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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_________________
Commission file number 0-8176
SOUTHWEST WATER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 95-1840947
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
225 NORTH BARRANCA AVENUE, SUITE 200 91791-1605
WEST COVINA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 915-1551
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(1) COMMON SHARES, $.01 PAR VALUE
(2) SERIES A, 5-1/4% PREFERRED SHARES, CUMULATIVE, $.01 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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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]
On March 20, 1997, there were 3,129,622 common shares outstanding. The
aggregate market value of the Registrant's common shares held by non-affiliates
of Registrant (2,927,491 shares) was approximately $35,129,892 based upon the
average of the high and low stock prices as of March 20, 1997. Registrant is
unable to estimate the aggregate market value of its preferred shares held by
non-affiliates of Registrant because there is no public market for such shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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DOCUMENTS FORM 10-K REFERENCE
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Portions of Registrant's 1996
Annual Report to Stockholders Part II
Proxy Statement dated on or about April 11, 1997,
for Annual Meeting of Stockholders on Thursday,
May 22, 1997 Part III
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SEE PAGES 36 TO 39 FOR EXHIBIT INDEX FILED WITH THIS REPORT.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
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PART I. PAGE NO.
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Item 1: Business......................................................................... 1-8
Item 2: Properties....................................................................... 8-9
Item 3: Legal Proceedings................................................................ 9
Item 4: Submission of Matters to a Vote of Security Holders.............................. 10
Item 4A: Executive Officers of the Registrant............................................. 10
PART II.
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters.......................................................................... 11
Item 6: Selected Financial Data.......................................................... 11
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 11-15
Item 8: Financial Statements and Supplementary Data...................................... 16-32
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 33
PART III.
Item 10: Directors and Executive Officers of the Registrant............................... 33
Item 11: Executive Compensation........................................................... 33
Item 12: Security Ownership of Certain Beneficial Owners and Management................... 33
Item 13: Certain Relationships and Related Transactions................................... 33
PART IV.
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 34-35
Exhibit Index.................................................................... 36-39
Signatures....................................................................... 40
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
General Development of Business
Southwest Water Company (hereafter together with its subsidiaries referred to as
the "Company" or "Registrant") was incorporated under the laws of the State of
California on December 10, 1954. The Company reincorporated in the State of
Delaware on June 30, 1988. The Company is engaged in the water management
business, providing water and wastewater services to over half a million people
located throughout California, New Mexico, Texas and Mississippi. All regulated
water utility operations of the Company are conducted through two wholly owned
subsidiaries, Suburban Water Systems ("Suburban") and New Mexico Utilities, Inc.
("NMUI"). A third wholly owned subsidiary, ECO Resources, Inc. ("ECO"), operates
and manages water and wastewater treatment facilities owned by cities,
municipalities and private entities.
General Information
There have been no significant changes in the way the Company does business
during the year. The focus of the water management industry is customer service,
not technology or manufacturing processes; therefore, the Company conducts no
significant research or development activities, and the Company has no patents,
trademarks or licenses. The Company does use certain commodities in its daily
operations, such as chemicals and supplies, which are at present readily
available from a number of different suppliers.
There are no individual customers of the Company who generated revenues that
exceeded 10 percent of the Company's consolidated revenues, or whose loss would
have a material adverse effect on the Company's consolidated operations. To
date, the Company has experienced no material adverse effects upon its
operations or capital expenditures resulting from compliance with governmental
regulations relating to protection of the environment. At December 31, 1996, the
Company employed 524 persons, none of whom were represented by an employee
union.
A. REGULATED UTILITY OPERATIONS
SUBURBAN WATER SYSTEMS
Product and Business
Suburban is a regulated public water utility that produces and supplies
water for residential, business, industrial and public authority use, and for
private and public fire protection service under jurisdiction of the California
Public Utilities Commission (the "CPUC"). Suburban's service areas are located
within Los Angeles and Orange Counties, California.
Suburban or its predecessor entities have been engaged in supplying water
since approximately 1907. From the mid-1950s to the late 1960s, Suburban's
operations rapidly expanded as the transition from agricultural land use to
residential, business and industrial use occurred throughout its service areas.
Primarily due to the population saturation of its existing service areas,
Suburban has experienced modest customer growth since the late 1960s.
At December 31, 1996, Suburban served 66,236 customers, including 62,519
residential customers, 2,640 business and industrial customers, 265 public
authority customers and 812 fire protection service customers. During 1996,
Suburban's operating revenues were 74% from sales to residential customers, 18%
from sales to business and industrial customers, and 8% from sales to other
customers.
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Seasonal temperature and rainfall variations subject Suburban's business to
material fluctuations. Since most of Suburban's residential customers use more
water in hot, dry weather conditions, the first quarter of each year is usually
the lowest in terms of customer consumption, revenues and profitability.
Wells and Other Water Sources
Suburban owns 15 wells that pump water from two of the major groundwater
basins in the Southern California coastal watershed: the Central Basin and the
Main San Gabriel Basin (the "Main Basin"). The Main Basin is the source of
approximately 71% of Suburban's total water production. The rights to pump
water from these basins have been fully adjudicated under the laws of the State
of California. These adjudications have established Suburban's right to produce
water at levels prescribed each year by the Watermaster Boards which manage the
basins. As the water level in the Main Basin increases or decreases, the
Watermaster Board adjusts the amount of water Suburban and other producers may
pump from this basin without paying an additional charge. When Suburban
produces water from either basin in excess of prescribed levels, an additional
payment is required to provide for the replenishment of the water supply. These
basins provide the lowest cost of water for Suburban.
During the past few years, Suburban has drilled new, deep wells which allow
it to discontinue using older inefficient wells that contain the presence of
nitrates and contaminants. These wells have successfully replaced the lost
production of the older wells. However, no assurance can be given that Suburban
will be able to replace wells with either production problems or the presence of
nitrates and contaminants in the future.
Suburban also purchases water from two mutual water companies. Suburban's
ownership of shares in each of these mutual water companies has allowed it to
increase its water entitlement and maintain a lower cost of water. In addition,
Suburban leases basin pumping rights from other parties, which also helps reduce
its cost of water.
Supplementing this water supply is water occasionally purchased from
external sources at a higher cost to Suburban. Suburban has a connection to the
"Lower Feeder" of the Metropolitan Water District of Southern California ("MWD")
through which it purchases water to supplement the supply to its Whittier/La
Mirada Service Area. Additionally, Suburban has access to another MWD connection
which serves to supplement the supply of water in its San Jose Hills Service
Area. Suburban also has interconnections with other water purveyors that can be
used as supplemental and emergency sources of supply. Current levels of the
basins discussed above are sufficient to eliminate any drought concerns;
however, there is no assurance that the current allowable pumping levels will
continue in the future.
Water Quality Regulation
Water supplied by Suburban is subject to regulation by the United States
Environmental Protection Agency (the "EPA") acting pursuant to the Federal Safe
Drinking Water Act as reenacted in 1996, (the "US Act") and by the Office of
Drinking Water of the California Department of Health Services (the "Health
Department") acting pursuant to the California Safe Drinking Water Act (the "Cal
Act"). The US Act provides for establishment of uniform minimum national water
quality standards, as well as governmental authority to specify the type of
treatment processes to be used for public drinking water. The EPA has an
ongoing directive to issue regulations under the US Act and to require
disinfection of drinking water, specification of maximum contaminant levels
("MCLs") and filtration of surface water supplies. The Cal Act and the mandate
of the Health Department are similar to the US Act and the mandate of the EPA.
In many instances MCLs and other requirements of the Health Department are even
more restrictive than those of the EPA.
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Both the EPA and the Health Department have promulgated regulations and
other pronouncements that require periodic testing and sampling of water. Among
other rules, these regulations include permissible levels of radio nuclides
(including radon), rules governing lead and copper and mandating corrosion
control studies and sampling, as well as specifying permissible levels of
volatile organic compounds ("VOCs"), herbicides, pesticides and inorganic
substances.
Suburban's water quality personnel regularly monitor and sample the quality
of water being distributed. Samples of water from throughout Suburban's system
are tested regularly by independent, state-certified laboratories for bacterial
contamination, chemical contaminant content and for the presence of pollutants
and contaminants for which MCLs have been promulgated. In addition, sampling and
testing for certain pollutants such as VOCs is conducted by independent
engineers retained by the Boards of the Central Basin and the Main Basin. The
results of such sampling and testing are made available to all producers, with
the cost of such sampling and testing covered by Board assessments to the
producers. Testing, sampling and inspections are conducted at the intervals,
locations and frequencies required by EPA and Health Department regulations.
Chlorination is currently performed only to provide a chlorine residual required
by the Health Department as a safeguard against bacterialogical contamination.
Water supplied by Suburban meets all current requirements of the US Act, the
Cal Act and the regulations promulgated under such legislation, and Suburban
anticipates no significant capital expenditures to comply with current
requirements. There can be no assurance, however, that water supplied by
Suburban will meet future EPA or Health Department requirements or that such
requirements will not require capital expenditures by Suburban.
Main San Gabriel Basin Contamination
In 1979, VOCs were discovered in the Main Basin. Most of the contamination
located in the Main Basin was found in areas not within Suburban's service
areas. Subsequently, underground water sampling resulted in the discovery of
four large areas of groundwater VOC contamination. The areas include Suburban's
Bartolo Well Field, which contains four of Suburban's producing wells and from
which Suburban produces approximately 25% of its total water production.
Currently, however, Suburban's wells do not contain VOCs in excess of MCLs.
The EPA has conducted numerous studies of underground water in the Main
Basin (including the Bartolo Well Field). In 1984, the EPA named the Main Basin
as a Superfund site and named as potentially responsible parties ("PRPs")
several large industrial companies that allegedly caused the contamination.
Suburban's facilities were not named as sources of VOCs or other contamination
in any portion of the Main Basin (i.e., Suburban's operations do not discharge
VOCs into the ground or groundwater). However, some government officials have
suggested that the Main Basin water producers may have clean-up liability with
respect to contaminants in the Main Basin under applicable environmental
statutes on various theories by virtue of their pumping operations. It is
expected that the EPA will continue to identify sources of contamination in
order to establish legal responsibility for clean-up costs. Currently, neither
the EPA nor any governmental agency has targeted Suburban or other water
producers as PRPs.
To date, water produced from the Bartolo Well Field and other wells
maintained by Suburban in the Main Basin meets all applicable governmental
requirements. The treatment proposed by the EPA, and other measures taken by or
available to Suburban, are intended to ensure that Suburban continues to have an
adequate supply of potable water which meets all applicable governmental
standards. While technology exists to remove VOC contaminants from basin water,
there can be no assurance that either (i) such technology will be adequate in
the future to reduce the amounts of VOCs and other contaminants in water
produced by Suburban in the Main Basin to acceptable levels or (ii) the costs of
such removal will be fully recoverable from Suburban's customers. To date,
Suburban has been permitted to recover from its ratepayers all expenses
associated with water quality maintenance.
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There can be no assurance that governmental authorities will not seek in the
future to recover clean-up costs from Suburban or that source polluters will not
seek contribution from water producers for clean-up costs which they may be
required to pay. If Suburban were required to pay any such clean-up costs,
Suburban would seek to recover such costs, and costs incurred in removing
contaminants from water produced, through increased rates to its customers, a
practice which has been permitted by the CPUC in the past. Moreover, there are
over 100 water producers in the Main Basin, and the Company believes that
Suburban's share of any clean-up costs assessed against the producers would only
be a small a fraction of the total. Due to the potential recovery of the clean-
up costs through higher rates, such costs are not expected to have a material
impact on Suburban's financial condition or results of operation.
Competition and Rate Relief
Suburban operates under long-term franchises and certificates of indefinite
duration granted by the CPUC and other governmental authorities having
jurisdiction over water service. The success of Suburban's water service
business is dependent upon maintaining these franchises and certificates and
upon various contracts and governmental and court decisions affecting Suburban's
water rights and service areas.
Under current CPUC practices, water rates may be increased by two methods:
general rate increases and offsets for certain expense increases. General rate
increases typically are for three years and include "step" increases in rates
for the second and third years. General rate increases are authorized after
formal proceedings with the CPUC in which the overall rate structure, expenses
and rate base are examined by CPUC staff, and public hearings are held. Formal
general rate proceedings require approximately 12 months from the filing of an
application to the authorization of new rates by the CPUC. Rates are based on
estimated expenses and capital costs for a forecasted two-year period and are
established for each of the two years based on these estimates, as approved by
the CPUC. Rates for the third year of the three-year rate period are set by
assuming that costs and expenses will increase in the same proportion over the
second year as the increase projected for the second year over the first. The
step rate increases for the second and third years are allowed to compensate for
projected cost increases, but are subject to later demonstration that earnings
levels in the service area do not exceed the rate of return authorized at the
general rate proceeding. In 1995, Suburban filed a general rate increase
application with the CPUC and negotiated with the CPUC staff a 4.25%
($1,100,000) rate increase, which became effective April 24, 1996. On December
3, 1996, the CPUC approved Suburban's filing for a 2.62% ($705,000) step
increase which became effective January 1, 1997. Suburban will file for another
step increase for inflation to become effective on January 1, 1998.
Rate increases to offset increases in certain expenses such as cost of
purchased water and energy costs to pump water are accomplished through an
abbreviated "offset" proceeding that requires approximately two months from the
time of filing a request for rate increases to the authorization of new rates.
Suburban has been, and believes that it will continue to be, permitted to
increase its rates as necessary to achieve a reasonable rate of return.
However, any inability to increase rates would adversely affect Suburban's
results of operations. On occasion, Suburban has filed for a rate decrease when
actual water production costs incurred were less than CPUC-adopted water
production costs. As permitted by the CPUC, Suburban records the difference
between actual and CPUC-adopted water production costs in balancing accounts in
the income statement, with a corresponding adjustment on the balance sheet.
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Future Development
In recent years, Suburban's growth has been limited to minor extensions into
new subdivisions along the periphery of its service areas. During 1996, Suburban
constructed a new water storage reservoir with a capacity of three million
gallons, fed by adjacent wells, which will supply water to 1,100 new homes.
Because there is little area available for new business or industrial
construction and because of recent low levels of residential growth, this
increase in customers is unusual, and is not expected to continue in the future.
The laws of the State of California provide that no public agency can
install facilities within the service area of a public utility in order to
compete with it, except upon payment of just compensation for all damages
incurred by the public utility. Under California law, municipalities and certain
other public bodies have the right to acquire private water utility plants and
systems within their territorial limits by condemnation after proof of necessity
is shown. Suburban is not aware of any impending proceeding relating to the
condemnation of any portion of its facilities.
The water utility business requires substantial amounts of capital for the
construction, extension and replacement of water distribution facilities. This
capital is generated from Suburban's operations; from periodic debt financings
by Suburban; from lines of credit of the Company; from contributions in aid of
construction received from developers, governmental agencies, municipalities or
individuals; and from advances received by developers that are repaid under
rules of the CPUC. During 1996, $8 million of First Mortgage Bonds were issued
to retire existing short-term indebtedness and fund future capital expenditures.
During 1996 and 1995, capital expenditures approximated $6,124,000 and
$4,095,000, respectively.
NEW MEXICO UTILITIES, INC.
Product and Business
In 1969, Suburban purchased NMUI. On June 1, 1987, the New Mexico Public
Utility Commission ("NMPUC") authorized Suburban to transfer by stock dividend
all of the stock of NMUI to Southwest Water Company which caused NMUI to become
a wholly owned subsidiary of Southwest Water Company. NMUI is a regulated
public water utility which provides water supply and sewage collection services
for residential, commercial, irrigation, and fire protection customers under
jurisdiction of the NMPUC. NMUI's service area is located in the northwest part
of the City of Albuquerque and in the northern portion of Bernalillo County, New
Mexico. NMUI's service area contains a population of approximately 17,000
persons and covers approximately 17 square miles, of which approximately 21% has
been developed.
Since 1969, NMUI has grown from approximately 800 customers to almost 5,000
customers. Most of this growth has come from extension of water services and
sewage collection services into new residential subdivisions and from the
development of commercial property. Continuing economic development in NMUI's
service area is expected to lead to additional increases in the number of
customers in the near future. NMUI believes that it has an adequate water
capacity to serve its current customer base as well as new customers in the
foreseeable future.
At December 31, 1996, NMUI provided water service to 4,740 customers
including 4,255 residential customers, 458 commercial and industrial customers,
one golf course with five service connections, and 22 private fire protection
customers. NMUI also provided sewer collection service to 4,408 customers
including 4,151 residential customers and 257 commercial and industrial
customers. During 1996, NMUI's operating revenues were 44% from sales to
residential customers and 56% from sales to commercial and industrial customers.
Seasonal temperature and rainfall variations subject NMUI's business to
material fluctuations. Since most of NMUI's residential customers use more water
in hot, dry weather conditions, the first quarter of each
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year is usually the lowest in terms of customer consumption, revenues and
profitability. The sewer operation revenues remain relatively constant
throughout the year.
Wells and Other Water Sources
NMUI owns four wells and three reservoirs, including a new 2.75 million
gallon water storage reservoir which was constructed and placed in service in
1996. If customer growth continues in NMUI's service area as projected, NMUI may
have to increase its water supply capability through additional well
construction. To ensure the availability of an emergency supply of water, NMUI
has one interconnection with another water purveyor.
NMUI wells produce good quality water from the Rio Grande Underground Basin.
All water supplied by NMUI to its customers is subject to regulation by the EPA
and by the State of New Mexico Environmental Improvement Division ("EID").
Samples of water from throughout the system are tested regularly by independent,
state certified laboratories and the results of the tests are sent to the EID.
Chlorination is performed to provide an allowable chlorine residual as a
safeguard against bacteriological contamination.
Water supplied by NMUI meets all current requirements of the US Act and the
EID, and NMUI anticipates no significant capital expenditures to comply with
current requirements. To date, NMUI has experienced no material affect upon its
operations or capital expenditures resulting from compliance with governmental
regulations relating to protection of the environment. There can be no
assurance, however, that water supplied by NMUI will meet future EPA or EID
requirements, or that such requirements will not require capital expenditures by
NMUI.
Competition, Regulation and Future Development
NMUI operates under a Certificate of Public Convenience and Necessity granted
by the NMPUC and is regulated by other state and local governmental authorities
having jurisdiction over water and wastewater service and other aspects of its
business.
Requests for rate increases are submitted to the NMPUC with the test year
typically being the previous year's actual results. In December 1995, NMUI was
granted an 8% ($124,000) general sewer rate increase by the NMPUC, effective
January 1996. NMUI has been, and believes that it will continue to be, permitted
to increase its rates as necessary to achieve a reasonable rate of return.
However, any inability to increase rates would adversely affect NMUI's results
of operations.
As the City of Albuquerque (the "City") has expanded its jurisdiction, it has
annexed to the City most of NMUI's service area; however, NMUI has continued to
serve the customers located in the annexed areas. Currently, 52% of NMUI's
customers are located within the city limits. Under New Mexico law,
municipalities and certain other public bodies have the right to acquire private
water utility plants and systems within their territorial limits by condemnation
but must pay fair value if the election to proceed with a condemnation is made.
The laws of the State of New Mexico also provide that no public agency can
install facilities within the service area of a public utility in order to
compete with it, except upon payment of just compensation for all damages
incurred by the public utility.
In February 1997, the Company was approached by the City concerning the
potential sale of NMUI's assets to the City. The current expression of interest
by the City is a continuation of intermittent discussions held over a number of
years as the City has expanded its borders. Discussions have begun; however, at
this time, management cannot predict whether an agreement for the sale of NMUI's
assets is likely, or, if an agreement were reached, the price for the assets.
NMUI's operations are capital intensive. This capital is generated from
NMUI's operations; from periodic debt financings by NMUI; from lines of credit
of NMUI and the Company; from contributions in aid of construction received from
developers; and from advances received by developers which are repaid under
rules of the NMPUC. During 1996, $4 million of First Mortgage Bonds were issued
to retire existing short-term indebtedness and fund future capital expenditures.
During 1996 and 1995, capital expenditures approximated $8,169,000 and
$7,275,000, respectively.
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B. CONTRACT OPERATIONS
ECO RESOURCES, INC.
Product, Business and Regulation
In 1985, the Company purchased all of the outstanding common shares of ECO
thereby diversifying into the management and operation of water and wastewater
systems owned by others. In addition to managing and operating water and
wastewater systems, ECO also performs associated specialized services, such as
equipment maintenance and repair, sewer pipeline cleaning, billing and
collection, and state-certified laboratory analysis.
ECO has two distinct types of contractual relationships: municipal utility
district contracts and operations and maintenance contracts with cities and
municipalities.
Municipal Utility District (MUDs) Contracts
ECO has 138 contracts with MUDs in Houston and Austin, Texas. A MUD is a
utility district created by the Texas Natural Resource Conservation Commission
with an objective of providing water, wastewater and drainage services to areas
where municipal services are not available. ECO negotiates operating contracts
with each MUD's respective Board of Directors.
Most MUD contracts are short-term contracts and are cancelable on 30 or 60
day notice by either party. In a typical MUD contract, a monthly base fee is
charged for which ECO provides the MUD with certain maintenance and operations
services, as well as billing, collection and customer services. Additional
services beyond those covered by the base fee typically generate revenues on a
time and material basis.
As the large Texas cities, such as Houston and Austin, expand their
territory, they periodically condemn the MUD-owned facilities and annex them to
the city-owned facilities. In 1996, two MUD contracts were canceled due to
annexation, five MUD contracts were canceled for competitive reasons, and 10 new
MUD contracts were added.
Operations and Maintenance (O&M) Contracts
ECO has 18 O&M contracts with cities, municipalities, or private entities
located in Texas, Mississippi, New Mexico and California. A typical O&M contract
tends to average three to five years in duration and is generally cancelable
only upon a specific breach of the contract by either party. Typical O&M
contracts provide for a specified level of services with additional billings if
the owner of the facilities requires special services. During 1996, one O&M
contract was lost when the city elected not to continue outsourcing these
services. In 1996, two new O&M contracts were added.
Competition and Future Development
ECO is operating in an industry undergoing significant and rapid changes.
Competition is based on both lowest cost and technical expertise. ECO's
competition in the O&M portion of its business includes four significantly
larger companies that provide O&M services on a national and international
basis, as well as several regional competitors, both smaller and larger than
ECO. In the MUD portion of the business, competitors include one large national
company and at least five smaller, local companies.
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ECO intends to expand its current business base in Texas, Mississippi, New
Mexico and California. This expansion requires that sales and
marketing expenses continue at the current level.
ITEM 2. PROPERTIES
The Company leases approximately 5,500 square feet of office space for its
corporate headquarters in West Covina, California.
A. REGULATED UTILITY OPERATIONS
The Company's regulated utility operations lease two office buildings for
their headquarters in Covina, California, and Albuquerque, New Mexico. In
addition, Suburban owns two buildings that house its district operations, and
NMUI owns a warehouse building that houses its field supplies and equipment.
SUBURBAN WATER SYSTEMS
Suburban owns and operates water production and distribution systems
consisting of well pumping plants, booster pumping stations, reservoir storage
facilities, transmission and distribution mains, and service connections to
individual customers. Suburban also has rights-of-way and easements in its
service area necessary to provide its water services. At December 31, 1996,
Suburban owned 702 miles of transmission and distribution mains, 27 storage
reservoirs with a total capacity of 56 million gallons and 15 wells with a total
pumping capacity of approximately 32,000 gallons per minute. These facilities
vary as to age and quality, but each is believed by Suburban to be in good
condition and adequate for current operations. Suburban has a master plan that
provides for periodic evaluation of the adequacy of system operations. In
accordance with this master plan, Suburban will continue its capital expenditure
program and construct and replace reservoirs, wells and transmission and
distribution lines in future years, as needed. Normal maintenance and
construction work on these facilities is performed by employees of Suburban, and
major construction projects are performed by outside contractors chosen through
competitive bidding. Ongoing maintenance and repair is performed by Suburban
and constitutes a significant portion of its expenses (approximately $1,580,000
in 1996).
Virtually all property of Suburban, other than 11.4 acres of vacant land in
La Puente, California, is subject to the lien of an Indenture of Mortgage and
Deed of Trust dated October 1, 1986 (the "Indenture"), as amended February 7,
1990, January 24, 1992 and October 9, 1996, securing Suburban's First Mortgage
Bonds. The Indenture contains certain restrictions common to such types of
instruments regarding the disposition of property and includes various covenants
and restrictions common to such types of instruments, including limitations on
the amount of cash dividends that Suburban may pay to the Company. The vacant
land in La Puente, California is not necessary for utility operations and has
been listed for sale.
NEW MEXICO UTILITIES, INC.
NMUI owns and operates a water production and distribution system consisting
of well pumping plants, reservoir storage facilities, booster pumping stations,
transmission and distribution mains, and service connections to individual
customers. At December 31, 1996, NMUI owned 106 miles of transmission and
distribution mains and three storage reservoirs with a total capacity of eight
million gallons. The four wells operated by NMUI have a total pumping capacity
of 7,425 gallons per minute. In addition, NMUI owns and operates a sewer
collection system consisting of one lift station and 82 miles of interceptor and
collector lines. These facilities vary as to age, and each is believed by NMUI
to be adequate for current and foreseeable operations. Normal maintenance and
construction work on these facilities is performed by employees of NMUI or
outside contractors. Maintenance and repair expenses of approximately $185,000
were incurred in 1996. NMUI also has rights-of-way and easements in its service
area necessary to provide water and sewer services.
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Virtually all of NMUI's property is subject to the lien of an Indenture of
Mortgage and Deed of Trust (the "NMUI Indenture") dated February 14, 1992, as
amended May 15, 1992 and October 21, 1996, securing NMUI's First Mortgage Bonds.
The NMUI Indenture contains certain restrictions common to such types of
instruments regarding the disposition of such property, and includes various
covenants and other restrictions common to such types of instruments, including
limitations on the amount of cash dividends that NMUI may pay to the Company.
B. CONTRACT OPERATIONS
ECO RESOURCES, INC.
ECO owns 4.3 acres and a 17,000 square foot building that house fleet and
maintenance operations in the Houston, Texas, area. ECO also owns 10 acres and
a 10,000 square foot building in Austin, Texas that house office, fleet and
maintenance operations. In addition, ECO owns or leases 289 vehicles and other
equipment used in daily operations. ECO leases approximately 34,000 square feet
of office, warehouse and lab space in nine facilities in the Houston, Texas
area; the Rio Grande Valley, Texas area; Mississippi; New Mexico; and
California.
ITEM 3. LEGAL PROCEEDINGS
As described previously in the Company's Form 10-Q Report for the quarter ended
September 30, 1996, Suburban, the Company, and several unrelated parties were
served with a complaint in September 1995, by a former employee of Suburban who
worked for Suburban in the 1950s. The plaintiff claimed he was exposed to
asbestos fibers during his employment and, as a result of such exposure, he
contracted mesothelioma. Suburban and the Company denied all allegations in
their response to the complaint. In 1995, the former employee died and in 1996,
the former employee's widow and children filed a wrongful death action against
Suburban and the Company. This complaint alleges the same facts as the first
complaint, plus the death of the former employee. The two actions have been
consolidated.
The plaintiffs claim the defendants are responsible on the basis of negligence,
breach of warranty and strict liability. Both actions seek unspecified general
damages and burial expenses. The Company has made written demands for defense
and indemnity against all general liability and workers' compensation carriers
who provided coverage during the last 30 years. Two workers' compensation
carriers have acknowledged Suburban's written demands for defense and indemnity
against all general liability but have not accepted responsibility for defense
or indemnity. Two general liability carriers have agreed, on a very limited
basis, to accept defense and indemnity obligations under the liability policies
issued. Suburban and the Company are continuing discussions with other general
liability carriers concerning their acceptance of defense and indemnity
obligations.
Certain defendants who were alleged to be suppliers of asbestos cement pipe to
Suburban have been dismissed on the basis that they were not suppliers to
Suburban. The alleged manufacturer defendant may not be reachable in these
actions due to certain rulings made in a bankruptcy proceeding. As a result,
Suburban and the Company may be the only remaining defendants in the actions.
The plaintiffs have initiated discovery and negotiations are underway to limit
the scope of this discovery. Presently, there has been no specific claim for
damages by the plaintiffs. Suburban and the Company maintain that they have no
responsibility for the death of the former employee and intend to contest these
claims vigorously.
The Company and its subsidiaries are the subject of certain litigation arising
from the ordinary course of operations. The Company believes the ultimate
resolution of such matters will not materially affect its consolidated financial
condition, results of operation or cash flow.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected each year by the Board of
Directors at its first meeting following the Annual Meeting of Stockholders.
There are no family relationships between any of the executive officers of the
Company, nor are there any agreements or understandings between any such officer
and another person pursuant to which he was elected an officer. There are no
legal proceedings of the types required to be disclosed pursuant to the
instructions to this item involving any executive officer. The executive
officers of the Company and its subsidiaries are as follows:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES CURRENTLY HELD
NAME AGE AND BUSINESS EXPERIENCE DATE ELECTED
---- --- ------------------------------------ -------------
<S> <C> <C> <C>
Anton C. Garnier 56 Chief Executive Officer and President of the
Company November 1968
Chairman of the Board August 1996
Peter J. Moerbeek 49 Vice President Finance and Chief Financial Officer August 1995
Chief Operating Officer of ECO January 1997
Director of Suburban and ECO October 1995
Secretary of the Company, Suburban and ECO October 1995
Previously Executive Vice President Finance
and Operations of Pico Products, Inc. and
Pico Macom, Inc. (1989 - 1995)
Michael O. Quinn 50 President of Suburban May 1996
Director of Suburban May 1993
Chief Operating Officer of Suburban April 1992
Previously President of ECO
(October 1985 - April 1992)
Robert L. Swartwout 55 President and General Manager of NMUI March 1992
Director of NMUI May 1993
Previously Consulting Associate, Robert
Witter & Associates, Inc. (1985 - 1992)
</TABLE>
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information with respect to the market for and number of holders of the
Company's common shares as well as quarterly market and dividend information is
set forth under the caption "Market and Dividend Information" in the Company's
1996 Annual Report to Stockholders and is hereby incorporated by reference. The
number of holders of the Company's common shares was computed based on a count
of record holders as of December 31, 1996.
There were no equity securities of the Registrant sold by the Registrant during
1996 which were not registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The information included under the caption "Selected Financial Data" in the
Company's 1996 Annual Report to Stockholders is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban for the replacement and renovation of
existing water utility facilities and by construction expenditures for new water
and wastewater utility facilities at NMUI. Liquidity is also influenced by the
Company's continuing investment in ECO.
At December 31, 1996, the Company had cash and cash equivalent balances totaling
$790,000. The Company has three lines of credit from three commercial banks. As
of December 31, 1996, the Company had a total line of credit capacity of
$16,000,000, and unused lines of credit of $10,811,000. Each of the lines of
credit expires in 1997 and is expected to be renewed in the normal course of
business. During 1996, the Company borrowed on its lines of credit in order to
fund construction expenditures at its utility operations and to make an
investment in Windermere Utility Company ("Windermere"). In the fourth quarter,
the line of credit borrowings were reduced using proceeds from the long-term
First Mortgage Bond financing discussed below, resulting in a net repayment on
the Company's short-term lines of credit of $2,986,000 during 1996.
The Company completed long-term First Mortgage Bond financing negotiations and
made private placements during the third quarter of 1996. In October 1996,
Suburban received $8,000,000 of bond proceeds, and in November 1996, NMUI
received $4,000,000 of bond proceeds. Both financing arrangements have a 10-year
maturity period with semi-annual, interest-only payments required. Part of the
proceeds were used to repay a portion of short-term debt with the remaining
proceeds to be used to fund ongoing construction requirements at the utilities.
The Company has remaining borrowing capacity under its First Mortgage Bond
Indentures of approximately $22,646,000. The amount of additional borrowing
available to the Company under its current short-term lines of credit is limited
by financial covenants that restrict additional borrowing at December 31, 1996
to a maximum of $8,680,000.
The Company's additions to property, plant and equipment were $15,212,000 during
1996, representing an increase of $3,346,000 over the same period in 1995. This
increase relates primarily to utility plant additions both at NMUI in response
to increased residential and commercial construction and at Suburban for new
utility plant and refurbishment of existing utility plant. To help fund the
plant additions, developers made cash contributions in aid of construction
("CIAC") totaling $1,960,000. In addition, $3,437,000 was received from
developers through non-cash CIAC. Capital expenditures at NMUI are expected to
decrease approximately $2,700,000 in 1997 due to the completion of major
projects in 1996. Suburban's 1997 capital expenditures are
11
<PAGE>
expected to increase approximately $700,000 over 1996 levels due to the
construction of additional new utility plant and refurbishment of existing
utility plant. Short-term borrowing is anticipated by the Company in 1997 to
meet construction requirements not funded by operations or CIAC.
The Company anticipates that its available short-term borrowing capacity and its
cash flow generated from operations will be sufficient to fund its activities
during 1997. If additional cash were needed, the Company would consider
alternative sources including long-term financing. The amount and timing of any
future long-term financing will depend on various factors, including the
timeliness and adequacy of rate increases, the availability of capital, and the
Company's ability to meet interest and fixed charge coverage requirements.
Regulatory approval is required for any long-term financing by Suburban and
NMUI. If the Company were unable to renew its existing lines of credit or obtain
additional long-term financing, capital spending would be reduced or delayed
until new financing arrangements were secured. Such financing arrangements could
include seeking equity financing through a private placement or a public
offering.
REGULATORY AFFAIRS AND INFLATION:
Regulation:
The rates and operations of the Company's utilities are regulated by the CPUC
and the NMPUC. The rates allowed are intended to provide the utilities an
opportunity to earn a reasonable return on common equity. The Company
anticipates that future construction expenditures and increased direct operating
expenses will require periodic requests for rate increases.
In December 1995, Suburban and the CPUC staff negotiated a rate increase of
4.25% ($1,100,000), with two additional increases for inflation in 1997 and
1998. Final CPUC approval was received on April 19, 1996, with the new rates
effective April 24, 1996. The 1997 increase for inflation became effective
January 1, 1997. The CPUC has authorized Suburban to earn a 10% return on common
equity.
Tax Legislation:
The Water Utility Infrastructure Improvement Act of 1995 was passed by the
California legislature and signed by the governor on August 10, 1995. This law
provides that water utilities that sell excess real property and invest the
net proceeds from the sale in their utility plant within an eight-year period
are not required to allocate any gains to the ratepayers. Any net proceeds not
invested in utility plant during the eight-year period must be allocated to the
ratepayers. The legislation applies to land sales occurring after December 31,
1995.
On September 26, 1996, Senate Bill 1099 was passed by the California legislature
and signed by the governor. This law, effective January 1, 1997, is identical to
the Water Utility Infrastructure Improvement Act of 1995, and applies to real
property sold before January 1, 1996. From 1990 through 1995, Suburban recorded
pretax gains on land sales of four parcels of excess real property totaling
$1,690,000. Since the proceeds of the four land sales were invested in utility
plant, the gains should not be subject to allocation to the ratepayers.
On August 20, 1996, legislation was enacted that changed the federal tax
treatment of CIAC. Since 1986, water utilities have been required to include
CIAC in taxable income for federal tax purposes at the time of receipt and to
depreciate the related plant. The new law repealed the requirement to include
CIAC as taxable income, eliminating the requirement to pay taxes on CIAC as it
is received. The new legislation also eliminated the depreciation deduction for
contributed property. The law is effective for CIAC received after June 12,
1996.
To help replace tax revenue lost due to the repeal of the income tax on CIAC,
the legislation also changed the depreciation method and useful life for most
non-contributed water utility property. The old rules allowed a 150% declining
balance depreciation method over a 20-year period; the new rules require
straight-line depreciation over a 25-year period.
12
<PAGE>
The net impact of the repeal of the income tax on CIAC, combined with the change
in depreciation calculations, is expected to favorably impact NMUI's cash flow,
since significant amounts of CIAC are expected in its fast-growing service area.
The effect on earnings at Suburban is not expected to be significant; however,
cash flow could be negatively affected by the change in depreciation methods
since Suburban does not anticipate high levels of CIAC. Until the Internal
Revenue Service completes final regulations, and the states of California and
New Mexico complete changes, if any, to their tax regulations, the full impact
of this tax change cannot be determined. The Company does not believe that these
tax law changes will have a material adverse impact on its ability to fund
ongoing operations and capital needs.
Regulatory Developments:
The California legislature has held hearings discussing the CPUC's organization
and operation. Among other options, the CPUC has proposed consideration of
performance-based rate making, which provides incentives for utilities to
operate more efficiently and improve productivity, and is intended to reduce
regulatory burden and promote efficiency among utilities. Ratepayers and
stockholders would both likely benefit from improved productivity. Legislative
and CPUC developments are closely monitored by the Company and by the various
water industry associations in which the Company actively participates. Whether
such legislative or CPUC developments will be enacted, or, if enacted, what the
terms of such developments would be, are not known by the Company. Therefore,
management cannot predict the impact of final legislative or CPUC developments
on the Company's financial condition or results of operations.
Contract Operations:
The operations of ECO are not regulated. ECO's long-term water and wastewater
service contracts typically include annual inflation adjustments. Most contracts
with municipal utility districts are short-term contracts and do not generally
include inflation adjustments. Changes in prices are negotiated on a contract-
by-contract basis.
ENVIRONMENTAL AFFAIRS:
The Company's operations are subject to water and wastewater pollution
prevention standards and water and wastewater quality regulations of the EPA and
various state regulatory agencies. The EPA and state regulatory agencies
continue to promulgate new regulations mandated by the Federal Water Pollution
Control Act, the Safe Drinking Water Act (as reenacted in 1996), and the
Resource Conservation and Recovery Act. To date, the Company has not experienced
any material adverse effects upon its operations resulting from compliance with
governmental regulations. Costs associated with the testing of the Company's
water supplies have, however, increased and are expected to increase further as
the regulatory agencies adopt additional monitoring requirements. The Company
believes that future incremental costs of complying with governmental
regulations, including capital expenditures, if any, will be recoverable through
increased rates and contract operations revenues. However, there is no assurance
that recovery of such costs will be allowed.
RESULTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Earnings per common share (adjusted for stock dividends of 20% on January 2,
1997 and 5% on January 2, 1996) increased 33% from $.46 in 1995 to $.61 in 1996.
Operating income increased $1,302,000 or 29%, and, as a percentage of operating
revenues, increased from 8% in 1995 to 9% in 1996. Operating income at the
utilities increased $893,000 due primarily to increased water consumption and
the effects of a rate increase implemented at Suburban in the second quarter of
1996. NMUI's customer base growth also contributed to the increase. ECO's
operating loss decreased by $702,000 compared
13
<PAGE>
to 1995, due primarily to additional work outside the scope of contracts, new
contracts and cost containment. Parent company expenses increased $293,000
primarily due to additional corporate reserves which were partially offset by a
reduction in outside consulting fees.
Operating revenues
Operating revenues increased $9,338,000 or 16%. Water utility revenues increased
$2,683,000 due to warmer weather resulting in a 7% increase in water consumption
by customers at Suburban and NMUI. Suburban also benefitted from a water rate
increase and NMUI benefitted from a sewer rate increase. In addition, NMUI added
736 water customers and 707 sewer customers in 1996. ECO's revenues increased
$6,655,000, primarily as a result of revenues from additional work outside the
scope of contracts.
Direct operating expenses
Direct operating expenses increased $6,986,000 or 16%. As a percentage of
operating revenues, these expenses were 76% in 1996 and 1995. Water utility
direct operating expenses increased $1,401,000 primarily reflecting the increase
in water costs experienced to meet increased consumption by Suburban and NMUI
customers. ECO's direct operating expenses increased $5,585,000, reflecting the
corresponding increase in operating revenue.
Selling, general and administrative
Selling, general and administrative expenses increased $1,050,000 or 12%. As a
percentage of operating revenues, these expenses decreased from 16% in 1995 to
15% in 1996. General and administrative expenses at the utilities increased
$389,000 primarily due to increased legal reserves in 1996, and due to the
impact of a tax assessment recovery in 1995. ECO's selling, general and
administrative expenses increased $368,000 due to insurance, legal and
consulting expenses and from expanded sales and marketing activity. As discussed
above, general and administrative expenses of the parent company increased
$293,000.
Other income and expense
Interest expense increased $541,000 primarily due to higher line of credit
balances. Other income increased $237,000 primarily due to consulting fees
received as a result of the investment in Windermere.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Earnings per common share (adjusted for stock dividends of 20% on January 2,
1997, and 5% on January 2, 1996) were $.46 in 1995 compared to $.34 in 1994.
Results for 1995 include a net gain of $50,000, or $.02 per common share, from
the sale of surplus land.
Operating income increased $583,000 in 1995, and, as a percentage of operating
revenues, was 8% in 1995 and 1994. Utility operating income increased $484,000
due primarily to a significant increase in NMUI's customer base. ECO's operating
loss decreased by $236,000 due primarily to improved gross profit margins on
billable and project services and operating profits recorded on new contracts.
Parent company expenses increased $137,000, primarily due to higher consulting
and outside services expenses.
Operating revenues increased $5,875,000 or 12%. Water utility operating revenues
increased $978,000. Water consumption by Suburban's customers decreased
slightly, resulting in decreased revenues of $79,000. This decrease was offset
by the benefits of a step rate increase that resulted in additional revenues of
$328,000. NMUI added 629 new water customers in 1995, which resulted in a 19%
increase in water consumption, representing an increase in water revenues of
$350,000. Higher sewer collection volume at NMUI led to an increase in revenues
of $379,000. ECO's revenues increased $4,897,000 primarily as a result of
revenues from new contracts and increased billable work.
14
<PAGE>
Direct operating expenses increased $4,553,000 or 12%. As a percentage of
operating revenues, these expenses were 76% in 1995 and 1994. Water utility
direct operating expenses increased $178,000. NMUI recorded higher sewer
collection expenses primarily related to the increase in sewer collection
volume. ECO's direct operating expenses increased $4,375,000 resulting primarily
from the addition of new contracts and higher expenses associated with increased
billable work.
Selling, general and administrative expenses increased $739,000. As a percentage
of operating revenues, these expenses remained constant at 16% in 1995 and 1994.
The utilities' general and administrative expenses increased $316,000 primarily
due to higher payroll and associated payroll benefits. ECO's selling, general
and administrative expenses increased $286,000 primarily due to expanded sales
and marketing activity. As discussed above, general and administrative expenses
of the parent company increased $137,000.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Independent Auditors' Report.............................................................. 17
Consolidated Statements of Income - Three Years Ended December 31, 1996................... 18
Consolidated Balance Sheets - December 31, 1996 and 1995.................................. 19
Consolidated Statements of Changes in Common Stockholders' Equity -
Three Years Ended December 31, 1996....................................................... 20
Consolidated Statements of Cash Flows - Three Years Ended December 31, 1996............... 21
Notes to Consolidated Financial Statements................................................ 22
Schedule II - Valuation and Qualifying Accounts - Three Years Ended December 31, 1996..... 35
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of Southwest Water Company:
We have audited the consolidated financial statements of Southwest Water Company
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest Water
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
herein.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Los Angeles, California
January 27, 1997
17
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES (Note 12) $66,145,000 $56,807,000 $50,932,000
OPERATING EXPENSES:
Direct operating expenses (Note 12) 50,357,000 43,371,000 38,818,000
Selling, general and administrative 10,054,000 9,004,000 8,265,000
- -----------------------------------------------------------------------------------------------------------
60,411,000 52,375,000 47,083,000
OPERATING INCOME 5,734,000 4,432,000 3,849,000
OTHER INCOME (EXPENSE):
Interest expense (2,849,000) (2,308,000) (2,220,000)
Interest income 100,000 76,000 81,000
Gain on sale of land --- 84,000 ---
Other 313,000 76,000 62,000
- -----------------------------------------------------------------------------------------------------------
(2,436,000) (2,072,000) (2,077,000)
INCOME BEFORE INCOME TAXES 3,298,000 2,360,000 1,772,000
Provision for income taxes (Note 7) 1,375,000 921,000 715,000
- -----------------------------------------------------------------------------------------------------------
NET INCOME 1,923,000 1,439,000 1,057,000
DIVIDENDS ON PREFERRED SHARES (Note 9) 27,000 27,000 28,000
-------------------------------------------
NET INCOME AVAILABLE FOR COMMON SHARES $ 1,896,000 $ 1,412,000 $ 1,029,000
- ----------------------------------------------------------------===========================================
EARNINGS PER COMMON SHARE (Notes 8 and 9): $.61 $.46 $.34
===========================================
CASH DIVIDENDS PER COMMON SHARE (Note 9) $.34 $.32 $.32
- ----------------------------------------------------------------===========================================
WEIGHTED AVERAGE OUTSTANDING COMMON
SHARES (Notes 8 and 9): 3,112,000 3,076,000 3,031,000
- ----------------------------------------------------------------===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 790,000 $ 784,000
Customers' accounts receivable, less allowance for doubtful accounts
1996, $512,000; 1995, $192,000 8,216,000 7,785,000
Other current assets 2,086,000 2,528,000
- -----------------------------------------------------------------------------------------------------------------
11,092,000 11,097,000
PROPERTY, PLANT AND EQUIPMENT:
Utility property, plant and equipment -- at cost (Note 3) 119,731,000 106,280,000
Contract operations property, plant and equipment -- at cost 6,448,000 6,273,000
- -----------------------------------------------------------------------------------------------------------------
126,179,000 112,553,000
Less accumulated depreciation and amortization 34,765,000 32,286,000
- -----------------------------------------------------------------------------------------------------------------
91,414,000 80,267,000
OTHER ASSETS (Note 2) 8,910,000 6,092,000
- -----------------------------------------------------------------------------------------------------------------
$111,416,000 $ 97,456,000
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 6,089,000 $ 9,075,000
Accounts payable 1,513,000 2,269,000
Other current liabilities (Note 5) 7,569,000 7,019,000
- -----------------------------------------------------------------------------------------------------------------
15,171,000 18,363,000
OTHER LIABILITIES AND DEFERRED CREDITS:
Long-term debt (Note 6) 30,700,000 19,600,000
Advances for construction 7,719,000 8,200,000
Contributions in aid of construction 21,556,000 16,380,000
Deferred income taxes (Note 7) 3,398,000 3,238,000
Other liabilities and deferred credits 2,472,000 2,429,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFERRED CREDITS 81,016,000 68,210,000
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 8, 9 and 10):
Cumulative preferred stock 517,000 519,000
Common stock 31,000 26,000
Paid-in capital 26,159,000 18,715,000
Retained earnings 3,728,000 10,045,000
Unamortized value of restricted stock issued (35,000) (59,000)
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 30,400,000 29,246,000
- -----------------------------------------------------------------------------------------------------------------
$111,416,000 $ 97,456,000
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
-----------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 2,382,000 $24,000 $16,981,000 $10,753,000
Dividend reinvestment and
employee stock purchase plans 30,000 279,000
Conversion of $9,000 face amount of 9 1/2%
convertible subordinated debentures 4,000 9,000
Restricted stock cancellation (2,000) (28,000)
Net income 1,057,000
Cash dividends declared (990,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 2,414,000 24,000 17,241,000 10,820,000
Dividend reinvestment and
employee stock purchase plans 27,000 1,000 234,000
Conversion of $30,000 face amount of 9 1/2%
convertible subordinated debentures 12,000 30,000
5% stock dividend 123,000 1,000 1,210,000 (1,211,000)
Net income 1,439,000
Cash dividends declared (1,003,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 2,576,000 26,000 18,715,000 10,045,000
Dividend reinvestment and
employee stock purchase plans 25,000 287,000
Stock Options Exercised 1,000 8,000
20% stock dividend 520,000 5,000 7,149,000 (7,154,000)
Net income 1,923,000
Cash dividends declared (1,086,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 3,122,000 $31,000 $26,159,000 $ 3,728,000
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,923,000 $ 1,439,000 $ 1,057,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,887,000 3,701,000 3,605,000
Deferred income taxes 160,000 (22,000) 268,000
Gain on sale of land --- (84,000) ---
Changes in assets and liabilities:
Customers' accounts receivable (431,000) (1,764,000) (199,000)
Other current assets 442,000 (517,000) 112,000
Accounts payable (756,000) 1,084,000 (2,294,000)
Other current liabilities 550,000 884,000 168,000
Other, net 204,000 (209,000) (32,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,979,000 4,512,000 2,685,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (11,775,000) (9,858,000) (6,312,000)
Investment in Windermere Utility Company (Note 2) (3,000,000) --- ---
Proceeds from sale of land --- 94,000 ---
Net redemption of U.S. Government securities --- --- 1,503,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,775,000) (9,764,000) (4,809,000)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 12,000,000 --- ---
Contributions in aid of construction 1,960,000 1,619,000 225,000
Net proceeds from dividend reinvestment and employee
stock purchase plans 271,000 231,000 274,000
Advances for construction 89,000 --- 208,000
Net borrowings (repayment) of short-term debt (2,986,000) 5,725,000 1,850,000
Dividends paid (1,050,000) (999,000) (986,000)
Payments on long-term debt (900,000) (900,000) (900,000)
Payments on advances for construction (582,000) (468,000) (698,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,802,000 5,208,000 (27,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,000 (44,000) (2,151,000)
Cash and cash equivalents at beginning of year 784,000 828,000 2,979,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 790,000 $ 784,000 $ 828,000
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,776,000 $ 2,351,000 $ 2,200,000
Income taxes $ 1,573,000 $ 1,092,000 $ 725,000
Non-cash contributions in aid of construction and advances
for construction conveyed to Company $ 3,437,000 $ 2,008,000 $ 2,372,000
by developers
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Southwest Water Company and its subsidiaries ("the
Company") provide water management services through contract and utility
operations.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The principal
subsidiaries are Suburban Water Systems ("Suburban"), New Mexico Utilities, Inc.
("NMUI") and ECO Resources, Inc. ("ECO"). All significant intercompany
transactions have been eliminated.
REGULATION: Suburban and NMUI conform to the Uniform System of Accounts
prescribed by the California Public Utilities Commission ("CPUC") and the New
Mexico Public Utility Commission ("NMPUC"), respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. This affects the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECOGNITION OF REVENUES: Water utility revenues include amounts billed to
customers and an estimated amount of unbilled revenue for water used to the end
of the accounting period. Revenues from contract operations are recognized as
services are performed.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS: The carrying value of financial instruments such as cash
and cash equivalents, accounts receivable, accounts payable, and short and long-
term debt approximate fair value. At December 31, 1996, the Company had no
derivative financial instruments, financial instruments with off-balance sheet
risk or financial instruments with concentrations of credit risk that require
disclosure under Statement of Financial Accounting Standards No. 119,
"Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments."
PROPERTY, PLANT AND EQUIPMENT: The cost of additions to utility plant includes
labor, material and interest. Interest of $141,000, $122,000 and $56,000 was
capitalized in 1996, 1995 and 1994, respectively. The cost of utility plant
retired, including net removal costs, is charged to accumulated depreciation.
Depreciation expense on utility plant is recorded using the straight-line
method. Depreciation expense of 3.2%, 3.2% and 3.3% of average gross depreciable
plant was incurred during 1996, 1995 and 1994, respectively. Property, plant and
equipment used in contract operations is depreciated on the straight-line method
over estimated useful lives ranging from five to 30 years.
OTHER ASSETS: Included in other assets are regulatory assets representing
amounts that will be recovered from utility customers through rate adjustments
authorized by the CPUC and NMPUC. Other assets also include an investment in
Windermere Utility Company ("Windermere") as described in Note 2, and land and
its associated costs no longer used in utility operations. Additionally, other
assets include deferred debt expenses that are being amortized over the lives of
the related debt issues.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS No. 121")." Under SFAS No. 121, the
Company is required to review for impairment of long-lived assets, including
regulatory assets, as well as costs excluded from rate base by regulators.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
22
<PAGE>
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
results of operations or financial condition.
INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The most significant items are the tax effects of accelerated
depreciation, advances for construction and contributions in aid of
construction.
When the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," Suburban and NMUI recorded additional deferred
income taxes, as well as corresponding regulatory assets and regulatory
liabilities as permitted by the CPUC and NMPUC. The regulatory assets and
regulatory liabilities will be recovered from or refunded to utility customers
through future rate adjustments.
Unamortized investment tax credits have been deferred and are amortized over the
estimated productive lives of the related assets as allowed by the CPUC and the
NMPUC.
PRODUCTION COST BALANCING ACCOUNTS: Suburban records the difference between
actual water production costs incurred and CPUC-adopted water production costs
in balancing accounts in the income statement with a corresponding liability or
asset on the balance sheet. Under current regulations, the differences recorded
will be refunded to or recovered from utility customers through future CPUC-
authorized rate adjustments.
ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION: Advances for
construction represent amounts advanced by developers primarily for water
pipeline extensions. Advance contracts issued after June 1982 are refundable to
the depositor at a rate of 2.5% each year over a 40-year period. Advance
contracts issued prior to July 1982 are refundable over a 20-year period.
Contributions in aid of construction represent contributions in the form of
cash, services or property received from developers, governmental agencies,
municipalities or individuals for the purpose of constructing utility plant.
Depreciation expense related to utility plant additions from contributions in
aid of construction is charged as a reduction to contributions in aid of
construction instead of depreciation expense.
OTHER LIABILITIES AND DEFERRED CREDITS: Other liabilities and deferred credits
include unamortized investment tax credits recorded by Suburban and NMUI as
authorized by the CPUC and the NMPUC. Also included are regulatory liabilities
representing amounts that will be refunded to utility customers through rate
adjustments authorized by the CPUC and the NMPUC.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform with the 1996 presentation.
NOTE 2. INVESTMENTS
In June 1996, the Company secured an interest in Windermere for an investment of
$3,000,000. The agreement provides the majority shareholder the right to acquire
the Company's interest prior to June 1998 at an agreed upon price. If the
majority shareholder does not exercise his option, then the Company has the
right to acquire 100% of Windermere for an agreed upon price. Management
believes it is the majority shareholders' intent to acquire
23
<PAGE>
the Company's interest. The Company also executed a consulting agreement with
Windermere and an additional agreement by which the Company may receive an
annual payment based on Windermere's financial performance. The investment is
carried at cost and is included in Other Assets in the Company's consolidated
balance sheet.
NOTE 3. UTILITY PROPERTY, PLANT AND EQUIPMENT
The components of utility property, plant and equipment at December 31, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Land and land rights $ 598,000 $ 522,000
Source of supply 9,978,000 9,976,000
Pumping and purification 10,039,000 8,191,000
Transmission and distribution 86,158,000 77,794,000
General (including intangibles) 7,652,000 6,900,000
Construction work in progress 5,306,000 2,897,000
- ------------------------------------------------------------------------------------------------------
$ 119,731,000 $ 106,280,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, substantially all of the Company's utility plant was
pledged as collateral for the First Mortgage Bonds issued by the Company (Note
6).
Included in the general utility plant amounts in 1996 and 1995 is $698,000 for
investments in two not-for-profit mutual water companies. The investments are
recorded at cost and entitle the Company to certain water rights. The Company's
investment in the common stock of one of these mutual water companies is
approximately 32%, however, the Company does not exercise significant operating
and financial control over this mutual water company. The Company purchased
water from these mutual water companies at a cost of approximately $1,600,000,
$1,511,000 and $1,050,000 in 1996, 1995 and 1994, respectively.
NOTE 4. LINES OF CREDIT
At December 31, 1996, the Company had three revolving lines of credit totaling
$16,000,000 that expire on various dates through 1997. During 1996, the Company
increased its short-term borrowing capacity by $1,500,000. All borrowings are
unsecured. Interest charged on borrowings under the lines of credit is at the
banks' prime rates. Two of the lines of credit give the Company the ability to
borrow at an interest rate that is lower than the banks' existing prime rate, at
certain minimum borrowing requirements and for a fixed period of time. All of
the lines of credit contain certain financial restrictions, and one of the lines
of credit requires a commitment fee of 1/2% per year of the unused portion of
the available line of credit, calculated and payable on a quarterly basis. The
Company expects to renew and update these lines of credit in the normal course
of business.
A summary of borrowings on the lines of credit is presented below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Notes payable to banks at December 31 $ 5,189,000 $ 8,175,000
Weighted average interest rate at December 31 7.6% 7.6%
Maximum amount of borrowings outstanding at any month end $ 17,345,000 $ 8,175,000
Average borrowings $ 12,580,000 $ 5,270,000
Weighted average interest rate 7.7% 7.8%
- ------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTE 5. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
Included in other current liabilities at December 31, 1996 and 1995, are the following:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996 1995
Purchased water $ 1,872,000 $ 985,000
Accrued salaries, wages and benefits 1,815,000 1,682,000
Accrued interest payable 692,000 565,000
Franchise and other taxes 596,000 555,000
Current portion of advances for construction 482,000 570,000
Accrued dividends payable 288,000 252,000
Accrued income taxes payable 70,000 313,000
Production cost balancing accounts 62,000 529,000
Other 1,692,000 1,568,000
- -----------------------------------------------------------------------------------------------------------------------------
$ 7,569,000 $ 7,019,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6. LONG-TERM DEBT
<TABLE>
<CAPTION>
The long-term debt outstanding at December 31, 1996 and 1995, is summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996 1995
Suburban First Mortgage Bond, Series A, due 2006, at 8.93% interest rate, with
semiannual interest payments $ 9,600,000 $ 10,500,000
Suburban First Mortgage Bond, Series B, due 2022, at 9.09% interest rate, with
semiannual interest payments 8,000,000 8,000,000
Suburban First Mortgage Bond, Series C, due 2006, at 7.61% interest rate with
semiannual interest payments 8,000,000 ---
NMUI First Mortgage Bond, Series A, due 2002, at 8.86% interest rate, with
semiannual interest payments 2,000,000 2,000,000
NMUI First Mortgage Bond, Series B, due 2006, at 7.64% interest rate, with
semiannual interest payments 4,000,000 ---
- -----------------------------------------------------------------------------------------------------------------------------
31,600,000 20,500,000
Less current maturities 900,000 900,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 30,700,000 $ 19,600,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments
of $900,000. The bond is nonrefundable and may not be redeemed prior to October
2, 2000. After October 1, 2000, the bond may be redeemed at the option of the
Company at a price of par plus a call premium. Suburban's First Mortgage Bonds,
Series B and Series C, and NMUI's First Mortgage Bonds, Series A and Series B,
do not require annual sinking fund payments. These bonds are nonrefundable and
may be redeemed at any time by the Company at a price of par plus a call
premium. Additional mortgage bonds may be issued, subject to the provisions of
the indentures. Substantially all of the Company's utility plant is pledged as
collateral for these bonds (Note 3). Each indenture limits the amount of cash
and property dividends that Suburban and NMUI may pay to the Company. At
December 31, 1996 and 1995, the combined indenture limits totaled $10,320,000,
and $8,011,000, respectively.
25
<PAGE>
Aggregate annual maturities and sinking fund requirements of all long-term debt
for the five years ending December 31, 2001, are $900,000 each year.
NOTE 7. INCOME TAXES
<TABLE>
<CAPTION>
The components of the current and deferred income tax provisions are as follows:
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Current tax expense:
- --------------------
Federal $ 795,000 $ 803,000 $ 395,000
State 509,000 356,000 73,000
- ----------------------------------------------------------------------------------------------------------------
1,304,000 1,159,000 468,000
- ----------------------------------------------------------------------------------------------------------------
Deferred income taxes (benefits):
- ---------------------------------
Depreciation 713,000 965,000 261,000
Production cost balancing accounts 185,000 80,000 89,000
Investment tax credits 25,000 26,000 (37,000)
Contributions in aid of construction and advances for
construction (405,000) (1,148,000) (539,000)
Reserves (318,000) (56,000) (42,000)
Gains on condemnation of land (25,000) (56,000) (65,000)
Deferred debt expenses (6,000) (6,000) (9,000)
Litigation settlement --- --- 570,000
Other, net (10,000) 173,000 40,000
- ----------------------------------------------------------------------------------------------------------------
159,000 (22,000) 268,000
- ----------------------------------------------------------------------------------------------------------------
Change in regulatory assets and regulatory liabilities, net (39,000) (167,000) 28,000
Investment tax credit amortization (49,000) (49,000) (49,000)
- ----------------------------------------------------------------------------------------------------------------
$ 1,375,000 $ 921,000 $ 715,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Provision computed at statutory rates 34% 34 % 34 %
Depreciation 2% 3 % 4 %
Goodwill amortization and other non-deductible expenses 4% 4 % 5 %
State income taxes, net of federal tax benefit 3% 2 % 2 %
Investment tax credits (1)% (2)% (3)%
Other, net --% (2)% (2)%
- ----------------------------------------------------------------------------------------------------------------
42% 39% 40%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Net deferred income taxes consist of the following at December 31, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Deferred income tax assets:
- ---------------------------
Contributions in aid of construction and advances for construction $ 3,798,000 $ 3,393,000
Investment tax credits 582,000 607,000
Reserves 511,000 193,000
Production cost balancing accounts 25,000 210,000
Other 216,000 192,000
- ------------------------------------------------------------------------------------------------------------------
5,132,000 4,595,000
- ------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
- --------------------------------
Depreciation (7,255,000) (6,542,000)
Gains on condemnation of land (857,000) (882,000)
Deferred debt expenses (119,000) (125,000)
Other (299,000) (284,000)
- ------------------------------------------------------------------------------------------------------------------
(8,530,000) (7,833,000)
- ------------------------------------------------------------------------------------------------------------------
Net deferred income taxes $ (3,398,000) $ (3,238,000)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Management regularly reviews the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December 31,
1996 or 1995.
NOTE 8. EARNINGS PER SHARE
Primary earnings per share are calculated using the weighted average number of
shares and dilutive common equivalent shares outstanding during each year after
recognition of dividend requirements on preferred shares. Common equivalent
shares arise from stock options. In 1994, fully diluted earnings per share was
computed based upon the average number of common shares and dilutive common
equivalent shares outstanding, assuming the 9.50% convertible subordinated
debentures were converted at the beginning of the year and the related interest
for the year, net of income taxes, was eliminated. In 1995, the 9.50%
convertible debentures were retired. Primary and fully diluted earnings are not
reported separately since common stock equivalents do not exceed 3% of weighted
average common shares outstanding.
NOTE 9. STOCKHOLDERS' EQUITY
The Company is currently authorized to issue 10,000,000 common shares at a par
value of $.01 per share. There were 2,601,589 and 2,453,386 shares outstanding
at December 31, 1996 and 1995, respectively. The Company is also currently
authorized to issue 250,000 preferred shares at a par value of $.01 per share.
There were 10,341 and 10,373 1/4 Series A preferred shares outstanding at
December 31, 1996 and 1995, respectively. During 1996, 32 1/4 fractional shares
of Series A preferred shares were redeemed. The holders of Series A shares are
entitled to annual dividends of $2.625 per share. Series A shares are callable
by the Company at a price equal to $52 per share and have a preference in
liquidation of $50.
In December 1996 and 1995, the Company declared stock dividends of 20% and 5%,
respectively, or 520,317 and 122,669 shares, to stockholders of record on
January 2, 1997 and 1996, respectively. At December 31, 1996 and 1995, retained
earnings were charged approximately $7,154,000 and $1,211,000, respectively
which represents the market value of the shares issued using the closing price
of the Company's common stock on January 2, 1997 ($13 7/8) and on January 2,
1996 ($9 7/8). Corresponding entries of approximately $7,149,000 and $1,210,000,
respectively, were recorded to paid-in capital. The weighted average outstanding
common shares, as well as cash dividends per common share, shown in the
Company's Consolidated Statements of Income, have been restated to reflect the
20% and 5% stock dividends.
27
<PAGE>
The Company has a dividend reinvestment and stock purchase plan that allows
common stockholders the option of receiving their dividends either in cash or in
common stock at a 5% discount from the market value. The plan permits optional
cash purchases of stock at current market values up to a maximum of $3,000 per
quarter. At December 31, 1996, 167,836 common shares were reserved for issuance
under this plan.
NOTE 10. STOCK COMPENSATION PLANS
At December 31, 1996, the Company had three stock-based compensation plans: a
Stock Option Plan, a Director Stock Option Plan, and an Employee Stock Purchase
Plan. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations in accounting for these plans. For the
restricted stock issued under the Stock Option Plan, compensation expense of
$24,000, $24,000, and $13,000 was recorded in 1996, 1995 and 1994, respectively.
Compensation expense of approximately $16,500, $3,300 and $5,400 was recorded in
1996, 1995 and 1994, respectively, for the Company's Employee Stock Purchase
Plan.
If compensation cost for the Company's three stock-based compensation plans had
been determined using the alternative method described under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS No. 123")," the Company's net income and earnings per common share would
have been as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995
<S> <C> <C> <C>
Net income available for common shares As reported $ 1,896,000 $ 1,412,000
Pro forma $ 1,857,000 $ 1,403,000
- ---------------------------------------------------------------------------------------
Earnings per common share As reported $ 0.61 $ 0.46
Pro forma $ 0.60 $ 0.46
- ---------------------------------------------------------------------------------------
</TABLE>
STOCK OPTION PLAN ("THE PLAN"): In 1988, the stockholders approved the Plan and
reserved 150,000 shares for issuance under the Plan. In 1993, the stockholders
approved an amendment to the Plan (the Amendment), which provided for an
increase of 100,000 shares reserved for issuance under the Plan, and extended
the grant dates to February 17, 2003. In addition, the Amendment eliminated any
future grants of restricted stock and amended certain provisions with respect to
the outstanding restricted stock issued. A total of 315,000 shares (after
adjusting for stock dividends of 20% on January 2, 1997 and 5% on January 2,
1996) are authorized for issuance under the Plan.
The Plan allows the Company to grant non-qualified stock options to officers,
certain directors and employees at exercise prices not less than the fair market
value of the Company's common stock on the last trading date preceding the date
of grant. Options vest over a period of five years and expire 10 years from the
date of grant. Restricted stock issued to officers is held in escrow until the
restrictions lapse. Restricted stock issued prior to October 22, 1991, vests 10
years after grant. Restricted stock issued after October 22, 1991, was subject
to repurchase by the Company. Unearned compensation of $238,000 related to the
issuance of 18,582 shares of restricted stock (adjusted for stock dividends of
20% on January 2, 1997 and 5% on January 2, 1996) is being amortized over the
vesting period.
In the table on page 29, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996 and 1995 as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Dividend yield 3.3% 4.6%
Expected volatility 37.5% 34%
Risk free interest rate 6.6% 6.6%
Expected life in years 8 8
- ---------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
A summary of the status of the Plan as of December 31, 1996, 1995 and 1994, and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 166,108 $10.59 140,516 $11.74 149,121 $12.28
Granted 44,460 9.52 40,650 7.03 28,356 7.74
Exercised (882) 7.24 --- --- --- ---
Forfeited (1,200) 9.48 (15,058) 11.65 (36,961) 10.86
Outstanding at end of year 208,486 $10.38 166,108 $10.59 140,516 $11.74
======== ======== ========
Options exercisable at year-end 117,850 97,023 86,693
======== ======== ========
Weighted average fair value of
options granted during the year $3.52 $2.04 $2.24
======== ======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL LIFE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 IN YEARS EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6 TO $10 102,646 8.5 $ 8.22 15,412 $ 7.42
10 TO 13 57,834 3.9 11.70 54,432 11.76
13 TO 15 48,006 3.6 13.42 48,006 13.42
-------------- ----------
$ 6 TO $15 208,486 6.1 10.38 117,850 11.87
-------------- ----------
- --------------------------------------------------------------------------------------------------------
</TABLE>
DIRECTOR OPTION PLAN ("DOP"): In 1996, the stockholders approved the DOP for
non-employee directors and reserved 50,000 shares for issuance under the plan.
After adjusting for the 20% stock dividend on January 2, 1997, 60,000 shares are
authorized for issuance under the DOP. The DOP provides for an automatic grant
of an option to purchase 1,200 shares (after adjusting for the 20% stock
dividend on January 2, 1997) of the Company's common stock to eligible non-
employee directors of the Company, beginning with the 1997 Annual Meeting of
Stockholders, and on the date of the Company's Annual Meeting of Stockholders in
each subsequent year through 2006. New directors are granted an initial option
to purchase 1,200 shares of the Company's common stock upon appointment to the
Board of Directors. Since the plan is not effective until 1997, no stock options
were granted under the DOP in 1996. Prior to approval of the DOP, non-employee
directors were granted options under the Stock Option Plan above.
29
<PAGE>
The DOP options become exercisable in equal installments of 50% of the shares
covered by the option on the first and second anniversaries of the date of
grant. The options expire ten years and one day from the date granted.
EMPLOYEE STOCK PURCHASE PLAN (ESPP): The Company has an ESPP, approved by the
stockholders, that allows eligible employees to purchase common stock through
payroll deductions in an amount up to 10% of their salary (not to exceed $25,000
per year). The purchase price of the stock is 90% of the lower of the beginning
of period or end of period stock price. Under the ESPP, the Company issued 4,877
shares, 3,277 shares and 5,851 shares to employees in 1996, 1995 and 1994,
respectively. At December 31, 1996, 217,458 common shares were reserved for
issuance under the ESPP (after adjustment for the stock dividend of 20% on
January 2, 1997). Using the alternative method described under SFAS No.123,
compensation cost is recognized for the fair value of the employees' purchase
rights, which was estimated using the Black-Scholes model with the weighted
average assumptions shown in the table on page 27. The weighted average fair
value of those purchase rights granted in 1996 and 1995 was $3.97 and $1.72,
respectively, which resulted in compensation expense of $23,240 and $5,640,
respectively, and is included in the pro forma net income available for common
shares amount shown in the table on page 29.
NOTE 11. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLAN: The Company has a non-contributory pension plan ("the
Pension Plan") under which employees of the parent company, Suburban and NMUI
who have one or more years of service and have attained the age of 21 years are
qualified to participate. The Company funds annually the minimum required
statutory amount. In January 1996, 1995 and 1994, the Company contributed
$556,000, $531,000 and $516,000, respectively, to the Pension Plan. The benefits
are based on employees' years of service and their average compensation during
the highest five consecutive years of the last 10 years before retirement.
Benefits are reduced if a participant retires early.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 436,000 $ 406,000 $ 548,000
Interest cost on projected benefit obligation 573,000 556,000 555,000
Actual return on plan assets (907,000) (912,000) 303,000
Net amortization and deferral 110,000 243,000 (961,000)
- --------------------------------------------------------------------------------------------------
Net pension expense $ 212,000 $ 293,000 $ 445,000
- --------------------------------------------------------------------------------------------------
</TABLE>
The funded status at December 31, 1996 and 1995, is reconciled to accrued
expense as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation $(6,134,000) $(5,699,000)
Effect of increase in compensation levels (1,664,000) (1,935,000)
- --------------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered through December 31 (7,798,000) (7,634,000)
Plan assets at fair value 9,441,000 8,288,000
- --------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 1,643,000 654,000
Unrecognized net asset at transition date (747,000) (872,000)
Unrecognized prior service cost (164,000) (174,000)
Unrecognized net gain from past experience, different from that
assumed and effects of changes in assumptions (820,000) (40,000)
- --------------------------------------------------------------------------------------------------------
Accrued expense $ (88,000) $ (432,000)
========================================================================================================
</TABLE>
Included in the accumulated benefit obligation are vested benefits of $6,069,000
and $5,634,000 at December 31, 1996 and 1995, respectively. Approximately 88% of
Pension Plan assets are invested in two mutual funds consisting of investments
in stocks, bonds and money market investments, in addition to a group retirement
policy
30
<PAGE>
consisting of a guaranteed insurance contract. The remaining 12% of Pension Plan
assets are invested primarily in the Company's common stock. The Pension Plan
owns 80,720 common shares of the Company (after adjusting for the 20% stock
dividend on January 2, 1997), which had a market value of approximately
$1,122,000 and $647,000 at December 31, 1996 and 1995, respectively. The Pension
Plan received dividends on these shares of approximately $27,000 in 1996 and
$26,000 in 1995 and 1994.
The following represent actuarial assumptions used at December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 8.5%
Compensation level increase 3.5% 4.5% 5.5%
Expected long-term rate of return on assets 8.0% 8.0% 7.5%
- ---------------------------------------------------------------------------------------
</TABLE>
DEFINED CONTRIBUTION PLANS: The Company has established a 401(k) profit sharing
plan ("ECO 401(k) Plan") covering employees of its contract operations business.
The ECO 401(k) Plan provides for monthly enrollment by employees after the
completion of three months of service. Participants may elect to contribute up
to 15% of their salary to the ECO 401(k) Plan. The Company matches a
participant's contribution for an amount up to 50% of the first 4% of the
participant's salary. Company contributions vest immediately. Company
contributions to the ECO 401(k) Plan were $141,000, $104,000 and $91,000 in
1996, 1995 and 1994, respectively. The assets of the ECO 401(k) Plan are
invested at the discretion of the individual employees in mutual funds
consisting of stocks, bonds and money market investments.
The Company also has established a 401(k) plan ("the Utility 401(k) Plan")
covering employees of the parent company, Suburban and NMUI. The Utility 401(k)
Plan provides for monthly enrollment after the completion of three months of
service and allows participants to contribute up to 15% of their salary. The
Utility 401(k) Plan does not provide for Company contributions. The assets of
the Utility 401(k) Plan are invested at the discretion of the individual
employees in mutual funds consisting of stocks, bonds and money market
investments.
NOTE 12. OPERATING REVENUES AND DIRECT OPERATING EXPENSES
Included in operating revenues and direct operating expenses are the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Utility operating revenues $ 33,772,000 $ 31,089,000 $ 30,111,000
Other operating revenues 32,373,000 25,718,000 20,821,000
- ---------------------------------------------------------------------------------------
Total operating revenues $ 66,145,000 $ 56,807,000 $ 50,932,000
=======================================================================================
Utility direct operating expenses $ 20,266,000 $ 18,865,000 $ 18,687,000
Other direct operating expenses 30,091,000 24,506,000 20,131,000
- ---------------------------------------------------------------------------------------
Total direct operating expenses $ 50,357,000 $ 43,371,000 $ 38,818,000
=======================================================================================
</TABLE>
31
<PAGE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office facilities under operating
leases that expire through 2003. Aggregate rental expense under all operating
leases approximated $2,220,000 in 1996, $1,989,000 in 1995, and $1,724,000 in
1994. At December 31, 1996, the future minimum rental commitments under existing
noncancellable operating leases are as follows: 1997 - $2,118,000; 1998 -
$1,791,000; 1999 - $1,313,000; 2000 - $711,000; 2001 - $423,000; and thereafter
- - $280,000.
The Water Utility Infrastructure Improvement Act of 1995 was passed by the
California legislature and signed by the governor on August 10, 1995. This law
provides that water utilities that sell excess real property and invest the
net proceeds from the sale in their utility plant within an eight-year period
are not required to allocate any gains to the ratepayers. Any net proceeds not
invested in utility plant during the eight-year period must be allocated to the
ratepayers. This legislation applies to land sales occurring after December 31,
1995.
On September 26, 1996, Senate Bill 1099 was passed by the California legislature
and signed by the governor. This law, effective January 1, 1997, is identical to
the Water Utility Infrastructure Improvement Act of 1995, and applies to real
property sold before January 1, 1996. From 1990 through 1995, Suburban recorded
pretax gains on land sales of four parcels of excess real property totaling
$1,690,000. Since the proceeds of the four land sales were invested in utility
plant, the gains should not be subject to allocation to the ratepayers,
therefore, no regulatory liability has been recorded in the accompanying
consolidated financial statements.
The Company is the subject of certain litigation arising from the ordinary
course of operations. The Company believes the ultimate resolution of such
matters will not materially affect its consolidated financial condition, results
of operations or cash flow.
32
<PAGE>
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 relating to the directors of the Company is set forth in the
Company's definitive Proxy Statement, dated on or about April 11, 1997, to be
filed with the Commission under the caption "Information About the Board of
Directors and Committees of the Board," and is hereby incorporated by reference.
In addition, information appearing under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934, as Amended" is in the Company's
definitive Proxy Statement, dated on or about April 11, 1997, and is also hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in the Company's
definitive Proxy Statement, dated on or about April 11, 1997, and to be filed
with the Commission under the captions "Executive Compensation and Other
Information," and "Information About the Board of Directors and Committees of
the Board," and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management of the Company's voting securities is set forth in the Company's
definitive Proxy Statement, dated on or about April 11, 1997, to be filed with
the Commission under the caption "Beneficial Ownership of the Company's
Securities," and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
set forth under the captions "Information About the Board of Directors and
Committees of the Board", "Executive Severance Compensation Agreements", and
"Certain Transactions" in the Company's definitive Proxy Statement, dated on or
about April 11, 1997, to be filed with the Commission, and is hereby
incorporated by reference.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements listed below are filed as part of this report:
Independent Auditors' Report
Consolidated Statements of Income - Three Years Ended December 31, 1996,
1995 and 1994
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Changes in Common Stockholders' Equity -
Three Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Three Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) The supplementary financial statement schedule required to be filed with
this report is as follows:
Page
----
Schedule II - Valuation and Qualifying Accounts............. 35
Schedules not listed above are omitted because of the absence of conditions
under which they are required, or because the information required by such
omitted schedules is included in the consolidated financial statements or
notes to consolidated financial statements thereto.
(a)(3) Exhibit Index............................................... 36-39
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1996.
34
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
BALANCE PROVISION
AT CHARGED DEDUCTIONS - BALANCE
BEGINNING TO ACCOUNTS AT END
OF YEAR INCOME WRITTEN OFF OF YEAR
-------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
1996
ALLOWANCE FOR
DOUBTFUL ACCOUNTS $ 192,000 $ 614,000 $ (294,000) $ 512,000
====================================================================
1995
Allowance for
doubtful accounts $ 141,000 $ 245,000 $ (194,000) $ 192,000
====================================================================
1994
Allowance for
doubtful accounts $ 110,000 $ 207,000 $ (176,000) $ 141,000
====================================================================
</TABLE>
35
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NO. AND
APPLICABLE SECTION
OF ITEM 601 OF
REGULATION S-K
- ---------------
2 Agreement and Plan of Merger of Registrant dated May 25, 1988
(incorporated by reference to Exhibit 2 to Registrant's Form 10-K
Report for the year ended December 31, 1988).
3.1 Registrant's Restated Certificate of Incorporation dated April 4,
1988 (incorporated by reference to Exhibit 3.1 to Registrant's
Form 8-B Report filed with the Commission on July 5, 1988).
3.1B Certificate of Amendment of Article Fourth of Articles of
Incorporation dated March 30, 1995 (incorporated by reference to
Exhibit 3.1B to Registrant's Form 10-Q Report for the quarter ended
March 31, 1995).
3.2 Registrant's Bylaws as amended April 4, 1988 (incorporated by
reference to Exhibit 3.2 to Registrant's Form 8-B Report filed with
the Commission on July 5, 1988).
3.2A Amendment to Registrant's Bylaws dated March 15, 1991 (incorporated
by reference to Exhibit 3.2A to Registrant's Form 10-K Report for
the year ended December 31, 1990).
3.2B Amendment to Registrant's Bylaws dated June 27, 1995 (incorporated
by reference to Exhibit 3.2A to Registrant's Form 10-Q Report for
the quarter ended June 30, 1995).
3.2C Amendment to Registrant's Bylaws dated December 12, 1996, filed
herewith.
4.1 Indenture dated as of August 15, 1975, between Registrant and Bank
of America, formerly Security Pacific National Bank (incorporated
by reference to Exhibit 6(g) to Registrant's Form S-14 Registration
Statement filed with the Commission on June 19, 1975).
4.2 Indenture of Mortgage and Deed of Trust dated October 1, 1986,
between Suburban Water Systems and First Trust of California,
formerly Security Pacific National Bank (incorporated by reference
to Exhibit 4.3 to Registrant's Form 10-K Report for the year ended
December 31, 1986).
4.2A First Amendment and Supplement to Indenture of Mortgage and Deed of
Trust between Suburban Water Systems and First Trust of California,
formerly Security Pacific National Bank, dated February 7, 1990
(incorporated by reference to Exhibit 4.2A to Registrant's Form
10-K Report for the year ended December 31, 1989).
4.2B Second Amendment and Supplement to Indenture of Mortgage and Deed
of Trust between Suburban Water Systems and First Trust of
California, formerly Security Pacific National Bank, dated January
24, 1992 (incorporated by reference to Exhibit 4.2B to Registrant's
Form 10-K Report for the year ended December 31, 1991).
4.2C Third Amendment and Supplement to Indenture of Mortgage dated
October 9, 1996, between Suburban Water Systems and First Trust of
California, N.A. (incorporated by reference to Exhibit 4.7 to
Registrant's Form 10-Q Report for the quarter ended September 30,
1996).
36
<PAGE>
4.3 Bond Purchase Agreement dated October 1, 1986, for Suburban Water
Systems (incorporated by reference to Exhibit 4.4 to Registrant's Form
10-K Report for the year ended December 31, 1986).
4.3A Bond Purchase Agreement dated February 20, 1992, for Suburban Water
Systems (incorporated by reference to Exhibit 4.3A to Registrant's Form
10-K Report for the year ended December 31, 1991).
4.3B Bond Purchase Agreement dated October 21, 1996, for Suburban Water
Systems, filed herewith.
4.4 Indenture of Mortgage dated February 14, 1992, between New Mexico
Utilities, Inc., and Sunwest Bank of Albuquerque (incorporated by
reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year
ended December 31, 1991).
4.4A First Supplement to Indenture of Mortgage dated May 15, 1992,
between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, N.A.,
filed herewith.
4.4B Second Amendment and Supplement to Indenture of Mortgage dated
October 21, 1996, between New Mexico Utilities, Inc. and Sunwest Bank of
Albuquerque, N.A. (incorporated by reference to Exhibit 4.8 to
Registrant's Form 10-Q Report for the quarter ended September 30, 1996).
4.5 Bond Purchase Agreement dated March 12, 1992, for New Mexico
Utilities, Inc. (incorporated by reference to Exhibit 4.5 to Registrant's
Form 10-K Report for the year ended December 31, 1991).
4.5A Bond Purchase Agreement dated November 8, 1996, for New Mexico
Utilities, Inc. filed herewith.
4.6 Article Four of the Restated Certificate of Incorporation of the
Registrant as to the rights, preferences, privileges and restrictions of
all classes of stock (incorporated by reference to Exhibit 3.1 to
Registrant's Form 8-B Report filed with the Commission on July 5, 1988.)
10.1 Fourteenth Amendment to the Utility Employees' Retirement Plan dated
December 12, 1996, filed herewith.
10.2 Amended and Restated Employee Qualified Stock Purchase Plan dated
November 11, 1991 (incorporated by reference to Exhibit 10.7 to
Registrant's Form 10-Q Report for the quarter ended September 30, 1991).
10.3 Dividend Reinvestment and Stock Purchase Plan dated December 1, 1992
(incorporated by reference to Registrant's Form S-3 Registration
Statement filed with the Commission on December 1, 1992).
10.4 Line of Credit Agreement dated December 2, 1992, between Registrant
and Wells Fargo Bank (incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-K Report for the year ended December 31, 1992).
10.4A First Amendment to Credit Agreement dated December 1, 1993,
between Registrant and Wells Fargo Bank (incorporated by reference to
Exhibit 10.12 to Registrant's Form 10-K Report for the year ended
December 31, 1993).
37
<PAGE>
10.4B Second Amendment to Credit Agreement dated December 1, 1994, between
Registrant and Wells Fargo Bank (incorporated by reference to Exhibit
10.4B to Registrant's Form 10-K Report for the year ended December 31,
1994).
10.4C Third Amendment to Credit Agreement dated December 1, 1995, between
Registrant and Wells Fargo Bank (incorporated by reference to Exhibit
10.4C to Registrant's Form 10-K Report for the year ended December 31,
1995).
10.4D Fourth Amendment to Credit Agreement dated May 14, 1996 between
Registrant and Wells Fargo Bank (incorporated by reference to Exhibit
10.4D to Registrant's Form 10-Q Report for the quarter ended June 30,
1996).
10.5 Line of Credit Agreement dated December 2, 1992, between Registrant and
First Interstate Bank of California (incorporated by reference to Exhibit
10.7 to Registrant's Form 10-K Report for the year ended December 31,
1992).
10.5A First Amendment to Credit Agreement and Promissory Note dated July 29,
1993, between Registrant and First Interstate Bank (incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year
ended December 31, 1993).
10.5B Second Amendment to Credit Agreement and Promissory Note dated June 24,
1994, between Registrant and First Interstate Bank (incorporated by
reference to Exhibit 10.16 to Registrant's Form 10-Q Report for the
quarter ended June 30, 1994).
10.5C Third Amendment to Credit Agreement and Promissory Note dated June 30,
1995, between Registrant and First Interstate Bank (incorporated by
reference to Exhibit 10.5C to Registrant's Form 10-Q Report for the
quarter ended June 30, 1995).
10.5D Fourth Amendment to Credit Agreement and Promissory Note dated March 26,
1996, between the Registrant and First Interstate Bank (incorporated by
reference to Exhibit 10.5D to Registrant's Form 10-Q Report for the
quarter ended June 30, 1996).
10.6 Amended and Restated Stock Option and Restricted Stock Plan dated
November 11, 1991, and First Amendment to the Amended and Restated Stock
Option and Restricted Stock Plan dated March 21, 1993 (incorporated by
reference to Registrant's Form S-8 Registration Statement filed with the
Commission on December 21, 1993).
10.7 Stock Purchase Agreement and First Amendment to Stock Purchase Agreement
dated August 13, 1993, between ECO Resources, Inc., and Robert E. Hebert
(incorporated by reference to Exhibit 10.11 to Registrant's Form 10-K
Report for the year ended December 31, 1993).
10.8 Utility Employees' 401(k) Plan dated January 7, 1994 (incorporated by
reference to Exhibit 10.13 to Registrant's Form 10-K Report for the year
ended December 31, 1993).
10.8A Amendment One to Utility Employees' 401(k) Plan (incorporated by
reference to Exhibit 10.8A to Registrant's Form 10-K Report for the year
ended December 31, 1994).
10.9 Comprehensive Amendment to the Profit-Sharing 401(k) Plan for the
Southwest Water Company's Related Companies dated March 10, 1994
(incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K
Report for the year ended December 31, 1993).
10.9A Amendment One to the Profit Sharing 401(k) Plan for the Southwest Water
Company's Related Companies (incorporated by reference to Exhibit 10.9A
to Registrant's Form 10-K Report for the year ended December 31, 1994).
38
<PAGE>
10.10 Line of Credit Agreement dated January 25, 1995, between New Mexico
Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year
ended December 31, 1994).
10.10A First Amendment to Loan Agreement dated October 10, 1995, between New
Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by
reference to Exhibit 10.10A to Registrant's Form 10-Q Report for the
quarter ended March 31, 1996).
10.10B Second Amendment to Loan Agreement and Promissory Note dated April 17,
1996, between New Mexico Utilities, Inc., and Sunwest Bank of
Albuquerque (incorporated by reference to Exhibit 10.10B to Registrant's
Form 10-Q Report for the quarter ended March 31, 1996).
10.10C Third Amendment to Loan Agreement dated July 16, 1996, between New
Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by
reference to Exhibit 10.10C to Registrant's Form 10-Q Report for the
quarter ended June 30, 1996).
10.10D Fourth Amendment to Credit Agreement dated January 25, 1997, between New
Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, filed herewith.
10.11 Form of Severance Compensation Agreement between Registrant and certain
executive officers approved by the Compensation Committee of the Board
of Directors on February 21, 1995 (incorporated by reference to Exhibit
10.11 to Registrant's Form 10-Q Report for the quarter ended March 31,
1995).
10.12 Equity Investment Agreement dated May 23, 1996, between the Registrant
and RTNT, Inc., covering Windermere Utility Company, together with two
First Refusal Agreements and Call Purchase Agreements between the
Registrant and RTNT, Inc. (incorporated by reference to Exhibit 10.12 to
Registrant's Form 10-Q Report for the quarter ended June 30, 1996).
10.13 Credit Agreement dated June 30, 1996 between Suburban Water Systems and
Wells Fargo Bank (incorporated by reference 10.13 to Registrant's Form
10-Q Report for the quarter ended September 30, 1996).
10.14 Credit Agreement dated August 29, 1996 between Registrant and Mellon
Bank, N.A. (incorporated by reference to Exhibit 10.14 to Registrant's
Form 10-Q Report for the quarter ended September 30, 1996).
13.1 Portions of Registrant's Annual Report to Stockholders for the year
ended December 31, 1996.
21.1 Listing of Registrant's subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
39
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
SOUTHWEST WATER COMPANY
By: /s/ Anton C. Garnier
---------------------------
ANTON C. GARNIER
President and Chief Executive Officer
(Principal Executive Officer)
March 20, 1997
By: /s/ Peter J. Moerbeek
--------------------------
PETER J. MOERBEEK
Vice President Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ H. Frederick Christie /s/ Donovan D. Huennekens
- ------------------------- -------------------------
H. FREDERICK CHRISTIE DONOVAN D. HUENNEKENS
Director Director
March 20, 1997 March 20, 1997
/s/ Michael J. Fasman /s/ Richard Kelton
- ------------------------- -------------------------
MICHAEL J. FASMAN RICHARD KELTON
Director Director
March 20, 1997 March 20, 1997
/s/ Anton C. Garnier /s/ Richard G. Newman
- ------------------------- -------------------------
ANTON C. GARNIER RICHARD G. NEWMAN
Director Director
March 20, 1997 March 20, 1997
/s/ Monroe Harris
- -------------------------
MONROE HARRIS
Director
March 20, 1997
40
<PAGE>
[LETTERHEAD OF SOUTHWEST WATER COMPANY]
CERTIFIED COPY OF RESOLUTION
----------------------------
PETER J. MOERBEEK, hereby certifies that he is now the Corporate Secretary
of Southwest Water Company, a Delaware corporation.
He does further certify that the following is a true and correct copy of
resolutions adopted by the Board of Directors of said Corporation on December
12, 1996:
AMENDMENT TO THE BYLAWS:
- ------------------------
WHEREAS, Section 307 of the California Corporations Code was amended,
effective in 1996, to modify the means by which a member of the board of
directors may participate in a board meeting by telephone conference call; and
WHEREAS, this corporation is qualified to do business in the State of
California as a foreign corporation; and
WHEREAS, the Board of Directors deems it desirable to conform this
corporation's bylaws to meet the amended requirements of Section 307 of the
California Corporations Code;
NOW, THEREFORE, IT IS HEREBY RESOLVED, that Article II, Section 6 of
the corporation's bylaws which read:
"SECTION 6. Participation in Meetings by Conference Telephone. Members of the
--------------------------------------------------
Board of Directors, or of any committee thereof, may participate in a meeting of
such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting."
SHALL BE CHANGED IN ITS ENTIRETY TO READ:
<PAGE>
"SECTION 6. Participation in Meetings by Conference Telephone. With respect to
--------------------------------------------------
members of the Board of Directors who participate in a meeting of the Board of
Directors (or any committee thereof) by conference telephone or other
communications equipment, the Chairman of the Board, the Acting Chairman of the
Board, the Chairman of the Committee, or their designee, shall verify by voice
recognition or any other means reasonably selected at the outset of such meeting
(i) the identity of that member, and (ii) that statements, questions, actions or
votes by members so participating are made by such members and not by persons
who are not permitted to participate as Directors."
RESOLVED FURTHER, that the Board of Directors hereby authorizes and
directs the Secretary of this Corporation to do and perform all acts, to execute
and deliver all certificates and to take or cause to be taken all other action
as such officer may deem necessary, desirable or appropriate to carry out the
full intent and purpose of the foregoing resolution.
He does further certify that said resolutions have not been altered,
modified, or revoked and are at the date of this Certificate in full force and
effect.
IN WITNESS WHEREOF, the undersigned has executed this Certificate and
affixed the corporate seal of said Corporation this 20th day of December 1996.
/s/ Peter J. Moerbeek
------------------------------
(seal) PETER J. MOERBEEK
Secretary
<PAGE>
================================================================================
EXHIBIT 4.3B
SUBURBAN WATER SYSTEMS
____________________
BOND PURCHASE AGREEMENT
____________________
DATED AS OF OCTOBER 21, 1996
$8,000,000
FIRST MORTGAGE BONDS, SERIES C 7.61%, DUE OCTOBER 20, 2006
================================================================================
<PAGE>
SUBURBAN WATER SYSTEMS
1211 East Center Court Drive
Covina, California 91724-3603
__________
BOND PURCHASE AGREEMENT
$8,000,000
FIRST MORTGAGE BONDS, SERIES C 7.61%, DUE OCTOBER 20, 2006
__________
As of October 21, 1996
Aid Association for Lutherans
222 West College Avenue
Appleton, Wisconsin 54919
Ladies and Gentlemen:
Suburban Water Systems (the "Company"), a California corporation,
hereby agrees with you as follows:
SECTION 1 PURCHASE AND SALE OF BONDS
1.1 ISSUE OF BONDS.
The Company has authorized the issue of Eight Million Dollars ($8,000,000) in
aggregate principal amount of its First Mortgage Bonds, Series C 7.61%, Due
October 20, 2006 (herein called the "Bonds"). The Bonds will be issued under
and pursuant to the Third Amendment and Supplement to Indenture of Mortgage
Dated October 1, 1986 (the "Third Supplemental Indenture"), dated as of October
9, 1996, between the Company and First Trust of California, National
Association, as trustee (the "Trustee"). The Third Supplemental Indenture
modifies and amends that certain Indenture of Mortgage and Deed of Trust between
the Company and the Trustee, dated October 1, 1986 (as amended by (i) the First
Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated
October 1, 1986 (the "First Supplemental Indenture"), dated as of February
7,1990, between the Company and the Trustee, (ii) the Second Amendment and
Supplement to Indenture and Mortgage and Deed of Trust dated October 1, 1986
(the "Second Supplemental Indenture"), dated as of
<PAGE>
January 24, 1992, between the Company and the Trustee and (iii) the Third
Supplemental Indenture, and as may be further amended from time to time, the
"Indenture"). The Bonds will be secured pursuant to and entitled to all of the
benefits of the Indenture.
EACH BOND:
(a) will be in the amount of One Thousand Dollars ($1,000) or an
integral multiple thereof;
(b) will bear interest on the unpaid principal balance thereof from
the date of the Bond at the rate of seven and sixty-one one-hundredths
percent (7.61%) per annum, payable semiannually on the twentieth (20th) day
of each April and October in each year commencing on the first Interest
Payment Date next succeeding the date of such bond until the principal
amount thereof will be due and payable, and thereafter will bear interest
at a rate equal to the lesser of (i) the highest rate allowed by applicable
law or (ii) eight and sixty-one one-hundredths percent (8.61%) per annum;
(c) will mature on October 20, 2006; and
(d) will be in the form of Bond set forth in Exhibit A to this
Agreement.
1.2 THE CLOSING.
(a) PURCHASE AND SALE OF BONDS. The Company hereby agrees to sell to
you and, subject to the terms and conditions set forth herein, you hereby
agree to purchase from the Company, in accordance with the provisions of
this Agreement, Bonds in the principal amount specified opposite your name
on Annex I hereto, at a purchase price of one hundred percent (100%) of the
principal amount thereof.
(b) THE CLOSING. The closing (the "Closing") of your purchase will be
held at 10:00 a.m., Los Angeles, California time, on October 21, 1996 (the
"Closing Date") at the office of the Company's counsel, Latham & Watkins,
650 Town Center Drive, Twentieth Floor, Costa Mesa, California 92626-1925.
At the Closing, the Company will deliver to you one or more Bonds (as set
forth opposite your name on Annex 1 to this Agreement), in the aggregate
principal
2
<PAGE>
amount of your purchase, dated the Closing Date and payable to you or
payable as indicated on Annex I to this Agreement, against payment by
federal funds wire transfer in immediately available funds of the purchase
price thereof, as directed by the Company on Annex 2 to this Agreement. It
is understood and agreed that the Closing will not consist of a physical
closing with representatives of the Company, you, the Trustee and your and
their respective legal counsel. Rather, at the Closing, Messrs. Latham &
Watkins shall accumulate the Bonds, this Agreement and all other documents
required to effect a Closing of the sale provided for herein, each in fully
executed form, shall confirm to you by telephone that all matters necessary
to effect a Closing have occurred, shall forward to you and others the
Bonds and other items to be delivered at the Closing and you shall wire
transfer the purchase price in accordance with Annex 2.
1.3 CERTAIN PURCHASER REPRESENTATIONS.
(a) PURCHASE FOR INVESTMENT. You represent to the Company that you
are purchasing the Bonds listed on Annex 1 to this Agreement opposite your
name for your own account for investment and with no present intention of
distributing or reselling the Bonds or any part thereof, but without
prejudice, however, to your right at all times to sell or otherwise dispose
of all or any part of the Bonds under a registration statement filed under
the Securities Act, or in a transaction exempt from the registration
requirements of such Act, and to have control of the disposition of all of
your assets.
It is understood that, in making the representations set out in Section
2.9(a), Section 2.11 and Section 2.16 of this Agreement, the Company is relying,
to the extent applicable, upon your representation as aforesaid.
(b) ERISA. You further represent that no part of the funds to be
used by you to acquire the Bonds constitutes assets which may be deemed
under ERISA to constitute and contain the assets of any "employee benefit
plan" with respect to which the Company is a "party in interest" (as
defined below) or a "disqualified person" (as defined below) or with
respect to which the Bonds would constitute an "employer security" (as
defined below).
The Company acknowledges that your representation set forth herein is made
in reliance upon and subject to the accuracy of the representations of the
Company set forth in Section 2.18(c)(ii) of this Agreement. As used in this
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Section 1.3(b), the terms "employee benefit plan," "party in interest" and
"employer security" shall have the respective meanings assigned to them in
ERISA, and the term "disqualified person" shall have the meaning assigned
to it pursuant to Section 4975(e)(2) of the IRC.
1.4 FAILURE TO DELIVER; FAILURE OF CONDITIONS.
If at the Closing the Company fails to tender to you the Bonds to be
purchased by you thereat, or if any condition specified in Section 3 of
this Agreement has not been fulfilled, you may thereupon elect to be
relieved of all further obligations under this Agreement. Nothing in this
Section 1.4 will operate to relieve the Company from any of its obligations
under this Agreement or to waive any of your rights against the Company.
1.5 EXPENSES.
(a) GENERALLY. Whether or not the Bonds are sold, the Company shall
promptly (and in any event within thirty (30) days after receiving any
statement or invoice therefor) pay all expenses relating to this Agreement
and the Bonds, including but not limited to:
(i) the cost of reproducing this Agreement, the Third
Supplemental Indenture, the Bonds and any other documents or
instruments relating thereto;
(ii) subject to 1.5(b) below, the fees and disbursements of
your special counsel;
(iii) the cost of delivering to your home office or custodian
bank, insured to your satisfaction, the Bonds purchased by you at the
Closing;
(iv) the cost of obtaining the private placement number
referred to in Section 2.21 of this Agreement;
(v) the fees and expenses of SSP Hambro & Co., LLC and Wells
Fargo Bank, and any other broker or agent, incurred by the Company in
connection with the offer, issue, sale and delivery of the Bonds or
the transactions contemplated by this Agreement; and
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(vi) all expenses relating to the consideration, negotiation,
preparation or execution of any amendments, waivers or consents
pursuant to the provisions of this Agreement or the Indenture, whether
or not such amendments, waivers or consents shall have become
effective.
(b) COUNSEL. Without limiting the generality of the foregoing, it is
agreed and understood that the Company will pay, at or within thirty (30)
days after the Closing, a statement for fees and disbursements of your
special counsel presented at the Closing and the Company will also pay upon
receipt of any statement thereof, each additional statement for fees and
disbursements of your special counsel rendered after the Closing in
connection with the issuance of the Bonds or the matters referred to in
Section 1.5(a) hereof. However, the maximum liability of the Company for
the fees and disbursements of your special counsel shall not exceed $2,000
in the aggregate. There shall be no charge to the Company for fees or
disbursements of your counsel who are employees of you or your affiliates.
(c) SURVIVAL. The obligations of the Company under this Section 1.5
will survive the payment or prepayment of the Bonds and the termination of
this Agreement.
SECTION 2 WARRANTIES AND REPRESENTATIONS
To induce you to enter into this Agreement and to purchase the Bonds listed
on Annex 1 to this Agreement opposite your name, the Parent (solely with respect
to the representations and warranties set forth in Section 2.3(a), Section
2.4(a), Section 2.12(a) and Section 2.12(b) and, insofar as such representations
and warranties relate to the Parent, Section 2.10 and Section 2.18) and the
Company (with respect to all representations and warranties other than those set
forth in Sections 2.3(a)(i), (ii) and (iii), Section 2.4(a), Section 2.12(a) and
Section 2.12(b), and, insofar as such representations and warranties relate to
the Parent, Section 2.3(a)(iv), Section 2.10 and Section 2.18) warrant and
represent to you as of the Closing Date as follows.
2.1 SUBSIDIARY.
PART I OF ANNEX 3 TO THIS AGREEMENT STATES:
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(a) with respect to the Subsidiary, its name, jurisdiction of
incorporation and the percentage of its Voting Stock owned by the Company;
and
(b) the name of each of the Company's corporate or joint venture
Affiliates and the nature of the affiliation.
The Company has good title to all of the shares it purports to own of the
stock of the Subsidiary, free and clear in each case of any Lien. All such
shares have been duly issued and are fully paid and nonassessable.
2.2 CORPORATE ORGANIZATION AND AUTHORITY.
Each of the Company and the Subsidiary:
(a) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation; and
(b) has all requisite legal and corporate power and authority and all
necessary licenses and permits to own and operate its Properties and to
carry on its business as now conducted and as presently proposed to be
conducted.
2.3 BUSINESS, PROPERTY AND INDEBTEDNESS.
(a) Nature of Business; Properties. Each of:
(i) the Annual Report of the Parent on Form 10-K for the
fiscal year ended December 31, 1995, filed by the Parent with the
Securities and Exchange Commission;
(ii) the Annual Report to Shareholders of the Parent for the
fiscal year ended December 31, 1995;
(iii) the Quarterly Report of the Parent on Form 10Q for the
fiscal period ended June 30, 1996; and
(iv) the Confidential Direct Placement Memorandum (the
"Placement Memorandum"), dated August 1996 and prepared by SSP Hambro
& Co., LLC and Wells Fargo Bank;
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correctly describes, among other things, the general nature of the business
and principal Properties of the Company. Copies of each of such items have
previously been delivered to you.
(b) INDEBTEDNESS. Part II of Annex 3 to this Agreement correctly
lists all outstanding indebtedness for borrowed money of the Company and
the Subsidiary immediately prior to the Closing Date and after giving
effect to the proposed use of the proceeds of the Bonds.
2.4 FINANCIAL STATEMENTS; MATERIAL ADVERSE CHANGE.
(a) FINANCIAL STATEMENTS - PARENT. The consolidated balance sheets
of the Parent and its consolidated subsidiaries (including, without
limitation, the Company) as of December 31 in the years 1995 and 1994 and
the related consolidated statements of income, consolidated statements of
changes in common stockholders' equity and consolidated statements of cash
flows for the fiscal years ended on such dates, accompanied by a report
thereon, containing an opinion without qualification, by KMPG Peat Marwick
LLP, independent certified public accountants, and the consolidated
condensed balance sheets of the Parent and its consolidated subsidiaries as
of June 30, 1996 and December 31, 1995 and the related consolidated
condensed statements of income and cash flow for the three (3) and six (6)
month periods ended June 30, 1996, copies of which have been delivered to
you, have been prepared in accordance with generally accepted accounting
principles consistently applied, and present fairly the consolidated
financial position of the Parent and its consolidated subsidiaries as of
such dates and the results of their operations for such periods. All such
consolidated financial statements include the accounts of the Company and
the Subsidiary.
(b) FINANCIAL STATEMENTS - COMPANY. The consolidated balance sheets
of the Company and the Subsidiary as of December 31 in the years 1995 and
1994 and the related consolidated statements of income and retained
earnings and consolidated statements of cash flows for the fiscal years
ended on such date, accompanied by a report thereon, containing an opinion
without qualification, by KPMG Peat Marwick LLP, copies of which have been
delivered to you, have been prepared in accordance with generally accepted
accounting principals consistently applied, and present fairly the
consolidated financial position of the Company and the Subsidiary as of
such dates and the results of their operations for such periods.
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(c) MATERIAL ADVERSE CHANGE. Since December 31, 1995, there has been
no change in the business, profits, Properties or condition (financial or
otherwise) of the Company or the Subsidiary except:
(i) as disclosed to you in the documents referenced in clauses
(iii) and (iv) of Section 2.3(a) or otherwise disclosed to you in this
Agreement; and
(ii) for other changes in the ordinary course of business that,
in the aggregate, have not had a materially adverse effect on the
business, profits, Properties or condition (financial or otherwise) of
the Company and the Subsidiary or on the ability of the Company to
perform its obligations set forth in this Agreement, in the Bonds and
in the Indenture.
2.5 FULL DISCLOSURE.
The financial statements referred to in Sections 2.4(a) and 2.4(b) do not, nor
does this Agreement or the placement Memorandum, contain any untrue statement of
a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading.
2.6 PENDING LITIGATION.
Except as disclosed on Annex 4 hereto, there are no proceedings, actions or
investigations pending or, to the knowledge of the Company, threatened against
or affecting the Company or the Subsidiary in any court or before any
Governmental Authority or arbitration board or tribunal which, either
individually or in the aggregate, involve the possibility of materially and
adversely affecting the business, profits, Properties, or condition (financial
or otherwise) of the Company and the Subsidiary, or the ability of the Company
to consummate the Transactions or perform its obligations set forth in this
Agreement, in the Bonds or in the Indenture. Without limiting the generally of
the foregoing, except as has been disclosed in the Placement Memorandum, on
Annex 4 hereto or in the items listed in Section 2.3, no proceedings with
respect to the condemnation of any Property of the Company or the Subsidiary are
pending or, to the best knowledge of the Company, contemplated by any
Governmental Authority to which the Property of the Company or the Subsidiary is
subject. Neither the Company nor the Subsidiary is in default with respect to
any order of any court, Governmental Authority or arbitration board or tribunal.
2.7 TITLE TO PROPERTIES.
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Each of the Company and the Subsidiary has, and at the time of the Closing will
have, good and marketable title to all of the fee interests in real Property,
and good title to all of the other interests in Property, it purports to own,
including Property reflected in the most recent balance sheet referred to in
Section 2.4(b) of this Agreement and Property described in the Indenture as
being subject to the Lien thereof, subject only to the Lien of the Indenture and
other Permitted Encumbrances. Without limiting the generally of the foregoing,
each of the Company and the Subsidiary has, as of the Closing Date, all water,
water rights, rights to purchase water, water systems, water works, plants,
pumps, tanks, pipes, strainers, fittings, valves, reservoirs, supplies and
implements it purports to own, including but not limited to the water stock more
particularly described in Exhibit B to the Indenture and the stock of the
Subsidiary described in Part I of Annex 3 to this Agreement, in each case owned
by the Company subject only to the Lien of the Indenture and Permitted
Encumbrances and without limitation as to time within which any such rights may
be exercised or such stock may be held. There are no Liens upon or other
defects (including, without limitation, defects of the type which would be
disclosed by a survey) in or to any of the real Property of the Company, or the
title or interest of the Company in or to such real Property, which,
individually or in the aggregate, would have a material adverse effect upon the
business, profits, Properties or condition (financial or otherwise) of the
Company and the Subsidiary or the ability of the Company and the Subsidiary to
operate their respective businesses.
2.8 PATENTS, TRADEMARKS, LICENSES, ETC.
Each of the Company and the Subsidiary owns or possesses, and upon completion of
the Closing will own or possess, all of the franchises (including, without
limitation, franchises granted by the PUC), patents, trademarks, service marks,
trade names, copyrights, licenses and rights (including, without limitation,
rights to produce and purchase water) necessary for the present and planned
future conduct of its business, without any known conflict with the rights of
others, and all such franchises, patents, trademarks, service marks, trade
names, copyrights, licenses and rights are valid and subsisting. To the
Company's knowledge, no event has occurred which (a) permits, or after notice or
lapse of time or both would permit, revocation or termination of any such
license or franchise or (b) materially adversely affects or in the future may
(so far as the Company can now reasonably foresee) materially adversely affect
any of the rights of the Company or the Subsidiary thereunder.
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2.9 AUTHORIZATION, EXECUTION, DELIVERY AND ENFORCEABILITY.
(a) TRANSACTIONS ARE LEGAL AND AUTHORIZED. The consummation by the
Company of each of the Transactions:
(i) is within the corporate powers of the Company; and
(ii) is legal and will not conflict with, result in any breach
in any of the provisions of, constitute a default under, or result in
the creation of any Lien upon any Property of the Company or the
Subsidiary under the provisions of, any agreement, charter instrument,
bylaw or other instrument to which it is a party or by which it or any
of its Property may be bound.
(b) OBLIGATIONS ARE ENFORCEABLE. Each of this Agreement, the Third
Supplemental Indenture and the Bonds has been duty authorized by all
necessary action on the part of the Company and has been executed and
delivered by duly authorized officers of the Company. Each of this
Agreement, the Indenture and the Bonds constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its
terms, except that the enforceability of this Agreement, the Indenture and
the Bonds may be:
(i) limited by applicable bankruptcy, reorganization,
arrangement, insolvency, moratorium, or other similar laws affecting
the enforceability of creditors' rights generally; and
(ii) subject to the availability of equitable remedies.
2.10 NO DEFAULTS.
To the knowledge of the Company and the Parent, no event has occurred and no
condition exists which, upon the execution of this Agreement and the Third
Supplemental Indenture and the issuance of the Bonds, would constitute a Default
or an Event of Default. To the knowledge of the Company and the Parent, neither
the Company, the Parent nor the Subsidiary is in violation in any respect of any
term of any charter instrument or bylaw and neither the Company, the Parent nor
any Subsidiary is in violation in any material respect of any term in any
agreement or other instrument to which it is a party or by which it or any of
its Property may be bound. To the knowledge of the Company and the Parent, no
event has occurred or condition exists such that, but for the waiver by any
Person (other than the Company,
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the Parent or the Subsidiary) of any term or provision in any agreement or other
instrument to which the Company, the Parent or the Subsidiary is a party or by
which it or any of its Property may be bound, the Company, the Parent or the
Subsidiary would be in violation in any material respect of any of its
obligations under such agreement or instrument.
2.11 GOVERNMENTAL CONSENT.
As of the Closing, all consents, approvals, orders and authorizations required
of or by any Governmental Authority, including, without limitation, the PUC, for
the Company to consummate the Transactions will have been duly obtained, all
related filings, registrations and qualifications will have been duly made, and
no appeal from any such consent, approval, order or authorization of or by any
Governmental Authority will be pending, including, without limitation, any such
consent, approval, order or authorization of the PUC.
2.12 TAXES.
(a) RETURNS FILED; TAXES PAID. All tax returns required to be filed
by the Company or the Subsidiary, and any other Person with which the
Company or the Subsidiary files or has filed a consolidated return, in any
jurisdiction have in fact been filed on a timely basis, and to the
knowledge of the Company and the Parent, all taxes, assessments, fees and
other governmental charges upon the Company or the Subsidiary, or upon any
of their respective Properties, income or franchises, which are due and
payable have been paid or will be paid prior to delinquency. Neither the
Company nor the Subsidiary knows of any proposed additional tax assessment
against it or any such Person. There exists no controversy with any
Governmental Authority with respect to the amount of any tax payable by the
Company or the Subsidiary to such Governmental Authority.
(b) BOOK PROVISIONS ADEQUATE. The provisions for taxes (including,
without limitation, any payment or payments owing from each of the Company
and the Subsidiary to any other Person pursuant to any tax sharing
agreement among such Persons) on the books of the Company and the
Subsidiary are adequate for all open years and for its current fiscal
period. The amount of the liability for all taxes reflected in the
consolidated balance sheet of the Company and the Subsidiary as of December
31, 1995 is an adequate provision for such taxes (including, without
limitation, any payment due pursuant to any such tax sharing agreement) as
may be payable by the Company and the Subsidiary for
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the fiscal years 1992 through 1995, inclusive, With respect to federal
income taxes, and the fiscal years 1992 through 1995, inclusive, with
respect to California franchise taxes, in each case, the only fiscal years
not closed by the statute of limitations or by the completion of an audit.
2.13 USE OF PROCEEDS.
The Company will apply the proceeds from the sale of the Bonds solely to
refinance the Company's short-term bank indebtedness and for general corporate
purposes. None of the transactions contemplated in this Agreement (including,
without limitation, the use of the proceeds from the sale of the Bonds)
violates, will violate or will result in a violation of Section 7 of the
Securities Exchange Act of 1934, as amended, or any regulations issued pursuant
thereto, including, without limitation, Regulations G, T and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R., Chapter II. Neither the
Company nor the Subsidiary owns, or with the proceeds of the sale of the Bonds
intends to own, carry or purchase any "margin security" within the meaning of
said Regulations G, T and X, including "margin securities" originally issued by
the Company or the Subsidiary. This Agreement and the Bonds will not be secured
by any "margin security," and no Bonds are being sold on the basis of any such
collateral. None of the proceeds from the sale of the Bonds will be used to
purchase or carry (or refinance any borrowing the proceeds of which were used to
purchase or carry) any "security" within the meaning of the Securities Exchange
Act of 1934, as amended.
2.14 PUBLIC UTILITY HOLDING COMPANY ACT.
The Company is not a "holding company" or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
2.15 PRIVATE OFFERING.
Neither the Company nor SSP Hambro & Co., LLC and Wells Fargo Bank (the only
Persons authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Bonds or any similar
Security of the Company) has offered any of the Bonds or any similar Security of
the Company for sale to, or solicited offers to buy any thereof from, or
otherwise approached or negotiated with respect thereto with, any prospective
purchaser, other than you and thirty-eight (38) other Institutional Investors,
each of whom was offered all or a portion of the Bonds at private sale for
investment. The Company agrees that neither the Company nor anyone acting on
its behalf will offer the Bonds or any part thereof or any similar Securities
for issue or sale to, or solicit any offer to acquire any of the
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same from, anyone so as to bring the offering, issuance or sale of the Bonds
within the provisions of Section 5 of the Securities Act.
2.16 COMPLIANCE WITH LAW.
To the knowledge of the Company, neither the Company nor the Subsidiary:
(a) is in material violation of any law, ordinance, governmental
rule, regulation, order or judgment of any court or other Governmental
Authority OR award of any arbitrator to which it is subject; or
(b) has failed to obtain any material license, permit, franchise or
other governmental authorization necessary to the ownership of its Property
or to the conduct of its business;
which violation or failure to obtain might, either individually or in the
aggregate, materially adversely affect the business, profits, Properties or
condition (financial or otherwise) of the Company and the Subsidiary or the
ability of the Company to consummate the Transactions or perform its obligations
set forth in this Agreement, the Indenture or the Bonds.
2.17 RESTRICTIONS ON COMPANY AND SUBSIDIARY.
Neither the Company nor the Subsidiary:
(a) is a party to any contract or agreement, or subject to any
charter or other corporate restriction, which materially and adversely
affects the business, profits, Properties or condition (financial or
otherwise) of the Company and the Subsidiary or the ability of the Company
to perform its obligations set forth in this Agreement, the Indenture and
the Bonds;
(b) is a party to any contract or agreement (other than the Indenture
and a credit agreement with Wells Fargo Bank (the "Wells Agreement")) which
restricts the right or ability of such corporation to incur debt; or
(c) has agreed or consented to cause or permit in the future (upon
the happening of a contingency or otherwise) any of its Property, whether
now owned or hereafter acquired, to be subject to a Lien not permitted by
the Indenture.
2.18 ERISA.
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(a) RELATIONSHIP OF VESTED BENEFITS TO PENSION PLAN ASSETS. To the
knowledge of the Company and the Parent, the present value of all benefits
vested under all Pension Plans (other than Multiple Employer Pension Plans)
from time to time maintained by the Company, the Parent and their
respective subsidiaries (and under all Multiple Employer Pension Plans with
respect to which the Company, the Parent or any of such subsidiaries is a
"substantial employer" within the meaning of Section 4001 (a)(2) of ERISA)
does not exceed the value of the assets of the Pension Plans allocable to
such vested benefits. For purposes of this Section 2.18(a), the present
value of the benefits vested under any Pension Plan shall be determined as
of the most recent valuation date, based upon assumptions and methods
determined in the good faith judgment of the Company and in compliance with
the requirements of law.
(b) ERISA REQUIREMENTS. To the knowledge of the Company and the
Parent, each of the Company and the ERISA Affiliates:
(i) has fulfilled all obligations in all material respects
under the minimum funding standards of ERISA and the IRC with respect
to each Pension Plan;
(ii) has satisfied all contribution obligations in all material
respects in respect of each Multiemployer Pension Plan;
(iii) is in compliance in all material respects with all other
applicable provisions of ERISA and the IRC with respect to each
Pension Plan; and
(iv) has not incurred any material liability under Title IV of
ERISA to the PBGC (other than in respect of required insurance
premiums, all of which that are due having been paid), with respect to
any Pension Plan, any Multiemployer Pension Plan or any trust
established thereunder.
No Pension Plan, or trust created thereunder, has incurred any material
accumulated funding deficiency (as such term is defined in Section 302 of
ERISA), whether or not waived, as of the last day of the most recently
ended plan year of such Pension Plan. The liabilities, if any, of the
Company and the Subsidiary for post-retirement benefits (other than
benefits pursuant to Section
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4980B of IRC or Title I, Subtitle B, Part 6 of ERISA) under welfare plans
(as defined in Section 3(1) of ERISA) does not aggregate one hundred
thousand dollars ($100,000) or more.
(c) PROHIBITED TRANSACTIONS.
(i) The purchase of the Bonds by you will not constitute a
transaction prohibited by Section 406 of ERISA or a non-exempt
"prohibited transaction" (as such term is defined in Section 4975 of
the IRC) that could subject you, the Company or any ERISA Affiliate to
the penalty or tax on prohibited transactions imposed by Section 502
of ERISA or Section 4975 of the IRC. The representation by the Company
in the preceding sentence is made in reliance upon and subject to the
accuracy of the representation in Section 1.3(b) hereof as to the
source of funds used by you to purchase the Bonds.
(ii) Part III(B) of Annex 3 hereto completely lists all Pension
Plans with respect to which the Company is a "party in interest" or a
"disqualified person" (as such terms are hereinafter defined) and all
Pension Plans covering employees of the Company or any "affiliate" (as
such term is hereinafter defined).
(iii) Part III(A), to Annex 3 hereto completely lists all ERISA
Affiliates.
As used in this Section 2.18(c), the terms "employee benefit plan" and
"party in interest" have the respective meanings assigned to them in
Section 3 of ERISA; the term "affiliate" has the meaning assigned to it in
Section 407(d) of ERISA; and the term "disqualified person" has the meaning
assigned to it in Section 4975(e)(2) of the IRC.
(d) REPORTABLE EVENTS. No Pension Plan or trust created thereunder
has been terminated, and, to the knowledge of the Company and the Parent,
there have been no "reportable events" (as such term is defined in Section
4043 of ERISA), with respect to any Pension Plan or trust created
thereunder which reportable event or events will result in the termination
of such Pension Plan and give rise to a liability of the Company or any
ERISA Affiliate in respect thereof.
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(e) MULTIEMPLOYER PENSION PLANS. Except as set forth on Part III of
Annex 3 hereto, neither the Company nor any ERISA Affiliate is an employer
required to contribute to any Multiemployer Pension Plan. Neither the
Company nor any ERISA Affiliate has incurred, nor is expected to incur, any
withdrawal liability (that has not previously been fully satisfied) under
Title IV, Subtitle E of ERISA with respect to any Multiemployer Pension
Plan. None of the Multiemployer Pension Plans referred to in Part III of
Annex 3 have been terminated under Section 4041A of ERISA, have been placed
in reorganization status under Title IV of ERISA, or have been determined
to be "insolvent" (as such term is defined in Section 4245 of ERISA).
(f) MULTIPLE EMPLOYER PENSION PLANS. Except as set forth in Part III
of Annex 3 hereto, neither the Company nor any ERISA Affiliate is a
"contributing sponsor" (as such term is defined in Section 4001 of ERISA)
in any Multiple Employer Pension Plan and neither the Company nor any ERISA
Affiliate has incurred (without fully satisfying the same), or reasonably
expects to incur, withdrawal liability under Section 4063 of ERISA in
respect of any such Multiple Employer Pension Plan listed in Part III of
Annex 3 hereto, which withdrawal liability could have a material adverse
effect on the business, profits, Properties or condition (financial or
otherwise) of the Company and the Subsidiary or the ability of the Company
to perform its obligations set forth in this Agreement, the Indenture and
the Bonds.
2.19 INVESTMENT COMPANY ACT.
The Company is not, and is not directly or indirectly controlled by, or acting
on behalf of any Person which is, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
2.20 ENVIRONMENTAL COMPLIANCE.
Except as set forth in Part IV of Annex 3 hereto:
(a) COMPLIANCE - to the knowledge of the Company, each of the Company
and the Subsidiary is in compliance with all Environmental Protection Laws
in effect in each jurisdiction where it is presently doing business, except
such failures so to comply that would not, in the aggregate, be reasonably
expected to have a material adverse effect on the business, profits,
Properties or condition (financial or otherwise) of the Company and the
Subsidiary or the ability of the Company to perform its obligations set
forth in this Agreement, the Indenture and the Bonds;
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(b) LIABILITY - to the knowledge of the Company, neither the Company
nor the Subsidiary is subject to any liability under any Environmental
Protection Laws that, in the aggregate, could be reasonably expected to
have a material adverse effect on the business, profits, Properties or
condition (financial or otherwise) of the Company and the Subsidiary or the
ability of the Company to perform its obligations set forth in this
Agreement, the Indenture and the Bonds; and
(c) NOTICES - neither the Company nor the Subsidiary has received
any:
(i) written notice from any Governmental Authority by which
any of its present or previously-owned or leased real Properties has
been designated, listed, or identified in any manner by any
Governmental Authority charged with administering or enforcing any
Environmental Protection Law as a Hazardous Substance disposal or
removal site, "Super Fund" clean-up site, or candidate for removal or
closure pursuant to any Environmental Protection Law;
(ii) written notice of any Lien arising under or in connection
with any Environmental Protection Law that has attached to any
revenues of, or to any of its owned or leased real Properties; or
(iii) summons, citation, notice, directive, letter, or other
communication, written or oral, from any Governmental Authority
concerning any intentional or unintentional action or omission by the
Company or the Subsidiary in connection with its ownership or leasing
of any real Property resulting in the releasing, spilling, leaking,
pumping, pouring, emitting, emptying, dumping, or otherwise disposing
of any Hazardous Substance into the environment resulting in any
material violation of any Environmental Protection Law;
in the case of clauses (ii) and (iii) above, where the effect of which
could be reasonably expected to have a material adverse effect on the
business, profits, Properties or condition (financial or otherwise) of the
Company and the Subsidiary or the ability of the Company to consummate the
Transactions or to perform its obligations set forth in this Agreement, the
Indenture and the Bonds.
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2.21 PRIVATE PLACEMENT NUMBER.
The Company has obtained private placement number 864577 B@ 9 from Standard &
Poor's Corporation CUSIP Service Bureau for the Bonds.
SECTION 3 CLOSING CONDITIONS
Your obligation to purchase and pay for the Bonds to be delivered to you at
the Closing will be subject to the following conditions precedent:
3.1 OPINIONS OF COUNSEL.
You will have received from:
(a) Latham & Watkins, counsel for the Company;
(b) Steefel, Levitt & Weiss, PUC counsel for the Company; and
(c) internal legal counsel for the Trustees,
closing opinions, each dated as of the Closing Date, and substantially in the
respective forms set forth in Exhibits B1, B2 and B3 to this Agreement.
3.2 WARRANTIES AND REPRESENTATIONS TRUE; NO PROHIBITED ACTION.
(a) WARRANTIES AND REPRESENTATIONS TRUE. The warranties and
representations of the Company and the Parent contained in Section 2 of
this Agreement will be true in all material respects.
(b) NO PROHIBITED ACTION. Neither the Company nor the Subsidiary
shall have taken any action or permitted any condition to exist which would
constitute a Default or an Event of Default.
3.3 COMPLIANCE WITH THIS AGREEMENT.
The Company will have performed and complied with all agreements and conditions
contained herein which are required to be performed or complied with by the
Company before or at the Closing.
3.4 OFFICERS' CERTIFICATES.
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You will have received:
(a) a certificate dated the Closing Date and signed by (i) the
President or a vice president and (ii) the Chief Financial Officer of the
Company, substantially in the form of Exhibit C1 to this Agreement with
respect to the matters therein set forth;
(b) a certificate dated the Closing Date and signed by (i) the
President or a vice president and (ii) the Chief Financial Officer of the
Parent, substantially in the form of Exhibit C2 to this Agreement with
respect to the matters therein set forth;
(c) a certificate dated the Closing Date and signed by the Secretary
or an Assistant Secretary of the Company, substantially in the form of
Exhibit D1 to this Agreement, with respect to the matters therein set
forth; and
(d) a certificate dated the Closing Date and signed by the secretary
or an Assistant Secretary of the Parent, substantially in the form of
Exhibit D2 to this Agreement, with respect to the matters therein set
forth.
3.5 LEGALITY.
The Bonds shall on the Closing Date qualify as a legal investment for insurance
companies under applicable insurance law (without regard to any "basket" or
"leeway" provisions) and you shall have received such evidence as you may
reasonably request to establish compliance with this condition.
3.6 REGULATORY APPROVALS.
Not less than ten (10) days prior to the Closing, the PUC shall have issued the
PUC Order. Such order shall be effective and no appeal shall be pending with
respect thereto.
3.7 THIRD SUPPLEMENTAL INDENTURE.
The Company and the Trustee shall have executed and delivered the Third
Supplemental Indenture in the form of Exhibit E to this Agreement, and you shall
have received an executed original counterpart of such Third Supplemental
Indenture.
3.8 LIENS UPON COLLATERAL.
All recordings of the Indenture and the Third Supplemental Indenture with the
respective County Recorders of Los Angeles County and Orange County, California,
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which are required or reasonably requested by the Trustee or the Purchaser to
provide record notice of the Liens upon all of the Collateral shall have been
made.
3.9 TITLE INSURANCE.
That certain policy of title insurance, dated as of November 18, 1986, from
Ticor Title Insurance Company insuring the Trustee and the holders of the
Series A Bonds against loss or damage to the extent of $15,000,000 plus costs as
permitted by the policy by reason of any defect in the Lien of the Indenture on
the Property (other than Excepted Property) described therein or by reason of
the title to such Property being other than as shown in such policy, shall be in
full force and effect. The Trustee shall have received endorsements to such
policy, or commitments to issue the same, in each case satisfactory to you,
sufficient to extend the coverage of such policy to any additional Property
being added to the Lien of the Indenture by Virtue of the Third Supplemental
Indenture and to extend such insurance to the Trustee and the holders of the
Bonds and the Series A Bonds and Series B Bonds to the extent of $31,000,000
plus costs as permitted by the policy. You shall have received copies of such
policy of title insurance and such endorsements or commitments to issue such
endorsements.
3.10 INDENTURE CONDITIONS.
All conditions precedent set forth in the Indenture with respect to consummation
of any of the Transactions shall have been satisfied. Without limiting the
generally of the foregoing, the Company's Bondable Capacity and Net Earnings for
Interest shall be sufficient to permit the issuance of the Bonds.
3.11 PROCEEDINGS SATISFACTORY.
All proceedings taken in connection with the sale of the Bonds and all documents
and papers relating thereto will be satisfactory to you. You will have received
copies of such documents and papers as you may reasonably request in connection
therewith (including, without limitation, copies of all certificates delivered
to the Trustee in connection with the consummation of the Transactions), all in
form and substance satisfactory to you; provided, however, that you agree that
all documents the forms of which are annexed hereto as exhibits shall be in form
and substance satisfactory to you if duty authorized, executed and delivered in
the respective forms set forth in such exhibits.
SECTION 4 AGREEMENTS OF THE COMPANY
4.1 FINANCIAL AND BUSINESS INFORMATION.
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The Company will deliver to you, if at the time you or your nominee holds any
Bonds, and to each other institutional holder of the then Outstanding Bonds:
(a) QUARTERLY STATEMENTS - as soon as practicable after the end of
the third fiscal quarter of 1996, and the first, second and third fiscal
quarter of each fiscal year of the Company thereafter, and in any event
within sixty (60) days thereafter, duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiary as at the end of such quarter; and
(ii) consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiary, for such quarter and for
the portion of the fiscal year ending with such quarter;
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable detail
and certified as being complete and correct, and as having been prepared in
conformity with generally accepted accounting principles, subject to
changes resulting from year-end adjustments, by the chief financial officer
or treasurer of the Company;
(b) ANNUAL STATEMENTS - as soon as practicable after the end of each
fiscal year of the Company, and in any event within one hundred twenty
(120) days thereafter, commencing with the Company's 1996 fiscal year,
duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiary as at the end of such year; and
(ii) consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiary for such year;
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and accompanied by an opinion thereon
of the accountants named in Section 2.4 of this Agreement or other
independent certified public accountants of recognized national standing or
recognized regional standing selected by the Company, which opinion shall,
without qualification, state that such financial statements present fairly,
in all material
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respects, the financial position of the companies being reported upon and
their results of operations and cash flows in conformity with generally
accepted accounting principles, that the examination of such accountants in
connection with such financial statements has been made in accordance with
generally accepted auditing standards and that such audit provides a
reasonable basis for such opinion in the circumstances;
(c) AUDIT REPORTS - promptly upon receipt thereof, one copy of each
other report submitted to the Company or the Subsidiary by independent
accountants in connection with any annual, interim or special audit made by
them of the books of the Company or the Subsidiary;
(d) SEC AND OTHER REPORTS OF THE COMPANY AND THE PARENT - promptly
upon their becoming publicly available, one copy of each financial
statement, report, notice or proxy statement sent by the Company to its
stockholders generally, and of each regular or periodic report and any
registration statement, prospectus or written communication in respect
thereof filed by the Company with, or received by it in connection
therewith from, any securities exchange or the Securities and Exchange
Commission or any successor agency, and one copy of each financial
statement, report, notice or proxy statement sent by the Parent to its
stockholders generally;
(E) ERISA - promptly upon becoming aware of the occurrence of:
(i) any material "reportable event" (as such term is defined in
Section 4043 of ERISA) with respect to which the reporting requirement
has not been waived; or
(ii) any material transaction prohibited by Section 406 of ERISA
or any nonexempt "prohibited transaction" (as such term is defined in
Section 4975 of the IRC);
in connection with any Pension Plan or any trust created thereunder, a
written notice specifying the nature thereof, what action, if any, the
Company is taking or proposes to take with respect thereto, and, when
known, any action taken by the IRS, the Department of Labor or the PBGC
with respect thereto;
(f) ERISA WAIVERS - prompt written notice of and a description of any
request pursuant to Section 303 of ERISA or Section 412 of the IRC for, or
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notice of the granting pursuant to said Section 303 or Section 412 of, a
waiver in respect of all or part of the minimum funding standard set forth
in ERISA or the IRC, as the case may be, of any Pension Plan, and, in
connection with the granting of any such waiver, the amount of any "waived
funding deficiency" (as such term is defined in said Section 303 or said
Section 412) and the terms of such waiver; provided, however, that no such
notice need be given if the amount of any waived funding deficiency shall
not be material in the context of the business, profits, Properties or
condition (financial or otherwise) of the Company and the Subsidiary, taken
as a whole;
(g) OTHER ERISA NOTICES - prompt written notice of and, where
applicable, a description of:
(i) any notice from the PBGC in respect of the commencement of
any proceedings pursuant to Section 4042 of ERISA to terminate any
Pension Plan or for the appointment of a trustee to administer any
Pension Plan;
(ii) any distress termination notice delivered to the PBGC
under Section 4041 of ERISA in respect of any Pension Plan, and any
determination of the PBGC in respect thereof;
(iii) the placement of any Multiemployer Pension Plan in
reorganization status under Title IV of ERISA;
(iv) any Multiemployer Pension Plan becoming "insolvent" (as
such term is defined in Section 4245 of ERISA);
(v) the complete or partial withdrawal of the Company or any
ERISA Affiliate from any Multiemployer Pension Plan and the withdrawal
liability incurred in connection therewith; and
(vi) the withdrawal of the Company or any ERISA Affiliate from
any Pension Plan with respect to which it is a "substantial employer"
as defined in ERISA and the withdrawal liability under Section 4063 of
ERISA incurred in connection therewith;
(h) NOTICE OF DEFAULT OR EVENT OF DEFAULT - immediately upon becoming
aware of the existence of any condition or event which constitutes a
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Default or an Event of Default, a written notice specifying the nature and
period of existence thereof and what action the Company is taking or
proposes to take with respect thereto;
(i) NOTICE OF CLAIMED DEFAULT - immediately upon becoming aware that
the holder of any Bond or of any evidence of indebtedness or other Security
of the Company or the Subsidiary has given notice or taken any other action
with respect to a claimed Event of Default or default under such Bond,
evidence of indebtedness or Security, a written notice specifying the
notice given or action taken by such holder and the nature of the claimed
Event of Default or default and what action the Company is taking or
proposes to take with respect thereto;
(j) INFORMATION REQUIRED BY INDENTURE - all information, notices,
certificates and opinions required by the terms of the Indenture to be
delivered to the holders of the Bonds; and
(k) REQUESTED INFORMATION - with reasonable promptness, such other
data and information reasonably available to the Company as from time to
time may be reasonably requested. Without limiting the generally of the
foregoing, the Company will deliver to you or any successor or transferee
the information required by 17 C.F.R. (S)230.144A in connection with any
transfer or proposed transfer of Bonds by you or any successor or
transferee pursuant thereto.
4.2 OFFICERS' CERTIFICATES.
Each set of financial statements delivered to you or any other institutional
holder of the Bonds pursuant to Section 4.1(a) or Section 4.1(b) of this
Agreement will be accompanied by a certificate of the President or a Vice
president and the Chief Financial Officer of the Company setting forth:
(a) COVENANT COMPLIANCE - the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements of Article VI of the Indenture during the
period covered by the income statement then being furnished; and
(b) EVENT OF DEFAULT - a statement that the signers have reviewed the
relevant terms of this Agreement and the Indenture and have made, or caused
to be made, under their supervision, a review of the transactions and
conditions of the Company and the Subsidiary from the beginning of the
accounting
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period covered by the income statements being delivered therewith to the
date of the certificate and that such review has not disclosed the
existence during such period of any condition or event which constitutes a
Default or an Event of Default or, if any such condition or event existed
or exists, specifying the nature and period of existence thereof and what
action the Company has taken or proposes to take with respect thereto.
4.3 ACCOUNTANTS' CERTIFICATES.
Each set of annual financial statements delivered pursuant to Section 4.1(b)
will be accompanied by a certificate of the accountants who certify the
financial statements of the Company, stating that they have reviewed Sections
6.01, 6.03, 6.06, 6.10 and 6.14 of the Indenture and stating further, whether,
in making their audit, such accountants have become aware of any condition or
event which then constitutes a Default or an Event of Default (whether or not as
a result of failure by the Company to comply with any of Sections 6.01, 6.03,
6.06, 6.10 or 6.14 of the Indenture), and, if any such condition or event then
exists, specifying the nature and period of existence thereof.
4.4 INSPECTION.
The Company will permit any of your representatives, while you or your nominee
holds any Bond, or the representatives of any other institutional holder of the
Bonds, at your or such holder's expense (except during the continuance of any
default or Event of Default, in which case, at the Company's expense), to visit
and inspect any of the Properties of the Company or the Subsidiary, to examine
all their books of account, records, reports and other papers, to make copies
and extracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective officers, employees and independent public
accountants (and by this provision the Company authorizes said accountants to
discuss the finances and affairs of the Company and the Subsidiary) all at such
reasonable times and as often as may be reasonably requested.
4.5 REPORT TO NAIC.
Concurrently with the delivery to you of each annual statement required by
Section 4.1(b) hereof, the Company will deliver a copy thereof to: Securities
Valuation Office, National Association of Insurance Commissioners, 195 Broadway,
New York, New York 10007.
4.6 HAZARDOUS SUBSTANCES INDEMNIFICATION.
The Company shall indemnify, defend and hold you harmless from and against any
loss or liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge or
disposal of any
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Hazardous Substances in or about the Property of the Company, the Subsidiary or
the Parent. This indemnification provision shall apply whether the Hazardous
Substances are in, on, under or about the Property or operations of the Company,
the Subsidiary or the Parent. The foregoing indemnification includes but is not
limited to attorneys' fees (including the allocated cost of in-house counsel and
staff). The foregoing indemnification extends to you, your parent, your
subsidiaries and all of your or their directors, officers, employees, agents,
successors, attorneys and assigns. This indemnification provision shall survive
repayment of the Company's obligations under the Bonds, and payment shall not be
a condition precedent to recovery upon the foregoing indemnification provisions.
In the event that you receive a claim, demand or action for which you
believe that indemnification will or may be required pursuant to this Section,
you agree to so notify the Company in writing promptly (and in any event within
twenty (20) days after your receipt of such claim, and/or action). Upon receipt
of such notice from you, the Company shall have the right to defend such claim,
demand or action by legal counsel selected by the insurance carrier for the
Company, or selected by the Company and reasonably satisfactory to you. Such
right shall be exercised by written notice to you given within twenty (20) days
after the Company's receipt of your notice.
If the Company elects to undertake your defense, and so long as the Company
continues such defense, you agree that:
(a) you shall not admit any liability or enter into any settlement of
any such claim or action without, in any such case, the prior written
consent of the Company, which shall not be unreasonably withheld or
delayed;
(b) you shall be entitled to retain separate legal counsel as you
select. However, the Company shall not be obligated to reimburse you for
any costs or fees of such separate counsel (including in-house counsel or
staff); and
(c) you shall cooperate as reasonably requested by the Company in the
defense and settlement of any such claim or action; provided, however, that
you need not be required to incur or sustain any out-of-pocket costs.
If, however, the Company fails to undertake your defense within the time or
in the manner herein provided or thereafter abandons such defense or fails to
diligently prosecute the same, you shall thereafter be entitled to all benefits
of the foregoing indemnification provision, including the right to defend or
settle any such claim or
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action upon such terms as you shall select and to recover from the Company all
amounts expended by you to pay any judgment, award or settlement and all costs
and fees incurred by you in such defense, settlement or both.
SECTION 5 INTERPRETATION OF THIS AGREEMENT
5.1 TERMS DEFINED.
As used in this Agreement, the following terms have the respective meanings set
forth below or set forth in the Section of this Agreement or the Indenture
following such term:
AFFILIATE - at any time means a Person (other than a Subsidiary):
(a) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, the
Company;
(b) which beneficially owns or holds five percent (5%) or more of any
class of the Voting Stock of the Company; or
(c) five percent (5%) or more of the Voting Stock (or in the case of
a Person which is not a corporation, five percent (5%) or more of the
equity interest) of which is beneficially owned or held by the Company or a
Subsidiary;
at such time.
As used in this definition, "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
BOND PURCHASE AGREEMENT - this Agreement.
BONDABLE CAPACITY - Section 4.02A of the Indenture.
BONDS - Section 1.1 of this Agreement.
BUSINESS DAY - a day other than a Saturday, a Sunday or a day on which
commercial banks in Wisconsin are required or authorized to be closed (other
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than a general bank holiday or moratorium, in either case of longer than 4
calendar days).
CLOSING - Section 1.2 of this Agreement.
CLOSING DATE - Section 1.2 of this Agreement.
COLLATERAL - all of that Property subject to the Lien of the
Indenture.
COMPANY - the introductory sentence of this Agreement.
DEFAULT - Section 1.01 of the Indenture.
ENVIRONMENTAL PROTECTION LAW - means any federal, state, county,
regional or local law, statute, or regulation (including, without limitation,
(a) the Comprehensive Environmental Response, Compensation, and Liability Act of
1980; (b) the Resource Conservation and Recovery Act of 1976; (c) the Superfund
Amendments and Reauthorization Act of 1986; (d) the Federal Water Pollution
Control Act; and (e) the Clean Water Act of 1977; in each case, as amended from
time to time, and together with all rules and regulations promulgated in
connection therewith) enacted by any Governmental Authority in connection with
or relating to the protection or regulation of the environment, including,
without limitation, those laws, statutes, and regulations regulating the
disposal, removal, production, storing, refining, handling, transferring,
processing, or transporting of Hazardous Substances and any orders, decrees or
judgments issued by any court of competent jurisdiction in connection with any
of the foregoing.
ERISA - means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
ERISA AFFILIATE - means any corporation or trade or business that
(a) is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the IRC) as the Parent or the Company; or
(b) is under common control (within the meaning of Section 414(c) of
the IRC) with the Parent or the Company.
EVENT OF DEFAULT - Section 1.01 of the Indenture.
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EXCEPTED PROPERTY - the "Excepted Property" exceptions to the granting
clauses of the Indenture.
FIRST MORTGAGE BONDS - means and includes the Series A Bonds, the
Series B Bonds, the Bonds and each and every other bond, of whatever series,
issued pursuant to the Indenture.
FIRST SUPPLEMENTAL INDENTURE - Section 1.1 of this Agreement.
GOVERNMENTAL AUTHORITY - means and includes:
(a) the governments of:
(i) the United States of America and any State or other
political subdivision thereof; or
(ii) any jurisdiction in which the Company or the Subsidiary
conducts all or any part of its business;
(b) each public utilities commission or similar entity having
regulatory authority over the Company or the Subsidiary; and
(c) any other entity exercising executive, legislative, judicial,
regulatory or administrative functions of, or pertaining to, any such
government referred to in clauses (a) or (b) of this definition.
HAZARDOUS SUBSTANCES - means and includes any and all pollutants,
contaminants, toxic or hazardous wastes or any other substances that might pose
a hazard to health or safety, the removal of which may be required or the
generation, manufacture, refining, production, processing, treatment, storage,
handling, transportation, transfer, use, disposal, release, discharge, spillage,
seepage, or filtration of which is or shall be restricted, prohibited or
penalized by any applicable law (including, without limitation, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum and
petroleum-derived products).
INDENTURE - Section 1.1 of this Agreement.
INTEREST PAYMENT DATE - Section 1.01 of the Indenture.
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IRC - means the Internal Revenue Code of 1986, together with all rules
and regulations promulgated pursuant thereto, as amended from time to time.
IRS - means the Internal Revenue Service of the United States of
America and any successor agency.
LIEN - any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the security interest lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" includes reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting Property. For the purposes of this
Agreement, the Company or the Subsidiary will be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person for security purposes and such
retention or vesting will be deemed to be a Lien.
MAKE WHOLE AMOUNT DEFINITIONS - for the purposes of the optional
redemption provision in the Bonds, the following definitions shall apply. All
such definitions appear in the Third Supplemental Indenture, other than the
definition of Reinvestment Rate, which appears in the Second Supplemental
Indenture:
(a) Make Whole Amount means, at any time, with respect to any
prepayment of Series B Bonds being redeemed pursuant to Section 16.03(a)(1) or
the maturity of which has been accelerated, or any prepayment of Series C Bonds
being redeemed pursuant to Section 17.03A(1) or the maturity of which has been
accelerated, the excess, if any, of (a) the aggregate present value as of the
date of such prepayment of each dollar of principal being prepaid and the amount
of interest (exclusive of interest accrued to the date of prepayment) that would
have been payable in respect of such dollar of principal if such prepayment had
not been made, determined by discounting such amounts at the Reinvestment Rate
at such time from the respective dates on which they would have been payable;
over (b) 100% of the principal amount of the Outstanding Series B or Series C
Bonds, as applicable, being prepaid or being accelerated. If the Reinvestment
Rate is equal to or higher than
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9.09% in the case of the Series B Bonds, or 7.61% in the case of the Series C
Bonds, as applicable, the Make-Whole Amount shall be zero.
(b) Place of Payment means, (a) when used with respect to the Series
A Bonds (except as provided in clause (d) below), the place for payment of the
principal and interest upon the Series A Bonds designated in Section 3.01; (b)
when used with respect to the Series B Bonds (except as provided in clause (d)
below), the place for payment of the principal, Make-Whole Amount, if any, and
interest upon the Series B Bonds designated in Section 16.01; (c) when used with
respect to the Series C Bonds (except as provided in clause (d) below), the
place for payment of the principal, Make-Whole Amount, if any, and interest upon
the Series C Bonds designated in Section 17.01; and (d) with respect to any
exchange of Series A Bonds pursuant to Section 3.02 [Exchangeability], with
---------------
respect to any exchange of Series B Bonds pursuant to Section 16.02
[Exchangeability], with respect to any exchange of Series C Bonds pursuant to
---------------
Section 17.02 [Exchangeability] and with respect to Bonds of any other series
---------------
means a city or any political subdivision thereof in which the Company is by
this Indenture required to maintain an office or agency for the payment of the
principal of or interest on the Bonds of such series.
(c) Reinvestment Rate means, at any time, the sum of (a) one-half
percent (.50%), plus (b) the yield for United States government securities
having a maturity (rounded to the nearest month) corresponding to the Weighted
Average life to Maturity of the principal then being prepaid or accelerated as
reported on page "USD" of the Bloomberg Financial Markets Services Screen (or,
if not available, any other nationally recognized trading screen reporting on-
line intraday trading in United States government securities) at 11:00 A.M.
(Chicago time) on the second business day prior to the date of such prepayment
or acceleration, or in the event that no such nationally recognized trading
screen reporting on-line intraday trading in United States government securities
is available, the arithmetic mean of the yields under the respective headings
"This Week" and "Last Week" published in the Statistical Release at such time
under the caption "Treasury Constant Maturities" for the maturity (rounded to
the nearest month) corresponding to the Weighted Average Life to Maturity of the
principal being prepaid. If no maturity exactly corresponds to such Weighted
Average Life to Maturity, yields for the published maturity next longer than the
Weighted Average Life to Maturity and for the published maturity next shorter
than the Weighted Average Life to Maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
from such yields on a straight-line basis, rounding in each of such relevant
periods to the nearest month. For the purposes of calculating the Reinvestment
Rate, the most recent
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Statistical Release published prior to the date of determination of the Make-
Whole Amount shall be used.
(d) Remaining Dollar-Years of any principal amount of Series B Bonds
or Series C Bonds, as applicable, at any time shall mean the amount obtained by
(a) muliplying, for each scheduled payment date, (i) the remainder of (1) the
aggregate amount of principal amount of the Series B Bonds or Series C Bonds, as
applicable, that would have become due on such scheduled payment date if such
prepayment or acceleration had not been made; minus (2) the aggregate amount of
-----
principal on the Series B Bonds or Series C Bonds, as applicable, scheduled to
become due on such date after giving effect to such prepayment or acceleration;
by (ii) the number of years (calculated to the nearest one-twelfth) which will
elapse between the date of determination and such scheduled payment date, and
(b) totaling the products obtained in (a).
(e) Statistical Release means, at any time, the most recently
published statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Federal Reserve System and which
establishes yields on actively traded United States government securities
adjusted to constant maturities or, if such statistical release is not published
at the time of any determination hereunder, then such other reasonably
comparable index which shall be designated by the Holders of 66-2/3% in
aggregate principal amount of the Series B Bonds or Series C Bonds, as
applicable, then Outstanding.
(f) Weighted Average Life to Maturity of the principal amount of
Series B Bonds or Series C Bonds, as applicable, being prepaid or accelerated
shall mean, as of the time of any determination thereof, the number of years
obtained by dividing the then Remaining Dollar-Years of such principal amount by
the aggregate amount of such principal.
MULTIEMPLOYER PENSION PLAN - means any multiemployer plan (as defined
in Section 3(37) of ERISA), subject to Title IV of ERISA, in respect of which
the Company or any ERISA Affiliate is an "employer" (as such term is defined in
Section 3(5) of ERISA).
MULTIPLE EMPLOYER PENSION PLAN - means any Pension Plan (other than a
Multiemployer Pension Plan), subject to Title IV of ERISA, to which the Company
or any ERISA Affiliate and an employer (as such term is defined in Section 3(5)
of ERISA) other than an ERISA Affiliate or the Company contribute.
32
<PAGE>
NET EARNINGS FOR INTEREST - Section 4.02A of the Indenture.
OUTSTANDING - Section 1.01 of the Indenture; provided, however, that
for purposes of this Agreement only (and not the Indenture, except to the extent
provided therein), First Mortgage Bonds held or owned by the Company, any
Subsidiary or any Affiliate shall not be deemed to be Outstanding.
PARENT - Southwest Water Company, a Delaware corporation, which owns
one hundred percent (100%) of the capital stock of the Company.
PBGC - means the Pension Benefit Guaranty Corporation and any
successor corporation or governmental agency.
PENSION PLAN - means, at any time, any "employee pension benefit plan"
(as such term is defined in Section 3(2) of ERISA), subject to Title IV of
ERISA, maintained at such time by the Company or any ERISA Affiliate for
employees of the Company or such ERISA Affiliate, excluding any Multiemployer
Pension Plan, but including, without limitation any Multiple Employer Pension
Plan.
PERMITTED ENCUMBRANCES - Section 1.01 of the Indenture.
PERSON - an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
PLACEMENT MEMORANDUM - Section 2.3 of this Agreement.
PROPERTY - any interest in any kind of property or asset, whether
real, personal or mixed, and whether tangible or intangible.
PUC - the California Public Utilities Commission.
PUC ORDER - the order of the PUC, dated October 9, 1996, (a)
authorizing the Company to issue and sell the Bonds, (b) exempting the issuance
and sale of the Bonds from the competitive bidding rule set forth in Resolution
F-616 of the PUC, and (c) authorizing the Company to execute and deliver the
Third Supplemental Indenture.
PURCHASER - means the Person listed as purchaser of the Bonds on Annex
1 hereto.
33
<PAGE>
REQUIRED HOLDERS - at any time means the holders of 66 2/3% or more in
aggregate principal amount of Bonds Outstanding at such time.
SECOND SUPPLEMENTAL INDENTURE - Section 1.1 of this Agreement.
SECURITIES ACT - the Securities Act of 1933, as such act may be
amended from time to time.
SECURITY - has the same meaning as in Section 2(l) of the Securities
Act of 1933, as amended.
SECOND SUPPLEMENTAL INDENTURE - Section 1.1 of this Agreement.
SERIES A BONDS - Section 3.01 of the Indenture.
SERIES B BONDS - Section 3 of the Second Supplemental Indenture.
SUBSIDIARY - a corporation of which the Company owns, directly or
indirectly, more than fifty percent (50%) of the Voting Stock.
THIRD SUPPLEMENTAL INDENTURE - Section 1.1 of this Agreement.
TRANSACTIONS - means and includes (a) the execution and delivery by
the Company of the Bond Purchase Agreement and the Third Supplemental Indenture;
(b) the execution, delivery, issue and sale of the Series C Bonds; and (c)
compliance by the Company with the terms of the Series C Bonds, the Indenture
and the Bond Purchase Agreement.
TRUSTEE - Section 1.1 of this Agreement.
VOTING STOCK - capital 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).
5.2 ACCOUNTING PRINCIPLES.
All accounting terms not otherwise defined herein have the meanings assigned to
them, and all computations herein provided for shall be made in accordance with
generally accepted accounting principles at the time in effect, to the extent
applicable, except where such principles are inconsistent with the requirements
of this Agreement. In determining accounting principles, the Company shall
conform to generally
34
<PAGE>
accepted accounting principles at the time in effect, unless it is required to
conform to any other order, rule or regulation of any Governmental Authority
having jurisdiction over the Company.
5.3 DIRECTLY OR INDIRECTLY.
Where any provision in this Agreement refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision will be
applicable whether such action is taken directly or indirectly by such Person,
including actions taken by or on behalf of any partnership in which such Person
is a general partner.
5.4 GOVERNING LAW.
THIS AGREEMENT AND THE BONDS WILL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, INTERNAL CALIFORNIA LAW, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
5.5 SECTION HEADINGS, TABLE OF CONTENTS AND CONSTRUCTION.
The titles of the Sections and the Table of Contents appear as a matter of
convenience only, do not constitute a part of this Agreement and will not affect
the construction hereof. Each covenant contained in this Agreement will be
construed (absent an express contrary provision herein) as being independent of
each other covenant contained herein, and compliance with any one covenant will
not (absent such an express contrary provision) be deemed to excuse compliance
with one or more other covenants.
SECTION 6 MISCELLANEOUS
6.1 NOTICES.
(a) METHOD; ADDRESS. All communications under this Agreement or
under the Bonds will be in writing, will be delivered (i) personally; (ii)
by overnight courier; or (iii) sent by facsimile transmission,
acknowledgment received, with a copy sent by first class mail; in each
case, delivery or facsimile charges prepaid, and will be addressed:
(i) If to the Company:
Suburban Water Systems
1211 East Center Court Drive
35
<PAGE>
Covina, California 91724-3603
Attention: Chief Financial Officer
FAX: (818) 331-6363
or at such other address as the Company shall have furnished in
writing to the Trustee and all holders of the Bonds at the time
Outstanding:
(ii) if to any of the holders of the Bonds:
(A) if such holder is the Purchaser, at its address set
forth on Annex 1 hereto, and further including any parties
referred to on such Annex I that are required to receive notices
in addition to such holder of the Bonds, or to any such party at
such other address as such party may designate by notice duly
given to the Company and to the Trustee in the manner provided in
this Section 6.1 (which other address shall be entered in the
Bond register); and
(B) If such holders are not the Purchaser, at their
respective addresses set forth in the register for the
registration and transfer of Bonds maintained pursuant to Section
11.02 of the Indenture, or to any such party at such other
address as such party may designate by notice duly given in the
manner provided in this Section 6.1 to the Company and to the
Trustee (which other address shall be entered in such register).
(b) WHEN GIVEN. Any communication so addressed and delivered shall
be deemed received, in the case of personal delivery, when actually
received; in the case of delivery by overnight courier, on the Business Day
following transmission; and in the case of facsimile transmission, on the
date of acknowledgment of transmission, if a Business Day, and, if not a
Business Day, on the next succeeding Business Day.
6.2 AMENDMENT AND WAIVER.
(a) REQUIREMENTS. This Agreement may be amended, and the observance
of any term hereof may be waived, with (and only with) the written consent
of the Company and the Required Holders; provided that no such amendment or
waiver of any of the provisions of Section 1, Section 3 or this
36
<PAGE>
Section 6.2, or any definition relating thereto, shall be effective as to
any holder of Bonds unless consented to by such holder in writing.
(b) SOLICITATION OF BONDHOLDERS.
(i) SOLICITATION. The Company shall not:
(A) solicit, request or negotiate for or with respect to
any proposed waiver or amendment of any of the provisions hereof
or the Bonds; or
(B) solicit, request or negotiate for or with respect to
any proposed waiver or amendment of any of the provisions of the
Indenture, which proposed waiver or amendment would, pursuant to
the terms of the Indenture, require the consent of any holder of
a Bond;
unless, in each case, each holder of the Bonds (irrespective of the
amount of Bonds then owned by it) shall be informed thereof by the
Company with sufficient information to enable it to make an informed
decision with respect thereto. Executed or true and correct copies of
any waiver or consent effected pursuant to the provisions of this
Section 6.2 or Article XIII of the Indenture shall be delivered by the
Company to each holder of Outstanding Bonds forthwith following the
date on which the same shall have been executed and delivered by all
holders of Outstanding Bonds (if any) required to consent or agree to
such waiver or consent.
(ii) PAYMENT. The Company shall not, directly or indirectly, pay
or cause to be paid any remuneration, whether by way of supplemental
or additional interest, fee or otherwise, or grant any security, to
any holder of First Mortgage Bonds as consideration for or as an
inducement to the entering into by any holder of First Mortgage Bonds
of any waiver or amendment of any of the terms and provisions hereof,
of any other purchase agreement pursuant to which any other First
Mortgage Bonds were sold, of any First Mortgage Bond or of the
Indenture unless such remuneration is concurrently paid, security is
concurrently granted, or offer is concurrently made on the same terms,
ratably to the holders of all Bonds then Outstanding.
37
<PAGE>
(iii) SCOPE OF CONSENT. Any consent made pursuant to this
section 6.2 by a holder of Bonds that has transferred or has agreed to
transfer its Bonds to the Company, any Subsidiary or any Affiliate and
has provided or has agreed to provide such written consent as a
condition to such transfer shall be void and of no force and effect
except solely as to such holder, and any amendments effected or
waivers granted or to be effected or granted that would not have been
or would not be so effected or granted but for such consent (and the
consents of all other holders of Bonds that were acquired under the
same or similar conditions) shall be void and of no force and effect,
retroactive to the date such amendment or waiver initially took or
takes effect, except solely as to such holder.
(iv) OTHER OFFERS TO REPURCHASE. The Company shall not make any
offer to repurchase, exchange for any other security or otherwise
acquire for value any First Mortgage Bond (whether or not the
acceptance of such offer is conditioned upon the giving by any holder
of any First Mortgage Bond of any waiver or consent) unless such offer
is concurrently made on the same terms, ratably, to the holders of all
Bonds then Outstanding.
The foregoing provisions of this Section 6.2(b) shall not prevent or
preclude:
(A) payment by the Company of attorneys' fees and expenses
(including, without limitation, the fees of counsel who are employees of a
holder of First Mortgage Bonds, at the rate or rates, if any, not to exceed
the rate or rates then customarily charged by such holder) or other out-of-
pocket costs incurred by a holder of First Mortgage Bonds in connection
with any such consent, waiver or amendment where such payment is required
pursuant to a Purchase Agreement, any First Mortgage Bond or the Indenture;
(B) the issuance and sale by the Company of any series of First
Mortgage Bonds with an interest rate, a prepayment premium, prepayment
terms or other business or financial terms which are different from the
business or financial terms of the Bonds, so long as such issuance and sale
and all such terms are in compliance with all applicable provisions of the
Indenture concerning issuance of additional series of First Mortgage Bonds;
38
<PAGE>
(C) the redemption of any First Mortgage Bonds pursuant to their
respective terms so long as such redemption is not conditioned upon the
giving by any holder of any First Mortgage Bond of any waiver or consent;
or
(D) the payment or giving by the Company of consideration to all
holders of First Mortgage Bonds of any series in exchange for the waiver,
elimination or reduction of a right contained only in the First Mortgage
Bonds of such series, so long as the payment or giving of such
consideration does not violate any provision of the Indenture, and so long
as, immediately after giving effect to the payment of such consideration
and such waiver, elimination or reduction, no Event of Default would exist;
nor shall any provision of this Section 6.2(b) entitle the holders of the
Bonds to receive payments or other consideration equal or equivalent to the
payments or other consideration made or given pursuant to clauses (A), (C)
or (D), or to receive any right or benefit afforded to the holders of any
other series of First Mortgage Bonds pursuant to clause (B) above, to which
the holders of the Bonds would not otherwise be entitled.
(c) BINDING EFFECT. Except as provided in Section 6.2(b) hereof, any
amendment or waiver consented to as provided in this Section 6.2 shall
apply equally to all holders of Bonds and shall be binding upon them and
upon each future holder of any Bond and upon the Company whether or not
such Bond shall have been marked to indicate such amendment or waiver. No
such amendment or waiver shall extend to or affect any obligation,
covenant, agreement, Default or Event of Default not expressly amended or
waived or impair any right consequent thereon.
6.3 REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed; (b) documents received by you at the closing of your purchase of the
Bonds (except the Bonds themselves); and (c) financial statements, certificates
and other information previously or hereafter furnished to you; may be
reproduced by you by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and you may destroy any original
document so reproduced. The Company agrees and stipulates that any such
reproduction will be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by you in the regular
course
39
<PAGE>
of business) and that any enlargement, facsimile or further reproduction of such
reproduction will likewise be admissible in evidence.
6.4 SURVIVAL.
All warranties, representations, certifications and covenants made by you in
Section 1.3 of this Agreement, and made by the Company or by the Parent and
contained in this Agreement or in any certificate or other instrument executed
and delivered by the Company or the Parent, as the case may be, pursuant to this
Agreement in connection with the Closing, will be considered to have been relied
upon by you (if made by the Company or the Parent) or the Company (if made by
you), will be deemed made on and as of the Closing Date and will survive the
delivery to you of the Bonds and the payment by you of the purchase price,
regardless of any investigation made by or on behalf of you or the Company, as
the case may be. All statements in any such certificate or instrument made by
the Company or the Parent will constitute warranties and representations by the
Person executing such certificate or instrument.
6.5 SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon the successors
and assigns of each of the parties. The provisions of this Agreement are
intended to be for the benefit of all holders, from time to time, of Bonds, and
will be enforceable by any such holder, whether or not an express assignment to
such holder of rights under this Agreement has been made by you or your
successor or assign.
6.6 DUPLICATE ORIGINALS; EXECUTION IN COUNTERPARTS.
Two or more duplicate originals of this Agreement may be signed by the parties,
each of which will be an original but all of which together will constitute one
and the same instrument. This Agreement may be executed in one or more
counterparts and will be effective when at least one counterpart has been
executed by each party hereto, and each set of counterparts which, collectively,
show execution by each party hereto will constitute one duplicate original.
6.7 CONSTRUCTION - REPRESENTATIONS AND WARRANTIES.
The Parent is entering into this Agreement for the sole purpose of providing the
representations and warranties set forth in Sections 2.3(a), 2.4(a), 2.12(a) and
(b), and, to the extent such representations and warranties relate to the
Parent, Section 2.10 and Section 2.18, and the Parent shall not be liable in
connection with any other Sections of this Agreement other than Section 6.4 as
it relates to the above-referenced sections.
6.8 INCORPORATION BY REFERENCE.
40
<PAGE>
All exhibits and annexes attached to this Agreement are hereby incorporated into
and made a part of this Agreement by this reference.
THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
THE NEXT PAGE IS THE SIGNATURE PAGE
41
<PAGE>
If this Agreement is satisfactory to you, please so indicate by signing the
acceptance at the foot of a counterpart of this Agreement and return such
counterpart to the Company, whereupon this Agreement will become binding between
us in accordance with its terms.
Very truly yours,
SUBURBAN WATER SYSTEMS, a California corporation
By /s/ Daniel N. Evans By /s/ Michael O. Quinn
Title: V.P. Finance and CFO Title: President
The undersigned hereby joins in the foregoing Agreement for the sole
purpose described in Section 6.7 and to provide the representations and
warranties which are ascribed to Southwest Water Company by the provisions of
Section 2 and such section.
SOUTHWEST WATER COMPANY, a Delaware corporation
By /s/ Peter J. Moerbeek By /s/ Anton C. Carnier
Title: V.P. Finance and CFO Title: President
Agreed to and Accepted: AID ASSOCIATION FOR LUTHERANS
By /s/ Alan D. Onstad By /s/ James Abitz
Title: Assistant Vice President - Title: Vice President - Securities
Securities
SIGNATURE PAGE to the BOND PURCHASE AGREEMENT,
dated as of October 21, 1996,
among SUBURBAN WATER SYSTEMS, SOUTHWEST WATER COMPANY and
AID ASSOCIATION FOR LUTHERANS
42
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 PURCHASE AND SALE OF BONDS.................................. 1
1.1 Issue of Bonds.............................................. 1
1.2 The Closing................................................. 2
1.3 Certain Purchaser Representations........................... 3
1.4 Failure To Deliver; Failure of Conditions................... 3
1.5 Expenses.................................................... 3
SECTION 2 WARRANTIES AND REPRESENTATIONS.............................. 4
2.1 Subsidiary.................................................. 5
2.2 Corporate Organization and Authority........................ 5
2.3 Business, Property and Indebtedness......................... 5
2.4 Financial Statements; Material Adverse Change............... 6
2.5 Full Disclosure............................................. 6
2.6 Pending Litigation.......................................... 7
2.7 Title to Properties......................................... 7
2.8 Patents, Trademarks, Licenses, etc.......................... 7
2.9 Authorization, Execution, Delivery and Enforceability....... 8
2.10 No Defaults................................................. 8
2.11 Governmental Consent........................................ 9
2.12 Taxes....................................................... 9
2.13 Use of Proceeds............................................. 9
2.14 Public Utility Holding Company Act.......................... 10
2.15 Private Offering............................................ 10
2.16 Compliance with Law......................................... 10
2.17 Restrictions on Company and Subsidiary...................... 10
2.18 ERISA....................................................... 11
2.19 Investment Company Act...................................... 13
2.20 Environmental Compliance.................................... 13
2.21 Private Placement Number.................................... 14
SECTION 3 CLOSING CONDITIONS.......................................... 14
3.1 Opinions of Counsel......................................... 14
3.2 Warranties and Representations True; No Prohibited Action... 14
3.3 Compliance with This Agreement.............................. 14
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
<TABLE> ----
<S> <C>
3.4 Officers' Certificates...................................... 15
3.5 Legality.................................................... 15
3.6 Regulatory Approvals........................................ 15
3.7 Third Supplemental Indenture................................ 15
3.8 Liens Upon Collateral....................................... 15
3.9 Title Insurance............................................. 15
3.10 Indenture Conditions........................................ 16
3.11 Proceedings Satisfactory.................................... 16
SECTION 4 AGREEMENTS OF THE COMPANY................................... 16
4.1 Financial and Business Information.......................... 16
4.2 Officers' Certificates...................................... 19
4.3 Accountants' Certificates................................... 19
4.4 Inspection.................................................. 19
4.5 Report to NAIC.............................................. 20
4.6 Hazardous Substances Indemnification........................ 20
SECTION 5 INTERPRETATION OF THIS AGREEMENT............................ 21
5.1 Terms Defined............................................... 21
5.2 Accounting Principles....................................... 27
5.3 Directly or Indirectly...................................... 27
5.4 Governing Law............................................... 27
5.5 Section Headings, Table of Contents and Construction........ 27
SECTION 6 MISCELLANEOUS............................................... 28
6.1 Notices..................................................... 28
6.2 Amendment and Waiver........................................ 29
6.3 Reproduction of Documents................................... 31
6.4 Survival.................................................... 31
6.5 Successors and Assigns...................................... 31
6.6 Duplicate Originals; Execution In Counterparts.............. 31
6.7 Construction - Representations and Warranties............... 32
6.8 Incorporation by Reference.................................. 32
Annex 1 - Information as to Purchaser
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annex 2 - Payment Instructions at Closing
Annex 3 - Information as to Company
Annex 4 - Litigation
Exhibit A - First Mortgage Bond, Series C 7.61%, Due October 20, 2006
Exhibit B1 - Form of Company Counsel's Closing Opinion
Exhibit B2 - Form of Company PUC Counsel's Opinion
Exhibit B3 - Form of Trustee Counsel's Closing Opinion
Exhibit C1 - Form of Officers' Certificate of the Company
Exhibit C2 - Form of Officers' Certificate of the Parent
Exhibit D1 - Form of Secretary's Certificate of the Company
Exhibit D2 - Form of Secretary's Certificate of the Parent
Exhibit E - Form of Third Supplemental Indenture
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
ANNEX 1
INFORMATION AS TO PURCHASER
================================================================================
<S> <C>
Purchaser Name AID ASSOCIATION FOR LUTHERANS
- --------------------------------------------------------------------------------
Name in Which Bond is AID ASSOCIATION FOR LUTHERANS
Registered
- --------------------------------------------------------------------------------
Bond Registration Number, C-1
Principal Amount $8,000,000.00
- --------------------------------------------------------------------------------
Payments on Account of
Bond:
Federal Funds Wire Transfer (immediately available
Method funds)
Account Information
Citibank, NYC/CUST.
ABA#021-00-089
DDA#36112805
Attn: John Colavito
Ref. Account # 846647
Aid Association for Lutherans Custody Account
================================================================================
================================================================================
Accompanying Information: Name of Company: Suburban Water Systems
Description of Security: First Mortgage Bonds,
Series C
7.61%, due October 20,2006
Security Number (CUSIP): 864577 B@ 9
Payable Date:
Application (as among principal, premium and
interest) of the payment being made.
================================================================================
</TABLE>
ANNEX 1
<PAGE>
ANNEX 1
INFORMATION AS TO PURCHASER (CONT.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Address for All Notices and Investment Department
Communications: Aid Association for Lutherans
222 West College Avenue
Appleton, Wisconsin 54919
All Payment Notices to the above
address and: Income Collection and Disbursement
Ref. Account #846647
Aid Association for Lutherans Custody Account
Citicorp Services Inc.
1410 N. Westshore Blvd., 4th Floor
Tampa, FL 33607
- --------------------------------------------------------------------------------
Deliver Bonds To: Bradley Ranch
Ref. Account #846647
Aid Association for Lutherans Custody Account
Citibank
Level C
20 Exchange Place
New York, New York 10043
- --------------------------------------------------------------------------------
Tax Identification Number 39-0123480
================================================================================
</TABLE>
Annex 1-2
<PAGE>
ANNEX 2
PAYMENT INSTRUCTIONS
Make payment of the purchase price by federal funds wire transfer in
immediately available funds to:
Wells Fargo Bank, National Association
ABA #121000248
Flair Industrial Park Regional
Commercial Banking Office
9000 Flair Drive
Suite 100
El Monte, California 91731
Account of Suburban Water
Systems Account No. 4919-014608
Annex 2-1
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY
Part I: (a)
Subsidiaries.
<TABLE>
<CAPTION>
Jurisdiction Percent
Name of Incorporation Owned
- ---- ---------------- -----
<S> <C> <C>
*Water Suppliers Mobile California 100%
Communication Service
</TABLE>
(b) Affiliates
<TABLE>
<CAPTION>
Jurisdiction Percent Owned;
Name of Incorporation Owned by
- ---- ---------------- --------
<S> <C> <C>
*Southwest Water Company Delaware N/A
*ECO Resources, Inc. Texas 100% by Southwest Water Company
*Southwest Environmental Texas 100% by ECO Resources, Inc.
Laboratories, Inc.
*SOCI, Inc. Delaware 100% by Southwest Water Company
Covina Irrigating Company California 12.3% by the Company; 0.9% by
SW Resource Management Company
California Domestic Water California 32.4% by the Company
Company
*New Mexico Utilities, Inc. New Mexico 100% by Southwest Water Company
*SW Resource Management Delaware 100% by Southwest Water Company
Company
</TABLE>
Annex 3-1
<PAGE>
<TABLE>
<S> <C> <C>
*SW Operating Services Delaware 100% by Southwest Water Company
*Southern Municipal Texas 100% by ECO Resources, Inc.
Services, Inc.
</TABLE>
Annex 3-2
<PAGE>
Part II: Indebtedness for Borrowed Money
<TABLE>
<CAPTION>
Description Pre-Closing Post-Closing
- ----------- ----------- ------------
<S> <C> <C>
First Mortgage Bonds, Series A 8.93%, $ 9,600,000.00 $ 9,600,000
Due October 1, 2006
First Mortgage Bonds, Series B 9.09%, 8,000,000.00 8,000,000
Due February 20, 2022
First Mortgage Bonds, Series C 7.61%, - 0 - 8,000,000
Due October 20, 2006
Lines of Credit with Wells Fargo Bank 8,000,000.00 (1) - 0 -
----------------- --------------
TOTAL 25,600,000.00 (1) 25,600,000
</TABLE>
(1) Proceeds of the Series C Bonds will be used in part to retire debt to
Wells Fargo Bank.
Part III: ERISA
(A) ERISA Affiliates
Each of the Persons indicated with an asterisk (*) In Parts 1 (A) and
1 (B) of this Annex 3 are ERISA Affiliates.
(B) Multiemployer Plans and Multiple Employer Pension Plans
1. The Utility Employees Retirement Plan
2. The Profit-Sharing 401 (k) Plan for Southwest Water Company's Related
Companies
Part IV: Environmental Disclosure
Neither the Company nor its Subsidiary has received any notice,
summons, citation, directive, letter or communication from any
Annex 3-3
<PAGE>
Governmental Authority concerning any environmental matter of the types
described in Section 2.20. However, the Company advises you of the
following:
1. In late 1979, volatile organic compounds ("VOC's") were first
discovered in the Main San Gabriel Basin (the "Main Basin"). Subsequently,
underground water sampling resulted in the discovery of four large areas of
ground water VOC contamination. The areas include the Company's Bartolo
Well Field site, which contains four of the Company's producing wells and
from which the Company produces approximately 25% of its total water
production. Concurrently, the Company's wells do not contain VOCs in excess
of MCLs.
The Environmental Protection Agency ("EPA") has conducted
numerous studies of underground water in the Main Basin (including the
Bartolo Well Field). In 1984, the EPA named the Main Basin as a Superfund
site and named as potentially responsible parties ("PRPs") several large
industrial companies that allegedly caused the contamination. The Company's
facilities were not named as sources of VOCs or other contamination in any
portion of the Main Basin (i.e., the Company's operations do not discharge
VOCs into the ground or groundwater). However, some officials have
suggested that the Main Basin water producers may have clean-up liability
with respect to contaminants in the Main Basin under applicable
environmental statutes on various theories by virtue of their pumping
operations. It is expected that the EPA will continue to identify sources
of contamination in order to establish legal responsibility for clean-up
costs. Currently, neither the EPA nor any governmental agency has targeted
the Company or other water producers as PRPs.
Certain industrial companies identified as PRPs are working with
their water producers to build a $55 million water treatment facility in
Baldwin Park, California. An environmental impact report is currently being
reviewed for this project and, once clearance has been obtained,
construction of the treatment unit may begin. The treatment plant, if
constructed, would treat 19 million gallons per day of contaminated
groundwater. Currently, funding for this treatment facility would not be
provided directly by the Company.
Annex 3-4
<PAGE>
To date, water produced from the Bartolo Well Field and other
wells maintained by the Company in the Main Basin meets all applicable
governmental requirements. The treatment proposed by the EPA, and other
measures taken by or available to the Company, are intended to ensure that
the Company continues to have an adequate supply of potable water which
meets all applicable governmental standards. While technology exists to
remove VOC contaminants from basin water, there can be no assurance that
either (i) such technology will in the future be adequate to reduce the
amounts of VOCs and other contaminants in water produced by the Company in
the Main Basin to acceptable levels or (ii) the costs of such removal will
be fully recoverable from the Company's customers. To date, the Company has
been permitted to recover from its ratepayers all expenses associated with
water quality maintenance.
During 1992, a statute was passed by the State of California
establishing a Water Quality Authority (the "WQA") to oversee clean-up of
water in the Main Basin. Assessments for this purpose are levied against
those who own prescriptive pumping rights in the Main Basin, including the
Company. The amount of the Company's annual assessment is approximately
$348,000. Pursuant to a contract with the WQA, the Company will operate a
WQA-constructed water treatment facility (Big Dalton Treatment Facility)
and the third-party well to which the facility is connected. This facility
will have the capacity to treat approximately 1.3 billion gallons of water
annually; the treated water will be distributed to the Company's customers.
There can be no assurance that governmental authorities will not
seek in the future to recover clean-up costs from the Company or that
source polluters will not seek contribution from water producers for clean-
up costs which they may be required to pay. If the Company were required to
pay any such clean-up costs, the Company would seek to recover such costs,
and costs incurred in removing contaminants from water produced, through
increased rates to its customers as has been permitted by the PUC in the
past. Moreover, there are over 100 water producers in the Main Basin, and
the Company believes that the Company's share of any clean-up costs
assessed against the producers would only be a small fraction of the total.
Due to the potential recovery of the clean-up costs through higher rates,
such costs are not expected to have a material impact on the Company's
financial condition or results of operation.
Annex 3-5
<PAGE>
2. In 1987, the Company elected to reorganize to provide for
independent district operations. As a result, the Whittier, La Mirada and
San Jose Districts were established and separate district offices were
established separate from the Company headquarters then located in La
Puente. Subsequently, the main office operations of the Company and the
Parent were removed to their present locations. At the time of the
reorganization, approximately nine acres of property behind the Company's
main office facilities were deemed no longer used and useful and the
Company discontinued the use of its warehouse and garage facilities located
on those nine acres. In that connection, the Company elected to remove the
gasoline pumps and tanks which had been maintained adjacent to the garage
facilities. When such tanks were removed, gasoline contamination was found
in the soil, which contamination was the result of leaking underground
tanks. The Company has removed the contaminated soils and received
clearance from local governmental authorities to refill the hole created by
removal of the tanks. Such refilling operation has been completed.
To the knowledge of the Company, removal of such tanks, removal of
contaminated soil and the other remedial work conducted by the Company with
respect to this project were all conducted in compliance with all
governmental requirements applicable thereto. So far as the Company is
aware, all final clearances and approvals have been issued by relevant
governmental authorities in normal course and without imposition of any
additional obligations upon the Company. The Company believes that it has
no further obligations or liability as the result of such project or the
leakage from such underground tanks.
3. On October 19, 1990, two regulators on a water distribution plant
operated by the Company in the City of La Mirada apparently leaked or
failed with a resulting escape of chlorine gas. The Company's distribution
plant is located in the vicinity of a manufacturing plant operated by
Western Wheel. A number of Western Wheel employees contended that they were
affected by the chlorine gas, resulting in claims by approximately 60
employees against Sentry Insurance, the worker's compensation carrier for
Western Wheel.
Ultimately, three lawsuits were filed against the Company. Two
lawsuits were brought by, respectively, 5 Western Wheel employees and
Annex 3-6
<PAGE>
29 Western Wheel employees and spouses. These actions claimed substantial
damages according to proof. The third lawsuit was brought by Sentry to seek
reimbursement for amounts paid for worker's compensation claims paid to
Western Wheel employees. All such actions were settled by the Company and
the several plaintiffs. The Company paid substantial settlement sums and
received full releases from all plaintiffs. The Company made a demand upon
its primary liability insurance carrier for defense and indemnity, which
demand was ultimately denied. A subsequent action by the company against
such carrier seeking reimbursement of the settlement amounts paid by the
Company and defense costs incurred was unsuccessful.
No governmental agency or authority has notified the Company of any
alleged environmental violation by the Company resulting from the leak
which gave rise to this litigation.
Annex 3-7
<PAGE>
EXHIBIT A
FORM OF FIRST MORTGAGE BOND, SERIES C 7.61%, DUE OCTOBER 20, 2006
SUBURBAN WATER SYSTEMS
FIRST MORTGAGE BOND
Series C 7.61%, Due October 20, 2006
$8,000,000.00
No. C-1
PPN No. 864577 B@ 9
Los Angeles, California
SUBURBAN WATER SYSTEMS, a corporation organized under the laws of the State
of California (hereinafter called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to AID ASSOCIATION FOR LUTHERANS, or registered
assigns, on October 20, 2006, the sum of EIGHT MILLION DOLLARS ($8,000,000.00)
(or so much thereof as shall not have been paid upon prior redemption) and to
pay interest (computed on the basis of a 360-day year of twelve 30-day months)
thereon from the later of the initial issuance of the series of Bonds of which
this Bond is a part, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semiannually on the 20th day of
each April and October in each year commencing on the first Interest Payment
Date next succeeding the date of this Bond until the principal amount thereof
will be due and payable; provided that interest on any overdue principal,
overdue Redemption Price, and (to the extent permitted by applicable law)
overdue installments of interest, shall accrue at a rate equal to the lesser of
(a) the highest rate allowed by applicable law, or (b) 8.61% per annum. In no
event shall the interest payable on this Bond (including any interest on overdue
interest or any overdue Redemption Price) exceed the maximum amount which the
Holder hereof may legally collect under the then applicable usury law. In the
event that it is hereinafter determined by a court of competent Jurisdiction
that the interest payable under this Bond (including any interest on overdue
interest or any overdue Redemption Price) is in excess of the amount which the
<PAGE>
Holder hereof may legally collect under the then applicable usury law, then (i)
all interest actually paid (including any interest on overdue interest or any
overdue Redemption Price) in excess of the maximum amount legally collectible by
such Holder shall be applied to the payment of principal of this Bond or, if all
principal shall previously have been paid, promptly repaid by such Holder to the
Company and (ii) interest on this Bond (including any interest on overdue
interest or any overdue Redemption Price) subsequent to the date of such
determination shall be reduced to the maximum amount which it is determined that
the Holder may collect under the then applicable usury law.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in said Indenture, be paid to the Person
(the "Registered Holder") in whose name this Bond (or one or more Predecessor
Bonds, as defined in said Indenture) is registered at the close of business on
the Regular Record Date for such interest, which shall be the fifteenth (15th)
day (whether or not a Business Day) of the calendar month next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly
provided for shall forthwith cease to be payable to the Registered Holder on
such Regular Record Date, and may be paid to the Person in whose name this Bond
(or one or more Predecessor Bonds) is registered at the close of business on a
Special Record Date to be fixed by the Trustee for the payment of such defaulted
interest, notice whereof being given to Bondholders not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Bonds of this series shall be listed, if any, and upon such notice as
shall be required by such exchange, all as more fully provided in said
Indenture.
The principal and the Redemption Price of, and the interest on, this Bond
shall be payable by crediting, before 12:00 noon, New York time, by federal
funds bank wire transfer, the account of the Registered Holder hereof in any
bank in the United States as may be designated in a written notice delivered to
the Company by such Registered Holder, or in such other manner as may be
directed, or to such other address in the United States as may be designated, in
writing delivered to the Company, by such Registered Holder. All such payments
shall be made in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts.
A-2
<PAGE>
If any payment due on, or with respect to, this Bond shall fall due on a
day other than a Business Day, then such payment shall be made on the first
Business Day following the day on which such payment shall have so fallen due;
provided that if all or any portion of such payment shall consist of a payment
of interest, for purposes of calculating such interest, such payment shall not
be deemed to have been originally due on such first following Business Day, and
such interest shall accrue and be payable only to the Interest Payment Date.
This Bond is one of a duly authorized issue of Bonds of the Company
designated as its "First Mortgage Bonds" (herein called the "Bonds"), issued and
to be issued in one or more series under, and all equally and ratably secured
by, an Indenture of Mortgage and Deed of Trust, dated October 1, 1986, between
the Company and Security Pacific National Bank, as Trustee, as amended and
supplemented by (i) that certain First Amendment and Supplement to Indenture of
Mortgage dated October 1, 1986, dated as of February 7, 1990, between the
Company and Security Pacific National Bank, as Trustee, (ii) that certain Second
Amendment and Supplement to Indenture of Mortgage Dated October 1, 1986, dated
as of January 24, 1992, between the Company and Security Pacific National Bank,
as Trustee, and (iii) that certain Third Amendment and Supplement to Indenture
of Mortgage Dated October 1, 1986, dated as of October 9, 1996, between the
Company and First Trust of California, National Association, a national banking
association, as Trustee (herein called the "Trustee," which term includes any
successor Trustee), (such Indenture of Mortgage and Deed of Trust, as so amended
to and including the date hereof, being herein called the "Indenture") to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the properties thereby mortgaged, pledged and assigned, the
nature and extent of the security, the respective rights thereunder of the
Holders of the Bonds, the Trustee and the Company and the terms upon which the
Bonds are, and are to be, authenticated and delivered. Capitalized terms not
otherwise defined herein are defined as provided in the Indenture.
As provided in the Indenture, the Bonds are issuable in series which may
vary as in the Indenture provided or permitted. This Bond is one of the series
specified in its title.
A-3
<PAGE>
This Bond is subject to redemption in whole, at any time, and in part, from
time to time, before its maturity in the following events and in the manner
provided in Article V and Section 17.03 of the Indenture:
(1) at any time after issuance, at the option of the Company evidenced
by a Board Resolution at a Redemption Price equal to 100% of the principal
amount of this Bond to be redeemed, together with the Applicable Make-Whole
Amount (as defined below) and interest accrued to the Redemption Date, and on a
Redemption Date specified by the Company as provided in Section 5.02 of the
Indenture; and
(2) from moneys received by the Trustee as a result of a casualty or
condemnation, the proceeds of which equal or exceed $15,000,000, at a Redemption
Price equal to 100% of the principal amount of this Bond to be redeemed,
together with interest accrued to the Redemption Date, and on a Redemption Date
that is the first date for which notice of redemption can be given by the
Trustee as provided in Article V of the Indenture.
It is provided in the Indenture that Bonds of this series of a denomination
larger than $100,000.00 may be redeemed in part ($100,000.00 or a multiple
thereof) and that upon any partial redemption of any such Bond the same shall,
except as otherwise permitted by the Indenture, be surrendered in exchange for
one or more new Bonds in authorized form for the unredeemed portion of
principal. Bonds (or portions thereof as aforesaid) for whose redemption and
payment provision is made in accordance with the Indenture shall thereupon cease
to be entitled to the lien of the Indenture and shall cease to bear interest
from and after the date fixed for redemption.
If an Event of Default, as defined in the Indenture, shall occur, the
principal of the Bonds may become or be declared due and payable in the manner
and with the effect provided in the Indenture whereupon all principal, accrued
interest and the Applicable Make-Whole Amount, if any, shall be due and payable.
"Applicable Make-Whole Amount" at any time shall be equal to the product of
(a) the Make-Whole Amount at such time, times (b) a fraction, the numerator of
which shall be the principal amount of this Bond being prepaid
A-4
<PAGE>
or accelerated at such time, and the denominator of which shall equal the
aggregate principal amount of all Series C Bonds being prepaid or accelerated at
such time.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Bonds under the Indenture at any
time by the Company with the consent of the Holders of 66 2/3% in aggregate
principal amount of the Bonds of each series at the time Outstanding affected by
such modification. The Indenture also contains provisions permitting the
Holders of specified percentages in principal amount of Bonds at the time
Outstanding on behalf of the Holders of all the Bonds, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Bond issued upon the transfer hereof
or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Bond.
No reference herein to the Indenture and no provision of this Bond or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Bond at the times, places and rates, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, this Bond is transferable on the Bond Register of the Company, upon
surrender of this Bond for transfer at the office or agency of the Company in
Los Angeles, California, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Bond
Registrar duly executed by the Registered Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Bonds of the same series,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The Bonds of this series are issuable only as registered Bonds without
coupons in denominations of $1,000.00 or any multiple thereof. As provided
A-5
<PAGE>
in the Indenture and subject to certain limitations therein set forth, Bonds of
this series are exchangeable for a like aggregate principal amount of Bonds of
this series of a different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any transfer or exchange hereinbefore
referred to, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name this Bond is registered as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Bond shall be overdue, and neither the Company, the Trustee
nor any such agent shall be affected by notice to the contrary.
Unless the certificate of authentication hereon has been executed by the
Trustee by manual signature, this Bond shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
A-6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed under
its corporate seal.
Dated:
SUBURBAN WATER SYSTEMS
[SEAL]
By:
Attest:
This is one of the Bonds of the series designated herein referred to in the
within-mentioned indenture.
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION, as Trustee
By: Dated:
Authorized Officer
A-7
<PAGE>
EXHIBIT B1
FORM OF COMPANY COUNSEL'S LEGAL OPINION
[Latham & Watkins Letterhead]
[Closing Date]
Aid Association for Lutherans
222 West College Avenue
Appleton, Wisconsin 54919
Attn: Mr. Gunar Zarins
Re: $8,000,000 Series C First Mortgage Bonds of Suburban Water Systems
------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel (except with respect to matters involving the
Public Utilities Commission of the State of California) to Suburban Water
Systems (the "Company"), a California corporation, and Southwest Water Company
("Southwest"), a Delaware corporation, in connection with the Bond Purchase
Agreement (the "Bond Purchase Agreement"), dated as of October 21, 1996, among
the Company, Southwest and you, as Purchaser. The Bond Purchase Agreement
provides, among other things, for the sale by the Company of its First Mortgage
Bonds, Series C 7.61%, due October 20, 2006 (the "Series C Bonds") in the
aggregate principal amount of $8,000,000 issued under and pursuant to an
Indenture of Mortgage and Deed of Trust dated October 1, 1986 (together with
that certain First Amendment and Supplement to Indenture of Mortgage dated as of
February 7, 1990, and that certain Second Amendment and Supplement to Indenture
of Mortgage dated as of January 24, 1992, herein called the "Existing
Indenture"), between the Company and First Trust of California, National
Association, as trustee (the Trustee"), as amended and supplemented by that
Third Amendment and Supplement to the Existing Indenture (the "Third
Supplemental Indenture"), dated as of October 9, 1996, between the Company and
the Trustee (the Existing Indenture, as amended and supplemented by the Third
Supplemental Indenture, herein called the "Indenture"). This opinion is rendered
to you pursuant to Section 3.1(A) of the Purchase Agreement. Capitalized Terms
B1-1
<PAGE>
used in this opinion and not defined herein shall have the respective meanings
ascribed to them in, or pursuant to the provisions of, the Bond Purchase
Agreement or the Indenture.
The Indenture grants to the holders of the Company's first mortgage bonds
from time to time issued thereunder (collectively, the "First Mortgage Bonds"),
including the Series C Bonds, a security interest in certain property, whether
presently owned or hereafter acquired, of the Company, more particularly
described in the Indenture, consisting of both (i) real property and real
property interests, including, in each case, fixtures, other than Excepted
Property, as described (the "Real Property), and (ii) personal property, other
than Excepted Property, as described in the Indenture (the "Personal Property").
Prior to the delivery of this opinion letter, executed recorded counterparts of
the Existing Indenture were on file in the Recorder's offices of Los Angeles and
Orange Counties, California. At our direction, prior to the delivery of this
letter, executed counterparts of the Third Supplemental Indenture were recorded
by Chicago Title, successor to Ticor Title Insurance Company ("Ticor") in the
Recorder's offices of Los Angeles and Orange Counties, California. Also at our
direction, title reports and supplements thereto dated, respectively, as of
September 24, 1996, and September 1, 1996 were prepared by Ticor covering the
state of the title in and to that Real Property subject to the Lien of the
Existing Indenture (the "Ticor Reports").
A bondholder's policy of title insurance was received from Ticor on or
about November 18, 1986 insuring the Trustee and the holder of the Series A
Bonds against loss or damage to the extent of an aggregate of $15,000,000 plus
costs, if any, as allowed by said policy, by reason of any defect in the Lien of
the Existing Indenture on the Real Property described therein or by reason of
the title to such Real Property being other than as shown in such policy. In
addition, California endorsements numbered 110.1, 107.9, 110.5, 108.8 and 2842
were issued with respect to such policy of title insurance, which endorsements,
in effect, extended the coverage of such policy to that Real Property added to
the Real Property by virtue of the Second Supplemental Indenture, and insured
the Trustee and the holders of all of the First Mortgage Bonds (including the
holders of the Series A Bonds and the Series B Bonds) against loss or damage to
the extent of $23,000,000 in the event of any defect in the Lien of the
Indenture on the Real Property or by reason of the title to the Real Property
being other
B1-2
<PAGE>
than as shown in such policy and endorsements. Further, in connection with the
recordation of the Third Supplemental Indenture and the issuance of the Series C
Bonds, California endorsements numbered 107.9, 110.1, 110.5 and 108.8 have been
ordered with respect to such policy of title insurance, which endorsements, in
effect, insure the Trustee and the holders of all of the First Mortgage Bonds
(including the Series C Bonds) against loss or damage to the extent of
$31,000,000 in the event of any defect in the lien of the Indenture on the Real
Property or by reason of the title to the Real Property being other than as
shown in such policy and endorsements. We have received assurance satisfactory
to us from Ticor that the aforementioned title insurance endorsements have been
committed prior to the delivery of this letter, in accordance with our orders,
and that the Lien of the Indenture on the Real Property described in the
Indenture is in accordance with the statements hereinafter contained in this
opinion.
A California Form UCC-1 Financing Statement, as amended (the "Financing
Statement"), describing the personal property in which a security interest was
granted to the Trustee pursuant to the Existing Indenture, is on file with the
Secretary of State of California and is on file as a fixture filing in the
Recorder's Offices of Los Angeles and Orange Counties. We have reviewed the
Financing Statement, as on file, together with a form UCC-3 certificate issued
by the California Secretary of State indicating all financing statements of
record naming the Company as debtor in the office of the California Secretary of
State. Our opinions in paragraphs 8, 9 and 10 below are based, among other
things, upon such review and the assurances described in the immediately
preceding paragraph.
As counsel for the Company and Southwest, we have prepared or participated
in the preparation of the Bond Purchase Agreement, the Third Supplemental
Indenture and the Series C Bonds (collectively, the "Documents") and various
certificates and other documents executed and delivered in connection therewith.
In each instance, we have reviewed executed copies of such documents, of the
Indenture and each of the executed and authenticated Series C Bonds or have
otherwise received assurances satisfactory to us that such documents have been
executed, and in the case of the Series C Bonds, authenticated, prior to the
delivery of this letter, by each entity whose signature or authentication is
provided for therein.
B1-3
<PAGE>
In our examination, we have assumed the genuineness of all signatures
(other than those of officers of the Company and Southwest on the Documents),
the legal capacity of all natural persons executing documents, the authenticity
of all documents submitted to us as originals and the conformity to authentic
original documents of all documents submitted to us as copies.
We have been furnished with and with your consent have relied upon,
certificates of officer(s) of the Company and Southwest with respect to certain
factual matters. In addition, we have obtained and relied upon such
certificates and assurances from public officials as we have deemed necessary.
We are opining herein as to the effect on the subject transaction only of
the federal laws of the United States and the internal laws of the State of
California, and we express no opinion with respect to the applicability thereto,
or the effect thereon, of the laws of any other jurisdiction or as to any
matters of municipal law or the laws of any local agencies within any state.
Our opinions set forth in paragraphs 4, 5, 6 and 7 below are based upon our
consideration of only those statutes, rules and regulations which, in our
experience, are normally applicable to mortgage bond sale transactions. Various
issues concerning the authorization of the transactions described herein by the
California Public Utilities Commission (the "PUC") are addressed in the opinion
of Messrs. Steefel, Levitt and Weiss, separately provided to you, and we express
no opinion with respect to those matters.
Whenever a statement herein is qualified by "to the best of our knowledge"
or a similar phrase, it is intended to indicate that those attorneys in this
firm who have rendered legal services in connection with the sale of the Series
C Bonds do not have current actual knowledge of the inaccuracy of such
statement. However, except as otherwise expressly indicated, we have not
undertaken any independent investigation to determine the accuracy of any such
statement, and no inference that we have any knowledge of any matters pertaining
to such statement should be drawn from our representation of the Company and
Southwest.
We have also, with your consent, relied, for the purposes of our opinion
set forth in paragraph 13 below, on a letter to the Company, to us
B1-4
<PAGE>
and to you from SSP Hambro & Co., LLC and Wells Fargo Bank confirming the
warranty contained in Section 2.15 of the Bond Purchase Agreement, and the
representations contained in Sections 1.3 and 2.15 of the Bond Purchase
Agreement.
Subject to the foregoing and the other matters set forth herein, it is our
opinion that, as of the date hereof:
4. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of California with corporate power
and authority to execute and deliver the Bond Purchase Agreement and the Third
Supplemental Indenture, to issue, sell and deliver the Series C Bonds, to
perform its obligations pursuant to the Bond Purchase Agreement, the Series C
Bonds and the Indenture, to carry on its business as now conducted by it in the
State of California and to own the Real Property and the Personal Property.
5. The Subsidiary is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of California and has all
requisite corporate power and authority to carry on its business as now
conducted by it in the State of California and to own its respective real and
personal property.
6. Based upon representations by the Company to us that neither the
Company nor the Subsidiary owns any property in, maintains any office in or
conducts any business in any state other than California, neither the Company
nor the Subsidiary is required to qualify to do business as a foreign
corporation in any jurisdiction.
7. The Third Supplemental Indenture has been ratified and approved by all
necessary corporate action of the Company's Board of Directors and has been duly
executed and delivered by officers of the Company thereunto duly authorized by
all necessary corporate action of the Company's Board of Directors. Subject to
the matters set forth in paragraph (iii) and paragraphs (a) through (r) below,
the Indenture constitutes a legally valid and binding obligation of the Company,
enforceable in accordance with its terms. No action by the stockholder of the
Company is required by law, by the Articles of Incorporation of the
B1-5
<PAGE>
Company or by the By-Laws of the Company for the authorization, execution and
delivery of the Third Supplemental Indenture.
8. The Bond Purchase Agreement has been duly ratified and approved by all
necessary corporate action of the Company's Board of Directors and has been duly
executed and delivered by officers of the Company thereunto duly authorized by
all necessary corporate action of the Company's Board of Directors. Subject to
the matters set forth in paragraph (iii) and paragraphs (a) through (r) below,
the Bond Purchase Agreement constitutes a legally valid and binding instrument
of the Company enforceable in accordance with its, terms. No action by the
stockholder of the Company is required by law, by the Articles of Incorporation
of the Company or by the By-Laws of the Company for the authorization, execution
and delivery of the Bond Purchase Agreement.
9. The Series C Bonds in the aggregate principal amount of $8,000,000
being purchased on the date hereof have been duly ratified and approved by all
necessary corporate action of the Company's Board of Directors, have been duly
executed and delivered by officers of the Company thereunto authorized by all
necessary corporate action of the Company's Board of Directors, have been duly
issued by the Company and have been duly authenticated by the Trustee under the
Indenture, and the obligations of the Company represented by the Series B Bonds
are, subject to the matters set forth in paragraph (iii) and paragraphs (a)
through (r) below, legally valid and binding obligations of the Company,
enforceable in accordance with their terms. The Series C Bonds are entitled to
the benefit of the security of the Indenture, equally and ratably with all First
Mortgage Bonds of other series which, in the case of the Series A Bonds and
Series B Bonds, have been issued and, in the case of any other series of bonds,
which may from time to time be issued pursuant to and secured by the Indenture
in accordance with the terms thereof. The Series C Bonds conform to the
requirements of the Indenture.
10. Neither (a) the execution and delivery by the Company of the Bond
Purchase Agreement or the Third Supplemental Indenture; nor (b) the execution,
delivery, issue and sale of the Series C Bonds; nor (c) compliance by the
Company with the terms of the Series C Bonds, the Indenture and the Bond
Purchase Agreement (all such transactions referred to in clauses (a) through
(c), inclusive, of this paragraph 7 being hereinafter referred to as
B1-6
<PAGE>
the "Transactions") will conflict with, or result in any breach of any of the
provisions of, or constitute a default under, or result in the creation or
imposition of any Lien (other than the Lien of the Indenture) upon any of the
Real Property or Personal Property of the Company pursuant to (i) the provisions
of the Articles of Incorporation or By-Laws of the Company; (ii) any Material
Agreement to which the Company is a party or by which it or any of its Property
is bound; (iii) to the best of our knowledge, any Federal or California statute,
rule or regulation applicable to the Company; or (iv) to the best of our
knowledge, any order, judgment, award or decree, known to us after due inquiry
of the Company (no independent search of court records having been made), of any
court or arbitrator against or affecting the Company or any of its Property. The
term "Material Agreement" shall be limited to those agreements and instruments
identified to us by the Company and listed on Attachment A to this letter.
11. Each of the Existing Indenture and the Third Supplemental Indenture
has been duly filed for record as a mortgage on the Real Property in each and
every public office in which such filing and/or recording is a prerequisite to
the establishing of record of the Lien thereof on all of the Real Property
therein specifically described. For the purpose of the immediately preceding
sentence, we assume that all public officials involved with such filings have
followed their own procedures and legal requirements as to such filings. All
taxes and fees required to be paid with respect to the execution and recording
of the Indenture and the Issuance of the Series C Bonds have been paid. Neither
the Indenture nor the Third Supplemental Indenture will, under existing
California law, have to be refiled, reregistered or redeposited to continue the
Lien in and upon the Real Property or the effectiveness of such Lien as against
any subsequent transferee of the Real Property described therein.
12. The Indenture constitutes a valid mortgage Lien on the Real Property
now owned by the Company which is specifically or generally described in the
granting clauses of the Indenture as being subject to the Lien thereof.
Further, the indenture will, under existing California law, constitute a
mortgage Lien at the time of acquisition by the Company on all Real Property of
the Company acquired after the date of this letter located within the Counties
of Los Angeles and Orange, State of California and required by the Indenture to
be subject to the lien thereof.
B1-7
<PAGE>
13. The provisions of the Indenture are effective to create in favor of
the Trustee a valid security interest in that portion of the Personal Property
of the Company described in the Indenture which is subject to Division 9, as
defined below, as security for the payment of the Series C Bonds. The Financing
Statement has been filed or recorded in each and every public office in which
such filing and/or recording is a prerequisite to the establishing of record of
the lien of the Indenture on all of the Personal Property therein specifically
described which is owned by the Company. Upon the due filing with the
California Secretary of State of the Financing Statement, a security interest of
the Trustee in the Personal Property covered thereby was perfected to the extent
a security interest in such Personal Property can be perfected by the filing of
a financing statement under Division 9 of the Uniform Commercial Code ("Division
9") as in effect in California. Based upon the issuance and sale by the Company
to you prior to the delivery of this letter of the Series C Bonds and your
concurrent delivery of the consideration provided for in the Bond Purchase
Agreement, pursuant to the provisions of the Indenture the Trustee has a valid,
perfected security interest in the Personal Property presently owned by and in
the possession of the Company or hereafter acquired by the Company. Such
security interest is, in the case of after-acquired Personal Property, subject
to purchase money security interests and acquisition by the Company of rights in
and possession of such Personal Property. Under existing California law, except
for the filing of appropriate amendments to the Financing Statement required by
changes in circumstances, it is not necessary to refile the Financing Statement
or new financing statements to maintain the perfection of the security interests
in the Personal Property described in the Financing Statement.
Based upon the assumptions and subject to the limitations set forth below,
insofar as such security interest relates to that portion of the Personal
Property which is personal property owned and possessed by the Company as of the
date hereof and located in the State of California, such security interest is
prior to any security interest granted by the Company in any of such Personal
Property the priority of which is determined solely by the filing of a financing
statement in the Office of the Secretary of State of California under Division
9, except as such priority is or may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or other similar laws or case decisions
relating to or affecting the enforcement of the rights of creditors generally
and as is or may be limited by the
B1-8
<PAGE>
provisions of Division 6 (relating to Bulk Sales) of the California Commercial
Code. The foregoing opinions in this paragraph 10 are, as to Personal Property
acquired after the date of this letter, expressly subject to preexisting liens
and encumbrances.
The foregoing opinions in this paragraph 10 are also based, in part, upon a
certificate from an officer of the Company to the effect that the Company has
not, during the period from July 1, 1996 to the date hereof, created any
"purchase money security interests" as defined in Division 9, in any portion of
the Personal Property. Finally, we have obtained and delivered to you a Form
UCC-3 report from the California Secretary of State which indicates no prior,
presently effective Form UCC-1 financing statements on file which name the
Company as Debtor (other than (i) the Financing Statement and (ii) certain other
financing statements which relate solely to Excepted Property) and we are
relying upon the accuracy of such report as to the absence of filing of any Form
UCC-1 financing statements or notices against the Company except as shown in
such report. We express no opinion as to the priority of your security interest
as against any other secured party which, prior to the filing of the Financing
Statement, filed a Form UCC-1 financing statement or notice not reported in such
report.
14. Except with respect to matters involving the PUC, as to which we
express no opinion, all consents, approvals or authorizations, if any, of or by
any Governmental Authority required on the part of the Company in connection
with the consummation of the Transactions have been duly obtained, and the
Company has complied with all applicable provisions of law requiring any
designation, declaration, filing, registration or qualification with any
Governmental Authority in connection with the Transactions.
15. To the best of our knowledge, there is no litigation or proceeding
pending or threatened against the Company or the Subsidiary not disclosed in the
Bond Purchase Agreement or the financial statements of the Company which have
been furnished to you pursuant thereto which could result in a judgment, order
or award which would be materially adverse to the Company or the Subsidiary or
which could materially or adversely affect the ability of the Company to
consummate the
B1-9
<PAGE>
Transactions or perform its obligations under the Bond Purchase Agreement or the
Indenture.
16. The offer, issuance, sale and delivery of the Series C Bonds in the
principal amount of $8,000,000 in accordance with the provisions of the Bond
Purchase Agreement constitutes an exempt transaction under the Securities Act of
1933, as amended (the "Act"), and under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), and neither the Act nor the Trust Indenture
Act requires registration of the Series C Bonds or qualification of the
Indenture.
17. The Company has complied with all conditions precedent to the
consummation of the Transactions imposed by law or by the provisions of the
Existing Indenture.
18. The Company owns and, subject to the Lien of the Indenture, has the
unrestricted right to transfer all of the shares it purports to own of the
Subsidiary, to the best of our knowledge, free and clear of any lien (other than
the Lien of the Indenture), and all such shares have been duly issued and are
fully paid and non-assessable. The Company also owns and, subject to the Lien
of the Indenture, has the unrestricted right to transfer all of the shares it
purports to own of each of Covina Irrigating Company, a California corporation
("Covina"), and California Domestic Water Company, a California corporation
("California Domestic"), in each case, to the best of our knowledge, free and
clear of any lien other than the Lien of the Indenture in the case of Covina,
and all such shares have been duly issued. The Lien of the Indenture in favor
of the Trustee upon the shares of the Subsidiary and Covina owned by the Company
has been perfected.
19. The Company is not a "holding company" or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," as such terms are defined in the Public Utility
Holding Company Act of 1935, as amended. The Company is not, and is not
directly or indirectly controlled by, or acting on behalf of any Person which
is, an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
20. Neither the issuance of the Bonds nor the intended use of the proceeds
of the Bonds (as set forth in Section 2.13 of the Bond Purchase
B1-10
<PAGE>
Agreement) will violate Regulations G, T or X of the Federal Reserve Board.
In rendering certain of the foregoing opinions, we have, with your consent,
relied upon certain matters set forth herein. In addition:
(i) In rendering our opinions with respect to the due incorporation,
legal existence and good standing of the Company and the Subsidiary in
paragraphs 1 and 2 above, we have relied upon the certificates of appropriate
officials of the State of California.
(ii) In rendering our opinion as to the lack of any requirement that the
Company or any Subsidiary qualify as a foreign corporation in any jurisdiction
in paragraph 3 above, we have relied on a certificate of officers of the Company
to the effect set forth in such paragraph and have performed no independent
investigation concerning the representation of the Company to us.
(iii) In rendering our opinions as to due approval of the Third
Supplemental Indenture, the Bond Purchase Agreement and the Series C Bonds in
paragraphs 4, 5 and 6 above, we have relied on a certificate of officers of the
Company as to the adoption of certain resolutions by the Board of Directors of
the Company. In rendering our opinion in paragraph 6 above as to due
authentication of the Series C Bonds, we have relied in part on a certificate
furnished to us by the Trustee.
(iv) In rendering our opinion in paragraph 7 above, except as to the
Articles of Incorporation and By-Laws of the Company, we have relied as to
certain factual matters upon a certificate of officers of the Company. For the
purposes of clause (iii) of such paragraph, our opinion is limited to California
and United States laws, statutes, regulations and ordinances currently
applicable to the Company and the business presently conducted by it. Also for
the purposes of clause (iii) of such paragraph, our opinion set forth in such
clause is limited to laws, statutes, regulations and ordinances of general
applicability and we express no opinion as to the effect, if any, of the
California Public Utilities Code or any rules, regulations, orders or other
pronouncements by the PUC thereunder or the effect, if any, of the ordinances,
rules, regulations or other requirements of any county or city from whom the
Company has obtained any franchise, permit, license or other
B1-11
<PAGE>
authority to locate its facilities or to provide water service within the
geographical area over which such county or city has the authority to grant such
franchises, permits, licenses or other authority.
(v) In rendering our opinions with respect to the Lien of the Indenture
on the Real Property in paragraph 9 above and with respect to the recording of
the Existing Indenture and the Third Supplemental Indenture as a real estate
mortgage in California in paragraph 8 above, we have relied as to matters of
fact upon the confirmation from Ticor of the recordation of the Existing
Indenture and the Third Supplemental Indenture and its commitment to issue the
endorsements referred to in the third paragraph of this opinion to the policy of
title insurance in accordance with our instructions. For the purposes of such
opinions we have not independently examined the record title to the Real
Property.
(vi) In rendering our opinion with respect to perfection in paragraph 10,
we express no opinion with respect to the creation, validity or perfection of
any security interest in the Personal Property that is not governed by, or that
is excluded from coverage by, Division 9. We also call to your attention the
fact that perfection of security interests under Division 9 in any of the
Personal Property will be terminated as to any Personal Property acquired by the
Company more than four (4) months after the Company changes its name, identity
or corporate structure to such an extent as to make the Financing Statement
seriously misleading, unless a new appropriate financing statement indicating
the new name, identity or corporate structure of the Company is properly filed
before the expiration of four (4) months after such change. You should also be
aware that the perfection of a security interest in proceeds (as defined in
Division 9) of Personal Property is governed and restricted by Section 9306 of
Division 9. We further note that the law is not well developed with respect to
the specificity of description necessary to create a valid security interest in
Personal Property. To ensure that a sufficient description has been provided,
the personal property intended to be subject to the security interest should be
identified by serial, account or other identification numbers or by some other
method of specific identification. However, the general description of the
Personal Property used in the Indenture and in the Financing Statement filed in
connection therewith is consistent with that commonly used by major lenders in
California and, although the matter is not free from doubt, in our opinion
should be held by California
B1-12
<PAGE>
courts to be sufficient to create a security interest in the personal property
described therein; however, we express no opinion as to whether the phrase "all
personal property" or similar general phrases would be held to describe any
particular item or items of Personal Property.
(vii) In rendering our opinions set forth in paragraphs 11, 12 and 14
above, we have relied as to certain factual matters upon a certificate of
officers of the Company as to the matters which are the subjects of such
paragraphs.
(viii) In rendering our opinions set forth in paragraph 15 as to the
Subsidiary, Covina and California Domestic, and our opinion set forth in
paragraph 16 above, we have relied as to certain factual matters on a
certificate of officers of the Company. For the purposes of our opinion as to
perfection of the Lien of the Indenture upon the shares of Subsidiary and Covina
owned by the Company in paragraph 15 above, we are relying in part upon a
certificate executed and delivered to you by the Trustee prior to the delivery
of this opinion to the effect that the Trustee has possession of all
certificates representing such shares together with stock certificates as to all
such shares executed by the Company.
All opinions herein with respect to the validity, binding effect of and
enforceability of Documents are further subject to the following limitations,
qualifications and exceptions:
(a) the effect of bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting the rights of creditors
generally;
(b) enforceability of the Documents is subject to the effect of
general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief, other than judicial
foreclosure, in accordance with California law, of the lien of the Indenture,
regardless of whether considered in a proceeding in equity or at law;
(c) a California court may not strictly enforce certain covenants
contained in the Indenture or Bond Purchase Agreement or allow acceleration of
the maturity of the indebtedness evidenced by the Series C
B1-13
<PAGE>
Bonds if it concludes that such enforcement or acceleration would be
unreasonable under then existing circumstances. We believe, however, subject to
the limitations expressed elsewhere in this opinion, that enforcement or
acceleration would be available if an Event of Default occurs as a result of a
material breach of a material covenant contained in the Indenture;
(d) certain rights, remedies and waivers contained in the Documents
may be limited or rendered ineffective by applicable California laws or judicial
decisions governing such provisions, but such laws or judicial decisions do not
render the Documents invalid or unenforceable as a whole;
(e) we express no opinion as to the validity or enforceability of any
provision of the Documents that permits the Trustee or the holders of the Series
C Bonds to increase the rate of interest or collect a late charge or prepayment
premium in the event of a delinquency or default.
Without limiting the generality of the foregoing, all opinions expressed in
paragraphs 4, 5 and 6 as to validity, binding effect and enforceability of the
Documents are also subject to the following limitations, exceptions and
assumptions:
(f) the unenforceability under certain circumstances, under
California or federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future rights,
defenses to obligations or rights granted by law, where such waivers are against
public policy or prohibited by law;
(g) the unenforceability under certain circumstances of provisions to
the effect that rights or remedies are not exclusive, that every right or remedy
is cumulative and may be exercised in addition to or with any other right or
remedy, that election of a particular remedy or remedies does not preclude
recourse to one or more other remedies, that any right or remedy may be
exercised without notice, or that failure to exercise or delay in exercising
rights or remedies will not operate as a waiver of any such right or remedy;
(h) the unenforceability under certain circumstances of provisions
indemnifying a party against liability for its own wrongful or
B1-14
<PAGE>
negligent acts or where such indemnification is contrary to public policy or
prohibited by law;
(i) the effect of Section 1717 of the California Civil Code, which
provides that, where a contract permits one party to the contract to recover
attorneys' fees, the prevailing party in any action to enforce any provision of
the contract shall be entitled to recover its reasonable attorneys' fees;
(j) The effect of California law, which provides that a court may
refuse to enforce, or may limit the application of, a contract or any clause
thereof which the court finds as a matter of law to have been unconscionable at
the time it was made or contrary to public policy;
(k) the unenforceability under certain circumstances of contractual
provisions respecting self-help or summary remedies without notice or
opportunity for hearing or correction. No such restrictions shall, however,
prevent the exercise of the power of sale foreclosure of the Real Property in
accordance with the provisions of the Indenture and in compliance with all
applicable provisions of California law;
(l) the assumption that the Trustee will seek to enforce its rights
under the Indenture, the Bond Purchase Agreement and the Series C Bonds only in
good faith and in circumstances and in a manner in which it is commercially
reasonable to do so;
(m) we express no opinion as to the applicability to the transactions
discussed herein of the Fair Labor Standards Act, 29 U.S.C. (S)(S) 201 et seq.,
which may, under certain circumstances, preclude the sale or shipment in
interstate commerce of certain items of the Personal Property unless and until
all relevant payroll obligations are met;
(n) the effect of Section 9501 of the UCC which relates to the
enforcement and foreclosure of security interests in both real and personal
property granted to secure the same obligation;
(o) the opinions expressed in paragraph 6 do not include any opinions
with respect to compliance with laws relating to permissible rates of interest;
B1-15
<PAGE>
(p) with respect to our opinions in paragraphs 4, 8 and 9 above, we
call to your attention the effect of Section 882.020 of the California Civil
Code which provides that a deed of trust or similar instrument becomes
unenforceable: (i) ten (10) years after the last date fixed for payment of the
debt or performance of the obligation ascertainable from the record; or (ii) if
the last date for performance of the obligation cannot be ascertained from the
record, then 60 years after being recorded, in either case subject to certain
other provisions more fully set forth in the statute;
(q) we express no opinion with respect to compliance with the
California Subdivision Map Act, or any zoning, land use or environmental laws
which may be applicable to the Real Property; and
(r) the opinion of Messrs. Steefel, Levitt & Weiss delivered
concurrently herewith to the effect that the California Public Utilities
Commission (the "PUC") has issued an order as specified in Section 3.6 of the
Bond Purchase Agreement and that the Company has paid to the PUC the entire fee
required for such order to become effective.
With respect to the opinions set forth above, you should be aware of the
following provisions of California law:
(s) Section 726 of the California Code of Civil Procedure provides
that any action to recover on a debt or other right secured by a mortgage or a
deed of trust on real property or an estate for years must comply with the
provisions of that section, which provisions relate to and specify the
procedures for the sale of encumbered property or an estate for years therein,
the application of proceeds, the rendition in certain cases of a deficiency
judgment, and other related matters. We advise you that in such an action or
proceeding, the debtor may require the creditor to exhaust all of its security
before a personal judgment may be obtained against the debtor for a deficiency.
We also advise you that failure to comply with the provisions of Section 726
(including an attempt to exercise a right of setoff with respect to any funds of
the Company that may be deposited with the Trustee from time to time and with
respect to which the Trustee does not hold a perfected security interest) may
result in the loss of your lien on the Real Property and Personal Property and
the loss of your right to a deficiency judgment. See, e.g., Walker v. Community
Bank, 10
B1-16
<PAGE>
Cal.3d 729, 518 P.2d 329, 111 Cal.Rptr. 897 (1974); Security Pacific National
Bank v. Wozab, 51 Cal.3d 991, 275 Cal.Rptr. 201 (1990); Bank of America v.
Daily, 152 Cal.App.3d 767, 199 Cal.Rptr. 557 (1984). However, in our opinion,
the limitations of Section 726 do not prevent enforcement of your rights with
respect to the Real Property described in the Indenture provided you proceed in
accordance with California law, nor do such limitations prevent enforcement of
your rights with respect to the Personal Property or fixtures in which you have
a perfected security interest provided you proceed in accordance with the
requirements of Division 9.
(t) Section 580d of the California Code of Civil Procedure provides
that no deficiency judgment shall be rendered upon a note secured by a deed of
trust or mortgage on real property or an estate for years after sale of the real
property or estate for years under the power of sale contained in such deed of
trust or mortgage; and
(u) Section 2924c of the California Civil Code provides that whenever
the maturity of an obligation secured by a deed of trust or mortgage on real
property or an estate for years is accelerated by reason of a default in the
payment of interest or in the payment of any installment of principal or other
sums secured thereby, or by reason of failure of the trustor or mortgagor to pay
taxes, assessments, or insurance premiums, the trustor or mortgagor and certain
other entitled persons have the right, to be exercised at any time within the
reinstatement period described in such section, to cure such default by paying
the entire amount then due (including certain reasonable costs and expenses
incurred in enforcing such obligations but excluding any principal amount that
would not then be due had no default occurred) and thereby cure the default and
reinstate such deed of trust or mortgage and the obligations secured thereby to
the same effect as if no acceleration had occurred. If the power of sale in the
deed of trust or mortgage is not to be exercised, such reinstatement right may
be exercised at any time prior to entry of the decree of foreclosure.
Our opinions expressed in paragraphs 9 and 10 are also subject to the
following assumptions, exceptions, limitations and qualification:
(A) we express no opinion as to the priority of any security interest
or lien other than as expressly set forth in paragraphs 9 and 10;
B1-17
<PAGE>
(B) we have assumed that the Company has rights in the Personal
Property and that "value" has been given as contemplated by Section 9203 of
Division 9;
(C) we have assumed that none of the Personal Property consists of
consumer goods, crops growing or to be grown, timber to be cut, minerals or the
like (including oil and gas) or accounts resulting from the sale of minerals or
the like at the wellhead or the minehead, beneficial interests in a trust or
decedent's estate, letters of credit, items which are subject to a statute or
treaty of the United States which provides for a national or international
registration or a national or international certificate of title or which
specifies a place of filing different from that specified in Division 9 for
filing of the security interest, or any other items excluded from the coverage
of Division 9 by Section 9104 thereof;
(D) we call to your attention the fact that the perfection of a
security interest in "proceeds" (as defined in Division 9) of collateral is
governed and restricted by Section 9306 of Division 9;
(E) we express no opinion as to the priority of any security interest
as against (a) the rights of any party which may now or hereafter have a
perfected "purchase money security interest" (within the meaning of Division 9)
in such Personal Property, (b) the rights of a consignor which has delivered or
may hereafter deliver any Personal Property to the Company under a true
consignment (as distinguished from a consignment intended as security), (c)
another security interest in the Personal Property under the laws of any other
jurisdiction, (d) a security interest in the Personal Property created by any
person other than the Company prior to the acquisition by the Company of such
goods, (e) the rights of a "buyer in the ordinary course of business" (as such
term is defined in Division 9) of any of the Personal Property; (f) a lien on
any Personal Property by statute or rule of law for materials or services, (g)
any security interest in any item of Personal Property which becomes a part of a
product or mass with, or is installed in or affixed to, goods which are not
items of the Personal Property, to the extent governed by Sections 9313, 9314 or
9315 of Division 9, and (h) any goods sold by the Company which are repossessed
or the return of which is accepted by the Company where a third party had a
security interest in accounts or chattel paper which arose out of the sale of
such goods, to the extent provided in Section 9306(5) of Division 9;
B1-18
<PAGE>
(F) we express no opinion as to the priority of any security interest
as against any claim or lien in favor of the United States or any State, or any
agency or instrumentality thereof, including, without limitation, liens for the
payment of federal or state taxes which are given priority by operation of law
and liens under Title IV of ERISA;
(G) we express no opinion as to the priority of any security interest
as against any lien creditor (as such term is defined in Division 9) or any
buyer, to the extent that such security interest purports to secure any advances
or other extensions of credit other than the Series C Bonds;
(H) we express no opinion as to the priority of any security interest
in any of the Personal Property constituting goods which are or are to become
fixtures; and
(I) We express no opinion as to the priority of any security interest
as against security interests in the Personal Property perfected by any method
or means, including without limitation, by possession, other than by the filing
of a financing statement in the Office of the Secretary of State of California.
For the purposes of our opinion as to perfection in paragraph 15:
(1) We have assumed that the Trustee has taken the pledged shares for
value, in good faith and without prior notice of any adverse claim and that the
Trustee and the holders of the Bonds have not been a party to any fraud or
illegality affecting the pledged shares;
(2) We have assumed that neither the Trustee nor the holders of the
Bonds have expressly or by implication waived, subordinated or agreed to any
modification of the perfection or priority of any security interest under the
Indenture or agreed to any adverse claim; and
(3) We call to your attention the fact that the security interest of
the Trustee in the pledged shares may be subject to security interests in favor
of other Persons that exist pursuant to Section 8-313(l)(i) or Section 8-321 of
the California Commercial Code if on or within 21 days prior to the delivery of
any pledged shares to the Trustee, the owner of such pledged shares shall have
signed in favor of any Person
B1-19
<PAGE>
other than the Trustee a security agreement which contains a description of such
pledged shares and shall have received new value therefor from such Person.
In rendering the opinions expressed in paragraph 7 insofar as they require
interpretation of the Material Agreements (i) we have assumed with your
permission that all courts of competent jurisdiction would enforce such Material
Agreements as written but would apply the internal laws of the State of
California without giving effect to any choice of law provisions contained
therein or any choice of law principles which would result in application of the
internal laws of any other state and (ii) to the extent that any questions of
legality or legal construction have arisen in connection with our review, we
have applied the laws of the State of California in resolving such questions.
We advise you that certain of the Material Agreements may be governed by other
laws, that such laws may vary substantially from the law assumed to govern for
purposes of this opinion, and that this opinion may not be relied upon as to
whether or not a breach or default would occur under the law actually governing
such Agreements.
To the extent that the obligations of the Company may be dependent upon
such matters, we assume for purposes of this opinion that: all parties to the
Documents other than the Company and Southwest have complied with any applicable
requirement to file returns and pay taxes under the Franchise Tax Law of the
State of California; all parties to the Documents other then the Company and
Southwest are duly formed, validly existing and in good standing under the laws
of their respective jurisdictions of formation; all parties to the Documents
other than the Company and Southwest have the requisite power and authority to
execute and deliver the Documents and to perform their respective obligations
under the Documents to which they are a party; and the Documents to which such
parties other than the Company and Southwest are a party have been duly
authorized, executed and delivered by such parties and constitute their legally
valid and binding obligations, enforceable against them in accordance with their
terms. We express no opinion as to compliance by any parties to the Documents
with any state or federal laws or regulations applicable to the subject
transactions because of the nature of their businesses. Similarly, for the
purposes of this opinion we have relied upon the opinion of counsel to the
Trustee to the effect that the Second
B1-20
<PAGE>
Supplemental Indenture has been duly executed and delivered by the Trustee, that
the Series C Bonds have been duly authenticated and delivered by the Trustee and
that the Trustee has the requisite corporate or other organizational power and
authority to perform its obligations under the Indenture.
We note specifically that certain of the representations and warranties
made to you or in your favor contained in the Bond Purchase Agreement have been
made by the Company's parent, Southwest, rather than by the Company itself. In
our view, the fact that such representations and warranties have been made by
Southwest rather than the Company will not affect our opinions as to the
validity or enforceability of the Bond Purchase Agreement or the Indenture or
prevent the exercise by the Trustee of the remedies afforded to it by the
Indenture upon a default arising from the breach of any representation or
warranty made by Southwest in the Bond Purchase Agreement.
This opinion is rendered only to you and is solely for your benefit in
connection with the transactions covered hereby. This opinion may not be relied
upon by you for any other purpose, or furnished to, quoted to or relied upon by
any other person, firm or corporation for any purpose, without our prior written
consent. At your request, we hereby consent to reliance thereon by the Trustee,
delivery of this opinion to or reliance upon this opinion by any Governmental
Authority having regulatory jurisdiction over you or delivery of this opinion to
or reliance upon this opinion by any Holder of the Series C Bonds who becomes a
Holder in compliance with the provisions of the Bond Purchase Agreement and the
Indenture. Reliance upon this opinion by any governmental authority or
successor Holder of Series C Bonds is subject to the provisions that this
opinion speaks only as of the date hereof and to its addressee and that we have
no responsibility or obligation to update this opinion, to consider its
applicability or correctness to other than its addressee, or to take into
account changes in law, facts or any other development of which we may later
become aware.
Very truly yours,
Attachment A - Material Agreements
B1-21
<PAGE>
B1-22
<PAGE>
MATERIAL AGREEMENTS
- -------------------
1. Credit Agreement dated as of June 30, 1996 between Wells Fargo
Bank, National Association, as lender, and the Company, as borrower.
2. Operation and Maintenance Agreement for The Big Dalton Well
(Project No. 2) among San Gabriel Basin Water Quality Authority, the Company and
Valley County Water District dated July 1, 1995.
3. Agreement for construction of Water Facilities with Lyon La
Mirada Hills No. 108, a partnership (undated).
4. Industrial Real Estate Lease dated December 1, 1992 with Wong
Investment Management Company, et al.
-- --
Attachment A
<PAGE>
EXHIBIT B2
FORM OF COMPANY PUC COUNSEL CLOSING OPINION
[Letterhead of Steefel, Levitt & Weiss]
[Closing Date]
Aid Association for Lutherans
222 West College Avenue
Appleton, Wisconsin 54919
Attn: Mr. Gunar Zarins
Re: $8,000,000 Series C First Mortgage Bonds of Suburban Water Systems
------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel for Suburban Water Systems, a California
corporation (the "Company"), solely with respect to matters involving the Public
Utilities Commission of the State of California (the "PUC"), in connection with
the purchase by Aid Association for Lutherans (the "Purchaser"), from the
Company pursuant to the Purchase Agreement (as hereinafter defined) of an
aggregate of $8,000,000 principal amount of First Mortgage Bonds, Series C
7.61%, Due October 20, 2006 by the Company (the "Series C Bonds") under the
Original Indenture (hereinafter defined), as amended by the First Supplement
(hereinafter defined), the Second Amendment and Supplement to Indenture of
Mortgage dated October 1, 1986 (the "Second Supplement"), dated as of January
24, 1992, and the Third Amendment and Supplement to Indenture of Mortgage Dated
October 1, 1986 (the "Third Supplement"), dated as of October 9, 1996, by and
between the Company and First Trust of California, National Association, as
trustee ("Trustee").
In connection with our opinion, we have examined what has been presented to
us as the final forms of the following documents (which documents are sometimes
collectively referred to as the "Third Supplement Documents"):
B2-1
<PAGE>
A. Third Supplement;
B. Bond Purchase Agreement, dated as of October 21, 1996, among the
Company, Southwest Water Company, a Delaware corporation, and the Purchaser
(hereinafter referred to as the "Purchase Agreement"); and
C. Series C Bond No. C-1, issued by the Company as First Mortgage Bonds,
Series C 7.61%, dated October 21, 1996, in the principal amount of $8,000,000,
registered in the name of Aid Association for Lutherans.
In addition to our examination of the Third Supplement Documents, we have
examined original or photostatic copies of the following documents (which
documents, together with the Third Supplement Documents, are sometimes
collectively referred to as the "Documents":
1. Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the
"Original Indenture"), between the Company and the Trustee, and recorded in the
State of California as follows: On November 17, 1986, as Instrument No. 86-
1574184 in the Official Records of Los Angeles County and on November 17, 1986
as Instrument No. 86-563570 in the Official Records of Orange County.
2. The First Amendment and Supplement to Indenture of Mortgage dated
October 1, 1986 (the "First Supplement") between the Company and the Trustee
dated as of February 7, 1990, and recorded in the State of California as
follows: On April 12, 1990, as Instrument No. 90-694089 in the Official Records
of Los Angeles County and on May 8,1990 as Instrument No. 90-241742 in the
Official Records of Orange County.
3. The Second Supplement.
4. Application No. 9608051 of the Company filed _______________, 1996
with the PUC with respect to the Series C Bonds.
5. Certified copy of Decision No. 9610032 of the PUC (the "Decision"),
dated _______________, 1996, authorizing the Company to issue $8,000,000
principal amount of its Series C Bonds, including, without limitation the PUC
Order ("Order") attached thereto.
B2-2
<PAGE>
The Original Indenture together with the First Supplement, Second Supplement and
Third Supplement are hereinafter collectively referred to as the "Indenture."
We have obtained, and have relied upon the accuracy, genuineness and
completeness of, such certificates and assurances from public officials as we
have deemed necessary or appropriate to enable us to render our opinion. We
have considered such questions of California law and have examined the foregoing
and such other documents, instruments and agreements as we have deemed necessary
for the purpose of rendering our opinion.
Opinion.
- -------
Based upon and subject to the qualifications, limitations, exceptions,
explanations and assumptions set forth herein, we express the following
opinions:
1. All authorizations of the PUC (the "Authorization") to the extent
required by law have been obtained with respect to:
a. the execution, delivery, issue and sale by the Company of, and
compliance with the Company's obligations under, the Series C Bonds;
b. the execution and delivery by the Company of the Third Supplement
and compliance by the Company with its obligations under the Indenture in
connection with the sale of the Series C Bonds; and
c. the compliance by the Company with the terms of the Purchase
Agreement.
2. The Authorization is final and unappealable and we know of no facts
which would result in the revocation of the Authorization.
3. There is in effect no other order of the PUC denying, suspending or
revoking the effectiveness of the Authorization, and no proceedings for such
purposes are pending or, to our knowledge, threatened before the PUC.
Assumptions.
- -----------
B2-3
<PAGE>
We have assumed, without investigation, the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all items
submitted to us as originals, the conformity to originals of all items submitted
to us as certified or photostatic copies and the authenticity of the originals
of such latter documents. We have assumed, without investigation, that each
party to the Documents (1) has the power and capacity to enter into and perform
all of its obligations under the Documents, (2) has duly authorized all
requisite action with respect to the Documents and (3) has duly executed the
Documents.
We have also assumed, without investigation, that the Documents are legal,
valid and binding on all parties thereto in all respects, that all parties to
the Documents have complied with all applicable laws (other than those which are
the subject of this opinion) and that the issuance and sale of the Series C
Bonds is exempt from the registration requirements under the Securities Act of
1933, as amended, and the qualification provisions of the Trust Indenture Act of
1939, as amended. We have also assumed that all representations and warranties
(other than representations concerning the legal conclusions which are the
subject matter of this opinion) contained in the Documents are true and correct
in all respects.
We have assumed that the Documents are substantially in the form approved
in the Resolutions of the Board of Directors of the Company in all material
respects. We have assumed that the Documents are adequate to accomplish the
transactions contemplated thereby and we have made no independent investigation
of the matters set forth in the Documents.
We have assumed that the Purchaser has purchased the Series C Bonds in good
faith for its own account, that all payments of principal and interest due under
the Series C Bonds will be received by Purchaser for its own account, and that
there is no present agreement, express or implied, or plan on the part of the
Purchaser to sell participations in the Series C Bonds or to sell, assign,
distribute or otherwise transfer the Series C Bonds or any interest therein to
any other person or entity, other than under circumstances qualifying for an
exemption from the registration requirements of the Securities Act of 1933, as
amended. We have further assumed that the transactions contemplated by the
Third Supplement Documents comply with all applicable usury laws.
B2-4
<PAGE>
To the extent that the obligations of the Company and rights of the
Purchaser may be dependent upon such matters, we have assumed for purposes of
our opinion that the Company, the Trustee and the Purchaser are duly organized,
validly existing and in good standing under the laws of their respective
jurisdictions; that the Company's, the Trustee's and the Purchaser's respective
charter powers and bylaws are adequate to permit the bond transaction with the
Company; that the bond transaction has been duly authorized pursuant thereto;
and that the purchase of the Series C Bonds does not violate the laws of the
State of the principal place of business of the Company or the Purchaser.
Qualifications.
- --------------
Our opinion is based solely upon the California Public Utilities Code and
is effective as of the date hereof, and we express no opinion concerning any
other laws.
Our opinion is subject to the effect of bankruptcy, insolvency, fraudulent
transfer or conveyance, reorganization, arrangement, moratorium or similar laws
now or hereafter in effect relating to or affecting creditors' rights generally.
We neither express nor imply any opinion regarding the enforceability of
the Indenture or any documents to be delivered thereunder or otherwise in
connection with the Third Supplement or the Purchase Agreement.
Our opinion letter is rendered solely for the benefit of the Purchaser in
connection with the Documents and the transactions contemplated thereunder.
Without our prior written consent, our opinion letter may not be (a) relied upon
by, or constitute the basis of a claim or admission for the benefit of, any
other party other than your counsel, your successors-in-interest as holders of
the Series C Bonds which acquire the Series C Bonds in a transaction or series
of transactions exempt from the registration requirements of the Securities Act
of 1933, as amended ("Successors"), and Latham & Watkins, as counsel to the
Company, who may rely upon this opinion in part, in connection with the delivery
of its own legal opinion to you, (b) relied upon for any other purpose, or (c)
except as may be required by any court or regulatory authorities having
jurisdiction
B2-5
<PAGE>
over the Purchaser or any Successors, delivered or furnished (the original or
copies thereof) to any other party, nor may all or any portion of this opinion
be quoted, circulated, or referred to in any other document without our prior
written consent. We expressly disclaim any obligation to advise you of any
developments in areas covered by our opinion letter that occur after the date of
our opinion letter. This opinion is expressly limited to the matters set forth
herein, and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
Very truly yours,
Steefel, Levitt & Weiss
B2-6
<PAGE>
EXHIBIT B3
FORM OF TRUSTEE COUNSEL'S CLOSING OPINION
[Letterhead of Counsel to First Trust of California]
[Closing Date]
Aid Association for Lutherans
222 West College Avenue
Appleton, Wisconsin 54919
Attn: Mr. Gunar Zarins
Re: Suburban Water Systems $8,000,000
First Mortgage Bonds, Series C 7.61%
Due October 20, 2006 (the "Series C Bonds")
-------------------------------------------
Gentlemen:
I have acted as special counsel to First Trust of California, National
Association, and in such capacity, I am familiar with that certain Indenture of
Mortgage and Deed of Trust dated October 1, 1986 (as amended and supplemented
to, but not including, the date hereof, the "Existing Indenture"), between
Suburban Water Systems (the "Company") and First Hope of California, as trustee
(the "Trustee") as thereafter amended and supplemented by that Third Amendment
and Supplement to Indenture of Mortgage Dated October 1, 1986 (the "Third
Supplemental Indenture"), dated as of October 9, 1996, between the Company and
the Trustee (the Existing Indenture, as amended and supplemented by the Third
Supplemental Indenture, the "Indenture"). The terms used herein and not defined
herein shall have the respective meanings ascribed to them in, or pursuant to
the provisions of, the Indenture.
In that connection I have examined (i) the Existing Indenture, (ii) a draft
of the Third Supplemental Indenture, (iii) a form of the Series C Bonds, (iv)
the Articles of Incorporation and By-Laws of the Trustee, (v)
B3-1
<PAGE>
resolutions of the Trustee with respect to signing authority, and (vi) such
other documents as were deemed necessary to render this opinion.
In rendering this opinion, I have relied upon the facts and information
obtained from the records of the Trustee, officers of the Trustee, and other
sources believed by me to be reliable, and I have not undertaken to
independently verity the accuracy of the factual matters represented, warranted,
or certified in such documents. I have reviewed copies only of the documents in
(ii) and (iii) above, and I have assumed that all documents submitted to me as
copies conform to the originals, which assumptions I have not independently
verified. The opinions expressed herein are based on an analysis of existing
laws, regulations, rulings and court decisions.
Based upon and subject to the foregoing, I am of the opinion that:
21. The Trustee is a national banking association having trust powers,
duly organized, validly existing and in good standing under the laws of the
United States, with all requisite corporate rights, power and authority to
execute, deliver and perform its obligations as trustee under the Indenture.
The Trustee is authorized to exercise corporate trust powers in the State of
California.
22. The Trustee has full right, power and authority to perform its
obligations under the Indenture, including without limitation the authentication
of the Series C Bonds, and neither the execution and delivery by the Trustee,
nor performance of the Indenture or authentication of the Series C Bonds by the
Trustee, will conflict with, or result in a breach of the provisions of the
Trustee's Articles of Incorporation or Bylaws.
23. The Third Supplemental Indenture has been duly authorized, executed
and delivered by the Trustee and, assuming due authorization, execution and
delivery by the other parties thereto, constitutes the valid, legal and binding
obligations of the Trustee, enforceable in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting the enforcement of creditors' rights in general and
by general equity principles (regardless of whether such enforcement is
considered in a proceeding in equity or at law).
B3-2
<PAGE>
24. No consent, approval, authorization or other action by any
governmental or regulatory authority having jurisdiction over the Trustee that
has not been obtained is or will be required for the execution, delivery and
performance by the Trustee of the Indenture.
25. The Series C Bonds have been duly authenticated by the Trustee.
I express no opinion as to any matter other than as expressly set forth
above, and, in conjunction therewith, I specifically express no opinion as to
the status of the Series C Bonds or the interest thereon under (i) any federal
securities laws, including but not limited to the Securities Act of 1933, as
amended, and the Trust Indenture Act of 1939, as amended, or any state
securities or "Blue Sky" law, or (ii) any federal, state or local tax law.
This opinion is as of the date hereof, and I have undertaken no, and hereby
disclaim any, obligation to advise you of any change in any matter set forth
herein. Further, this opinion neither implies, nor should it be viewed to
imply, an approval or recommendation of any investment in any Series C Bonds.
I am not admitted to practice law in any state other than the State of
California and I do not express my opinion as to the effect of any law other
than the law of California and the federal laws of the United States of America
on the matters referred to herein.
This opinion is furnished by me solely for your benefit and may not,
without my express written consent, be relied upon by any other person.
Very truly yours,
B3-3
<PAGE>
SUBURBAN WATER SYSTEMS
CERTIFICATE OF OFFICERS
We, Michael O. Quinn and Daniel N. Evans, each hereby certify that we are,
respectively, the President and the Vice President - Finance and Chief Financial
Officer of SUBURBAN WATER SYSTEMS (the "Company"), a California corporation, and
that, as such, we are authorized to execute and deliver this Certificate in the
name of and on behalf of the Company, and hereby further certify as follows.
26. This certificate is being delivered pursuant to Section 3.4(a) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 21,
1996, among the Company, Southwest Water Company, a Delaware corporation, and
Aid Association for Lutherans (the "Purchaser"). The terms used in this
Certificate and not defined herein shall have the respective meanings ascribed
to them in the Bond Purchase Agreement.
27. The warranties and representations made by the Company contained in
Section 2 of the Bond Purchase Agreement are true in all material respects on
the date hereof.
28. Neither the Company nor the Subsidiary has taken any action or
permitted any condition to exist that would constitute a Default or Event of
Default.
29. The Company has performed and complied with all agreements and
conditions contained in the Bond Purchase Agreement that are required to be
performed or complied with by the Company before or at the date hereof.
30. Peter J. Moerbeek is, on and as of the date hereof, and at all times
subsequent to October, 1995, has been, the duly elected, qualified and acting
Secretary of the Company, and the signature appearing on the Certificate of
Secretary dated the date hereof and delivered to the Purchaser contemporaneously
herewith is his genuine signature.
1
<PAGE>
IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf
of the Company as of on October 21, 1996.
SUBURBAN WATER SYSTEMS
By
Michael O. Quinn, President
By
Daniel N. Evans, Vice President
- Finance and Chief Financial
Officer
2
<PAGE>
SOUTHWEST WATER COMPANY
CERTIFICATE OF OFFICERS
We, Anton C. Garnier and Peter J. Moerbeek each hereby certify that we are,
respectively, the President and the Vice President - Finance and Chief Financial
Officer of SOUTHWEST WATER COMPANY ("Southwest"), a Delaware corporation, and
that, as such, we are authorized to execute and deliver this Certificate in the
name and on behalf of Southwest, and hereby certify as follows.
31. This certificate is being delivered pursuant to Section 3.4(b) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 21,
1996, among Suburban Water Systems, a California corporation, Southwest, and Aid
Association for Lutherans (the "Purchaser").
32. The warranties and representations made by Southwest contained in
Section 2 of the Bond Purchase Agreement are true in all material respects.
33. Peter J. Moerbeek is, on and as of the date hereof, the duly elected,
qualified and acting Secretary of Southwest, and the signature appearing on the
Certificate of Secretary of Southwest dated the date hereof and delivered to the
Purchasers contemporaneously herewith is his genuine signature.
IN WITNESS WHEREOF, we have executed this Certificate in the name and
on behalf of Southwest as of October 21, 1996.
SOUTHWEST WATER COMPANY
By
Anton C. Garnier, President
1
<PAGE>
By
Peter J. Moerbeek, Vice
President - Finance and Chief
Financial Officer
<PAGE>
SUBURBAN WATER SYSTEMS
CERTIFICATE OF SECRETARY
I, Peter J. Moerbeek, hereby certify that I am the duly elected, qualified
and acting Secretary of SUBURBAN WATER SYSTEMS, a California corporation (the
"Company"); that, as such, I have access to its corporate records and am
familiar with the matters herein certified; that I am authorized to execute and
deliver this Certificate in the name and on behalf of the Company; and hereby
further certify as follows.
34. This certificate is being delivered pursuant to Section 3.4(c) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 21,
1996, among the Company, Southwest Water Company, a Delaware corporation, and
Aid Association for Lutherans (the "Purchaser"). The terms used in this
Certificate and not defined herein shall have the respective meanings ascribed
to them in the Bond Purchase Agreement.
35. Attached hereto as Attachment A is a true and correct copy of
resolutions, and the preamble thereto, adopted by the Board of Directors of the
Company on October 17, 1996, and such resolutions and preamble set forth in
Attachment A hereto were duly adopted by said Board of Directors and are in full
force and effect on and as of the date hereof, not having been amended, altered
or repealed, and such resolutions are filed with the records of the Board of
Directors.
36. The documents listed below were executed and delivered by the Company
pursuant to and in accordance with the resolutions set forth in Attachment A
hereto and said documents as executed are substantially on the terms submitted
to and approved by the Board of Directors of the Company as aforementioned:
(a) the Bond Purchase Agreement;
(b) the Series C Bonds; and
(c) the Third Supplemental Indenture.
37. Attached hereto as Attachment B is a true, correct and complete copy
of the bylaws of the Company as in full force and effect on
1
<PAGE>
and as of the date hereof, which bylaws were last amended by the Board of
Directors of the Company on, and have been in full effect in said form at all
times from and after May 26, 1993 to and including the date hereof, without
modification or amendment in any respect.
38. Each of the following named persons is on and as of the date hereof,
and at all times subsequent to May 21, 1996 has been a duty elected, qualified
and acting officer of the Company holding the office or offices set forth below
opposite his name:
<TABLE>
<CAPTION>
Name Office Signature
- ---- ------ ---------
<S> <C> <C>
Michael O. Quinn President /s/ Michael O. Quinn
Peter J. Moerbeek Secretary /s/ Peter J. Moerbeek
Daniel N. Evans Chief Financial Officer /s/ Daniel N. Evans
</TABLE>
39. The signature appearing opposite the name of each such person set
forth above is his genuine signature.
40. There have been no amendments or supplements to or restatements of the
Articles of Incorporation of the Company since August 9, 1982.
41. The seal set forth beside my name below is the true corporate seal of
the Company.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate
seal of the Company as of October 21, 1996.
SUBURBAN WATER SYSTEMS
2
<PAGE>
[Corporate Seal]
Secretary
3
<PAGE>
Attachment A
RESOLUTIONS OF THE
BOARD OF DIRECTORS
SUBURBAN WATER SYSTEMS
[To follow].
Attachment A - 1
<PAGE>
Attachment B
Bylaws of the Company
[To be supplied by Company].
Attachment B - 1
<PAGE>
SOUTHWEST WATER COMPANY
CERTIFICATE OF SECRETARY
I, Peter J. Moerbeek, hereby certify that I am the duly elected, qualified
and acting Secretary of SOUTHWEST WATER COMPANY, a Delaware corporation
("Southwest"); that, as such, I have access to its corporate records and am
familiar with the matters herein certified; that I am authorized to execute and
deliver this Certificate in the name and on behalf of Southwest; and hereby
further certify as follows.
42. This certificate is being delivered pursuant to Section 3.4(d) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 21,
1996, among Suburban Water Systems, a California corporation, Southwest and Aid
Association for Lutherans (the "Purchaser"). The terms used in this Certificate
and not defined herein shall have the respective meanings ascribed to them in
the Bond Purchase Agreement.
43. Attached hereto as Attachment A is a true and correct copy of
resolutions, and the preamble thereto, adopted by the Board of Directors of the
Company on October 17, 1996, and such resolutions and preamble set forth in
Attachment A hereto were duly adopted by said Board of Directors and are in full
force and effect on and as of the date hereof, not having been amended, altered
or repealed, and such resolutions are filed with the records of the Board of
Directors. Southwest has executed and delivered, for the purpose of making
certain representations, the Bond Purchase Agreement pursuant to and in
accordance with such resolutions.
44. Attached hereto as Attachment B is a true, correct and complete copy
of the bylaws of Southwest as in full force and effect on and as of the date
hereof, which bylaws were last amended by the Board of Directors of Southwest
on, and have been in full effect in said form at all times from and after June
27, 1995 to and including the date hereof, without modification or amendment in
any respect.
45. Each of the following named persons is on and as of the date hereof a
duly elected, qualified and acting officer of Southwest holding the office or
offices set forth below opposite his name:
1
<PAGE>
Name Office Signature
- ---- ------ ---------
Anton C. Garnier President /s/ Anton C. Garnier
Peter J. Moerbeek Vice President - Finance, /s/ Peter J. Moerbeek
Chief Financial Officer
and Secretary
Stephen J. Muzi Corporate Controller /s/ Stephen J. Muzi
46. The signature appearing opposite the name of each such person set
forth above is his genuine signature.
47. Attached hereto as Attachment C is a true, accurate and complete copy
of the Certificate of Incorporation of Southwest, together with all amendments
thereto, as currently in effect. There have been no amendments or supplements
to or restatements of the Certificate of Incorporation of Southwest since May 1,
1995.
48. The seal set forth beside my name below is the true corporate seal of
Southwest.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate
seal of Southwest as of October 21, 1996.
SOUTHWEST WATER COMPANY
[Corporate Seal]
/s/ Peter J. Moerbeek
Secretary
2
<PAGE>
ANNEX 4
LITIGATION
In September 1995, the Company and the Parent were served with a
complaint and summons in an action entitled Edward Laborde v. Manville
--------------------------
Corporation Asbestos Disease Compensation Fund, et al., Case No. 751460 in the
- ------------------------------------------------------
Orange County Superior Court. In the complaint, Mr. Laborde alleged that during
the 1950s and 1960s he was employed by, among others, the parent as an asbestos
pipe layer, that in the course of his employment he was exposed to asbestos
fibers and that as the result of such employment and such exposure he contracted
mesothelioma. The Company and the Parent answered the complaint denying all
allegations and raising several affirmative defenses.
In late 1995, Mr. Laborde died. In March 1996, Mr. Laborde's widow
and three children filed a wrongful death action against the same defendants
named in the first action, including the Company and the Parent. This action is
Case No. 761172 in the Orange County Superior Court and alleges the same basic
facts as the first action, plus the death of Mr. Laborde. Subsequent to the
filing of the second action, Mrs. Laborde was substituted in as the plaintiff in
the first action and the two actions were consolidated for purposes of discovery
and trial.
In both actions, the plaintiffs contend that the several defendants,
including alleged manufacturers and suppliers of asbestos cement pipe, are
liable for the condition and ultimate death of Mr. Laborde on theories of
negligence, breach of warranty and strict liability. Both actions seek
unspecified general damages according to proof and the wrongful death action
seeks burial expenses.
In July 1996, the Company and the Parent demurred (i.e., moved to
dismiss) the second complaint on the ground that any claim against them (as
opposed to the other defendants) would be barred as a matter of law. Based upon
this motion, the Court struck the causes of action for breach of warranty, but
left standing the causes of action for negligence and strict liability. An
answer is due to the second complaint in October 1996, and the Company and the
Parent again intend to deny all allegations and raise several affirmative
defenses.
Annex 4-1
<PAGE>
Upon the filing of the first action, the Company made written demands
for defense and indemnity against several general liability and workers'
compensation carriers who provided coverage to the Company and the Parent during
the more than thirty (30) year period from Mr. Laborde's alleged first exposure
to asbestos fibers on construction projects of the Company and the Parent
through the present. Two workers' compensation carriers have acknowledged these
demands in writing but have not accepted responsibility for defense or
indemnity. One general liability carrier which provided coverage during the
period from January 1, 1986 through September 1, 1988 has agreed, on a very
qualified basis, to accept defense and indemnity obligations under the liability
policies which it issued. Such carrier has not at this time elected to
designate defense counsel to assume the defense of the Company and the Parent in
the two actions. The Company and its insurance consultant are continuing
discussions with other general liability carriers concerning acceptance by them
of defense and indemnity obligations.
With the consolidation of the two actions, they are proceeding toward
trial in normal course. Certain of the defendants who were alleged to be
suppliers of asbestos cement pipe to the Company and the Parent have apparently
been dismissed on the basis that they were not suppliers to the Company and the
Parent, and the alleged manufacturer defendant may not be reachable in these
actions due to certain rulings made in a bankruptcy proceeding. As a result,
the Company and the Parent may be the only remaining defendants in the actions.
The Plaintiffs have initiated discovery with requests to the Company and the
Parent for production of documents and designation of knowledgeable witnesses,
and responses are due in October, 1996. Thereafter, one or more depositions may
be taken by the plaintiffs in November.
It has been and remains the position of the Company and the Parent
that they have no responsibility for the alleged condition and the death of Mr.
Laborde. Rather, the Company and the Parent believe that Mr. Laborde's alleged
condition and death were due to other factors, including, perhaps, a smoking
habit. Accordingly, the Company and the Parent intend to contest these actions
vigorously.
Annex 4-2
<PAGE>
EXHIBIT 4.4A
RECORDING REQUESTED BY
AND WHEN RECORDED
RETURN TO:
James W. Daniels, Esq.
Latham & Watkins
650 Town Center Drive
Suite 2000
Costa Mesa, CA 92626
INSTRUCTIONS TO COUNTY CLERK:
Index this instrument as: (i) a Mortgage;
(ii) a Fixture Filing; and (iii) a Deed of Trust.
- --------------------------------------------------------------------------------
NEW MEXICO UTILITIES, INC.
(formerly Paradise Community Services, Inc.)
TO
SUNWEST BANK OF ALBUQUERQUE, NATIONAL ASSOCIATION
Trustee
____________________
FIRST SUPPLEMENT TO
INDENTURE OF MORTGAGE
Dated February 14, 1992
Securing
First Mortgage Bonds
____________________
- --------------------------------------------------------------------------------
[The Indenture to which this instrument is a supplement
is a mortgage of both real and personal property, including
chattels, and also constitutes, among other things, a Security
Agreement creating a security interest in personal property.
Such Indenture contains after-acquired property provisions.
Such Indenture also contains an agreement, in Section 9.04
thereof, by which New Mexico Utilities, Inc., as trustor,
agrees to subject the real estate subject thereto to the
terms of the Deed of Trust Act, 48-10-1 to 48-10-21 NMSA 1978.]
<PAGE>
THIS FIRST SUPPLEMENT TO INDENTURE OF MORTGAGE (the "Supplement") is made
and entered into as of the 15th day of May, 1992 by and between NEW MEXICO
UTILITIES, INC., a New Mexico corporation, formerly Paradise Community Services,
Inc. (hereinafter called the "Company"), and SUNWEST BANK OF ALBUQUERQUE,
NATIONAL ASSOCIATION, a national banking association (hereinafter called
"Trustee") with respect to the following:
RECITALS
--------
A. The Company and Trustee are parties to a certain Indenture of
Mortgage dated February 14, 1992 and filed March 11, 1992 as Document No. 92-
22404, recorded in Book 92-5, Pages 9251 to 9380, records of Bernalillo County,
New Mexico (the "Indenture").
B. Exhibit "A" to the Indenture, as recorded, describes certain real
property and real property interests owned by the Company. As recorded, such
Exhibit "A" contains a number of errors. In addition, when the Indenture was
recorded, page 13 thereof was not included in the recorded instrument.
C. Section 13.01 of the Indenture permits the Company to execute,
deliver and record, without the consent of the Bondholders, supplements to the
Indenture for the purpose, among other things, of clarifying or correcting
matters in the Indenture, including Exhibit "A" thereto. The Company and the
Trustee desire to execute, deliver and record this Supplement for the purpose of
correcting the errors which currently exist in Exhibit "A" to the Indenture and
for the purpose of adding page 13 to the recorded instrument, and do so pursuant
to the provisions of Section 13.01 of the Indenture.
AGREEMENT
---------
IN CONSIDERATION OF the foregoing recitals, the Company and the Trustee
agree as follows:
1. Amendments to Exhibit "A" to Indenture. Exhibit "A" to the Indenture
--------------------------------------
shall be amended in the following respects:
(a) Item 84 in Part I of Exhibit "A" is modified to reflect that the
Easement therein described is dated June 15, 1990 rather than June 2, 1990.
(b) Item A in Part II of Exhibit "A" is modified in the following
respects:
(i) The letter "L" appearing in the third and fourth lines of
the indented legal description shall be replaced with an "E" each place where
such letter "L" appears.
(ii) The phrase "02 minutes" appearing in the fourth line of the
indented legal description shall be amended to read "00 minutes."
(c) The phrase "S.60 degrees 55'53" East" appearing in the next to
last line of the indented legal description in Item D of Part II of Exhibit A
shall be amended to read "S.63 degrees 55'53" East."
2. Inclusion of Page 13. The page attached to this supplement as
--------------------
Exhibit "A" is hereby added to the Indenture as page 13 thereof.
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3. Effective Date. The effective date of this Supplement shall be that
--------------
date upon which an executed and acknowledged counterpart of this Supplement is
recorded in the office of the County Clerk of Bernalillo County, New Mexico.
4. Indenture in Effect. The Company and the Trustee agree and
-------------------
acknowledge that the Indenture, as amended and supplemented by this Supplement,
remains in full force and effect in accordance with its terms.
5. Company Covenant to Pay Trustee Fees. By its signature hereto, the
------------------------------------
Company covenants and agrees to pay the reasonable fees and costs of the Trustee
incurred or charged in connection with the review and execution of this
Supplement and all amendments to the form UCC-1 financing statements filed and
recorded concurrently with the recordation of the Indenture.
6. Counterparts and Inclusions in Indenture. This Supplement may be
----------------------------------------
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute a single instrument. Upon recordation
of this Supplement in the office of the County Clerk of Bernalillo County, New
Mexico, this Supplement shall be and become a part of the Indenture and shall be
construed as a part thereof. By its signature hereto, the Trustee authorizes the
Company to record an executed and acknowledged counterpart of this Supplement in
the office of the County Clerk of Bernalillo County, New Mexico.
7. Separability Clause. In case any provision in this Supplement shall
-------------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions, and of the other provisions of the Indenture, shall
not in any way be affected or impaired thereby.
8. Governing Law. THIS SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW MEXICO.
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IN WITNESS WHEREOF, the parties hereto have caused this Supplement to
Indenture of Mortgage to be duly executed, with the Company's corporate seal to
be hereunto affixed and attested, all as of the day and year first above
written.
[SEAL] NEW MEXICO UTILITIES INC.,
a New Mexico corporation
By /s/ Robert Swartwout
----------------------------
Its: President
--------------------------
By /s/ William C. Jasura
----------------------------
Its: V.P. Finance
--------------------------
"Company"
SUNWEST BANK OF ALBUQUERQUE,
NATIONAL ASSOCIATION,
a national banking association
By /s/ Elizabeth Dean
---------------------------
Authorized Officer
Attest:___________________________
Assistant Secretary
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STATE OF NEW MEXICO
COUNTY OF BERNALILLO
On July 1, 1992, before me, Jean G. Stevens, Notary Public, personally
appeared Robert Swarthout, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Jean G. Stevens
_________________________________
Notary Public
STATE OF NEW MEXICO
COUNTY OF BERNALILLO
On July 1, 1992, before me, Jean G. Stevens, Notary Public, personally
appeared William C. Jasura, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Jean G. Stevens
_________________________________
Notary Public
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STATE OF NEW MEXICO
COUNTY OF BERNALILLO
On June 19, 1992, before me, W. M. Reach, Notary Public, personally
appeared Elizabeth Dean, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
/s/ W. M. Reach
---------------------------------
Notary Public
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Payment of Taxes]; and (f) any lien modifying, renewing, extending or replacing
- ----------------
solely a lien or liens described in clause (d) of this definition, the
incurrence of which complies with subsection B of Section 6.06 [Limitations on
--------------
Liens; Payment of Taxes]; and (g) the lien permitted by Section 10.07
- -----------------------
[Compensation and Reimbursement].
- -------------------------------
"Prior Lien Obligation" means any indebtedness and the evidence
---------------------
thereof, if any, secured by a Prior Lien.
"Purchase Agreement" means the document by which a Purchaser agrees to
------------------
purchase all or a portion of the Series A Bonds or any subsequent series of
Bonds.
"Purchaser" means the buyer or buyers of the Series A Bonds or any
---------
subsequent series of Bonds as provided by one or more Purchase Agreements with
respect to such series of Bonds.
"Redemption Date" when used with respect to any Bond to be redeemed
---------------
means the date fixed for such redemption pursuant to this Indenture.
"Redemption Price" when used with respect to any Bond to be redeemed
----------------
means the price at which it is to be redeemed pursuant to this Indenture. Such
price includes the applicable premium, if any, but does not include installments
of interest whose Stated Maturity is on or before the Redemption Date.
"Registered Holder" when used with respect to any Bond means the
-----------------
Person in whose name such Bond is registered in the Bond Register.
"Regular Record Date" for the interest payable on any Interest Payment
-------------------
Date on the Bonds of any series means the date for the determination of the
Person entitled to the payment of such interest as specified in the provisions
of this Indenture creating such series.
"Responsible Officer" when used with respect to the Trustee means the
-------------------
chairman or vice-chairman of the board of directors of the Trustee, the chairman
or vice-chairman of the executive committee of said board, the president, any
vice-president, the secretary, any assistant secretary, the treasurer, any
assistant treasurer, the cashier, any assistant cashier, any trust officer or
assistant trust officer, the controller, any assistant controller or any other
officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer of the Trustee to whom
such matter is referred because of his knowledge of and familiarity with the
particular subject.
"Restricted Third-Party Encumbrance" means any lien, mortgage,
----------------------------------
security interest, charge or title defect such that any person other than the
Company (the "obligee") has, or would have, upon a default in any obligation by
any other person other than the Company (the "obligor"), a right or remedy, the
exercise of which by the obligee would materially detract from the value of the
property interest of the Company affected thereby or would materially impair the
use of such property for the purposes for which the Company holds such property
or such rights therein or thereto. A Restricted Third-Party Encumbrance shall
not include this Indenture or any supplement thereto.
"Security" shall have the meaning set forth in Section 2(1) of the
--------
Securities Act of 1933, as amended.
EXHIBIT "A"
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EXHIBIT 4.5A
NEW MEXICO UTILITIES, INC.
4700 Irving Boulevard, N.W., Suite 201
Albuquerque, New Mexico 87114
_______________
BOND PURCHASE AGREEMENT
$4,000,000
FIRST MORTGAGE BONDS, SERIES B 7.64%, DUE NOVEMBER 7, 2006
_______________
As of November 8, 1996
Ameritas Life Insurance Corp.
5900 "O" Street
Lincoln, Nebraska 68510-6970
and
Woodmen Accident and Life Company
1526 "K" Street
Lincoln, Nebraska 68508
Ladies and Gentlemen:
New Mexico Utilities, Inc. (the "Company"), a New Mexico corporation,
hereby agrees with you as follows:
SECTION 1. PURCHASE AND SALE OF BONDS
1.1 ISSUE OF BONDS.
The Company has authorized the issue of Four Million Dollars ($4,000,000) in
aggregate principal amount of its First Mortgage Bonds, Series B 7.64%, Due
November 7, 2006 (herein called the "Bonds"). The Bonds will be issued under
and pursuant to the Second Amendment and Supplement to Indenture of Mortgage
dated as of February 14, 1992 (the "Second Supplemental Indenture") dated as of
October 21, 1996, between the Company and Sunwest Bank of Albuquerque, National
Association, as trustee (the "Trustee"). The Second Supplemental Indenture
modifies
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and amends that certain Indenture of Mortgage, dated as of February 14, 1992
(the "Original Indenture"), between the Company and the Trustee (as amended by
the First Supplement to Indenture of Mortgage dated as of February 14, 1992 (the
"First Supplemental Indenture"), dated as of May 15, 1992, between the Company
and the Trustee, and as may be further amended from time to time, the
"Indenture"). The Bonds will be secured pursuant to and entitled to all of the
benefits of the Indenture.
Each Bond:
(a)
will be in the amount of One Thousand Dollars ($1,000) or an integral multiple
thereof;
(b)
will bear interest on the unpaid principal balance thereof from the date of the
Bond at the rate of seven and sixty-four one-hundredths percent (7.64%) per
annum, payable semiannually on the tenth (10th) day of each May and
November in each year commencing on the first Interest Payment Date next
succeeding the date of such Bond until the principal amount thereof will be
due and payable, and thereafter will bear interest at a rate equal to the
lesser of (i) the highest rate allowed by applicable law or (ii) eight and
sixty-four one-hundredths percent (8.64%) per annum;
(c)
will mature on November 7, 2006; and
(d)
will be in the form of Bond set forth in Exhibit A to this Agreement.
1.2 THE CLOSING.
(a) PURCHASE AND SALE OF BONDS.
The Company hereby agrees to sell to each of you and, subject to the terms and
conditions set forth herein, you each hereby agree to purchase from the
Company, in accordance with the provisions of this Agreement, Bonds in the
principal amount specified opposite your name on Annex 1 hereto, at a
purchase price of one hundred percent (100%) of the principal amount
thereof. Each sale shall be a separate sale by the Company to a Purchaser
identified and in the principal amount of the Bonds identified to such
Purchaser on Annex 1. However, each Purchaser and the Company shall be
obligated to close the sales provided for in this Agreement only if both
such sales close.
(b) THE CLOSING.
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The closing (the "Closing") of your purchase will be held at 8:30 a.m., Los
Angeles, California Time, on November 8, 1996 (the "Closing Date") at the
office of the Company's counsel, Latham & Watkins, 650 Town Center Drive,
Twentieth Floor, Costa Mesa, California 92626-1925. At the Closing, the
Company will deliver to each of you one or more Bonds (as set forth
opposite your respective name on Annex 1 to this Agreement), in the
aggregate principal amount of your respective purchase, dated the Closing
Date and payable to you or payable as indicated on Annex 1 to this
Agreement, against payment by federal funds wire transfer in immediately
available funds of the purchase price thereof, as directed by the Company
on Annex 2 to this Agreement.
1.3 CERTAIN PURCHASER REPRESENTATIONS.
(a) PURCHASE FOR INVESTMENT.
Each of you severally and not jointly represents to the Company that you are
purchasing the Bonds listed on Annex 1 to this Agreement opposite your
respective name for your respective own account for investment and with no
present intention of distributing or reselling the Bonds or any part
thereof, but without prejudice, however, to your respective rights at all
times to sell or otherwise dispose of all or any part of the Bonds under a
registration statement filed under the Securities Act, or in a transaction
exempt from the registration requirements of such Act, and to have control
of the disposition of all of your respective assets. It is understood
that, in making the representations set out in Section 2.9(a), Section 2.11
and Section 2.16 of this Agreement, the Company is relying, to the extent
applicable, upon your respective representations as aforesaid.
(b) ERISA.
Each of you further severally and not jointly represents that the source of
funds (the "Source") to be used by you to pay the purchase price of the
Bonds to be purchased by you hereunder is an insurance company general
account as such term is used in PTCE 95-60 issued by the United States
Department of Labor and that there is no employee benefit plan (treating as
a single plan all plans maintained by the same employer or employee
organization, or any affiliate thereof (as defined in Section V(a)(1) of
PTCE 95-60)) with respect to which the amount of the general account
reserves and liabilities for all contracts held by or on behalf of such
plan exceeds ten percent (10%) of the total reserves and liabilities of
such general account (exclusive of separate account liabilities) plus
surplus, as set forth in the NAIC Annual Statements filed with your state
of domicile and as determined in accordance with Section I(a) of PTCE 95-
60.
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Each of you further severally and not jointly covenant that you shall
effect no transfer of the Bonds which would cause the foregoing
representation, if made by the transferee of the Bonds immediately
following such transfer, to be inaccurate or untrue. The foregoing
covenant includes any transfer from a general account to a separate
account.
(c) SURRENDER FOR REISSUE UPON TRANSFER.
Each Purchaser severally and not jointly represents and covenants that such
Purchaser shall not sell, transfer or otherwise dispose of the Bonds unless
prior to delivery thereof such Purchaser shall present such Bonds to the
Trustee for notation thereon of the portion of the principal thereof
redeemed or shall surrender such Bonds to the Trustee in exchange for a new
Bond or Bonds for the unredeemed balance of the principal of the
surrendered bond or bonds. It is intended that the provisions of this
subsection shall constitute the written agreement of the Company and each
Purchaser provided for in clause (i) of Section 5.07 of the Original
Indenture and that the Trustee may rely upon this subsection in connection
with any partial redemption of the Bonds.
1.4 FAILURE TO DELIVER; FAILURE OF CONDITIONS.
If at the Closing the Company fails to tender to you or either of you the Bonds
to be purchased by you thereat, or if any condition specified in Section 3 of
this Agreement has not been fulfilled, each of you may thereupon elect to be
relieved of all further obligations under this Agreement. Nothing in this
Section 1.4 will operate to relieve the Company from any of its obligations
under this Agreement or to waive any of your respective rights against the
Company.
1.5 EXPENSES.
(a) GENERALLY.
Whether or not the Bonds are sold, the Company shall promptly (and in any event
within thirty (30) days after receiving any statement or invoice therefor)
pay all expenses relating to this Agreement, the Indenture and the Bonds,
including but not limited to:
(i) the cost of reproducing this Agreement, the Second
Supplemental Indenture, the Bonds and any other documents or
instruments relating thereto;
(ii) subject to Section 1.5(b) below, the fees and
disbursements of your respective special counsel;
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(iii) the cost of delivering to your respective home offices or
custodian banks, insured to your respective satisfaction, the Bonds
purchased by you at the Closing;
(iv) the cost of obtaining the private placement number
referred to in Section 2.21 of this Agreement;
(v) the fees and expenses of SSP Hambro & Co., LLC and Wells
Fargo Bank, and any other broker or agent, incurred by the Company in
connection with the offer, issue, sale and delivery of the Bonds or
the transactions contemplated by this Agreement; and
(vi) all expenses relating to the consideration, negotiation,
preparation or execution of any amendments, waivers or consents
pursuant to the revisions of this Agreement or the Indenture, whether
or not such amendments, waivers or consents shall have become
effective.
(b) COUNSEL.
Without limiting the generality of the foregoing, it is agreed and understood
that the Company will pay, at or within thirty (30) days after the Closing,
statements for fees and disbursements of your respective special counsel
presented at the Closing and the Company will also pay upon receipt of any
statement thereof, each additional statement for fees and disbursements of
your respective special counsel rendered after the Closing in connection
with the issuance of the Bonds or the matters referred to in Section 1.5(a)
hereof. Provided, however, that the maximum liability of the Company for
the fees and disbursements of special counsel to each Purchaser shall not
exceed $1,000 in the aggregate as to each Purchaser. There shall be no
charge to the Company for fees or disbursements of counsel for the
Purchasers who are employees of the Purchasers or their respective
affiliates.
(c) SURVIVAL.
The obligations of the Company under this Section 1.5 will survive the payment
or prepayment of the Bonds and the termination of this Agreement.
SECTION 2. WARRANTIES AND REPRESENTATIONS
To induce each of you to enter into this Agreement and to purchase the
Bonds listed on Annex 1 to this Agreement opposite your respective names, the
Parent (solely with respect to the representations and warranties set forth in
Section 2.3(a), Section 2.4(a), Section 2.12(a) and Section 2.12(b) and, insofar
as such representations and warranties relate to the Parent, Section 2.10 and
Section 2.18) and the Company (with respect to all representations and
warranties other than those set
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forth in Sections 2.3(a)(i), (ii), and (iii), Section 2.4(a), Section 2.12(a)
and Section 2.12(b), and, insofar as such representations and warranties relate
to the Company, Section 2.3(a) (iv), Section 2.10 and Section 2.18) warrant and
represent to you as of the Closing Date as follows.
2.1 SUBSIDIARIES.
The Company has no Subsidiaries.
2.2 CORPORATE ORGANIZATION AND AUTHORITY.
The Company:
(a)
is a corporation duly organized, validly existing and in good standing under the
laws of the State of New Mexico;
(b)
has all requisite legal and corporate power and authority and all necessary
licenses and permits to own and operate its Properties and to carry on its
business as now conducted and as presently proposed to be conducted; and
(c)
Part I of Annex 3 to this Agreement sets forth the name of each of the Company's
corporate or joint venture Affiliates, the nature of the affiliation and
the jurisdiction of incorporation of the Company and each such Affiliate.
2.3 BUSINESS, PROPERTY AND INDEBTEDNESS.
(a) NATURE OF BUSINESS; PROPERTIES.
Each of:
(i) the Annual Report of the Parent on Form 10-K for the
fiscal year ended December 31, 1995, filed by the Parent with the
Securities and Exchange Commission;
(ii) the Annual Report to Shareholders of the Parent for the
fiscal year ended December 31, 1995;
(iii) the Quarterly Report of the Parent on Form 10-Q for the
fiscal period ended June 30, 1996; and
(iv) the Confidential Direct Placement Memorandum (the
"Placement Memorandum"), dated August 1996 and prepared by SSP Hambro
& Co., LLC and Wells Fargo Bank;
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correctly describes, among other things, the general nature of the business
and principal Properties of the Company. Copies of each item described in
clauses (i) through (iv) above have previously been delivered to each
Purchaser.
(b) INDEBTEDNESS.
Part II of Annex 3 to this Agreement correctly lists all outstanding
indebtedness for borrowed money of the Company as of the Closing Date.
2.4 FINANCIAL STATEMENTS; MATERIAL ADVERSE CHANGE.
(a) FINANCIAL STATEMENTS-PARENT.
The consolidated balance sheets of the Parent and its consolidated subsidiaries
(including, without limitation, the Company) as of December 31 in the years
1995 and 1994 and the related consolidated statements of income,
consolidated statements of changes in common stockholders' equity and
consolidated statements of cash flows for the fiscal years ended on such
dates, all accompanied by reports thereon, containing opinions without
qualification, by KPMG Peat Marwick, LLC, independent certified public
accountants, and the consolidated condensed balance sheets of the Parent
and its consolidated subsidiaries as of June 30, 1996 and December 31,1995,
and the related consolidated condensed statements of income and cash flow
for the three (3) and six (6) month periods ended on June 30, 1996, copies
of which have been delivered to each of you, have been prepared in
accordance with generally accepted accounting principles consistently
applied, and present fairly the consolidated financial position of the
Parent and its consolidated subsidiaries as of such dates and the results
of their operations for such periods. All such consolidated financials
include the accounts of the Company.
(b) FINANCIAL STATEMENTS - COMPANY.
The balance sheets of the Company as of December 31 in the years 1995 and 1994
and the related statements of income and retained earnings and statements
of cash flows for the fiscal years ended on such dates, accompanied by a
report thereon, containing an opinion without qualification, by KPMG Peat
Marwick LLP, copies of which have been delivered to you, have been prepared
in accordance with generally accepted accounting principles consistently
applied, and present fairly the financial position of the Company as of
such dates and the results of its operations for such periods.
(c) MATERIAL ADVERSE CHANGE.
Since December 31, 1995, there has been no change in the business, profits,
Properties or condition (financial or otherwise) of the Company except:
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(i) as disclosed to you in the documents referenced in clauses
(iii) and (iv) of Section 2.3(a) or otherwise disclosed to you in this
Agreement; and
(ii) for other changes in the ordinary course of business that,
in the aggregate, have not had a materially adverse effect on the
business, profits, Properties or condition (financial or otherwise) of
the Company or on the ability of the Company to perform its
obligations set forth in this Agreement, in the Bonds and in the
Indenture.
2.5 FULL DISCLOSURE.
The financial statements referred to in Section 2.4(a) and 2.4(b) do not, nor
does this Agreement or the Placement Memorandum, contain any untrue statement of
a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading.
2.6 PENDING LITIGATION.
There are no proceedings, actions or investigations pending or, to the knowledge
of the Company, threatened against or affecting the Company in any court or
before any Governmental Authority or arbitration board or tribunal which, either
individually or in the aggregate, involve the possibility of materially and
adversely affecting the business, profits, Properties, or condition (financial
or otherwise) of the Company, or the ability of the Company to consummate the
Transactions or perform its obligations set forth in this Agreement, in the
Bonds or in the Indenture. Without limiting the generality of the foregoing,
except as has been disclosed in the Placement Memorandum or the items listed in
Section 2.3, no proceedings with respect to the condemnation of any Property of
the Company are pending or, to the best knowledge of the Company, contemplated
by any Governmental Authority to which the Property of the Company is subject.
The Company is not in default with respect to any order of any court,
Governmental Authority or arbitration board or tribunal.
2.7 TITLE TO PROPERTIES.
The Company has, and at the time of the Closing will have, good and
marketable title to all of the fee interests in real Property, and good title to
all of the other interests in Property, it purports to own, including Property
reflected in the most recent balance sheet referred to in Section 2.4(b) of this
Agreement and Property described in the Indenture as being subject to the Lien
thereof, subject only to the Lien of the Indenture and Prior Liens. Without
limiting the generality of the foregoing, the Company has, as of the Closing
Date, all water, water rights, rights to purchase water, water systems, water
works, plants, pumps, tanks, pipes, strainers, fittings, valves, reservoirs,
supplies and implements it purports to own, in each case owned by the Company
subject only to the Lien of the Indenture and Prior Liens and without
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limitation as to time within which any such rights may be exercised or such
Property may be held. There are no Liens upon or other defects (including,
without limitation, defects of the type which would be disclosed by a survey) in
or to any of the real Property of the Company, or the title or interest of the
Company in or to such real Property, which, individually or in the aggregate,
would have a material adverse effect upon the business, profits, Properties or
condition (financial or otherwise) of the Company or the ability of the Company
to operate its business.
2.8 PATENTS, TRADEMARKS, LICENSES, ETC.
The Company owns or possesses, and upon completion of the Closing will own or
possess, all of the franchises (including, without limitation, franchises
granted by the PUC), patents, trademarks, service marks, trade names,
copyrights, licenses and rights (including, without limitation, rights to
produce and purchase water) necessary for the present and planned future conduct
of its business, without any known conflict with the rights of others, and all
such franchises, patents, trademarks, service marks, trade names, copyrights,
licenses and rights are valid and subsisting. To the Company's knowledge, no
event has occurred which (a) permits, or after notice or lapse of time or both
would permit, revocation or termination of any such license or franchise or (b)
materially adversely affects or in the future may (so far as the Company can now
reasonably foresee) materially adversely affect any of the rights of the Company
thereunder.
2.9 AUTHORIZATION, EXECUTION, DELIVERY AND ENFORCEABILITY.
(a) TRANSACTIONS ARE LEGAL AND AUTHORIZED.
The consummation by the Company of each of the Transactions:
(i) is within the corporate powers of the Company; and
(ii) is legal and will not conflict with, result in any breach
in any of the provisions of, constitute a default under, or result in
the creation of any Lien upon any Property of the Company under the
provisions of, any agreement, charter instrument, bylaw or other
instrument to which it is a party or by which it or any of its
Property may be bound.
(b) OBLIGATIONS ARE ENFORCEABLE.
Each of this Agreement, the Second Supplemental Indenture and the Bonds has been
duly authorized by all necessary action on the part of the Company, has
been executed and delivered by duly authorized officers of the Company and
constitutes a legal, valid and binding obligation of the Company,
enforceable in
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accordance with its terms, except that the enforceability of this
Agreement, the Indenture and the Bonds may be:
(i) limited by applicable bankruptcy, reorganization,
arrangement, insolvency, moratorium, or other similar laws affecting
the enforceability of creditors' rights generally; and
(ii) subject to the availability of equitable remedies.
2.10 NO DEFAULTS.
To the knowledge of the Company and the Parent, no event has occurred and no
condition exists which, upon the execution of this Agreement and the Second
Supplemental Indenture and the issuance of the Bonds, would constitute a Default
or an Event of Default. To the knowledge of the Company and the Parent, neither
the Company nor the Parent is in violation in any respect of any term of any
charter instrument or bylaw and neither the Company nor the Parent is in
violation in any material respect of any term in any agreement or other
instrument to which it is a party or by which it or any of its Property may be
bound. To the knowledge of the Company and the Parent, other than as disclosed
to you in Part V of Annex 3, no event has occurred or condition exists such
that, but for the waiver by any Person (other than the Company or the Parent) of
any term or provision in any agreement or other instrument to which the Company
or the Parent is a party or by which it or any of its Property may be bound, the
Company or the Parent would be in violation in any material respect of any of
its obligations under such agreement or instrument.
2.11 GOVERNMENTAL CONSENT.
As of the Closing, all consents, approvals, orders and authorizations
required of or by any Governmental Authority, including, without limitation, the
PUC, for the Company to consummate the Transactions will have been duly
obtained, all related filings, registrations and qualifications will have been
duly made, and no appeal from any such consent, approval, order or authorization
of or by any Governmental Authority will be pending, including, without
limitation, any such consent, approval, order or authorization of the PUC.
2.12 TAXES.
(a) RETURNS FILED; TAXES PAID.
All tax returns required to be filed by the Company, and any other Person with
which the Company files or has filed a consolidated return, in any
jurisdiction have in fact been filed on a timely basis, and, to the
knowledge of the Company and the Parent, all taxes, assessments, fees and
other governmental charges upon the Company, or upon any of its Properties,
income or franchises, which are due
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and payable have been paid or will be paid prior to delinquency. The
Company is not aware of any proposed additional tax assessment against it
or any such Person. There exists no controversy with any Governmental
Authority with respect to the amount of any tax payable by the Company to
such Governmental Authority.
(b) BOOK PROVISIONS ADEQUATE.
The provisions for taxes (including, without limitation, any payment or payments
owing from the Company to any other Person pursuant to any tax sharing
agreement among such Persons) on the books of the Company are adequate for
all open years and for its current fiscal period. The amount of the
liability for all taxes reflected in the consolidated balance sheet of the
Company as of December 31, 1995 is an adequate provision for such taxes
(including, without limitation, any payment due pursuant to any such tax
sharing agreement) as may be payable by the Company for the fiscal years
1992 through 1995, inclusive, the only fiscal years not closed by the
statute of limitations or by the completion of an audit.
2.13 USE OF PROCEEDS.
The Company will apply the proceeds from the sale of the Bonds solely to retire
short term bank indebtedness and to repay the Parent for advances used to fund
expenditures associated with water and sewer utility plant expansion for
anticipated growth in its service area and to redeem advances for certain
construction contracts. None of the transactions contemplated in this Agreement
(including, without limitation, the use of the proceeds from the sale of the
Bonds) violates, will violate or will result in a violation of Section 7 of the
Securities Exchange Act of 1934, as amended, or any regulations issued pursuant
thereto, including, without limitation, Regulations G, T and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Company
does not own, and does not intend with the proceeds of the sale of the Bonds to
own, carry or purchase any "margin security" within the meaning of said
Regulations G, T and X, including "margin securities" originally issued by the
Company. This Agreement and the Bonds will not be secured by any "margin
security," and no Bonds are being sold on the basis of any such collateral.
None of the proceeds from the sale of the Bonds will be used to purchase or
carry (or refinance any borrowing the proceeds of which were used to purchase or
carry) any "security" within the meaning of the Securities Exchange Act of 1934,
as amended.
2.14 PUBLIC UTILITY HOLDING COMPANY ACT.
The Company is not a "holding company" or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of
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a "holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
2.15 PRIVATE OFFERING.
Neither the Company nor SPP Hambro & Co., LLC and Wells Fargo Bank (the only
Persons authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Bonds or any similar
Security of the Company) has offered any of the Bonds or any similar Security of
the Company for sale to, or solicited offers to buy any thereof from, or
otherwise approached or negotiated with respect thereto with, any prospective
purchaser, other than you and thirty-eight (38) other institutional investors,
each of whom was offered all or a portion of the Bonds at private sale for
investment. The Company agrees that neither the Company nor anyone acting on its
behalf will offer the Bonds or any part thereof or any similar Securities for
issue or sale to, or solicit any offer to acquire any of the same from, anyone
so as to bring the offering, issuance or sale of the Bonds within the provisions
of Section 5 of the Securities Act.
2.16 COMPLIANCE WITH LAW.
To the knowledge of the Company, the Company:
(a)
is not in material violation of any law, ordinance, governmental rule,
regulation, order or judgment of any court or other Governmental Authority or
award of any arbitrator to which it is subject; and
(b)
has not failed to obtain any material license, permit, franchise or other
governmental authorization necessary to the ownership of its Property or to the
conduct of its business;
which violation or failure to obtain might, either individually or in the
aggregate, materially adversely affect the business, profits, Properties or
condition (financial or otherwise) of the Company or the ability of the Company
to consummate the Transactions or perform its obligations set forth in this
Agreement, the Indenture or the Bonds.
2.17 RESTRICTIONS ON COMPANY.
The Company:
(a)
is not a party to any contract or agreement, or subject to any charter or other
corporate restriction, which materially and adversely affects the business,
profits, Properties or condition (financial or otherwise) of the Company or
the ability of
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the Company to perform its obligations set forth in this Agreement, the
Indenture and the Bonds;
(b)
is not a party to any contract or agreement (other than the Indenture) which
restricts the right or ability of such corporation to incur debt; and
(c)
has not agreed or consented to cause or permit in the future (upon the happening
of a contingency or otherwise) any of its Property, whether now owned or
hereafter acquired, to be subject to a Lien not permitted by the Indenture.
2.18 ERISA.
(a) RELATIONSHIP OF VESTED BENEFITS TO PENSION PLAN ASSETS.
To the knowledge of the Company and the Parent, the present value of all
benefits vested under all Pension Plans (other than Multiple Employer
Pension Plans) maintained by the Company, the Parent and the subsidiaries
of the Parent (and under all Multiple Employer Pension Plans with respect
to which the Company, the Parent or of any such subsidiaries is a
"substantial employer" within the meaning of Section 4001(a)(2) of ERISA)
does not exceed the value of the assets of the Pension Plans allocable to
such vested benefits. For purposes of this Section 2.18(a), the present
value of the benefits vested under any Pension Plan shall be determined as
of the most recent valuation date, based upon assumptions and methods
determined in the good faith judgment of the Company and in compliance with
the requirements of law.
(b) ERISA REQUIREMENTS.
To the knowledge of the Company and the Parent, each of the Company and the
ERISA Affiliates:
(i) has fulfilled all obligations in all material respects
under the minimum funding standards of ERISA and the IRC with respect
to each Pension Plan;
(ii) has satisfied all contribution obligations in all material
respects in respect of each Multiemployer Pension Plan;
(iii) is in compliance in all material respects with all other
applicable provisions of ERISA and the IRC with respect to each
Pension Plan; and
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(iv) has not incurred any material liability under Title IV of
ERISA to the PBGC (other than in respect of required insurance
premiums, all of which that are due having been paid), with respect to
any Pension Plan, any Multiemployer Pension Plan or any trust
established thereunder.
No Pension Plan, or trust created thereunder, has incurred any material
accumulated funding deficiency (as such term is defined in Section 302 of
ERISA), whether or not waived, as of the last day of the most recently
ended plan year of such Pension Plan. The Company has no liability for any
post-retirement benefits (other than benefits pursuant to Section 4980B of
IRS or Title I, Subtitle B, Part 6 of ERISA) under any welfare plan (as
defined in Section 3(1) of ERISA).
(c) PROHIBITED TRANSACTIONS.
(i) The purchase of the Bonds by you will not constitute a
transaction prohibited by Section 406 of ERISA or a non-exempt
"prohibited transaction" (as such term is defined in Section 4975 of
the IRC) that could subject you, the Company" or any ERISA Affiliate
to the penalty or tax on prohibited transactions imposed by Section
502 of ERISA or Section 4975 of the IRC, and neither the Company nor
any ERISA Affiliate, nor any "employee benefit plan" (as such term is
hereinafter defined) of the Company or any ERISA Affiliate or any
trust created thereunder or any trustee or administrator thereof, has
engaged in any "prohibited transaction" that could subject you, the
Company, or any ERISA Affiliate, to such penalty or tax. The
representation by the Company in the preceding sentence is made in
reliance upon and subject to the accuracy of the representations in
Section 1.3(b) hereof as to the source of funds used by you.
(ii) Part III of Annex 3 hereto completely lists all Pension
Plans with respect to which the Company is a "party in interest" or a
"disqualified person" (as such terms are hereinafter defined) and all
Pension Plans covering employees of the Company or any "affiliate" (as
such term is hereinafter defined).
(iii) Part III to Annex 3 hereto completely lists all ERISA
Affiliates.
As used in this Section 2.18(c), the terms "employee benefit plan" and
"party in interest" have the respective meanings assigned to them in
Section 3 of ERISA;
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the term "affiliate" has the meaning assigned to it in Section 407(d) of
ERISA; and the term "disqualified person" has the meaning assigned to it in
Section 4975(e)(2) of the IRC.
(d) REPORTABLE EVENTS.
No Pension Plan or trust created thereunder has been terminated, and to the
knowledge of the Company and the Parent, there have been no "reportable
events" (as such term is defined in Section 4043 of ERISA), with respect to
any Pension Plan or trust created thereunder, which reportable event or
events will result in the termination of such Pension Plan and give rise to
a liability of the Company or any ERISA Affiliate in respect thereof.
(e) MULTIEMPLOYER PENSION PLANS.
Except as set forth on Part III of Annex 3 hereto, neither the Company nor any
ERISA Affiliate is an employer required to contribute to any Multiemployer
Pension Plan. Neither the Company nor any ERISA Affiliate has incurred,
nor is expected to incur, any withdrawal liability (that has not previously
been fully satisfied) under Title IV, Subtitle E of ERISA with respect to
any Multiemployer Pension Plan. None of the Multiemployer Pension Plans
referred to in Part III of Annex 3 have been terminated under Section 4041A
of ERISA, have been placed in reorganization status under Title IV of
ERISA, or have been determined to be "insolvent" (as such term is defined
in Section 4245 of ERISA).
(f) MULTIPLE EMPLOYER PENSION PLANS.
Except as set forth in Part III of Annex 3 hereto, neither the Company nor any
ERISA Affiliate is a "contributing sponsor" (as such term is defined in
Section 4001 of ERISA) in any Multiple Employer Pension Plan and neither
the Company nor any ERISA Affiliate has incurred (without fully satisfying
the same), or reasonably expects to incur, withdrawal liability under
Section 4063 of ERISA in respect of any such Multiple Employer Pension Plan
listed in Part III of Annex 3 hereto, which withdrawal liability could have
a material adverse effect on the business, profits, Properties or condition
(financial or otherwise) of the Company or the ability of the Company to
perform its obligations set forth in this Agreement, the Indenture and the
Bonds.
2.19 INVESTMENT COMPANY ACT.
The Company is not, and is not directly or indirectly controlled by, or acting
on behalf of any Person which is, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
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2.20 ENVIRONMENTAL COMPLIANCE.
Except as set forth in Part IV of Annex 3 hereto:
(a) COMPLIANCE
- -- to the knowledge of the Company, the Company is in compliance with all
Environmental Protection Laws in effect in each jurisdiction where it is
presently doing business, except such failures so to comply as would not,
in the aggregate, be reasonably expected to have a material adverse effect
on the business, profits, Properties or condition (financial or otherwise)
of the Company or the ability of the Company to perform its obligations set
forth in this Agreement, the Indenture and the Bonds;
(b) LIABILITY
- -- to the knowledge of the Company, the Company is not subject to any liability
under any Environmental Protection Laws that, in the aggregate, could be
reasonably expected to have a material adverse effect on the business,
profits, Properties or condition (financial or otherwise) of the Company or
the ability of the Company to perform its obligations set forth in this
Agreement, the Indenture and the Bonds; and
(c) NOTICES
- -- the Company has not received any:
(i) written notice from any Governmental Authority by which
any of its present or previously-owned or leased real Properties has
been designated, listed, or identified in any manner by any
Governmental Authority charged with administering or enforcing any
Environmental Protection Law as a Hazardous Substance disposal or
removal site, "Super Fund" clean-up site, or candidate for removal or
closure pursuant to any Environmental Protection Law;
(ii) written notice of any Lien arising under or in connection
with any Environmental Protection Law that has attached to any
revenues of, or to, any of its owned or leased real Properties; or
(iii) summons, citation, notice, directive, letter, or other
communication, written or oral, from any Governmental Authority
concerning any intentional or unintentional action or omission by the
Company in connection with its ownership or leasing of any real
Property resulting in the releasing, spilling, leaking, pumping,
pouring, emitting, emptying, dumping, or otherwise disposing of any
Hazardous
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Substance into the environment resulting in any material violation of
any Environmental Protection Law;
in the case of clauses (ii) and (iii) above, where the effect of which
could be reasonably expected to have a material adverse effect on the
business, profits, Properties or condition (financial or otherwise) of the
Company or the ability of the Company to consummate the Transactions or to
perform its obligations set forth in this Agreement, the Indenture and the
Bonds.
2.21 PRIVATE PLACEMENT NUMBER.
The Company has obtained private placement number 64744# AB 9 from Standard &
Poor's Corporation CUSIP Service Bureau for the Bonds.
2.22 RESTRICTED THIRD-PARTY ENCUMBRANCES.
The easements owned by the Company referenced by numbers 47 through 56,
inclusive, 73, 74 and 90 to Exhibit A to the Indenture are encumbered by Third-
Party Encumbrances as reflected on Exhibit B to the Title Commitment. The
information set forth in Part V of Annex 3 to this Agreement with respect to the
Property subject to such Restricted Third Party Encumbrances, the Company's use
of such Properties and the nature of such Restricted Third Party Encumbrances is
true, accurate and complete in all material respects. Other than those
Properties listed in the first sentence of this Section 2.22 and described in
Part V of Annex 3 to this Agreement, the Company owns no Property which is
subject to Restricted Third Party Encumbrances. Those Properties listed in the
first sentence of this Section 2.22 and described in Part V of Annex 3 to this
Agreement are subject to no Restricted Third Party Encumbrances other than those
reflected on Exhibit B to the Title Commitment. Such Restricted Third Party
Encumbrances do not, and the exercise of such remedies as would foreclose or
terminate the right or interest of the Company in or to such Property by the
Persons who hold such Restricted Third Party Encumbrances would not be likely
to, individually or in the aggregate, have a material adverse effect upon the
business, profits, Properties (taken as a whole) or condition (financial or
otherwise) of the Company or the ability of the Company to consummate the
Transactions or perform its obligations set forth in this Agreement, the Bonds
or the Indenture.
The easements referenced by numbers 91 through 93, inclusive, to Exhibit A
to the Indenture are grants by the fee owners of the Properties underlying such
easements of general Utility easements in favor of no specified Person. The
Company has the right to use each of such easements for the purposes for which
the Company is now using them.
SECTION 3. CLOSING CONDITIONS
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Your respective obligations to purchase and pay for the Bonds to be
delivered to you at the Closing will be subject to the following conditions
precedent:
3.1 OPINIONS OF COUNSEL.
You will have received from:
(a)
Latham & Watkins, counsel for the Company;
(b)
Montgomery & Andrews, P.A., special counsel and PUC counsel for the Company; and
(c)
Modrall, Sperling, Roehl, Harris & Sisk, P.A., legal counsel for the Trustee.
closing opinions, each dated as of the Closing Date, and substantially in the
respective forms set forth in Exhibit B1, Exhibit B2 and Exhibit B3 to this
Agreement, and to such other matters as you may reasonably request.
3.2 WARRANTIES AND REPRESENTATIONS TRUE; NO PROHIBITED ACTION.
(a) WARRANTIES AND REPRESENTATIONS TRUE.
The warranties and representations of the Company and the Parent contained in
Section 2 of this Agreement will be true in all material respects.
(b) NO PROHIBITED ACTION.
The Company shall not have taken any action or permitted any condition to exist
which would constitute a Default or an Event of Default.
3.3 COMPLIANCE WITH THIS AGREEMENT.
The Company will have performed and complied with all agreements and conditions
contained herein which are required to be performed or complied with by the
Company before or at the Closing.
3.4 OFFICERS' CERTIFICATES.
You will have received:
(a)
a certificate dated the Closing Date and signed by (i) the Chairman of the Board
or the President and (ii) the Vice President, Finance of the Company,
substantially in the form of Exhibit C1 to this Agreement with respect to
the matters therein set forth;
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(b)
a certificate dated the Closing Date and signed by (i) the President or a Vice-
President and (ii) the Chief Financial Officer of the Parent, substantially
in the form of Exhibit C2 to this Agreement with respect to the matters
therein set forth;
(c)
a certificate dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, substantially in the form of Exhibit D1 to this
Agreement, with respect to the matters therein set forth; and
(d)
a certificate dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Parent, substantially in the form of Exhibit D2 to this
Agreement, with respect to the matters therein set forth.
3.5 LEGALITY.
The Bonds shall on the Closing Date qualify as a legal investment for insurance
companies under applicable insurance law (without regard to any "basket" or
"leeway" provisions) and you shall have received such evidence as you may
reasonably request to establish compliance with this condition.
3.6 REGULATORY APPROVALS.
Not less than thirty (30) days prior to the Closing, the PUC shall have issued
the PUC Order. Such order shall be effective and no appeal shall be pending
with respect thereto.
3.7 BOTH PURCHASERS.
With respect to each Purchaser, the other Purchaser shall have
executed and delivered this Agreement and accepted delivery of and made payment
for the Bonds to be purchased by it on the Closing Date.
3.8 LIENS UPON COLLATERAL.
All recordings and filings of:
(a)
the Second Supplemental Indenture with the clerk of Bernalillo County, New
Mexico;
(b)
a financing statement on Form UCC-1 relating to that Collateral which consists
of personal Property with the Secretary of State of New Mexico; and
(c)
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a financing statement on Form UCC-1 relating to that Collateral which consists
of fixtures with the clerk of Bernalillo County, New Mexico,
in each case, which are required or reasonably requested by the Trustee or you
to provide record notice of the Liens upon all of the Collateral, shall have
been made.
3.9 TITLE INSURANCE.
The Trustee shall have received a policy of title insurance or the Title
Commitment committing to issue the same in form and substance satisfactory to
you, from Ticor Title Insurance Company insuring the Trustee and the holders of
the Outstanding Bonds issued under the Indenture against loss or damage to the
extent of $6,000,000 plus costs as permitted by the policy by reason of any
defect in the Lien of the Indenture on the Property (other than Excepted
Property and the parcels identified on Exhibit A to the Original Indenture as
not being insured by a policy of title insurance) described therein or by reason
of the title to the Property being other than as shown in such policy. Such
policy (or the Title Commitment to issue the same) shall extend to the Property
(other than uninsurable Property) identified on Exhibit A to the Original
Indenture and to the additional Property being added to the Lien of the
Indenture by virtue of the Second Supplemental Indenture. You shall have
received a copy of such policy of title insurance or the Title Commitment.
3.10 INDENTURE CONDITIONS.
All conditions precedent set forth in the Indenture with respect to consummation
of the Transactions shall have been satisfied. Without limiting the generality
of the foregoing, the Company's Bondable Capacity (after giving effect to the
addition of certain Collateral on the Closing Date pursuant to the Second
Supplemental Indenture) and Net Earnings for Interest shall be sufficient to
permit the issuance of the Bonds, and you shall have received certificates of
the Company, as contemplated by Article IV of the Indenture, to such effect.
3.11 PROCEEDINGS SATISFACTORY.
All proceedings taken in connection with the sale of the Bonds and all documents
and papers relating thereto will be satisfactory to you. You will have received
copies of such documents and papers as you may reasonably request in connection
therewith (including, without limitation, copies of all certificates delivered
to the Trustee in connection with the consummation of the Transactions), all in
form and substance satisfactory to you; provided, however, that you agree that
all documents the forms of which are annexed hereto as exhibits shall be in form
and substance satisfactory to you if duly authorized, executed and delivered in
the respective forms set forth in such exhibits.
SECTION 4. AGREEMENTS OF THE COMPANY
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4.1 FINANCIAL AND BUSINESS INFORMATION.
The Company will deliver to you, if at the time you or your nominee holds any
Bonds, and to each other institutional holder of the then Outstanding Bonds:
(a) QUARTERLY STATEMENTS
- -- as soon as practicable after the end of each quarterly fiscal period in each
fiscal year of the Company (other than the last quarterly fiscal period of
such fiscal year) commencing with the third fiscal quarter of 1996, and in
any event within sixty (60) days thereafter, duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter; and
(ii) consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiaries, for such quarter and
(in the case of the second or third quarters) for the portion of the
fiscal year ending with such quarter;
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable detail
and certified as being complete and correct, and as having been prepared in
conformity with generally accepted accounting principles, subject to
changes resulting from year-end adjustments, by the chief financial officer
or treasurer of the Company;
(b) ANNUAL STATEMENTS
- -- as soon as practicable after the end of each fiscal year of the Company, and
in any event within one hundred twenty (120) days thereafter, commencing
with the Company's 1996 fiscal year, duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such year; and
(ii) consolidated statements of income, retained earnings and
cash flows of the Company and its Subsidiaries for such year;
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and accompanied by an opinion thereon
of the accountants named in Section 2.4 of this Agreement or other
independent certified public accountants of recognized national standing
selected by the Company, which opinion shall, without qualification, state
that such financial statements present fairly, in all material respects,
the financial position of the companies being reported upon and their
results of operations and cash flows
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in conformity with generally accepted accounting principles, that the
examination of such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards and that such audit provides a reasonable basis for such opinion
in the circumstances;
(c) AUDIT REPORTS
- -- promptly upon receipt thereof, one copy of each other report submitted to the
Company or any Subsidiary by independent accountants in connection with any
annual, interim or special audit made by them of the books of the Company
or any Subsidiary;
(d) SEC AND OTHER REPORTS OF THE COMPANY AND THE PARENT
- -- promptly upon their becoming publicly available, one copy of each financial
statement, report, notice or proxy statement sent by the Company to its
stockholders generally, and of each regular or periodic report and any
registration statement, prospectus or written communication in respect
thereof filed by the Company with, or received by it in connection
therewith from, any securities exchange or the Securities and Exchange
Commission or any successor agency, and one copy of each financial
statement, report, notice or proxy statement sent by the Parent to its
stockholders generally;
(e) ERISA
- -- promptly upon becoming aware of the occurrence of:
(i) any material "reportable event" (as such term is defined in
Section 4043 of ERISA) with respect to which the reporting requirement
has not been waived; or
(ii) any material transaction prohibited by Section 406 of ERISA
or any non-exempt "prohibited transaction" (as such term is defined in
Section 4975 of the IRC);
in connection with any Pension Plan or any trust created thereunder, a
written notice specifying the nature thereof, what action, if any, the
Company is taking or proposes to take with respect thereto, and, when
known, any action taken by the IRS, the Department of Labor or the PBGC
with respect thereto;
(f) ERISA WAIVERS
- -- prompt written notice of and a description of any request pursuant to Section
303 of ERISA or Section 412 of the IRC for, or notice of the granting
pursuant to said Section 303 or Section 412 of, a waiver in respect of all
or part of the minimum funding standard set forth in ERISA or the IRC, as
the case may be, of any
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Pension Plan, and, in connection with the granting of any such waiver, the
amount of any "waived funding deficiency" (as such term is defined in said
Section 303 or said Section 412) and the terms of such waiver; provided,
however, that no such notice need be given if the amount of any waived
funding deficiency shall not be material in the context of the business,
profits, Properties or condition (financial or otherwise) of the Company
and the Subsidiaries, taken as a whole;
(g) OTHER ERISA NOTICES
- -- prompt written notice of and, where applicable, a description of:
(i) any notice from the PBGC in respect of the commencement of
any proceedings pursuant to Section 4042 of ERISA to terminate any
Pension Plan or for the appointment of a trustee to administer any
Pension Plan;
(ii) any distress termination notice delivered to the PBGC
under Section 4041 of ERISA in respect of any Pension Plan, and any
determination of the PBGC in respect thereof;
(iii) the placement of any Multiemployer Pension Plan in
reorganization status under Title IV of ERISA;
(iv) any Multiemployer Pension Plan becoming "insolvent" (as
such term is defined in Section 4245 of ERISA);
(v) the complete or partial withdrawal of the Company or any
ERISA Affiliate from any Multiemployer Pension Plan and the withdrawal
liability incurred in connection therewith; and
(vi) the withdrawal of the Company or any ERISA Affiliate from
any Pension Plan with respect to which it is a "substantial employer"
as defined in ERISA and the withdrawal liability under Section 4063 of
ERISA incurred in connection therewith;
(h) NOTICE OF DEFAULT OR EVENT OF DEFAULT
- -- immediately upon becoming aware of the existence of any condition or event
which constitutes a Default or an Event of Default, a written notice
specifying the nature and period of existence thereof and what action the
Company is taking or proposes to take with respect thereto;
(i) NOTICE OF CLAIMED DEFAULT
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- -- immediately upon becoming aware that the holder of any Bond or of any
evidence of indebtedness or other Security of the Company or any Subsidiary
has given notice or taken any other action with respect to a claimed Event
of Default or default under such Bond, evidence of indebtedness or
Security, a written notice specifying the notice given or action taken by
such holder and the nature of the claimed Event of Default or default and
what action the Company is taking or proposes to take with respect thereto;
(j) INFORMATION REQUIRED By INDENTURE
- -- all information, notices, certificates and opinions required by the terms of
the Indenture to be delivered to the holders of the Bonds; and
(k) REQUESTED INFORMATION
- -- with reasonable promptness, such other data and information reasonably
available to the Company as from time to time may be reasonably requested.
Without limiting the generality of the foregoing, the Company will deliver
to you or any successor or transferee the information required by 17 C.F.R.
(S) 230.144A in connection with any transfer or proposed transfer of Bonds
by you or any successor or transferee pursuant thereto.
4.2 OFFICERS' CERTIFICATES.
Each set of financial statements delivered to you or any other institutional
holder of the Bonds pursuant to Section 4.1(a) or Section 4.1(b) of this
Agreement will be accompanied by a certificate of the Chairman of the Board, the
President or a vice president and the Vice President, Finance of the Company
setting forth:
(a) COVENANT COMPLIANCE
- -- the information (including detailed calculations) required in order to
establish whether the Company was in compliance with the requirements of
Article VI of the Indenture during the period covered by the income
statement then being furnished; and
(b) EVENT OF DEFAULT
- -- a statement that the signers have reviewed the relevant terms of this
Agreement and the Indenture and have made, or caused to be made, under
their supervision, a review of the transactions and conditions of the
Company and the Subsidiaries from the beginning of the accounting period
covered by the income statements being delivered therewith to the date of
the certificate and that such review has not disclosed the existence during
such period of any condition or event which constitutes a Default or an
Event of Default or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action the
Company has taken or proposes to take with respect thereto.
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4.3 ACCOUNTANTS' CERTIFICATES.
Each set of annual financial statements delivered pursuant to Section 4.1 (b)
will be accompanied by a certificate of the accountants who certify the
financial statements of the Company, stating that they have reviewed Sections
6.01, 6.03, 6.06, 6.10, 6.14 and 12.01 of the Indenture and stating further,
whether, in making their audit of the financial statements:
(a)
such accountants have become aware of any condition or event which then
constitutes a Default or an Event of Default (whether or not as a result of
failure by the Company to comply with any of Sections 6.01, 6.03, 6.06,
6.10, 6.14 or 12.01 of the Indenture), and, if any such condition or event
then exists, specifying the nature and period of existence thereof; or
(b)
have become aware of any issuance of First Mortgage Bonds by the Company, or
withdrawal of cash held by the Trustee pursuant to the Indenture by the
Company, in each case, in violation of the terms of Section 4.02 of the
Indenture, and, in the event of any such issuance or withdrawal, describing
such issuance or withdrawal and specifying the violation occasioned
thereby.
4.4 INSPECTION.
The Company will permit any of your representatives, while you or your nominee
holds any Bond, or the representatives of any other institutional holder of the
Bonds, at your or such holder's expense (except during the continuance of any
Default or Event of Default, in which case, at the Company's expense), to visit
and inspect any of the Properties of the Company or any Subsidiary, to examine
all their books of account, records, reports and other papers, to make copies
and extracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective officers, employees and independent public
accountants (and by this provision the Company authorizes said accountants to
discuss the finances and affairs of the Company and the Subsidiaries) all at
such reasonable times and as often as may be reasonably requested.
4.5 REPORT TO NAIC.
Concurrently with the delivery to you of each annual statement required by
Section 4.1 (b) hereof, the Company will deliver a copy thereof to: Securities
Valuation Office, National Association of Insurance Commissioners, 195 Broadway,
New York, New York 10007.
SECTION 5. INTERPRETATION OF THIS AGREEMENT
5.1 TERMS DEFINED.
25
<PAGE>
As used in this Agreement, the following terms have the respective meanings set
forth below or set forth in the Section of this Agreement or the Indenture
following such term:
Affiliate -- at any time means a Person (other than a Subsidiary):
(a)
which directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company;
(b)
which beneficially owns or holds five percent (5%) or more of any class of the
Voting Stock of the Company; or
(c)
five percent (5%) or more of the Voting Stock (or in the case of a Person which
is not a corporation, five percent (5%) or more of the equity interest) of which
is beneficially owned or held by the Company or a Subsidiary;
at such time. As used in this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
Bond Purchase Agreement -- this Agreement.
Bondable Capacity -- Section 4.02A of the Indenture.
Bonds -- Section 1.1 of this Agreement.
Business Day -- a day other than a Saturday, a Sunday or a day on
which commercial banks in Lincoln, Nebraska are required or authorized to be
closed (other than a general bank holiday or moratorium, in either case of
longer than 4 calendar days).
Closing -- Section 1.2 of this Agreement.
Closing Date -- Section 1.2 of this Agreement.
Collateral -- all of that Property subject to the Lien of the
Indenture, after giving effect to the addition of collateral effectuated by
Section 2 of the Second Supplemental Indenture.
26
<PAGE>
Company -- the introductory sentence of this Agreement.
Default -- Section 1.01 of the Indenture.
Environmental Protection Law -- means any existing or future federal,
state, county, regional or local law, statute, or regulation (including, without
limitation, (a) the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980; (b) the Resource Conservation and Recovery Act of 1976;
(c) the Superfund Amendments and Reauthorization Act of 1986; (d) the Federal
Water Pollution Control Act; and (e) the Clean Water Act of 1977; in each case,
as amended from time to time, and together with all rules and regulations
promulgated in connection therewith) enacted by any Governmental Authority in
connection with or relating to the protection or regulation of the environment,
including, without limitation, those laws, statutes, and regulations regulating
the disposal, removal, production, storing, refining, handling, transferring,
processing, or transporting of Hazardous Substances and any orders, decrees or
judgments issued by any court of competent jurisdiction in connection with any
of the foregoing.
ERISA -- means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
ERISA Affiliate -- means any corporation or trade or business that
(a) is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the IRC) as the Parent or the Company; or
(b) is under common control (within the meaning of Section 414(c) of
the IRC) with the Parent or the Company.
Event of Default -- Section 1.01 of the Indenture.
Excepted Property -- the "Excepted Property" exceptions to the
granting clauses of the Indenture.
First Mortgage Bonds -- means and includes the Series A Bonds, the
Bonds and each and every other bond, of whatever series, issued pursuant to the
Indenture.
First Supplemental Indenture -- Section 1.1 of this Agreement.
Governmental Authority -- means and includes:
(a) the governments of:
27
<PAGE>
(i) the United States of America and any State or other
political subdivision thereof; or
(ii) any jurisdiction in which the Company or any Subsidiary
conducts all or any part of its business;
(b) each public utility commission or similar entity having
regulatory authority over the Company or any Subsidiary; and
(c) any other entity exercising executive, legislative, judicial,
regulatory or administrative functions of, or pertaining to, any such government
referred to in clauses (a) or (b) of this definition.
Hazardous Substances -- means and includes any and all pollutants,
contaminants, toxic or hazardous wastes or any other substances that might pose
a hazard to health or safety, the removal of which may be required or the
generation, manufacture, refining, production, processing, treatment, storage,
handling, transportation, transfer, use, disposal, release, discharge, spillage,
seepage, or filtration of which is or shall be restricted, prohibited or
penalized by any applicable law (including, without limitation, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum and
petroleum-derived products).
Indenture -- Section 1.1 of this Agreement.
Interest Payment Date -- Section 1.01 of the Indenture.
IRC -- means the Internal Revenue Code of 1986, together with all
rules and regulations promulgated pursuant thereto, as amended from time to
time.
IRS -- means the Internal Revenue Service of the United States of
America and any successor agency.
Lien -- any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the security interest lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" includes reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting Property. For the purposes of this
Agreement, the Company or a Subsidiary will be deemed to be the owner of any
28
<PAGE>
Property which it has acquired or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person for security purposes and such
retention or vesting will be deemed to be a Lien.
Multiemployer Pension Plan -- means any multiemployer plan (as defined
in Section 3 (37) of ERISA), subject to Title IV of ERISA, in respect of which
the Company or any ERISA Affiliate is an "employer" (as such term is defined in
Section 3(5) of ERISA).
Multiple Employer Pension Plan - means any Pension Plan (other than a
Multiemployer Pension Plan), subject to Title IV of ERISA, to which the Company
or any ERISA Affiliate and an employer (as such term is defined in Section 3(5)
of ERISA) other than an ERISA Affiliate or the Company contribute.
Net Earnings for Interest -- Section 4.02A of the Indenture.
Original Indenture -- Section 1.1 of this Agreement.
Outstanding -- Section 1.01 of the Indenture; provided, however, that
for purposes of this Agreement only (and not the Indenture, except to the extent
provided therein), First Mortgage Bonds held or owned by the Company, any
Subsidiary or any Affiliate shall not be deemed to be Outstanding.
Parent -- Southwest Water Company, a Delaware corporation, which owns
one hundred percent (100%) of the capital stock of the Company.
PBGC -- means the Pension Benefit Guaranty Corporation and any
successor corporation or governmental agency.
Pension Plan -- means, at any time, any "employee pension benefit
plan" (as such term is defined in Section 3(2) of ERISA), subject to Title IV of
ERISA, maintained at such time by the Company or any ERISA Affiliate for
employees of the Company or such ERISA Affiliate, excluding any Multiemployer
Pension Plan, but including, without limitation any Multiple Employer Pension
Plan.
Permitted Encumbrances -- Section 1.01 of the Indenture.
Person -- an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
29
<PAGE>
Placement Memorandum -- Section 2 .3 of this Agreement.
Prior Liens -- Section 1.01 of the Indenture.
Property -- any interest in any kind of property or asset, whether
real, personal or mixed, and whether tangible or intangible.
PUC -- the New Mexico Public Utility Commission.
PUC Order -- the order of the PUC, dated October 7, 1996, (a)
authorizing the Company to issue and sell the Bonds, and (b) authorizing the
Company to execute and deliver the second Supplemental Indenture.
Required Holders -- at any time means the holders of 66 2/3% or more
in aggregate principal amount of Bonds Outstanding at such time.
Restricted Third Party Encumbrance -- Section 1.01 of the Indenture.
Second Supplemental Indenture -- Section 1.1 of this Agreement.
Series A Bonds -- the Series A Bonds of the Company issued pursuant to
Articles II and III of the Indenture.
Securities Act -- the Securities Act of 1933, as such act may be
amended from time to time.
Security -- has the same meaning as in Section 2(l) of the Securities
Act of 1933, as amended.
Subsidiary - a corporation of which the Company owns, directly or
indirectly, more than fifty percent (50%) of the Voting Stock.
Title Commitment -- means the commitment of Ticor Title Insurance
Company, dated as of a recent date, to issue the policy of Title Insurance
referred to in Section 3.9 of this Agreement, which commitment shall describe
and cover the Properties of the Company previously subjected to the Lien of the
Indenture and those being subjected to such Lien pursuant to the Second
Supplemental Indenture and the Liens existing of record upon such Properties as
of the date of such commitment.
Transactions -- means and includes (a) the execution and delivery by
the Company of this Agreement and the Second Supplemental Indenture; (b) the
granting to the Trustee of a Lien upon certain collateral pursuant to the
provisions of
30
<PAGE>
the Second Supplemental Indenture; (c) the execution, delivery, issue and sale
of the Series B Bonds; and (d) compliance by the Company with the terms of the
Series B Bonds, the Indenture and this Agreement.
Trustee -- Section 1.1 of this Agreement.
Voting Stock -- capital 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).
5.2 ACCOUNTING PRINCIPLES.
All accounting terms not otherwise defined herein have the meanings assigned to
them, and all computations herein provided for shall be made in accordance with
generally accepted accounting principles at the time in effect, to the extent
applicable, except where such principles are inconsistent with the requirements
of this Agreement. In determining accounting principles, the Company shall
conform to generally accepted accounting principles at the time in effect,
unless it is required to conform to any other order, rule or regulation of any
Governmental Authority having jurisdiction over the Company.
5.3 DIRECTLY OR INDIRECTLY.
Where any provision in this Agreement refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision will be
applicable whether such action is taken directly or indirectly by such Person,
including actions taken by or on behalf of any partnership in which such Person
is a general partner.
5.4 GOVERNING LAW.
THIS AGREEMENT AND THE BONDS WILL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, INTERNAL NEW MEXICO LAW, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
5.5 SECTION HEADINGS, TABLE OF CONTENTS AND CONSTRUCTION.
The titles of the Sections and the Table of Contents appear as a matter of
convenience only, do not constitute a part of this Agreement and will not affect
the construction hereof. Each covenant contained in this Agreement will be
construed (absent an express contrary provision herein) as being independent of
each other covenant contained herein, and compliance with any one covenant will
not (absent such an express contrary provision) be deemed to excuse compliance
with one or more other covenants.
SECTION 6. MISCELLANEOUS
31
<PAGE>
6.1 NOTICES.
(a) METHOD; ADDRESS.
All communications under this Agreement or under the Bonds will be in writing,
will be delivered (i) personally; (ii) by overnight courier; or (iii) sent
by facsimile transmission, acknowledgment received, with a copy sent by
first class mail; in each case, delivery or facsimile charges prepaid, and
will be addressed:
(i) if to the Company:
New Mexico Utilities, Inc.
4700 Irving Boulevard, N.W., Suite 201
Albuquerque, New Mexico 87114
Attention: Vice President Finance
FAX: (505) 898-6379
with a copy to:
Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91744
Attention: Vice President/Finance
FAX: (818) 915-1558
or at such other address as the Company shall have furnished in
writing to the Trustee and all holders of the Bonds at the time
Outstanding:
(ii) if to you, at your addresses set forth on Annex 1 hereto,
and further including any parties referred to on such Annex 1 that are
required to receive notices in addition to you, or to any such party
at such other address as you may designate by notice duly given to the
Company and the Trustee in the manner provided in this Section 6.1
(which other address shall be entered in the Bond register); and
(iii) if to any other holder of Bonds, at their respective
addresses set forth in the register for the registration and transfer
of Bonds maintained pursuant to the Indenture, or to any such party at
such other address as such party may designate by notice duly given in
the manner provided in this Section 6.1 to the Company and to the
Trustee (which other address shall be entered in such register).
(b) WHEN GIVEN.
32
<PAGE>
Any communication so addressed and delivered shall be deemed received, in the
case of personal delivery, when actually received; in the case of delivery
by overnight courier, on the Business Day following transmission; and in
the case of facsimile transmission, on the date of acknowledgment of
transmission, if a Business Day, and, if not a Business Day, on the next
succeeding Business Day.
6.2 AMENDMENT AND WAIVER.
(a) REQUIREMENTS.
This Agreement may be amended, and the observance of any term hereof may be
waived, with (and only with) the written consent of the Company and the
Required Holders; provided that no such amendment or waiver of any of the
provisions of Section 1, Section 3 or this Section 6.2, or any definition
relating thereto, shall be effective as to any holder of Bonds unless
consented to by such holder in writing.
(b) SOLICITATION OF BONDHOLDERS.
(i) Solicitation. The Company shall not:
(A) solicit, request or negotiate for or with respect to any
proposed waiver or amendment of any of the provisions hereof or the
Bonds; or
(B) solicit, request or negotiate for or with respect to any
proposed waiver or amendment of any of the provisions of the
Indenture, which proposed waiver or amendment would, pursuant to the
terms of the Indenture, require the consent of any holder of a Bond;
unless, in each case, each holder of the Bonds (irrespective of the
amount of Bonds then owned by it) shall be informed thereof by the
Company with sufficient information to enable it to make an informed
decision with respect thereto. Executed or true and correct copies of
any waiver or consent effected pursuant to the provisions of this
Section 6.2 or Article XIII of the Indenture shall be delivered by the
Company to each holder of Outstanding Bonds forthwith following the
date on which the same shall have been executed and delivered by all
holders of Outstanding Bonds (if any) required to consent or agree to
such waiver or consent.
(ii) Payment. The Company shall not, directly or indirectly, pay
or cause to be paid any remuneration, whether by way of supplemental
or additional interest, fee or otherwise, or grant any
33
<PAGE>
security, to any holder of First Mortgage Bonds as consideration for
or as an inducement to the entering into by any holder of First
Mortgage Bonds of any waiver or amendment of any of the terms and
provisions hereof, of any other purchase agreement pursuant to which
any other First Mortgage Bonds were sold, of any First Mortgage Bond
or of the Indenture unless such remuneration is concurrently paid,
security is concurrently granted, or offer is concurrently made on the
same terms, ratably to the holders of all Bonds then Outstanding.
(iii) Scope of Consent. Any consent made pursuant to this
Section 6.2 by a holder of Bonds that has transferred or has agreed to
transfer its Bonds to the Company, any Subsidiary or any Affiliate and
has provided or has agreed to provide such written consent as a
condition to such transfer shall be void and of no force and effect
except solely as to such holder, and any amendments effected or
waivers granted or to be effected or granted that would not have been
or would not be so effected or granted but for such consent (and the
consents of all other holders of Bonds that were acquired under the
same or similar conditions) shall be void and of no force and effect,
retroactive to the date such amendment or waiver initially took or
takes effect, except solely as to such holder.
(iv) Other Offers to Repurchase. The Company shall not make any
offer to repurchase, exchange for any other security or otherwise
acquire for value any First Mortgage Bond (whether or not the
acceptance of such offer is conditioned upon the giving by any holder
of any First Mortgage Bond of any waiver or consent) unless such offer
is concurrently made on the same terms, ratably, to the holders of all
Bonds then Outstanding.
The foregoing provisions of this Section 6.2(b) shall not prevent or
preclude:
(A) payment by the Company of attorneys' fees and expenses
(including, without limitation, the fees of counsel who are employees
of a holder of First Mortgage Bonds, at the rate or rates, it any, not
to exceed the rate or rates then customarily charged by such holder)
or other out-of-pocket costs incurred by a holder of First Mortgage
Bonds in connection with any such consent, waiver or amendment where
such payment is required pursuant to a purchase agreement, any First
Mortgage Bond or the Indenture, all of which fees and expenses shall
be paid by the Company;
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<PAGE>
(B) the issuance and sale by the Company of any series of
First Mortgage Bonds with an interest rate, a prepayment premium,
prepayment terms or other business or financial terms which are
different from the business or financial terms of the Bonds, so long
as such issuance and sale and all such terms are in compliance with
all applicable provisions of the Indenture concerning issuance of
additional series of First Mortgage Bonds;
(C) the redemption of any First Mortgage Bonds pursuant to
their respective terms so long as such redemption is not conditioned
upon the giving by any holder of any First Mortgage Bond of any waiver
or consent; or
(D) the payment or giving by the Company of consideration to
all holders of First Mortgage Bonds of any series in exchange for the
waiver, elimination or reduction of a right contained only in the
First Mortgage Bonds of such series, so long as the payment or giving
of such consideration does not violate any provision of the Indenture,
and so long as, immediately after giving effect to the payment of such
consideration and such waiver, elimination or reduction, no Event of
Default would exist;
nor shall any provision of this Section 6.2(b) entitle the holders of the
Bonds to receive payments or other consideration equal or equivalent to the
payments or other consideration made or given pursuant to clauses (A), (C)
or (D), or to receive any right or benefit afforded to the holders of any
other series of First Mortgage Bonds pursuant to clause (B) above, to which
the holders of the Bonds would not otherwise be entitled.
(c) BINDING EFFECT.
Except as provided in Section 6.2(b) hereof, any amendment or waiver consented
to as provided in this Section 6.2 shall apply equally to all holders of
Bonds and shall be binding upon them and upon each future holder of any
Bond and upon the Company whether or not such Bond shall have been marked
to indicate such amendment or waiver. No such amendment or waiver shall
extend to or affect any obligation, covenant, agreement, Default or Event
of Default not expressly amended or waived or impair any right consequent
thereon.
6.3 REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed; (b) documents received by you at the closing of your purchase of the
Bonds (except the Bonds
35
<PAGE>
themselves); and (c) financial statements, certificates and other information
previously or hereafter furnished to you; may be reproduced by you by any
photographic, photostatic, microfilm, micro-card, miniature photographic or
other similar process and you may destroy any original document so reproduced.
The Company agrees and stipulates that any such reproduction will be admissible
in evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not such
reproduction was made by you in the regular course of business) and that any
enlargement, facsimile or further reproduction of such reproduction will
likewise be admissible in evidence.
6.4 SURVIVAL.
All warranties, representations, certifications and covenants made by you in
Section 1.3 of this Agreement, and made by the Company or by the Parent and
contained in this Agreement or in any certificate or other instrument executed
and delivered by the Company or the Parent, as the case may be, pursuant to this
Agreement in connection with the Closing, will be considered to have been relied
upon by you (if made by the Company or the Parent) or the Company (it made by
you), will be deemed made on and as of the Closing Date and will survive the
delivery to you of the Bonds and the payment by you of the purchase price,
regardless of any investigation made by or on behalf of you or the Company, as
the case may be. All statements in any such certificate or instrument made by
the Company or the Parent will constitute warranties and representations by the
Person executing such certificate or instrument.
6.5 SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon the successors
and assigns of each of the parties. The provisions of this Agreement are
intended to be for the benefit of all holders, from time to time, of Bonds, and
will be enforceable by any such holder, whether or not an express assignment to
such holder of rights under this Agreement has been made by you or your
successor or assign.
6.6 DUPLICATE ORIGINALS; EXECUTION IN COUNTERPARTS.
Two or more duplicate originals of this Agreement may be signed by the parties,
each of which will be an original but all of which together will constitute one
and the same instrument. This Agreement may be executed in one or more
counterparts and will be effective when at least one counterpart has been
executed by each party hereto, and each set of counterparts which, collectively,
show execution by each party hereto will constitute one duplicate original.
6.7 CONSTRUCTION - REPRESENTATIONS AND WARRANTIES.
The Parent is entering into this Agreement for the sole purpose of providing the
representations and warranties set forth in Sections 2.3(a), 2.4(a), 2.12(a) and
(b), and,
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<PAGE>
to the extent such representations and warranties relate to the
Parent, Section 2.10 and Section 2.18, and the Parent shall not be liable in
connection with any other Sections of this Agreement other than Section 6.4 as
it relates to the above-referenced sections.
6.8 SEVERABILITY.
Any provision of this Agreement which shall be determined by a court of
competent jurisdiction to be invalid , void or illegal, or invalid, void or
illegal as to any particular facts or circumstances, shall in no way (a) affect,
impair or invalidate such provision in any other facts or circumstances or (b)
affect, impair or invalidate any other provision hereof. Such provision shall
remain in full force and effect as to such other facts and circumstances and all
such other provisions shall remain in full force and effect.
6.9 INCORPORATION BY REFERENCE.
All exhibits and annexes attached to this Agreement are hereby incorporated into
and made a part of this Agreement by this reference.
THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY THE NEXT PAGE IS
THE SIGNATURE PAGE
37
<PAGE>
If this Agreement is satisfactory to you, please so indicate by signing the
acceptance at the foot of a counterpart of this Agreement and return such
counterpart to the Company, whereupon this Agreement will become binding between
us in accordance with its terms.
Very truly yours,
NEW MEXICO UTILITIES, INC., a New Mexico corporation
By /s/ Robert Swartwout By /s/ William C. Jasura
Title: President Title: V.P. Finance
The undersigned hereby joins in the foregoing Agreement for the sole
purpose described in Section 6.7 and to provide the representations and
warranties which are ascribed to Southwest Water Company by the provisions of
Section 2 and such section.
SOUTHWEST WATER COMPANY, a Delaware corporation
By /s/ Peter J. Moerbeek By /s/ Anton C. Garnier
Title: V.P. Finance, CFO Title: President
Agreed to and Accepted: AMERITAS LIFE INSURANCE CORP.,
By Ameritas Investment Advisors, Inc.,
its Agent
By /s/ Patrick J. Henry
Title: Vice President - Fixed Income Securities
Agreed to and Accepted: WOODMEN ACCIDENT AND LIFE
COMPANY
By /s/ A. Cray
Title: Vice President and Assistant Treasurer
38
<PAGE>
SIGNATURE PAGE to the BOND PURCHASE AGREEMENT, dated as of
November 8,1996, among NEW MEXICO UTILITIES, INC., SOUTHWEST WATER
COMPANY, AMERITAS LIFE INSURANCE CORP., and
WOODMEN ACCIDENT AND LIFE COMPANY
39
<PAGE>
ANNEX 1
INFORMATION AS TO PURCHASERS
================================================================================
Purchaser Name AMERITAS LIFE INSURANCE CORP.
- --------------------------------------------------------------------------------
Name in Which AMERITAS LIFE INSURANCE CORP.
Bond is Registered
- --------------------------------------------------------------------------------
Bond B-1
Registration Number, Principal $2,000,000.00
Amount
- --------------------------------------------------------------------------------
Payment on Account of Bond:
Method Federal Funds Wire Transfer (Immediately
Available Funds)
Account First Bank of Nebraska,
Information NA ABA No.: 104-000-029
Ameritas Life Insurance Corp.
Account No.: 1-494-0070-0188 Re:
New Mexico Utilities, Inc.
Series B 7.64% First Mortgage Bonds
- --------------------------------------------------------------------------------
Accompanying Name of Company: New Mexico Utilities,
Information Inc.
Description of Security: First Mortgage
Bonds, Series B 7.64% due November 7, 2006
Security Number (CUSIP): 64744# AB 9
Application (as among principal, premium and
interest) of the payment being made.
- --------------------------------------------------------------------------------
Address for Ameritas Life Insurance Corp.
Notices Related 5900 "O" Street
to Payments and Lincoln, Nebraska 68510-2234
all Other Notices: Attention: James Mikus
FAX: (402) 467-6970
- --------------------------------------------------------------------------------
Annex1-1
<PAGE>
- --------------------------------------------------------------------------------
Deliver Bonds Ameritas Life Insurance Corp.
5900 "O" Street
To: Lincoln, Nebraska 68510-2234
Attention: James Mikus
- --------------------------------------------------------------------------------
Tax 47-0098400
Identification Number
================================================================================
2
<PAGE>
ANNEX 1
INFORMATION AS TO PURCHASERS
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C> <C>
Purchaser Name WOODMEN ACCIDENT AND LIFE COMPANY
COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------
Name in Which WOODMEN ACCIDENT AND LIFE COMPANY
Bond is Registered COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------
Bond B-2
Registration Number, $2,000,000.00
Principal Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Payment on
Account of Bond:
Method Federal Funds Wire Transfer (Immediately
Available Funds)
Account First Bank Nebraska, NA 13
Information and M Streets
Lincoln, Nebraska 68508
ABA #1040-000-29 for
credit to:
Woodmen Accident and Life
Company's General Fund
Account No. 1-494-0092-9092
- ------------------------------------------------------------------------------------------------------------------------------------
Accompanying Name of Company: New Mexico Utilities,
Inc.
Information: Description of Security: First Mortgage Bonds, Series B
7.64% due November 7, 2006
Security Number (CUSIP): 64744# AB 9
Application (as among principal, premium and interest) of
the payment being made.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Address for Woodmen Accident and Life Company
Notices Related to Payments P.O. Box 82288
and all Other Notices: Lincoln, Nebraska 68501
Attention: Securities Division
FAX: (402) 437-4392
Notices delivered by overnight courier shall be addressed
to:
Woodmen Accident and Life Company
1526 "K" Street
Lincoln, Nebraska 68508
Attention: Securities Division
-----------------------------------------------------------------------------------------------------------------------------------
Deliver Bonds Woodmen Accident and Life Company
To: 1526 "K" Street
Lincoln, Nebraska 68508
Attention: Securities Division
- ------------------------------------------------------------------------------------------------------------------------------------
Tax 47-0339220
Identification Number
====================================================================================================================================
</TABLE>
<PAGE>
ANNEX 2
PAYMENT INSTRUCTIONS
Make payment of the purchase price by federal funds wire transfer in
immediately available funds to:
Wells Fargo Bank, National Association
ABA #121000248
Flair Industrial Park Regional
Commercial Banking Office
9000 Flair Drive
Suite 100
El Monte, California 91731
Account of New Mexico Utilities, Inc.
Account No. 6627-351786
Annex 2-1
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY
<TABLE>
<CAPTION>
Part I: Affiliates
Name Jurisdiction Percent Owned; Owned By
---- of Incorporation --------
----------------
<S> <C> <C> <C>
*Southwest Water Company Delaware N/A
*ECO Resources, Inc. Texas 100% by Southwest
Water Company
*Southwest Environmental Texas 100% by ECO Resources,
Laboratories, Inc. Inc.
*SOCI, Inc. Delaware 100% by Southwest
Water Company
Covina Irrigating Company California 12.3% by Suburban
Water Systems; 0/9% by
SW Resource Management
Company
California Domestic Water California 32.4% by Suburban
Company Water Systems
*Suburban Water Systems California 100% by Southwest
Water Company
*SW Resource Management Delaware 100% by Southwest
Company Water Company
*SW Operating Services Delaware 100% by Southwest
Water Company
*Water Suppliers Mobile California 100% by Suburban Water
Communication Service Systems
*Southern Municipal Texas 100% by ECO Resources,
Services, Inc. Inc.
</TABLE>
Annex 3-1
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
Part II: Indebtedness for Borrowed Money
First Mortgage Bonds, Series A 8.86%, Due March 12, 2002 $2,000,000.00
Unsecured Line of Credit with Sunwest Bank of Albuquerque $4,000,000.00
First Mortgage Bonds, Series B 7.64%, Due November 7, 2006 $4,000,000.00
------------
Total $10,000,000.00(1)
_______________
(1) Proceeds of the Series B Bonds will be used to retire debt to Sunwest Bank.
Part III: ERISA
ERISA Affiliates
- ----------------
Each of the Persons indicated with an asterisk (*) in Part I of this Annex
3 are ERISA Affiliates.
Multiemployer Plans and Multiple Employer Pension Plans
- -------------------------------------------------------
1. The Utility Employees Retirement Plan
2. The Profit-Sharing 401(k) Plan for Southwest Water Company's Related
Companies
Part IV: Environmental Disclosure
The Company has received no notice, summons, citation, directive, letter or
communication from any Governmental Authority concerning any environmental
matter of the three types described in Section 2.20.
Sparton Technology, Inc. ("Sparton") owns a manufacturing facility at 9621
Coors Road NW, Albuquerque, New Mexico (the "Sparton Plant"). From 1961
Annex 3-2
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
through 1994, Sparton manufactured commercial, industrial and military
electronic components at the Sparton Plant. Waste solvents containing heavy
metals were stored at the Sparton Plant in concrete ponds (through 1975) and in
lined surface impoundments.
The Environmental Protection Agency (the "EPA") and the City of Albuquerque
(the "City") have determined that the containment vehicles used by Sparton at
the Sparton Plant leaked, resulting in the creation of an underground plume
containing heavy metals in the vicinity of the Sparton Plant. The EPA, the City
and Sparton have conducted various studies and tests, including installation of
numerous monitor wells to determine the level of groundwater contamination and
the movement of such contamination.
The Company has been advised by the EPA that the Sparton plume is
dispersing or migrating to the northwest at a rate of approximately 100 lineal
feet per year. The closest Company Well is located approximately 2.62 miles or
approximately 13,850 feet from the Sparton Plant and more than two miles from
the closest boundary of the Sparton plume, as such boundary has been estimated
by the EPA and the City.
Based on the foregoing information provided to the Company, the Company
believes that the Sparton plume does not pose a danger to the Company's wells in
the foreseeable future. Moreover, if the Sparton plume were to affect the water
produced by the Company's wells, the Company believes that it could avoid a
contamination problem by extended such wells below the level of the plume and
pumping uncontaminated water. In the normal course of its business, the Company
samples and tests water produced from its wells for the presence of, among other
things, heavy metals. To date, the Company's tests indicate that no heavy
metals are present in water produced by the Company at levels requiring action
by the Company.
Part V: Restricted Third Party Encumbrances.
The following easements, referenced by the number beside which they are
described in Exhibit A to the Indenture, contain the respective size water and
sewer lines shown beside the number of such easement in the chart below.
Annex 3-3
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
<TABLE>
<CAPTION>
================================================================================
The Easement numbered as follows on Exhibit A to Is used by the Company to
the Indenture Support Water or Sewer
Lines of the Following
Sizes:
================================================================================
<C> <S>
47 21" sewer
- --------------------------------------------------------------------------------
48 6" water
- --------------------------------------------------------------------------------
49 6" water
- --------------------------------------------------------------------------------
50 6" water
- --------------------------------------------------------------------------------
51 12" water
- --------------------------------------------------------------------------------
52 8" sewer
- --------------------------------------------------------------------------------
53 12" sewer
- --------------------------------------------------------------------------------
54 12" water
- --------------------------------------------------------------------------------
55 6" water
- --------------------------------------------------------------------------------
56 6" water
- --------------------------------------------------------------------------------
73 20" water
- --------------------------------------------------------------------------------
74 8" sewer
- --------------------------------------------------------------------------------
90 8" sewer
- --------------------------------------------------------------------------------
91 12" water
- --------------------------------------------------------------------------------
92 8" water
- --------------------------------------------------------------------------------
93 8" water
================================================================================
</TABLE>
The foregoing easement numbered 47 contains a sewer line which serves
an apartment complex and no other customers of the Company. Such sewer line is
not owned by the Company, but is rather owned and maintained by the owner of the
apartment complex and is located in land previously owned by Horizon
Corporation. The sewer line located in number 47 ties into a sewer main operated
by the Company. In the event that the rights to the easement numbered 47 were
foreclosed or otherwise terminated pursuant to the terms of any Restricted Third
Party Encumbrance encumbering the Property over which such easement was granted,
and the holder of such Restricted Third Party Encumbrance or its successor in
interest were to take action to prevent the use of the Property, the Company
might be unable to provide sewer service to such apartment complex, but no other
water or sewer service of the Company would be affected. The fact that any such
action would prevent the Company from supplying sewer service to such apartment
complex would likely cause
Annex 3-4
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
the owner of such complex to grant to or obtain for the benefit of the Company a
replacement easement to enable the Company to provide sewer service to such
complex.
The foregoing easements numbered 48 through 56, inclusive, other than
the water line in number 51 (which is a transmission line), supply water and
sewer service solely to the fee parcels over which such easements were granted.
Such fee parcels comprise one shopping center. The water and sewer service
provided through these easements, other than the waterline in number 51 (which
is a transmission line), supply only such shopping center, and do not supply
water or sewer service to any other parcels. If the rights of the Company
pursuant to easements 48-50 and 52-56 were foreclosed or otherwise terminated
pursuant to the terms of any Restricted Third Party Encumbrance encumbering the
Property over which such easements were granted, and the holder of such
Restricted Third Party Encumbrance or its successor in interest were to take
action to prevent the Company from using the Property, the Company might be
unable to supply water or sewer service to all or some portion of such shopping
center, but no other water or sewer service of the Company would be affected.
If the rights of the Company pursuant to easement 51 were foreclosed or
otherwise terminated pursuant to the terms of Any Restricted Third Party
Encumbrance encumbering the Property over which such easement was granted, and
the holder of such Restricted Third Party Encumbrance or its successor in
interest were to take action to prevent the Company from using the Property, the
Company might be unable to supply water or sewer service to all or some portion
of such shopping center. However, due to water and sewer line loops owned by
the Company and in place around the perimeter of the shopping center, the loss
of use of the lines in easement number 51 would not interfere with water or
sewer service of the Company to customers other than those in the shopping
center. Moreover, the fact that any such action (i.e., prevention of the
Company's use of easements 48 through 56) would prevent the Company from
supplying water and/or sewer service for the benefit of the fee parcels
encumbered or held by the holder(s) of such Restricted Third Party Encumbrance
would likely deter such Person from taking such action.
The foregoing easement number 73 contains a portion of a main water
supply line through which water is supplied to numerous other parcels served by
the Company. In the event that the rights of the Company pursuant to such
easement were foreclosed or otherwise terminated pursuant to the terms of any
Restricted Third Party Encumbrance encumbering the Property over which such
easement was granted,
Annex 3-5
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
and the holder of such Restricted Third Party Encumbrance or its successor in
interest were to take action to prevent the Company from using the Property, the
Company has an alternate water main through which it can supply water to the
parcels served by the portion of the water line located in easement Property 73.
Such alternate water main is in place, in service and is currently being used.
Such alternate water main could be used in place of the portion of the water
main located in easement 73 without any significant interruption in service or
any substantial additional cost or expense to the Company. Any minor
interruption or additional cost incurred by the Company from use of the
alternate water main would not have a material adverse effect upon the business,
profits, Properties (taken as a whole) or condition (financial or other) of the
Company or the ability of the Company to consummate the Transactions or perform
its obligations set forth in this Agreement, the Bonds or the Indenture.
The foregoing easement numbered 74 contained a small sewer line
serving one customer. Such line is no longer in service. A grammar school has
been constructed, in part, on the Property in which easement 74 is located. In
connection with the construction of such school, the Company ceased using such
line, removed such line and relocated the line to another easement area. The
most recent plat of the area containing the Property in which easement 74 is
located depicts easement 74 as abandoned. Accordingly, termination of such
easement as the result of foreclosure or other termination pursuant to the terms
of any Restricted Third Party Encumbrance encumbering the Property which
contains easement 74 will have no adverse effect upon the Company (i.e.,
business, profits, Properties or condition) or the ability of the Company to
consummate the Transactions or perform its obligations set forth in the Bond
Purchase Agreement, the Bonds or the Indenture.
The foregoing easement numbered 90 contains an 8" sewer line which
serves a portion of a residential subdivision. It connects such subdivision to
a main sewer line operated by the Company. The 8" sewer line has been in use by
the Company for more than 20 years. The area described in the easement grant
creating such easement is also depicted on a recorded plat of the subdivision as
a utility easement for sewer line purposes. The 8" sewer line is located
entirely within the easement area as described in such grant of easement and as
depicted on such plat. The Company is not aware of anyone having any right or
alleged right to terminate the Company's right to use such 8" sewer line.
Annex 3-6
<PAGE>
ANNEX 3
INFORMATION AS TO COMPANY (CONT.)
The foregoing easements numbered 91 through 93 were granted in 1961.
Originally, easement area 91 contained a 12" water main which ran a length of
approximately 1 1/2 miles to serve the sole industrial customer of the Company,
Spartan Industries. Such line has, with the development of a shopping center
along such line, been largely replaced by a new line which is not located in
such easement. Such new line serves all customers along the length of the line
other than Spartan Industries. Approximately 500 feet of such original line
remains in easement 91. Such 500 feet of the original line serves only one
customer, Spartan Industries, and will not be used by the Company to serve any
future customers. Easement 92 and 93 contain an 8 "water line which connects to
the 12" water line in easement area 91 and runs past Spartan Industries to a
connection with another water main operated by the Company. Although service to
Spartan Industries is currently provided through the water line in easement area
91, the Company can, with no interruption in service and no additional cost to
the Company, also provide service to Spartan Industries through the water line
in easement areas 92 and 93.
The Company is not aware of anyone having any right or alleged right
to terminate the Company's right to use either the line in easement area 91 or
the line in easement areas 92 and 93. As described above, if the Company's right
to use either line were terminated in any manner, the Company can serve Spartan
Industries without interruption in service or additional cost to the Company
from the other line. If the Company's rights to use both lines were terminated,
the Company would not be able to serve Spartan Industries, but such termination
would not affect service provided by the Company to any other customers.
Termination of service to Spartan Industries would not have a material adverse
effect upon the business, profits, Properties (taken as a whole) or condition
(financial or other) of the Company or the ability of the Company to consummate
the Transactions or perform its obligations set forth in this Agreement, the
Bonds or the Indenture.
Annex 3-7
<PAGE>
EXHIBIT B1
FORM OF COMPANY'S LEGAL OPINION
[Letterhead of Latham & Watkins]
[Closing Date]
Ameritas Life Insurance Corp. Woodmen Accident and Life Company
5900 "O" Street 1526 "K" Street
Lincoln, Nebraska 68510-6970 Lincoln, Nebraska 68508
Re: $4,000,000 Series B First Mortgage Bonds of New Mexico Utilities, Inc.
Ladies and Gentlemen:
We have acted as counsel to New Mexico Utilities, Inc. (the "Company"), a
New Mexico corporation and to Southwest Water Company, a Delaware corporation
("Southwest"), in connection with the Bond Purchase Agreement (the "Bond
Purchase Agreement"), dated as of November 8, 1996, between the Company,
Southwest and each of you, as Purchasers, which Bond Purchase Agreement
provides, among other things, for the sale by the Company of its First Mortgage
Bonds, Series B 7.64%, due November 7, 2006 (the "Series B Bonds") in the
aggregate principal amount of $4,000,000 issued under and pursuant to an
Indenture of Mortgage dated February 14, 1992 (the "Original Indenture"),
between the Company and Sunwest Bank of Albuquerque, National Association, as
trustee (the "Trustee"), as amended by a certain First Supplement to Indenture
of Mortgage (the "First Supplemental Indenture") dated as of May 15, 1992,
between the Company and the Trustee and a certain Second Amendment and
Supplement to Indenture of Mortgage (the "Second Supplemental Indenture") dated
as of October 21, 1996, between the Company and the Trustee. The Original
Indenture, First Supplemental Indenture and Second Supplemental Indenture are
herein sometimes referred to, collectively, as the "Indenture." The Company's
parent, Southwest, has also executed the Bond Purchase Agreement for the limited
purpose of making certain representations and warranties contained therein.
This opinion is rendered to you pursuant to Section 3.1(a) of the Bond
Purchase Agreement. As counsel to the Company and Southwest, we are not opining
as to matters of New Mexico law or matters involving the New Mexico Public
Utility
B1-1
<PAGE>
Commission (the "PUC "). Messrs. Montgomery & Andrews, P.A. ("M&A") have acted
as special counsel to the Company with respect to such matters and are
delivering to you a separate opinion of even date herewith. Capitalized terms
used in this opinion and not defined herein shall have the respective meanings
ascribed to them in, or pursuant to the provisions of, the Bond Purchase
Agreement or the Indenture.
The Indenture grants to the holders of the Company's first mortgage bonds
from time to time issued thereunder (collectively, the "First Mortgage Bonds"),
including the Series B Bonds, a security interest in certain property of the
Company, more particularly described in the Indenture, consisting of both (i)
real property and real property interests, including, in each case, fixtures,
other than Excepted Property, as described in the Indenture (the "Real
Property"), and (ii) personal property, other than Excepted Property, as
described in the Indenture (the "Personal Property"). Prior to the delivery of
this letter, an executed recorded counterpart of the Indenture was on file in
the Clerk's office of Bernalillo County, New Mexico. At our direction, an
executed counterpart of the Indenture was also filed, as a financing statement,
in the office of the Secretary of State of the State of New Mexico. Also at our
direction, a commitment for title insurance dated September 27, 1996 (the "Ticor
Report") was prepared by Ticor Title Insurance Company ("Ticor") covering the
state of the title in and to that Real Property subject to the Lien of the
Indenture (other than certain parcels noted on Exhibit "A" to the Original
Indenture as not insured), including the Real Property added to the Lien of the
Indenture by the Second Supplemental Indenture.
A bondholder's policy of title insurance dated March 11, 1992 was received
from Ticor to insure the Trustee and the holder of the Outstanding Bonds under
the Indenture against loss or damage to the extent of an aggregate of $2,000,000
plus costs, if any, as allowed by said policy, by reason of any defect in the
Lien of the Indenture on the Real Property described therein or by reason of the
title to such Real Property described in the Indenture being other than as shown
in such policy. Further, in connection with the recordation of the Second
Supplemental Indenture and the issuance of the Series B Bonds, we have ordered a
new policy of title insurance to insure the Trustee and the holder of all of the
First Mortgage Bonds (including the Series B Bonds) against loss or damage to
the extent of $6,000,000 in the event of any defect in the Lien of the Indenture
on the Real Property or by reason of the title to the Real Property being other
than as shown in such policy and endorsements. We have received assurance
satisfactory to us from Ticor that the aforementioned policy of title
B1-2
<PAGE>
insurance has been committed prior to the delivery of this opinion letter, in
accordance with our orders. Copies of such commitment have been furnished to
each of you. A New Mexico Form UCC-1 Financing Statement, as amended by New
Mexico Form UCC-3 Financing Statements adding certain property added to the Lien
of the Indenture by the Second Supplemental Indenture and renewing the Form UCC-
1 Financing Statement (with the Form UCC-1 Financing Statement, the "Financing
Statement") describing the personal property in which a security interest was
granted to the Trustee pursuant to the Indenture, including the Second
Supplemental Indenture, is also on file with the Secretary of State of New
Mexico and is on file as a fixture filing in the Clerk's office of Bernalillo
County, New Mexico.
As counsel for the Company and Southwest, we have prepared or participated
in the preparation of the Bond Purchase Agreement, the Second Supplemental
Indenture, the Series B Bonds and the Financing Statement (collectively, the
"Documents") and various certificates and other documents executed and delivered
in connection therewith. In each instance, we have reviewed executed copies of
such documents and each of the executed and authenticated Series B Bonds or have
otherwise received assurances satisfactory to us that such documents have been
executed, and in the case of the Series B Bonds, authenticated, prior to the
delivery of this letter, by each entity whose signature or authentication is
provided for therein.
In our examination, we have assumed the genuineness of all signatures
(other than those of officers of the Company and Southwest) on the Documents,
the authenticity of all Documents submitted to us as originals, the conformity
to authentic original Documents of all Documents submitted to us as copies and
the legal capacity of all natural persons executing the Documents.
We have been furnished with and with your consent have relied upon,
certificates of officers of the Company and Southwest with respect to certain
factual matters. In addition, we have obtained and relied upon such
certificates and assurances from public officials as we have deemed necessary.
Except as provided in paragraph 1, we are opining herein as to the effect
on the subject transaction only of the federal laws of the United States and the
internal laws of the State of California, and we express no opinion with respect
to the applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or as to any matters of municipal law or the laws of any local
agencies within any state.
B1-3
<PAGE>
Whenever a statement herein is qualified by "to the best of our knowledge"
or a similar phrase, it is intended to indicate that those attorneys in this
firm who have rendered legal services in connection with the sale of the Series
B Bonds do not have current actual knowledge of the inaccuracy of such
statement. However, except as otherwise expressly indicated, we have not
undertaken any independent investigation to determine the accuracy of any such
statement, and no inference that we have any knowledge of any matters pertaining
to such statement should be drawn from our representation of the Company or
Southwest.
We have also, with your consent, relied, for the purposes of our opinion
set forth in paragraph 3 below, on a letter to the Company, to you and to us,
from SSP Hambro & Co., LLC and Wells Fargo Bank, confirming the warranty
contained in Section 2.15 of the Bond Purchase Agreement, and the
representations contained in Sections 1.3 and 2.15 of the Bond Purchase
Agreement.
Subject to the foregoing and the other matters set forth herein, it is our
opinion that, as of the date hereof:
1. Based upon representations by the Company to us that the Company does
not own any property in, does not maintain an office in and does not conduct any
business in any state other than New Mexico, the Company is not required to
qualify to do business as a foreign corporation in any jurisdiction.
2. The Series B Bonds conform to the requirements of the Indenture.
3. The offer, issuance, sale and delivery of the Series B bonds in the
principal amount of $4,000,000 in accordance with the provisions of the Bond
Purchase Agreement constitute an exempt transaction under the Securities Act of
1933, as amended (the "Act"), and under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), and neither the Act nor the Trust Indenture
Act requires registration of the Series B Bonds or qualification of the
Indenture.
4. The Company has complied with all conditions precedent to the
issuance, sale and delivery of the Series B Bonds imposed by the provisions of
the Indenture.
5. The Company is not a "holding company" or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
B1-4
<PAGE>
company" of a "holding company," as such terms are defined in the Public Utility
Holding Company Act of 1935, as amended.
6. The Company is not, and is not directly or indirectly controlled by,
or acting on behalf of any Person which is, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
7. Neither the issuance of the Bonds nor the intended use of the proceeds
of the Bonds (as set forth in Section 2.13 of the Bond Purchase Agreement) will
violate Regulations G, T or X of the Federal Reserve Board.
8. The Bond Purchase Agreement has been duly ratified and approved by all
necessary corporate action of Southwest's Board of Directors and has been duly
executed and delivered by officers of Southwest thereunto duly authorized by
proper corporate action of Southwest's Board of Directors. No action by the
stockholders of Southwest is required by law, by the Certificate of
Incorporation of Southwest or by the By-Laws of Southwest for the authorization,
execution and delivery of the Bond Purchase Agreement.
In rendering our opinion as to the lack of any requirement that the
Company qualify as a foreign corporation in any jurisdiction in paragraph 1
above, we have relied on a certificate of officers of the Company to the effect
set forth in the first sentence of such paragraph and have performed no
independent investigation concerning the representation of the Company to us.
In rendering our opinions set forth in paragraphs 5, 6 and 7 above, we
have also relied as to certain factual matters on a certificate of officers of
the Company.
To the extent that the obligations of the Company may be dependent upon
such matters, we assume for purposes of this opinion that: all parties to the
Documents other than the Company and Southwest are duly formed, validly existing
and in good standing under the laws of their respective jurisdictions of
formation; all parties to the Documents other than the Company and Southwest
have the requisite power and authority to execute and deliver the Documents and
to perform their respective obligations under the Documents to which they are a
party; and the Documents to which such parties other than the Company and
Southwest are a party have been duly authorized, executed and delivered by such
parties and constitute their legally valid and binding obligations, enforceable
against them in accordance with their terms. We
B1-5
<PAGE>
express no opinion as to compliance by any parties to the Documents with any
state or federal laws or regulations applicable to the subject transactions
because of the nature of their businesses.
This opinion is rendered only to you and is solely for your benefit in
connection with the transactions covered hereby. This opinion may not be relied
upon by you for any other purpose, or furnished to, quoted to or relied upon by
any other person, firm or corporation for any purpose, without our prior written
consent. At your request, we hereby consent to reliance hereon by the Trustee
and by M&A, delivery of this opinion to or reliance upon this opinion by any
governmental authorities having regulatory jurisdiction over you and delivery of
this opinion to or reliance upon this opinion by any Holder of the Series B
Bonds who becomes a Holder in compliance with the provisions of the Bond
Purchase Agreement and the Indenture. Reliance upon this opinion by any
governmental authority or successor holder of Series B Bonds is subject to the
provisos that this opinion speaks only as of the date hereof and to its
addressees and that we have no responsibility or obligation to update this
opinion, to consider its applicability or correctness to other than its
addressee, or to take into account changes in law, facts or any other
development of which we may later become aware.
Very truly yours,
B1-6
<PAGE>
EXHIBIT B2
FORM OF COMPANY'S SPECIAL COUNSEL'S CLOSING OPINION
[Letterhead of Montgomery & Andrews]
[Closing Date]
Ameritas Life Insurance Corp. Woodmen Accident and Life Company
5900 "O" Street 1526 "K" Street
Lincoln, Nebraska 68510-6970 Lincoln, Nebraska 68508
Re: New Mexico Utilities, Inc.
$4,000,000 First Mortgage Bonds, Series B
Ladies and Gentlemen:
We have been engaged as special counsel to New Mexico Utilities, Inc. (the
"Company"), a New Mexico corporation, for purposes of rendering certain opinions
under New Mexico law in connection with the Bond Purchase Agreement (the "Bond
Purchase Agreement"), dated as of November 8, 1996, between the Company, joined
for certain purposes by Southwest Water Company, a Delaware corporation
("Southwest"), and each of you, as Purchasers, which Bond Purchase Agreement
provides, among other things, for the sale by the Company of its First Mortgage
Bonds, Series B, due November 7, 2006 (the "Series B Bonds") in the aggregate
principal amount of $4,000,000 issued under and pursuant to an Indenture of
Mortgage (the "Original Indenture"), dated as of February 14, 1992, between the
Company and Sunwest Bank of Albuquerque, National Association, as trustee (the
"Trustee"), as amended by a certain First Supplement to Indenture of Mortgage
(the "First Supplemental Indenture") dated as of May 15, 1992, between the
Company and the Trustee and a certain Second Supplement to Indenture of Mortgage
(the "Second Supplemental Indenture") dated as of October 21, 1996, between the
Company and the Trustee. The Original Indenture, First Supplemental Indenture
and Second Supplemental Indenture are herein sometimes referred to,
collectively, as the "Indenture." The Indenture grants to the holders of the
Company's first mortgage bonds from time to time issued thereunder, including
the Series B Bonds, a security interest in certain property, whether presently
owned or hereafter acquired, of the Company, more particularly described in the
Indenture, consisting of both real
B2-1
<PAGE>
property and real property interests, including, in each case, fixtures, other
than Excepted Property, as described (the "Real Property"), and personal
property, other than Excepted Property, as described (the "Personal Property").
We were also engaged to represent the Company in certain proceedings before the
New Mexico Public Utility Commission (the "PUC") regarding the issuance and sale
of the Series B Bonds and related transactions. The terms used in our opinion
and not defined herein shall have the respective meanings ascribed to them in,
or pursuant to the provisions of the Bond Purchase Agreement or the Indenture.
In the course of our engagement, we have reviewed executed copies of the
Bond Purchase Agreement, the Indenture, the Financing Statements and various
certificates and other documents executed and delivered in connection therewith,
and each of the executed and authenticated Series B Bonds, prior to the delivery
of this letter, by each entity whose signature is provided for therein.
We have also made such legal and factual examinations and inquiries,
including an examination of originals or copies certified or otherwise
identified to our satisfaction as being true copies, of such instruments,
corporate records and other documents as we have deemed necessary or appropriate
for the purposes of this opinion.
As to factual matters and the authentication of instruments and other
documents relevant to the opinions expressed below, we have, with your consent,
relied upon certificates of public officials and officers of the Company,
without conducting independent investigations with respect thereto.
In addition, we have, with your consent, relied upon certain other matters
as described below in rendering certain of the opinions set forth below. We
express no opinion as to the application of the laws of any State other than New
Mexico, nor as to the application or requirements of any federal securities laws
or regulations.
On the basis of the foregoing and in reliance thereon and on such other
matters as are hereinafter specified, we are of the opinion that, as of the date
hereof:
9. The Company is a corporation duly incorporated, legally existing, and
in good standing under the laws of the State of New Mexico and has all requisite
corporate power and authority to execute and deliver the Bond Purchase Agreement
and the Indenture, to issue, sell and deliver the Series B Bonds, to perform its
obligations pursuant to the Bond Purchase Agreement, the Series B Bonds and the
B2-2
<PAGE>
Indenture, to carry on its business as now conducted by it in the State of New
Mexico, and to own the Real Property and the Personal Property which it now
owns.
10. The Indenture has been duly authorized by proper corporate action of
the Company's Board of Directors and has been duly executed and delivered on
behalf of the Company by its duly authorized officers. The Indenture
constitutes a legal, valid and binding instrument of the Company enforceable in
accordance with its terms, except to the extent that enforcement thereof may be
limited by (i) the laws of the State of New Mexico (where the property covered
thereby is situated) affecting the remedies for the enforcement of the liens and
security interests provided for therein, which laws in our opinion do not make
inadequate the remedies necessary for the realization of the benefits of such
security; (ii) bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting the enforcement of
creditors' rights; and (iii) general principles of equity. The Real Property
now owned by the Company has been subjected to the terms of the New Mexico Deed
of Trust Act (N.M. Stat. Ann. (S)(S) 48-10-1 et seq.) by the Indenture, and,
-- ---
subject to continuing compliance with the requirements of that act, the Trustee
has a power of sale under which such Real Property may be sold as provided in
the act. No action by the stockholder of the Company is required by law, by the
Articles of Incorporation of the Company or by the By-Laws of the Company for
the authorization, execution and delivery of the Indenture.
11. The Bond Purchase Agreement has been duly authorized by proper
corporate action of the Company's Board of Directors and has been duly executed
and delivered on behalf of the Company by its duly authorized officers. Except
to the extent that enforcement may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application relating
to or affecting the enforcement of creditors' rights, and (ii) general
principles of equity, the Bond Purchase Agreement constitutes a legal, valid and
binding instrument of the Company enforceable in accordance with its terms. No
action by the stockholder of the Company is required by law, by the Articles of
Incorporation of the Company or by the By-Laws of the Company for the
authorization, execution and delivery of the Bond Purchase Agreement.
12. The Series B Bonds in the aggregate principal amount of $4,000,000
being purchased on the date hereof have been duly authorized by proper corporate
action of the Company's Board of Directors, have been duly executed and
delivered on behalf of the Company by its authorized officers, have been duly
issued by the
B2-3
<PAGE>
Company and have been duly authenticated by the Trustee under the Indenture, and
the obligations of the Company represented by the Series B Bonds are legal,
valid and binding obligations of the Company which are enforceable in accordance
with their terms, except to the extent that enforcement may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application relating to or affecting the enforcement of creditors'
rights, and (ii) general principles of equity. Subject to the qualifications in
paragraph 2, above, with respect to the enforceability of the Indenture, the
Series B Bonds are entitled to the benefit and security of the Indenture,
equally and ratably with all First Mortgage Bonds of other series which may from
time to time be issued pursuant to and secured by the Indenture in accordance
with the terms thereof, except as to any sinking, amortization, improvement, or
other analogous fund established in accordance with the provisions of the
Indenture.
13. Neither (a) the execution and delivery by the Company of the Bond
Purchase Agreement or the Indenture; nor (b) the granting to the Trustee of
liens upon certain collateral pursuant to the provisions of the Indenture; nor
(c) the execution, delivery, issue and sale of the Series B Bonds; nor (d)
compliance by the Company with the terms of the Series B Bonds, the Indenture
and the Bond Purchase Agreement (all such transactions referred to in clauses
(a) through (d), inclusive, of this paragraph 5 being hereinafter referred to as
the 'Transactions") will conflict with, or result in any breach of any of the
provisions of, or constitute a default under, or result in the creation or
imposition of any lien (other than the lien of the Indenture) upon, any of the
Real Property or Personal Property of the Company pursuant to (i) the provisions
of the Articles of Incorporation or By-Laws of the Company; (ii) any agreement
or other instrument, known to us after due inquiry, to which the Company is a
party or by which it or any of its Property is bound; (iii) any New Mexico law,
statute, regulation or ordinance; or (iv) any order, judgment, award or decree,
known to us after due inquiry of the Company (no independent search of court
records having been made) of any court or arbitrator against or affecting the
Company or any of its property.
14. The Indenture is in due form for recording and has been duly filed for
record as a mortgage on the Real Property in each and every public office in
which such recording is a prerequisite to the establishing of record of the lien
thereof on the Real Property therein specifically described which is now owned
by the Company. All taxes and fees required to be paid with respect to the
execution and recording of the Indenture and the issuance of the Series B Bonds
have been paid. The Indenture will
B2-4
<PAGE>
not have to be refiled, reregistered or redeposited to continue the lien in and
upon the Real Property now owned by the Company and specifically described
therein or the effectiveness of such lien as against any subsequent transferee
of the Real Property specifically described therein.
15. The Indenture constitutes a valid mortgage lien on the Real Property
now owned by the Company which is specifically or generally described in the
granting clauses of the Indenture as being subject to the lien thereof and which
is located in Bernalillo County, New Mexico. We express no opinion as to the
attachment of the lien of the Indenture on Real Property acquired after the date
and time of recording. The opinion in this paragraph is given in partial
reliance on Title Insurance Policy No. 34-4042-61-001004 dated March 11, 1992,
and issued by Ticor Title Insurance Company ("Ticor"), and upon the written
commitment of Ticor dated September 27, 1996 that all requirements for the
issuance of a new policy of title insurance to increase the amount of coverage
to $6,000,000, to extend the coverage under such policy to certain Real Property
added to the lien of the Indenture by the Second Supplemental Indenture and to
extend the coverage of such policy to the Series B Bonds have been satisfied.
16. The provisions of the Indenture are effective to create a valid
security interest in favor of the Trustee in the Personal Property of the
Company. The Indenture, as a financing statement, or a separate financing
statement in respect of the Personal Property (the term "Financing Statement"
referring to either or both as the case may be) has been duly filed or recorded
in each and every public office in which such filing and/or recording is a
prerequisite to the establishing of record of the lien of the Indenture on all
of the Personal Property therein specifically described which is owned by the
Company. Based upon the issuance and sale by the Company to you prior to the
delivery of this letter of the Series B Bonds and your concurrent delivery of
the consideration provided for in the Bond Purchase Agreement, pursuant to the
provisions of the Indenture the Trustee has a valid, perfected security interest
in the Personal Property presently owned by and in the possession of the Company
or hereafter acquired by the Company. Our opinion as to perfection, however, is
expressly limited to those items and types of the Personal Property as to which
perfection is accomplished by the filing of a financing statement in accordance
with the Uniform Commercial Code--Secured Transactions (N.M. Stat. Ann. (S)(S)
9-101 et seq. (1978)) as in effect in New Mexico ("UCC Article 9"). Such
-- ---
security interest is, in the case of after-acquired Personal Property, subject
to purchase money security interests and acquisition by the Company of rights in
and possession of such Personal
B2-5
<PAGE>
Property. Except for the timely filing of continuation statements as required by
UCC Article 9 and the filing of appropriate amendments to the Financing
Statements required by changes in circumstances, it is not necessary to refile
the Financing Statements or to file new financing statements to maintain the
perfection of the security interests in the Personal Property.
Based upon the assumptions and subject to the limitations set forth in this
paragraph, insofar as such security interest relates to that portion of the
Personal Property which is personal property owned and possessed by the Company
as of the date hereof and located in the State of New Mexico and, in the case of
fixtures, in Bernalillo County, New Mexico, such security interest will have
priority over all other security interests in any of such Personal Property
which may be perfected under UCC Article 9 by filing with the New Mexico
Secretary of State or the County Clerk of Bernalillo County, New Mexico, a
financing statement covering such Personal Property subsequent to the date
hereof, except as such priority is or may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or other similar laws or case decisions
relating to or affecting the enforcement of the rights of creditors generally.
The opinions in this paragraph 8 are, as to Personal Property acquired after the
date of this letter, expressly subject to pre-existing liens and encumbrances.
Such opinions are also given in reliance upon a certificate of an officer of the
Company to the effect that all of such Personal Property has been continuously
located in the State of New Mexico since at least May 8, 1996, and that no other
security interest in any of such Personal Property exists by a certificate of
title or ownership issued under the laws of any state other than New Mexico. In
addition, in giving such opinions we have relied, in part, upon a certificate
from an officer of the Company to the effect that the Company has not, during
the period from May 8, 1996 to the date hereof, created any "purchase money
security interest," as defined in UCC Article 9 (N.M. Stat. Ann. (S)(S) 55-9 -
107 (1978)) in any portion of the Personal Property. Finally, we have relied on
the reports of UCC and other lien searches provided to us by Latham & Watkins,
and we are relying upon the accuracy of such reports as to the absence of filing
of any financing statements or notices against the Company except as shown in
such reports. We have made no independent examination of the public records and
indices covered by such reports and consequently express no opinion as to the
priority of the Trustee's security interest under the Indenture as against the
interest of any other secured party which, prior to the filing of the Financing
Statements, filed a financing statement or notice not reported in such reports.
B2-6
<PAGE>
17. All consents, approvals or authorizations, if any, of or by any
Governmental Authority required on the part of the Company in connection with
the consummation of the Transactions have been duly obtained, and the Company
has complied with all applicable provisions of law requiring any designation,
declaration, filing, registration or qualification with any Governmental
Authority in connection with the Transactions.
18. All approvals and consents of the PUC required for the valid issuance
and sale of the Series B Bonds, the valid execution and delivery of the Bond
Purchase Agreement by the Company, the valid execution and delivery of the
Second Supplemental Indenture by the Company pursuant to and in accordance with
the terms and conditions of the Bond Purchase Agreement and the Indenture, the
granting to the Trustee of liens upon certain collateral, in each case, pursuant
to the provisions of the Second Supplemental Indenture, and the compliance by
the Company with the terms of the Series B Bonds, the Indenture and the Bond
Purchase Agreement have been obtained and have become effective. All appeal
periods applicable to the effectiveness of such approvals and consents have
expired. There is in effect no stop order or other order of the PUC denying,
suspending or revoking the effectiveness of any such approvals and consents, and
no proceedings for such purposes are pending or, to our knowledge, threatened
before the PUC.
19. There is no litigation or proceeding, known to us after due inquiry of
the Company (no independent search of court records having been made), pending
or threatened against the Company not disclosed in the Bond Purchase Agreement
or the financial statements of the Company which have been furnished to you
pursuant thereto in which a judgment, order or award is likely that could be
materially adverse to the Company or that could affect the ability of the
Company to consummate the Transactions or perform its obligations under the Bond
Purchase Agreement or the Indenture.
20. The Company has complied with all conditions precedent to the
consummation of the Transactions imposed by law.
21. To the best of our knowledge, the Company is not in violation of any
applicable federal, state or other law or regulation which would have a material
adverse effect on the business of the Company.
B2-7
<PAGE>
The certificates of officers or other representatives of the Company upon
which we have relied which are referred to in this opinion are being delivered
to you in connection with the closing proceedings.
To the extent that the obligations of the Company may be dependent upon
such matters, we have assumed for the purposes of our opinions that the Bond
Purchase Agreement has been duly authorized, executed and delivered by each of
you and constitutes your respective legal, valid and binding obligation
enforceable in accordance with its terms; and that each of you has the requisite
corporate or other organizational power and authority to perform your respective
obligations under the Bond Purchase Agreement. For the purposes of our opinions
we have also relied upon the opinion of counsel to the Trustee to the effect
that the Second Supplemental Indenture has been duly executed and delivered by
the Trustee, that the Trustee has the requisite corporate or other
organizational power and authority to perform its obligations under the
Indenture, and that the Trustee has duly authenticated the Series B Bonds under
the Indenture.
We note specifically that certain of the representations and warranties
made to you or in your favor contained in the Bond Purchase Agreement have been
made by Southwest rather than by the Company itself. In our view, the fact that
such representations and warranties have been made by Southwest rather than the
Company will not affect our opinions as to the validity or enforceability of the
Bond Purchase Agreement or the Indenture or prevent the exercise by the Trustee
of the remedies afforded to it by the Indenture upon a default arising from the
breach of any representation or warranty made by Southwest in the Bond Purchase
Agreement. Such opinion is based, in part, upon the opinion of Latham & Watkins
of even date to the effect that the Bond Purchase Agreement has been ratified
and approved by proper corporate action of Southwest's board of directors and
has been duly executed and delivered on behalf of Southwest by its duly
authorized officers.
This letter is provided to you solely in connection with the transactions
described herein and may not be published or disseminated in any way without our
prior written consent; the foregoing shall not, however, preclude reliance upon
this opinion by Latham & Watkins, delivery of this opinion to or reliance upon
this opinion by any governmental authorities having regulatory jurisdiction over
you or delivery of this opinion to or reliance upon this opinion by any Holder
of the Series B Bonds who becomes a Holder in compliance with the provisions of
the Bond Purchase Agreement and the Indenture.
B2-8
<PAGE>
Very truly yours,
MONTGOMERY & ANDREWS, P.A.
Nancy M. King
B2-9
<PAGE>
EXHIBIT B3
FORM OF TRUSTEE COUNSEL'S CLOSING OPINION
[Letterhead of Modrall, Sperling, Roehl, Harris & Sisk, P.A.]
[Closing Date]
Ameritas Life Insurance Corp. Woodmen Accident and Life Company
5900 "O" Street 1526 "K" Street
Lincoln, Nebraska 68510-6970 Lincoln, Nebraska 68508
Re: $4,000,000 First Mortgage Bonds, Series B 7.64%, Due November 7, 2006
of New Mexico Utilities, Inc.
Ladies and Gentlemen:
We have acted as counsel to Sunwest Bank of Albuquerque, National
Association, a national banking association, (the "Trustee"), in connection with
its appointment as trustee, registrar and paying agent with respect to the
Series B Bonds (as defined below), pursuant to that certain Indenture of
Mortgage dated as of February 14, 1992, by and between New Mexico Utilities,
Inc. (the "Company") and the Trustee (the "Original Indenture"), as amended by a
certain First Supplement to Indenture of Mortgage (the "First Supplemental
Indenture") dated as of May 15, 1992, between the Company and the Trustee and a
certain Second Supplement to Indenture of Mortgage (the "Second Supplemental
Indenture") dated as of October 21, 1996, between the Company and the Trustee.
The Original Indenture, First Supplemental Indenture and Second Supplemental
Indenture are herein sometimes referred to, collectively, as the "Indenture."
Pursuant to that certain Bond Purchase Agreement (the "Bond Purchase
Agreement"), dated as of November 8, 1996, among the Company, Southwest Water
Company, a Delaware corporation, Ameritas Life Insurance Corp. and Woodmen
Accident and Life Company (the "Purchasers"), the Company proposes to issue and
sell to the Purchaser an aggregate of $4,000,000 of the Company's First Mortgage
Bonds, Series B 7.64%, due November 7, 2006 (the First Mortgage Bonds of such
series being referred to as the "Series B Bonds") pursuant to the Indenture.
Capitalized terms used herein and not otherwise defined shall have the
respective meanings ascribed to such terms in the Indenture.
B3-1
<PAGE>
This opinion is being delivered to you pursuant to Section 3.1 of the Bond
Purchase Agreement.
In connection with the foregoing, we have examined the following:
(i) the Bond Purchase Agreement;
(ii) the Indenture;
(iii) The Series B Bonds, dated the date hereof, numbered B-1 and B-2, each
in the principal amount of $2,000,000 and each registered in the name of one of
the Purchasers (the "Bonds");
(iv) the Articles of Association and By-Laws of the Trustee;
(v) resolutions of the Trustee with respect to signing authority;
and such records and proceedings of the Trustee, agreements or other
instruments, certificates of public officials and of officers of the Trustee and
such other instruments and documents as we have deemed necessary as a basis for
the opinions expressed herein. As to certain questions of fact material to such
opinions which we have not independently verified, we have relied upon the
representations and warranties of the Trustee set forth in the Certificate of
Trustee dated as of November 8, 1996 (a copy of which is attached to this
opinion), as if such representations and warranties were made directly to us.
Except as to the execution on behalf of the Trustee of the various closing
documents executed in connection with the issuance of the Bonds, we have assumed
the due execution by properly authorized signatories of all documents submitted
to us, the genuineness of all signatures shown on such documents and the
conformity to the originals of documents submitted to us as copies.
In delivering this opinion, we have relied upon the following assumptions
(neither of which has been independently verified by us):
A. The parties to the Indenture, other than the Trustee, have the power,
right and legal authority to execute and deliver, and have duly authorized,
executed and delivered, the Indenture.
B. All permits, consents, authorization, certificates, approvals or
licenses of, and registrations and declarations with, any governmental authority
of any state,
B3-2
<PAGE>
other than required of the Trustee by the laws of the State of New Mexico,
governing or necessary for the execution, delivery, validity and enforceability
of the Indenture, and the performance by the respective parties to the Indenture
of the transactions contemplated thereby, which are required to be obtained have
been obtained.
Based upon the foregoing and in reliance thereon and subject to the
qualifications set forth below, we are of the opinion that:
22. The Trustee is a duly chartered and validly existing national banking
association having trust powers. By virtue of its standing as a national
banking association with trust powers, the Trustee is authorized to exercise
corporate trust powers in the State of New Mexico.
23. The Trustee has duly authorized the acceptance of the trusts
contemplated by the Indenture, and the Indenture has been duly executed and
delivered by duly authorized officers of the Trustee.
24. The Trustee has full right, power and authority to perform its
obligations as Trustee under the Indenture, including without limitation the
authentication of the Bonds, and neither the execution and delivery by the
Trustee, nor performance of the Indenture or authentication of the Bonds by the
Trustee will conflict with, or result in a breach of, the provisions of the
Trustee's Articles of Association or Bylaws.
25. The Bonds have been duly authenticated by duly authorized officers of
the Trustee.
26. No governmental consent, authorization or approval which has not been
obtained is required from federal or New Mexico banking authorities in
connection with the execution and delivery of the Indenture by the Trustee, or
the performance under the Indenture or authentication of the Bonds by the
Trustee.
27. The Indenture constitutes a legal, valid and binding obligation of the
Trustee, enforceable against the Trustee in accordance with its terms, except as
such enforceability may be limited by:
(a) applicable bankruptcy, reorganization, arrangement, insolvency,
liquidation, conservatorship, moratorium or similar laws affecting the
enforcement of creditors' rights generally as at the time in effect;
B3-3
<PAGE>
(b) principles of equity and the availability of equitable remedies;
and
(c) common law or statutory requirements with respect to commercial
reasonableness.
We express no opinion as to the availability of equitable remedies against
the Trustee, including specific performance and injunctive relief, under or
pursuant to the Indenture. We express no opinion as to the enforceability of any
indemnification provisions in the Indenture.
This opinion is delivered to you solely for use, as described in the
initial two paragraphs hereof, by you in connection with the issuance of the
Series B Bonds and may not be used or relied upon by you for any other purpose
or by any person or entity other than you. Except for the use permitted herein,
this letter is not to be quoted or reproduced in whole or in part or otherwise
referred to in any manner, nor is it to be filed with any governmental agency
(other than as may be required by a Court or regulatory authority having
jurisdiction over you or any successor in interest to you) or delivered to any
other person without our prior written consent. This opinion speaks only as of
its date and is based upon and limited to the laws of the State of New Mexico
and federal laws as of the date hereof; we assume no responsibility to notify
you of any subsequent changes in such laws or of any circumstance or event which
may occur after the date hereof that affects or could possibly affect the
opinions expressed herein or to otherwise supplement such opinions to reflect
any such changes in such laws or the occurrence of any circumstance or event
after the date hereof.
Very truly yours,
B3-4
<PAGE>
EXHIBIT C1
FORM OF COMPANY OFFICERS' CERTIFICATE
NEW MEXICO UTILITIES, INC.
CERTIFICATE OF OFFICERS
We, Robert L. Swartwout and William C. Jasura, each hereby certify that we
are, respectively, the President and the Vice President/Finance of NEW MEXICO
UTILITIES, INC. (the "Company"), a New Mexico corporation, and that, as such, we
are authorized to execute and deliver this Certificate in the name and on behalf
of the Company, and hereby further certify as follows:
28. This certificate is being delivered pursuant to Section 3.4(a) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of November
8,1996, among the Company, Southwest Water Company, a Delaware corporation,
Ameritas Life Insurance Corp. and Woodmen Accident and Life Company (the
"Purchasers"). The terms used in this Certificate and not defined herein shall
have the respective meanings ascribed to them in the Bond Purchase Agreement.
29. The warranties and representations made by the Company contained in
Section 2 of the Bond Purchase Agreement are true in all material respects on
the date hereof.
30. The Company has not taken any action or permitted any condition to
exist that would constitute a Default or Event of Default.
31. The Company has performed and complied with all agreements and
conditions contained in the Bond Purchase Agreement that are required to be
performed or complied with by the Company before or at the date hereof.
32. William C. Jasura is, on and as of the date hereof, and at all times
subsequent to October, 1995 has been, the duly elected, qualified and acting
Secretary of the Company, and the signature appearing on the Certificate of
Secretary dated the date hereof and delivered to the Purchaser contemporaneously
herewith is his genuine signature.
IN WITNESS WHEREOF, we have executed this Certificate in the name and on
behalf of the Company as of November 8, 1996.
NEW MEXICO UTILITIES, INC.
C1-1
<PAGE>
By /s/ Robert L. Swartwout
Robert L. Swartwout,
President
By /s/ William C. Jasura
William C. Jasura,
Vice President/Finance
C1-2
<PAGE>
EXHIBIT C2
FORM OF PARENT OFFICERS' CERTIFICATE
SOUTHWEST WATER COMPANY
CERTIFICATE OF OFFICERS
We, Anton C. Garnier and Peter J. Moerbeek each hereby certify that we are,
respectively, the President and the Vice President/Finance of SOUTHWEST WATER
COMPANY ("Southwest"), a Delaware corporation, and that, as such, we are
authorized to execute and deliver this Certificate in the name and on behalf of
Southwest, and hereby certify as follows:
33. This certificate is being delivered pursuant to Section 3.4(b) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of November 8,
1996, among New Mexico Utilities, Inc., a New Mexico corporation, Southwest,
Ameritas Life Insurance Corp. and Woodmen Accident and Life Company (the
"Purchasers").
34. The warranties and representations made by Southwest contained in
Section 2 of the Bond Purchase Agreement are true in all material respects.
35. Peter J. Moerbeek is, on and as of the date hereof, the duly elected,
qualified and acting Secretary of Southwest, and the signature appearing on the
Certificate of Secretary of Southwest dated the date hereof and delivered to the
Purchaser contemporaneously herewith is his genuine signature.
IN WITNESS WHEREOF, we have executed this Certificate in the name and on
behalf of Southwest as of November 8, 1996.
SOUTHWEST WATER COMPANY
By /s/ Anton C. Garnier
Anton C. Garnier,
President
By /s/ Peter J. Moerbeek
Peter J. Moerbeek,
Vice President/Finance
C2-1
<PAGE>
EXHIBIT D1
FORM OF COMPANY SECRETARY'S CERTIFICATE
NEW MEXICO UTILITIES, INC.
CERTIFICATE OF SECRETARY
I, William C. Jasura, hereby certify that I am the duly elected, qualified
and acting Secretary of NEW MEXICO UTILITIES, INC., a New Mexico corporation
(the "Company"); that, as such, I have access to its corporate records and am
familiar with the matters herein certified; that I am authorized to execute and
deliver this Certificate in the name and on behalf of the Company; and hereby
further certify as follows:
36. This certificate is being delivered pursuant to Section 3.4(c) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of November 8,
1996, among the Company, Southwest Water Company, a Delaware corporation,
Ameritas Life Insurance Corp. and Woodmen Accident and Life Company (the
"Purchasers). The terms used in this Certificate and not defined herein shall
have the respective meanings ascribed to them in the Bond Purchase Agreement.
37. Attached hereto as Attachment A is a true and correct copy of
resolutions, and the preamble thereto, adopted by the Board of Directors of the
Company on October 17, 1996, and such resolutions and preamble set forth in
Attachment A hereto were duly adopted by said Board of Directors and are in full
force and effect on and as of the date hereof, not having been amended, altered
or repealed, and such resolutions are filed with the records of the Board of
Directors.
38. The documents listed below were executed and delivered by the Company
pursuant to and in accordance with the resolutions set forth in Attachment A
hereto and said documents as executed are substantially on the terms submitted
to and approved by the Board of Directors of the Company as aforementioned:
(a) the Bond Purchase Agreement;
(b) the Series B Bonds; and
(c) the Second Supplemental Indenture.
39. Attached hereto as Attachment B is a true, correct and complete copy
of the bylaws of the Company as in full force and effect on and as of the date
hereof, which bylaws were last
D1-1
<PAGE>
amended by the Board of Directors of the Company on, and have been in full
effect in said form at all times from and after March 29, 1996, to and including
the date hereof, without modification or amendment in any respect.
40. Each of the following named persons is on and as of the date hereof,
and at all times subsequent to May 21, 1996, has been a duly elected, qualified
and acting officer of the Company holding the office or offices set forth below
opposite his name:
<TABLE>
<CAPTION>
NAME OFFICE SIGNATURE
---- ------ ---------
<S> <C> <C>
Robert L. Swartwout President /s/ Robert L. Swartwout
William C. Jasura Vice President/Finance /s/ William C. Jasura
and Secretary
</TABLE>
41. The signature appearing opposite the name of each such person set
forth above is his genuine signature.
42. Attached hereto as Attachment C is a true, correct and complete copy
of the Certificate of Incorporation of the Company together with all amendments
thereto, as currently in effect. There have been no amendments or supplements to
or restatements of the Certificate of Incorporation of the Company since June
13, 1979.
43. The seal set forth beside my name below is the true corporate seal of
the Company.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate
seal of the Company as of November 8, 1996.
NEW MEXICO UTILITIES, INC.
/s/ William C. Jasura
Secretary
[Corporate Seal]
D1-2
<PAGE>
ATTACHMENT A
RESOLUTIONS OF THE
BOARD OF DIRECTORS
NEW MEXICO UTILITIES, INC.
[TO FOLLOW.]
Attachment A-1
<PAGE>
ATTACHMENT B
Bylaws of the Company
[To be supplied by Company.]
Attachment B-1
<PAGE>
ATTACHMENT C
Certificate of Incorporation of the Company
[To be supplied by Company.]
Attachment C-1
<PAGE>
EXHIBIT D2
FORM OF COMPANY SECRETARY'S CERTIFICATE
SOUTHWEST WATER COMPANY
CERTIFICATE OF SECRETARY
I, Peter J. Moerbeek, hereby certify that I am the duly elected,
qualified and acting Secretary of SOUTHWEST WATER COMPANY, a Delaware
corporation ("Southwest"); that, as such, I have access to its corporate records
and am familiar with the matters herein certified; that I am authorized to
execute and deliver this Certificate in the name and on behalf of Southwest; and
hereby further certify as follows:
44. This certificate is being delivered pursuant to Section 3.4(d) of the
Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of November
8,1996, among New Mexico Utilities, Inc., a New Mexico corporation, Southwest,
Ameritas Life Insurance Corp. and Woodmen Accident and Life Company (the
"Purchasers"). The terms used in this Certificate and not defined herein shall
have the respective meanings ascribed to them in the Bond Purchase Agreement.
45. Attached hereto as Attachment A is a true and correct copy of
resolutions, and the preamble thereto, adopted by the Board of Directors of the
Company on October 17, 1996, and such resolutions and preamble set forth in
Attachment A hereto were duly adopted by said Board of Directors and are in full
force and effect on and as of the date hereof, not having been amended, altered
or repealed, and such resolutions are filed with the records of the Board of
Directors. Southwest has executed and delivered, for the purpose of making
certain representations, the Bond Purchase Agreement pursuant to and in
accordance with such resolutions.
46. Attached hereto as Attachment B is a true, correct and complete copy
of the bylaws of Southwest as in full force and effect on and as of the date
hereof, which bylaws were last amended by the Board of Directors of Southwest
on, and have been in full effect in said form at all times from and after June
27, 1995 to and including the date hereof, without modification or amendment in
any respect.
47. Each of the following named persons is on and as of the date hereof a
duly elected, qualified and acting officer of Southwest holding the office or
offices set forth below opposite his name:
D2-1
<PAGE>
<TABLE>
<CAPTION>
NAME OFFICE SIGNATURE
---- ------ ---------
<S> <C> <C>
Anton C. Garnier President /s/ Anton C. Garnier
Peter J. Moerbeek Vice President/Finance, /s/ Peter J. Moerbeek
Chief Financial Officer
and Secretary
Stephen J. Muzi Corporate Controller /s/ Stephen J. Muzi
</TABLE>
48. The signature appearing opposite the name of each such person set
forth above is his genuine signature.
49. Attached hereto as Attachment C is a true, accurate and complete copy
of the Certificate of Incorporation of Southwest, together with all amendments
thereto, as currently in effect. There have been no amendments or supplements to
or restatements of the Certificate of Incorporation of Southwest since May 1,
1995.
50. The seal set forth beside my name below is the true corporate seal of
Southwest.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of Southwest as of November 8, 1996.
SOUTHWEST WATER COMPANY
[Corporate Seal]
Secretary
D2-2
<PAGE>
ATTACHMENT A
RESOLUTIONS OF THE
BOARD OF DIRECTORS
OF SOUTHWEST
[To be supplied by Southwest.]
Attachment A-1
<PAGE>
ATTACHMENT B
Bylaws of Southwest
[To be supplied by Southwest.]
Attachment B-1
<PAGE>
ATTACHMENT C
Certificate of Incorporation of Southwest
[To be supplied by Southwest.]
Attachment C-1
<PAGE>
NEW MEXICO UTILITIES, INC.
_________________________
BOND PURCHASE AGREEMENT
_________________________
Dated as of November 8 1996
$4,000,000
First Mortgage Bonds, Series B 7.64%, Due November 7, 2006
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURCHASE AND SALE OF BONDS................................. 1
1.1 Issue of Bonds............................................. 1
1.2 The Closing................................................ 2
1.3 Certain Purchaser Representations.......................... 3
1.4 Failure To Deliver; Failure of Conditions.................. 4
1.5 Expenses................................................... 4
SECTION 2. WARRANTIES AND REPRESENTATIONS............................. 5
2.1 Subsidiaries............................................... 5
2.2 Corporate Organization and Authority....................... 5
2.3 Business, Property and Indebtedness........................ 6
2.4 Financial Statements; Material Adverse Change.............. 6
2.5 Full Disclosure............................................ 7
2.6 Pending Litigation......................................... 7
2.7 Title to Properties........................................ 8
2.8 Patents, Trademarks, Licenses, etc......................... 8
2.9 Authorization, Execution, Delivery and Enforceability...... 8
2.10 No Defaults................................................ 9
2.11 Governmental Consent....................................... 9
2.12 Taxes...................................................... 10
2.13 Use of Proceeds............................................ 10
2.14 Public Utility Holding Company Act......................... 10
2.15 Private Offering........................................... 11
2.16 Compliance with Law........................................ 11
2.17 Restrictions on Company.................................... 11
2.18 ERISA...................................................... 12
2.19 Investment Company Act..................................... 14
2.20 Environmental Compliance................................... 14
2.21 Private Placement Number................................... 15
2.22 Restricted Third-Party Encumbrances........................ 15
SECTION 3. CLOSING CONDITIONS......................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.1 Opinions of Counsel........................................ 16
3.2 Warranties and Representations True; No Prohibited Action.. 16
3.3 Compliance with This Agreement............................. 17
3.4 Officers' Certificates..................................... 17
3.5 Legality................................................... 17
3.6 Regulatory Approvals....................................... 17
3.7 Both Purchasers............................................ 18
3.8 Liens Upon Collateral...................................... 18
3.9 Title Insurance............................................ 18
3.10 Indenture Conditions....................................... 18
3.11 Proceedings Satisfactory................................... 19
SECTION 4. AGREEMENTS OF THE COMPANY.................................. 19
4.1 Financial and Business Information......................... 19
4.2 Officers' Certificates..................................... 22
4.3 Accountants' Certificates.................................. 23
4.4 Inspection................................................. 23
4.5 Report to NAIC............................................. 23
SECTION 5. INTERPRETATION OF THIS AGREEMENT........................... 24
5.1 Terms Defined.............................................. 24
5.2 Accounting Principles...................................... 28
5.3 Directly or Indirectly..................................... 29
5.4 Governing Law.............................................. 29
5.5 Section Headings, Table of Contents and Construction....... 29
SECTION 6. MISCELLANEOUS.............................................. 29
6.1 Notices.................................................... 29
6.2 Amendment and Waiver....................................... 30
6.3 Reproduction of Documents.................................. 32
6.4 Survival................................................... 33
6.5 Successors and Assigns..................................... 33
6.6 Duplicate Originals; Execution in Counterparts............. 33
6.7 Construction - Representations and Warranties.............. 33
6.8 Severability............................................... 34
6.9 Incorporation by Reference................................. 34
</TABLE>
ii
<PAGE>
PAGE
----
Annex 1 -- Information as to Purchaser
Annex 2 -- Payment Instructions at Closing
Annex 3 -- Information as to Company
Exhibit A -- First Mortgage Bond, Series B 7.64%, Due November 7, 2006
Exhibit B1 -- Form of Company Counsel's Closing Opinion
Exhibit B2 -- Form of Company's Special Counsel's Closing Opinion
Exhibit B3 -- Form of Trustee Counsel's Closing Opinion
Exhibit C1 -- Form of Officers' Certificate of the Company
Exhibit C2 -- Form of Officers' Certificate of the Parent
Exhibit D1 -- Form of Secretary's Certificate of the Company
Exhibit D2 -- Form of Secretary's Certificate of the Parent
Exhibit E -- Form of Indenture
iii
<PAGE>
EXHIBIT A
FORM OF FIRST MORTGAGE BOND, SERIES B 7.64%, DUE NOVEMBER 7,
2006
NEW MEXICO UTILITIES, INC.
FIRST MORTGAGE BOND
SERIES B 7.64%, DUE NOVEMBER 7, 2006
$2,000,000.00
No. B-1
PPN No. 64744# AB 9
Albuquerque, New Mexico
NEW MEXICO UTILITIES, INC., a corporation organized under the laws of the
State of New Mexico (hereinafter called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to AMERITAS LIFE INSURANCE CORP., or registered
assigns, on November 7, 2006, the sum of TWO MILLION DOLLARS ($2,000,000.00) (or
so much thereof as shall not have been paid upon prior redemption) and to pay
interest (computed on the basis of a 360-day year of twelve 30-day months)
thereon from the later of the initial issuance of the series of Bonds of which
this Bond is a part, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semiannually on the 10th day of
each May and November in each year commencing on the first Interest Payment Date
next succeeding the date of this Bond until the principal amount thereof will be
due and payable; provided that interest on any overdue principal, overdue
Redemption Price, and (to the extent permitted by applicable law) overdue
installments of interest, shall accrue at a rate equal to the lesser of (a) the
highest rate allowed by applicable law, or (b) 8.64% per annum. In no event
shall the interest payable on this Bond (including any interest on overdue
interest or any overdue Redemption Price) exceed the maximum amount which the
Holder hereof may legally collect under the then applicable usury law. In the
event that it is hereinafter determined by a court of competent Jurisdiction
that the interest payable under this Bond (including any interest on overdue
interest or any overdue Redemption Price) is in excess of the amount which the
Holder hereof may legally collect under the then applicable usury law, then (i)
all interest actually paid (including any interest on overdue interest or any
overdue Redemption Price) in excess of the maximum amount legally collectible by
such Holder shall be applied to the payment of principal of this Bond or, if all
principal shall previously have been paid, promptly repaid by such Holder to the
Company and (ii) interest on this Bond (including any interest on overdue
interest or any overdue Redemption Price) subsequent to the date of such
<PAGE>
determination shall be reduced to the maximum amount which it is determined that
the Holder may collect under the then applicable usury law.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in said Indenture, be paid to the Person
(the "Registered Holder") in whose name this Bond (or one or more Predecessor
Bonds, as defined in said Indenture) is registered at the close of business on
the Regular Record Date for such interest, which shall be the fifteenth (15th)
day (whether or not a Business Day) of the calendar month next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly
provided for shall forthwith cease to be payable to the Registered Holder on
such Regular Record Date, and may be paid to the Person in whose name this Bond
(or one or more Predecessor Bonds) is registered at the close of business on a
Special Record Date to be fixed by the Trustee for the payment of such defaulted
interest, notice whereof being given to Bondholders not less than four (4) days
prior to such Special Record Date, or may be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Bonds of this series shall be listed, if any, and upon such notice
as shall be required by such exchange, all as more fully provided in said
Indenture. The Trustee shall give notice of such Special Record Date and pay or
arrange for payment of such defaulted interest as promptly as possible following
receipt of or availability of funds for such purpose.
The principal and the Redemption Price of, and the interest on, this Bond
shall be payable by crediting, before 12:00 noon, New York time, by federal
funds bank wire transfer, the account of the Registered Holder hereof in any
bank in the United States as may be designated in a written notice delivered to
the Company by such Registered Holder, or in such other manner as may be
directed, or to such other address in the United States as may be designated, in
writing delivered to the Company, by such Registered Holder. All such payments
shall be made in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts.
If any payment due on, or with respect to, this Bond shall fall due on a
day other than a Business Day, then such payment shall be made on the first
Business Day following the day on which such payment shall have so fallen due;
provided that if all or any portion of such payment shall consist of a payment
of interest, for purposes of calculating such interest, such payment shall not
be deemed to have been originally due on such first following Business Day, and
such interest shall accrue and be payable only to the Interest Payment Date.
This Bond is one of a duly authorized issue of Bonds of the Company
designated as its "First Mortgage Bonds" (herein called the "Bonds"), issued and
to be issued in one or more series under, and all equally and ratably secured
by, an Indenture of Mortgage and Deed of Trust, dated February 14, 1992, between
the Company and Sunwest Bank of Albuquerque, National Association, as Trustee
(herein called the "Trustee," which term includes any
<PAGE>
successor Trustee), as amended and supplemented by that certain First Amendment
and Supplement to Indenture of Mortgage dated February 14, 1992, dated May 15,
1992, between the Company and the Trustee, and further amended and supplemented
by that certain Second Amendment and Supplement to the Indenture of Mortgage
(the "Second Supplemental Indenture") dated October 21, 1996, between the
Company and the Trustee, (such Indenture of Mortgage and Deed of Trust, as so
amended to and including the date hereof, being herein called the "Indenture")
to which Indenture and all indentures supplemental thereto reference is hereby
made for a description of the properties thereby mortgaged, pledged and
assigned, the nature and extent of the security, the respective rights
thereunder of the Holders of the Bonds, the Trustee and the Company and the
terms upon which the Bonds are, and are to be, authenticated and delivered.
Capitalized terms not otherwise defined herein are defined as provided in the
Indenture.
As provided in the Indenture, the Bonds are issuable in series which may
vary as in the Indenture provided or permitted. This Bond is one of the series
specified in its title.
This Bond is subject to redemption in whole, at any time, and in part, from
time to time, before its maturity in the following events and in the manner
provided in Article V and Section 16.03 (as added by the Second Supplemental
Indenture) of the Indenture:
(1) at any time after issuance, at the option of the Company
evidenced by a Board Resolution at a Redemption Price equal to 100% of the
principal amount of this Bond to be redeemed, together with the Applicable Make-
Whole Amount (as defined below) and interest accrued to the Redemption Date, and
on a Redemption Date specified by the Company as provided in Section 5.02 of the
Indenture; and
(2) from Major Event Proceeds, at a Redemption Price equal to 100% of
the principal amount of this Bond to be redeemed, together with interest accrued
to the Redemption Date, and on a Redemption Date that is the first date for
which notice of redemption can be given by the Trustee as provided in Article V
of the Indenture; provided, however, that such redemption may only be made if
this Bond is redeemed pro rata with all other Outstanding Bonds of whatever
series.
It is provided in the Indenture that Bonds of this series of a denomination
larger than $10,000.00 may be redeemed in part ($10,000.00 or a multiple
thereof) and that upon any partial redemption of any such Bond the same may, but
are not required to be, surrendered in exchange for one or more new Bonds in
authorized form for the unredeemed portion of principal. Bonds (or portions
thereof as aforesaid) for whose redemption and payment provision is made in
accordance with the Indenture shall thereupon cease to be entitled to the lien
of the Indenture and shall cease to bear interest from and after the date fixed
for redemption.
<PAGE>
If an Event of Default, as defined in the Indenture, shall occur, the
principal of the Bonds may become or be declared due and payable in the manner
and with the effect provided in the Indenture whereupon all principal, accrued
interest and the Applicable Make-Whole Amount, if any, shall be due and payable.
"Applicable Make-Whole Amount" at any time shall be equal to the product of
(a) the Make-Whole Amount at such time, times (b) a fraction, the numerator of
which shall be the principal amount of this Bond being prepaid or accelerated at
such time, and the denominator of which shall equal the aggregate principal
amount of all Series B Bonds being prepaid or accelerated at such time.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Bonds under the Indenture at any
time by the Company with the consent of the Holders of 66 2/3% in aggregate
principal amount of the Bonds of each series at the time Outstanding affected by
such modification. The Indenture also contains provisions permitting the
Holders of specified percentages in principal amount of Bonds at the time
Outstanding on behalf of the Holders of all the Bonds, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Bond issued upon the transfer hereof
or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Bond.
No reference herein to the Indenture and no provision of this Bond or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Bond at the times, places and rates, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, this Bond is transferable on the Bond Register of the Company, upon
surrender of this Bond for transfer at the office or agency of the Company in
Albuquerque, New Mexico, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Bond
Registrar duly executed by the Registered Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Bonds of the same series,
of authorized denominations and for the same aggregate principal amount will be
issued to the designated transferee or transferees.
The Bonds of this series are issuable only as registered Bonds without
coupons in denominations of $1,000.00 or any multiple thereof. As provided in
the Indenture and subject to certain limitations therein set forth, Bonds of
this series are exchangeable for a like
<PAGE>
aggregate principal amount of Bonds of this series of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any transfer or exchange hereinbefore
referred to, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name this Bond is registered as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Bond shall be overdue, and neither the Company, the Trustee
nor any such agent shall be affected by notice to the contrary.
Unless the certificate of authentication hereon has been executed by the
Trustee by manual signature, this Bond shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed under
its corporate seal.
Dated:
NEW MEXICO UTILITIES, INC.
[SEAL]
By: /s/ Robert L. Swartwout
Attest:
This is one of the Bonds of the series designated herein referred to in the
within-mentioned indenture.
SUNWEST BANK OF ALBUQUERQUE, NATIONAL ASSOCIATION,
as Trustee
By: Dated:
Authorized Officer
<PAGE>
EXHIBIT 10.1
FOURTEENTH AMENDMENT TO
THE UTILITY EMPLOYEES' RETIREMENT PLAN
The Utility Employees' Retirement Plan (the "Plan") was established on
December 30, 1957, effective as of December 31, 1957, by Suburban Water Systems,
a California corporation, as a mandatory contributory money purchase plan and
trust for the exclusive benefit of participating employees of Suburban Water
Systems. It was amended on November 12, 1958, December 21, 1959, April 20,
1960, April 26, 1968 and October 10, 1968. The Sixth Amendment to the Plan,
effective December 31, 1972, restated the Plan and converted it into a non-
contributory defined benefit pension plan. The Plan has since been amended on
December 22, 1976, June 10, 1978, June 25, 1979, twice on March 26, 1986, by a
"model amendment" adopted on October 20, 1989, and on December 11, 1990.
The Plan has been adopted by Southwest Water Company, Suburban Water
Systems, New Mexico Utilities, Inc. and East Pasadena Water Co.
In order to comply with amendments to the Internal Revenue Code
through the Omnibus Budget Reconciliation Act of 1993 and to make certain
changes requested by the Internal Revenue Service, this Fourteenth Amendment to
the Plan has been adopted the December 12, 1996 meeting of the Board of
Directors of Southwest Water Company effective as of the dates set forth herein.
1. Effective as of December 31, 1989, Section 1.12 of the Plan is
hereby amended to add the following at the end thereof:
(c) Notwithstanding subsection (a), if for any Plan Year, a
Participant is described in subsection (b), or is a member of the "family"
(as defined in Code Section 414(q)(6), as modified by Code Section
401(a)(17)) of a Participant described in subsection (b), the
"Compensation" of such Participant for such Plan Year shall be determined
under subsection (a) by reducing the applicable limitation under Code
Section 401(a)(17) to the proportion that such Participant's "Compensation"
(determined under subsection (a) without regard to the limitation under
Code Section 401(a)(17)) comprises of the total "Compensation" (determined
under subsection (a) without regard to the limitation under Code Section
401(a)(17)) of the Participant described in subsection (b) and all
Participants who are members of the "family" (as defined in Code Section
414(q)(6), as modified by Code Section 401(a)(17)) of the Participant
described in subsection (b).
<PAGE>
2. Effective as of December 31, 1987, subsection 4.6(a) of the Plan
is hereby amended to read in its entirety as follows:
(a) Each Participant who incurs a Separation from the Service
after he completes five Years of Vesting Service or attains age 65 shall be
entitled to a Vested Retirement Benefit; provided, however, that a
Participant who was an Employee on October 31, 1990 shall become entitled
to a Vested Retirement Benefit upon his sixtieth birthday, if that occurs
before his completion of five Years of Vesting Service.
3. Effective as of December 31, 1987, paragraph 4.7(a)(iii) of the
Plan is hereby amended to read in its entirety as follows:
(iii) the then present value of such Benefit as
determined under Section 1.3(a)(i)b or c is more than $3,500.
- -
4. Effective as of December 31, 1987, subsection 4.9(b) of the Plan
is hereby amended to add the following at the end thereof:
Notwithstanding the foregoing, the Survivor Annuity shall commence not
later than the date on which the Participant or Former Participant would
have attained age 70 1/2.
5. Effective as of December 31, 1987, the last line of subsection
4.10 of the Plan is hereby amended to read as follows: "Sections 4.3, 4.5, 4.7,
4.8, or 4.9, as the case may be."
6. Effective as of December 31, 1987, paragraph 4.12(a)(iii) of the
Plan is hereby amended to read in its entirety as follows:
(iii) the maximum allowed under Code Section 415 (taking
into account the annual Benefit under this Plan and the annual
benefits under all other defined benefit plans (whether or not
terminated) of a Company or a Company Affiliate, and utilizing the
adjustments to the "defined contribution fraction" allowed by Section
1106(i)(4) of the Tax Reform Act of 1986 and Code Section 415(e)).
7. Effective as of December 31, 1987, subsection 4.12(c) of the Plan
is hereby amended to read in its entirety as follows:
(c) If the annual Benefit of a Participant under this Plan and
the annual benefits under all other defined benefit plans (whether or not
terminated) of a Company or a Company Affiliate is not in excess of $10,000
for the Plan Year in question or any prior Plan Year, and such Company and
any Company Affiliates
<PAGE>
have not at any time maintained a defined contribution plan in which such
Participant participated, the provisions of subsection (a) shall not apply.
8. Effective as of December 31, 1987, subsection 4.12(d) of the Plan
is hereby amended to read in its entirety as follows:
(d)(i) For any Participant with less than ten years of
participation in the Plan, within the meaning of Code Section
415(b)(5)(A), the limitation referred to in paragraph (a)(i) shall be
multiplied by fraction, the numerator of which is the number of years
(or a portion thereof) of participation, and the denominator of which
is ten.
(ii) For any Participant with less than ten years of
service, within the meaning of Code Section 415(b)(5)(B), the
limitation referred to in paragraph (a)(ii) and subsection (c) shall
be multiplied by fraction, the numerator of which is the number of
years (or a portion thereof) of service, and the denominator of which
is ten.
(iii) Notwithstanding paragraphs (i) and (ii), the
limitations referred to in paragraphs (a)(i) and (a)(ii) and
subsection (c) shall not be reduced to less than one tenth of the
amount of such limitation, determined without regard to this
subsection.
9. Effective as of December 31, 1987, paragraph 6.1(b)(ii) of the
Plan is hereby amended to read in its entirety as follows:
(ii) "Determination Date" shall mean, with respect to
any Plan Year, the first day of the preceding Plan Year, or in the
case of the first Plan Year, the last day of the Plan Year.
10. Effective as of December 31, 1987, paragraph 6.1(b)(vi) of the
Plan is hereby amended to add the following at the end thereof:
The accrued Benefit of any Non-Key Employee for purposes of this
paragraph (vi) shall be determined in accordance with Code Section
416(g)(4)(F). For purposes of determining the Actuarial Equivalents of
the accrued Benefits under this paragraph (vi), proportional subsidies
shall be disregarded, and non-proportional subsidies shall be taken
into account, in accordance with Treas. Reg. Section 1.416-1 T-26 and
T-27.
11. Effective as of December 31, 1994 Section 8.3 of the Plan is
hereby amended to read in its entirety as follows:
Section 7.3 - Limitation on Certain Distributions
----------- -----------------------------------
<PAGE>
(a) In the event of the termination of the Plan, the Benefit of
any Participant or Former Participant who is or was a "highly compensated
employee", within the meaning of Code Section 414(q), shall not exceed the
Benefit that is nondiscriminatory under Code Section 401(a)(4) and the
Treasury Regulations thereunder.
(b) In any Plan Year, the Benefit payments to or on behalf of
any Participant or Former Participant who is or was a "highly compensated
employee", within the meaning of Code Section 414(q), and who, in such Plan
Year, is a member of the group of 25 such Participants and Former
Participants whose Compensation in such Plan Year or a prior Plan Year is
highest shall be limited to the maximum amount permitted under Treas. Reg.
Section 1.401(a)(4)-5(b)(3)(i)(A) and (B), except as provided in subsection
(c).
(c) The restrictions of subsection (b) shall not apply if
(i) after all Benefits are paid to the Participant or
Former Participant, the value of Plan assets is at least 110% of the
value of the current liabilities (as determined under Treas. Reg.
Section 1.401(a)(4)-5(b)(3)(iv)(A) and (v)) of the Plan, or
(ii) the value of the Benefits payable to the
Participant or Former Participant is less than
a 1% of the value of the current liabilities (as
-
determined as provided in paragraph (i)) of the Plan before
distribution, or
b $3,500.
-
12. The Plan is hereby amended as follows:
In addition to other applicable limitations set forth in the
plan, and notwithstanding any other provision of the plan to the
contrary, for plan years beginning on or after January 1, 1994, the
annual compensation of each employee taken into account under the plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with Section
401(a)(17)(B) of the Internal Revenue Code. The cost of living
adjustment in effect for a calendar year applies to any period, not
exceeding 12 months, over which compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction,
<PAGE>
the numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For plan years beginning on of after January 1, 1994, any
reference in this plan to the limitation under section 401(a)(17) of
the Code shall mean the OBRA '93 annual compensation limit set forth
in this provision.
If compensation for any prior determination period is taken
into account in determining an employee's benefits accruing in the
current plan year, the compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in effect
for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first plan
year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
Unless otherwise provided under the plan, each section
401(a)(17) employee's accrued benefit under this plan will be the
greater of the accrued benefit determined for the employee under 1 or
2 below:
1. the employee's accrued benefit determined with respect
to the benefit formula applicable for the plan year beginning on or
after January 1, 1994, as applied to the employee's total years of
service taken into account under the plan for purposes of benefit
accruals, or
2. the sum of:
(a) the employee's accrued benefit as of the last day
of the last plan year beginning before January 1, 1994, frozen in
accordance with section 1.401(a)(4)-13 of the regulations, and
(b) the employee's accrued benefit determined under
the benefit formula applicable for the plan year beginning on or after
January 1, 1994, as applied to the employee's years of service
credited to the employee for plan years beginning on or after January
1, 1994, for purposes of benefit accruals.
A section 401(a)(17) employee means an employee whose
current accrued benefit as of a date on or after the first day of the
first plan year beginning on or after January 1, 1994, is based on
compensation for a year beginning prior to the first day of the first
plan year beginning on or after January 1, 1994, that exceeded
$150,000.
<PAGE>
13. The Plan is hereby amended to add the following:
Section 1. This Article applies to distributions made on or
after January 1, 1993. Notwithstanding any provision of the plan to
the contrary that would otherwise limit a distributee's election under
this Article, a distributee may elect, at the time and in the manner
prescribed by the plan administrator, to have any portion of an
eligible rollover distribution paid directly to an eligible retirement
plan specified by the distributee in a direct rollover.
Section 2. Definitions.
Section 2.1. Eligible rollover distribution: An eligible
rollover distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an eligible
rollover distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of
the distributee or the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more, any distribution to the extent
such distribution is required under section 401(a)(9) of the Code; and
the portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
Section 2.2. Eligible retirement plan: An eligible
retirement plan is an individual retirement account described in
section 408(a) of the Code, an individual retirement annuity described
in section 408(b) of the Code, an annuity plan described in section
403(a) of the Code, or a qualified trust described in section 401(a)
of the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan is
an individual retirement account or individual retirement annuity.
Section 2.3. Distributee: A distributee includes an
employee or former employee. In addition, the employee's or former
employee's surviving spouse and the employee's or former employee's
spouse or former spouse who is the alternate payee under a qualified
domestic relations order, as defined in section 414(p) of the Code,
are distributees with regard to the interest of the spouse or former
spouse.
Section 2.4. Direct rollover: A direct rollover is a
payment by the plan to the eligible retirement plan specified by the
distributee.
<PAGE>
As adopted by the Board of Directors of the Company on December 12,
1996 at West Covina, California.
SOUTHWEST WATER COMPANY
By /s/ Peter J. Moerbeek
-----------------------------
Peter J. Moerbeek
Vice President Finance
Chief Financial Officer
Secretary
<PAGE>
EXHIBIT 10.10D
FOURTH AMENDMENT TO LOAN AGREEMENT
This Amendment made this 28/th/ day of January, 1997, effective as of
December 31, 1996, by and between Sunwest Bank of Albuquerque, National
Association, a national banking association ("Bank") and New Mexico Utilities,
Inc., a New Mexico corporation ("Borrower").
WHEREAS, on January 25, 1995 Bank and Borrower entered into a certain Loan
Agreement ("Loan Agreement") pursuant to the terms and conditions of which
credit has been extended by Bank to Borrower;
WHEREAS, Bank and Borrower entered into a First Amendment to Loan Agreement
dated October 10, 1995 (the "First Amendment").
WHEREAS, Bank and Borrower entered into a Second Amendment to Loan
Agreement dated April 17, 1996 (the "Second Amendment").
WHEREAS, Bank and Borrower entered into a Third Amendment to Loan Agreement
dated July 16, 1996 (the "Third Amendment"). (The Loan Agreement, First
Amendment, Second Amendment and Third Amendment collectively referred to as
"Agreement").
WHEREAS, Bank and Borrower are desirous of amending the Agreement upon
the following terms and conditions.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which is hereby
acknowledged by the undersigned, Bank and Borrower agree as follows:
1. Paragraph 8(e) shall be amended by deleting the phrase "1.20 to 1.00"
and substituting therefor the phrase "1.00 to 1.00".
2. Except as expressly amended hereby, the terms and conditions of the
Agreement and the documents executed and delivered in conjunction with
the credit extended thereunder shall remain in full force and effect
and are hereby ratified.
BORROWER: New Mexico Utilities, Inc.,
a New Mexico corporation
By /s/ WILLIAM C. JASURA
-------------------------
William C. Jasura, Vice President
Finance & Chief Financial Officer
<PAGE>
GRANTOR: Southwest Water Company,
a Delaware corporation
By /s/ PETER J. MOERBEEK
-------------------------
Peter Moerbeek, Vice President
Finance & Chief Financial Officer
BANK: Sunwest Bank of Albuquerque,
N.A., a national association
By /s/ DON K. PADGETT
-----------------------------
Don K. Padgett,
Senior Vice President
<PAGE>
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(in thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996(1)(2) 1995(1)(2)(3) Change
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 66,145 $ 56,807 16%
Net income 1,923 1,439 34%
Earnings per common share 0.61 0.46 33%
Cash dividends per common share 0.34 0.32 6%
Total assets 111,416 97,456 14%
Stockholders' equity 30,400 29,246 4%
Book value per common share 9.57 9.29 3%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings per common share and book value per common share have been adjusted
to reflect stock dividends of 20% on January 2, 1997 and 5% on January 2,
1996.
(2) Cash dividends of $.408 and $.40 per share paid in 1996 and 1995,
respectively, have been restated to reflect the stock dividends of 20% on
January 2, 1997 and 5% on January 2, 1996.
(3) Net income includes net gain of $50,000, or .02 per share, from sale of
surplus land.
<PAGE>
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION> (in thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------
1996 Quarter Ended (1) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $13,989 $17,438 $18,476 $16,242
Operating income 403 1,613 2,109 1,609
Net income (loss) (125) 563 866 619
Net income (loss) available for common shares (132) 556 860 612
Earnings (loss) per common share (0.04) 0.18 0.28 0.20
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1995 Quarter Ended (1) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $11,290 $13,329 $16,848 $15,340
Operating income 151 1,003 1,943 1,335
Net income (loss) (171) 248 806 556
Net income (loss) available for common shares (178) 241 799 550
Earnings (loss) per common share (0.06) 0.08 0.26 0.18
</TABLE>
(1) The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of the water utility and contract operations.
Earnings (loss) per common share have been restated to reflect the stock
dividends of 20% on January 2, 1997 and 5% on January 2, 1996.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands except per share amounts and number of customers)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Operating revenues $66,145 $56,807 $50,932 $48,218 $44,482
Operating income $5,734 $4,432 $3,849 $3,421 $5,305
Gains on sale of land - $84 - $67 -
Litigation settlements - - - ($1,437) -
Net income $1,923 $1,439 $1,057 $127 $2,300
Net income available for common shares $1,896 $1,412 $1,029 $99 $2,271
- ----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA (1)
Earnings per common share $0.61 $0.46 $0.34 $0.03 $0.77
Cash dividends per common share $0.34 $0.32 $0.32 $0.53 $0.73
Weighted average outstanding common shares 3,112 3,076 3,031 2,990 2,941
- ---------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
Working capital (deficit) ($4,079) ($7,266) ($1,951) $1,161 $6,765
Capital additions $15,212 $11,866 $8,684 $7,133 $4,914
Property, plant and equipment, net $91,414 $80,267 $72,136 $67,076 $63,506
Total assets $111,416 $97,456 $86,834 $85,848 $83,672
Long-term debt $30,700 $19,600 $20,500 $21,550 $22,455
Stockholders' equity $30,400 $29,246 $28,532 $28,176 $29,153
Return on average common equity 6.5% 5.0% 3.7% 0.4% 8.0%
Number of utility customers 70,976 70,023 69,012 68,721 68,146
===========================================================================================================================
</TABLE>
(1) Earnings per common share, cash dividends per common share and weighted
average outstanding common shares have been adjusted to reflect stock
dividends of 20% on January 2, 1997 and 5% on January 2, 1996.
<PAGE>
MARKET AND DIVIDEND INFORMATION
The following table sets forth the range of market prices of Southwest Water
Company's common shares. The prices reflect inter-dealer prices without retail
markup, markdown or commissions and may not necessarily represent actual
transactions. High and low market price ranges shown below, as well as cash
dividends, have been restated to reflect stock dividends of 20% on January 2,
1997, and 5% on January 2, 1996. The shares are traded on the NASDAQ stock
market - symbol SWWC. The current quarterly dividend rate is $.09 per common
share after adjusting for the 20% stock dividend on January 2, 1997. At December
31, 1996, there were 2,059 stockholders of record.
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Market Price Range Market Price Range
Dividends High Low Dividends High Low
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $0.083 $10 13/64 $7 13/16 $0.079 $7 9/64 $5 61/64
2nd Quarter 0.083 10 27/64 8 1/8 0.079 7 35/64 6 5/32
3rd Quarter 0.083 13 21/64 9 11/64 0.079 7 35/64 6 11/32
4th Quarter 0.090 14 3/4 10 0.079 7 15/16 6 35/64
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21.1
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (1)
<TABLE>
<CAPTION>
Jurisdiction
of
Name of Subsidiary Incorporation Parent
- ------------------ ------------- ------
<S> <C> <C>
Suburban Water Systems California Southwest Water Company
New Mexico Utilities, Inc. New Mexico Southwest Water Company
ECO Resources, Inc. Texas Southwest Water Company
Water Suppliers Mobile
Communication Service California Suburban Water Systems
SW Resource Management
Company Delaware Southwest Water Company
SOCI, Inc. (2) Delaware Southwest Water Company
SW Operating
Services Co. (2) Delaware Southwest Water Company
Southwest Environmental
Laboratories, Inc. (2) Texas ECO Resources, Inc.
Southern Municipal
Services, Inc. (2) Texas ECO Resources, Inc.
</TABLE>
All above listed subsidiaries have been consolidated in the Registrant's
consolidated financial statements.
(1) As of March 31, 1997
(2) Inactive
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
EXHIBIT 23.1
The Board of Directors and Stockholders
Southwest Water Company:
We consent to the incorporation by reference in the registration statement (No.
33-21154) on Form S-3 and the registration statements (Nos. 33-28918, 33-28919,
33-73174 and 333-18513) on Form S-8 of Southwest Water Company of our report
dated January 27, 1997, relating to the consolidated balance sheets of Southwest
Water Company and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows and related schedule for each of the years in the three-year period ended
December 31, 1996, which report appears in the December 31, 1996, annual report
on Form 10-K of Southwest Water Company.
KPMG Peat Marwick LLP
Los Angeles, California
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 790,000
<SECURITIES> 0
<RECEIVABLES> 8,728,000
<ALLOWANCES> 512,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,092,000
<PP&E> 126,179,000
<DEPRECIATION> 34,765,000
<TOTAL-ASSETS> 111,416,000
<CURRENT-LIABILITIES> 15,171,000
<BONDS> 30,700,000
0
517,000
<COMMON> 31,000
<OTHER-SE> 29,852,000
<TOTAL-LIABILITY-AND-EQUITY> 111,416,000
<SALES> 0
<TOTAL-REVENUES> 66,145,000
<CGS> 0
<TOTAL-COSTS> 60,411,000
<OTHER-EXPENSES> 313,000
<LOSS-PROVISION> 614,000
<INTEREST-EXPENSE> 2,849,000
<INCOME-PRETAX> 3,298,000
<INCOME-TAX> 1,375,000
<INCOME-CONTINUING> 1,923,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,923,000
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
