary of United Utilities PLC, a water and electric
utility based in the United Kingdom, formed Golden State Water Company LLC
("GSWC") for the purpose of pursuing potential opportunities to lease, or
operate and maintain, municipally owned retail water supply and distribution
systems and water treatment, wastewater collection and wastewater treatment
facilities in California. The joint venture currently acts as the manager of the
water department of the City of Compton, California pursuant to a short-term
contract. GSWC has submitted additional bids in response to requests for
proposal. The bids remain subject to approval by the cities and no assurance can
be given that GSWC's bids will be approved or that GSWC will ultimately be
retained to operate and maintain the cities' water systems or perform any other
services for them. There can be no assurance that any other such opportunities
will materialize or that, if they do, Registrant (either jointly with GSWC or
alone) would be successful in consummating any such lease and/or maintenance and
operation arrangements.
YEAR 2000 ISSUES
Registrant has made an assessment of its Year 2000 issues and does not
believe that those issues are likely to be material to its business, operations
or financial condition.
RATES AND REGULATION
Registrant is subject to regulation by the CPUC as to its water and
electric business and properties. The CPUC has broad powers to regulate public
utilities with respect to service and facilities, rates, classifications of
accounts, valuation of properties and the purchase, disposition and mortgaging
of properties necessary or useful
<PAGE> 5
in rendering public utility service. The also has authority over the
issuance of securities, the granting of certificates of convenience and
necessity as to the extension of services and facilities and various other
matters.
The 22 customer service areas of Registrant are grouped into 16 water
districts and one electric district for ratemaking purposes. Registrant's water
rates vary among the 16 ratemaking districts due to differences in operating
conditions and costs. Registrant continuously monitors operations in each of
these districts so that it may file applications for rate changes, when
warranted, on a district-by-district basis, in accordance with the CPUC's
procedure. Under the CPUC's practices, rates may be increased by three methods:
general rate increases, offsets for certain expense increases and advice letter
filings related to certain plant additions.
General rate increases typically are for three-year periods and include
"step" and "attrition" increases in rates for the second and third years,
respectively. General rate increases are established by formal proceedings in
which overall rate structure, expenses and rate base of the district are
examined. Rates are based on estimated expenses and capital costs for a
prospective two-year period. The attrition mechanism is used to set rates
applicable to the third of the three-year cycle, which assumes that the costs
and expenses for the third year of the cycle will change in the same proportion
over the second year as the change projected for the second year over the first
year. Step and attrition rate increases for the second and third years,
respectively, are allowed to compensate for projected cost changes, but are
subject to the satisfaction of certain tests, including a demonstration that
earnings levels in the district did not exceed the latest rate of return
authorized for Registrant. General rate proceedings typically take about twelve
months from the filing of an application to the authorization of new rates.
However, the forecasted test years utilized in general rate proceedings helps to
reduce the effects of regulatory lag.
Rate increases to offset increases in certain expenses, such as costs
of purchased water, energy costs to pump water, costs of power purchased for
resale and groundwater production assessments, are accomplished through an
abbreviated "offset" procedure that typically takes about two months. The CPUC's
regulations require utilities to maintain balancing accounts that reflect
differences between specific offset cost increases and the rate increases
authorized to offset those costs. The balancing accounts are subject to
amortization through the offset procedure or through general rate decisions.
An advice letter, or rate base offset, proceeding is generally
undertaken on an order of the CPUC in a general rate proceeding and provides for
the inclusion of certain plant facilities in future rates, pending notification
that such facilities have actually been placed in service. The advice letter
provides the required notification and, after CPUC approval, permits Registrant
to include the costs associated with the facilities in rates.
During each of 1997, 1996 and 1995, Registrant's rates for most of its
water ratemaking districts were changed, among other reasons, to directly offset
changes in certain expenses (principally purchased water) and for increased
levels of capital improvements. Rates in Registrant's Bear Valley Electric
customer service area were adjusted in 1996 and 1997. The following table lists
information on estimated rate changes, by major type, for the last three years:
<PAGE> 6
<TABLE>
<CAPTION>
Balancing General and Rate Base
Account Step Rate Offset
Year Supply Amortization Increases and Others Total
- ----- ---------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1997 $ 182,900 $ 63,500 $ 1,331,900 $(63,600) $ 1,514,700
1996 $ 102,500 $(757,700) $16,804,100 $913,300 $17,062,200
1995 $1,780,000 $(272,800) $ 1,426,800 $256,500 $ 3,190,500
</TABLE>
In January, 1996, new rates were effective in six of Registrant's
rate-making districts which, among other things, authorized a rate of return on
common equity of 10.40%, increased depreciation rates, authorized recovery of
postretirement medical benefit costs, increased current recovery of labor and
labor-related expenses and resulted in an increase in annual water operating
revenues of approximately $15 million. Water rates in two additional ratemaking
districts were increased on January 1, 1997 to recover costs associated with
1996 and 1997 capital projects in those areas.
Registrant filed notices of intent to increase water rates in six
ratemaking districts in January, 1998. Registrant is unable to predict if the
CPUC will authorize all or any of the proposed increases although it is not
anticipated that new rates, if approved, would be effective before January,
1999.
New rates were effective in May, 1996 in Registrant's Bear Valley
Electric customer service area. An additional step increase was effective in
January, 1997.
In November, 1996, Registrant filed an application with the CPUC
seeking recovery through rates of costs associated with its participation in the
coastal aqueduct extension of the State Water Project. Registrant is currently
unable to predict if the CPUC will authorize recovery of all or any of the costs
associated with its participation in the Project.
EMPLOYEE RELATIONS
Registrant had 467 employees as of December 31, 1997. Seventeen
employees in Registrant's Bear Valley Electric customer service area were
members of the International Brotherhood of Electrical Workers, hereinafter
referred to as the IBEW. The bargaining unit agreement with the IBEW expires in
1999. Forty-eight of Registrant's water utility employees in its Metropolitan
ratemaking district are members of the Utility Workers of America, hereinafter
referred to as the UWA. The collective bargaining agreement with the UWA expires
in March, 2001. Registrant has no other unionized employees.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to
the Safe Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA
revised the 1986 amendments to the SDWA, which required that the federal
Environmental Protection Agency (EPA) set 25 new contaminant standards every
three years, with a new process for selecting and regulating contaminants. The
EPA can only regulate contaminants that may have adverse health effects, are
known or likely to occur at levels of public health concern, and the regulation
of which will provide "a meaningful opportunity for health risk reduction." The
EPA must, within 18 months of the time that the 1996 SDWA amendments were signed
<PAGE> 7
into law, publish a list of contaminants for possible regulation and must update
that list every five years. In addition, every five years, the EPA must select
at least five contaminants on that list and determine whether to regulate them.
The new law allows the EPA to bypass the selection process and adopt interim
regulations for contaminants in order to address urgent health threats. Current
regulations, however, remain in place and are not subject to the new
standard-setting provisions. The California Department of Health Services,
acting on behalf of the EPA, administers the EPA's program in California.
The 1996 SDWA amendments allow the EPA for the first time to
base primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
Registrant currently tests its wells and water systems for
more than 90 contaminants, currently covering all contaminants listed in the
SDWA. Water from wells found to contain levels of contaminants above the
established MCL's is either treated or blended before it is delivered to
customers.
Since the SDWA became effective, Registrant has experienced
increased operating costs for testing to determine the levels, if any, of the
contaminants in Registrant's sources of supply and additional expense to lower
the level of any contaminants in order to meet the MCL standards. Such costs and
the costs of controlling any other contaminants may cause Registrant to
experience additional capital costs as well as increased operating costs.
Registrant is currently unable to predict the ultimate impact
that the 1996 SDWA amendments might have on its financial position or its
results of operation. The ratemaking process provides Registrant with the
opportunity to recover prudently incurred capital and operating costs associated
with water quality. Management believes that such incurred costs will be
authorized for recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water
Treatment Rule ("ESWTR") which would require increased surface-water treatment
to decrease the risk of microbial contamination. The EPA has proposed several
versions of the ESWTR for promulgation. The version selected for promulgation
will be determined based on data collected by certain water suppliers and
forwarded to the EPA pursuant to EPA's Information Collection Rule, which
requires such water suppliers to monitor microbial and other contaminants in
their water supplies and to conduct certain tests in respect of such
contaminants. The EPA has proposed an Interim ESWTR applicable only to systems
serving greater than 10,000 persons. The final Interim ESWTR will be promulgated
by November 1998. The final ESWTR, in any of the forms currently proposed, would
apply to each of Registrant's five surface water treatment plants and is
expected to be promulgated by November 2000. However, because it is impossible
to predict the version of the ESWTR that will be promulgated, Registrant is
unable to predict what additional costs, if any, will be incurred to comply with
the ESWTR.
<PAGE> 8
Regulation of Disinfection/Disinfection By-Products
Registrant will also be subject to the new regulations
concerning disinfection/disinfection by-products ("DBPs"), Stage I of which
regulations are expected to become effective in November, 1998 with compliance
required by 2001. Stage 1 will require reduction of tri-halomethane contaminants
from 100 micrograms per liter to 80 micrograms per liter and are expected to
affect two of Registrant's systems.
The EPA must adopt Stage II rules pertaining to DBPs according
to a negotiated schedule by 2000. The EPA is not allowed to use the new
cost/benefit analysis provided for in the 1996 SDWA amendments for establishing
the Stage II rules applicable to DBPs but may utilize the regulatory negotiating
process provided for in the 1996 SDWA amendments to develop the Stage II rule.
The final rule is expected by 2002.
Ground Water Disinfection Rule
By December, 1998, the EPA is scheduled to propose regulations
requiring disinfection of certain groundwater systems and provide guidance on
determining which systems must provide disinfection facilities. The final rule
is expected by December 1999. The EPA may utilize the cost/benefit analysis
provided in the 1996 SDWA amendments to establish such regulations. It is
anticipated that the regulations will apply to several of Registrant's systems
using groundwater supplies. While no assurance can be given as to the nature and
cost of any additional compliance measures, if any, Registrant does not believe
that such regulations will impose significant compliance costs, since Registrant
already currently engages in disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon
and arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a
rule one year later. Although EPA originally had 180 days after enactment of the
1996 SDWA amendments to develop a plan to study ways to reduce arsenic health
risk uncertainties and was authorized to enter into cooperative agreements to
carry out the study, the studies are still being conducted. Depending on the MCL
eventually established for arsenic, compliance could cause Registrant to
implement costly well-head treatment remedies such as ion exchange or,
alternatively, to purchase additional and more expensive water supplies already
in compliance for blending with well sources.
The EPA has withdrawn its proposed radon rule and has arranged
for the National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The EPA is
expected to establish an MCL based on the findings of the National Academy of
Sciences' risk assessment report and to set an alternative MCL based on
potential mitigation measures for overall radon reduction. Although Registrant
is unable to predict what the standard for radon might eventually be, Registrant
itself is currently conducting studies to determine the best treatment for
affected wells, which treatment could range from simple aeration to filtration
through granular activated carbon.
<PAGE> 9
Voluntary Efforts to Exceed Surface Water Treatment Standards
Registrant is a voluntary member of the EPA's "Partnership for
Safe Water", a national program designed to further protection of the public
from diseases caused by cryptosporidium and other microscopic organisms. As a
volunteer in the program, Registrant has committed to exceed current regulations
governing surface water treatment to ensure that its surface treatment
facilities are performing as efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733
which requires fluoridation of water supplies for public water systems serving
more than 10,000 service connections. Although the bill requires affected
systems to install treatment facilities only when public funds have been made
available to cover capital and operating costs, the bill requires the CPUC to
authorize cost recovery through rates should public funds for operation of the
facilities, once installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
Three of the 27 wells in Registrant's Arden-Codova system
have, for several years, been subject to contamination by tricholoroethylene.
GenCorp Aerojet has, by court decree, been responsible for all costs related to
the provision of well-head treatment. Although the ten-year agreement with
Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to reimburse
Registrant for the continuing costs, if any, associated with well-head treatment
at all three wells.
In January, 1997, Registrant was notified that ammonium
perchlorate in amounts above the state-determined action level had been detected
in three of its wells in its Arden-Cordova system. GenCorp Aerojet has, in the
past, used ammonium perchlorate in their processing as an oxidizer of rocket
fuels. Registrant has taken the three wells detected with ammonium perchlorate
out of service. Although neither the EPA nor the DOHS has established a drinking
water standard for ammonium perchlorate, DOHS has established an action level of
18 ppb which requires Registrant to notify customers in its Arden-Cordova
customer service area of detection of ammonium perchlorate in amounts in excess
of this action level. In April, 1997, Registrant found ammonium perchlorate in
three additional wells and had removed those wells from service until it was
determined that the levels were below the state-determined action level. Those
wells have been returned to service. Registrant provides continual monitoring of
these wells to ensure that levels of perchlorate are below the action level
currently in effect. GenCorp Aerojet has reimbursed Registrant for all necessary
and reasonable activities in the construction of a pipeline to for
interconnection of the Folsom City and Arden-Cordova water systems to provide an
alternative source(s) of water supply in Registrant's Arden-Cordova customer
service area.
Registrant and GenCorp Aerojet are in negotiations on other
matters related to procedures to address cleanup of the contaminated wells,
costs associated with the cleanup, costs associated with increased costs of
purchased water as compared to pumped sources and costs associated with new
sources of groundwater supply. Registrant is unable to predict when the
negotiations will be completed or the likely outcome of such negotiations.
<PAGE> 10
Matters Relating to Culver City System
The compound methyl tertiary butyl ether ("MTBE") has been
detected in the Charnock Basin located in the city of Santa Monica and Culver
City, which lies within Registrant's service area. MTBE is an oxygenate used in
reformulated fuels. At the request of the Regional Water Quality Control Board,
the City of Santa Monica and the California Environmental Protection Agency,
Registrant removed two of its wells in the Culver City system from service in
October, 1996 to help in efforts to avoid further spread of the MTBE
contamination plume. Neither of these wells have been found to be contaminated
with MTBE. Registrant is purchasing water from the Metropolitan Water District
at an increased cost to replace the water supply formerly pumped from the two
wells removed from service.
Several studies are under way to determine the possible
sources and causes of the MTBE contamination. The federal EPA is pursuing an
enforcement effort to reach a settlement with the potentially responsible
parties on matters relating to the cleanup of the contamination. Registrant is
unable to predict the outcome of the EPA's enforcement efforts. Two of the
potentially responsible parties and Registrant have executed an agreement which
provides for reimbursement of Registrant's legal and consulting costs related to
this matter as well as reimbursement from such parties for increased costs
incurred by Registrant in purchasing replacement water.
Bear Valley Electric
There have been no environmental matters that have
materially affected or are currently materially affecting Registrant's Bear
Valley Electric customer service area.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can generally be
identified as such because the context of the statement will include words such
as Registrant "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe Registrant's future plans, objectives,
estimates or goals are also forward-looking statements. Such statements address
future events and conditions concerning capital expenditures, earnings,
litigation, rate, water quality and other regulatory matters, adequacy of water
supplies, liquidity and capital resources, opportunities related to the
operation of municipally-owned water systems and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as utility restructuring, including
ongoing local, state and federal activities; future economic conditions,
including changes in customer demand; future climatic conditions; legislative,
regulatory and other circumstance affecting anticipated revenues and costs.
ITEM 2 - PROPERTIES
FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES
Registrant holds franchises from the incorporated communities and the
counties which it serves. Registrant holds certificates of public convenience
and necessity granted by the CPUC in each of the ratemaking districts it serves.
Registrant's certificates, franchises and similar rights are subject to
alteration, suspension or repeal by the respective governmental authorities
having jurisdiction.
The laws of the State of California provide for the acquisition of
public utility property by governmental agencies through their power of eminent
domain, also known as condemnation. Registrant has not been, within the last
three years, involved in activities related to the condemnation of any of its
water customer service areas or in its Bear Valley Electric customer service
area.
WATER PROPERTIES
As of December 31, 1997, Registrant's physical properties consisted of
water transmission and distribution systems which included 2,638 miles of
pipeline together with services, meters and fire hydrants and 437 parcels of
land, generally less than 1 acre each, on which are located wells, pumping
plants, reservoirs and other water utility facilities including five surface
water treatment plants. Registrant's 41 water systems and operating properties
have been maintained and improved in the ordinary course of business.
<PAGE> 11
As of December 31, 1997, Registrant owned and operated 295 active wells
equipped with pumps with an aggregate capacity of approximately 180 million
gallons per day. Registrant has 52 connections to the water distribution
facilities of the MWD and other municipal water agencies. Registrant's storage
reservoirs and tanks have an aggregate capacity of approximately 95 million
gallons. Registrant owns no dams in its customer service areas. The table below
provides, in greater detail, selected water utility plant by ratemaking
district.
<TABLE>
<CAPTION>
Pumps Distribution Facilities Reservoirs
----------------- ----------------------------------------------- ------------------
Well Booster Mains(ft) Meters Services Hydrants Tanks Capacity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arden-Cordova 27 15 461,389 3,127 8,032 1,139 2 2,000
Barstow 27 33 866,221 12,739 10,741 990 13 5,025
Bay Point 1 16 138,638 4,914 2,999 296 8 5,046
Calipatria 0 9 134,878 1,064 1,663 69 2 200
Claremont 27 37 716,388 15,753 11,011 1,165 18 17,367
Clearlake 0 14 188,616 2,544 894 73 4 867
Desert 19 24 748,762 7,247 4,561 568 12 1,500
Los Osos 10 11 195,811 3,663 1,374 149 8 1,423
Metropolitan 78 82 4,735,015 143,466 107,630 7,346 41 25,067
Ojai 5 13 234,007 5,098 3,430 347 6 1,536
Orange County 30 37 2,143,579 58,703 39,785 4,330 17 12,153
San Dimas 11 38 1,184,443 19,841 7,652 830 14 10,143
San Gabriel 22 10 547,521 12,459 12,678 770 3 1,520
Santa Maria 29 25 950,041 21,005 7,217 757 8 3,238
Simi Valley 1 19 468,756 13,818 9,454 811 6 6,210
Wrightwood 8 6 215,028 5,403 634 71 7 1,546
- ------------------------------------------------ ----------------------------------------------- ---------------------
Total 295 389 13,929,093 330,844 229,755 19,711 169 94,841
</TABLE>
Capacity is measured in thousands of gallons
ELECTRIC PROPERTIES
Registrant's electric properties are all located in the Big Bear area
of San Bernardino County. As of December 31, 1997, the Registrant operated 28.7
miles of overhead 34.5 KV transmission lines, 0.6 miles of underground 34.5 KV
transmission lines, 172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5
miles of underground cable and 14 sub-stations. There are no generating plants
in Registrant's system.
OFFICE BUILDINGS
Registrant's general offices are housed in a single-story office
building located in San Dimas, California. The land and the building, which was
completed and occupied in early 1990, are owned by Registrant. The Registrant
also owns and occupies certain facilities housing regional, district and
customer service offices while other such facilities are housed in leased
premises.
MORTGAGE AND OTHER LIENS
As of December 31, 1997, Registrant had no mortgage debt outstanding,
and its properties were free of any encumbrances or liens securing indebtedness.
<PAGE> 12
FINANCING OF CAPITAL EXPENDITURES
Registrant's construction program is designed to ensure its customers
high quality service. Registrant maintains an ongoing distribution main
replacement program throughout its customer service areas, based on the priority
of leaks detected, fire protection enhancement and a reflection of the
underlying replacement schedule. In addition, Registrant upgrades its electric
and water supply facilities and is aggressively scheduling meter replacements
that conform with CPUC requirements.
Registrant's Board of Directors has approved anticipated net capital
expenditures of approximately $27,100,000 in 1998. Registrant anticipates
capital expenditures of approximately $33,000,000 in 1999 and 2000, although
such expenditures are subject to final approval by Registrant's Board of
Directors. Registrant anticipates that net capital expenditures in excess of its
internally generated cash will continue to be financed through a combination of
the sale of long-term debt and additional Common Shares.
Registrant issued 1,000,000 Common Shares in December, 1996 and an
additional 71,500 Common Shares in January, 1997 for aggregate net proceeds of
$22,062,000. Also during 1996, Registrant issued approximately 41,000 Common
Shares through its Dividend Reinvestment and Common Share Purchase (DRP) and
401(k) Plans for additional aggregate proceeds of approximately $904,000. During
1997 and 1995, all Common Shares issued pursuant to Registrant's DRP and 401(k)
plans were purchased on the open market.
In December, 1996, Registrant sold $8 million in tax-exempt debt that
was issued through the California Pollution Control Financing Authority. The
funds were deposited with a trustee and were used during 1997 to finance water
main replacements in several of Registrant's customer service areas.
ITEM 3. LEGAL PROCEEDINGS
On April 24, 1997, a complaint in multiple counts seeking recovery for
negligence, wrongful death, strict liability, trespass, public nuisance, private
nuisance, negligence per se, strict liability for ultrahazardous activities and
fraudulent concealment was filed in Los Angeles Superior Court on behalf of
approximately 145 plaintiffs (the "Adler matter"). After preliminary Demurrers
and Motions to Strike, these same plaintiffs filed a First Amended Complaint on
or about October 16, 1997 seeking recovery on essentially the same theories.
Plaintiffs allege that they are, and at all relevant times were, (1) customers
of Registrant, (2) that Registrant has provided and continues to provide them
with allegedly contaminated water from wells located in an area of the San
Gabriel Valley that
<PAGE> 13
has been designated a federal environmental (USEPA) superfund site, and (3) the
maintenance of this contaminated well water has resulted in contamination of the
soil, subsurface soil, and surrounding air, with trichloroethylene,
perchloroethene, carbon tetrachloride and other solvents. Plaintiffs further
allege that Registrant's actions have caused, and continue to cause, injuries to
the plaintiffs' person, personal property and financial interests in unspecified
amounts. Plaintiffs seek damages, including general, special, and punitive
damages, according to proof at trial, as well as attorney's fees on certain
causes of action, costs of suit, and other unspecified relief. Registrant was
initially served with the original Complaint on June 3, 1997. On July 31, 1997,
Registrant's Motion for A Change of Venue for this matter from Downtown Los
Angeles to Pasadena, California was granted.
Registrant has provided water service in portions of the San
Gabriel Valley for over 60 years along with over 30 other water purveyors.
Portions of the San Gabriel Valley have been designated a USEPA superfund site.
Registrant is not a potentially responsible party with respect to contamination
of the site or sites in the San Gabriel Valley which have been designated as
superfund sites. Registrant has commenced and is continuing a review and
evaluation of plaintiff's claims and its insurance coverage for these potential
liabilities allegedly arising over the past 30 years. Ten plaintiff's were
served with interrogatories approximately 45 days ago. A Case Management Order
has been agreed upon and within the next 30 days Interrogatories will be sent to
the remaining plaintiffs.
Registrant was served on November 3, 1997 as Doe I in the
matter of Santamaria v. Suburban Water Systems which was filed in Los Angeles
Superior court. The complaint makes claims based on Negligence, Strict
Liability, Trespass, Nuisance, Negligence per se, Absolute Liability for
Ultrahazardous Activity and Fraudulent Concealment. The complaint makes
allegations that Registrant sold, but did not create, contaminated water to
certain of the 379 individual plaintiffs claiming personal injury and property
damage. In addition, there are 10 wrongful death claims with 19 wrongful death
plaintiffs. The complaint encompasses a geographical area which includes, as far
as can be ascertained, little of Registrant's systems. The complaint differs
from the Adler matter in that the plaintiffs have also named Suburban Water
Systems, Southwest Water Co., Covina Irrigating Co., California Domestic Water
Company, San Gabriel Valley Water Company, and certain parties that have been
named as potentially responsible parties in the Superfund Site effecting this
area. On February 16, 1998, a Second Amended Complaint was received with some
new plaintiffs who were generally spouses of previously named wrongful death
plaintiffs. This latest version of the complaint contains new causes of action
for battery, and unfair business practices with a request for injunctive relief
to abate a nuisance created as a result of alleged contamination. A Motion to
Change Venue from Los Angeles County to Ventura County is pending for hearing on
March 18, 1998.
Registrant was served in January 1998 in the matter of
Nathaniel Allen, Jr., et al. V. Aerojet-General Corporation, et al which was
filed in Sacramento Superior court. The complaint makes claims based on wrongful
death, personal injury, property damage as a result of nuisance and trespass,
medical monitoring, and diminution of property values. The claims center around
the allegation that the plaintiffs in this matter have been damaged as a result
of water delivered to them by Registrant and other defendants which is, or has
been in the past, contaminated with a number of chemicals, including TCE, PCE,
carbon tetrachloride,
<PAGE> 14
perchlorate, Freon-113, hexavalent chromium and other, unnamed, chemicals. On
February 9, 1998, defendant McDonnell Douglas Corporation removed this case to
United States District Court for the Eastern District of California. A Motion
for Partial Dismissal or in the Alternative to Strike and for a More Definitive
Statement was also filed by McDonnell Douglas Corporation and that Motion will
be heard on March 23, 1998.
In light of the breadth of plaintiff's claims, the lock of
factual information regarding plaintiff's claims and injuries, if any, the fact
that no discovery has yet been completed, Registrant is unable at this time to
determine what, if any, potential liability it may have with respect to claims
in these lawsuits. Registrant intends to vigorously defend itself against these
allegations.
Registrant is also subject to ordinary routine litigation
incidental to its business. Other than as disclosed above, no legal proceedings
are pending, except such incidental litigation, to which Registrant is a party
or of which any of its properties is the subject which are believed to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION RELATING TO COMMON SHARES -
Information responding to Item 201(a) of Regulation S-K is
included in the 1997 Annual Report to Shareholders, under the
caption "Stock Listing" and located on page 36, filed by
Registrant with the Commission pursuant to Regulation 14A, and
is incorporated herein by reference pursuant to General
Instruction G(2).
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES -
As of February 27, 1998, there were 3,874 holders of record of
Common Shares.
(c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND
DIVIDEND RESTRICTIONS
Information responding to Item 201(c) of Regulation S-K is
included in the 1997 Annual Report to Shareholders, under the
caption "Stock Listing" and located on page 36, filed by
Registrant with the Commission pursuant to Regulation 14A, and
is incorporated herein by reference pursuant to General
Instruction G(2). For the last three years, Registrant has
paid dividends on its Common Shares on March 1, June 1,
September 1 and December 1.
Additional information responding to Item 201(c) of Regulation
S-K with respect to dividend restrictions is included in the
1997 Annual Report to Shareholders, under Note 2 captioned
"Capital Stock" located on Page 29 of the Notes to
Financial Statements, filed by Registrant with the Commission
pursuant to Regulation 14A, and is incorporated herein by
reference pursuant to General Instruction G(2).
ITEM 6. SELECTED FINANCIAL DATA
Information responding to Item 6 is included in the 1997 Annual Report
to Shareholders, under the caption entitled "Selected Financial Data" located on
Page 11, filed by Registrant with the Commission pursuant to Regulation 14A, and
is incorporated herein by reference pursuant to General Instruction G(2).
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Information responding to Item 7 is included in the 1997 Annual Report
to Shareholders, under the caption entitled "Management's Discussion and
Analysis" located on Pages 19 through 22, filed by Registrant with the
Commission pursuant to Regulation 14A, and is incorporated herein by reference
pursuant to General Instruction G(2).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information responding to Item 8 is included in the 1997 Annual Report
to Shareholders, filed by Registrant with the Commission pursuant to Regulation
14A, under the following captions located on Pages 23 through 32 and is
incorporated herein by reference pursuant to General Instruction G(2).
Report of Independent Public Accountants
Balance Sheets - December 31, 1997 and 1996
Statements of Capitalization - December 31, 1997 and 1996
Statements of Income - for the years ended December 31, 1997, 1996 and
1995
Statements of Changes in Common Shareholders' Equity - for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - for the years ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responding to Item 10 is included in the Proxy Statement,
to be filed by Registrant with the Commission pursuant to Regulation 14A, under
the captions entitled "Election of Directors" and "Executive Officers -
Experience, Security Ownership and Compensation" and is incorporated herein by
reference pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responding to Item 11 is included in the Proxy Statement,
to be filed by Registrant with the Commission pursuant to Regulation 14A, under
the captions entitled "Election of
<PAGE> 16
Directors," "Executive Officers - Experience, Security Ownership and
Compensation" and "Performance Graph" is incorporated herein by reference
pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responding to Item 12 is included in the Proxy Statement,
to be filed by Registrant with the Commission pursuant to Regulation 14A, under
the captions entitled "Election of Directors" and "Executive Officers -
Experience, Security Ownership and Compensation" and is incorporated herein by
reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responding to Item 13 is included in the Proxy Statement,
to be filed by Registrant with the Commission pursuant to Regulation 14A, under
the caption entitled "Election of Directors" and is incorporated herein by
reference pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Reference is made to the Financial Statements incorporated
herein by reference to Item 8 hereof.
2. Schedules I, III, IV, and V are omitted as they are not
applicable. All other required schedules may be found in
Exhibit 13 filed herewith.
3. See (c) below.
(b) None.
(c) Exhibits -
3.1 By-Laws as Amended to April 26, 1994
3.2.1 Restated Articles of Incorporation as Amended to December
4, 1990 incorporated herein by reference to Registrant's
Form 10-K with respect to the year ended December 31,
1990. Commission File No. 0-1121
3.2.2 Certificate of Amendment of Articles of Incorporation
dated December 3, 1992 incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1992. Commission File No. 0-1121.
3.2.3 Certificate of Amendment of Articles of Incorporation
dated February 17, 1994 incorporated herein by reference
to Registrant's Form 10-K with respect to the year ended
December 31, 1993. Commission File No. 0-1121.
<PAGE> 17
3.2.4 Certificate of Amendment of Articles of Incorporation
dated May 22, 1997.*
3.2.5 Certificate of Amendment of Articles of Incorporation
dated August 21, 1997.*
3.3 Certificate of Ownership dated August 10, 1978
incorporated herein by reference to Registrant's Form 10-K
with respect to the year ended December 31, 1990.
Commission File No. 0-1121
4.1 Indenture, dated September 1, 1993 between Registrant and
Chemical Trust Company of California, as trustee, relating
to Registrant's Medium Term Notes, Series A, incorporated
herein by reference to Registrant's Form 8-K. Commission
File No. 33-62832.
10.1 Deferred Compensation Plan for Directors and Executives
incorporated herein by reference to Registrant's
Registration Statement on Form S-2 (Registration No.
33-5151).
10.2 Reimbursement Agreement dated October 3, 1997 between
Registrant and The Bank of Nova Scotia.*
10.3 Second Sublease dated October 5, 1984 between Registrant
and Three Valleys Municipal Water District incorporated
herein by reference to Registrant's Registration Statement
on Form S-2 (Registration No. 33-5151).
10.4 Note Agreement dated as of February 1, 1989 between
Registrant and First Colony Life Insurance incorporated
herein by reference to Registrant's Form 10-K with respect
to the year ended December 31, 1990. Commission File No.
0-1121.
10.5 Schedule of omitted Note Agreements incorporated herein by
reference to Registrant's Form 10-K with respect to the
year ended December 31, 1990. Commission File No. 0-1121.
10.6 Note Agreement dated as of May 15, 1991 between Registrant
and Transamerica Occidental Life Insurance Company
incorporated herein by reference to Registrant's Form 10-Q
with respect to the quarter ended June 30, 1991.
Commission File No. 0-1121.
10.7 Schedule of omitted Note Agreements incorporated herein by
reference to Registrant's Form 10-Q with respect to the
quarter ended June 30, 1991. Commission File No. 0-1121.
10.8 Agreement for Financing Capital Improvement dated as of
June 2, 1992 between Registrant and Three Valleys
Municipal Water District incorporated herein by reference
to Registrant's Form 10-K with respect to the year ended
December 31, 1992. Commission File No. 0-1121.
<PAGE> 18
10.9 Water Supply Agreement dated as of June 1, 1994 between
Registrant and Central Coast Water Authority incorporated
herein by reference to Registrant's Form 10-K with respect
to the year ended December 31, 1994. Commission File No.
0-1121.
10.9 Retirement Plan for Non-Employee Directors of Southern
California Water Company, as amended, January 25, 1995
incorporated herein by reference to Registrant's Form 10-K
with respect to the year ended December 31, 1994.
Commission File No. 0-1121.
10.10 Dividend Reinvestment and Common Share Purchase Plan
incorporated herein by reference to Registrant's
Post-Effective Amendment No. 1 to Form S-3 (Registration
No. 33-42218).
10.11 Key Executive Long-Term Incentive Plan incorporated herein
by reference to Registrant's 1995 Proxy Statement,
Commission File No. 0-1121.
10.19 Energy Management Services Agreement between Registrant
and Enova Energy, Inc. incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1996. Commission File No. 0-1121.
13. Portions of the Annual Report to Shareholders for the year
ended December 31, 1997 which are expressly incorporated
herein by reference.*
21. Subsidiaries of Registrant - Exhibit not included as
subsidiaries in the aggregate are not significant.
23. Consent of Independent Public Accountants*.
27. Schedule UT*.
(d) None.
---------------------
*Filed concurrently herewith
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN CALIFORNIA WATER COMPANY
By : /s/McCLELLAN HARRIS III
McClellan Harris III
Vice President - Finance, Treasurer,
Chief Financial Officer and Secretary
Date: March 6, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
/s/ W. V. CAVENEY Date: March 6, 1998
- -------------------------------------------
W. V. Caveney
Chairman of the Board and Director
/s/ FLOYD E. WICKS March 6, 1998
- -------------------------------------------
Floyd E. Wicks
Principal Executive Officer;
President, CEO and Director
/s/ McCLELLAN HARRIS III March 6, 1998
- -------------------------------------------
McClellan Harris III
Principal Financial and Accounting Officer;
VP - Finance, Treasurer, CFO and Secretary
/s/ JAMES L. ANDERSON March 6, 1998
- -------------------------------------------
James L. Anderson, Director
/s/ JEAN E. AUER March 6, 1998
- -------------------------------------------
Jean E. Auer, Director
/s/ N. P. DODGE, JR. March 6, 1998
- -------------------------------------------
N. P. Dodge, Jr., Director
/s/ ROBERT F. KATHOL March 6, 1998
- -------------------------------------------
Robert F. Kathol, Director
/s/ LLOYD E. ROSS March 6, 1998
- -------------------------------------------
Lloyd E. Ross, Director
<PAGE> 20
EXHIBIT INDEX
3.1 By-Laws as Amended to April 26, 1994
3.2.1 Restated Articles of Incorporation as Amended to December
4, 1990 incorporated herein by reference to Registrant's
Form 10-K with respect to the year ended December 31,
1990. Commission File No. 0-1121
3.2.2 Certificate of Amendment of Articles of Incorporation
dated December 3, 1992 incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1992. Commission File No. 0-1121.
3.2.3 Certificate of Amendment of Articles of Incorporation
dated February 17, 1994 incorporated herein by reference
to Registrant's Form 10-K with respect to the year ended
December 31, 1993. Commission File No. 0-1121.
3.2.4 Certificate of Amendment of Articles of Incorporation
dated May 22, 1997.*
3.2.5 Certificate of Amendment of Articles of Incorporation
dated August 21, 1997.*
3.3 Certificate of Ownership dated August 10, 1978
incorporated herein by reference to Registrant's Form 10-K
with respect to the year ended December 31, 1990.
Commission File No. 0-1121
4.1 Indenture, dated September 1, 1993 between Registrant and
Chemical Trust Company of California, as trustee, relating
to Registrant's Medium Term Notes, Series A, incorporated
herein by reference to Registrant's Form 8-K. Commission
File No. 33-62832.
10.1 Deferred Compensation Plan for Directors and Executives
incorporated herein by reference to Registrant's
Registration Statement on Form S-2 (Registration No.
33-5151).
10.2 Reimbursement Agreement dated October 3, 1997 between
Registrant and The Bank of Nova Scotia.*
10.3 Second Sublease dated October 5, 1984 between Registrant
and Three Valleys Municipal Water District incorporated
herein by reference to Registrant's Registration Statement
on Form S-2 (Registration No. 33-5151).
10.4 Note Agreement dated as of February 1, 1989 between
Registrant and First Colony Life Insurance incorporated
herein by reference to Registrant's Form 10-K with respect
to the year ended December 31, 1990. Commission File No.
0-1121.
10.5 Schedule of omitted Note Agreements incorporated herein by
reference to Registrant's Form 10-K with respect to the
year ended December 31, 1990. Commission File No. 0-1121.
10.6 Note Agreement dated as of May 15, 1991 between Registrant
and Transamerica Occidental Life Insurance Company
incorporated herein by reference to Registrant's Form 10-Q
with respect to the quarter ended June 30, 1991.
Commission File No. 0-1121.
10.7 Schedule of omitted Note Agreements incorporated herein by
reference to Registrant's Form 10-Q with respect to the
quarter ended June 30, 1991. Commission File No. 0-1121.
10.8 Agreement for Financing Capital Improvement dated as of
June 2, 1992 between Registrant and Three Valleys
Municipal Water District incorporated herein by reference
to Registrant's Form 10-K with respect to the year ended
December 31, 1992. Commission File No. 0-1121.
<PAGE> 21
10.9 Water Supply Agreement dated as of June 1, 1994 between
Registrant and Central Coast Water Authority incorporated
herein by reference to Registrant's Form 10-K with respect
to the year ended December 31, 1994. Commission File No.
0-1121.
10.9 Retirement Plan for Non-Employee Directors of Southern
California Water Company, as amended, January 25, 1995
incorporated herein by reference to Registrant's Form 10-K
with respect to the year ended December 31, 1994.
Commission File No. 0-1121.
10.10 Dividend Reinvestment and Common Share Purchase Plan
incorporated herein by reference to Registrant's
Post-Effective Amendment No. 1 to Form S-3 (Registration
No. 33-42218).
10.11 Key Executive Long-Term Incentive Plan incorporated herein
by reference to Registrant's 1995 Proxy Statement,
Commission File No. 0-1121.
10.19 Energy Management Services Agreement between Registrant
and Enova Energy, Inc. incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1996. Commission File No. 0-1121.
13. Portions of the Annual Report to Shareholders for the year
ended December 31, 1997 which are expressly incorporated
herein by reference.*
21. Subsidiaries of Registrant - Exhibit not included as
subsidiaries in the aggregate are not significant.
23. Consent of Independent Public Accountants*.
27. Schedule UT*.
---------------------
*Filed concurrently herewith
<PAGE> 1
EXHIBIT 3.2.4
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
SOUTHERN CALIFORNIA WATER COMPANY
A CALIFORNIA CORPORATION
Floyd E. Wicks and McClellan Harris III certify that:
1. They are the duly elected and acting President and Secretary,
respectively of Southern California Water Company (the "Corporation").
2. The Restated Articles of Incorporation of the Corporation shall be
amended by striking in its entirety the first full paragraph of Article IV of
the restated Articles of Incorporation which now reads:
"This Corporation is authorized to issue three classes of
stock to be designated, respectively, "$100 Preferred Shares",
"Preferred Shares" and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
10,239,600 and the aggregate par value of all such shares is
$42,240,000; all shares of each class are to have a par value;
150,000 shares are to be $100 Preferred Shares with a par
value of $100 per share and an aggregate par value of
$15,000,000; 89,600 shares are to be Preferred Shares with a
par value of $25 per share and an aggregate par value of
$2,240,000; and 10,000,000 shares are to be Common Shares with
a par value of $2.50 per share and an aggregate par value of
$25,000,000."
<PAGE> 2
and substituting therefore the following paragraph to read in full as follows:
"This Corporation is authorized to issue three classes of
stock to be designated, respectively, "$100 Preferred Shares",
"Preferred Shares" and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
30,234,800 and the aggregate par value of all such shares is
$92,120,000; all shares of each class are to have a par value;
150,000 shares are to be $100 Preferred Shares with a par
value of $100 per share and an aggregate par value of
$15,000,000; 84,800 shares are to be Preferred Shares with a
par value of $25 per share and an aggregate par value of
$2,120,000; and 30,000,000 shares are to be Common Shares with
a par value of $2.50 per share and an aggregate par value of
$75,000,000."
3. The Restated Articles of Incorporation of the Corporation shall be
further amended by striking in its entirety paragraph (2) of Article VII of the
Restated Articles of Incorporation which now reads:
"(2) Number of Shares. The authorized number of shares
constituting said Preferred Shares, 5% Series, shall
be 80,000."
and substituting therefore the following paragraph to read in full as follows:
"(2) Number of Shares. The authorized number of shares
constituting said Preferred Shares, 5% Series, shall
be 84,800."
4. The foregoing amendment set forth in paragraph 3 of this
Certificate, as well as the portion of the amendment in paragraph 2 that relates
to the "Preferred Shares," are each amendments that may be adopted by the Board
of Directors alone (and which were so adopted) because the
<PAGE> 3
amendments are required by Section 510 of the California General Corporation Law
to reflect the reacquisition of a portion of the Corporation's Preferred Shares,
5% Series, $25 par value, in accordance with the sinking fund provisions
thereof. Such reacquired Preferred Shares cannot be reissued. 5. To the extent
that it relates to the "Common Shares," the foregoing amendment in paragraph 2
of this Certificate was approved by the required vote of the shareholders of the
Corporation in accordance with Section 903 of the California General Corporation
Law. The number of outstanding shares of each class entitled to vote was
8,957,671 Common Shares and 84,800 Preferred Shares and the number of shares of
each class voting in favor of the amendment equaled or exceeded the required
vote, such required vote being the affirmative vote of the majority of the
voting power of the outstanding Common Shares and Preferred Shares entitled to
vote.
6. The foregoing amendments have been duly approved by the Board of
Directors as required by Section 905(b) of the California General Corporation
Law.
We further declare, under penalty of perjury under the laws of the
State of California, that the matters set forth in this Certificate of Amendment
are true and correct.
IN WITNESS WHEREOF, the undersigned have executed this Certificate in
San Dimas, California on this 22nd day of May, 1997.
/s/ Floyd E. Wicks
------------------------------
FLOYD E. WICKS, President
/s/ McClellan Harris III
------------------------------
McCLELLAN HARRIS III, Secretary
<PAGE> 1
EXHIBIT 3.2.5
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
SOUTHERN CALIFORNIA WATER COMPANY
A CALIFORNIA CORPORATION
Floyd E. Wicks and McClellan Harris III certify that:
1. They are the duly elected and acting President and Secretary,
respectively of Southern California Water Company (the "Corporation").
2. The Restated Articles of Incorporation of the Corporation shall be
amended by striking in its entirety the first full paragraph of Article IV of
the restated Articles of Incorporation which now reads:
"This Corporation is authorized to issue three classes of
stock to be designated, respectively, "$100 Preferred Shares",
"Preferred Shares" and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
30,234,800 and the aggregate par value of all such shares is
$92,120,000; all shares of each class are to have a par value;
150,000 shares are to be $100 Preferred Shares with a par
value of $100 per share and an aggregate par value of
$15,000,000; 84,800 shares are to be Preferred Shares with a
par value of $25 per share and an aggregate par value of
$2,120,000; and 30,000,000 shares are to be Common Shares with
a par value of $2.50 per share and an aggregate par value of
$75,000,000."
<PAGE> 2
and substituting therefore the following paragraph to read in full as follows:
"This Corporation is authorized to issue three classes of
stock to be designated, respectively, "$100 Preferred Shares",
"Preferred Shares" and "Common Shares". The total number of
shares which this Corporation is authorized to issue is
30,233,200 and the aggregate par value of all such shares is
$92,080,000; all shares of each class are to have a par value;
150,000 shares are to be $100 Preferred Shares with a par
value of $100 per share and an aggregate par value of
$15,000,000; 83,200 shares are to be Preferred Shares with a
par value of $25 per share and an aggregate par value of
$2,080,000; and 30,000,000 shares are to be Common Shares with
a par value of $2.50 per share and an aggregate par value of
$75,000,000."
3. The Restated Articles of Incorporation of the Corporation shall be
further amended by striking in its entirety paragraph (2) of Article VII of the
Restated Articles of Incorporation which now reads:
"(2) Number of Shares. The authorized number of shares constituting
said Preferred Shares, 5% Series, shall be 84,800."
and substituting therefore the following paragraph to read in full as follows:
"(2) Number of Shares. The authorized number of shares constituting
said Preferred Shares, 5% Series, shall be 19,200."
4. The foregoing amendment set forth in paragraph 3 of this
Certificate, as well as the portion of the amendment in paragraph 2 that relates
to the "Preferred Shares," are each amendments that may be adopted by the Board
of Directors alone (and which were so adopted) because the
<PAGE> 3
amendments are required by Section 510 of the California General Corporation Law
to reflect the reacquisition of a portion of the Corporation's Preferred Shares,
5% Series, $25 par value, in accordance with the sinking fund provisions
thereof. Such reacquired Preferred Shares cannot be reissued.
5. The foregoing amendments have been duly approved by the Board
of Directors as required by Section 905(b) of the California General Corporation
Law.
We further declare, under penalty of perjury under the laws of the
State of California, that the matters set forth in this Certificate of Amendment
are true and correct.
IN WITNESS WHEREOF, the undersigned have executed this Certificate in
San Dimas, California on this 21st day of August, 1997.
/s/ Floyd E. Wicks
------------------------------
FLOYD E. WICKS, President
/s/ McClellan Harris III
------------------------------
McCLELLAN HARRIS III, Secretary
<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I
Definitions
1.01 Certain Defined Terms...................................................2
1.02 Rules of Interpretation.................................................8
ARTICLE II
Letter of Credit
2.01 Agreement to Issue Letter of Credit.....................................9
2.02 Obligations.............................................................9
2.03 Obligations Absolute...................................................11
2.04 Letter of Credit Fees and Commissions..................................12
2.05 Increased Costs Due to Change in Law...................................12
2.06 Additional Fees........................................................13
2.07 Waivers................................................................13
2.08 Payment of Expenses, Etc...............................................14
2.09 Actions Relating to Letter of Credit; Indemnity........................14
2.10 Prepayments............................................................16
2.11 Right of Bank to Extend Letter of Credit...............................17
2.12 Optional Prepayment of Certificates; Custodial Account.................17
2.13 Receipt of Certain Funds by Bank.......................................19
2.14 Removal and Replacement of Remarketing Agent...........................19
ARTICLE III
Collateral Security
3.01 Security Interest in Accounts..........................................20
3.02 Right of Setoff........................................................20
3.03 Security Interest in Certificates......................................20
3.04 Further Security.......................................................21
ARTICLE IV
Conditions Precedent
4.01 Opinion of Counsel to the Company......................................21
4.02 Opinion of Special Counsel.............................................21
4.03 Required Acts and Conditions...........................................21
4.04 No Default.............................................................21
4.05 Representations and Warranties.........................................22
4.06 Certificate of Compliance..............................................22
4.07 Proceedings............................................................22
4.08 Filings and Recordings.................................................23
4.09 Other Conditions Precedent. ...........................................23
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
ARTICLE V
<S> <C>
Representations and Warranties
5.01 Due Organization, Etc..................................................23
5.02 Due Authorization, Etc.................................................23
5.03 Approvals..............................................................24
5.04 Enforceability.........................................................24
5.05 Financial Statements...................................................24
5.06 Litigation.............................................................25
5.07 Title to Property......................................................25
5.08 Compliance with Laws, Contracts........................................25
5.09 Loan Documents.........................................................26
5.10 Exemption of Interest from Federal Income Tax..........................26
5.11 No Misleading Statements...............................................26
5.12 Employee Retirement Income Security Act of 1974........................26
5.13 Subsidiaries...........................................................26
5.14 No Burdensome Restrictions.............................................27
5.15 Taxes..................................................................27
5.16 Investment Company Act.................................................27
5.17 Leases.................................................................27
ARTICLE VI
Affirmative Covenants
6.01 Financial Statements...................................................28
6.02 Officer's Certificate..................................................29
6.03 Accountant's Certificate...............................................30
6.04 Subsidiaries...........................................................30
6.05 Other Reports..........................................................30
6.06 Inspection.............................................................32
6.07 Payment of Taxes and Other Charges; ERISA..............................32
6.08 Preservation of Existence, Etc.........................................32
6.09 Compliance with Laws, Etc..............................................32
6.10 Certain Notices........................................................33
6.11 Insurance..............................................................33
6.12 Related Documents......................................................33
6.13 Incorporated Covenants.................................................33
ARTICLE VII
Negative Covenants
7.01 Issuance of Stock By Subsidiaries......................................34
7.02 Prohibition of Certain Contracts.......................................34
7.03 Consolidated Tax Returns...............................................35
7.04 Sale of Certain Instruments and Accounts...............................35
7.05 Leasebacks.............................................................35
7.06 Amendments.............................................................36
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE VIII
<S> <C>
Events of Default
8.01 Events of Default......................................................36
8.02 Remedies...............................................................39
8.03 Additional Remedies....................................................39
ARTICLE IX
Covenants Relating to Construction
9.01 Indemnity..............................................................39
ARTICLE X
Miscellaneous
10.01 Amendment and Waiver..................................................40
10.02 Governing Law.........................................................40
10.03 Notices...............................................................40
10.04 Waiver................................................................40
10.05 Descriptive Headings, Etc.............................................40
10.06 Benefit of Agreement..................................................41
10.07 Counterparts..........................................................41
10.08 Actions...............................................................41
10.09 Participations........................................................41
10.10 Severability..........................................................41
10.11 Confidentiality.......................................................42
</TABLE>
EXHIBIT A Irrevocable Letter of Credit
EXHIBIT B Pledge and Security Agreement (Certificates of Participation)
EXHIBIT C Security Agreement (Second Trust Agreement Funds)
EXHIBIT D Opinion of Company Counsel
<PAGE> 4
EXHIBIT 10.2
REIMBURSEMENT AGREEMENT
BY AND BETWEEN
SOUTHERN CALIFORNIA WATER COMPANY
AND
THE BANK OF NOVA SCOTIA
-----------------------------
Dated as of October 3, 1997
-----------------------------
<PAGE> 5
REIMBURSEMENT AGREEMENT
THIS REIMBURSEMENT AGREEMENT is made and entered into as of October 3,
1997, by and between SOUTHERN CALIFORNIA WATER COMPANY, a California corporation
(the "Company"), and THE BANK OF NOVA SCOTIA (the "Bank").
A. The Company has requested the Three Valleys Municipal Water District,
a Municipal Water District of the State of California duly organized and
existing under the Constitution and laws of the State of California (the
"District"), to finance a portion of the costs of acquisition, construction,
equipping and installing of certain water treatment, water transmission and
hydroelectric generating facilities (the "Project") as described in Exhibit B to
the Second Lease-Purchase Agreement dated as of November 1, 1984 (the "Second
Lease-Purchase Agreement") between the District and Central Bank Leasing, a
division of Cenval Leasing Corp., a corporation organized under the laws of the
State of California (the "Leasing Firm") by the issuance pursuant to the Second
Trust Agreement dated as of November 1, 1984, as amended and modified (the
"Second Trust Agreement") among the District, the Leasing Firm, First Trust of
California National Association, as trustee (the "Trustee") and the Company, of
$6,000,000 principal amount of Certificates of Participation (Variable Rate
Obligation), (Miramar Water Treatment, Water Transmission and Hydroelectric
Generating Facilities Project) (the "Certificates").
B. The Company has requested the Bank to issue an irrevocable letter of
credit substantially in the form of Exhibit A hereto (as amended or supplemented
from time to time, the "Letter of Credit") in an amount not exceeding $6,296,000
(Six Million Two Hundred and Ninety-Six Thousand Dollars) (the "Letter of Credit
Commitment"), of which an amount not exceeding $6,000,000 (Six Million Dollars)
may be drawn upon with respect to the principal, or portion of the purchase
price equal to principal, of the Certificates, and of which an amount not
exceeding $296,000, (Two Hundred Ninety Six Thousand Dollars) may be drawn upon
with respect to the payment of up to one hundred twenty (120) days' interest
accrued on the Certificates at or prior to the Expiration Date of the Letter of
Credit.
C. The Bank has agreed to issue the Letter of Credit on the terms and
subject to the conditions set forth herein.
Accordingly, the parties hereto agree as follows:
<PAGE> 6
ARTICLE I
Definitions
Section 1.01 Certain Defined Terms. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Agreement" shall mean this Reimbursement Agreement as the same may be
amended, supplemented or otherwise modified from time to time.
"Alternate Base Rate" means, on any date, a fluctuating rate of interest
per annum equal to the higher of
(a) the rate of interest most recently announced by the Bank in
San Francisco, California as its base or prime rate for dollar loans;
and
(b) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as determined by the Bank, plus 1/2 of 1%.
The Alternate Base Rate is not necessarily intended to be the lowest rate of
interest determined by the Bank in connection with extensions of credit. Changes
in the rate of interest applied on the basis of the Alternate Base Rate will
take effect simultaneously with each change in the Alternate Base Rate.
"Bank" shall initially mean The Bank of Nova Scotia and shall also mean
the issuer of any Alternate Credit Facility (as defined in the Trust Agreement).
"Bankruptcy Law" shall mean Title 11, U.S. Code, as amended or
supplemented, any successor statute thereto or any similar federal, State or
foreign law for the relief of debtors.
"Business Day" shall mean a day on which banks located in each of the
cities in which (i) the principal office of the Trustee is located, (ii) the
principal office of the Paying Agent is located and (iii) the Bank is located
are not required or authorized to remain closed and on which the New York Stock
Exchange is not closed.
"Capitalized Lease" shall mean, with respect to any Person, any lease or
any other agreement with respect to the use of property which, in accordance
with generally accepted accounting principles, should be capitalized on the
lessee's or user's balance sheet or for which the amount of the liability
thereunder as if so capitalized should be disclosed in such balance sheet.
"Capitalized Lease Obligations" of any Person shall mean and include, as
of any date as of which the amount thereof is to be determined, the amount of
the liability capitalized or disclosed (or which should be disclosed) in a
balance sheet of such Person in respect of a Capitalized Lease of such Person.
<PAGE> 7
"Certificates" shall mean the $6,000,000 Certificates of Participation
(Variable Rate Obligation) (Miramar Water Treatment, Water Transmission and
Hydroelectric Generating Facilities) issued pursuant to the Second Trust
Agreement.
"Closing Date" shall mean the date all of the conditions precedent to
the issuance of the Letter of Credit set forth herein are satisfied.
"Company" shall mean Southern California Water Company, a California
corporation.
"Consolidated" or "consolidated", when used with reference to any
financial term in this Agreement (but not when used with respect to any tax
return or tax liability), shall mean the aggregate for two or more Persons of
the amounts signified by such term for all such Persons, with inter-company
items eliminated and, with respect to earnings, after eliminating the portion of
earnings properly attributable to minority interests, if any, in the capital
stock of any such Person or attributable to shares of Preferred Stock of any
such Person not owned by any other such Person.
"Co-paying Agent" shall mean the Person serving as Co-Paving Agent
pursuant to the Second Trust Agreement.
"Controlled Group" shall mean a "controlled group of corporations" as
defined in Section 1563(a) of the Internal Revenue Code of 1986, as amended,
determined without regard to Sections 1563(a)(4) and (e)(3)(C) of such Code, of
which the Company is a part.
"Current Indebtedness" of any Person shall mean and include (i) all
Indebtedness of such Person for borrowed money which does not constitute Funded
Indebtedness of such Person, and (ii) all Indebtedness of such Person (other
than for property taxes) which does not constitute Funded Indebtedness of such
Person and which is secured by any Lien existing upon property owned by such
Person, whether or not the Indebtedness secured thereby has been assumed by such
Person.
"Default" shall mean any event which, with notice or lapse of time, or
both, or the happening of any further condition, event or act, would become an
Event of Default.
"District" shall mean Three Valleys Municipal Water District, a
Municipal Water District duly organized and existing under the Constitution and
laws of the State of California.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Event of Default" shall mean any of the events described in Section
8.01.
<PAGE> 8
"Expiration Date" shall mean the expiration date of the Letter of Credit
which shall initially be at 3:00 p.m. San Francisco time on November 15, 2000.
The Expiration Date shall be subject to extension as provided in Section 2.11
hereof.
"Funded Indebtedness" of any Person shall mean and include, as of any
date of which the amount thereof is to be determined, all Indebtedness of such
Person, whether secured or unsecured, which by its terms has a final maturity,
duration, term or payment date more than one year from the date on which Funded
Indebtedness is to be determined (including that portion of the principal of
such indebtedness due within one year from such date of determination, and also
including any Indebtedness of such Person having a final maturity, duration or
payment date within one year from such date, which, pursuant to the terms of a
revolving credit or similar agreement or otherwise, may be renewed or extended
from such date, whether or not theretofore renewed or extended).
"Incur" or "incur" (including the correlative terms "incurred",
"incurring", incurs and "incurrence"), when used with respect to any
Indebtedness, shall mean create, incur, assume, guarantee or in any manner
become liable in respect of, such Indebtedness.
"Indebtedness" of any Person shall mean and include all obligations of
such Person which in accordance with generally accepted accounting principles
shall be classified upon a balance sheet of such Person as liabilities of such
Person, and in any event shall include all (i) obligations of such Person for
borrowed money or which have been incurred in connection with the acquisition of
property or assets, (ii) obligations secured by any lien or other charge upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations, (ii) obligations created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person, notwithstanding the fact that the
rights and remedies of the seller, lender or lessor under such agreement in the
event of default are limited to repossession or sale of property, (iv)
Capitalized Lease Obligations of such Person and (v) all guarantees of such
Person guaranteeing or in effect guaranteeing any indebtedness or other
obligation of any other Person. For the purpose of computing the "indebtedness"
of any Person, there shall be excluded any particular Indebtedness to the extent
that, upon or prior to the maturity thereof, there shall have been deposited
with the proper depositary in trust the necessary funds (or evidences of such
Indebtedness, if permitted by the instrument creating such Indebtedness) for the
payment, redemption or satisfaction of such Indebtedness; and thereafter such
funds and evidences of Indebtedness so deposited shall not be included in any
computation of the assets of such Person.
"Interest Drawing" shall mean a drawing pursuant to Exhibit B of the
Letter of Credit.
"Interest Purchase Drawing" shall mean a drawing pursuant to Exhibit D
of the Letter of Credit.
"Investment" shall mean, with respect to any Person, any loan, advance
or extension of credit by such Person to, and any guaranty or other contingent
liability with respect to the capital stock, Indebtedness or other obligations
of, and any contributions to the capital of, any other
<PAGE> 9
Person, as well as any ownership, purchase or other acquisition by such Person
of any interest in any capital stock or other securities of any such other
Person as well as any transfer or sale of property by such Person to any other
Person other than upon full payment, in cash, of not less than the agreed sale
price or the fair value of such property, whichever is higher, provided that
nothing which constitutes Current Indebtedness or Funded Indebtedness of such
Person shall also be an Investment of such Person.
"Issuance Date" shall mean November 14, 1997.
"Joint Venture" shall mean Golden State Water Company LLC and any other
joint venture, limited liability company or partnership in which the Company or
any of its Subsidiaries has an interest and which has been formed for the
purpose of owning, leasing, operating and maintaining, planing, designing,
constructing, rebuilding, repairing, rehabilitating and improving or providing
services for water, water treatment, wastewater or wastewater treatment systems.
"Leasing Firm" shall mean Central Bank Leasing, a division of Cenval
Leasing Corp, a corporation organized under the laws of the State of California.
"Letter of Credit" shall mean the Bank's irrevocable letter of credit in
substantially the form of Exhibit A hereto, as the same may be amended,
supplemented or otherwise modified, and any substitute therefor or replacement
thereof issued by the Bank.
"Letter of Credit Commitment" shall initially mean $6,296,000, which
shall be subject to reduction as provided in the Letter of Credit.
"Lien" shall mean: (i) any interest in property (whether real, personal
or mixed and whether tangible or intangible) which secures an obligation owed
to, or a claim by, a Person other than the owner of such property, whether such
interest is based on the common law, statute or contract, including, without
limitation, any such interest arising from a Capitalized Lease, arising from a
mortgage, charge, pledge, security agreement, conditional sale or trust receipt,
or arising from a consignment or bailment given for security purposes, (ii) any
encumbrance upon such property which does not secure such an obligation and
(iii) any exception to or defect in the title to or ownership interest in such
property, including, without limitation, reservations, rights of entry,
possibilities of reverter, encroachments, easements, rights of way restrictive
covenants, licenses and profits a prendre. For purposes of this Agreement, the
Company or a Subsidiary shall be deemed to be the owner of any property which it
has acquired or holds subject to a Capitalized Lease or conditional sale
agreement or other arrangement pursuant to which title to the property has been
retained by or vested in some other Person for security purposes.
"Limited Waiver" shall mean the Limited Waiver dated as of October 3,
1997 executed by the Trustee and Barclays Bank PLC.
"Loan Documents" shall mean this Agreement, the Limited Waiver, the
Pledge Agreement and the Security Agreement.
<PAGE> 10
"Obligations" shall mean all obligations of the Company to the Bank
hereunder, whether monetary or nonmonetary.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a government or
political subdivision or any department or agency thereof or any other entity.
"Plan" shall mean any employee pension benefit plan or plans subject to
Title IV of ERISA and maintained by the Company or any Subsidiary or any member
of a Controlled Group, or any such plan or plans to which the Company or any
Subsidiary is required to contribute on behalf of any of its employees.
"Pledge Agreement" shall mean the pledge agreement in substantially the
form of Exhibit B hereto, pursuant to which the Bank shall have a first lien on
and security interest in any Remarketing Certificates (as defined in Section
2.10) and the other property described therein.
"Preferred Stock" shall mean any class of the capital stock of a
corporation (whether or not convertible into any other class of such capital
stock) which has any right, whether absolute or contingent, to receive dividends
or other distributions of the assets of such corporation (including amounts
payable in the event of the voluntary or involuntary liquidation, dissolution or
winding-up of such corporation), which right is superior to the rights of any
other class of the capital stock of such corporation.
"Principal Purchase Drawing" shall mean a drawing pursuant to Exhibit C
of the Letter of Credit.
"Project" shall have the meaning set forth in the Preamble.
"Purchase Drawing" shall mean the aggregate of amounts drawn under a
Principal Purchase Drawing and, if necessary, an Interest Purchase Drawing in
order to purchase Certificates together with accrued interest thereon, if any.
"Related Documents" shall mean the Second Trust Agreement, the
Certificates, the Second Lease-Purchase Agreement, the Second Miramar Project
Sublease, the Pledge Agreement, the Security Agreement (Second Trust Agreement
Funds), the Remarketing Agreement and any exhibit, certificate, notice or other
written information or document furnished by the Company on or prior to the
Closing Date or to be furnished by the Company to the Bank in connection
therewith.
"Remarketing Agent" shall have the meaning defined in the Second Trust
Agreement.
<PAGE> 11
"Remarketing Agreement" shall mean that certain Remarketing Agreement
dated November 27, 1984[, as amended,] among the Remarketing Agent, the Company
and the Trustee and any substitute Remarketing Agreement.
"Reportable Event" shall mean a reportable event as defined in Title IV
of ERISA, except actions of general applicability by the Secretary of Labor
under Section 110 of ERISA.
"Restricted Payment" shall mean: (i) every dividend or other
distribution paid, made, declared or authorized by the Company on or in respect
of any class of its capital stock and (ii) every payment by or on behalf of the
Company or by any Subsidiary in connection with the redemption, purchase,
retirement or other acquisition of any shares of the Company's capital stock;
but excluding, however, from the foregoing every dividend, distribution or other
payment to the extent payable in shares of the capital stock of the Company. For
purposes of this definition, "capital stock" shall include warrants and other
rights and options to acquire shares of capital stock.
"Second Lease-Purchase Agreement" shall mean that certain Second
Lease-Purchase Agreement dated as of November 1, 1984 by and between the
District and the Leasing Firm.
"Second Miramar Project Sublease" shall mean that certain Second Miramar
Project Sublease dated as of October 5, 1984, by and between the District and
the Company.
"Second Trust Agreement" shall mean that certain Second Trust Agreement
dated as of November 1, 1984, as amended among the District, the Leasing Firm,
the Trustee and the Company.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
any similar or successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same may be in effect at the time.
"Security Agreement (Second Trust Funds)" shall mean the Security
Agreement in substantially the form of Exhibit C hereto, to be executed and
delivered by the Trustee and the Bank, pursuant to which the Bank shall have a
security interest subordinate to that of the Trustee in all moneys and
investments held by the Trustee under the Second Trust Agreement.
"Subsidiary" shall mean any corporation of which more than 80% of the
Voting Stock is at the time directly or indirectly owned by the Company or one
or more of the other Subsidiaries.
"Trustee" shall mean First Trust of California National Association or
any successor trustee thereto pursuant to the terms of the Second Trust
Agreement.
"Voting Stock" shall mean stock of any class or classes of a corporation
the holders of which are ordinarily in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
<PAGE> 12
Section 1.02 Rules of Interpretation. The definitions set forth in
Section 1.01 shall be equally applicable to both the singular and the plural
forms of the terms therein defined and shall cover all genders.
"Herein," "hereby," "hereunder," "hereof," "hereinbefore," "hereinafter"
and other equivalent words refer to this Agreement and not solely to the
particular Article, Section or subdivision hereof in which such word is used.
Reference herein to an Article number (e.g., Article IV) or a Section
number (e.g., Section 6.02) shall be construed to be a reference to the
designated Article number or Section number hereof unless the context or use
clearly indicates another or different meaning or intent.
ARTICLE II
Letter of Credit
Section 2.01 Agreement to Issue Letter of Credit. The Bank agrees with
the Company, in reliance upon the representations and warranties of the Company
and on the terms and subject to the conditions herein set forth, to issue to the
Trustee on the Issuance Date the Letter of Credit.
Section 2.02 Obligations.
(a) Except as provided in Subsections 2.02(b) and (c) below, the Company
promises to pay to the Bank on the date paid, advanced or incurred with
respect to Subsection 2.02(a)(i) hereof and upon demand by the Bank with
respect to Subsections 2.02(a)(ii) and 2.02(a)(iii) hereof at its 580
California Street, Suite 2100 in San Francisco, California office, or at
such other location in California as the Bank shall specify in a notice
to the Company, in United States Dollars and in immediately available
funds, the following:
(i) The amount paid on each demand or draft (other than pursuant
to a Purchase Drawing (except Purchase Drawings required to
purchase Certificates pursuant to Sections 3.11(a)(4) and 3.12
of the Second Trust Agreement) or an Interest Drawing) under or
in connection with or howsoever purporting to be under or in
connection with the Letter of Credit.
(ii) Any and all amounts paid, advanced or incurred by the Bank
under this Agreement, the Related Documents or any other
instrument or document related hereto or thereto.
(iii) All other amounts, expenses, fees, commissions, advances,
liabilities or any other financial accommodations, howsoever
arising, owing by the Company to the Bank, direct or indirect,
absolute or contingent, due or to become due, now existing or
hereafter arising pursuant to the terms of this Agreement, the
Letter of Credit, the Related Documents or any other instrument
or document related hereto or thereto.
<PAGE> 13
(b) The Company also hereby agrees to pay to the Bank at its 580
California Street, Suite 2100 office in San Francisco, California, or at
such other location in California as the Bank shall specify in a notice
to the Company, in United States Dollars and in immediately available
funds with respect to any Purchase Drawing (except Purchase Drawings
required to purchase Certificates pursuant to Sections 3.11(a)(4) and
3.12 of the Second Trust Agreement which shall be subject to Section
2.02(a)(i) hereof) (i) on the earlier of (A) 364 days from the date that
any amount is drawn under the Letter of Credit pursuant to any Purchase
Drawing or (B) such date as (x) the principal amount of the Certificates
purchased pursuant to such Purchase Drawing shall become due and payable
under Section 13.02 of the Second Trust Agreement or as a result of
redemption or prepayment of such Certificates, (y) the Certificates
purchased pursuant to such Purchase Drawing shall be purchased pursuant
to Sections 3.11(a)(4) or 3.12 of the Second Trust Agreement, or (z) the
Letter of Credit shall terminate, a sum equal to the amount so drawn
under the Letter of Credit that has not been prepaid pursuant to Section
2.10 hereof, in the case of clause (A) above, or the total of all
amounts drawn under the Letter of Credit pursuant to any Purchase
Drawing that have not been prepaid pursuant to Section 2.10, in the case
of clause (B) above; (ii) interest on the amount required to be paid by
the Company under clause (i) above from the date of such Purchase
Drawing until such amount required to be paid by the Company under
clause (i) above is due and payable, payable quarterly in arrears from
the date of drawing of such amounts under the Letter of Credit, with the
balance due (except as required under clause (i) above) on the day which
is 364 days from the date of such Purchase Drawing, at a fluctuating
interest rate per annum (computed on the basis of a year of 360 days and
the actual number of days elapsed) equal to the Alternate Base Rate plus
one percent (1%) from the date of such Purchase Drawing. Any change in
an interest rate hereunder which results from a change in the Alternate
Base Rate shall become effective at the opening of business on the day
on which such change in the Alternate Base Rate shall become effective.
(c) The Company also agrees to pay the Bank at its 580 California
Street, Suite 2100, office in San Francisco, California, or at such
other location in California as the Bank shall specify in a notice to
the Company, in United States Dollars and in immediately available funds
on or prior to 9:00 a.m. San Francisco time on any day the Bank is
required to honor an Interest Drawing, the amount to be paid by the Bank
pursuant to such Interest Drawing. The Bank agrees that any funds
deposited with it pursuant to this Section 2.02(c) shall be used solely
to reimburse the Bank after any Interest Drawing by the Trustee and any
other amounts owing hereunder and shall not be used by the Bank to fund
any such Interest Drawing, which shall be funded only from moneys of the
Bank held separately from such funds deposited.
(d) The Company hereby agrees that if any amount remaining unpaid under
paragraph (a), (b) or (c) (including any unpaid principal or interest)
is not paid when due (whether at maturity, by demand, acceleration or
otherwise) it shall thereafter until paid in full (after as well as
before judgment) bear interest, payable on demand, at a fluctuating rate
per annum (computed on the basis of a year of 360 days and the actual
number of
<PAGE> 14
days elapsed) equal to the Alternate Base Rate plus two percent (2%).
For the purposes of this paragraph (d), any amount owing to the Bank
under paragraph (a) or (b) shall be deemed "not paid when due" if
payment of such amount is received by the Bank after 3:00 p.m., San
Francisco time on the day such amount is due.
Section 2.03 Obligations Absolute. The Obligations shall be absolute,
unconditional and irrevocable, shall survive expiration or cancellation of the
Letter of Credit and payment of the Certificates, and shall be paid strictly in
accordance with the terms of this Agreement, under all circumstances whatsoever,
including, without limitation, the following circumstances:
(a) any lack of validity or enforceability of this Agreement, the Letter
of Credit or any of the Related Documents;
(b) any amendment or waiver of or any consent to departure from the
terms of any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right which the
Company or any other Person may have at any time against the Trustee,
any beneficiary or any transferee of the Letter of Credit (or any Person
for whom the Trustee, any such beneficiary or any such transferee may be
acting), the Bank or any other Person, whether in connection with this
Agreement, the Letter of Credit, the Related Documents, the Project or
any unrelated transaction provided, however, that nothing herein shall
prevent the assertion of any such claim, setoff, defense or other right
by suit or compulsory counterclaim following payment;
(d) any demand, statement or any other document presented under the
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect, or any statement therein being untrue or
inaccurate in any respect whatsoever; or
(e) the surrender or impairment of any security for the performance or
observance of any of the terms of this Agreement, the Certificates or
any of the Related Documents.
Section 2.04 Letter of Credit Fees and Commissions.
(a) In consideration of the commitment of the Bank to issue the Letter
of Credit on the terms and subject to the conditions of this Agreement,
the Company agrees to pay the Bank from the date of execution of this
Agreement through and including the Expiration Date of the Letter of
Credit, a letter of credit fee (computed on the basis of the actual
number of days elapsed over a year of 360 days) at the rate of forty
five-hundredths of one percent (0.45%) per annum of an amount equal to
the difference between the Letter of Credit Commitment and the amount
available for drawing under the Letter of Credit, payable quarterly in
arrears on the last Business Day of each calendar quarter, commencing
December 31, 1997, or if any such day is not a Business Day, on the next
preceding Business Day.
<PAGE> 15
(b) In consideration of the issuance by the Bank of the Letter of
Credit, the Company agrees to pay to the Bank a facility fee in the
amount of $6,296, payable upon execution of this Agreement.
Section 2.05 Increased Costs Due to Change in Law. If any law or
regulation, any change in any law or regulation, or any interpretation thereof
by any court or administrative or governmental authority charged or claiming to
be charged with the administration thereof shall (a) impose, modify or make
applicable any reserve, special deposit or similar requirement against letters
of credit issued by the Bank or with respect to this Agreement, the Letter of
Credit or any Related Document or any transactions hereunder or thereunder, (b)
impose on the Bank any other condition regarding this Agreement, the Letter of
Credit or any Related Document, (c) subject the Bank to any tax, (other than
taxes upon income (including State Franchise taxes)) charge, fee, deduction or
withholding of any kind whatsoever or (d) affects the amount of capital required
or expected to be maintained by the Bank, and the result of any such event, or
any similar measure, shall be to increase the cost to the Bank of issuing or
maintaining the Letter of Credit, or reduce the rate of return on the Bank's
capital, or reduce the amount of principal of, interest on, or any fee or
compensation receivable by the Bank in respect of, the Letter of Credit, this
Agreement or any Related Document, upon demand by the Bank, the Company shall
pay to the Bank, from time to time as specified by the Bank, such additional
amounts as shall, in the judgment of the Bank, be sufficient to compensate the
Bank for such increased costs or reductions together with interest on each such
amount from the date demanded until payment in full thereof at the rate set
forth in Section 2.02(d).
For the purpose of this Section any reference to the Bank shall be
deemed to include any Person to whom the Bank has sold a participation in the
Letter of Credit and this Agreement; provided that the Company shall not be
obligated to pay any participant in the Letter of Credit any sum in excess of
the sum which the Company would have been obligated to pay to the Bank in
respect of such interest had the Bank not sold such participation.
Section 2.06 Additional Fees. The Company agrees to pay to the Bank, (a)
upon each transfer of the Letter of Credit in accordance with its terms, a
transfer fee of $1,000 and (b) on the date of each draw under the Letter of
Credit, a transaction fee of $150.
Section 2.07 Waivers. The Company hereby waives (a) presentment, demand,
notice of demand, protest, notice of protest, notice of dishonor and notice of
non-payment; (b) except as provided in the Second Trust Agreement or the Pledge
Agreement, the right, if any, to the benefit of, or to direct application of,
any security hypothecated to the Bank including any Certificates until all
Obligations, howsoever arising, shall have been paid; (c) the right to require
the Bank to proceed against the Company hereunder, or against any Person under
any guaranty or similar arrangement, or under any agreement between the Bank and
any Person or to pursue any other remedy in the Bank's power; (d) to the full
extent permitted by law, all statutes of limitation; and (e) any defense arising
out of the election by the Bank to foreclose on any security by one or more
non-judicial or judicial sales, whether or not every aspect of any such sale is
commercially reasonable. The Bank may exercise any other right or remedy, even
though any such election operates to impair or extinguish the Company's right to
reimbursement from, or any other right
<PAGE> 16
or remedy it may have against, any Person, or any security. The Company agrees
that the Bank may proceed against the Company or any Person directly and
independently of any other, and that any forbearance, change of rate of
interest, or acceptance, release or substitution of any security, guaranty, or
loan or change of any term or condition hereunder or under the Letter of Credit
or any Related Document shall not in any way affect the liability of the Company
hereunder.
Section 2.08 Payment of Expenses, Etc. The Company agrees to pay on
demand, whether or not the transactions hereby contemplated shall be
consummated, all out-of-pocket costs and expenses (including, without
limitation, reasonable fees and expenses of counsel of the Bank in connection
therewith and with respect to advising the Bank as to its rights and
responsibilities hereunder and thereunder) paid or incurred by the Bank or any
Person to whom the Bank has sold a participation in the Letter of Credit in
connection with (a) the preparation, review, execution and delivery of this
Agreement, the Letter of Credit and any Loan Document or otherwise arising in
connection with this Agreement, the Letter of Credit or any Related Document,
(b) any amendments, consents or waivers to this Agreement, the Letter of Credit
or any Related Document, (c) the protection of the rights of the Bank under this
Agreement, the Letter of Credit and the Related Documents, (d) the enforcement
of this Agreement and any Related Document, whether by judicial proceedings or
otherwise, (e) the enforcement of payment of all Obligations by any action or
participation in, or in connection with, a case or a proceeding under the
Bankruptcy Law and (f) all stamp, documentary and other taxes and fees
(including interest and penalties, if any) which may be payable in connection
with the execution, delivery, filing and recording of this Agreement, the Letter
of Credit or any Loan Document. The Company agrees to indemnify, defend and hold
the Bank, and each Person to whom the Bank has sold a participation in the
Letter of Credit and this Agreement, harmless from and against all liability
(including, without limitation, interest, penalties and attorneys' fees and
expenses) to which it may become subject insofar as such liability arises out of
or is based upon a suit or proceeding or governmental action brought or taken in
connection with the Project, the issuance of the Certificates or the use (or the
proposed or potential use) of the proceeds of any drawing under the Letter of
Credit. The obligations of the Company hereunder shall survive cancellation or
expiration of the Letter of Credit and payment of the Certificates.
Section 2.09 Actions Relating to Letter of Credit; Indemnity.
(a) Any action taken or omitted by the Bank under or in connection with
this Agreement, the Letter of Credit or any Related Document, if taken
or omitted in good faith, shall be binding upon the Company and shall
not put the Bank under any resulting liability to the Company. Without
limiting the generality of the foregoing, the Bank shall be protected in
relying upon a duly executed instrument of transfer in the form attached
as an annex to the Letter of Credit.
(b) The Bank may, under the Letter of Credit, receive, accept and pay
any drafts, demands or other documents and instruments (otherwise in
order) signed by, or issued to, the receiver, trustee in bankruptcy,
custodian, executor, administrator, guardian or
<PAGE> 17
conservator of anyone named in the Letter of Credit as the Person by
whom drafts, demands and other documents and instruments are to be made
or issued.
(c) The Bank shall not have any liability to the Company, and the
Company assumes all responsibility for (i) the form, sufficiency,
correctness, validity, genuineness, falsification and legal effect of
any drafts, demands and other documents, instruments and other papers
relating thereto, (ii) the general and particular conditions stipulated
therein, (iii) the existence, form, sufficiency and breach of contracts
of any nature whatsoever, including the Related Documents, (iv) the
solvency, standing and responsibility of any Person whomsoever, (v) any
delay in giving or failure to give any notice, demand, or protest, (vi)
failure of any Person (other than the Bank, subject to the terms and
conditions hereof and thereof) to comply with the terms of the Letter of
Credit, (vii) errors, omissions, delays in or non-delivery of any
message, however sent, and (viii) any other error, neglect or omission,
if done by the Bank in good faith.
(d) The Company hereby waives any right to object to any payment made
under the Letter of Credit against a draft and accompanying documents as
provided in the Letter of Credit varying in punctuation, capitalization,
spelling or similar matters of form. The determination whether a demand
has been made prior to the expiration of the Letter of Credit and
whether a demand is in proper and sufficient form for compliance with
the Letter of Credit shall be made by the Bank in its sole discretion,
which determination shall be conclusive and binding upon the Company.
(e) The Company agrees at all times to protect, indemnify and save
harmless the Bank, and any Person to whom the Bank has sold a
participation in the Letter of Credit, from and against any and all
claims, actions, suits and other legal proceedings, and from and against
any and all losses, claims, demands, liabilities, damages, costs,
charges, counsel fees and other expenses which the Bank or any such
Person may, at any time, sustain or incur by reason of or in consequence
of or arising out of the issuance of the Letter of Credit, this
Agreement or any Related Document; it being the intention of the parties
that this Agreement shall be construed and applied to protect and
indemnify the Bank and any such Person against any and all risks
involved in the issuance of the Letter of Credit, all of which risks are
hereby assumed by the Company, including, without limitation, any and
all risks of the acts or omissions, whether rightful or wrongful, of any
present or future de jure or de facto government or governmental
authority. The Bank and any Person holding a participation in the Letter
of Credit shall not, in any way, be liable for any failure by the Bank
or anyone else to pay any draft under the Letter of Credit as a result
of any governmental acts or any other cause beyond the control of the
Bank. The obligations of the Company hereunder shall survive
cancellation or expiration of the Letter of Credit and payment of the
Certificates.
Section 2.10 Prepayments. Pursuant to the Pledge Agreement, the Company
has agreed to pledge to the Bank, and grant to the Bank a security interest in,
its right, title and interest in Certificates purchased with the proceeds of any
Purchase Drawing and delivered to the Bank (the "Remarketing Certificates"; such
Certificates when released by the Bank pursuant to Section 5 of
<PAGE> 18
the Pledge Agreement shall cease to be Remarketing Certificates). Remarketing
Certificates shall be registered as provided for in Section 3 of the Pledge
Agreement. Any amounts from time to time owing to the Bank pursuant to clause
(i) and (ii) of Section 2.02(b) above may be prepaid at any time (i) by the
Company on notice stating the amount to be prepaid, or (ii) on behalf of the
Company by the Remarketing Agent on notice from the Remarketing Agent or its
designee directing the Bank to deliver Certificates held by the Bank to the
Remarketing Agent for sale pursuant to Section 3(c) of the Remarketing
Agreement, and specifying the principal amount of Certificates to be so sold.
Any notice furnished pursuant to clause (i) or (ii) of this Section 2.10 may be
given by telephone and promptly confirmed in writing but shall not be effective
unless received by the Bank on or prior to the Business Day preceding the day of
the proposed prepayment referred to in clauses (i) and (ii) of this Section
2.10. In addition, the Company shall, for the purpose of paying the purchase
price of any Certificate delivered to the Co-Paying Agent (as defined in the
Second Trust Agreement) pursuant to Section 3.02(e) of the Second Trust
Agreement forthwith upon demand by the Bank prepay any amount owing to the Bank
pursuant to clause (i) and (ii) of Section 2.02(b) if the Bank shall at any time
determine that the Co-Paying Agent or the Remarketing Agent, as the case may be,
failed for any reason to pay or tender payment of the purchase price of such
Certificate when due to or for the account of the Person (as defined in the
Second Trust Agreement) entitled thereto, and such failure is continuing or any
other Person shall assert that such Person has a lien on or security interest in
such Certificate and the Bank determines that such assertion is not manifestly
unreasonable. The amount of each prepayment pursuant to clause (i) or (ii) of
this Section 2.10 or pursuant to the next preceding sentence, shall be allocated
first to the reduction of interest accrued to the date of such prepayment
pursuant to clause (ii) of Section 2.02(b), and the balance, if any, of such
prepayment shall be applied to the reduction of the amount owing pursuant to
clause (i) of Section 2.02(b). Upon such prepayment, interest shall cease to
accrue on the amount pursuant to clause (i) of 2.02(b) which has been prepaid
and the Bank shall release and deliver to the Company, in the case of a
prepayment pursuant to clause (i) of this Section 2.10, or the Co-Paying Agent,
in the case of a prepayment pursuant to clause (ii) of this Section 2.10, from
the pledge and security interest created by the Pledge Agreement, Remarketing
Certificates as to which the principal amount plus accrued interest to the date
of such release and delivery is equal to the amount of such prepayment.
Section 2.11 Right of Bank to Extend Letter of Credit. Upon written
notice given by the Company to the Bank at least 90 days prior to the end of
each one-year period after the Issuance Date requesting the Bank to extend the
Letter of Credit as provided in this Section 2.11, the Bank shall have the right
either (i) subject to such terms and conditions as agreed upon by the Bank and
the Company, to extend the Letter of Credit for an additional one year after the
Expiration Date of the then outstanding Letter of Credit, or,(ii) to decline to
extend the Letter of Credit. The Bank shall have complete and absolute
discretion in selecting one of the aforesaid options. If the Bank elects to
extend the Letter of Credit, the Bank shall give written notice to the Company
and the Trustee of such election at least 60 days prior to the end of such
one-year period and shall issue to the Trustee an advice of amendment providing
for a one-year extension to the Expiration Date of the Letter of Credit
provided, however, that the Bank shall also have the option to instruct the
Trustee to surrender the outstanding Letter of Credit to the Bank and upon such
instruction, the Trustee shall surrender the outstanding Letter of Credit to the
Bank on
<PAGE> 19
the Business Day next following the day of such instruction, and the
Bank shall provide to the Trustee on such date a substitute irrevocable letter
of credit in substantially the form of Exhibit A having a new expiration date
one year from the Expiration Date of the then outstanding Letter of Credit but
otherwise having a term identical to the then outstanding Letter of Credit.
Section 2.12 Optional Prepayment of Certificates; Custodial Account.
(a) Section 3.11(a)(2) of the Second Trust Agreement provides for the
prepayment of all Outstanding Certificates on any Interest Payment Date
on or after February 6, 1985 (as these terms are defined in the Second
Trust Agreement) upon the exercise of the District's option at the
direction of the Company pursuant to Section 8.2 of the Second Lease -
Purchase Agreement to cause such prepayment. Section 8.2 of the Second
Lease - Purchase Agreement requires the District to give the Leasing
Firm, the Company and the Trustee notice of such prepayment at least 60
days prior to the Interest Payment Date on which such prepayment is to
occur. The Company hereby agrees that it will give prior written notice
to the Bank of its intention to direct the District to exercise its
option to prepay all Outstanding Certificates at least fifteen (15)
Business Days prior to such direction. Such notice shall state (i) the
date on which the Company intends to give such direction to the
District, (ii) the Interest Payment Date on which all Outstanding
Certificates are to be prepaid and (iii) the Company's intentions with
respect to the deposit of monies pursuant to subsection (b) hereof
sufficient to reimburse the Bank for a drawing under the Letter of
Credit with respect to such prepayment pursuant to subsection (b)
hereof. The Company agrees that it will not direct the District to
exercise its option to prepay all Outstanding Certificates without the
prior written consent of the Bank, provided however, that the Bank
agrees that it will give such consent if (i) there has occurred no
material adverse change in the financial condition of the Company and
(ii) the Company has demonstrated to the satisfaction of the Bank that
it will have sufficient moneys to make the deposit required under
subsection (b) hereof.
(b) In order to facilitate the optional prepayment by the District of
the Certificates pursuant to Section 3.11(a)(4) of the Second Trust
Agreement, the Company agrees to deposit, in a custodial account
maintained by and with the Bank for such purpose (the "Custodial
Account"), on or prior to thirty-five (35) days prior to the date
designated for such prepayment and in accordance with the Bank's
instructions, in immediately available funds, in an amount equal to the
amount of principal and accrued interest (if any) to be paid to prepay
such Certificates on such prepayment date.
The Bank agrees to invest any moneys deposited pursuant to this section as
directed by the Company in any investment permitted under the Second Trust
Agreement with a maturity of thirty (30) days or less that is generally made
available by the Bank to its customers. The Bank agrees to pay to the Company on
the respective prepayment date to which such deposit pertains any amounts not
needed to reimburse the Bank for any drawings under the Letter of Credit and any
other amounts owing hereunder. Cash deposited into the custodial account
described above shall be used solely to reimburse the Bank after any drawing by
the Trustee under the Letter of Credit in respect of the prepayment of
Certificates pursuant to Section 3.11(a)(4) of the Second
<PAGE> 20
Trust Agreement and any other amounts owing hereunder and shall not be used by
the Bank to fund any such drawing, which shall be funded only from moneys of the
Bank held separately from such cash deposited. The Company hereby grants to the
Bank, any participant in the Letter of Credit and the Trustee as representative
of the holders from time to time for the Certificates, as security for the
payment and performance of the Obligations, a lien upon and security interest in
all amounts deposited in the Custodial Account. All funds deposited with the
Bank pursuant to this Section 2.12 shall be held by the Bank on a pari passu
basis with the interest of the Trustee in such funds.
Section 2.13 Receipt of Certain Funds by Bank. The Trustee has agreed
that it will transfer the monies required to be transferred to the Bank pursuant
to the Second Trust Agreement. All such moneys received by the Bank shall be
credited by the Bank against any Obligations of the Company to the Bank and any
other amounts owing hereunder. The Bank shall also be entitled to retain all or
a portion of such moneys received equal to an amount which it reasonably
anticipates may be necessary to reimburse the Bank for Obligations and any other
amounts which may be incurred by the Bank in the future. The Bank shall transfer
all such moneys not required to be so credited or retained to the Company.
Section 2.14 Removal and Replacement of Remarketing Agent. Section 9.10
of the Second Trust Agreement and Section 5(a) of the Remarketing Agreement
grant the Company the right to remove the Remarketing Agent at any time with the
concurrence of the District and Section 9.10 of the Second Trust Agreement
grants the Company the right to appoint a successor Remarketing Agent with the
concurrence of the District. The Company hereby agrees that (i) upon the receipt
of written request by the Bank, it shall take such action so as to cause the
removal of the Remarketing Agent, and (ii) it shall not remove the Remarketing
Agent without the prior written consent of the Bank, which consent shall not be
unreasonably withheld. The Company additionally agrees that it will not appoint
a successor Remarketing Agent without the prior written consent of the Bank
which consent shall not be unreasonably withheld.
ARTICLE III
Collateral Security
The Obligations shall be secured as follows:
Section 3.01 Security Interest in Accounts. The Company hereby grants to
the Bank, as security for the payment and performance of the Obligations, a lien
upon and security interest subordinate to the lien granted to the Trustee under
the Second Trust Agreement, if any, in (i) all interest the Company has in all
funds the Company deposits with the Trustee or the District under the Second
Trust Agreement, the Second Lease-Purchase Agreement or the Second Miramar
Project Sublease, as the case may be, if any, and all interest the Company has
in all funds held under the Second Trust Agreement, if any. The Bank shall hold
such security interest and lien pursuant to the California Uniform Commercial
Code and shall be entitled to all rights, powers and remedies of a secured party
thereunder and otherwise available at law or in equity with respect thereto.
<PAGE> 21
Section 3.02 Right of Setoff. In addition to any other right or remedy
that the Bank may have by operation of law or otherwise, the Bank and any bank
buying a participation in the Letter of Credit and this Agreement shall be
entitled to exercise their right of setoff or banker's lien in any and all
accounts of the Company maintained with the Bank or such participating bank and
any and all funds at any time held therein; provided, however, that the Bank
hereby irrevocably waives such right of setoff or banker's lien in order to
appropriate and apply to the payment of unreimbursed payments under the Letter
of Credit and interest thereon any balances, credits, deposits, accounts or
moneys of the Company at any time with the Bank when and if there shall be a
drawing under the Letter of Credit during the pendency of any proceedings by or
against the Company, seeking relief in respect of the Company under the
Bankruptcy Law; provided further, however, that the Bank may exercise such right
of setoff or banker's lien when and to the extent that it is determined that
such exercise would not result in the Bank's being released, prevented or
restrained from or delayed in fulfilling its obligations under the Letter of
Credit.
Section 3.03 Security Interest in Certificates. The Company shall, in
accordance with the provisions of the Pledge Agreement, grant to the Bank, for
the benefit of the Bank, as security for the payment and performance of the
Obligations, a lien upon and first priority security interest in the Remarketing
Certificates (as defined in the Pledge Agreement) and other property described
in such Pledge Agreement. The Company agrees to execute and deliver and cause to
be executed and delivered to the Bank the Pledge Agreement and such financing
statements, acknowledgments, notices, authorizations, consents and other
documents, instruments and agreements as the Bank may from time to time request
to obtain and maintain on behalf of the Bank, the benefits of the security
interest and lien granted in the Pledge Agreement.
Section 3.04 Further Security. The Bank hereby agrees that it will not
at any time accept any collateral as security for the payment of the Obligations
unless provision is made prior to or simultaneously with taking of such
collateral security for the Bank for an equal and ratable security interest in
such collateral security to be granted to the Trustee for the benefit of the
holders from time to time of the Certificates; provided, however, that such
agreement shall terminate and be of no force and effect as and when and to the
extent that the acceptance of such collateral would not result in the Bank's
being released, prevented or restrained from or delayed in fulfilling the Bank's
obligations under the Letter of Credit.
ARTICLE IV
Conditions Precedent
The obligation of the Bank to issue the Letter of Credit on the Issuance
Date is subject to the satisfaction of the following conditions:
Section 4.01 Opinion of Counsel to the Company. There shall have been
delivered to the Bank in opinion of O'Melveny & Myers, counsel to the Company,
dated the Issuance Date,
<PAGE> 22
addressed to the Bank and in substantially the form of Exhibit D hereto, and
covering such other matters as the Bank may reasonably request.
Section 4.02 Opinion of Special Counsel. There shall have been delivered
to the Bank the opinion of Rutan & Tucker, Special counsel, dated the Issuance
Date, addressed to the Bank and in form and substance satisfactory to the Bank,
and covering such other matters as the Bank way reasonably request.
Section 4.03 Required Acts and Conditions. All acts and conditions
(including, without limitation, the obtaining of any necessary regulatory
approvals and the making of any required filings, recordings or registrations)
required to be done and performed, and to have happened precedent to the
execution, delivery and performance of this Agreement, the Letter of Credit and
the Related Documents to which the Company is or is to be a party, and to
constitute the same legal, valid and binding obligations of the Company
enforceable in accordance with their respective terms, shall have been done and
performed and shall have happened in due and strict compliance with all
applicable laws.
Section 4.04 No Default. There shall exist no Default or Event of
Default.
Section 4.05 Representations and Warranties. All representations and
warranties of the Company contained herein or otherwise made in writing in
connection herewith or with any Loan Document shall be true and correct with the
same force and effect as though such representations and warranties had been
made on and as of the Closing Date.
Section 4.06 Certificate of Compliance. There shall have been delivered
to the Bank a certificate of the Company, signed by an officer of the Company
and dated the Closing Date, to the effect that all of the conditions specified
in Sections 4.04 and 4.05 have been satisfied as of such date.
Section 4.07 Proceedings. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement, the Letter of
Credit and the Loan Documents shall be satisfactory in form and substance to the
Bank and its counsel, and the Bank and its counsel shall have received an
executed copy of this Agreement, each of the Pledge Agreement and the Security
Agreement (Second Trust Agreement Funds), and an executed or conformed copy of
each Related Document, a specimen copy of the Certificates and copies of such
documents as the Bank or such counsel may reasonably request, including, without
limitation:
(a) Copies of the Articles of the Company, certified by the Secretary of
State of the State of California;
(b) Copies of the Bylaws of the Company, certified by the Secretary or
an Assistant Secretary of the Company;
(c) Copies of the resolutions of the Board of Directors of the Company,
certified by the Secretary or an Assistant Secretary of the Company,
authorizing the execution,
<PAGE> 23
delivery and performance by the Company of this Agreement and approving
the Letter of Credit;
(d) Copies of all approvals, authorizations and consents of any trustee
or any holder of any indebtedness or obligation of the Company or any
governmental agency or public authority, necessary for the Company to
enter into this Agreement, including the Limited Waiver; and
(e) A certificate of the Secretary or an Assistant Secretary of the
Company certifying the names and true signatures of the Authorized
Company Representatives of the Company (as defined in the Second Trust
Agreement) authorized to sign this Agreement and the other documents to
be delivered by the Company hereunder.
Section 4.08 Filings and Recordings. The Pledge Agreement and any
required financing statements relating thereto shall have been duly filed and
recorded in each jurisdiction in which required to perfect, preserve and protect
the first lien and security interest of the Bank and the Trustee thereunder, and
the Bank shall have received evidence satisfactory to it as to any such filing,
recording and/or registration.
Section 4.09 Other Conditions Precedent. The conditions precedent to the
obligations of the Company and the Bank hereunder shall also be subject to the
effectiveness of the Limited Waiver on or prior to October 3, 1997.
ARTICLE V
Representations and Warranties
In order to induce the Bank to enter into this Agreement and to issue
the Letter of Credit, the Company makes the following representations and
warranties to the Bank, which shall survive the execution and delivery of this
Agreement and the Letter of Credit:
Section 5.01 Due Organization, Etc. Each of the Company and its
Subsidiaries has been duly organized and is validly existing and in good
standing as a corporation under the laws of the jurisdiction in which
incorporated. The Company has all requisite power and authority to conduct its
business as presently conducted, to own its assets and properties, and to
execute and deliver, and to perform all of its obligations under, this Agreement
and the Related Documents to which it is or is to be a party, and to carry out
the transactions contemplated hereby and thereby. Each of the Company and its
Subsidiaries is duly qualified to do business in the jurisdictions in which its
ownership of property or conduct of business legally requires such
authorization.
Section 5.02 Due Authorization, Etc. The execution, delivery and
performance by the Company of this Agreement and the Related Documents to which
it is or is to be a party have been duly authorized by all necessary corporate
action and do not and will not (a) violate any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Company or any Subsidiary or of
the
<PAGE> 24
Articles of Incorporation or By-Laws of the Company or any Subsidiary, (b)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
or its or their assets or properties may be bound or affected, or (c) except as
provided herein, result in or require the creation or imposition of any Lien
upon or with respect to any of the assets or properties now owned or hereafter
acquired by the Company or any Subsidiary. Neither the Company nor any
Subsidiary is a party to, or is otherwise subject to any provision contained in,
any instrument evidencing its indebtedness, any agreement relating thereto or
any other contract or agreement which limits the amount of, or otherwise imposes
restrictions on the incurring of, obligations of the Company under this
Agreement and the Related Documents, or if such restrictions are present, such
restrictions have been met or duly waived with respect to this Agreement and the
Related Documents.
Section 5.03 Approvals. No consent, approval or other action by or any
registration with, notice to or filing with any Person or any court or
administrative or governmental body is or will be necessary for the valid
execution, delivery or performance by the Company of this Agreement or any of
the Related Documents to which it is or is to be a party other than such
consents and approvals which have heretofore been obtained or will be obtained
in a timely manner in the future if not currently required.
Section 5.04 Enforceability. This Agreement and each of the Related
Documents to which the Company is or is to be a party constitute, or when
executed and delivered will constitute, legal, valid and binding obligations of
the Company, enforceable against it in accordance with their respective terms,
subject to the effect of bankruptcy, insolvency, reorganization, moratorium or
similar laws now or hereafter in effect generally affecting creditors' rights.
The Pledge Agreement, along with all action required to fully perfect the Bank's
security interests thereunder, which action has been taken or completed, creates
and constitutes valid and perfected first priority security interests in and to
the collateral therein described enforceable against all third parties and
secures the payment of the Obligations.
Section 5.05 Financial Statements. The Company has furnished the Bank
with consolidated balance sheets of the Company as of December 31, 1996, and
statements of income and retained earnings and changes in financial position for
the fiscal year then ended, certified by independent public accountants, and the
unaudited consolidated balance sheet of the Company and its Subsidiaries as of
June 30, 1997, and statements of income and retained earnings and changes in
financial position for the six-month period then ended. Such financial
statements (including any related schedules and/or notes) are complete and
correct in all material respects, have been prepared in accordance with
generally accepted accounting principles consistently followed throughout the
period involved and show all liabilities (except as heretofore disclosed to the
Bank in writing), direct and contingent, as at the date thereof, and fairly
present the condition of the Company and its Subsidiaries as at such dates and
the results of operations for the periods indicated, subject only to normal
year-end audit adjustments with respect to such unaudited statements. There has
been no material adverse change in the business, properties or condition
(financial or otherwise) of the Company or its Subsidiaries since the date of
the most recent balance sheet furnished hereunder. There are no contingent
liabilities which, if
<PAGE> 25
determined adversely, would have a material adverse effect on the Company or its
Subsidiaries other than as heretofore disclosed in writing to the Bank.
Section 5.06 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Company, threatened against or affecting the
Company or its Subsidiaries, or any of their assets, properties or rights, at
law or in equity, by or before any court, arbitrator, administrative or
governmental body or other Person which, if determined adversely, would have a
material adverse effect on the business, properties, condition (financial or
otherwise) or operations of the Company or its Subsidiaries, or adversely affect
the Company's ability to perform its obligations under any of the Related
Documents other than as heretofore disclosed in writing to the Bank.
Section 5.07 Title to Property. The Company believes that, in all
material respects, it and its Subsidiaries have such title to the property owned
or claimed by each of them, respectively as is necessary to allow the Company
and its Subsidiaries taken as a whole to conduct its business as now conducted
and as proposed to be conducted by the Company and its Subsidiaries taken as a
whole. The Company and its Subsidiaries have good title to all principal plants
and reservoirs and other real and personal property material to the Company's
business (excluding easements, mineral rights, water rights and other rights
ancillary to fee ownership of real property) now purported to be owned by it,
subject to no lien of any kind except as permitted under Section 6.13 or as
referred to in its balance sheet furnished under Section 5.05.
Section 5.08 Compliance with Laws, Contracts. Neither the Company nor
any Subsidiary is in violation or default with respect to any applicable law
and/or regulation which materially affects the business, properties, condition
(financial or otherwise) or operations of the Company or its Subsidiaries taken
as a whole, nor are any of them in violation or in default with respect to any
order, writ, injunction, demand or decree of any court, or any indenture,
agreement or other instrument under which any of them is bound or may be bound,
default under or violation of which might have a material and adverse effect on
the business, properties, condition (financial or otherwise) or operations of
the Company or its Subsidiaries taken as a whole or might result in the
acceleration of the maturity of any of their indebtedness other than as
heretofore disclosed in writing to the Bank.
Section 5.09 Loan Documents. The Company makes each of the
representations and warranties made by it in the Loan Documents to which it is
or is to be a party, to and for the benefit of the Bank as if the same were set
forth at length herein.
Section 5.10 Exemption of Interest from Federal Income Tax. It is the
intention of the Company that the interest on the Certificates be excluded from
the gross income of the holders thereof (other than "substantial users," or
"related Persons" of substantial users, as such terms were defined in Section
103(b) of the Internal Revenue Code of 1954, as amended from time to time as in
effect on the date of issuance of the Certificates) for Federal income tax
purposes. To that end, the Company represents to the Bank that it has not taken
any action, and knows of no action that any other Person has taken, which would
cause interest on the Certificates to be included in the gross income of the
recipients thereof. The Company warrants that it will not
<PAGE> 26
take any action or omit to take any action which, if taken or omitted, would
cause interest on the Certificates to be included in the gross income of the
holders thereof (other than "substantial users," or "related Persons" of
substantial users, as such terms were defined in Section 103(b) of the Internal
Revenue Code of 1954, as amended from time to time as in effect on the date of
issuance of the Certificates) for Federal income tax purposes.
Section 5.11 No Misleading Statements. Nothing herein or in any exhibit,
certificate, notice or other written information furnished or to be furnished by
the Company in connection with this Agreement, the Letter of Credit or any
Related Document contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Section 5.12 Employee Retirement Income Security Act of 1974. The
Company is in substantial compliance with ERISA; no Reportable Event has
occurred and is continuing with respect to any Plan; no notice of withdrawal
liability has been received from a Plan pursuant to Section 4202 of ERISA; and
the minimum funding standards imposed on the Company by ERISA with respect to
each Plan have been satisfied.
Section 5.13 Subsidiaries. The Company has heretofore furnished the Bank
with a list of all present Subsidiaries, including for each the type of
business, jurisdiction of incorporation and percentage of outstanding securities
owned of record and beneficially. The Company directly or indirectly owns such
securities free and clear of all liens, charges, encumbrances and rights of
others.
Section 5.14 No Burdensome Restrictions. No contract, agreement or other
instrument as to which the Company or its Subsidiaries may be bound materially
adversely affects, or insofar as the Company may reasonably foresee may so
affect, the business, operations, property or financial or other condition of
the Company or its Subsidiaries taken as a whole.
Section 5.15 Taxes. Each of the Company and its Subsidiaries has filed
or caused to be filed all tax returns which to the knowledge of the Company are
required to be filed, and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it, except for returns which have
been appropriately extended, and all other taxes, fees or other charges imposed
on it by any governmental authority, agency or instrumentality which have become
due and payable (other than those the amount or validity of which is currently
being contested in good faith by appropriate proceedings and with respect to
which reserves in conformity with generally accepted accounting principles have
been provided on the books of the Company or its Subsidiaries); and no tax liens
have been filed.
Section 5.16 Investment Company Act. The Company is not an "investment
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
<PAGE> 27
Section 5.17 Leases. The Company and its Subsidiaries enjoy peaceful and
undisturbed possession under all leases under which they operate which either
singly or in the aggregate are material to the Company's operations as a whole,
subject to subleases in the ordinary course of business, and all of such leases
are valid and subsisting and are in full force and effect. There is no default
on the part of the Company or any Subsidiary existing under any of such leases,
and none of such leases contains any unusual or burdensome provision which
materially adversely affects or in the future may (so far as the Company can now
foresee) materially adversely affect the Company's or such Subsidiary's right of
occupancy and to continue its operations under such lease.
ARTICLE VI
Affirmative Covenants
The Company covenants with the Bank, until expiration or cancellation of
the Letter of Credit and payment in full of all Obligations, as follows:
Section 6.01 Financial Statements. The Company will furnish to the Bank:
(a) within 90 days after the close of each fiscal year, a balance sheet
of the Company setting forth its financial condition as at the end of
such fiscal year, together with statements of income, capitalization,
earned surplus and changes in financial position of the Company for such
fiscal year, setting forth in each case in comparative form the figures
for the preceding fiscal year, all in reasonable detail, such balance
sheet and statements of income, capitalization, earned surplus and
changes in financial position to be accompanied by an opinion with
respect thereto of independent public accountants, who may be either the
present regular auditors of the books of the Company or other auditors
of recognized national standing, which opinion shall state that such
financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied (except for changes
in application in which such accountants concur) and that the
examination of such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards and accordingly included such tests of the accounting records
and such other auditing procedures as were considered necessary in the
circumstances;
(b) within 45 days after the end of the first, second and third
quarterly accounting periods in each fiscal year, an unaudited balance
sheet of the Company as at the end of such accounting period, and
unaudited statements of income and earned surplus of the Company and a
statement of changes in financial position of the Company for the
portion of the fiscal year ending with the last day of such quarterly
accounting period, setting forth in each case in comparative form the
figures for the corresponding periods a year earlier, all in reasonable
detail, prepared by the Controller, the Treasurer or an Assistant
Treasurer or any other accounting officer of the Company, accompanied by
the certificate of the officer preparing such financial statements to
the effect that they fairly present the Company's financial condition
and results of operations, respectively;
<PAGE> 28
(c) promptly upon distribution thereof, copies of all such financial or
other statements, including proxy statements, and reports as the Company
shall send to any class of its stockholders or holders of its debt
securities;
(d) promptly after filing thereof, copies of all regular and periodic
reports, proxy statements (other than preliminary) and registration
statements which the Company may file with the SEC or any governmental
agency substituted therefor and, promptly upon written request therefor,
copies of the financial statements which the Company may file annually
with any state regulatory agency or agencies; provided, however, that
the Company need not deliver to the Bank any document which it has filed
with the SEC or any governmental agency substituted therefor, or any
state regulatory agency or agencies if such reports are not available
for inspection by the public or if confidential treatment thereof has
been requested and has not been denied;
(e) promptly upon receipt thereof, copies of any notices received from
state regulatory agencies relating to any order, ruling, statute or
other law or information which might reasonably be expected to
materially and adversely affect the franchises, permits, licenses or
rights for the operation of the business of the Company; and
(f) promptly upon request therefor, such information as to the business
and properties of the Company as the Bank may from time to time
reasonably request in writing.
(g) as soon as available any written report pertaining to material items
in respect of the Company's internal control matters submitted to the
Company by its independent public accountants in connection with each
annual or interim special audit of the financial condition of the
Company and its Subsidiaries made by the Company's independent public
accountants; and
Together with each delivery of financial statements required by clauses (a) and
(b), the Company will deliver to the Bank a certificate signed by its principal
financial officer stating that there exists no Event of Default or Default or,
if any such Event of Default or Default exists, stating the nature thereof, the
period of existence thereof and what action the Company proposes to take with
respect thereto.
Section 6.02 Officer's Certificate. Each set of financial statements
delivered pursuant to Section 6.01(a) or Section 6.01(b) will be accompanied by
a certificate, signed by the President or a Vice President and the Treasurer or
an Assistant Treasurer of the Company, stating that a review of the affairs and
activities of the Company during the applicable period has been made under their
supervision and that the Company was not at any time during such period in
default under any of the provisions of this Agreement and demonstrating, in
reasonable detail, compliance with Section 6.13 and; provided, however, that, in
the event that any such default shall have occurred, such certificate shall so
specify and shall state whether such Default has been cured or is continuing.
<PAGE> 29
Section 6.03 Accountant's Certificate. Each set of annual financial
statements delivered pursuant to Section 6.01(a) will be accompanied by a report
of the independent public accountants who have certified or reported on such
financial statements stating that, in making their examination necessary to
express an opinion on such financial statements, such accountants have obtained
no knowledge of any condition or event which then constitutes, or which after
the giving of notice or the passage of time or both would constitute, an Event
of Default and, if any such condition or event then exists, specifying the
nature and period of existence thereof.
Section 6.04 Subsidiaries. If at any time the Company shall have a
Subsidiary:
(a) the financial statements delivered to the Bank pursuant to Section
6.01(a) and (b) shall be prepared on a consolidated basis for the
Company and any such Subsidiary or Subsidiaries in accordance with
generally accepted accounting principles; and
(b) if the assets of any such Subsidiary exceed 10% of the total assets
of the Company as shown on the balance sheet of the Company as at the
end of its last preceding fiscal quarter or the net income of such
Subsidiary exceeds 10% of the net income of the Company as shown on its
income statement for its last preceding fiscal quarter, the financial
statements referred to in Section 6.01(a) and (b) shall, at the Bank's
request, be furnished on a consolidating basis with respect to the
Company and such Subsidiary in addition to those for the Company.
Section 6.05 Other Reports. The Company will deliver to the Bank:
(a) forthwith upon an officer of the Company's obtaining knowledge of
the occurrence of each Default or Event of Default, a certificate from
an officer of the Company setting forth the details thereof and the
action which the Company proposes to take with respect thereto;
(b) a prompt written notice of any condition or event which has resulted
or might reasonably be expected to result in (i) a material adverse
change in the business, properties, condition (financial or otherwise)
or operations of the Company or any Subsidiary, (ii) a breach of or
noncompliance with any term, condition or covenant contained herein or
in any Related Document, (iii) a material breach of or noncompliance
with any term, condition or covenant of any material contract to which
the Company or any Subsidiary is a party or by which it or its assets or
properties may be bound, or (iv) any material adverse change in the
Project (financial, physical or otherwise);
(c) a prompt written notice of any claims, proceedings or disputes
against or on behalf of the Company or any Subsidiary or, to the
knowledge of the Company, threatened or affecting the Company or any
Subsidiary, which, if adversely determined, would have a material
adverse effect on the business, condition (financial or otherwise) or
operations of the Company or any Subsidiary (without in any way limiting
the foregoing, claims, proceedings, or disputes involving monetary
amounts in excess of $500,000 not fully covered by insurance shall be
deemed to be material), or any material labor
<PAGE> 30
controversy resulting in or threatening to result in a strike against
the Company or any Subsidiary, or any proposal by any public authority
to acquire any of the material assets or business of the Company or any
Subsidiary;
(d) will cause each of its Subsidiaries to deliver to the Bank, as soon
as possible, and in any event within thirty (30) days after the Company
knows, or has reason to know, that any Reportable Event with respect to
any Plan has occurred, a statement of the principal financial officer of
the Company or the affected Subsidiary setting forth details as to such
Reportable Event and the action which the Company or the affected
Subsidiary proposes to take with respect thereto, together with a copy
of the notice of such Reportable Event given to the PBGC, if a copy of
such notice is available to the Company or the affected Subsidiary, (ii)
prompt written notice to the Bank of any decision by the Company, any
Subsidiary or any member of the Controlled Group to terminate or
withdraw from any Plan, or receipt of a notice of withdrawal liability
with respect to a Plan pursuant to Section 4202 of ERISA, and (iii)
promptly after receipt thereof a copy of any notice of intent to
terminate any Plan or to appoint a trustee to administer any Plan which
the Company, any Subsidiary or any member of the Controlled Group may
receive from the PBGC or the Internal Revenue Service with respect to
any Plan; provided, however, this subparagraph shall not apply to
notices of general application promulgated by the Department of Labor;
and
(e) promptly upon the filing thereof, any annual, quarterly or special
reports (including, without limitation, any 10K, 10Q or 8K reports)
which the Company shall file with the Securities and Exchange
Commission, or any successor agency thereto.
Section 6.06 Inspection. The Company will permit any Person designated
by the Bank in writing, at the Bank's expense, to visit and inspect any of the
assets and properties of the Company and any Subsidiary, including the Project,
to examine the books and financial records of the Company and any Subsidiary and
make copies thereof or take extracts therefrom, and to discuss the affairs,
finances and accounts of the Company and any Subsidiary with the principal
officers of the Company and such Subsidiary, all at such reasonable times and as
often as the Bank may reasonably request.
Section 6.07 Payment of Taxes and Other Charges; ERISA. The Company will
pay, and will cause each Subsidiary to pay, before the same shall become
delinquent, (i) all taxes, assessments and other governmental charges or levies
imposed upon it or any of its properties or income (including, without
limitation, such as may rise under Section 4062, 4063 or 4064 of ERISA, or any
similar provision of law), and (ii) all claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like Persons which, if
unpaid, might result in the creation of a lien upon any of its properties,
provided that neither the Company nor any Subsidiary shall be required to pay
any such tax, assessment, charge, levy, claim or demand whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings. The Company will take all actions and fulfill all conditions
necessary to maintain, and will maintain, substantial compliance of all employee
benefit plans established or
<PAGE> 31
maintained, or to which contributions shall be made by the Company that are
under the control of the Company (whether such plans are now existing or
established in the future), with the requirements of ERISA and the rules and
regulations adopted or that may be adopted thereunder.
Section 6.08 Preservation of Existence, Etc. Except as otherwise
provided, the Company will preserve and maintain its and any Subsidiaries the
net assets of which exceed $300,000 existence, rights, franchises and privileges
necessary or desirable in the normal conduct of its business as contemplated and
as presently conducted.
Section 6.09 Compliance with Laws, Etc. The Company will, and will cause
each Subsidiary to, comply with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority having jurisdiction, the
terms of any indenture, contract or other instrument to which it is a party or
under which it or its properties may be bound, noncompliance with which could
materially adversely affect (a) the Company's business, properties, condition
(financial or otherwise) or operations, or (b) the Company's ability to perform
its obligations under this Agreement or any of the Related Documents to which it
is or is to be a party, unless the same is being contested in good faith and by
appropriate proceedings and the Company makes adequate provision for payment
thereof, satisfactory to the Bank, in the event it should lose such contest.
Section 6.10 Certain Notices. The Company will furnish to the Bank (a) a
copy of any material notice, certification, demand or other writing or
communication given by the District, Leasing Firm or the Trustee to the Company
or by the Company to the District, Leasing Firm or the Trustee under or in
connection with any of the Related Documents, in each case promptly after the
receipt or giving of the same, and (b) any opinion of counsel or certificate
required to be given to the District, Leasing Firm or Trustee under the Related
Documents, addressed to the Bank.
Section 6.11 Insurance. The Company and its Subsidiaries will maintain
or cause to be maintained in force until expiration or cancellation of the
Letter of Credit and full payment of the Obligations insurance (including but
not limited to public liability insurance) with responsible and reputable
insurance companies in such amounts and covering such risks as is required by
law and as is usually carried by companies engaged in a similar business and
owning similar properties in the same general areas in which the Company and its
Subsidiaries operates.
Section 6.12 Related Documents. The Company makes each of the covenants
made by it in the Related Documents to which it is or is to be a party, to and
for the benefit of the Bank as if the same were set forth at length herein.
Section 6.13 Incorporated Covenants. The Company will perform, comply
with and be bound by all of its agreements, covenants and obligations contained
in Sections 5.5, 5.6 (other than Section 5.6(a)(3)(ii)), 5.7, 5.8, 5.10, 5.11
and 5.13 of that certain Note Agreement, dated as of May 15, 1991 (the "Note
Agreement"), among the Company and the purchasers named in Schedule I attached
thereto (such Sections and all other terms of the Note Agreement to which
<PAGE> 32
reference is made herein, together with all related definitions and ancillary
provisions, being hereby incorporated into this Agreement by reference as though
specifically set forth in this Agreement); provided, however, that
(a) all references to "Purchaser" or "Purchasers" shall be deemed to
refer to the Bank;
(b) all references to "Note" or "Notes" shall be deemed to refer to the
Obligations hereunder, except in Section 5.6(a)(1) in which the
reference to "Notes" shall be deemed to refer to the Obligations
hereunder and the promissory notes of the Borrower outstanding under the
Note Agreement; and
(c) all references to "this Agreement" and "herein", "hereof" and words
of similar purport shall, except where the context otherwise requires,
be deemed to refer to this Agreement.
All such Sections and other terms, definitions and provisions of the Note
Agreement shall, except as the Bank shall otherwise consent for purposes of this
Agreement, continue in full force and effect for the benefit of the Bank as if
it were a Purchaser (as defined in the Note Agreement), whether or not the Notes
(as so defined) remain outstanding or the Note Agreement remains in effect
among, or is modified or amended by, or any provisions thereof are waived by,
the parties thereto.
ARTICLE VII
Negative Covenants
The Company covenants with the Bank, until expiration or cancellation of
the Letter of Credit and payment in full of all Obligations, that, without the
prior written consent of the Bank:
Section 7.01 Issuance of Stock By Subsidiaries. The Company will not
permit any Subsidiary to issue, sell or dispose of (i) any shares of its
Preferred Stock to any Person except to the Company, or (ii) any shares of its
stock, other than Preferred Stock and directors' qualifying shares as required
by law, except to the Company or to another Subsidiary or on a pro rata basis to
the then holders of each class of shares to be issued or in a transaction
otherwise permitted hereunder.
Section 7.02 Prohibition of Certain Contracts. The Company will not, and
will not permit any Subsidiary to, enter into, become a party to or become
liable in respect of, any of the following:
(a) any contract obligating the Company or any Subsidiary to make any
Investment in any Person unless such Investment is otherwise permitted
hereunder, or to purchase any property from any Person if the purpose of
such purchase is to enable such Person to maintain working capital, net
worth or any other balance sheet condition, or to pay debts, dividends
or expenses;
<PAGE> 33
(b) any lease or contract to use any real or Personal property if such
lease or contract or any related document provides that the obligation
of the Company or any Subsidiary, as lessee or user, to make payments
thereunder is absolute and unconditional under provisions not
customarily found in commercial leases then in general use, or requires
that the lessee or user underwrite the adequacy of condemnation awards
or insurance proceeds or purchase or otherwise acquire securities or
obligations of the lessor, except such lease or contract any part of the
future payments under which constitutes Funded Indebtedness permitted
hereunder;
(c) any contract for the sale or use of materials, supplies or other
property, or any contract for rendering services, if such contract or
any related document requires that payment to the Company or any
Subsidiary, as the case may be, for such materials, supplies or other
property, or the use thereof, or payment to the Company or any
Subsidiary, as the case may be, for such services, shall be subordinated
to any Indebtedness (of the purchaser or user of such materials,
supplies or other property or the Person entitled to the benefit of such
services) owed or to be owed to any Person;
(d) any contract or agreement subordinating or consenting to the
subordination of any then existing right or claim of the Company or any
Subsidiary to any right or claim of any other Person; and
(e) any other contract which, in economic effect, is substantially
equivalent to a guarantee of the obligations of any Person, except if
such contract constitutes Funded Indebtedness permitted hereunder.
Section 7.03 Consolidated Tax Returns. The Company will not file, or
consent to the filing of, any consolidated income tax return with any Person
other than a Subsidiary or any corporation controlled by the Company.
Section 7.04 Sale of Certain Instruments and Accounts. The Company will
not, and will not permit any Subsidiary to, sell, assign, transfer or otherwise
dispose of any promissory notes owned by it, or any of its accounts receivable
(including trade acceptances), except (i) in transactions involving the Company
and one or more Subsidiaries, exclusively, or involving two or more
Subsidiaries, exclusively, and (ii) as part of a transaction otherwise permitted
hereunder.
Section 7.05 Leasebacks. The Company will not, and will not permit any
Subsidiary to, become or remain liable in any way, whether directly or by
assignment or as a guarantor, for the obligations of the lessee or user under
any lease or contract for the use of any real or Personal property, if such
property is owned on the date of this Agreement or is thereafter acquired by the
Company or any Subsidiary, and if such property either (i) has been or is to be
sold or transferred to any Person by the Company or any Subsidiary or (ii) was,
is or will be used by the Company or any Subsidiary for substantially the same
purpose as any other property which has been or is to be sold or transferred by
the Company or any Subsidiary to any Person in connection with such lease or
contract, except that the Company may become and remain liable for Capitalized
<PAGE> 34
Lease Obligations to the extent such Capitalized Lease Obligations were incurred
in compliance with the terms hereof.
Section 7.06 Amendments. Without the consent of the Bank, the Company
will not amend, modify or terminate, or agree to amend, modify or terminate any
Certificate or any Related Document.
ARTICLE VIII
Events of Default
Section 8.01 Events of Default. If any of the following events ("Events
of Default") shall occur and be continuing:
(a) the Company shall fail to make any payment required to be made by it
hereunder or under any of the Related Documents when due; or
(b) the Trustee shall fail to make any payment required to be made by it
under (the Second Trust Agreement) or any Certificate when due; or
(c) any representation or warranty made by the Company in this
Agreement, any of the Related Documents or any writing furnished in
connection with or pursuant to this Agreement or any of the Related
Documents shall be false in any material respect or shall omit any
material fact on the date as of which made; or
(d) the Company shall fail to perform or observe any term, covenant or
agreement contained in Article VII; or
(e) the Company shall fail to perform or observe any other term,
covenant or agreement contained in this Agreement or any of the Related
Documents on its part to be performed or observed, (i) with respect to
any such term, covenant or agreement contained herein, any such failure
remains unremedied for thirty (30) days after such failure shall first
become known to any officer of the Company, and (ii) with respect to any
such term, covenant or agreement contained in any of the other Related
Documents and any such failure remains unremedied after any applicable
grace period specified in such Related Document, if any; or
(f) an event of default shall occur under the Second Trust Agreement,
the Second Lease-Purchase Agreement the Second Miramar Project Sublease,
the Remarketing Agreement or the Pledge Agreement; or
(g) the Company shall default in any payment of principal of or interest
on any other obligation for money borrowed (or of any obligation under a
conditional sale or other title retention agreement or of any obligation
secured by a purchase money mortgage or of any obligation under notes
payable or drafts accepted representing extensions of credit)
<PAGE> 35
beyond any period of grace provided with respect thereto; or the Company
shall default in the performance or observance of any other agreement,
or any term or condition contained in any other agreement under which
any such obligation is created (or if any other default thereunder or
under such agreement shall occur and be continuing) and the effect of
such default is to cause, or to permit the holder or holders of such
obligation (or a trustee on behalf of such holder or holders) to cause,
such obligation to become due prior to any stated maturity; or
(h) the Company or any Subsidiary shall commence (by petition,
application, or otherwise) a voluntary case or other proceeding under
the laws of any jurisdiction seeking liquidation, reorganization, or
other relief with respect to itself or its debts under any bankruptcy,
insolvency, or other similar law now or hereafter in effect, or seeking
the appointment of a trustee, self-trusteeship, receiver, custodian, or
other similar official of it or any substantial part of its property; or
shall consent (by answer or failure to answer, or otherwise) to any such
relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against
it; or shall make an assignment for the benefit of creditors; or shall
generally not pay its debts as they become due or not be able to pay its
debts as they become due; or admit in writing its inability to pay its
debts as they become due; or shall take any corporate action to
authorize any of the foregoing; or
(i) an involuntary case or other proceeding shall be commenced under the
laws of any jurisdiction against the Company or any Subsidiary, seeking
liquidation, reorganization, or other relief with respect to it or its
debts under any bankruptcy, insolvency, or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
custodian, or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 30 days or a trustee, receiver,
custodian or other official shall be appointed in such involuntary case;
or
(j) a judgment or order for the payment of money in excess of $250,000
shall be rendered against the Company and such judgment or order shall
continue unsatisfied and unstayed for a period of thirty (30) days; or
(k) any judgment, writ, attachment, execution, injunction, or similar
process in excess of $250,000 shall be issued or levied against the
property of the Company, and such process shall not be released,
vacated, or fully bonded within thirty (30) days after its issue or
levy; or
(l) any Reportable Event, which the Bank determines in good faith
constitutes grounds for the termination of any Plan or Plans by the PBGC
or for the appointment by the appropriate United States District Court
of a trustee to administer or liquidate any Plan or Plans shall have
occurred and be continuing thirty (30) days after written notice of such
determination by the Bank shall have been given to the Company, any of
its Subsidiaries or any member of the Controlled Group, or (ii) a
decision shall have been
<PAGE> 36
made by the Company, any of its Subsidiaries or any member of the
Controlled Group to terminate, file a notice of termination with respect
to, or withdraw from, any Plan or Plans, or (iii) a trustee shall be
appointed by the appropriate United States District Court to administer
any Plan or Plans, or (iv) the PBGC shall institute proceedings to
terminate any Plan or Plans or to appoint a trustee to administer any
Plan or Plans, or (v) the receipt of a notice of withdrawal of liability
pursuant to Section 4202 of ERISA, and in case of the occurrence of any
event described in the preceding clauses (i), (ii), (iii), (iv) and (v)
of this subsection, the aggregate amount of the Company's liability to a
Plan or to the Pension Benefit Guaranty Corporation under Sections 4062,
4063, 4064, 4201 or 4204 of ERISA as determined in good faith by the
Bank could exceed 5% of the Company's net worth, and such liability of
the Company is not covered in full, for the benefit of the Company, by
insurance;
(m) a Determination of Taxability (as defined in the Second Lease -
Purchase Agreement) shall occur;
THEN, or at any time thereafter, the Bank may take such action in its
discretion as is authorized under Sections 8.02 and 8.03 below.
Section 8.02 Remedies. When the Company is in default under Section
8.01(h) or 8.01(i) above, any and all Obligations then owing or which will
become owing upon a drawing of the full amount available under the Letter of
Credit shall automatically become due and payable, and in the case of any other
default under Section 8.01, the Bank may, at its option, in addition to all
other rights, powers and privileges the Bank may have, by written notice to the
Company and the Trustee exercise any or all of the following remedies, which
remedies shall not be exclusive: (a) require the Trustee to declare the
Certificates due and payable as provided in the Second Trust Agreement, (b)
declare the amount for which the Letter of Credit was issued and any other
Obligations then owing or which will become owing as a result of the
Certificates being declared due and payable as provided in the Second Trust
Agreement immediately due and payable without further demand or notice and the
Company shall pay to the Bank such amounts, and (c) take such action as the Bank
in its sole discretion deems necessary or desirable to remedy any default, which
action shall not be deemed a waiver of such default or any prior or subsequent
default.
Section 8.03 Additional Remedies. In addition to the remedies set forth
in Section 8.02, upon the occurrence of any Event of Default, the Bank may
exercise any right or remedy which it has under this Agreement, any Related
Document or otherwise available at law or in equity or by statute, and all of
the Bank's rights and remedies will be cumulative.
ARTICLE IX
Covenants Relating to Construction
<PAGE> 37
Section 9.01 Indemnity. The Company agrees to indemnify and hold the
Bank harmless from and against all liabilities, claims, damages, costs and
expenses (including but not limited to reasonable legal fees and disbursements)
arising out of or resulting from any defective workmanship or materials
occurring in the construction of the Project. Upon demand by the Bank, the
Company will defend any action or proceeding brought against the Bank alleging
any defective workmanship or materials, or the Bank may elect to conduct its own
defense at the expense of the Company.
ARTICLE X
Miscellaneous
Section 10.01 Amendment and Waiver. This Agreement and each provision
hereof may be amended, changed, waived, discharged or terminated only by an
instrument in writing signed by the parties hereto provided, however the
signature of the Trustee shall be required only with respect to those
amendments, waivers, discharges or terminations that expand or otherwise modify
the nature of its obligations hereunder. A Default or Event of Default may be
waived by the Bank and any such Default or Event of Default which has been
waived in writing by the Bank shall not be deemed to be continuing during the
period (including any retroactive period) for which the waiver is effective.
Section 10.02 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
Section 10.03 Notices. Except as provided herein, all notices, requests,
demands or other communications to or upon the respective parties hereto shall
be deemed to have been given or made when deposited in the mail, postage
prepaid, or, in the case of telex or telegraphic notice, when delivered to the
telex or telegraphic company, or in the case of telex notice sent over a telex
owned or operated by a party hereto, when sent, addressed to the Company or to
the Bank, as the case may be, at their respective addresses shown opposite their
signatures hereto or at such other address as either of such parties may
hereafter specify in writing to the other, except that any communication with
respect to a change of address shall be deemed to be given or made when received
by the party to whom such communication was sent.
Section 10.04 Waiver. No failure or delay on the part of the Bank in
exercising any right, power or privilege under this Agreement, the Letter of
Credit, or any of the Related Documents and no course of dealing between the
Company or any other Person and the Bank shall operate as a waiver hereof or
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise of any other right,
power or privilege. No notice to or demand on the Company in any case shall
entitle the Company to any other or further notice or demand in similar or other
circumstances or Constitute a waiver of the right of the Bank to any other or
further action in any circumstances without notice or demand.
<PAGE> 38
Section 10.05 Descriptive Headings, Etc. The descriptive headings of the
several Articles and Sections of this Agreement are inserted for convenience
only and shall not be deemed to affect the meaning or construction of any of the
provisions hereof.
Section 10.06 Benefit of Agreement. This Agreement shall be binding upon
each party hereto, its successors and assigns, except that the Company may not
transfer or assign any or all of its rights or obligations hereunder without the
prior written consent of the Bank. This Agreement is made and entered into
solely for the protection and benefit of the Bank the Trustee and the Company
and their successors and assigns and no other Person shall have any right of
action under this Agreement.
Section 10.07 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original and all of which
taken together shall constitute one agreement, and any party hereto may execute
this Agreement by signing any such counterpart.
Section 10.08 Actions. The Bank shall have the right, but not the
obligation, to commence, appear in and defend any action or proceeding which
might affect its security or its rights, duties or liabilities relating to the
Obligations, the Project, this Agreement, the Related Documents or the Letter of
Credit. The Company will pay promptly on demand all of the Bank's reasonable
out-of-pocket costs, expenses and legal fees and disbursements incurred in those
actions or proceedings.
Section 10.09 Participations. The Bank shall have the right at any time
to sell participations in the Letter of Credit and this Agreement to any other
Persons without the consent of the Company or the Trustee, provided that no such
action by the Bank shall relieve the Bank of its obligations hereunder. The Bank
may disclose to any participants or prospective participants any information or
other data or material in the Bank's possession relating to this Agreement, any
Related Document, the Company and the Project, without the consent of the
Company.
Section 10.10 Severability. Any provision of this Agreement which is
illegal, invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such illegality, invalidity or
enforceability without invalidating the remaining provisions hereof or affecting
the legality, validity or enforceability of such provision in any other
jurisdiction. The parties hereto agree to negotiate in good faith to replace any
illegal, invalid or unenforceable provision of this Agreement with a legal,
valid and enforceable provision that, to the extent possible, will preserve the
economic bargain of this Agreement or otherwise to amend this Agreement to
achieve such result.
Section 10.11 Confidentiality. The Bank agrees to use reasonable
precautions to keep confidential, in accordance with its customary procedures
for handling confidential information of the same nature, all non-public
information supplied by the Company, its Subsidiaries or Joint Ventures pursuant
to the Agreement which (a) is identified as non-public at the time it is
delivered to the Bank or (b) constitutes any financial statement, financial
projections or forecasts,
<PAGE> 39
budget, compliance certificate, audit report, management letter or accountants'
certification delivered hereunder or any contract or agreement not previously
filed, or filed on a confidential basis, with any governmental authority
(collectively, the "Confidential Information"), provided that nothing herein
shall limit the disclosure of any such Confidential Information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) on a
confidential basis, to the counsel to the Bank, (iii) to bank examiners,
auditors or accountants and any analogous counterpart thereof, (iv) in
connection with litigation to which the Bank is a party, or (v) to any
participant or prospective participant in the Letter of Credit so long as such
participant or prospective participant agrees to keep such Confidential
Information confidential on substantially the same basis as provided in this
Section.
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
ADDRESS: SOUTHER CALIFORNIA WATER COMPANY
630 East Foothill Boulevard
San Dimas, CA 91773 By___________________________
Attn: McClellan Harris III
Its CFO, VP-Finance, Treasurer
and Corporate Secretary
ADDRESS: THE BANK OF NOVA SCOTIA
580 California Street
Suite 2100 By___________________________
San Francisco, CA 94104
Its____________________________
<PAGE> 41
EXHIBIT A
IRREVOCABLE LETTER OF CREDIT
THE BANK OF NOVA SCOTIA
580 California Street
San Francisco, California 94104
Date: November 14,1997
LETTER OF CREDIT No.____
First Trust of California National Association
550 South Hope Street, Suite 500 Los Angeles, California 90071
Attention:__________________
Dear Sirs:
You, as Trustee under the Second Trust Agreement dated as of November 1,
1984, as amended and modified (the "Second Trust Agreement") among Central Bank
Leasing (the "Leasing Firm"), Three Valleys Municipal Water District (the
"District"), Southern California Water Company (the "Company"), and you,
pursuant to which U.S. $6,000,000 (Six Million Dollars) in aggregate principal
amount of Certificates of participation (Variable Rate Obligation) (Miramar
Water Treatment, Water Transmission and Hydroelectric Generating Facilities)
(the "Certificates") are being issued, are hereby irrevocably authorized to draw
on Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia
(the "Bank"), for the account of the Company available by your drafts at sight
upon the terms and conditions hereinafter set forth, an aggregate amount not
exceeding U.S. $6,296,000 (Six Million Two Hundred and Ninety-Six Thousand
Dollars) (the "Stated Amount"). This Letter of Credit is effective immediately
and expires on November 15, 2000 (the "Expiration Date").
The amount available, in the aggregate, under Principal Drawings (as
hereinafter defined) and principal purchase Drawings (as hereinafter defined)
shall not exceed $6,000,000 (Six
<PAGE> 42
Million Dollars), as such amount may be decreased and/or increased as
hereinafter provided. The amount available, in the aggregate, under Interest
Drawings (as hereinafter defined) and Interest purchase Drawings (as hereinafter
defined) shall not exceed $296,000 (Two Hundred and Ninety-Six Thousand
Dollars), as such amount may be decreased and/or increased as hereinafter
provided.
Funds under this Letter of Credit are available to you against your
sight drafts drawn on us, stating on their face: "Drawn under Irrevocable Letter
of Credit No. ______ issued by The Bank of Nova Scotia, 580 California Street,
San Francisco, California."
(A) If the drawing is being made with respect to any payment of
principal of the Certificates ("Principal Drawing"), the sight draft
shall be accompanied by your written certificate signed by you in the
form of Exhibit A attached hereto appropriately completed.
(B) If the drawing is being made with respect to a payment of
interest on the Certificates (an "Interest Drawing"), the sight draft
shall be accompanied by your written certificate signed by you in the
form of Exhibit B hereto appropriately completed.
(C) If the drawing is being made in accordance with Sections
3.02(e), 3.11(a)(4) or 3.12 of the Second Trust Agreement with respect
to payment of the portion of the purchase price of Certificates
delivered to the Co-Paying Agent appointed pursuant to the Second Trust
Agreement (the "Co-Paying Agent") equal to the principal amount of such
Certificates (a "Principal Purchase Drawing"), the sight draft shall be
accompanied by your written certificate signed by you in the form of
Exhibit C attached hereto appropriately completed. In connection with
any principal Purchase Drawing, Certificates in aggregate principal
amount equal to the amount of your sight draft(s) presented in respect
of any such drawing shall be delivered by the Co-Paying Agent to the
Bank as promptly as practicable, and in any event within five (5)
Business Days (as hereinafter defined), after such drawing.
(D) If the drawing is being made with respect to payment of the
portion of the purchase price of Certificates referred to in paragraph
(C) above equal to the amount of accrued and unpaid interest on such
Certificates to the date of purchase of such Certificates (an "Interest
Purchase Drawing"), the sight draft shall be accompanied by your written
certificate signed by you in the form of Exhibit D attached hereto
appropriately completed and such Interest purchase Drawing shall be made
simultaneously with the related principal Purchase Drawing.
Presentation of such draft(s), Certificate(s) and certificate(s) shall
be made at our office located at 580 California Street, San Francisco,
California 94104, Attention: Letter of Credit Department, or at any other office
in the State of California which may be designated by us by written notice
delivered to you. Drafts and certificates may be presented to the Bank in the
forms of a tested
<PAGE> 43
telex (telex no. 00340602), with original executed drafts and certificates to
follow immediately thereafter.
We hereby agree that all drafts drawn under and in compliance with the
terms of this Letter of Credit will be duly honored by us upon delivery of the
certificate(s) as specified if presented at such office on or before the
Expiration Date hereof provided that in each case the documents presented in
connection with a drawing conform to the terms and conditions hereof, the
following time schedule shall prevail:
(A) If a Principal Drawing or an Interest Drawing is made by you
hereunder at or prior to 2:00 P.M., San Francisco time, on a Business
Day (as hereinafter defined), payment shall be made to you or to your
order of the amount specified, in immediately available funds, at or
prior to 9:00 A.M. San Francisco time, on the next succeeding Business
Day.
(B) If a Principal Drawing or an Interest Drawing is made by you
hereunder after 2:00 P.M., San Francisco time, on a Business Day,
payment shall be made to you or to your order of the amount specified,
in immediately available funds, at or prior to 9:00 A.M. San Francisco
time, on the second succeeding Business Day.
(C) If a principal purchase Drawing or an Interest purchase
Drawing is made by you hereunder at or prior to 9:00 AM., San Francisco
time on a Business Day, payment shall be made to you or to your order of
the amount specified, in immediately available funds, at or prior to
12:00 noon, San Francisco time on such Business Day.
(D) If a principal Purchase Drawing or an Interest Purchase
Drawing is made by you hereunder after 9:00 AM., San Francisco time, on
a Business Day, payment shall be made to you or to your order of the
amount specified, in immediately available funds, at or prior to 12:00
noon, San Francisco time, on the next succeeding Business Day.
If requested by you, payment under this Letter of Credit may be made by
deposit of immediately available funds into a designated account, that you
maintain with us. As used herein, "Business Day" shall mean a day on which banks
located in each of the cities in which, (i) the principal office of the Trustee
is located (ii) the principal office of the Paying Agent (as defined in the
Second Trust Agreement) is located and (iii) the Bank is located are not
required or authorized to remain closed and on which the New York Stock Exchange
is not closed.
The amount available under this Letter of Credit and the amount
available, in the aggregate, under principal Drawings and principal purchase
Drawings shall be decreased upon, and to the extent of, each principal Drawing
and principal Purchase Drawing and shall also be decreased upon and to the
extent of any prepayment of the principal amount of Certificates for which no
drawing under this Letter of Credit is required pursuant to Sections 3.11 (a)
(1), 3.11 (a) (2), 3.11 (a) (6) or 3.11 (a) (7) of the Second Trust Agreement.
The amount available under this Letter of Credit and the amount available, in
the aggregate, under Interest Drawings and Interest purchase Drawings shall be
decreased upon, and to the extent of, each Interest Drawing,
<PAGE> 44
and shall be decreased by an amount equal to one hundred and twenty (120) days'
interest on each Certificate purchased pursuant to a Principal purchase Drawing
and on each Certificate prepaid for which no drawing under the Letter of Credit
is required. Upon receipt by the Bank of reimbursement in full by the Company of
any amounts due the Bank because of an Interest Drawing, the amount available
under this Letter of Credit and the amount available, in the aggregate, under
Interest Drawings and Interest Purchase Drawings shall be increased by the
amount of the reimbursed Interest Drawing. The Bank shall have the right at any
time during the ten Business Days following the day on which a payment in
respect of an Interest Drawing is made to increase the amount available, in the
aggregate, under Interest Drawings and Interest Purchase Drawings by the amount
of the Interest Drawing or not to increase the amount so available if at such
time such reimbursement has not been made or any other Event of Default (as
defined in the Reimbursement Agreement, dated as of October 3, 1997, among the
Company and the Bank) shall have occurred and then be continuing. The Bank shall
immediately notify the Company and the Trustee by telephone (confirmed in
writing) if the Bank elects to increase its obligation under this Letter of
Credit pursuant to the immediately preceding sentence. If no such notice is
given by the Bank prior to the close of business on the tenth Business Day
following a date on which a payment with respect to an Interest Drawing is made,
the amount available under this Letter of Credit shall be automatically
increased as hereinabove provided whether or not the Bank has received
reimbursement by the Company of the amounts due in respect of such payment.
If the Bank releases Certificates to the Remarketing Agent pursuant to
Section S of the pledge Agreement, dated as of October 3, 1997(the "Pledge
Agreement") between the Company and the Bank in connection with a remarketing of
such Certificates and the Bank receives payment in an amount equal to the
principal amount of, plus accrued and unpaid interest on, such Certificates, (i)
the amount available under this Letter of Credit will thereupon, and without
further action by the Bank, be increased by an amount equal to the sum of the
principal amount of such Certificates so released, and an amount equal to one
hundred and twenty (120) days' interest on such Certificates, (ii) the amount
available, in the aggregate, for Principal Drawings and Principal Purchase
Drawings shall be increased by the principal amount of the Certificates so
released; and (iii) the amount available, in the aggregate, for Interest
Drawings and Interest Purchase Drawings shall be increased by an amount equal to
one hundred and twenty (120) days' interest on the Certificates so released.
Only you as Trustee may make a drawing under this Letter of Credit. You
may not make any drawing with respect to any Certificate purchased by the
Company pursuant to Sections 3.02(e), 3.11(a) (4) or 3.12 of the Second Trust
Agreement and not released pursuant to Section 5 of the Pledge Agreement, and
the Bank shall not honor any such drawing. Upon the payment to you or to your
order of the amount specified in a sight draft drawn hereunder, we shall be
fully discharged on our obligation under this Letter of Credit with respect to
such sight draft, and we shall not thereafter be obligated to make any further
payments under this Letter of Credit in respect of such sight draft to you or
any other person who may have made to you or makes to you a demand for payment
of principal of, purchase price of, or interest on, any Certificate.
<PAGE> 45
If the amount available under this Letter of Credit has been decreased
as a result of a Principal Drawing or Principal Drawings, the Bank shall have
the right to require the Trustee to surrender this Letter of Credit to the Bank
and to accept a substitute Letter of Credit which has a Stated Amount equal to
the Stated Amount of this Letter of Credit less (i) the amount of such Principal
Drawing or principal Drawings and (ii) an amount equal to one hundred and twenty
days' interest on such Principal Drawing or Principal Drawings and which
otherwise contains terms identical to this Letter of Credit.
Upon the earlier of (i) the making by you of the final drawing available
to be made hereunder (except a Principal Purchase Drawing with respect to which
the Remarketing Agent is permitted to offer for sale pursuant to the Second
Trust Agreement the Certificates purchased with the proceeds of such drawing),
(ii) our receipt of a certificate signed by your duly authorized officer stating
that: "(a) the conditions precedent to the acceptance of an Alternate Credit
Facility (as defined in the Second Trust Agreement) set forth in the Second
Trust Agreement have been satisfied, (b) the Trustee has accepted the Alternate
Credit Facility and (c) upon receipt by The Bank of Nova Scotia of this
certificate, Irrevocable Letter of Credit No. ______ issued by The Bank of Nova
Scotia shall terminate.", (iii) 3:00 P.M. at San Francisco time, on the
effective date of the Fixed Interest Rate (as defined in the Second Trust
Agreement), such effective date to be specified in a written direction from the
Company or the Trustee to the Bank pursuant to Section 3.03 of the Second Trust
Agreement and (iv) the Expiration Date hereof, this Letter of Credit shall
automatically terminate and be delivered to the Bank for cancellation.
This Letter of Credit is subject to the Uniform Customs and practices
for Documentary Credits (1993 Revision), International Chamber of Commerce,
publication No. 500 (the "Uniform Customs"). As to matters not governed by the
Uniform Customs, this Letter of Credit shall be governed by and construed in
accordance with the laws of the State of California. Communications with respect
to this Letter of Credit shall be in writing and shall be addressed to The Bank
of Nova Scotia, San Francisco Agency, 580 California Street, San Francisco,
California 94104, Attention: Letter of Credit Department, specifically referring
thereon to "Irrevocable Letter of Credit No. ______ issued by The Bank of Nova
Scotia, 580 California Street, San Francisco, California 94104."
This Letter of Credit may be transferred more than once, but only in the
amount of the full unutilized balance hereof and only after receipt by the Bank
of a $1,000 transfer fee, to any single transferee who has succeeded First Trust
of California National Association as trustee under the Second Trust Agreement.
Transfers may be effected only through ourselves and only upon presentation to
us of a duly executed instrument of transfer in the form attached hereto as
Exhibit E. Any transfer of this Letter of Credit as aforesaid must be endorsed
by us on the reverse hereof and may not change the place of presentation from
our Letter of Credit office in San Francisco, California.
This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not in any way be modified, amended, amplified or limited by
reference to any document, instrument or agreement referred to herein
(including, without limitation, the Certificates), except only the
certificate(s) and the sight draft(s) referred to herein; and any such reference
shall not be deemed
<PAGE> 46
to incorporate herein by reference any document, instrument or agreement except
for such certificate(s) and such sight draft (5).
Very truly yours,
THE BANK OF NOVA SCOTIA
By_________________________________
Its_________________________________
By_________________________________
Its_________________________________
<PAGE> 47
EXHIBIT A
CERTIFICATE FOR PRINCIPAL DRAWING
The undersigned, [Insert Name of Beneficiary) (the "Trustee") hereby
certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable
Letter of Credit No. ______ (the "Letter of Credit"; any capitalized term used
herein and not defined shall have its respective meaning as set forth in the
Letter of Credit) issued by the Bank in favor of the Trustee, that:
(1) The Trustee is the Trustee under the Second Trust Agreement
for the holders of the Certificates.
(2) The Trustee is making a drawing under the Letter of Credit
with respect to the payment of the principal amount of all or a portion
of the Certificates by reason of prepayment, acceleration or redemption
(in whole or in part) pursuant to Section [Insert 3.11(a) (2), 3.11(a)
(3), or 13.02] of the Second Trust Agreement or their maturity.
(3) The amount of principal of the Certificates which is due and
payable is $ [Insert Amount], and the Trustee has not heretofore made a
drawing which has been honored under the Letter of Credit for such
amount or any portion thereof in respect of such principal payment. The
amount of the sight draft accompanying this certificate does not exceed
such amount.
(4) The amount of the sight draft accompanying this Certificate
does not exceed the amount available in the aggregate for Principal
Drawings and Principal Purchase Drawings under the Letter of Credit.
(5) The amount of the sight draft accompanying this certificate
was computed in accordance with the terms and conditions of the
Certificates and the Second Trust Agreement.
IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the __ day of ____________________
Very truly yours,
-----------------------------------
[Insert Name), as Trustee
-----------------------------------
By
[Insert Name and Title of Authorized
Officer]
<PAGE> 48
EXHIBIT B
CERTIFICATE FOR INTEREST DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable
Letter of Credit No. ______ (the "Letter of Credit"; any capitalized term used
herein and not defined shall have its respective meaning as set forth in the
Letter of Credit) issued by the Bank in favor of the Trustee, that:
(1) The Trustee is the Trustee under the Second Trust Agreement
for the holders of the Certificates.
(2) The Trustee is making a drawing in the amount of $[Insert
Amount] under the Letter of Credit with respect to the payment of
interest on the Certificates.
(3) Interest accrued on the Certificates on or prior to the
Expiration Date is due and payable, and the Trustee has not heretofore
made a drawing which has been honored under the Letter of Credit for
such amount or any portion thereof in respect of such interest payment.
The amount of the sight draft accompanying this certificate does not
exceed the amount of interest on the Certificates that is due and
payable.
(4) The amount of the sight draft accompanying this certificate
does not exceed the amount available in the aggregate for Interest
Drawings and Interest Purchase Drawings under the Letter of Credit.
(5) The amount of the sight draft accompanying this certificate
was computed in accordance with the terms and conditions of the
Certificates and the Second Trust Agreement.
IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of
the __ day of _________________,
Very truly yours,
-----------------------------------
[Insert Name], as Trustee
By_________________________________
[Insert Name and Title of Authorized
Officer]
<PAGE> 49
EXHIBIT C
CERTIFICATE FOR PRINCIPAL PURCHASE DRAWING
The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable
Letter of Credit No. _____ (the "Letter of Credit"; any capitalized term used
herein and not defined shall have its respective meaning as set forth in the
Letter of Credit) issued by the Bank in favor of the Trustee, that:
(1) The Trustee is the Trustee under the Second Trust Agreement
for the holders of the Certificates.
(2) The Trustee is making a drawing under the Letter of Credit at
the written request of [Insert Name of CoPaying Agent] in its capacity
as Co-Paying to pay the portion of the purchase price of Certificates
delivered to the Co-Paying Agent pursuant to Section [Insert 3.02(e),
3.11(a) (4) or 3.12] of the Second Trust Agreement equal to the
principal amount of such Certificates, and the Co-Paying Agent has
agreed to deliver to the Bank within 5 Business Days a principal amount
of Certificates equal to the amount of the sight draft accompanying this
certificate.
(3) The principal amount of the purchased Certificates with
respect to which this drawing is made is $[Insert Amount], and the
Trustee has not heretofore made a drawing which has been honored under
the Letter of Credit for the principal amount, or any portion thereof,
of the Certificates with respect to such purchase. The amount of the
sight draft accompanying this certificate does not exceed such amount.
(4) The amount of the sight draft accompanying this certificate
does not exceed the amount available in the aggregate for Principal
Drawings and Principal Purchase Drawings under the Letter of Credit.
(5) The Trustee hereby directs you to make payment of $[Insert
Amount, not Exceeding Amount of Sight Draft] of the sight draft
accompanying this Certificate to account no. ________ of said Co-Paying
Agent at _____________ and the balance thereof (if any) to the Trustee.
IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the __ day of ______
Very truly yours,
-----------------------------------
[Insert Name], as Trustee
By_________________________________
[Insert Name and Title of Authorized
Officer]
<PAGE> 50
EXHIBIT D
CERTIFICATE FOR INTEREST PURCHASE DRAWING
The undersigned1 [Insert Name of Beneficiary] (the "Trustee") hereby
certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable
Letter of Credit No. _____ (the "Letter of Credit"; any capitalized term used
herein and not defined shall have its respective meaning as set forth in the
Letter of Credit) issued by the Bank in favor of the Trustee, that:
(1) The Trustee is the Trustee under the Second Trust Agreement
for the holders of the certificates.
(2) The Trustee is making a drawing under the Letter of Credit at
the written request of [Insert Name of Co-Paying Agent] in its capacity
as Co-Paying Agent, to pay the portion of the purchase price of
Certificates delivered to the Co-Paying Agent pursuant to Section
[Insert 3.02(e), 3.11(a) (4) or 3.12] of the Second Trust Agreement
equal to the amount of accrued and unpaid interest on such Certificates
to the date of purchase thereof.
(3) The amount of accrued and unpaid interest on the purchased
Certificates with respect to which this drawing is made is $[Insert
Amount], and the Trustee has not heretofore made a drawing which has
been honored under this Letter of Credit for the accrued and unpaid
interest, or any portion, thereof on the purchased Certificates with
respect to such purchase. The amount of the sight draft accompanying
this certificate does not exceed the amount of interest accrued and
unpaid on such Certificates to the date of purchase thereof.
(4) The amount of the sight draft accompanying this certificate
does not exceed the amount available in the aggregate for Interest
Drawings and Interest purchase Drawings under the Letter of Credit.
(5) The amount of the sight draft accompanying this certificate
was computed in accordance with the terms and conditions of the
Certificates and the Second Trust Agreement.
The Trustee hereby directs you to make payment of $[Insert
Amount not Exceeding Amount of Sight Draft] of the sight draft
accompanying this certificate to account no. of said Co-Paying
Agent at _____________ balance thereof (if any) to the
Trustee.
<PAGE> 51
IN WITNESS WHEREOF, the Trustee has executed and delivered this
Certificate as of the __day of ____________ ____.
Very truly yours,
------------------------------------
[Insert Name], as Trustee
By_________________________________
[Insert Name and Title of Authorized
Officer]
<PAGE> 52
EXHIBIT E
The Bank of Nova Scotia
San Francisco Agency
580 California Street
San Francisco, California 94104
Re: Irrevocable Letter of Credit No. ______ issued by The Bank of Nova
Scotia
Gentlemen:
For value received, the undersigned beneficiary hereby irrevocably
transfers to:
(Name of Transferee)
(Address)
all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety.
By this transfer, all rights of the undersigned beneficiary in such
Letter of Credit are transferred to the transferee, and the transferee shall
have the sole rights as beneficiary thereof, including sole rights relating to
any amendments, whether increases or extensions or other amendments, and whether
now existing or hereafter made. The Letter of Credit may hereafter be amended,
extended or increased without necessity of any consent of or notice to the
undersigned beneficiary, and you will give notice thereof directly to the
transferee.
The advice of such Letter of Credit is returned herewith, and we ask you
to endorse the transfer on the reverse thereof, and forward it direct to the
transferee with your customary notice of transfer.
SIGNATURE AUTHENTICATED Yours very truly,
- ----------------------------- -----------------------------
(Bank). Signature of Beneficiary
<PAGE> 53
EXHIBIT B
PLEDGE AND SECURITY AGREEMENT, dated as of November 14, 1997, made by
THE SOUTHERN CALIFORNIA WATER COMPANY, a California corporation (the "Pledgor"),
in favor of THE BANK OF NOVA SCOTIA (the "Bank"), as contemplated by the
Reimbursement Agreement dated as of October 3, 1997, among the Pledgor and the
Bank (hereinafter, as the same may from time to time be amended or supplemented,
called the "Agreement"):
W I T N E S S E T H:
WHEREAS, pursuant to that certain Second Trust Agreement dated as of
November 1, 1984, as amended and modified (the "Second Trust Agreement") among
the Three Valleys Municipal Water District (the "District"), Central Bank
Leasing (the "Leasing Firm"), the Pledgor, and Bank of America National Trust
and Savings Association (the "Trustee"), $6,000,000 in a~gregate principal
amount of Certificates of Participation (Variable Rate Obligation) (Miramar
Water Treatment, Water Transmission and Hydroelectric Generating Facilities)
(the "Certificates") are to be issued.
WHEREAS, the Second Trust Agreement requires that Certificates delivered
by the holders thereof to the Co-Paying Agent pursuant to the Second Trust
Agreement be purchased under certain circumstances with the proceeds of
Principal purchase Drawings and Interest Purchase Drawings under the Letter of
Credit issued by the Bank under the Agreement (the "Remarketing
Certificate(s)");
WHEREAS, the Pledgor will be the owner of the Remarketing
Certificate(s); and
WHEREAS, it is a condition precedent to the obligation of the Bank to
enter into the Agreement and to issue the Letter of Credit that the Pledgor
shall have executed and delivered this pledge Agreement to the Bank;
NOW, THEREFORE, in consideration of the premises and in order to induce
the Bank to enter into the Agreement and issue the Letter of Credit thereunder
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the Pledgor hereby agrees with the Bank as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
Agreement shall have such defined meanings when used herein.
2. Pledge. The Pledgor hereby pledges, assigns, hypothecates, transfers,
and delivers to the Bank all its right, title and interest in and to the
Remarketing Certificate(s) and hereby grants tot he Bank a first lien on, and
security interest in, the pledgor's right, title and interest in and to the
Remarketing Certificate(s) and in all proceeds thereof, as collateral security
for the prompt
<PAGE> 54
and complete payment when due of all amounts due in respect of the reimbursement
obligation of the Pledgor set forth in Sections 2.02(a) and 2.02(b) of the
Agreement and interest on such amounts as set forth mt he Agreement (all the
foregoing being hereinafter called the "Obligations")
3. Registration of and Interest on the Remarketing Certificate(s) - Upon
delivery to the Bank pursuant to Section 9.14(b) of the Second Trust Agreement,
Remarketing Certificate(s) shall be registered in the name of the pledgor and
shall be duly endorsed for transfer by the pledgor in blank or the Pledgor shall
have delivered to the Bank appropriate instruments of transfer duly executed in
blank by the pledgor. The Bank may, but shall not be obligated to, register
Remarketing Certificate(s) in its name or that of its agent at any time or from
time to time. Except after the occurrence of an Event of Default and while the
same is continuing, and except after any portion of the Obligations has been
declared or has otherwise become due and payable and has not been paid, the
Pledgor shall be entitled to receive and retain interest payments in respect of
the Remarketing Certificate(s) and the Bank shall promptly pay over to or to the
order of the Pledgor any interest received by the Bank and deliver to or to the
order of the Pledgor any due-bill-checks received by the Bank pursuant to the
Second Trust Agreement. If an Event of Default shall be cured or waived in
writing by the Bank before the Obligations shall become or be declared to be due
and payable, the Bank shall promptly thereafter pay over or deliver to the
Pledgor all interest and due-bill-checks received by the Bank after the
occurrence of such Event of Default and prior to such cure or waiver.
4. Collateral. All property at any time pledged with the Bank hereunder
(whether describe herein or not) and all income therefrom and proceeds thereof,
are herein collectively sometimes called the "Collateral."
5. Release of Remarketing Certificate(s). If the Pledgor or the
Co-Paying Agent or the Remarketing Agent makes or cause to be made to the Bank a
payment of the Pledgor's reimbursement obligation under Section 2.02(a) of the
Agreement or a prepayment in respect of the Pledgor's reimbursement obligation
under Section 2.02(b) of the Agreement in accordance with Section 2.10 thereof,
the Bank agrees to release from the lien of this Pledge and Security Agreement
and deliver to the Pledgor (or its order) or the Co-Paying Agent (if such
prepayment is made by the Co-Paying Agent on behalf of the Pledgor) Remarketing
Certificate(s), of which the principal amount plus accrued interest is equal to
the amount of the prepayment so made.
6. Rights of the Bank. The Bank shall not be liable for failure to
collect or realize upon the Obligations or any collateral security or guarantee
therefor, or any part thereof, or for any delay in so doing nor shall it be
under any obligation to take any action whatsoever with regard thereto. If an
Event of Default has occurred and is continuing, the Bank may thereafter without
notice exercise all rights, privileges or options pertaining to any Remarketing
Certificate(s) as if it were the absolute owner thereof (except, before any
portion of the Obligations has been declared or has otherwise become due and
payable and has not been paid, the right to sell the Remarketing Certificates),
upon such terms and conditions as it may determine, all without liability except
to account for property actually received by it, but the Bank shall have no duty
to
<PAGE> 55
exercise any of the aforesaid rights, privileges or~options and shall not be
responsible for any failure to do so or delay in so doing.
7. Remedies. In the event that any portion of the Obligations has been
declared or has otherwise become due and payable, and has not been paid, the
Bank, without demand of performance or other demand, advertisement or notice of
any kind (except the notice specified below of time and place of public or
private sale) to or upon the Pledgor or any other person (all and each of which
demands, advertisements and/or notices are hereby expressly waived), may
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, assign, give option or options to
purchase, contract to sell or otherwise dispose of and deliver said Collateral,
or any part thereof, in one or more parcels at public or private sale or sales,
at any exchange, broker's board or at any of the Bank's offices or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk, with the right to the Bank upon any such sale or sales,
public or private, to purchase the whole or any part of said Collateral so sold,
free of any right or equity of redemption in the Pledgor, which right or equity
is hereby expressly waived or released. The Bank shall apply the net proceeds of
any collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care, safekeeping orotherwise of any and all of the Collateral
or in any way relating to the rights of the Bank hereunder, including reasonable
attorney's fees and legal expenses, to the payment in whole or in part of the
Obligations in such order as the Bank may elect, and only after such application
of such net proceeds and after the payment by the Bank of any other amount
required by any provision of law, including, without limitation, Section 9-504
(a) (c) of the Uniform Commercial Code of the State of California need the Bank
account for the surplus, if any, to the Pledgor. The Pledgor agrees that the
Bank need not give more than ten days' notice of the time and place of any
public sale or of the time after which a private sale or other intended
disposition. In addition to the rights and remedies granted to it herein and in
any other instrument or agreement securing, evidencing or relating to any of the
Obligations, the Bank shall have all the rights and remedies of a secured party
under the Uniform Commercial Code of the State of California.
8. ReDresentations. Warranties and Certain Covenants of the Pledgor. The
Pledgor represents and warrants that (a) on the date of delivery to the Bank of
any Remarketing Certificate(s) described herein, neither the Remarketing Agent,
Co-Paying Agent nor the Trustee will, in its capacity as Remarketing Agent,
Co-Paying Agent or Trustee, as the case may be, have any right, title or
interest in or to the Remarketing Certificate(s); (b) it has, and on the date of
delivery to the Bank of any Remarketing Certificate(s) will have, full power,
authority and legal right to pledge all of its right, title and interest in and
to the Remarketing Certificate(s) pursuant to this Pledge and Security
Agreement; (c) this Pledge and Security Agreement has been duly authorized,
executed and delivered by the Pledgor and constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, or other laws relating to or limiting creditors' rights generally
and subject to usual equity principles in the event that equitable remedies are
sought; (d) no consent of any other party (including, without limitation,
stockholders or creditors of the Pledgor) and no consent, license, permit,
approval or
<PAGE> 56
authorization of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority, domestic or foreign, is required
to be obtained by the Pledgor in connection with the execution, delivery or
performance of this Pledge and Security Agreement; (e) the execution, delivery
and performance of this Pledge and Security Agreement will not violate any
provision of any law or regulation presently in effect having applicability to
the Pledgor or of any order, judgment, writ, award or decree of any court,
arbitrator or governmental authority, domestic or foreign, or of the certificate
of incorporation or by-laws of the Pledgor or of any securities issued by the
Pledgor, or of any material mortgage, indenture lease contract, or other
agreement, instrument or undertaking to which the Pledgor is a party or which is
binding upon the Pledgor or upon any of the Pledgor's assets and will not result
in the creation or imposition of any lien, charge or encumbrance on or security
interest in any of the assets of the Pledgor, except as contemplated by this
Pledge and Security Agreement; (f) there is no pending action or proceeding
before any court, governmental agency or arbitrator against or directly
involving the Pledgor and, to the best of the Pledgor's knowledge, there is no
threatened action or proceeding affecting the Pledgor before any court,
governmental agency or arbitrator which, in any case, is likely (to the extent
not covered by insurance) materially to impair the Pledgor's ability to perform
its obligations under this Pledge and Security Agreement; and (g) the pledge,
assignment and delivery of Remarketing Certificate(s) pursuant to this Pledge
and Security Agreement will create a valid first lien on and a first perfected
security interest in, all right, title and interest of the Pledgor in and to
such Remarketing Certificate(s), and the proceeds thereof, subject to no prior
pledge, lien, mortgage, hypothecation, security interest, charge, option or
encumbrance created by the Pledgor or to any agreement purporting to grant to
any third party a security interest in the property or assets of the Pledgor
which would include the Remarketing Certificate (5). The Pledgor covenants and
agrees that upon delivery of any Remarketing Certificate to the Bank and payment
of the proceeds of the related Principal Purchase Drawing or Interest Purchase
Drawing if any, to or for the account of the holder who delivered such
Certificate to the Co-Paying Agent or the Trustee pursuant to Section 3.02(e) of
the Second Trust Agreement, the Pledgor will own the same free and clear of all
lines, claims, encumbrances and security interests of any nature whatsoever
created by the Pledgor, except for the lien and security interest provided for
hereby, and the Pledgor covenants and agrees that it will defend the Bank's
right, title and security interest in and to the Remarketing Certificate(s) and
the proceeds thereof against the claims and demands of all persons whomsoever;
and covenants and agrees that it will have like title to and right to pledge any
other property at any time hereafter pledged to the Bank as Collateral hereunder
and will likewise defend the Bank's right thereto and security interest therein.
9. Negative Covenant. Except for interest on and duebill-checks in
respect of Remarketing Certificate(s) which the Pledgor is entitled to receive
under Section 3 hereof, and except as contemplated in Section 5 hereof, the
Pledgor will not, without the prior written consent of the Bank, sell, assign,
transfer, exchange, or otherwise dispose of, or grant any option with respect
to, the Collateral, nor will it create, incur or permit to exist any pledge,
lien, mortgage, hypothecation, security interest, charge, option or any other
encumbrance with respect to any of the Collateral, or any interest therein, or
any proceeds thereof, except for the lien and security interest provided for by
this Pledge and Security Agreement and except for any of the foregoing which
were not created by the Pledgor and which are being contested in good faith.
<PAGE> 57
10. Sale of Collateral. The Pledgor agrees to do or cause to be done all
such other acts and things as may be necessary to make any sale or sales of any
portion or all of the Remarketing Certificate(s) contemplated by Section 7
hereof valid and binding and in compliance with any and all applicable laws,
regulations, orders, writs, injunctions, decrees or awards of any and all
courts, arbitrators or governmental instrumentalities, domestic or foreign,
having jurisdiction over any such sale or sales, all at the Pledgor's expense.
The pledgor further agrees that a breach of any of the covenants contained in
this Section 10 will cause irreparable injury to the Bank, that the Bank has no
adequate remedy at law in respect or such breach and, as a consequence, agrees
that each and every covenant contained in this section shall be specifically
enforceable against the pledgor and the Pledgor hereby waives and agrees not to
assert any defenses against an action for specific performance of such covenants
except for a defense that no Event of Default has occurred under the Agreement.
The Pledgor further acknowledges that impossibility of ascertaining the amount
of damages which would be suffered by the Bank by reason of a breach of any of
such covenants and, consequently, agrees that, if the Bank shall sue for damages
for breach, it shall pay, as liquidated damages and not as a penalty, against
release to it of the Remarketing Certificate(s), an amount equal to the value of
the Remarketing Certificate(s) on the date the Bank shall demand compliance with
this Section.
11. Amendments. Modifications and Waivers with Respect to Obligations.
The Pledgor hereby consents that, without the necessity of any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the Bank may
be rescinded by the Bank and any of the Obligations continued, and the
Obligations, or the liability of the Pledgor or any other party upon or for any
part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered, or released by the Bank, and the Agreement or any collateral
security documents of guarantees or documents in connection therewith may be
amended, modified, supplemented or terminated, in whole or in part, as the Bank
may deem advisable from time to time, and any collateral security at any time
held by the Bank for the payment of the Obligations may be sold, exchanged,
waived, surrendered or released, all without the necessity of any reservation of
rights against the Pledgor and without notice to or further assent by the
pledgor, which will remain bound hereunder, notwithstanding any such renewal,
extension, modification, acceleration, compromise, amendment, supplement,
termination, sale, exchange, waiver, surrender or release. The Bank shall have
no obligation to protect, secure, perfect or insure any other collateral
security document or property subject thereto at any time held as security for
the Obligations. The pledgor waives any and all notice of the creation, renewal,
extension or accrual of any of the Obligations and notice of or proof of
reliance by the Bank upon this Pledge and Security Agreement, and the
Obligations and any of them shall conclusively be deemed to have been created,
contracted or incurred in reliance upon this pledge and Security Agreement, and
all dealings between the Company and the Bank shall likewise be conclusively
presumed to have been had or consummated in reliance upon this pledge and
Security Agreement. The Pledgor waives diligence, presentment, protest, demand
for payment and notice of default or nonpayment to or upon the Pledgor with
respect to the Obligations.
<PAGE> 58
12. Further Assurances. The pledgor agrees that at any time and from
time to time upon the written request of the Bank, the pledgor will execute and
deliver such further documents and do such further acts and things as the Bank
may reasonably request in order to effect the purposes of this Pledge and
Security Agreement.
13. Severability. Any provision of this Pledge and Security Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceabi1ity in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
14. No Waiver; cumulative Remedies. The Bank shall not by an act, delay,
omission or otherwise be deemed to have waived any of its rights or remedies
hereunder and no waiver shall be valid unless in writing, signed by the Bank,
and then only to the extent herein set forth. A waiver by the Bank of any right
or remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Bank would otherwise have on any future occasion. No
failure to exercise nor any delay in exercising on the part of the Bank, any
right, power or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided are
cumulative and may be exercised singly or concurrently, and not exclusive of any
rights or remedies provided by law.
15. Waivers. Amendments; Applicable Law. None of the terms or provisions
of this Pledge and Security Agreement may be waived, altered, modified or
amended except by an instrument in writing, duly executed by the Bank. This
Pledge and Security Agreement and all obligations of the Pledgor hereunder shall
be binding upon the successors and assigns of the Pledgor, and shall, together
with the rights and remedies of the Bank hereunder, inure to the benefit of the
Bank and its successors and assigns. This Pledge and Security Agreement shall be
governed by, and be construed and interpreted in accordance with, the laws of
the State of California.
IN WITNESS WHEREOF, the Pledgor has caused this Pledge and Security
Agreement to be duly executed and delivered by its duly authorized officer, and
its corporate seal to be affixed on the day and year first above written.
SOUTHERN CALIFORNIA WATER COMPANY,
a California corporation
By_________________________________
Its:_______________________________
<PAGE> 59
EXHIBIT C
SECURITY AGREEMENT (Second Trust Agreement Funds)
This Agreement is made as of November 14, 1997, between The BANK OF NOVA
SCOTIA ("Bank") and FIRST TRUST OF CALIFORNIA, as Trustee under the Second Trust
Agreement hereinafter mentioned (the "Trustee"). Unless otherwise defined herein
or unless the context otherwise requires, terms defined in the Second Trust
Agreement shall have the same meanings herein.
Trustee has entered into a Second Trust Agreement, dated as of November
1, 1984, as amended and modified (the "Second Trust Agreement"), with Central
Bank Leasing, Three Valleys Municipal Water District and Southern California
Water Company (the "Company"), under which it, as Trustee, has agreed to take
certain actions in the event of a drawing or drawings under the Letter of
Credit.
Trustee has agreed, pursuant to Sections 4.05, 4.06 and 15.02 of the
Second Trust Agreement to pay or deliver to the Bank monies in the Funds
specified in Sections 4.05, 4.06 and 15.02, respectively.
Trustee acknowledges that, subject to the terms of the Second Trust
Agreement and the Reimbursement Agreement dated as of October 3, 1997, between
the Company and the Bank, the Bank has a security interest in all monies,
interest payable thereon and investments held by the Trustee, as Trustee, which
security interest is subordinate to the security interest granted in favor of
the Trustee by the terms of the Second Trust Agreement. Insofar as the Bank's
security interest in such monies, interest and investments is concerned, Trustee
acknowledges that it holds such monies, interest and investments on behalf of
the Bank to constitute the perfection of the Bank's security interest therein
pursuant to the California Uniform Commercial Code without the necessity of
filing.
The Bank agrees that in the event such monies, interest and investments
are paid to the Bank under the Second Trust Agreement, the Bank will indemnify
and hold Trustee harmless from any liability or expenses Trustee may incur as a
result of such payment, arising out of or relating to any action brought against
Trustee by or on behalf of the Company, including without limitation any
bankruptcy trustee thereof. The Bank shall have the right to defend any such
action with counsel of the Bank's own selection, and Trustee will agree to any
settlement of any such action approved by the Bank, provided that Trustee is
concurrently indemnified as provided herein.
This Agreement does not expand Trustee's powers, duties, or
responsibilities under the Second Trust Agreement, and does not in any manner
change, alter or diminish Trustee's duties
<PAGE> 60
to the holders of the Certificates as set forth in the Second Trust Agreement,
nor create any conflict with such powers, duties or responsibilities. The
parties acknowledge that Trustee's primary responsibility under the Second Trust
Agreement is to the holders of the Bonds.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California, and shall be binding upon each party hereto,
its successors and assigns.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one agreement, and any party hereto may execute this Agreement by
signing any such counterpart.
FIRST TRUST OF CALIFORNIA, as Trustee
By
-----------------------------------
-------------------------------------
Name and Title
THE BANK OF NOVA SCOTIA
By
-----------------------------------
--------------------------------------
Name and Title
<PAGE> 1
EXHIBIT 13
SOUTHERN CALIFORNIA WATER COMPANY 11.
Selected Financial Data
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share amounts) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Total Operating Revenues $153,755 $151,529 $129,813 $122,675 $108,506
Total Operating Expenses 130,297 128,100 108,425 103,745 88,456
Operating Income 23,458 23,429 21,388 18,930 20,050
Other Income 758 531 336 236 354
Interest Charges 10,157 10,500 9,559 7,828 8,378
Net Income 14,059 13,460 12,165 11,338 12,026
Preferred Dividends 92 94 96 98 100
Earnings Available for Common Shareholders 13,967 13,366 12,069 11,240 11,926
Basic Earnings per Common Share $ 1.56 $ 1.69 $ 1.54 $ 1.43 $ 1.66
Dividends Declared per Common Share $ 1.25 $ 1.23 $ 1.21 $ 1.20 $ 1.19
BALANCE SHEET INFORMATION
Total Assets $457,074 $430,922 $406,255 $383,627 $358,533
Common Shareholders' Equity 151,053 $146,766 $121,576 $118,962 $116,463
Long-Term Debt 115,286 107,190 107,455 92,891 84,286
Preferred Shares - Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600
Preferred Shares - Mandatory Redemption 440 480 520 560 600
Total Capitalization $268,379 $256,036 $231,151 $214,013 $202,949
Book Value per Common Share $ 16.86 $ 16.52 $ 15.50 $ 15.16 $ 14.92
Average Shares Outstanding 8,957 7,891 7,845 7,842 7,186
</TABLE>
BOOK VALUE PER COMMON SHARE
(in dollars)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
14.92 15.16 15.50 16.52 16.86
</TABLE>
DIVIDENDS DECLARED PER COMMON SHARE
(in dollars)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
1.19 1.20 1.21 1.23 1.25
</TABLE>
EARNINGS PER COMMON SHARE
(in dollars)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
1.66 1.43 1.54 1.69 1.56
</TABLE>
<PAGE> 2
SOUTHERN CALIFORNIA WATER COMPANY 19.
Management's Discussion and Analysis
Results of Operations
Years Ended December 31, 1997 and 1996
Earnings per common share in 1997 decreased by 7.7% to $1.56 per share as
compared to $1.69 per share for the comparable period last year. Earnings from
operations only, after interest and dividends paid, were $1.48 per share in
1997, a decrease of 8.6% from the $1.62 reported in 1996. The decline in
recorded results is significantly attributed to increased supply costs during
the first eight months of 1997.
Water operating revenues increased by 0.7% in 1997 to $141.0 million from the
$140.0 million reported in 1996. Although water sales volumes in 1997 were 2.6%
higher than last year, in 1996, the Company began recovery of previously
incurred supply costs, in accordance with rules of the CPUC. In 1997, recovery
of these costs was completed in several customer service areas and rates were
accordingly reduced partially offsetting rate increases effective during 1997
in other customer service areas.
Electric operating revenues of $12.8 million were 10.7% higher in 1997 as
compared to last year due to the impacts of a general rate increase effective
in January 1997 as well as a 3.6% increase in kilowatt-hour sales.
Purchased water costs remained relatively the same at $38.3 million in 1997 as
compared to $38.4 million in 1996, despite a 6.4% increase in volumes purchased,
due to refunds received from the Company's wholesale water supplier during 1997
of approximately $1.984 million, which reduced recorded purchased water costs.
There were no such refunds received during 1996.
Costs of power purchased for pumping decreased by 2.0% to $7.6 million in 1997
chiefly as the result of the reduced amounts of water produced from pumped
sources in the Company's resource mix. During 1997, the Company had several
wells out of service due to water quality issues which significantly affected
its ability to fully utilize its groundwater resources.
Costs of power purchased for resale in 1997 decreased by 10.9%
to $5.2 million from the $5.8 million recorded in 1996 due to reduced costs
from the Company's energy provider which partially offset the effects of
increased kilowatt-hour sales volumes recorded during the year.
Groundwater production assessments increased 15.2% to $6.8 million in 1997 from
$5.9 million in 1996 due to additional assessments associated with increased
pumping in the Company's San Gabriel Valley and San Dimas customer service
areas.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. Conversely, a negative
entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The positive entry for
1997 is a result of approval by the CPUC of rate increases sufficient to
recover previously under-collected purchased supply costs, as well as refunds
received during 1997 from wholesale suppliers. The balancing account mechanism
insulates earnings from changes in the costs of supply costs which are outside
of the immediate control of the Company. However, the balancing account is not
designed to insulate earnings against changes in supply mix, as occurred during
the first eight months of 1997.
Administrative and general expenses increased by 7.7% to $22.1 million in 1997
from the $20.5 million recorded in 1996. This increase reflects higher labor
costs. In addition, during 1997 the Company incurred costs for consulting on
water quality litigation for which there was no corresponding amount in 1996.
In 1997, maintenance expense decreased by 5.7% to $7.3 million from $7.7
million recorded in 1996 due principally to increased emphasis being placed on
the Company's meter replacement and capital improvement program which partially
offset increased maintenance on the Company's water supply sources.
Depreciation expense in 1997 increased by 8.4% to $11.0 million reflecting the
effects of recording approximately $31.0 million in net plant additions during
1996, depreciation on which began in 1997.
Taxes on income decreased by approximately 4.4% to $9.8 million in 1997 as
compared to the $10.3 million last year as a result of lower pre-tax income.
Other taxes increased by 3.0% in 1997 to $6.3 million due primarily to
increased property taxes resulting from higher valuation assessments in 1997.
Other income increased by 42.7% in 1997 due principally to an increase in
billings to the City of Folsom for the lease of a portion of the Company's
water rights in the American River.
Interest expense decreased by 3.3% to $10.2 million primarily due to reduced
short-term bank borrowing and the lower borrowing rates experienced during
1997.
<PAGE> 3
20. SOUTHERN CALIFORNIA WATER COMPANY
Years Ended December 31, 1996 and 1995
Earnings per common share in 1996 increased by 9.7% to $1.69 per share as
compared to $1.54 per share for the comparable period last year. Earnings from
operations only, after interest and dividends paid, were $1.62 per share in
1996, an increase of 8% from the $1.50 reported in 1995.
Water operating revenues increased by 17.7% in 1996 to $140 million from the
$118.9 reported in 1995 due principally to the impacts of general rate
increases, which went into effect in January, 1996, and to a 7.5% increase in
water sales volumes in 1996 as compared to 1995.
Electric operating revenues of $11.5 million were 5.9% higher
in 1996 as compared to last year due to the impacts of a general rate increase
effective in May, 1996 as well as a 5% increase in kilowatt-hour sales.
Purchased water costs increased by 17.5% to $38.4 million in 1996 reflecting
increases in purchased water rates, the latest series of which was effective
July 1, 1995, as well as increased purchased water volumes.
Costs of power purchased for pumping decreased by 3.2% to
$7.7 million in 1996 chiefly as the result of increased usage
of purchased water in the resource mix.
In 1996, costs of power purchased for resale increased by 11.7% to $5.8 million
due to increased kilowatt-hour sales and recovery of costs in the electric
supply cost balancing account.
Groundwater production assessments of $5.9 million in 1996 were 3.1% lower due
to the increased amount of purchased water in the resource mix.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. The positive entry for
1996 results from approval by the CPUC of rate increases sufficient to recover
previously under-collected purchased water supply costs, supply costs for
power purchased for pumping and for resale and groundwater production
assessments.
Although other operating expenses remained relatively unchanged in 1996 as
compared to 1995, administrative and general expenses of $20.5 million were
20.7% greater than in 1995. This increase reflects an increase in the amount of
labor being charged to this category since, as a part of the settlement
stipulation for the rates that were effective January 1, 1996, the company
began expensing, and currently recovering, a greater percentage of labor for
persons engaged in general and administrative functions. Moreover, this
category has increased due to higher personnel-related expenses such as health
insurance, post-retirement medical benefits, pension and 401(k) plan costs and
long-term compensation expenses. In addition, in 1995, the company reversed
approximately $639,000 in costs related to its participation in the State Water
Project for which there is no corresponding entry in 1996.
Depreciation expense in 1996 increased by 19.1% to $10.1 million reflecting the
effects of recording approximately $30 million in net plant additions during
1995, depreciation on which began in 1996 as well as higher depreciation rates
authorized by the CPUC that became effective January 1, 1996.
Taxes on income increased by approximately 17.1% to $10.3 million in 1996 as
compared to last year as a result of higher pre-tax income.
For 1996, other taxes increased by 25.4% due to increased franchise fees as a
result of increased revenues, as well as increased property taxes resulting
from higher valuation assessments in 1996.
Maintenance expense of $7.7 million in 1996 was 34.6% greater than last year
reflecting increased maintenance emphasis on pumping, hydrant and valve
equipment.
Other income increased by 58% in 1996 due principally to an increase in
billings to the City of Folsom for the lease of a portion of the company's
water rights in the American River.
Interest expense for 1996 increased by 9.8% to $10.5 million primarily as a
result of the sale in September, 1995 of $30 million in long-term debt as well
as increased short-term bank borrowing during 1996.
Financial Condition
Liquidity and Capital Resources
The Company funds the majority of its operating expenses, interest payments on
its debt, dividends on its outstanding common and preferred shares and makes
its mandatory sinking fund payments through internal sources. However, because
of the seasonal nature of its water and electric businesses, the Company
utilizes its short-term borrowing capacity on occasion to finance current
operating expenses.
<PAGE> 4
SOUTHERN CALIFORNIA WATER COMPANY 21.
The Company continues to rely on external sources, including short-term bank
borrowing, the receipt of contributions-in-aid-of-construction and advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures. The aggregate short-term borrowing capacity
available to the Company under its three bank lines of credit was $37 million
as of December 31, 1997 of which a total of $26 million was outstanding. The
Company routinely employs short-term bank borrowing as an interim financing
source prior to executing either a long-term debt or equity issue.
The Company issued 71,500 common shares in January 1997 for aggregate proceeds
of $1,472,185. These funds were used to repay a portion of the then-outstanding
short-term bank debt. The Company anticipates issuing additional long-term debt
in 1998, with the net proceeds again being used initially to repay short-term
bank borrowings and, after that, fund construction expenditures.
The Company has no derivative financial instruments, financial instruments with
significant off-balance sheet risks or financial instruments with
concentrations of credit risk.
Construction Program
The Company's construction program is designed to ensure its
customers high quality service. A program for distribution main replacement is
on-going throughout the customer service areas, based on priority of leaks
detected, fire protection enhancement and reflects the underlying replacement
schedule. In addition, general upgrades in the Company's water supply
facilities are anticipated to be on-going. The Company's Board of Directors has
approved anticipated net capital expenditures of approximately $27.1 million in
1998.
Regulatory Matters
The Company is subject to regulation by the CPUC which has broad powers with
respect to service and facilities, rates, classifications of accounts,
valuation of properties, the purchase, disposition and mortgaging of properties
necessary or useful in rendering public utility service, the issuance of
securities, the granting of certificates of convenience and necessity as to the
extension of services and facilities and various other matters.
The 22 customer service areas of the Company are grouped into 16 water
districts and one electric district for ratemaking purposes. Water rates vary
among the 16 ratemaking districts due to differences in operating conditions
and costs. The Company continuously monitors operations in each of these
districts so that applications for rate changes may be filed, when warranted.
Under the CPUC's practices, rates may be increased by three methods: general
rate increases (GRC's), offsets for certain expense increases and advice letter
filings related to certain plant additions. GRC's are typically for three-year
periods, include step increases, and rates are based on estimated expenses and
capital costs. GRC's have a typical regulatory lag of one year. Offset rate
increases typically have a two to four month regulatory lag.
In January, 1996, new rates were implemented in six water ratemaking districts
and water rates in two additional ratemaking districts were increased on
January 1, 1997 to recover costs associated with capital projects in those
areas. Step increases in rates were effective in January 1997 in Bear Valley
Electric. Increased rates were approved and are in effect as of January 2, 1998
for three additional water ratemaking districts.
Notices of intent to increase water rates were filed for six water ratemaking
districts as well as for recovery of costs associated with general office
functions in January 1998. The Company is unable to predict whether the CPUC
will authorize all or any of the proposed increases, although it is not
anticipated that new rates, if approved, would be effective before January,
1999.
In November, 1996, the Company filed an application with the CPUC seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project
("SWP"). The Company is pursuing alternative forms of recovery of its
investment in SWP, which will require CPUC approval. The Company is currently
unable to predict if the CPUC will authorize recovery of all or any of the
costs associated with its participation in the Project.
Environmental Matters
The 1996 amendments to the Safe Drinking Water Act
("SDWA") amount to a rewrite of the law that the United States Environmental
Protection Agency ("EPA") has been trying to implement for the last ten years.
The California Department of Health Services, acting on behalf of the EPA,
administers the EPA's program.
The 1996 SDWA amendments contain a new process for selecting and regulating
contaminants under which EPA regulates contaminants that may have adverse
health effects, are known or are likely to occur at levels of public health
concern, and provide "a meaningful opportunity for health risk reduction." The
EPA must, within 18 months, publish a list of contaminants for possible
regulation and must update such list every five years. In addition,
<PAGE> 5
22. SOUTHERN CALIFORNIA WATER COMPANY
every five years, the EPA must select at least five contaminants on the list
and determine whether to regulate them. The new law allows the EPA to bypass
the selection process and adopt interim regulations for contaminants in order
to address urgent health threats. Current regulations, however, remain in place
and are not subject to the new standard-setting provisions.
The Company currently tests its wells and water systems for more than 90
contaminants, covering all contaminants listed in the SDWA. Water from wells
found to contain levels of contaminants above the established maximum
contaminant limits (MCL's) is either treated or blended before it is delivered
to customers.
Since the SDWA became effective, the Company has experienced increased
operating costs for testing to determine the levels, if any, of the
contaminants in the Company's sources of supply as well as additional expense
to lower the level of any contaminants in order to meet the MCL standards. Such
costs and the costs of controlling any other contaminants may cause the Company
to incur additional capital costs as well as increased operating costs.
However, the rate-making process provides the Company with the opportunity to
recover prudently incurred capital and operating costs associated with water
quality, and management believes that such prudently incurred costs will be
authorized for recovery by the CPUC.
There have been no environmental matters that have materially affected or are
currently materially affecting the Company's Bear Valley Electric customer
service area.
Water Supply
During 1997, the Company supplied a total of 199,146 acre feet
of water. Of this amount, approximately 54% came from pumped sources and 45%
was purchased from others, principally the Metropolitan Water District of
Southern California ("MWD"). The remaining amount was supplied by the Bureau of
Reclamation (the "Bureau") under a no-cost contract. During 1996, the Company
produced 194,397 acre feet of water, 56% of which came from pumped sources,
42.5% was purchased and the remainder was supplied by the Bureau.
The MWD is a water district organized under the laws of the State of California
for the purpose of delivering imported water to areas within its jurisdiction.
The Company has 52 connections to the water distribution facilities of MWD and
other municipal water agencies. MWD imports water from two principal sources:
the Colorado River and the State Water Project (SWP). Available water supplies
from the Colorado River and the SWP have historically been sufficient to meet
most of MWD's requirements and MWD's supplies from these sources are
anticipated to continue to remain adequate through 1998. However, MWD has taken
a number of steps to secure additional storage capacity and increase available
water supplies, including effecting transfers of water rights from other
sources.
The 1996-1997 water year, which ended September 1997, was labeled a "wet one"
by the California Department of Water Resources. The outlook for water supply
in 1998 remains favorable. In those customer service areas of the Company which
pump groundwater, overall groundwater conditions remain at adequate levels.
However, certain of the Company's groundwater supplies have been affected to
varying degrees by various forms of contamination which, in some cases, has
caused increased reliance on purchased water in its resource mix and has
adversely affected earnings.
Water-Related Opportunities
The Company has pursued and continues to pursue opportunities to bid on
long-term leases, and operation and maintenance contracts of government-owned
water systems on a stand-alone basis or as part of its joint venture - Golden
State Water Company (GSWC). GSWC has four active bids currently outstanding,
although no assurance can be given that GSWC will be successful on any of the
currently active bids. The Company may pursue future bids, if any, through
GSWC, on a stand-alone basis, or through another affiliation.
In addition, the Company is pursuing the creation of a holding
company, subject to shareholder and regulatory approval, which will provide the
structure necessary to allow for independent operations of both the regulated
and non-regulated sectors of the Company. Shareholders will be asked to approve
formation of the holding company at the 1997 Annual Meeting of Shareholders.
<PAGE> 6
SOUTHERN CALIFORNIA WATER COMPANY 23.
<TABLE>
<CAPTION>
Balance Sheets
For the years ended December 31,
(in thousands, except per share amounts) 1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Assets
UTILITY PLANT, AT COST
Water $ 446,605 $ 411,852
Electric 34,137 33,300
--------------------------
480,742 445,152
Less - Accumulated depreciation (125,020) (114,086)
--------------------------
355,722 331,066
Construction work in progress 27,901 26,710
--------------------------
Net utility plant 383,623 357,776
--------------------------
OTHER PROPERTY AND INVESTMENTS 1,355 774
--------------------------
CURRENT ASSETS
Cash and cash equivalents 4,186 3,783
Accounts receivable - Customers, less reserves of $466 in 1997 and $387 in 1996 8,544 7,870
Other 3,614 1,713
Unbilled revenue 9,106 12,596
Materials and supplies, at average cost 1,299 1,292
Supply cost balancing accounts 4,286 6,273
Prepayments 7,676 6,933
Accumulated deferred income taxes - net 5,783 3,302
--------------------------
Total current assets 44,494 43,762
--------------------------
DEFERRED CHARGES
Regulatory tax-related assets 22,337 23,201
Other 5,265 5,409
--------------------------
Total deferred charges 27,602 28,610
--------------------------
TOTAL ASSETS $ 457,074 $ 430,922
==========================
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $ 151,053 $ 146,766
Preferred shares 1,600 1,600
Preferred shares - mandatory redemption 440 480
Long-term debt 115,286 107,190
--------------------------
Total capitalization 268,379 256,036
--------------------------
CURRENT LIABILITIES
Notes payable to banks 26,000 16,000
Long-term debt and preferred shares - current 231 482
Accounts payable 11,770 12,865
Taxes payable 9,115 5,777
Accrued interest 1,868 1,772
Other 7,196 7,792
--------------------------
Total current liabilities 56,180 44,688
--------------------------
OTHER CREDITS
Advances for construction 55,574 55,848
Contributions in aid of construction 28,467 28,158
Accumulated deferred income taxes - net 42,984 40,404
Unamortized investment tax credits 3,246 3,337
Regulatory tax-related liability 1,950 1,995
Other 294 456
--------------------------
Total other credits 132,515 130,198
--------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 457,074 $ 430,922
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 7
24. SOUTHERN CALIFORNIA WATER COMPANY
Statements Of Capitalization
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY:
Common shares, $2.50 par value --
Authorized 30,000,000 shares
Outstanding 8,957,671 in 1997 and 8,886,171 in 1996 $ 22,394 $ 22,215
Additional paid-in capital 74,937 73,645
Earnings reinvested in the business 53,722 50,906
--------------------------
151,053 146,766
--------------------------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800 800
Outstanding 32,000 shares, 4 1/4% Series 800 800
--------------------------
1,600 1,600
--------------------------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 19,200 shares in 1997 and 20,800 shares
in 1996, 5% Series 480 520
Less: Preferred shares to be redeemed within one year (40) (40)
--------------------------
440 480
--------------------------
LONG-TERM DEBT
5.82% notes due 2003 12,500 12,500
10.10% notes due 2009 10,000 10,000
6.64% notes due 2013 1,100 1,100
6.80% notes due 2013 2,000 2,000
8.50% fixed rate obligation due 2013 1,947 2,018
Variable rate obligation due 2014 6,000 6,000
6.87% notes due 2023 5,000 5,000
7.00% notes due 2023 10,000 10,000
7.55% notes due 2025 8,000 8,000
7.65% notes due 2025 22,000 22,000
5.50% notes due 2026 8,000 8,000
less funds held by trustee -- (8,000)
9.56% notes due 2031 28,000 28,000
Other 930 1,014
--------------------------
115,477 107,632
Less: Current maturities (191) (442)
--------------------------
115,286 107,190
--------------------------
TOTAL CAPITALIZATION $ 268,379 $ 256,036
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY 25.
Statements Of Income
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Water $ 140,988 $ 139,997 $ 118,922
Electric 12,767 11,532 10,891
-------------------------------------------
Total operating revenues 153,755 151,529 129,813
-------------------------------------------
OPERATING EXPENSES
Water purchased 38,318 38,355 32,629
Power purchased for resale 5,188 5,825 5,215
Power purchased for pumping 7,554 7,711 7,963
Groundwater production assessment 6,847 5,946 6,137
Supply cost balancing accounts 2,813 2,064 (1,146)
Other operating expenses 13,074 13,421 13,351
Provision for State Water Project -- -- (639)
Administrative and general expenses 22,138 20,549 17,029
Depreciation 10,952 10,102 8,483
Maintenance 7,301 7,745 5,754
Taxes on income 9,830 10,283 8,784
Property and other taxes 6,282 6,099 4,865
-------------------------------------------
Total operating expenses 130,297 128,100 108,425
-------------------------------------------
OPERATING INCOME 23,458 23,429 21,388
-------------------------------------------
OTHER INCOME
Total other income - net 758 531 336
-------------------------------------------
Income before interest charges 24,216 23,960 21,724
-------------------------------------------
INTEREST CHARGES
Interest on long-term debt 8,821 8,551 7,807
Other interest and amortization of debt expense 1,336 1,949 1,752
-------------------------------------------
Total interest charges 10,157 10,500 9,559
-------------------------------------------
NET INCOME 14,059 13,460 12,165
Dividends on Preferred Shares (92) (94) (96)
-------------------------------------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 13,967 $ 13,366 12,069
-------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 1.56 $ 1.69 $ 1.54
-------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,957 7,891 7,845
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 9
26. SOUTHERN CALIFORNIA WATER COMPANY
Statements Of Changes In Common Shareholders' Equity
<TABLE>
<CAPTION>
Common Shares
--------------------- Additional Earnings
Number Paid-in Reinvested in
(in thousands) of Shares Amount Capital the Business
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 7,845 $19,613 $54,753 $44,596
Add:
Net income 12,165
Deduct:
Dividends on Preferred Shares 96
Dividends on Common Shares - $1.205 per share 9,455
-----------------------------------------------
BALANCES AT DECEMBER 31, 1995 7,845 $19,613 $54,753 $47,210
Add:
Net income 13,460
Issuance of Common Shares
for public offering 1,000 2,500 18,090
under Dividend Reinvestment and 401(k) Plans 41 102 802
Deduct:
Dividends on Preferred Shares 94
Dividends on Common Shares - $1.225 per share 9,670
-----------------------------------------------
BALANCES AT DECEMBER 31, 1996 8,886 $22,215 $73,645 $50,906
Add:
Net income 14,059
Issuance of Common Shares for public offering 72 179 1,292
Deduct:
Dividends on Preferred Shares 92
Dividends on Common Shares - $1.245 per share 11,151
-----------------------------------------------
BALANCES AT DECEMBER 31, 1997 8,958 $22,394 $74,937 $53,722
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 10
SOUTHERN CALIFORNIA WATER COMPANY 27.
Statements Of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share amounts) 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,059 $ 13,460 $ 12,165
Adjustments for non-cash items:
Depreciation and amortization 11,387 10,389 9,033
Deferred income taxes and investment tax credits 826 577 2,016
Other - net (1,426) (1,660) 416
Changes in assets and liabilities:
Customer receivables (673) 368 651
Supply cost balancing accounts 1,987 1,800 (1,065)
Accounts payable (1,095) 6,026 (1,609)
Taxes payable 3,338 215 (73)
Other - net 341 122 (2,585)
----------------------------------------
Net cash provided 28,744 31,297 18,949
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (34,717) (31,953) (25,808)
----------------------------------------
Net cash used (34,717) (31,953) (25,808)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Shares 1,472 21,494 --
Issuance of long-term debt and lease obligations 8,000 -- 30,000
Receipt of advances for and contributions in aid of construction 1,302 2,462 2,761
Refunds on advances for construction (2,957) (2,088) (2,812)
Repayments of long-term debt and redemption of preferred shares (198) (15,447) (4,477)
Net change in notes payable to banks 10,000 7,500 (11,000)
Common and preferred dividends paid (11,243) (9,825) (9,614)
----------------------------------------
Net cash provided 6,376 4,096 4,858
----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 403 3,440 (2,001)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,783 343 2,344
----------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,186 $ 3,783 $ 343
----------------------------------------
TAXES AND INTEREST PAID:
Income taxes paid $ 6,338 $ 10,767 $ 6,955
Interest paid 9,451 10,128 9,043
----------------------------------------
NON-CASH TRANSACTIONS:
Property installed by developers and conveyed to Company $ 2,082 $ 957 $ 2,764
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 11
28. SOUTHERN CALIFORNIA WATER COMPANY
Notes to Financial Statements
Note 1
Summary of Significant Accounting Policies
The Company is an investor-owned public utility engaged
principally in the purchase, production, distribution and sale of water. The
Company also distributes electricity in one community. The Company is regulated
by the California Public Utilities Commission (CPUC) as to its water and
electric business including properties, rates, services, facilities and other
matters.
The accounting records are maintained in accordance with the Uniform System of
Accounts prescribed by the CPUC. The preparation of these financial statements
required the use of certain estimates by management in determining the
company's assets, liabilities, revenues and expenses.
Property and Depreciation -- The Company capitalizes as utility plant the cost
of additions and replacements of retirement units. Such cost includes labor,
material and certain indirect charges. Depreciation is computed on the
straight-line, remaining-life basis. For the years 1997, 1996 and 1995, the
aggregate provisions for depreciation approximated 2.77%, 2.71%, and 2.52% of
beginning of the year depreciable plant, respectively.
Interest is generally not capitalized for financial reporting purposes
as such procedure is generally not followed for rate-making purposes.
Revenues -- Revenues include amounts billed to customers and an amount of
unbilled revenue representing amounts to be billed for usage from the last
meter reading date to the end of the accounting period.
Basic Earnings Per Common Share -- Earnings per Common
Share are based upon the weighted average number of Common Shares outstanding
and net income after deducting preferred dividend requirements.
Supply Cost Balancing Accounts -- As permitted by the CPUC,
the Company maintains water and electric supply cost balancing accounts to
account for under-collections and over-collections of revenues designed to
recover such costs. Recoverability of such costs is recorded in income and
charged to balancing accounts when such costs are incurred. The balancing
accounts are credited when such costs are recovered through rate adjustments.
The Company accrues interest on its supply cost balancing accounts at the rate
prevailing for 90-day commercial paper.
Debt Issue Expense and Redemption Premiums -- Original debt issue expenses are
amortized over the lives of the respective issues. Premiums paid on the early
redemption of debt which is reacquired through refunding are deferred and
amortized over the life of the debt issued to finance the refunding. The
redemption premium on debt reacquired without refunding is amortized over the
remaining period the debt would have been outstanding.
Other Credits -- Advances for construction represent amounts advanced by
developers which are generally refundable at either a rate of 22% of the
revenue received from the installations for which funds were advanced or in
equal annual installments over a 40-year period. Contributions in aid of
construction are similar to advances, but require no refunding and are
amortized over the useful lives of the related property.
Cash and Cash Equivalents -- For purposes of the Statements of Cash Flows, cash
and cash equivalents include short-term cash investments with an original
maturity of three months or less.
Deferred Charges -- At December 31, 1997, $362,000 of deferred rate case
charges are being recovered over three year periods in rates charged to
customers.
Financial Instrument Risk -- The Company does not carry
any financial instruments with off-balance sheet risk nor do its operations
result in concentrations of credit risk.
Fair Value of Financial Instruments -- The following methods and assumptions
were used to estimate the fair value, as shown in the table below, of each
class of financial instrument for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Accounts Receivable and Short-term Debt -- The
carrying amount.
Long-term Debt -- Rates available to the Company at December 31, 1997 and 1996
for debt with similar terms and remaining maturities were used to estimate fair
value. Changes in the assumptions will produce differing results.
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) amount value amount value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash $ 4,186 $ 4,186 $ 3,783 $ 3,783
Accounts receivable 21,264 21,264 22,179 22,179
Financial liabilities:
Short-term debt 26,000 26,000 16,000 16,000
Long-term debt $115,326 $126,930 $107,632 $114,892
=====================================================
</TABLE>
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY 29.
Note 2
Capital Stock
All of the series of Preferred Shares outstanding at December 31, 1997 are
redeemable at the option of the Company. At December 31, 1997, the redemption
price per share for each series of $25 Preferred Shares was $27.00, $26.50 and
$25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the
redemption prices must be added accrued and unpaid dividends to the redemption
date.
The $25 Preferred Shares, 5% Series, are subject to mandatory redemption
provisions of 1,600 shares per year. The annual aggregate mandatory redemption
requirements for this Series for the five years subsequent to December 31, 1997
is $40,000 each year.
In 1996, the Company issued 1,000,000 Common Shares through a secondary public
offering and, in January 1997, issued an additional 71,500 Common Shares as
part of the same offering. The net proceeds from these sales were used to repay
a portion of short-term debt then outstanding.
For the years ended December 31, 1996 and December 31, 1995, all shares issued
under the Company's Dividend Reinvestment Plan (DRP) and the 401(k) Plan were
purchased on the open market. For the year ended December 31, 1996, the Company
issued 20,228 and 20,851 Common Shares, respectively, under the DRP and the
401(k) programs. There are 89,226 and 71,408 Common Shares reserved for
issuance under the DRP and the 401(k) Plan, respectively, at December 31, 1997.
Shares reserved for the 401(k) Plan are in relation to Company matching
contributions and for investment purposes by participants.
As of December 31, 1997 there were no retained earnings restricted as to the
payment of cash dividends on Common Shares.
Note 3
Compensating Balances and Bank Debt
At December 31, 1997, the Company maintained $37,000,000 in aggregate borrowing
capacity with three commercial banks with no compensating balances required. Of
this amount, $26,000,000 was outstanding at year-end. Loans can be obtained at
the option of the Company and bear interest at rates based on floating prime
borrowing rates or at money market rates.
Short-term bank borrowing activities for the last three years
were as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Outstanding at
December 31, $26,000 $16,000 $ 8,500
Interest Rate at December 31, 6.39% 6.17% 6.39%
Average Amount Outstanding $15,678 $26,109 $17,897
Weighted Average Annual Interest Rate 6.27% 5.97% 6.92%
Maximum Amount Outstanding $32,000 $36,000 $27,500
-------------------------------------
</TABLE>
Note 4
Long-Term Debt
In December, 1996, the Company sold $8 million in tax-exempt debt that was
issued through the California Pollution Control Financing Authority. The funds
were deposited with a trustee and were used during 1997 to finance water main
replacements.
In 1995, the Company issued a total of $30 million of unsecured notes, the
proceeds of which were used to pay down short-term bank borrowing. The Company
has no mortgage debt, and leases and other similar financial arrangements are
not material.
The Company has posted an Irrevocable Letter of Credit, which expires July 31,
1998, in the amount of $713,016 as security for its self-insured workers'
compensation plan. The Company has also provided an Irrevocable Letter of
Credit in the amount of $6,296,000 to a trustee with respect to the variable
rate obligation issued by the Three Valleys Municipal Water District.
Annual maturities of all long-term debt, including capitalized
leases, amount to $191,114, $203,038, $1,208,804, $1,216,212 and $1,167,779 for
the 5 years ending December 31, 1998 through 2002, respectively.
Note 5
Taxes on Income
The Company provides deferred income taxes for temporary differences under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) for certain transactions which are recognized for income
tax purposes in a period different from that in which they are reported in the
financial statements. The most significant items are the tax effects of
accelerated depreciation, the supply cost balancing accounts and advances for
and contributions in aid of construction. SFAS No. 109 also requires that
rate-regulated enterprises record deferred income taxes for temporary
differences accorded flow-through treatment at the direction of a regulatory
commission. The resulting deferred tax assets and liabilities are recorded at
the expected cash flow to be reflected in future rates. Since the CPUC has
consistently permitted the recovery of previously flowed-through tax effects,
the Company has established regulatory liabilities and assets offsetting such
deferred tax assets and liabilities.
Deferred investment tax credits are being amortized to other income ratably
over the lives of the property giving rise to the credits.
The significant components of deferred tax assets and deferred tax liabilities,
as reflected in the balance sheets, and the accumulated net deferred income tax
liabilities at December 31, 1997 and 1996 were:
<PAGE> 13
30. SOUTHERN CALIFORNIA WATER COMPANY
<TABLE>
<CAPTION>
December 31,
---------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Balancing accounts $ 27 $ 908
State tax effect 5,756 2,394
---------------------------
5,783 3,302
---------------------------
Deferred tax liabilities:
Depreciation (40,822) (38,888)
Advances and contributions 17,005 17,805
Other property related (9,602) (10,170)
Other non-property related (9,565) (9,151)
---------------------------
(42,984) (40,404)
---------------------------
Accumulated deferred income taxes - net $(37,201) $(37,102)
---------------------------
</TABLE>
The current and deferred components of income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 7,205 $ 7,224 $ 5,432
State 2,287 2,452 2,110
----------------------------------------
Total current tax expense 9,492 9,676 7,542
----------------------------------------
Deferred -- Federal and State:
Accelerated depreciation 2,996 3,175 3,273
Balancing accounts (871) (798) 472
State Water Project -- 296 (296)
Advances and contributions (210) (894) (477)
California privilege year
franchise tax (617) (683) (394)
Adjustments to prior year provision -- 410 (855)
Other (566) (732) (520)
----------------------------------------
Total deferred tax expense 732 774 1,203
----------------------------------------
Total income tax expense $ 10,224 $ 10,450 $ 8,745
----------------------------------------
Income taxes included in
operating expenses $ 9,830 $ 10,283 $ 8,784
Income taxes included in other
income and expenses -- net 394 167 (39)
----------------------------------------
Total income tax expense $ 10,224 $ 10,450 $ 8,745
----------------------------------------
</TABLE>
Additional information regarding taxes on income is set forth in the following
table:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes on pre-tax income at
statutory rates $ 8,451 $ 8,368 $ 7,318
Increase (decrease) in taxes
resulting from:
State income tax expense 1,864 2,051 1,725
Depreciation 853 716 426
Federal benefit of state taxes (652) (718) (604)
Adjustments to prior years'
provisions (143) 254 76
Other -- net (149) (221) (196)
------------------------------------------
Total income tax expense $ 10,224 $ 10,450 $ 8,745
------------------------------------------
Pre-tax income $ 24,145 $ 23,910 $ 20,910
------------------------------------------
Effective income tax rate 42.3% 43.7% 41.8%
------------------------------------------
</TABLE>
Note 6
Employee Benefit Plans
The Company maintains a pension plan (the Plan) which provides eligible
employees (those age 21 and over, with one year of service) monthly benefits
upon retirement based on average salaries and length of service. The normal
retirement benefit is equal to 2% of the five highest consecutive years average
earnings multiplied by the number of years of credited service, up to a maximum
of 40 years, reduced by a percentage of primary social security benefits. There
is an early retirement option. Annual contributions are made to the Plan which
comply with the funding requirements of the ERISA. At December 31, 1997, the
Company had 467 employees. Sixty-five employees are covered by collective
bargaining agreements, the earliest of which expires in 1999.
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of projected benefit
obligations for 1997 and 1996 were 7.0% and 4% and 7.5% and 4% respectively.
The expected long-term rate of return on assets, which consist primarily of
fixed income securities, was 8.0% for 1997 and 1996.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's balance sheets at December 31, 1997 and 1996 and the
components of net pension cost for 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation:
Vested $ 24,381 $ 21,078
Nonvested 1,985 1,862
------------------------
Total $ 26,366 $ 22,940
------------------------
Projected benefit obligation for service
rendered to date (33,410) (28,733)
Plan assets at fair value 33,433 29,240
Unrecognized net loss/(gain) due to past
experience different from assumptions made 1,538 936
Unrecognized net obligation at January 1, 1986
being recognized over 15 years 171 228
Unrecognized prior service cost due to
Plan amendments 444 489
------------------------
Accrued pension asset $ 2,176 $ 2,160
------------------------
Service cost benefits earned during the period $ 1,351 $ 1,406
Interest cost on projected benefit obligation 2,112 1,970
Return on Plan assets (4,065) (2,169)
Net amortization and deferral 1,873 165
------------------------
Net pension cost $ 1,271 $ 1,372
------------------------
</TABLE>
The Company also provides all active employees medical, dental and vision care
benefits through a medical insurance plan. Eligible employees who retired prior
to age 65, and/or their spouses, were able to retain the benefits under the
active plan until reaching age 65. Upon reaching age 65, and for those employees
retiring at or after age
<PAGE> 14
SOUTHERN CALIFORNIA WATER COMPANY 31.
65, and/or their spouses, continued coverage was provided through a medicare
supplement insurance policy paid for by the Company. Effective January 1,
1993, the Company adopted the provisions of SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." As a result, the
Company amended the retiree medical plan, substantially reducing benefits for
those current employees retiring after September 30, 1995. No such benefits are
available to employees hired on or after February 1, 1995.
The CPUC has issued a decision which provides for the recovery in rates of
tax-deductible contributions made to a separately trusteed fund. The Company
established two separate trusts in 1995, one for those retirees who were
subject to a collectively bargained agreement and another for all other
retirees. The Company's funding policy is to contribute annually an amount at
least equal to the revenues authorized to be collected through rates for
post-retirement benefit costs. Assets in these trusts amounted to approximately
$1,103,485 as of December 31, 1997.
The following table presents information on the plan's funded status and the
accrued post-retirement liability as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement
benefit obligation (APBO):
Retirees and dependents $ 2,326 $ 2,248
Other fully eligible participants 421 307
Other active participants 1,755 1,458
------------------------
Total $ 4,502 $ 4,013
------------------------
Plan assets at fair value $ 1,103 $ 549
------------------------
Accumulated post-retirement benefit
obligation in excess of plan assets 3,399 3,413
Unrecognized transition obligation (7,126) (7,545)
Unrecognized prior service cost 3,627 3,826
Unrecognized net (gain)/loss 1,644 2,000
------------------------
Accrued post-retirement benefit liability $ 1,544 $ 1,694
------------------------
</TABLE>
The components of net periodic post-retirement benefits cost for 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost -- benefits earned during year $ 120 $ 127
Interest cost on APBO 294 345
Actual return on plan assets (48) --
Net amortization and deferral 140 220
--------------------
Net periodic post-retirement benefit cost $ 506 $ 692
--------------------
</TABLE>
Post-retirement benefit costs for 1993, 1994 and 1995 were estimated at a total
of approximately $1.6 million and have been recorded as a regulatory asset for
recovery over a 20 year period. The weighted average discount rate used in
determining the accumulated post-retirement benefit obligation at December 31,
1997 and 1996 was 7.0% and 7.5%, respectively. A sliding scale for assumed
health care cost increases starting at 11% in 1996 declining 1% per year for
five years and then remaining at 6% thereafter was used for both periods. A 1%
increase in the health care cost trend would increase the accumulated
post-retirement benefit obligation at December 31, 1997 by $228,000 and the net
periodic post-retirement benefit cost for 1997 by $15,000.
The Company has a 401(k) Investment Incentive Program under which employees may
invest a percentage of their pay, up to a maximum investment prescribed by law,
in an investment program managed by an outside investment manager. Company
contributions to the 401(k) are based upon a percentage of individual employee
contributions and, for 1997, 1996 and 1995, totaled $785,687, $839,000, and
$389,000, respectively.
Note 7
Business Risks and Concentration of Sales
The Company's utility operations are engaged in supplying water and electric
service to the public. Although the Company has a diversified base of
residential, industrial and other customers, revenues derived from commercial
and residential water customers accounted for approximately 93% and 90% of
total Company revenues in 1997 and 1996, respectively.
Approximately 44% of the Company's water supplies comes from imported water
with the remainder produced from Company-owned wells. The long term
availability of imported water supplies is dependent upon, among other things,
drought conditions throughout the state, increases in population, water quality
standards and legislation that may potentially reduce water supplies. SCW does
not anticipate any constraints on its imported water supplies in 1998.
Note 8
Contingencies
In November 1996, the Company filed an application with the CPUC seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project
("SWP"). Alternate forms of recovery of these costs are also being pursued,
which will require CPUC approval. Currently the Company is unable to predict if
the CPUC will authorize recovery of all or any of the costs associated with its
participation in the Project.
In 1996, the Company formed Golden State Water Company LLC (GSWC) for the
purpose of pursuing strategic opportunities related to the operation of
government-owned water systems. Pursuant to the terms of the Limited Liability
Company Agreement, the Company's losses, if any, are limited during the first
three years of the agreement. At the end of the three year period, if the
Company decides
<PAGE> 15
32. SOUTHERN CALIFORNIA WATER COMPANY
to continue as a partner in GSWC, it is required to contribute
additional capital, if necessary, to reimburse the joint venture for the
difference between the actual losses incurred and the losses booked by the
Company. For 1997, the difference between the actual loss and the amount booked
by the Company was $185,000.
The Company has been named as a defendant in three lawsuits which allege that
the Company delivered contaminated water to its customers. Plaintiffs in these
actions seek damages, including general, special, and punitive damages,
according to proof at trial, as well as attorney's fees on certain causes of
action, costs of suit, and other unspecified relief. The Company has commenced
and is continuing a review and evaluation of plaintiff's claims and its
insurance coverage for these potential liabilities. In light of the breadth of
plaintiff's claims, the lack of factual information regarding plaintiff's
claims and injuries, if any, the fact that no discovery has yet been completed,
the Company is unable to determine at this time what, if any, potential
liability it may have with respect to these claims. The Company intends to
vigorously defend itself against these allegations.
Management believes that proper insurance coverage and reserves are in place to
insure against property, general and product liability and workers'
compensation claims.
Note 9
Construction Program
The Company's 1998 construction budget provides for gross expenditures of
approximately $33.0 million of which $5.9 million is anticipated to be obtained
from developers and others.
Note 10
Allowance for Doubtful Accounts
The table below presents the Company's provision for doubtful accounts charged
to expense and accounts written off, net of recoveries for the last three
years.
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 387 $ 648 $ 419
Provision charged to expense 707 571 1,501
Accounts written off, net of recoveries (628) (832) (1,272)
Balance at end of year $ 466 $ 387 $ 648
</TABLE>
Note 11
Business Segments
The table below sets forth information relating to the Company's operating
segments. In addition to amounts set forth, certain assets have not been
allocated. The identifiable assets are net of respective accumulated provisions
for depreciation.
Note 12
Selected Quarterly Financial Data (Unaudited)
The quarterly financial information presented below is unaudited. The business
of the Company is of a seasonal nature and it is management's opinion that
comparisons of earnings for the quarterly periods do not reflect overall trends
and changes in the Company's operations.
Business Segments
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1997 1996 1995
-----------------------------------------------------------------------------------
Water Electric Water Electric Water Electric
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $140,988 $ 12,767 $139,997 $ 11,532 $118,922 $ 10,891
Operating income before income taxes 29,200 4,089 30,294 3,418 27,776 2,396
Identifiable assets 359,474 24,149 333,377 24,399 313,190 21,778
Depreciation expense 10,011 941 9,235 867 7,717 766
Capital additions 37,205 2,007 31,295 2,644 25,753 2,985
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarterly Financial Data
(in thousands, except Operating Operating
per share amounts) Revenues Income Net Income Earnings per Share
---------------------- ---------------------- ---------------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------ ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 32,206 $ 30,397 $ 3,738 $ 4,710 $ 1,312 $ 2,168 $ 0.14 $ 0.27
Second Quarter 39,343 39,894 5,372 6,486 3,080 4,102 0.34 0.52
Third Quarter 45,700 45,218 8,385 7,963 6,044 5,410 0.67 0.68
Fourth Quarter 36,506 36,020 5,963 4,270 3,623 1,780 0.41 0.22
-------------------------------------------------------------------------------------------------------
Year $153,755 $151,529 $ 23,458 $ 23,429 $ 14,059 $ 13,460 $ 1.56 $ 1.69
-------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
SOUTHERN CALIFORNIA WATER COMPANY 33.
Report Of Management
The financial statements contained in this annual report were prepared by the
management of Southern California Water Company, which is responsible for their
integrity and objectivity. The financial statements were prepared in accordance
with generally accepted accounting principles and include, where necessary,
amounts based upon management's best estimates and judgments. All other
financial information in the annual report is consistent with the financial
statements and is also the responsibility of management.
The Company maintains systems of internal control which are designed to help
safeguard the assets of the Company and provide reasonable assurance that
accounting and financial records can be relied upon to generate accurate
financial statements. These systems include the hiring and training of
qualified personnel, appropriate segregation of duties, delegation of authority
and an internal audit function which has reporting responsibility to the Audit
Committee of the Board of Directors.
The Audit Committee, composed of three outside directors, exercises oversight
of management's discharge of its responsibilities regarding the systems of
internal control and financial reporting. The committee periodically meets with
management, the internal auditor and the independent accountants to review the
work and findings of each. The committee also reviews the qualifications of,
and recommends to the Board of Directors, a firm of independent accountants.
The independent accountants, Arthur Andersen LLP, have performed an audit of
the financial statements in accordance with generally accepted auditing
standards. Their audit gave consideration to the company's system of internal
accounting control as a basis for establishing the nature, timing and scope of
their work. The result of their work is expressed in their Report of
Independent Public Accountants.
/S/ FLOYD E. WICKS
Floyd E. Wicks
President, Chief Executive Officer
/S/ MCCLELLAN HARRIS III
McClellan Harris III
Chief Financial Officer,
Vice President-Finance,
Treasurer and Corporate Secretary
February 12, 1998
Report Of Independent Public Accountants
To the Shareholders and the Board of Directors of Southern California Water
Company:
We have audited the balance sheets and statements of capitalization of Southern
California Water Company (a California corporation) as of December 31, 1997 and
1996 and the related statements of income, changes in common shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also Eincludes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern California Water
Company as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
February 12, 1998
<PAGE> 17
34. SOUTHERN CALIFORNIA WATER COMPANY
Statistical Review 1997-1988
<TABLE>
<CAPTION>
(in thousands, except per share and per customer amounts) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL INFORMATION
Revenues by classification
Residential and commercial $131,007 $126,456 $106,480 $100,796
Industrial 1,998 1,847 1,674 1,459
Fire service 1,319 1,269 1,211 1,181
Other 6,664 10,425 9,557 8,651
Total water 140,988 139,997 118,922 112,087
Electric 12,767 11,532 10,891 10,588
Total operation revenues 153,755 151,529 129,813 122,675
Net income 14,059 13,460 12,165 11,338
Earnings available for common shareholders 13,967 13,366 12,069 11,240
Earnings per common share 1.56 1.69 1.54 1.43
Dividends declared per common share 1.25 1.23 1.21 1.20
Book value per common share 16.86 16.52 15.50 15.16
Total assets 457,074 430,922 406,255 383,627
Net utility plant 383,623 357,776 334,968 317,879
Capital additions 39,226 34,374 28,761 30,307
Long-term debt 115,286 107,190 107,455 92,891
Preferred shares 1,600 1,600 1,600 1,600
Preferred shares - mandatory redemption 440 480 520 560
Investment per customer $ 1,900 $ 1,808 $ 1,688 $ 1,578
OPERATION INFORMATION
Water sold by classification (mg)
Residential and commercial 54,623 52,843 49,641 51,084
Industrial 899 828 802 818
Fire service 417 831 130 308
Other 5,070 4,932 4,706 4,537
Total water 61,009 59,434 55,279 56,747
Total electric sales (mwh) 121,315 117,139 111,519 110,234
Customers by classification
Residential and commercial 236,270 235,244 233,920 232,879
Industrial 331 333 326 323
Fire service 2,964 2,925 2,909 2,896
Other 2,016 2,046 1,807 1,807
Total water 241,581 240,548 238,962 237,905
Electric 20,698 20,437 20,475 20,331
Total company 262,279 260,985 259,437 258,236
Water production by source (mg)
Purchased 28,894 27,147 24,356 25,940
Pumped -- electric 34,531 35,216 34,105 33,337
Pumped -- gas 316 40 218 198
Gravity and surface 1,147 932 979 967
Total supply 64,888 63,335 59,658 60,442
Miles of main in service 2,638 2,603 2,587 2,567
Number of employees 467 463 448 467
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
mg=Millions of Gallons mwh=Mega-Watt Hours
<PAGE> 18
SOUTHERN CALIFORNIA WATER COMPANY 35.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 86,918 $ 82,112 $ 68,063 $ 69,161 $ 67,404 $ 64,279
1,134 1,110 1,019 1,021 1,074 1,330
1,149 1,067 927 954 785 724
8,954 6,336 8,273 5,150 4,909 4,874
98,155 90,625 78,282 76,286 74,172 71,207
10,351 10,035 12,378 11,054 10,043 8,682
108,506 100,660 90,660 87,340 84,215 79,889
12,026 12,142 15,363 8,907 8,730 6,127
11,926 12,040 15,259 8,801 8,622 6,017
1.66 1.82 2.34 1.40 1.38 1.47
1.19 1.15 1.10 1.08 1.04 1.01
14.92 13.28 12.59 11.31 10.97 10.61
358,533 312,491 293,444 268,028 254,346 237,450
294,990 277,525 258,558 235,713 214,465 213,947
28,626 26,975 32,472 27,078 25,726 24,036
84,621 84,195 82,634 67,246 67,767 56,532
1,600 1,600 1,600 1,600 1,600 1,600
600 640 680 720 760 800
$ 1,480 $ 1,388 $ 1,297 $ 1,213 $ 1,125 $ 1,078
48,033 47,541 44,528 51,696 51,841 50,425
679 699 737 937 966 1,286
33 23 11 50 25 19
4,019 3,890 3,807 4,511 4,635 4,546
52,764 52,153 49,083 57,194 57,467 56,276
106,234 105,346 101,923 103,376 97,583 88,375
231,966 230,956 230,175 221,888 220,876 231,139
322 330 347 376 385 398
2,877 2,846 2,779 2,610 2,562 2,416
1,820 1,795 1,812 1,819 1,813 1,843
236,985 235,927 235,113 226,693 225,636 235,796
20,131 20,039 19,780 19,559 19,215 18,780
257,116 255,966 254,893 246,252 244,851 254,576
25,156 24,377 23,221 31,021 32,189 31,542
32,056 30,406 28,640 28,923 29,733 30,391
195 177 245 270 306 276
658 1,249 1,046 1,255 361 1,002
58,065 56,209 53,152 61,469 62,589 63,211
2,560 2,549 2,535 2,517 2,488 2,688
486 445 422 410 388 392
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 19
36. SOUTHERN CALIFORNIA WATER COMPANY
Shareholder Information
Annual Meeting of Shareholders
All shareholders are invited to attend the Annual Meeting of Shareholders which
will be held on Tuesday, April 28, 1998, beginning at 10:00 am, at the Industry
Hills Sheraton, One Industry Hills Parkway, City of Industry, California 91744.
Notice of meeting and proxy materials will be mailed.
Stock Listing
Common Shares of Southern California Water Company are traded on the New York
Stock Exchange under the symbol SCW. The high and low sales prices and
dividends paid on the Common Shares for the past two years were:
<TABLE>
<CAPTION>
Dividends
1997 High Low Paid
- -------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 23 $20 5/8 $ 0.310
Second Quarter 24 1/2 20 1/4 0.310
Third Quarter 24 5/8 20 1/2 0.310
Fourth Quarter 25 5/8 21 1/2 0.315
----------------------------------------
$ 1.245
</TABLE>
<TABLE>
<CAPTION>
Dividends
1996 High Low Paid
- ------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 22 $ 18 3/4 $ 0.305
Second Quarter 22 5/8 19 3/4 0.305
Third Quarter 23 3/8 19 3/8 0.305
Fourth Quarter 24 1/8 21 0.310
---------------------------------------------
$ 1.225
</TABLE>
Independent Certified Public Accountants
Arthur Andersen LLP
633 West Fifth Street
Los Angeles, CA 90071
Corporate Reports
Shareholders with questions, or who wish to obtain a copy of the company's
reports to the Securities and Exchange Commission without charge, should
contact:
Southern California Water Company
Attn: McClellan Harris III
630 East Foothill Boulevard
San Dimas, CA 91773
Phone: (909) 394-3600
Fax: (909) 394-1382
Shareholder Assistance
Shareholders with questions about replacement of dividend checks, transferring
stock, replacing lost or stolen certificates or other matters related to their
ownership of stock, should contact:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 522-6645
http://www.cmssonline.com
Dividend Reinvestment and Common Share Purchase Plan
The Company has a Dividend Reinvestment and Common Share Purchase Plan that
offers shareholders of record a convenient way to increase their holdings by
reinvesting all or part of their cash dividends in additional Common Shares of
the Company. The Plan also provides for receipt of optional cash payments for
the purchase of additional Common Shares. A prospectus and authorization form
may be obtained from ChaseMellon Shareholder Services, L.L.C.
1998 Dividend Schedule
The following schedule shows the anticipated Common and Preferred Share record
and payment dates for 1998:
Record Dates Payment Dates
- -------------------------------------------
February 9 March 1
May 11 June 1
August 10 September 1
November 9 December 1
Internet Address
http://www.scwater.com
<PAGE> 20
Corporate Information
Board of Directors
W. V. Caveney (71, 17) (a,c)
Chairman of the Board
Floyd E. Wicks (54, 8) (c,d)
President, Chief Executive Officer
James L. Anderson (56, 1) (a,c)
Senior Vice President
Americo Life Inc.
Orange, California
Jean E. Auer (61, 2) (a,b,c,d)
Consultant and member of the
Board of Directors of the Water
Education Foundation
Hillsborough, California
N. P. Dodge, Jr. (61, 7) (a,b)
President, N.P. Dodge Company
Omaha, Nebraska
Robert F. Kathol (56, 2) (a,b)
Executive Vice President
Kirkpatrick, Pettis, Smith, Polian Inc.
Omaha, Nebraska
Lloyd E. Ross (56, 2) (a,c,d)
Managing Partner, Invermex L.P.
Irvine, California
(age, years of service)
(a) Member - Compensation Committee
(b) Member - Audit Committee
(c) Member - Business Opportunities Committee
(d) Member - Nominating Committee
Elected Officers
W. V. Caveney (71, 29)
Chairman of the Board
Floyd E. Wicks (54, 10)
President, Chief Executive Officer
McClellan Harris III (46, 7)
Chief Financial Officer, Vice President -- Finance,
Treasurer and Corporate Secretary
Joel A. Dickson (45, 7)
Vice President -- Customer and Operations Support
Donald K. Saddoris (54, 30)
Vice President -- Customer Service, Region I
Randell J. Vogel (62, 5)
Vice President -- Customer Service, Region II
James B. Gallagher (43, 10)
Vice President -- Customer Service, Region III
Joseph F. Young (52, 20)
Vice President -- Government Affairs
Denise L. Kruger (33, 5)
Vice President -- Quality Assurance
Susan L. Conway (36, 9)
Vice President -- Regulatory Affairs
(age, years of service)
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated February 12,
1998 included in the 1997 Annual Report to Shareholders of Southern California
Water Company. It should be noted that we have not audited any financial
statements of the Company subsequent to December 31, 1997 or performed any audit
procedures subsequent to the date of our report.
We further consent to the incorporation by reference of the
above-mentioned report, incorporated by reference in this Annual Report on Form
10-K in the Southern California Water Company Registration Statements which
follow:
<TABLE>
<CAPTION>
Registration Form File No. Effective Date
----------------- -------- ----------------
<S> <C> <C>
S-3 33-42218 August 22, 1991
S-8 33-71226 November 4, 1993
S-3 33-60441 August 11, 1995
</TABLE>
ARTHUR ANDERSEN LLP
Los Angeles, California
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 383,623
<OTHER-PROPERTY-AND-INVEST> 1,355
<TOTAL-CURRENT-ASSETS> 44,494
<TOTAL-DEFERRED-CHARGES> 27,602
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 457,074
<COMMON> 22,394
<CAPITAL-SURPLUS-PAID-IN> 74,937
<RETAINED-EARNINGS> 53,722
<TOTAL-COMMON-STOCKHOLDERS-EQ> 151,053
440
1,600
<LONG-TERM-DEBT-NET> 115,286
<SHORT-TERM-NOTES> 26,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66
40
<CAPITAL-LEASE-OBLIGATIONS> 928
<LEASES-CURRENT> 125
<OTHER-ITEMS-CAPITAL-AND-LIAB> 161,536
<TOT-CAPITALIZATION-AND-LIAB> 457,074
<GROSS-OPERATING-REVENUE> 153,755
<INCOME-TAX-EXPENSE> 9,830
<OTHER-OPERATING-EXPENSES> 120,467
<TOTAL-OPERATING-EXPENSES> 130,297
<OPERATING-INCOME-LOSS> 23,458
<OTHER-INCOME-NET> 758
<INCOME-BEFORE-INTEREST-EXPEN> 24,216
<TOTAL-INTEREST-EXPENSE> 10,157
<NET-INCOME> 14,059
92
<EARNINGS-AVAILABLE-FOR-COMM> 13,967
<COMMON-STOCK-DIVIDENDS> 11,152
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 28,744
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
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