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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 Exchange
Act of 1934 for the fiscal year ended December 31, 1999 or
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[ ] 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)
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Delaware 95-1840947
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (626) 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 Nasdaq
(2) Series A, 5-1/4%, Cumulative Preferred Shares None
$.01 par value
(Title of each class) (Name of each exchange on which registered)
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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[ ].
On February 29, 2000, there were 6,462,609 common shares outstanding. The
aggregate market value of the voting common equity held by non-affiliates of the
registrant was approximately $72,029,084 based upon the average high and low
stock prices as of February 29, 2000. The registrant is unable to estimate the
aggregate market value of its preferred shares held by non-affiliates of the
registrant because there is no public market for such shares.
Documents incorporated by reference: Form 10-K Reference
- ----------------------------------- -------------------
Proxy Statement dated on or about April 7,
2000 for Annual Meeting of Stockholders on
Tuesday, May 23, 2000 Part III
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 in this Form 10-K or any amendment to this
Form 10-K. [X]
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
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PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 8
Item 3. Legal Proceedings................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................... 11
Item 4a Executive Officers of the Registrant.............................................. 11
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters......... 12
Item 6: Selected Financial Data........................................................... 13
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 13
Item 8: Financial Statements and Supplementary Data....................................... 20
Item 9: Changes and Disagreements with Accountants on Accounting and Financial Disclosure. 41
PART III
Item 10: Directors and Executive Officers of the Registrant................................ 41
Item 11: Executive Compensation............................................................ 41
Item 12: Security Ownership of Certain Beneficial Owners and Management.................... 41
Item 13: Certain Relationships and Related Transactions.................................... 41
PART IV
Item 14: Exhibits, Financial Statement Schedule and Reports on Form 8-K.................... 42
Exhibit Index..................................................................... 44
Signatures........................................................................ 49
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
Certain statements contained in this Annual Report on Form 10-K that are not
based on historical fact are "forward-looking" statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are only
predictions. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any performance or
achievements planned, expressed or implied by such forward-looking statements.
Although the Company believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. Factors that could cause actual results to differ from
expectations are discussed in Part II, Item 7, Management's Discussion and
Analysis, Risk Factors.
PART I
Item 1. Business
General Description 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 business of
managing all aspects of water and wastewater systems, and provides these
services to more than three-quarters of a million people located throughout
California, New Mexico, Texas and Mississippi. Through its wholly owned
subsidiary, ECO Resources, Inc. ("ECO"), the Company operates and manages water
and wastewater treatment facilities owned by cities, municipal utility districts
and private entities. The Company operates and manages water utilities that it
owns (regulated water operations) through two wholly owned subsidiaries,
Suburban Water Systems ("Suburban"), and New Mexico Utilities, Inc. ("NMUI").
The Company also owns an interest in Windermere Utility Company ("Windermere"),
a small, regulated water utility located near Austin, Texas.
General Information
The primary focus of the water and wastewater management industry is customer
service, and the industry does not rely heavily on technological or proprietary
manufacturing processes. The Company does not conduct significant research and
development activities, and has no patents, licenses or trademarks (except for
certain logos and artwork used in marketing). In its daily operations, the
Company uses certain commodities such as chemicals and supplies that are
currently readily available from a number of suppliers. During the past year,
there were no significant changes in the way the Company does business.
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. The
Company is subject to the requirements of various regulatory agencies with
respect to its water and wastewater treatment services. 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, 1999, the Company employed 560
people, none of whom are represented by an employee union.
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A. Contract Operations
ECO Resources, Inc.
Development of Business, Product and Regulation
In 1985, by purchasing all of the outstanding common stock of ECO, the Company
entered into the contract water and wastewater management industry. ECO was
established in 1970, and incorporated under the laws of the State of Texas in
1974. ECO provides all aspects of water and wastewater operations and
maintenance services and performs related services which include facility and
equipment maintenance and repair, sewer pipeline cleaning, billing and
collection and state-certified laboratory analyses. As a contract operator, ECO
does not own any of the water sources, water production facilities or water
distribution systems that it operates for its clients, nor does ECO own any of
the wastewater collection systems or wastewater treatment facilities that it
operates for its clients. Although not the owner, ECO is responsible for
operating these water and wastewater facilities in compliance with all federal,
state and local health standards and regulations.
ECO has two distinct types of contractual relationships: time and material
contracts primarily with municipal utility districts, and fixed fee operations
and maintenance contracts.
Municipal Utility District Contracts
A Municipal Utility District ("MUD") is a utility district created under the
rules of the Texas Natural Resource Conservation Commission in order to provide
water, wastewater and drainage services to areas where existing municipal
services are not available. ECO has MUD contracts in the suburbs of Houston,
Austin and El Paso, Texas. ECO negotiates each MUD contract with the MUD's
Board of Directors. As the large Texas cities expand their boundaries, they
periodically acquire MUD-owned facilities through condemnation and annex them to
city-owned facilities. As of January 1, 1999, ECO had 150 MUD contracts.
During 1999, 18 new MUD contracts were added, one MUD contract was canceled due
to annexation and two MUD contracts were canceled for competitive reasons,
bringing the total to 165 MUD contracts as of December 31, 1999.
Typically, a MUD contract provides for a monthly base fee that ensures a
certain basic level of maintenance and operations services, billing, collection
and customer services, and environmental monitoring and reporting. Additional
services provided at a level beyond the basic contracted services typically
generate revenues on a time and materials basis as such services are rendered.
Most MUD contracts are short-term and are cancelable on 30 or 60-day notice by
either party. Most contracts allow ECO to increase its monthly fee as the
number of connections increases.
Operations and Maintenance Contracts
Operations and maintenance ("O&M") contracts are agreements with cities and
private entities located in Texas, Mississippi, New Mexico and California that
provide for a specified level of services such as facility operation and
maintenance, meter reading and billing, or management of the entire water or
wastewater system. Most contracts provide for a fee that covers the specified
level of services, and provides limits on ECO's contractual liability in the
event of a major system failure or catastrophe. ECO provides services beyond
the scope of the contract and would generally provide services after a system
failure or catastrophe. Additional billings are generated when services beyond
the scope of the contract are provided. ECO may seek fee increases from the city
or private entity and may request specific payment for services when the cost of
such services exceeds a reasonable amount beyond the scope of the contract.
Most contracts provide for annual cost of living increases and ECO typically has
the right to increase its fixed operations fee if the system undergoes growth
beyond a specified level. Typical O&M contracts are cancelable only upon a
specific breach of the contract by either party. As of December 31, 1999, ECO
had 27 O&M contracts compared to 20 O&M contracts as of December 31, 1998.
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Competition and Future Development
ECO provides contract water and wastewater services in Texas, Mississippi, New
Mexico and California. It continues to improve its market position by adding
new MUD and O&M contracts and aggressively pursuing renewal of its existing
contracts. The contract water and wastewater management industry continues to
undergo rapid growth and change. New contracts are awarded based on both lowest
cost and technical expertise. ECO's competition in the O&M portion of its
business includes a number of significantly larger companies that provide O&M
services on a national and international basis, as well as several regional
competitors. In the Texas MUD market, competitors include four large national
companies and several smaller, local companies.
At December 31, 1999, ECO's anticipated future revenue from firm contractual
commitments was over $100,000,000. Industry renewal rates tend to be high;
however, the contract water and wastewater management business is very
competitive. ECO intends to continue expanding its current business base in the
southwestern and southern United States.
B. Regulated Utility Operations
Suburban Water Systems
Development of Business, Product and Regulation
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 area contains a
population of approximately 250,000 people within Los Angeles and Orange
counties, California.
Suburban or its predecessor entities have supplied 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 area. Primarily due to the
population saturation of its existing service area, Suburban has experienced
only modest customer growth since the late 1960s.
At December 31, 1999, Suburban served 67,153 customers, including 63,386
residential customers, 2,793 business and industrial customers, 317 public
authority customers and 657 other customers. During 1999, Suburban's operating
revenues were 74 percent from sales to residential customers, 18 percent from
sales to business and industrial customers, and eight percent from sales to
other customers.
Seasonal temperature and rainfall variations subject Suburban's business to
significant revenue and profitability fluctuations. Since most of Suburban's
residential customers use more water in hot, dry weather, the third quarter of
each year is usually the highest in terms of customer water consumption and
revenues. Profitability is determined by the mix of the source of water sold
and could be higher in unseasonably warm winter months compared to typically
hot, dry summer months.
Wells and Other Water Sources
Suburban's wells 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 "Basins"). The Basins are the source of approximately 71
percent of Suburban's water supply. The rights to pump water from the 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 (the "Boards") that manage the
Basins. As the water levels in the Basins increase or decrease, the Boards may
adjust the amount of water that Suburban and other producers are allowed to pump
without paying additional charges. Suburban is allowed to produce a certain
amount of water from the Basins in excess of the set amount, but when Suburban
does so, an additional payment is required to provide for the replenishment of
the water supply. However, even when additional payments are required, the
Basins provide Suburban with water at a cost that is lower than other available
sources. The Boards establish the prices that Suburban pays for water it
produces from the Basins each year. The Basins'
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current water levels are sufficient to eliminate any foreseeable drought
concerns. However, there is no assurance that the current allowable pumping
levels set by the Boards will continue in the future.
Suburban also purchases water from two mutual water companies that also
produce their water from the Main San Gabriel Basin. Suburban's ownership of
shares in each of these mutual water companies has allowed it to increase its
water entitlement and purchase water at a lower cost. In addition, Suburban
leases Basin pumping rights from other parties, which also helps reduce its cost
of water.
Suburban's water supply is further supplemented by water purchased at a higher
cost from external sources. Suburban has the right to purchase water from the
Metropolitan Water District of Southern California. Suburban also has
interconnections with other water purveyors that can be used as supplemental and
emergency sources of supply.
Water Quality Regulation
A stated responsibility of the CPUC is to ensure an adequate supply of
affordable, healthful, potable water to residents of the state. Accordingly,
Suburban's water quality is under the regulatory jurisdiction of the CPUC.
Suburban's water supply is also subject to regulation by the United States
Environmental Protection Agency (the "EPA") under the 1996 Federal Safe Drinking
Water Act (the "US Act"), and by the Office of Drinking Water of the California
Department of Health Services (the "DOHS") under the California Safe Drinking
Water Act (the "Cal Act"). The US Act establishes uniform minimum national water
quality standards, as well as specification of the types of treatment processes
to be used for public drinking water. The EPA, as mandated under the US Act,
issues regulations, which require, among other things, disinfection of drinking
water, specification of maximum contaminant levels ("MCLs") and filtration of
surface water supplies. The Cal Act and the rules of the DOHS are similar to the
US Act and the mandates of the EPA, while in many instances, the requirements of
the DOHS are more restrictive than those of the EPA.
Both the EPA and the DOHS have put into effect regulations and other
pronouncements that require periodic testing and sampling of water to ensure
that only permissible levels of volatile organic compounds ("VOCs"), herbicides,
pesticides and inorganic substances are present in water supplied to the public.
Suburban's water quality personnel regularly sample and monitor the quality of
water being distributed throughout the system. Suburban conducts testing,
sampling and inspections at the intervals, locations and frequencies required by
EPA and DOHS regulations. Chlorination is currently performed to provide
chlorine residuals required by the DOHS as a safeguard against bacteriological
contamination. In addition to water sampling and testing performed by Suburban
personnel, independent engineers retained by the Boards conduct sampling and
testing for certain pollutants such as VOCs. Water samples 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 put into
effect. The results of the sampling and testing are made available to all water
purveyors that produce water from the Basins. The cost of such sampling and
testing is covered by Board assessments to the producers. Water supplied by
Suburban meets all current requirements of the US Act, the Cal Act and the
regulations put into effect under the related legislation. Suburban provides
its customers with an annual water quality report, which, among other things,
informs them of the source and quality of the water being provided. The Company
believes that future incremental costs of complying with governmental
regulations, including capital expenditures, will be recoverable through
increased rates. However, there is no assurance that recovery of such costs
will be allowed.
In June 1998, Suburban detected in one of its wells a substance called N-
nitrosodimethylamine ("NDMA") in excess of the EPA reference dosage for health
risks. Upon detection, the well was immediately removed from service. In 1999,
Suburban completed construction of a treatment facility that is intended to
reduce the NDMA to non-detectable levels. Suburban is awaiting final regulatory
approval of the facility and anticipates that operation of the treatment
facility will begin in mid-2000.
Costs associated with testing of Suburban's water supplies have increased and
are expected to increase further as regulatory agencies adopt additional
monitoring requirements. Suburban believes that costs associated with the
additional monitoring and testing of its water will be recoverable from
ratepayers
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in future rate increases. There can be no assurance that water sources currently
available to Suburban will meet future EPA or DOHS requirements, that recovery
of additional costs will be allowed, or that new or revised monitoring
requirements will not necessitate additional capital expenditures by Suburban in
the future.
Competition and Rate Relief
Suburban operates under a Certificate of Public Convenience and Necessity
granted by the CPUC and is regulated by other state and local governmental
authorities having jurisdiction over water service and other aspects of its
business. Suburban's water business is dependent upon maintaining this
certificate and upon various governmental and court decisions affecting
Suburban's water rights and service area.
Under current CPUC practices, water rates may be increased through general
rate increases or by offsets for certain expense increases. Typically, general
rate increases are for three years and include "step" increases in the second
and third years. General rate increases require formal proceedings with the
CPUC in which overall rate structure, expenses and rate base are examined by
CPUC staff. Public hearings are also held. General rate proceedings require
approximately 12 months from the time an application is filed to the CPUC's
authorization of new rates. The step increases for the second and third years
are intended to compensate for projected expense increases. Prior to their
approval, step increases are subject to verification that earnings levels have
not exceeded the rate of return authorized at the general rate proceeding. Rate
increases to offset increases in certain expenses such as the 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 to the authorization of new rates. Suburban filed its last
general rate increase request in 1995. In recent years, Suburban has succeeded
in achieving efficiencies and cost savings that resulted in the deferral of rate
requests. However, in February 2000, the CPUC directed Suburban to file a
general rate application by July 1, 2001. The Company and Suburban are unable
to predict the outcome of such rate proceedings at this time.
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, the inability to increase rates in the event of increases for certain
expenses could adversely affect Suburban's results of operations. 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. Suburban believes that these
amounts will be recovered from or returned to the ratepayers through future
CPUC-authorized rate adjustments.
Future Development
In recent years, Suburban's growth has been limited to extensions into new
subdivisions along the periphery of its service area. There is little area
available for new business, industrial construction or residential growth, and
as such, significant increases in the number of customers in Suburban's current
service area are not expected. In 1999, Suburban successfully completed
negotiations to purchase the City of West Covina's ("West Covina") water
distribution system and facilities for approximately $11,500,000. The sale
closed February 25, 2000 with Suburban assuming ownership and operation of the
water system on that date. The actual purchase price paid by Suburban was
approximately $8,500,000 due to the exercise by another water purveyor of a
right to purchase West Covina's interest in certain facilities for approximately
$3,000,000. These facilities are not critical to Suburban's operation of this
system; however, Suburban may negotiate a lease to use these facilities. The
transaction added approximately 7,000 connections to Suburban's customer base,
an increase of approximately 11 percent.
The laws of the State of California provide that no public or private 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 but must pay
fair value for the condemned system. Suburban is not aware of any impending
proceeding for the condemnation of any portion of its facilities.
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Water utilities require substantial amounts of capital for the construction,
extension and replacement of water distribution facilities. This capital is
generated from Suburban's operations, periodic debt financing by Suburban, lines
of credit of Suburban, contributions in aid of construction received from
developers, governmental agencies, municipalities or individuals, and from
advances received from developers that are repaid under rules of the CPUC. For
the years ended December 31, 1999, 1998 and 1997, capital expenditures
approximated $4,865,000, $5,636,000 and $5,853,000, respectively.
New Mexico Utilities, Inc.
Development of Business, Product and Regulation
NMUI is a regulated public water utility that provides water supply and sewage
collection services for residential, commercial, irrigation, and fire protection
customers under jurisdiction of the New Mexico Public Regulation Commission
("NMPRC"). 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 about 26,000 people and covers
approximately 34 square miles, of which an estimated 24 percent has been
developed.
In 1969, Suburban purchased NMUI. In 1987, NMUI became a wholly owned
subsidiary of the Company after the New Mexico Public Utility Commission, the
NMPRC's predecessor agency, authorized Suburban to transfer by stock dividend
all of the stock of NMUI to the Company. Since 1969, NMUI has grown from
approximately 800 customers to over 7,600 customers. Most of this growth has
come from the extension of water services and sewage collection services into
new residential subdivisions and from new commercial property. During 1999, NMUI
added 1,050 new water customers, and 928 new wastewater customers. Because of
the continuing economic development in NMUI's service area, NMUI expects to add
a similar number of customers in 2000.
At December 31, 1999, NMUI provided water service to 7,689 customers including
7,035 residential customers, 577 commercial and industrial customers and 77
other customers. NMUI also provided sewer collection service to 7,152 customers
including 6,802 residential customers and 350 commercial and industrial
customers. During 1999, NMUI's operating revenues were 51 percent from sales to
residential customers and 49 percent from sales to commercial and industrial
customers.
Seasonal temperature and rainfall variations subject NMUI's business to
significant revenue and profitability fluctuations. Since most of NMUI's
residential customers use more water in hot, dry weather, the third quarter of
each year is usually the highest in terms of customer consumption, revenues and
profitability. The sewer operation revenues and profitability remain relatively
constant throughout the year.
Wells, Other Water Sources, and Water Quality Regulation
NMUI owns five wells and four reservoirs and believes that it has adequate
water capacity to serve its current customer base as well as new customers in
the foreseeable future. NMUI's wells produce water from the Rio Grande
Underground Basin. The 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 allowable
chlorine residuals as a safeguard against bacteriological contamination.
Water supplied by NMUI meets all current requirements of the EPA and the EID,
and NMUI anticipates no significant capital expenditures to comply with the
requirements of these agencies. There can be no assurance, however, that water
sources currently available to NMUI will meet future EPA or EID requirements, or
that such requirements will not require future capital expenditures by NMUI. If
customer growth continues in NMUI's service area, 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.
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Competition, Rate Relief and Future Development
NMUI operates under a Certificate of Public Convenience and Necessity granted
by the NMPRC and is regulated by other state and local governmental authorities
having jurisdiction over water and wastewater service and other aspects of its
business. NMUI's water and sewer business is dependent upon maintaining this
certificate and upon various governmental and court decisions affecting NMUI's
water rights and service area.
Requests for rate increases are submitted to the NMPRC with the test year
typically being the previous year's actual results. 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
in the event of increased cost of certain expenses would adversely affect NMUI's
results of operations.
The laws of the State of New Mexico provide that no public or private 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 utility. 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 for the
condemned system.
In recent years, the City of Albuquerque ("Albuquerque") has annexed a
significant portion of NMUI's service area; however, NMUI has continued to serve
the customers located in the annexed areas. Currently, 70 percent of NMUI's
customers are located within the city limits. As discussed in the Company's
1998 Annual Report on Form 10-K ("the 1998 Annual Report") and in Part I, Item
3, Legal Proceedings, Albuquerque initiated, but is not currently prosecuting,
an action in eminent domain to acquire the operations of NMUI. Discussions with
Albuquerque are ongoing; however, there is no assurance that these discussions
will lead to a settlement of the legal action, or that the action will be
resolved quickly.
NMUI's operations are capital intensive. Capital is generated from NMUI's
operations, periodic debt financing by NMUI, lines of credit of NMUI and the
Company, contributions in aid of construction received from developers, and from
advances received from developers, which are repaid under rules of the NMPRC.
For the years ended December 31, 1999, 1998 and 1997, capital expenditures
approximated $3,569,000, $5,727,000 and $8,916,000, respectively. The decrease
in capital expenditures in 1999 compared to 1998 was primarily due to the
completion of a new reservoir in 1998.
Windermere Utility Company
As previously discussed, the Company owns a 49 percent interest in Windermere,
a small regulated water utility located near Austin, Texas. The Company is
currently holding discussions with the majority shareholder of Windermere to
purchase its interest in Windermere along with two other utilities, also located
near Austin, Texas and anticipates that negotiations will be completed in 2000.
C. New Business
In January 2000, the Company announced the formation of Inland Pacific Water
Company ("IPWC") and Inland Pacific Development Company, LLC ("IPDC"). Both are
joint ventures designed to develop water and wastewater-related opportunities in
Southern California's San Bernardino and Riverside counties. IPWC will market
and sell a wide range of services that include financing, design and
construction of water and wastewater facilities, water rights development and
full contract operation, maintenance and management of water and wastewater
systems.
As previously discussed, on February 25, 2000, Suburban purchased West
Covina's water distribution system and facilities, assuming ownership and
operation of the water system on that date. The transaction added approximately
7,000 connections to Suburban's customer base, an increase of approximately 11
percent.
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Item 2. Properties
The Company's corporate headquarters are located in West Covina, California,
where the parent company leases approximately 7,500 square feet of office space.
A. Facilities
Contract Operations Facilities
ECO owns 4.3 acres and a 17,000 square-foot building for its fleet and
maintenance operations in the Houston, Texas area, and 10 acres and a 10,000
square-foot building for its office, fleet and maintenance operations in Austin,
Texas. In addition, ECO owns or leases 343 vehicles and other equipment used in
daily operations. ECO leases approximately 38,000 square feet of office,
warehouse and laboratory space in eight facilities in the Houston, Texas area;
the Rio Grande Valley, Texas area; Mississippi; New Mexico; and California.
Regulated Utility Operations Facilities
Suburban leases an office building with approximately 14,600 square feet of
office space for its headquarters in Covina, California. Suburban also owns a
3,550 square foot building in La Puente, California, and a 3,200 square foot
building in La Mirada, California that are used for its district operations.
In September 1999, Suburban sold a parcel of surplus land for a sales price of
approximately $4,000,000. The transaction involved approximately 11 acres of
vacant land in La Puente, California, formerly the site of Suburban's main
office and equipment yard. The transaction resulted in a pretax gain of
$2,747,000. The sale of land, net of tax, added $1,648,000 to net income, or
$.25 per diluted common share. For federal income tax purposes, Suburban
elected to treat the sale of the land as an Internal Revenue Code ("Code")
Section 1031 like-kind exchange. Net proceeds of approximately $3,900,000 were
transferred to an accommodator serving as the intermediary in this transaction.
The net proceeds were used to pay a portion of the purchase price for the
acquisition of the West Covina water distribution system and facilities on
February 25, 2000, thereby satisfying the Code like-kind property reinvestment
requirement.
NMUI leases 4,000 square feet of space in an office building for its
headquarters in Albuquerque, New Mexico, and owns a 2,400 square foot warehouse
that is used for its field supplies and equipment.
B. Water Distribution Systems
Suburban Water Systems
Suburban owns and operates water production and distribution systems
consisting of well pumping plants, booster pumping stations, a water treatment
facility, reservoir storage facilities, transmission and distribution mains, and
service connections to individual customers. Suburban has rights-of-way and
easements in its service area necessary to provide water services. At December
31, 1999, Suburban owned 705 miles of transmission and distribution mains and 27
storage reservoirs with a total capacity of 56 million gallons. Suburban also
owns 14 active wells with a total pumping capacity of approximately 25,000
gallons per minute. While these facilities vary as to age and quality, each is
believed by Suburban to be in good condition and adequate for current and
foreseeable operations. Suburban intends to continue its capital expenditure
program and construct and replace reservoirs, wells and transmission and
distribution lines in future years, as needed and approved by the CPUC.
Suburban's employees perform normal maintenance and construction work on these
facilities, and major construction projects are performed by outside contractors
chosen through competitive bidding. Ongoing maintenance and repairs performed by
Suburban were approximately $1,597,000 in 1999 and constituted approximately
eight percent of its operating expenses. As previously discussed, on February
25, 2000, Suburban acquired the West Covina water distribution system, which
added 87 miles of transmission and distribution mains and four storage
reservoirs with a total capacity of 15 million gallons to Suburban's production
and distribution systems.
8
<PAGE>
Virtually all of Suburban's property is subject to the lien of an Indenture of
Mortgage and Deed of Trust dated October 1, 1986 (the "Suburban Indenture"), as
amended February 7, 1990, January 24, 1992 and October 9, 1996, securing
Suburban's First Mortgage Bonds. The Suburban Indenture contains certain
restrictions common to such types of instruments regarding the disposition of
property and includes various covenants and restrictions, including limitations
on the amount of cash dividends that Suburban may pay to the Company. In
addition to its regular quarterly dividends, in December 1999, Suburban paid a
specially authorized $3,000,000 dividend to the Company. As of December 31,
1999, Suburban was in compliance with dividend limitations mandated by the
Suburban Indenture.
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. NMUI has rights-of-way and easements in its service area necessary to
provide water and sewer services. At December 31, 1999, NMUI owned five wells,
140 miles of transmission and distribution mains and four storage reservoirs
with a total capacity of 10 million gallons. NMUI's wells have a total pumping
capacity of 9,525 gallons per minute. In addition, NMUI owns and operates a
sewer collection system consisting of one lift station and 106 miles of
interceptor and collector lines. Wastewater is treated at a facility owned by
the City of Albuquerque. While these facilities vary as to age and quality, each
is believed by NMUI to be in good condition and adequate for current and
foreseeable operations. NMUI's employees or outside contractors perform normal
maintenance and construction work on these facilities, and major construction
projects are performed by outside contractors chosen through competitive
bidding. Ongoing maintenance and repairs performed by NMUI were approximately
$233,000 in 1999 and constituted approximately seven percent of NMUI's operating
expenses.
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, including limitations on the amount of cash
dividends that NMUI may pay to the Company. NMUI pays regular quarterly
dividends to the Company. At December 31, 1999, NMUI was in compliance with
dividend limitations mandated by the NMUI Indenture.
Item 3. Legal Proceedings
In 1998, ECO was named as a defendant in four lawsuits alleging injury and
damages as the result of a sewage spill, which occurred at an Austin, Texas
sewage pumping station. The case is presently in the discovery stage. No oral
depositions have been taken and there have been no court hearings. The Company
and ECO intend to vigorously defend against these claims and have requested
defense and indemnification by their insurance carrier. At this time, the
Company does not believe this matter will have a material adverse effect on the
Company's financial position or results of operations.
As discussed in the Company's 1998 Annual Report the Company has been named in
several complaints alleging water contamination in the Main San Gabriel Basin in
Southern California. In September 1999, the California 2/nd/ District Court of
Appeal ordered that the lawsuits be dismissed. A three-judge panel ruled that
the CPUC had final regulatory authority in water quality matters. The plaintiffs
petitioned the California Supreme Court for review of this decision and the
petition was granted. The Company anticipates that the California Supreme Court
will hear the case during 2000. The Company and Suburban have requested defense
and indemnification from their liability insurance carriers for these lawsuits.
Several of the liability insurance carriers are currently contributing to the
costs of defense of the lawsuits. Based upon information available at this time,
management does not expect that these actions will have a material adverse
effect on the Company's financial position or results of operations.
As discussed in the Company's 1998 Annual Report, in October 1998, the Company
and ECO were sued in an action in Texas arising out of a fatal auto accident.
The Company believes that its maximum exposure in
9
<PAGE>
this action is limited to the self-insured retention under its umbrella
liability policy. Based on the information available at this time, management
does not expect that this action will have a material adverse effect on the
Company's financial position or results of operations.
As discussed in the Company's 1998 Annual Report, Albuquerque initiated an
action in eminent domain to acquire the operations of NMUI. The Company believes
that the fair market value of NMUI is substantially in excess of the amount
offered in Albuquerque's complaint. Under New Mexico state law, there are
procedures that would allow Albuquerque to take possession of NMUI prior to the
resolution of the fair market issue; however, the Company believes that it has
adequate defenses should Albuquerque choose to pursue these procedures. At
present, discussions are ongoing; however, there is no assurance that these
discussions will lead to a settlement of the legal action. Albuquerque is not
currently prosecuting this action.
The Company and its subsidiaries are the subjects of certain litigation
arising from the ordinary course of operations. The Company believes the
ultimate resolution of such matters will not materially adversely affect its
consolidated financial position, results of operations or cash flow.
10
<PAGE>
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 4a. Executive Officers Of The Registrant
The Company's Board of Directors elects the executive officers each year at
its first meeting following the Annual Meeting of Stockholders. There are no
family relationships among 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 or she was elected an officer. There are no legal
proceedings of the type 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, with information about the Chairman of the
Board and President of the Company incorporated by reference to the Company's
definitive Proxy Statement dated on or about April 7, 2000.
<TABLE>
<CAPTION>
Position and Offices Currently Held
Name Age and Business Experience Date Elected
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Peter J. Moerbeek 52 President of ECO November 1998
Director of Suburban and ECO October 1995
Secretary of the Company, Suburban and ECO October 1995
Chief Financial Officer of the Company August 1995
Previously Executive Vice President Finance and
Operations of Pico Products, Inc. and Pico Macom, Inc.
(1989-1995)
Thomas C. Tekulve 48 Vice President Finance of the Company January 1999
Previously Vice President, Chief Financial Officer
SafeGuard Health Enterprises Inc. (1995-1998)
Previously (and most recently serving as) Director of Finance
International Operations, Beckman Instruments, Inc. (1984-1995)
Maurice W. Gallarda 46 President of Inland Pacific Water Company January 2000
Vice President New Business Development of the Company August 1999
Previously Strategic Planning Consultant (1997-1998)
Previously CEO Watershed Holdings, Inc. (1990-1997)
Michael O. Quinn 53 President of Suburban May 1996
Director of Suburban May 1993
Chief Operating Officer of Suburban April 1992
Previously President of ECO (1985-1992)
</TABLE>
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is in the process of drafting an S-3 Registration Statement to
register approximately 159,000 shares held by the Utility Employees' Retirement
Plan ("UERP"). These shares were issued to the UERP beginning in the early
1960s and were not registered under the Securities Act of 1933. The Company
anticipates the S-3 filing will be completed by April 30, 2000. No proceeds
will be remitted to the Company as a result of this filing.
The following table shows the range of market prices of Southwest Water
Company's common shares. The prices shown reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent actual
transactions. The price ranges shown in the table, as well as cash dividends,
reflect a 3-for-2 stock split in the form of a stock dividend on October 1,
1999, and a 5-for-4 stock split in the form of a stock dividend on October 1,
1998, as well as a five percent stock dividend on January 2, 1998. The shares
are traded on the Nasdaq Stock Market - symbol SWWC. The current quarterly
dividend rate is $.06 per common share. At December 31, 1999, there were 2,218
stockholders of record.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------
Market Price Range Market Price Range
------------------ ---------------------
Dividends High Low Dividends High Low
- --------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 0.053 $ 10.92 $ 8.33 $ 0.048 $ 9.20 $ 7.80
2nd Quarter $ 0.053 $ 12.00 $ 7.38 $ 0.048 $ 9.33 $ 7.93
3rd Quarter $ 0.053 $ 17.96 $ 11.33 $ 0.053 $ 9.73 $ 7.00
4th Quarter $ 0.060 $ 18.63 $ 11.50 $ 0.053 $ 11.33 $ 8.40
- --------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Earnings per common share, cash dividends per common share and basic and
diluted weighted average outstanding common shares reflect a 3-for-2 stock split
in the form of a stock dividend on October 1, 1999, a 5-for-4 stock split in the
form of a stock dividend on October 1, 1998, and stock dividends of five percent
on January 2, 1998, 20 percent on January 2, 1997, and five percent on January
2, 1996.
<TABLE>
<CAPTION>
(in thousands except per share amounts and numbers of customers)
Years Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Operating revenues $ 80,849 $ 72,146 $ 71,005 $ 66,145 $ 56,807
Operating income $ 9,314 $ 8,055 $ 7,215 $ 5,734 $ 4,432
Gains on sale of land $ 2,855 $ 110 $ - $ - $ 84
Net income $ 5,819 $ 3,349 $ 2,601 $ 1,923 $ 1,439
Net income available for common shares $ 5,792 $ 3,322 $ 2,574 $ 1,896 $ 1,412
- ------------------------------------------------------------------------------------------------------------------
Common Share Data
Earnings per common share:
Basic before land sale $ 0.65 $ 0.53 $ 0.41 $ 0.31 $ 0.23
Land sale, net of taxes $ 0.25 $ - $ - $ - $ -
Basic $ 0.90 $ 0.53 $ 0.41 $ 0.31 $ 0.23
Diluted before land sale $ 0.62 $ 0.51 $ 0.41 $ 0.31 $ 0.23
Land sale, net of taxes $ 0.25 $ - $ - $ - $ -
Diluted $ 0.87 $ 0.51 $ 0.41 $ 0.31 $ 0.23
Cash dividends per common share $ 0.22 $ 0.20 $ 0.19 $ 0.17 $ 0.16
Weighted average outstanding common shares:
Basic 6,404 6,304 6,217 6,137 6,070
Diluted 6,655 6,453 6,350 6,186 6,070
Statistical Data
Working capital (deficit) $ 1,705 $ (2,678) $ 473 $ (4,079) $ (7,266)
Capital additions $ 9,509 $ 11,921 $ 15,202 $ 15,212 $ 11,866
Property, plant and equipment, net $ 113,697 $ 109,238 $ 102,136 $ 91,414 $ 80,267
Total assets $ 142,950 $ 129,927 $ 123,100 $ 111,416 $ 97,456
Long-term debt $ 28,000 $ 28,900 $ 29,800 $ 30,700 $ 19,600
Stockholders' equity $ 40,477 $ 35,143 $ 32,427 $ 30,400 $ 29,246
Return on average common equity before land sale 11.1% 10.0% 8.3% 6.5% 5.0%
Return on average common equity 15.5% 10.0% 8.3% 6.5% 5.0%
Number of utility customers 74,842 73,482 72,319 70,976 70,023
</TABLE>
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 and NMUI for the addition, replacement and
renovation of water utility facilities. The Company's capital resources may also
be influenced by investments to acquire new business opportunities.
At December 31, 1999, the Company had cash and cash-equivalent balances
totaling $4,146,000. Included in cash and cash equivalents was approximately
$3,900,000 of proceeds from a sale of surplus
13
<PAGE>
land no longer used in utility operations. As previously discussed, the proceeds
from the sale were being held by an accommodator serving as intermediary for the
Company's Code Section 1031 like-kind exchange transaction. On February 25,
2000, the Company completed the purchase of West Covina's water distribution
system and the proceeds from the land sale were used as part of the purchase
price. The remaining funds for the purchase of West Covina's water system were
obtained from line of credit borrowing.
The Company has three separate unsecured lines of credit from three commercial
banks with total line of credit capacity of $20,000,000. One of the lines
expires in 2000, and two of the lines expire in 2001. The Company expects to
renew expiring lines of credit in the normal course of business. At December 31,
1999, outstanding borrowing was $6,593,000, and the unused borrowing capacity
was $13,407,000. In 1999, the Company's outstanding line of credit borrowing
increased a net $1,314,000 primarily due to additional cash requirements for
certain investments made by the Company and for tax payments in the fourth
quarter. Under two of the line of credit agreements, interest is charged at each
banks' prime rates less one-quarter percent. The Company may also borrow at an
interest rate that is lower than this rate; however, the amount borrowed must
remain outstanding for a fixed period of time. Interest charged under the third
line of credit is lower than the bank's prime rate and contains no restrictions
as to minimum borrowing or borrowing for a fixed period of time. Two of the
lines of credit require a $6,000 annual fee and the remaining line of credit
requires no annual fee. Each of the line of credit agreements, as amended,
contains certain financial restrictions. As of December 31, 1999, the Company
was in compliance with all applicable financial covenants of the line of credit
agreements.
In addition to its lines of credit, the Company has existing borrowing
capacity under its First Mortgage Bond Indentures. Under these indentures, the
Company has remaining borrowing capacity of approximately $41,869,000. However,
the amount of additional borrowing available to the Company under its current
lines of credit is limited by financial covenants that restricted additional
borrowing at December 31, 1999 to the unused credit line amount.
During 1999, the Company's additions to property, plant and equipment were
$9,509,000, representing a decrease of $2,412,000 from 1998. The decrease was
due primarily to the completion of major capital projects during 1998.
Developers made contributions in aid of construction ("CIAC"), and advances
totaling $4,166,000, of which $1,548,000 was received in cash. Company-financed
capital additions were $5,343,000, which was funded primarily by cash flow from
operations. For 2000, the Company estimates that its capital additions will be
approximately $8,200,000 and that cash flow from operations and CIAC will fund
these additions. Line of credit borrowing is also available to meet construction
requirements if needed.
The Company anticipates that its available line of credit borrowing capacity
and the cash flow generated from operations will be sufficient to fund its
activities during the next 12 months, including certain new business
investments. 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 would 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 or NMUI.
If the Company were unable to renew its existing lines of credit or unable to
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. Similarly, if the Company needed additional cash to fund
an acquisition, financing arrangements could include long-term borrowing or
equity financing.
REGULATORY AFFAIRS:
Regulation and Regulatory Developments
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with MUDs are short-term contracts and do not generally include
inflation adjustments. Changes in prices are
14
<PAGE>
negotiated on a contract-by-contract basis. ECO's O&M contracts are generally
longer-term water and wastewater service contracts, primarily with cities, and
typically include inflation adjustments.
The CPUC and the NMPRC regulate the rates and operations of Suburban and NMUI,
respectively. The rates allowed are intended to provide the utilities an
opportunity to recover costs and earn a reasonable return on common equity.
Although the Company is not currently seeking any rate increase, future
construction expenditures and increased operating expenses may require periodic
requests for rate increases. As previously discussed, the CPUC has directed
Suburban to file a general rate application by July 1, 2001.
Regulatory Developments:
The Company closely monitors legislative, CPUC, and NMPRC developments. The
various water industry associations in which the Company actively participates
also monitor these developments. The Company does not know the future possible
legislative, CPUC or NMPRC changes that will be enacted or the terms of such
changes if enacted. Therefore, management cannot predict the impact, if any, of
future legislative changes, CPUC or NMPRC developments or changes on the
Company's financial position or results of operations.
ENVIRONMENTAL AFFAIRS:
As a contract operator, ECO does not own any of the water sources, water
production facilities, or water distribution systems that it operates for its
clients, nor does ECO own any of the wastewater collection systems or wastewater
treatment facilities that it operates for its clients. Although not the owner,
ECO is responsible for operating these water and wastewater facilities in
compliance with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the
CPUC and the NMPRC, respectively. The responsibilities of both regulatory
agencies are to ensure an adequate supply of affordable, healthful, potable
water to residents of their respective states. The Company's operations are also
subject to water and wastewater pollution prevention standards and water and
wastewater quality regulations of the EPA and various state regulatory agencies.
Both the EPA and state regulatory agencies require periodic testing and sampling
of water. Costs associated with the testing of the Company's water supplies have
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, will be recoverable through increased rates and contract
operations revenues. However, there is no assurance that recovery of such costs
will be allowed. To date, the Company has not experienced any material adverse
effects upon its operations resulting from compliance with governmental
regulations.
As discussed in the Company's 1998 Annual Report, and in Part I, Item 3, Legal
Proceedings, the Company has been named in several complaints alleging water
contamination in the Main San Gabriel Basin in Southern California. In September
1999, the California 2/nd/ District Court of Appeal ordered that the lawsuits be
dismissed. A three-judge panel ruled that the CPUC has final regulatory
authority in water quality matters. The plaintiffs petitioned the California
Supreme Court for review of this decision and the petition was granted. The
Company anticipates that the Supreme Court will hear the case during 2000.
As discussed in the Company's 1998 Annual Report, in March 1998, the CPUC
issued an order instituting investigation ("OII") directed to all Class A and B
water utilities in California, including Suburban. The purpose of the OII is to
address a series of questions dealing with the safety of current drinking water
standards and compliance with those standards. Additional information about the
OII is set forth in the 1998 Annual Report. In February 2000, the CPUC issued a
draft opinion finding that the DOHS requirements governing drinking water
quality adequately protect the public health and safety, and that the regulated
water utilities have complied with past and present drinking water quality
requirements. While the CPUC continues to investigate the issues concerned with
water quality, the Company and Suburban are unable to predict what final
actions, if any, will be taken by the CPUC and/or the DOHS as
15
<PAGE>
the result of this investigation, or their impact on the operations or financial
position of the Company and Suburban.
YEAR 2000 COMPUTER COMPLIANCE:
The Company did not experience any Year 2000 ("Y2K") related problems in any
of its critical systems. The Company will watch for any date related problems in
the future, although none are expected. No further expenditures related to the
Y2K issue are anticipated.
RISK FACTORS
Certain statements contained in this Annual Report on Form 10-K that are not
based on historical fact are "forward-looking" statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are only
projections. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any performance or
achievements planned, expressed or implied by such forward-looking statements.
Although the Company believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations.
The forward-looking information referred to above includes, but is not
limited to, revenue backlog information, expectations regarding sales growth and
new contracts, and potential acquisitions, weather conditions, changes in
business conditions, legal and other contingencies.
Weather
There is seasonality to the water services industry; thus the results of
operations for one period do not necessarily indicate results to be expected in
another period. Rainfall and weather conditions affect utility operations, with
most water consumption occurring during the third quarter of each year when
weather tends to be hot and dry. Drought conditions would have the effect of
lowering revenue due to conservation efforts of the consumer and less water
available to the utilities. The Company's contract operations business can also
be seasonal in nature. Heavy rainfall tends to hamper the Company's ability to
perform billable work such as pipeline maintenance, manhole rehabilitation and
other outdoor services. Moderate rainfall by contrast may create opportunities
for additional billable work outside the scope of existing contracts. Drought
conditions would not necessarily affect the Company's contract operations
because of the base fee and fixed fee contracts, but could affect the Company's
opportunities for additional billable work outside the scope of the contracts.
Contract Operations
The water and wastewater management business is highly competitive. In the
United States, municipal employees perform the majority of water and wastewater
utility operations. As a result, a significant portion of ECO's sales and
marketing efforts require convincing elected officials and city staff persons
that outsourcing of the utility operations is beneficial to the city. There is
no assurance that any city will choose to outsource, or will select ECO as its
operator at the end of the sales effort. While industry renewal rates tend to be
high, periodically cities change operators or terminate outsourcing at the end
of a contract. An inability to renew its existing contracts could have a
material adverse impact on the Company. In addition, a city or MUD could cancel
a long-term contract without notice, and in breach of the contract. This would
not only result in loss of revenue and operating profits, but could potentially
involve the Company in litigation. In addition, ECO competes with several larger
competitors whose size, customer base and capital resources may restrict ECO's
ability to successfully compete for certain O&M contracts.
16
<PAGE>
Risk of Failure to Manage Growth
The Company continues to expand its business and is actively seeking
acquisitions and joint ventures to improve the Company's position in the
contract water and wastewater business. This kind of growth demands experienced
and qualified personnel to manage the transition as the Company expands. The
success of future business development and growth relies heavily on the
Company's ability to retain qualified personnel to operate and manage its new
business ventures. There can be no assurance that the Company will successfully
manage this growth, and failure to do so could have a material adverse effect on
the Company.
Water Quality and Contamination
As previously discussed in the Company's 1998 Annual Report, Suburban detected
a substance called NDMA in one of its wells in excess of the EPA reference
dosage for health risks. Upon detection, the well was immediately removed from
service. During 1999, Suburban completed construction of a treatment facility
that is intended to reduce the NDMA to non-detectable levels. In 1997, the San
Gabriel Basin Water Quality Authority advised Suburban that the DOHS had
detected the contaminant "perchlorate" in the Main San Gabriel Basin. The
contaminant was later detected in a well that is operated but not owned by
Suburban. Subsequently, NDMA was detected in this well, at which time Suburban
removed the well from service. The potential impact of these contaminants on the
results of operations for Suburban is not fully known at this time. Costs
associated with testing of Suburban's water supplies have increased and are
expected to increase further as regulatory agencies adopt additional monitoring
requirements.
The EPA has conducted numerous studies of underground water in the Main San
Gabriel Basin (the "Main Basin") and in 1984 named the Main Basin as a Super-
fund site. Several large industrial companies were named as potentially
responsible parties ("PRPs") for allegedly causing the contamination. Suburban's
facilities were not named as sources of the contamination in the Main Basin.
However, individual government officials have suggested that, because of their
pumping operations, the Main Basin water producers may have clean-up liability
under certain environmental statutes. The EPA is expected to continue to
identify sources of contamination in order to establish legal responsibility for
clean-up costs. Currently, neither the EPA nor any other governmental agency has
identified Suburban or other water producers as PRPs. However, the Company
currently is involved in litigation concerning the quality of the Main Basin
groundwater as described in Part 1, Item 3, Legal Proceedings.
In 1979, VOCs were discovered in the Main Basin. While most of the VOC
contamination was found outside Suburban's service areas, subsequent underground
water sampling resulted in the discovery of four large areas of groundwater VOC
contamination. One of the areas includes Suburban's Bartolo Well Field, which
contains four of Suburban's producing wells. Suburban produces approximately 27
percent of its total water production from these wells. Currently, the water
delivered to Suburban's wells does not contain VOCs in excess of established
MCLs, and to date, water produced from the Bartolo Well Field and other wells
owned by Suburban in the Main Basin meets all applicable governmental
requirements. Suburban has taken measures to ensure that it has an adequate
supply of potable water that meets all applicable governmental standards.
Technology exists to remove VOC contaminants from basin water. However, there is
no assurance that either such technology will be adequate in the future to
reduce the amounts of VOCs and other contaminants in the Main Basin to
acceptable levels or the costs of such removal will be fully recoverable from
Suburban's customers. To date, Suburban has been permitted to recover all
expenses associated with water quality maintenance from its ratepayers.
In addition to the matters set forth, there can be no assurance that there are
no other water quality and contamination issues which exist but are not known to
the Company at this time. There is no assurance that, in the future,
governmental authorities will not seek to recover clean-up costs from Suburban
or that PRPs will not seek contributions from water producers for clean-up
costs. If Suburban were required to pay clean-up costs, it would seek to recover
such costs through increased rates to its customers. This practice has been
permitted by the CPUC in the past; however, there can be no assurance that
Suburban would be allowed to recover such costs in the future.
17
<PAGE>
RESULTS OF OPERATIONS:
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Diluted earnings per common share before a gain on a land sale (after
adjustment for a 3-for-2 stock split in the form of a stock dividend on October
1, 1999), net of taxes were $.62 in 1999 compared to $.51 in 1998. Diluted
earnings per common share including the gain on sale of land, net of taxes, were
$.87 in 1999.
Operating income increased $1,259,000 or 16 percent, and, as a percentage of
operating revenues, was 12 percent in 1999 compared to 11 percent in 1998. ECO's
operating income increased $697,000 due to the addition of new contracts and
increases in project work performed outside the scope of existing contracts.
Operating income at the utilities increased $1,139,000, due primarily to a 12
percent increase in water consumption by Suburban's customers as a result of
warmer, dryer weather in 1999, especially in the fourth quarter, compared to
cooler weather in 1998. At NMUI, there was a five percent increase in water
consumption due to warmer, dryer weather, and an increase in the number of
customers. Parent company expenses increased $577,000 due primarily to self-
insured retention reserves, health insurance reserves and other compensation-
related expenses.
Operating revenues
Operating revenues increased $8,703,000 or 12 percent in 1999 compared to
1998. ECO's revenues increased $5,805,000 or 16 percent, primarily due to the
addition of new contracts and to additional project work. Utility revenues
increased $2,898,000 or eight percent due primarily to increased water
consumption by Suburban's customers as a result of unseasonably warm, dry winter
weather. NMUI revenues were higher due to a five percent increase in water
consumption, primarily from the addition of new customers.
Direct operating expenses
Direct operating expenses increased $6,839,000 or 13 percent. As a percentage
of operating revenues, these expenses were 74 percent in 1999 and 73 percent in
1998. The percentage increase in operating expenses from 1998 to 1999 was
primarily due to the cost of water sold at the California utility. ECO's direct
operating expenses increased $4,885,000 due to the addition of new contracts and
to additional project work performed outside the scope of existing contracts.
Utility direct operating expenses increased $1,954,000, primarily reflecting the
increase in customer water consumption at both Suburban and NMUI, and to the
increase in the number of NMUI's customers.
Selling, general and administrative
Selling, general and administrative expenses increased $605,000 or five
percent in 1999 compared to 1998. As a percentage of operating revenues, these
expenses were 14 percent in 1999 and 15 percent in 1998. ECO's selling, general
and administrative expenses increased $223,000, primarily due to increased
regional marketing costs associated with new business development opportunities.
General and administrative expenses at the utilities decreased $195,000,
primarily as a result of decreased legal fees. As discussed above, general and
administrative expenses of the parent company increased $577,000.
Other income and expense
Interest income decreased $25,000 as a result of a centralized cash management
system, which effectively utilized excess cash to pay off line of credit
balances. Interest expense decreased $59,000 as the result of decreases in line
of credit balances during 1999 and also due to lower average interest rates in
1999 compared to 1998. Other income increased $119,000, primarily due to fees
paid to extend the closing of the sale of surplus land no longer used in utility
operations.
18
<PAGE>
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Diluted earnings per common share (adjusted for a 3-for-2 stock split in the
form of a stock dividend on October 1, 1999) were $.51 in 1998 compared to $.41
in 1997.
Operating income increased $840,000 or 12 percent, and, as a percentage of
operating revenues, was 11 percent in 1998 compared to 10 percent in 1997. ECO's
operating income increased $615,000 due to increased revenue from new contracts,
additional billable work performed outside the scope of the existing contracts,
and aggressive cost containment measures that reduced operating costs as a
percentage of revenue. Operating income at the utilities increased $87,000. The
increase in operating income was primarily due to the addition of new customers
and increased customer water consumption at NMUI. The increase was offset by
decreased water sales at Suburban because of inclement weather in California as
a result of El Nino-generated storms. Parent company expenses decreased
$138,000, primarily due to decreases in compensation-related expenses.
Operating revenues
Operating revenues increased $1,141,000 or two percent. ECO's revenues
increased $1,859,000, primarily as a result of revenues from new contracts and
additional work performed outside the scope of existing contracts. ECO's net
increase in revenue reflects a loss of approximately $2,400,000 in revenue with
respect to an O&M contract in New Mexico, which was not renewed in 1998. Water
utility revenues decreased $718,000, primarily due to a 10 percent reduction in
water consumption by Suburban's customers because of El Nino-generated storms.
The decrease was partially offset by the positive effects of a rate increase,
and also by the addition of new customers at NMUI.
Direct operating expenses
Direct operating expenses increased $317,000. As a percentage of operating
revenues, these expenses decreased to 73 percent in 1998 from 74 percent in
1997. ECO's direct operating expenses increased $855,000 due primarily to higher
expenses associated with new contracts and increased billable work. Water
utility direct operating expenses decreased $538,000, due primarily to the
decrease in water consumption by Suburban's customers. The decrease was
partially offset by additional direct operating expenses at NMUI as a result of
increased consumption and new customers.
Selling, general and administrative
Selling, general and administrative expenses decreased $16,000. As a
percentage of operating revenues, these expenses were 15 percent in 1998 and 16
percent in 1997. ECO's selling, general and administrative expenses increased
$389,000, due primarily to expanded marketing efforts. General and
administrative expenses at the utilities decreased $267,000, primarily due to
cost containment measures intended to offset the effect of the reduction in
revenue. As discussed above, parent company expenses decreased $138,000.
Other income and expense
Interest expenses decreased $183,000, primarily due to the reduction in line
of credit balances, and lower average interest rates in 1998 compared to 1997.
In October 1998, Suburban sold two parcels of land no longer used in utility
operations, and recorded a gain of $110,000.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<S> <C>
Index to Financial Statements and Financial Statement Schedule
Independent Auditors' Report .............................................................. 21
Consolidated Statements of Income - Three Years Ended December 31, 1999.................... 22
Consolidated Balance Sheets - December 31, 1999 and 1998................................... 23
Consolidated Statements of Changes in Common Stockholders' Equity -
Three Years Ended December 31, 1999..................................................... 24
Consolidated Statements of Cash Flows - Three Years Ended December 31, 1999................ 25
Notes to Consolidated Financial Statements................................................. 26
Schedule II - Valuation and Qualifying Accounts - Three Years Ended December 31, 1999...... 43
</TABLE>
20
<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
supplementary financial statement Schedule II, 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement Schedule II,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Los Angeles, California
January 27, 2000
21
<PAGE>
Southwest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
Operating Revenues $ 80,849 $ 72,146 $ 71,005
Operating Expenses:
Direct operating expenses 59,850 53,011 52,694
Selling, general and administrative 11,685 11,080 11,096
- ---------------------------------------------------------------------------------------------------------
71,535 64,091 63,790
- ---------------------------------------------------------------------------------------------------------
Operating Income 9,314 8,055 7,215
Other Income (Expense):
Interest expense (2,925) (2,984) (3,167)
Interest income 66 91 94
Gain on sales of land 2,855 110 0
Other 387 268 309
- ---------------------------------------------------------------------------------------------------------
383 (2,515) (2,764)
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes 9,697 5,540 4,451
Provision for income taxes (Note 7) 3,878 2,191 1,850
- ---------------------------------------------------------------------------------------------------------
Net Income 5,819 3,349 2,601
Dividends on Preferred Shares (Note 9) 27 27 27
- ---------------------------------------------------------------------------------------------------------
Net Income Available for Common Shares $ 5,792 $ 3,322 $ 2,574
- ---------------------------------------------------------------------------------------------------------
Earnings per Common Share (Notes 8 and 9):
Basic $ 0.90 $ 0.53 $ 0.41
Diluted $ 0.87 $ 0.51 $ 0.41
- ---------------------------------------------------------------------------------------------------------
Cash Dividends per Common Share (Note 9) $ 0.22 $ 0.20 $ 0.19
=========================================================================================================
Weighted Average Outstanding Common Shares (Notes 8 and 9):
Basic 6,404 6,304 6,217
Diluted 6,655 6,453 6,350
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Southwest Water Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------
Assets 1999 1998
- -------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 4,146 $ 394
Customers' accounts receivable, less allowance for doubtful accounts
($1,202 in 1999 and $895 in 1998) 10,465 8,630
Other current assets 3,700 2,586
- -------------------------------------------------------------------------------------------------------
18,311 11,610
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost (Note 3) 152,624 144,690
Contract operations property, plant and equipment -- at cost 5,654 4,678
- -------------------------------------------------------------------------------------------------------
158,278 149,368
Less accumulated depreciation and amortization 44,581 40,130
- -------------------------------------------------------------------------------------------------------
113,697 109,238
Other Assets (Note 2) 10,942 9,079
- -------------------------------------------------------------------------------------------------------
$ 142,950 $ 129,927
- -------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 2,039 $ 1,679
Accounts payable 2,081 2,782
Other current liabilities (Note 5) 12,486 9,827
- -------------------------------------------------------------------------------------------------------
16,606 14,288
Other Liabilities and Deferred Credits:
Long-term debt (Note 6) 28,000 28,900
Bank notes payable (Note 4) 5,454 4,500
Advances for construction 7,930 8,049
Contributions in aid of construction 34,519 31,706
Deferred income taxes (Note 7) 6,146 4,430
Other liabilities and deferred credits 3,818 2,911
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 102,473 94,784
Commitments and Contingencies (Note 13)
Stockholders' Equity (Notes 8, 9 and 10):
Cumulative preferred stock 517 517
Common stock 64 42
Paid-in capital 31,080 30,127
Retained earnings 8,816 4,457
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 40,477 35,143
- -------------------------------------------------------------------------------------------------------
$ 142,950 $ 129,927
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
SouthWest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997, 1998 and 1999
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
Common Stock Total
----------------------
Number of Preferred Paid-In Retained Stockholders'
Shares Amount Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,122 $ 31 $ 517 $ 26,159 $ 3,728 $ 30,435
Dividend reinvestment and
employee stock purchase plans 29 383 383
Stock options exercised 20 194 194
5% stock dividend 159 2 2,733 (2,735) 0
Net income 2,601 2,601
Cash dividends declared (1,174) (1,174)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,330 33 517 29,469 2,420 32,439
Dividend reinvestment and
employee stock purchase plans 28 1 432 433
Stock options exercised 20 226 226
5 -for-4 stock split in the form of a stock 843 8 (8) 0
dividend
Net income 3,349 3,349
Cash dividends declared (1,304) (1,304)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,221 42 517 30,127 4,457 35,143
Dividend reinvestment and
employee stock purchase plans 33 498 498
Stock options exercised 51 1 455 456
3-for-2 stock split in the form of a stock dividend 2,142 21 (21) 0
Net income 5,819 5,819
Cash dividends declared (1,439) (1,439)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,447 $ 64 $ 517 $ 31,080 $ 8,816 $ 40,477
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
SouthWest Water Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,819 $ 3,349 $ 2,601
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,448 4,265 4,162
Deferred income taxes 1,716 300 732
Gain on sales of land (2,855) (110) 0
Changes in assets and liabilities:
Customers' accounts receivable (1,835) (1,344) 930
Other current assets (1,114) 390 (890)
Accounts payable (701) 1,568 (299)
Other current liabilities 2,659 916 1,343
Other, net (1,892) 176 (417)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,245 9,510 8,162
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of land 4,000 116 0
Additions to property, plant and equipment (6,891) (10,146) (9,384)
Other investments, net (533) 120 (338)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,424) (9,910) (9,722)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Contributions in aid of construction 1,345 2,799 1,501
Net borrowings on (repayments of) bank notes payable 1,314 (1,852) 1,942
Net proceeds from dividend reinvestment,
employee stock purchase and stock option plans 953 658 577
Advances for construction 203 595 447
Dividends paid (1,389) (1,266) (1,155)
Payments on long-term debt (900) (900) (900)
Payments on advances for construction (595) (477) (405)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 931 (443) 2,007
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
(including $3,883 cash held in escrow at December 31, 1999) 3,752 (843) 447
Cash and cash equivalents at beginning of year 394 1,237 790
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,146 $ 394 $ 1,237
=============================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 2,861 $ 3,029 $ 3,189
Income taxes $ 2,540 $ 1,355 $ 805
Non-cash contributions in aid of construction and advances
for construction conveyed to Company by developers $ 2,618 $ 1,775 $ 5,818
</TABLE>
See accompanying notes to consolidated financial statements.
25
<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") operate and manage water supply and wastewater treatment systems.
Some of the systems are owned by the Company and are regulated public utilities,
while the remainder are owned by cities, utility districts and private companies
and managed under contract.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The principal
subsidiaries are ECO Resources, Inc. ("ECO"), Suburban Water Systems
("Suburban") and New Mexico Utilities, Inc. ("NMUI"). 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 Regulation Commission ("NMPRC"), respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. 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 could
be affected. Actual results may differ from these estimates.
Recognition of Revenues: Revenues from contract operations are recognized as
services are performed. 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.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
During 1999, the Company sold a parcel of surplus land that had formerly been
used in utility operations. The sale of land was treated as an Internal Revenue
Code ("Code") Section 1031 like-kind exchange. The proceeds from the sale were
transferred to an accommodator and held until the completion of reinvestment of
the proceeds into utility plant. The proceeds were reinvested on February 25,
2000. As of December 31, 1999, approximately $3,900,000 was held by the
accommodator which is reflected as cash and cash equivalents on the balance
sheet.
Financial Instruments: The carrying value of financial instruments such as cash
and cash equivalents, accounts receivable, accounts payable, and short and long-
term debt approximates fair value. At December 31, 1999, the Company had no
derivative financial instruments, financial instruments with off-balance sheet
risk or financial instruments with concentrations of credit risks requiring
disclosure.
Property, Plant and Equipment: Property, plant and equipment used in contract
operations are depreciated on the straight-line method over estimated useful
lives ranging from five to 30 years. The cost of additions to utility plant
includes labor, material and capitalized interest. Interest of $43,000,
$147,000 and $63,000 was capitalized in 1999, 1998 and 1997, 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 over the useful lives of the assets as prescribed
by the CPUC and NMPRC, respectively, and as permitted by Statement of Financial
Accounting Standards ("SFAS") No. 71 "Accounting for the Effects of Certain
Types of Regulation." Depreciation expense on average gross depreciable plant
was approximately three percent in 1999, 1998 and 1997.
Other Assets: The Company includes in other assets its investment in Windermere
Utility Company ("Windermere") as described in Note 2, and a note receivable
from Windermere. Other assets also include regulatory assets recorded by
Suburban and NMUI and land no longer used in utility operations. Additionally,
other assets include deferred debt expenses that are being amortized over the
26
<PAGE>
lives of the related debt issues. In 1999, the Company incurred initial costs in
the development of Inland Pacific Water Company ("IPWC") and Inland Pacific
Development Company, LLC. Both are joint ventures designed to develop water and
wastewater-related opportunities in the San Bernardino and Riverside counties of
Southern California (Note 15). Additionally, in October 1999, the Company
invested in Metro H\\2\\O, another partnership, in order to supply wholesale
water and wastewater services to several communities in an area just east of
Austin, Texas. The partnership currently owns land that will be used for the
construction of water wells and a wastewater treatment plant. The initial costs
of these investments are currently included in other assets in the Company's
consolidated balance sheet.
The Company regularly reviews its long-lived assets for impairment. This review
includes regulatory assets and assets excluded from rate base by regulators.
Potential impairment of assets held for use is determined by comparing the
carrying amount of an asset to the future undiscounted cash flows expected to be
generated by that asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
value 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 cost to
sell.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recorded in order to recognize
future tax effects attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as the recognition of operating losses and tax credit carry-
forwards. The most significant items for which deferred taxes have been
recorded are the tax effects of a Code Section 1031 like-kind exchange gain on
the sale of property, accelerated depreciation, advances for construction and
contributions in aid of construction. Deferred tax assets and liabilities are
recorded using enacted tax rates expected to apply to taxable income in the
years in which the temporary differences are recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
the period that the enactment occurs.
When the Company adopted SFAS 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 NMPRC,
respectively.
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
NMPRC.
Production Cost Balancing Accounts: As permitted by SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation", 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 two and one-half percent 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 and regulatory liabilities recorded
by Suburban and NMUI.
Reclassifications: Certain reclassifications have been made to the 1998 and 1997
consolidated financial statement presentation to conform to the 1999
presentation.
27
<PAGE>
NOTE 2. INVESTMENTS
In 1996, the Company purchased a 49 percent interest in Windermere for an
investment of $3,000,000. The agreement, as amended, permits the majority
shareholder to acquire the Company's interest in Windermere at an agreed-upon
price. If the majority shareholder does not exercise his purchase option, then
the Company has the right to acquire 100 percent of Windermere for an agreed-
upon price. The Company also has a consulting agreement with Windermere and an
additional agreement by which the Company may receive an annual payment based
upon Windermere's financial performance. The agreement extends to March 31,
2000, the date by which the majority shareholder may exercise his purchase
option and also increases the agreed-upon purchase price for the majority
shareholder. The Company is currently holding discussions with the majority
shareholder of Windermere to purchase its interest in Windermere along with two
other utilities, also located near Austin, Texas and the Company anticipates
that negotiations will be completed in 2000. However, there is no
assurance that an agreement will be reached or that the purchase of Windermere
from the majority shareholder will be successfully completed. The investment is
carried at cost and is included in other assets in the Company's consolidated
balance sheets.
As described in Note 1, in 1999, the Company invested in the development of IPWC
and IPDC, which are partnerships designed to develop water and wastewater-
related opportunities and in Metro H\\2\\O a partnership, which currently owns
land that will be used for the construction of water wells and a wastewater
treatment plant. The Company also has an investment of $698,000 in two not-for-
profit mutual water companies ("mutuals"), which entitles the Company to certain
water rights. The Company's investment in one of these mutuals is approximately
32 percent of the outstanding stock. However, the Company does not exercise
significant operating and financial control over either of these mutuals. The
investments are recorded at cost and are reflected in the Company's general
utility property account (Note 3). The Company purchased water from these
companies at a cost of approximately $2,359,000, $1,747,000 and $1,835,000 in
1999, 1998 and 1997, respectively.
NOTE 3. UTILITY PROPERTY, PLANT, AND EQUIPMENT
The components of utility property, plant and equipment at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land and land rights $ 600 $ 598
Source of supply 11,466 11,440
Pumping and purification 15,537 14,710
Transmission and distribution 112,155 105,690
General (including intangibles) 8,888 8,045
Construction work in progress 3,978 4,207
- ---------------------------------------------------------------------------------
$ 152,624 $ 144,690
=================================================================================
</TABLE>
At December 31, 1999, substantially all of the Company's utility plant and
equipment was pledged as collateral for the First Mortgage Bonds issued by the
Company (Note 6).
NOTE 4. LINES OF CREDIT
At December 31, 1999, the Company had three unsecured lines of credit from three
commercial banks with a total borrowing capacity of $20,000,000. One of the
lines of credit expires in 2000 and the remaining two lines of credit expire in
2001. The Company expects to renew and update expiring lines of credit in the
normal course of business. Under two of the lines of credit, interest is
charged at the banks' prime rates less one-quarter percent. The Company may
also borrow at an interest rate that is lower than this; however, certain
minimum borrowing requirements must be maintained for a fixed period of time.
Interest charged under the third line of credit is lower than the bank's prime
rate and contains no restrictions as to minimum borrowing or borrowing for a
fixed period of time. Two of the line of credit
28
<PAGE>
agreements require a commitment fee of one-quarter percent per year of the
unused portion of the available lines of credit, calculated and payable on a
quarterly basis. Two of the lines of credit require a $6,000 annual fee, and the
third line requires no annual fee. Each of the line of credit agreements, as
amended, contains certain financial restrictions and the Company was in
compliance with all applicable restrictions at December 31, 1999.
A summary of borrowing on the lines of credit is presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Notes payable to banks at December 31 $ 6,593 $ 5,279
Weighted average interest rate at December 31 7.75% 7.03%
Maximum amount of borrowings outstanding at any month end $ 6,593 $ 7,840
Average borrowings $ 5,398 $ 6,283
Weighted average interest rate 6.77% 7.11%
========================================================================================================
</TABLE>
NOTE 5. OTHER CURRENT LIABILITIES
Included in other current liabilities at December 31, 1999 and 1998 are the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accrued salaries, wages and benefits $ 3,725 $ 2,748
Water purchased for sale 2,749 1,569
Drafts payable 1,008 696
Accrued interest payable 671 671
Franchise and other taxes 663 943
Current portion of advances for construction 398 399
Accrued dividends payable 394 344
Other 2,878 2,457
- --------------------------------------------------------------------------------------------------------
$ 12,486 $ 9,827
========================================================================================================
</TABLE>
29
<PAGE>
NOTE 6. LONG-TERM DEBT
The long-term debt outstanding at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Suburban First Mortgage Bond, Series A, due 2006, at 8.93%
interest rate, with semi-annual interest payments $ 6,900 $ 7,800
Suburban First Mortgage Bond, Series B, due 2022, at 9.09%
interest rate, with semi-annual interest payments 8,000 8,000
Suburban First Mortgage Bond, Series C, due 2006, at 7.61%
interest rate, with semi-annual interest payments 8,000 8,000
NMUI First Mortgage Bond, Series A, due 2002, at 8.86%
interest rate, with semi-annual interest payments 2,000 2,000
NMUI First Mortgage Bond, Series B, due 2006, at 7.64%
interest rate, with semi-annual interest payments 4,000 4,000
- ------------------------------------------------------------------------------------------------------------------
Long-term debt before current maturities 28,900 29,800
Less current maturities (900) (900)
- ------------------------------------------------------------------------------------------------------------------
Long-term debt $ 28,000 $ 28,900
==================================================================================================================
</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 C, and NMUI's First Mortgage Bonds, Series A and 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 existing
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. Suburban
and NMUI pay regular quarterly dividends to the Company. In addition, in 1999,
Suburban paid a specially authorized dividend of $3,000,000 to the Company. As
of December 31, 1999, and 1998, both Suburban and NMUI were in compliance with
dividend limitations mandated in the indentures. At December 31, 1999 and 1998,
the combined indenture limits for dividends totaled $17,687,000 and $15,605,000,
respectively. Aggregate annual maturity and sinking fund requirements of all
long-term debt are $900,000 for the two years ending December 31, 2001, and for
the two years ended December 31, 2004. Annual maturity and sinking fund
requirements are $2,900,000 for the year ended December 31, 2002, and include
NMUI's Series A Bonds, which mature in 2002.
30
<PAGE>
NOTE 7. INCOME TAXES
The components of the current and deferred income tax provisions are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 2,156 $ 1,683 $ 978
State 497 306 372
- --------------------------------------------------------------------------------------------------------------------------
2,653 1,989 1,350
- --------------------------------------------------------------------------------------------------------------------------
Deferred income taxes (benefits):
Section 1031 like-kind property exchange gain (Note 1) 1,241 0 0
Depreciation 570 568 640
Contributions in aid of construction and advances for
construction 216 227 242
Production cost balancing accounts 163 (39) 342
Investment tax credits 25 25 26
Pension expense (352) (193) 0
Reserves (168) (243) (440)
Gains on condemnation of land (72) (50) (51)
Deferred debt expenses (6) (7) (7)
Other, net 99 12 (20)
- --------------------------------------------------------------------------------------------------------------------------
1,716 300 732
- --------------------------------------------------------------------------------------------------------------------------
Change in regulatory assets and regulatory liabilities, net (442) (49) (183)
Investment tax credit amortization (49) (49) (49)
- --------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 3,878 $ 2,191 $ 1,850
==========================================================================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision computed at statutory rates 34% 34% 34%
State income taxes, net of federal tax benefit 4% 1% 2%
Goodwill amortization and other non-deductible expense 1% 2% 3%
Compensation expense on stock options exercised
deductible for tax purposes (2%) 0% 0%
Investment tax credits (1%) (1%) (1%)
Depreciation 1% 1% 1%
Other, net 3% 3% 3%
- --------------------------------------------------------------------------------------------------------------------------
40% 40% 42%
==========================================================================================================================
</TABLE>
31
<PAGE>
Net deferred income taxes consist of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred income tax assets:
Contributions in aid of construction and advances for construction $ 3,113 $ 3,329
Reserves 1,362 1,194
Investment tax credits 506 531
Production cost balancing accounts (441) (278)
Other 63 162
- --------------------------------------------------------------------------------------------------------------------------
Total deferred Income tax assets 4,603 4,938
- --------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation 9,033 8,463
Section 1031 like-kind property exchange gain 1,241 0
Gains on condemnation of land 684 756
Deferred debt expenses 99 105
Pension (395) (96)
Other 87 140
- --------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 10,749 9,368
- --------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 6,146 $ 4,430
==========================================================================================================================
</TABLE>
Management regularly reviews the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December 31,
1999 or 1998.
NOTE 8. EARNINGS PER SHARE
The Company records earnings per share ("EPS") by computing basic EPS and
diluted EPS. Basic EPS measures the performance of the Company over the
reporting period by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS measures the performance of the Company over the reporting period after
giving effect to all potentially dilutive common shares that would have been
outstanding if the shares had been issued. Stock options give rise to
potentially dilutive common shares.
32
<PAGE>
The following table is a reconciliation of the numerators and denominators used
in both basic and diluted EPS calculations:
<TABLE>
<CAPTION>
Dividends on Effect of
Preferred Dilutive
Net Income Shares Basic EPS Options Diluted EPS
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
1999
----
Income (numerator) $ 5,819 $ (27) $ 5,792 $ 0 $ 5,792
Shares (denominator) 6,404 251 6,655
Per share amount before land sale $ 0.65 $ 0.62
========= ===========
Land sale, net of taxes $ 0.25 $ 0.25
========= ===========
Per share amount $ 0.90 $ 0.87
========= ===========
1998
----
Income (numerator) $ 3,349 $ (27) $ 3,322 $ 0 $ 3,322
Shares (denominator) 6,304 149 6,453
Per share amount $ 0.53 $ 0.51
========= ===========
1997
----
Income (numerator) $ 2,601 $ (27) $ 2,574 $ 0 $ 2,574
Shares (denominator) 6,217 133 6,350
Per share amount $ 0.41 $ 0.41
========= ===========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. STOCKHOLDERS' EQUITY
The Company is currently authorized to issue 25,000,000 common shares and
250,000 preferred shares at a par value of $.01 per share. At December 31,
1999, there were 6,447,030 common shares and 10,341 preferred shares
outstanding, and at December 31, 1998, there were 4,220,743 common shares and
10,341 preferred shares outstanding. Series A-preferred stockholders are
entitled to annual dividends of $2.625 per share. Series A-preferred shares may
be called by the Company for a price of $52 per share and have preference in
liquidation of $50 per share.
In August 1999, the Company declared a 3-for-2 stock split (or 2,141,958
shares), paid in the form of a stock dividend to stockholders of record on
October 1, 1999. In September 1998, the Company declared a 5-for-4 stock split
(or 842,474 shares), paid in the form of a stock dividend to stockholders of
record on October 1, 1998. In December 1997, the Company declared a stock
dividend of five percent (or 158,581 shares) to stockholders of record on
January 2, 1998, and at December 31, 1997, retained earnings were charged
approximately $2,735,000, which represents the market value of the shares issued
using the closing price of the Company's common stock on January 2, 1998. A
corresponding entry of approximately $2,733,000 was recorded to paid-in-capital.
The weighted-average number of outstanding common shares and dividends per
common share reflect the stock splits and stock dividends.
The Company has a dividend reinvestment and stock purchase plan ("DRIP") that
allows common stockholders the option of receiving their dividends either in
cash or in common stock at a five percent discount from the market value. The
DRIP permits optional cash purchases of stock at current market values up to a
maximum of $3,000 per quarter. As of December 31, 1999, there were 744,187
shares (adjusted for stock splits and stock dividends) authorized for issuance
under the DRIP and 213,645 shares were available for issuance.
33
<PAGE>
NOTE 10. STOCK COMPENSATION PLANS
At December 31, 1999, the Company had three stock-based compensation plans: the
Stock Option Plan, the Director Stock Option Plan, and the Employee Stock
Purchase Plan. The Company accounts for these plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. If
compensation expense for the Company's three stock-based compensation plans had
been determined using the alternative method described under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net income available for common shares As reported $ 5,792 $ 3,322 $ 2,574
Pro forma $ 5,612 $ 3,208 $ 2,511
- --------------------------------------------------------------------------------------------------
Basic earnings per common share As reported $ 0.90 $ 0.53 $ 0.41
Pro forma $ 0.88 $ 0.51 $ 0.40
- --------------------------------------------------------------------------------------------------
Diluted earnings per common share As reported $ 0.87 $ 0.51 $ 0.41
Pro forma $ 0.84 $ 0.50 $ 0.39
==================================================================================================
</TABLE>
In the table below, 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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.8% 2.3% 2.6%
Expected volatility 42.1% 32.4% 33.1%
Risk free interest rate 5.0% 5.5% 6.0%
Expected life in years 7 6 6
=================================================================================================
</TABLE>
STOCK OPTION PLAN ("SOP"): In 1988, the stockholders approved the SOP and
reserved 150,000 shares for issuance under the SOP and in 1993, approved an
amendment to the SOP which increased the shares reserved for issuance to
250,000. The amendment also eliminated any future grants of restricted stock as
well as amending certain provisions for the restricted stock already issued. In
1997, the stockholders approved another amendment to the SOP, which provided for
an increase of 200,000 shares reserved for issuance and also extended the future
grant date to February 17, 2007. As of December 31, 1999, there were 1,013,905
shares (adjusted for the stock splits and stock dividends) authorized for
issuance under the SOP and 170,642 shares were available for issuance.
Under the SOP, the Company may grant non-qualified stock options to officers and
employees at an exercise price not less than the fair value of the stock on the
last trading date preceding the date of grant. Prior to the approval of the
Director Option Plan discussed below, the Company also granted non-qualified
options to certain non-employee directors of the Company. Options vest equally
over a period of five years and expire 10 years and one day from the date of
grant. Restricted stock was issued under the SOP prior to 1993 and was held in
escrow until the restrictions lapsed. The Company released 13,291 shares of
restricted stock from escrow in 1999. All restricted stock has been issued.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the assumptions described above.
34
<PAGE>
A summary of the status of the SOP and changes during the years ended as of
December 31, 1999, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
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 524,163 $ 6.32 425,911 $ 5.69 410,036 $ 5.31
Granted 203,850 10.14 134,059 8.42 75,989 6.87
Exercised (65,280) 6.16 (35,807) 6.60 (40,363) 4.80
Forfeited (18,775) 7.38 0 0.00 (19,751) 4.29
-------- -------- --------
Outstanding at end of year 643,958 7.52 524,163 6.32 425,911 5.69
======== ======== ========
Options exercisable at year-end 263,037 $ 5.73 252,090 $ 5.69 231,178 $ 5.95
======== ======== ========
Weighted average fair value $ 4.47 $ 2.64 $ 2.45
======== ======== ========
====================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Life Average Exercisable Average
Exercise Prices at 12/31/99 in Years Exercise Price at 12/31/99 Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3 to $ 6 156,387 5.0 $ 4.23 118,829 $ 4.18
$ 6 to $ 8 171,411 4.1 $ 6.77 121,148 $ 6.71
$ 8 to $12 316,160 8.6 $ 9.56 23,060 $ 8.53
------- -------
$ 3 to $12 643,958 6.3 $ 7.52 263,037 $ 5.73
====================================================================================================================
</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 DOP. As of
December 31, 1999, there were 118,125 shares (adjusted for the stock splits and
stock dividends) authorized for issuance under the DOP and 72,066 shares were
available for issuance. The DOP provides for an automatic grant of options to
purchase 1,000 of the Company's common stock to eligible non-employee directors
of the Company on the date of the Company's Annual Meeting of Stockholders
through 2006. All unexercised awarded options are adjusted for stock splits and
stock dividends. New directors are granted an initial option to purchase 1,000
shares of the Company's common stock upon appointment to the Board of Directors.
The DOP options become exercisable in equal installments over two years and
expire 10 years and one day after the date of grant. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the assumptions described above.
35
<PAGE>
A summary of the status of the DOP and changes during the years ended as of
December 31, 1999,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
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 33,068 $ 7.51 16,534 $ 6.41 0 $ 0
Granted 14,172 10.00 16,534 8.60 16,534 6.41
Exercised (5,043) 7.01 0 0 0 0
Forfeited (1,181) 8.40 0 0 0 0
------- ------- -------
Outstanding at end of year 41,016 8.17 33,068 7.51 16,534 6.41
======= ======= =======
Options exercisable at year-end 19,758 $ 7.17 0 $ 0 0 $ 0
======= ======= =======
Weighted average fair value of
options granted during the year $ 4.25 $ 2.64 $ 2.41
======= ======= =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP"): The Company has a stockholder-approved
ESPP that allows eligible employees to purchase common stock through payroll
deductions up to 10 percent of their salary (not to exceed $25,000 per year).
The purchase price of the stock is 90 percent of the lower of the share price as
calculated at the beginning and end of each three-month offering period. Under
the ESPP, the Company issued 9,005 shares, 9,714 shares and 9,867 shares to
employees in 1999, 1998 and 1997, respectively. At December 31, 1999, 620,155
shares (after adjustment for stock splits and stock dividends) were reserved for
issuance under the ESPP and 522,002 shares were available for issuance. 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 option-pricing model with the assumptions
shown in the table on page 34. The weighted average value of those purchase
rights granted in 1999, 1998 and 1997 was $1.569, $0.979, and $0.773,
respectively, which resulted in compensation expense of $13,905, $9,637 and
$9,096, and is included in the pro forma net income available for common share
amounts shown in the table on page 34.
NOTE 11. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLAN: The Company has a non-contributory defined benefit 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. Each year, the Company funds the minimum
required statutory amount and in 1999 and 1998, no contributions were required.
In 1997, the Company contributed $560,000 to the Pension Plan. Benefits to
employees are based upon their years of service and their average compensation
for the five highest consecutive years of the last ten years before retirement.
Benefits are reduced if a participant retires before a certain age.
Approximately 82 percent of Pension Plan assets are invested in retirement money
market funds, in addition to a group retirement policy consisting of a
guaranteed insurance contract. The remaining 18 percent of Pension Plan assets
are invested primarily in the Company's common stock. The Pension Plan owns
158,917 shares of the Company's common stock, which had a market value of
approximately $2,384,000 and $1,642,000 at December 31, 1999 and 1998,
respectively. The Pension Plan received dividends on these shares of
approximately $35,000 and $32,000 in 1999 and 1998, respectively. The Company
adopted SFAS No. 132, "Employer's Disclosures about Pension and Other Post-
retirement Benefits", which was effective for financial statements issued after
December 15, 1997.
On August 5, 1999, the Company's Board of Directors adopted a resolution to
terminate the Pension Plan, freeze the assets of the Pension Plan and cease all
benefit accruals as of December 30, 1999. In connection with the termination of
the Pension Plan, the Company enhanced its current defined
36
<PAGE>
contribution plan covering employees of the parent company, Suburban and NMUI.
Upon plan termination and favorable determination from the Internal Revenue
Service, the net assets of the Pension Plan will be distributed as permitted by
ERISA and its related regulations. In accordance with generally accepted
accounting principles, the Company will recognize any termination gain or loss
when final settlement of the Pension Plan has taken place, all assets have been
distributed and the Company no longer has primary responsibility for the pension
benefit obligation. The Company does not expect the termination to adversely
affect its financial position or results of operations. The Company may be
required to pay certain excise taxes on any amounts currently held by the
Pension Plan and not ultimately distributed to the vested participants; however,
the Company does not expect this amount to be material.
The following tables provide the actuarial assumptions used in determining the
Pension Plan Valuation, the reconciliation of the Projected Benefit Obligation
and the reconciliation of Pension Plan assets:
<TABLE>
<CAPTION>
Weighted-Average Assumptions 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.5% 6.5%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 3.0% 3.0%
==============================================================================
Pension Benefits
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 10,265 $ 8,422
Amendments 1,898
Service cost 536 440
Interest cost 667 632
Actuarial gain (loss) 0 1,058
Plan curtailment (1,586) 0
Benefits paid (285) (287)
------------------------------
Benefit obligation at end of year $ 11,496 $ 10,265
------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 13,032 $ 11,414
Actual return on plan assets 1,405 1,905
Employer contribution 0 0
Benefits paid (285) (287)
------------------------------
Fair value of plan assets at end of year $ 14,152 $ 13,032
------------------------------
Funded status 2,656 2,766
Unrecognized net actuarial gain (2,082) (1,747)
Unrecognized prior service cost 0 (143)
Unrecognized net asset (372) (496)
------------------------------
Prepaid benefit cost $ 202 $ 380
==============================
Components of net periodic benefits
Service cost $ 536 $ 440
Interest cost 667 632
Expected return on plan assets (1,043) (915)
Amortization of prior service costs (10) (10)
Recognized actuarial gain (27) (39)
Recognized net initial asset (125) (124)
------------------------------
Net periodic benefit cost $ (2) $ (16)
------------------------------
</TABLE>
37
<PAGE>
DEFINED CONTRIBUTION PLANS: The Company has established a 401(k) profit sharing
plan (the "ECO Plan") covering employees of its contract operations business.
The ECO Plan provides for monthly enrollment by employees after completion of
three months of service. Participants may elect to contribute up to 15 percent
of their salary to the ECO Plan. The Company matches a participant's
contribution for an amount up to 50 percent of the first four percent of the
participant's salary. Company contributions vest immediately. Company
contributions to the ECO Plan were $181,000, $152,000 and $133,000 in 1999, 1998
and 1997, respectively. The assets of the ECO Plan are invested at the
discretion of the individual employees in mutual funds consisting of stocks,
bonds, and money market investments.
The Company also established a 401(k) plan ("Utility Plan") covering employees
of the parent company, Suburban and NMUI. Prior to December 30, 1999, the
Utility Plan provided for monthly enrollment by employees after completion of
three months of service. Participants may elect to contribute up to 15 percent
of their salary to the Utility Plan. Prior to December 30, 1999 the Utility Plan
did not provide for Company contributions. The assets of the Utility Plan are
invested at the discretion of the individual employees in mutual funds
consisting of stocks, bonds, and money market investments. Subsequent to
December 30, 1999, the Company amended the plan because the Company's defined
benefit plan was terminated. Under the amendment, the Company matches 100
percent of the first two percent and 50 percent of the next four percent of the
employees' contributions up to a maximum Company match of four percent. In
addition, the Company contributes $250 semi-annually to each eligible employee.
Employees become eligible for participation on the first of the month following
their date of hire. The Company contributions vest depending upon an employee's
length of service.
NOTE 12. SEGMENT INFORMATION
Under FASB No. 131, Southwest Water Company has two reportable segments: non-
regulated and regulated operations. The non-regulated contract operations
segment operates and manages water and wastewater treatment facilities owned by
cities, municipalities and private entities. Revenue is derived through
municipal utility district contracts and operations and maintenance contracts.
The regulated utility segment provides water and wastewater services through
regulated utility operations, and derives revenue from the sales of water and
wastewater services to the consumer.
Southwest Water Company's reportable segments are strategic business units that
offer different services. They are managed separately since each business
requires different operating and marketing strategies. The contract operations
segment, while subject to certain environmental standards, is not regulated in
its pricing, marketing or rates of return. The utility operations are governed
by the regulatory bodies of the respective states and by the federal government.
The service areas in which the utilities operate constitute monopolies with
allowable rates of return determined by state regulatory agencies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1.
38
<PAGE>
The following table presents information about each reported segment profit or
loss and segment assets. These items are the measures reported to the chief
operating decision-maker for purposes of making decisions about allocating
resources to the segment and assessing its performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Non- Total
Regulated Regulated Total Segment Consolidated
Segment Segment Information Other Information
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
As of December 31, 1999
- -----------------------
Revenues from external customers $ 42,649 $ 38,200 $ 80,849 $ 0 $ 80,849
Interest income 46 8 54 12 66
Interest expense 30 2,756 2,786 139 2,925
Depreciation and amortization 717 3,674 4,391 57 4,448
Segment operating profit 1,528 11,648 13,176 (3,862) 9,314
Income tax provision (benefit) 370 3,776 4,146 (268) 3,878
Gain on sales of land 0 2,855 2,855 0 2,855
All other 28 96 124 263 387
Other significant non-cash items:
Non-cash contributions in aid of construction 0 2,618 2,618 0 2,618
Segment assets 12,450 123,310 135,760 7,190 142,950
Expenditures for segment assets 925 8,434 9,359 150 9,509
As of December 31, 1998
- -----------------------
Revenues from external customers $ 36,844 $ 35,302 $ 72,146 $ 0 $ 72,146
Interest income 66 8 74 17 91
Interest expense 14 2,742 2,756 228 2,984
Depreciation and amortization 736 3,477 4,213 52 4,265
Segment operating profit 848 10,493 11,341 (3,286) 8,055
Income tax provision (benefit) 192 2,588 2,780 (589) 2,191
Gain on sales of land 0 110 110 0 110
All other 15 (11) 4 264 268
Other significant non-cash items:
Non-cash contributions in aid of construction 0 1,775 1,775 0 1,775
Segment assets 10,157 115,515 125,672 4,255 129,927
Expenditures for segment assets 430 11,363 11,793 128 11,921
As of December 31, 1997
- -----------------------
Revenues from external customers $ 34,985 $ 36,020 $ 71,005 $ 0 $ 71,005
Interest income 67 2 69 25 94
Interest expense 7 2,833 2,840 327 3,167
Depreciation and amortization 808 3,311 4,119 43 4,162
Segment operating profit (loss) 147 10,407 10,554 (3,339) 7,215
Income tax provision (benefit) (39) 2,344 2,305 (455) 1,850
All other 0 19 19 290 309
Other significant non-cash items:
Non-cash contributions in aid of construction 0 5,818 5,818 0 5,818
Segment assets 9,765 109,167 118,932 4,168 123,100
Expenditures for segment assets 404 14,365 14,769 433 15,202
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office facilities under operating
leases that expire through 2004. Aggregate rental expense under all operating
leases approximated $2,240,000 in 1999, $2,384,000 in 1998 and $2,225,000 in
1997. At December 31, 1999, the future minimum rental commitments under existing
non-cancelable operating leases are as follows: 2000-$2,264,000, 2001-
$1,905,000, 2002-$1,207,000, 2003-$663,000, 2004-$437,000 and $91,000
thereafter.
39
<PAGE>
NOTE 14. SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION
The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of contract and utility operations. Earnings per
basic and diluted common share reflect a 3-for 2 stock split in the form of a
stock dividend on October 1, 1999 and a 5-for-4 stock split in the form of a
stock dividend on October 1, 1998, as well as a stock dividend of five percent
on January 2, 1998. Selected unaudited quarterly financial information of the
Company is presented in the table below.
<TABLE>
<CAPTION>
1999 Quarters Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 16,649 $ 19,454 $ 22,911 $ 21,835
Operating income 1,179 3,750 3,239 1,146
Net income before land sale 354 1,165 1,659 993
Land sale, net of taxes - - 1,648 -
Net income 354 1,165 3,307 993
Net income available for common shares 347 1,158 3,300 987
Basic earnings before land sale 0.05 0.18 0.26 0.15
Land sale, net of taxes - - 0.25 -
Basic earnings per common share 0.05 0.18 0.51 0.15
Diluted before land sale 0.05 0.18 0.24 0.00
Land sale, net of taxes - - 0.25 -
Diluted 0.05 0.18 0.49 0.15
1998 Quarters Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
Operating revenues $ 15,946 $ 18,332 $ 19,960 $ 17,908
Operating income 1,022 2,184 3,088 1,761
Net income 182 926 1,448 793
Net income available for common shares 175 919 1,441 787
Basic earnings per common share 0.03 0.15 0.23 0.12
Diluted earnings per common share 0.03 0.14 0.22 0.12
</TABLE>
NOTE 15. NEW BUSINESS
In January 2000, the Company announced the formation of IPWC and IPDC, two
joint ventures designed to develop water and wastewater-related opportunities in
Southern California's San Bernardino and Riverside counties. IPWC will market
and sell a wide range of services that include financing, design and
construction of water and wastewater facilities, water rights development and
full contract operation, maintenance and management of water and wastewater
systems.
On February 25, 2000, Suburban purchased the City of West Covina's water
distribution system and facilities with Suburban assuming ownership and
operation of the water system on that date. The transaction added approximately
7,000 connections to Suburban's customer base, an increase of approximately 11
percent.
40
<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, to be filed with the Securities and
Exchange Commission ("Commission") dated on or about April 7, 2000, under the
caption "Governance of the Company," and is hereby incorporated by reference.
In addition, information appearing under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Securities Exchange Act of 1934, as
Amended" is in the Company's definitive Proxy Statement, dated on or about April
7, 2000, and is also hereby incorporated by reference.
Item 11. EXECUTIVE COMPENSATION
Information related to executive compensation is contained in the Company's
definitive Proxy Statement, to be filed with the Commission dated on or about
April 7, 2000, under the captions "Executive Compensation," and "Compensation of
Directors Fees and Benefit Plans," 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, to be filed with the Commission dated on or about
April 7, 2000, 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 "Item I - Election of Directors," "Executive
Severance Compensation Agreements," and "Certain Transactions" in the Company's
definitive Proxy Statement, to be filed with the Commission dated on or about
April 7, 2000, and is hereby incorporated by reference.
41
<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, 1999, 1998
and 1997
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Changes in Common Stockholders' Equity -
Three Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -
Three Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) The supplementary financial statement schedule required to be filed with
this report is as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts ....................................... 43
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.......................................................................... 44
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
December 31, 1999.
42
<PAGE>
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Provision
Beginning Charged to Recoveries / Accounts Balance at
of Year Income Other Written Off End of Year
----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
Allowance for Doubtful Accounts $ 895 $ 367 $ 0 $ (60) $ 1,202
----------------------------------------------------------------
1998
Allowance for Doubtful Accounts $ 711 $ 319 $ 0 $ (135) $ 895
----------------------------------------------------------------
1997
Allowance for Doubtful Accounts $ 512 $ 247 $ 0 $ (48) $ 711
</TABLE>
43
<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 Four 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).
3.1C Certificate of Amendment of Restated Certificate of Incorporation dated
June 4, 1998 (incorporated by reference to Appendix A of Registrant's 1998
Proxy Statement filed with the Commission on April 20, 1998).
3.1D Certificate of Correction of Amendment of Restated Certificate of
Incorporation dated September 14, 1998, filed herewith.
3.1E Certificate of Designation of Series E Convertible Preferred Stock Of
Southwest Water Company dated January 12, 2000, filed herewith.
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 3.2B to Registrant's Form 10-K Report for the year
ended December 31, 1995).
3.2C Amendment to Registrant's Bylaws dated December 12, 1996 (incorporated by
reference to Exhibit 3.2C to Registrant's Form 10-K Report for the year
ended December 31, 1996).
4.1 Indenture of Mortgage and Deed of Trust between Suburban Water Systems and
U.S. Bank Trust National Association, formerly First Trust of California,
N.A. dated October 1, 1986 (incorporated by reference to Exhibit 4.3 to
Registrant's Form 10-K Report for the year ended December 31, 1986).
4.1A First Amendment and Supplement to Indenture of Mortgage and Deed of Trust
between Suburban Water Systems and U.S. Bank Trust National Association,
formerly First Trust of California, N.A. 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).
4.1B Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust
between Suburban Water Systems and U.S. Bank Trust National Association,
formerly First Trust of California, N.A. 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).
4.1C Third Amendment and Supplement to Indenture of Mortgage dated October 9,
1996, between Suburban Water Systems and U.S. Bank Trust National
Association, formerly First Trust of California, N.A. (incorporated by
reference to Exhibit 4.2C to Registrant's Form 10-K Report for the year
ended December 31, 1996).
44
<PAGE>
4.2 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).
4.2A 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).
4.2B Bond Purchase Agreement dated October 21, 1996, for Suburban Water Systems
(incorporated by reference to Exhibit 4.3B to Registrant's Form 10-K
Report for the year ended December 31, 1996).
4.3 Indenture of Mortgage dated February 14, 1992, between New Mexico
Utilities, Inc., and Wells Fargo Bank, formerly Sunwest Bank of
Albuquerque, N.A. (incorporated by reference to Exhibit 4.4 to
Registrant's Form 10-K Report for the year ended December 31, 1991).
4.3A First Supplement to Indenture of Mortgage dated May 15, 1992, between New
Mexico Utilities, Inc. and Wells Fargo Bank, formerly Sunwest Bank of
Albuquerque, N.A. (incorporated by reference to Exhibit 4.4A to
Registrant's Form 10-K Report for the year ended December 31, 1996).
4.3B Second Amendment and Supplement to Indenture of Mortgage dated October 21,
1996, between New Mexico Utilities, Inc. and Wells Fargo Bank, formerly
Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit
4.4B to Registrant's Form 10-K Report for the year ended December 31,
1996).
4.4 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).
4.4A Bond Purchase Agreement dated November 8, 1996, for New Mexico Utilities,
Inc. (incorporated by reference to Exhibit 4.5A to Registrant's Form 10-K
Report for the year ended December 31, 1996).
4.5 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).
4.5A Registration Statement for the Second Amendment to the Amended and
Restated Southwest Water Company Stock Option and Restricted Stock Plan
(incorporated by reference to Registrant's Form S-8 Registration Statement
filed with the Commission October 29, 1997).
4.7 Stockholder's Rights Plan dated April 6, 1998 (incorporated by reference
to the Registrant's Form 8-K Report filed with the Commission April 23,
1998).
10.1 Fourteenth Amendment to the Utility Employees' Retirement Plan dated
December 12, 1996 (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-K Report for the year ended December 31, 1996).
10.1A Fifteenth Amendment to the Utility Employees' Retirement Plan dated
December 31, 1997 (incorporated by reference to Exhibit 10.1A to the
Registrant's Form 10-K Report for the year ended December 31, 1998).
10.1B Resolution adopted August 5, 1999 by the Board of Directors regarding
Cessation of Benefit Accruals and Termination of the Retirement Plan,
Effective December 30, 1999, filed herewith.
10.1C Sixteenth Amendment to the Utility Employees' Retirement Plan dated
December 30, 1999, filed herewith.
45
<PAGE>
10.2 Amended and Restated Employee Stock Purchase Plan dated May 28, 1998
(incorporated by reference to Appendix B to Registrant's 1998 Proxy
Statement filed with the Commission on April 20, 1998).
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 Amended and Restated Stock Option and Restricted 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).
10.5 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).
10.6 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).
10.6A First Amendment 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).
10.8 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).
10.8A First Amendment 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).
10.9 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-K Report for the year ended December 31,
1995).
10.9A Form of Severance Compensation Agreement between Registrant and certain
executive officers approved by the Compensation Committee of the Board
of Directors on August 5, 1998, (incorporated by reference to Exhibit
10.9A to Registrant's Form 10-K Report for the year ended December 31,
1998).
10.10 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-K Report for the year ended December 31, 1996).
10.10A First Amendment of RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 22,
1998 (incorporated by reference to Exhibit 10.10A to Registrant's Form
10-K Report for the year ended December 31, 1998).
10.10B Second Amendment of RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement between the Registrant and RTNT, Inc. dated January
15, 1999, (incorporated by reference to Exhibit 10.10B to Registrant's
Form 10-K Report for the year ended December 31, 1998).
10.10C First Amendment of SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 22,
1998 (incorporated by
46
<PAGE>
reference to Exhibit 10.10C to Registrant's Form 10-K Report for the
year ended December 31, 1998).
10.10D Second Amendment of SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement between the Registrant and RTNT, Inc. dated January
15, 1999 (incorporated by reference to Exhibit 10.10D to Registrant's
Form 10-Q Report for the year ended December 31, 1998).
10.10E Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 27,
1999 (incorporated by reference to Exhibit 10.10E to Registrant's Form
10-Q Report for the quarter ended June 30, 1999).
10.10F Third Amendment of RTNT Right of First Refusal Agreement and RTNT Call
Purchase Agreement between the Registrant and RTNT, Inc. dated May 27,
1999 (incorporated by reference to Exhibit 10.10F to Registrant's Form
10-Q Report for the quarter ended June 30, 1999).
10.11 Credit Agreement between Registrant and Bank of America, N.A. dated July
30, 1999, filed herewith.
10.12 Credit Agreement between Suburban Water Systems, Inc. and Bank of
America N.A., dated July 30, 1999, filed herewith.
10.13 Amended and Restated Credit Agreement between Registrant and Mellon
Bank, N.A. dated December 23, 1997 (incorporated by reference to Exhibit
10.13 to Registrant's Form 10-K Report for the year ended December 31,
1997).
10.13A First Amendment to the Amended and Restated Credit Agreement between
Registrant and Mellon Bank, N.A. dated September 1, 1998 (incorporated
by reference to Exhibit 10.13A to Registrant's Form 10-K for the year
ended December 31, 1998).
10.13B Second Amendment to the Amended and Restated Credit Agreement between
Registrant and Mellon Bank, N.A. dated September 29, 1999, filed
herewith.
10.14 Credit Agreement between Suburban Water Systems and Mellon Bank, N.A.
dated December 23, 1997 (incorporated by reference to Exhibit 10.14 to
Registrant's Form 10-K Report for the year ended December 31, 1997).
10.14A First Amendment to the Credit Agreement between Suburban Water Systems
and Mellon Bank, N.A. dated September 1, 1998 (incorporated by reference
to Exhibit 10.14A to Registrant's Form 10-K for the year ended December
31, 1998).
10.14B Second Amendment to Credit Agreement between Suburban Water Systems and
Mellon Bank, N.A. dated September 29, 1999, filed herewith.
10.15 Business Loan Agreement dated December 10, 1997 between New Mexico
Utilities, Inc. and First Security Bank of New Mexico, N.A.
(incorporated by reference to Exhibit 10.15 to Registrant's Form 10-K
Report for the year ended December 31, 1998).
10.15A Modification Agreement between New Mexico Utilities, Inc. and First
Security Bank of New Mexico, N. A, dated April 10, 1999 (incorporated by
reference to Exhibit 10.15A to Registrant's Form 10-Q Report for the
quarter ended September 30, 1999).
10.16 Agreement Between Suburban Water Systems and The City of West Covina,
California for the Acquisition of the City's Water Utility System dated
February 1, 2000, filed herewith.
47
<PAGE>
10.17 IPWC Stockholders Agreement Between Southwest Water Company, Inland
Pacific Partners and Inland Pacific Water Company effective January 1,
2000, filed herewith.
10.18 Limited Liability Company Agreement of Inland Pacific Development
Company, LLC effective January 1, 2000, filed herewith.
21.1 Listing of Registrant's subsidiaries.
23.1 Consent of KPMG LLP.
27 Financial Data Schedule.
48
<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 14, 2000
By: /s/ Peter J. Moerbeek
---------------------
PETER J. MOERBEEK
Chief Financial Officer
(Principal Financial Officer)
March 14, 2000
By: /s/ Thomas C. Tekulve
---------------------
THOMAS C. TEKULVE
Vice President Finance
(Principal Accounting Officer)
March 14, 2000
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/ Richard Kelton
- ------------------------- ------------------
H. FREDERICK CHRISTIE RICHARD KELTON
Director Director
March 14, 2000 March 14, 2000
/s/ Anton C. Garnier /s/ Maureen A. Kindel
- ---------------------- ---------------------
ANTON C. GARNIER MAUREEN A. KINDEL
Director Director
March 14, 2000 March 14, 2000
/s/ Monroe Harris /s/ Richard G. Newman
- ---------------------- ---------------------
MONROE HARRIS RICHARD G. NEWMAN
Director Director
March 14, 2000 March 14, 2000
/s/Donovan D. Huennekens
- ------------------------
DONOVAN D. HUENNEKENS
Director
March 14, 2000
49
<PAGE>
EXHIBIT 3.1D
CERTIFICATE OF CORRECTION
OF
SOUTHWEST WATER COMPANY
It is hereby certified that:
FIRST: On February 2, 1988, Southwest Water Company, a Delaware corporation
(the "Corporation"), filed a Certificate of Incorporation with the Delaware
Secretary of State (the "Certificate of Incorporation"). On April 6, 1988, the
Corporation filed a Restated Certificate of Incorporation and a Certificate of
Amendment of Articles of Incorporation was filed on May 1, 1995. On June 10,
1998, the Corporation filed a Certificate of Amendment of Restated Certificate
of Incorporation (the "Certificate of Amendment")
SECOND: Article FOURTH and Article SIXTH, Paragraph B of the Certificate of
Amendment included typographical errors. Article FOURTH of the Certificate of
Amendment erroneously restated Article FOURTH in its entirety and should have
only restated Article FOURTH, Paragraph A in its entirety.
THIRD: The undersigned executes, acknowledges and presents for filing this
Certificate of Correction in accordance with Section 103(f) of the General
Corporation Law of the State of Delaware for the purpose of correctly providing
that only Article FOURTH, Paragraph A is restated and for the purpose of
restating Article FOURTH, Paragraph A of the Certificate of Amendment as
follows:
"FOURTH: A. The total number of shares of all classes of stock which
the Corporation shall have authority to issue is twenty-five million
two hundred fifty thousand (25,250,000), consisting of the following:
(1) two hundred fifty thousand (250,000) shares of Preferred
stock, with a par value of $.01 per share (the "Preferred Stock"); and
(2) twenty-five million (25,000,000) shares of Common stock,
with a par value of $.01 per share (the "Common Stock")."
FOURTH: The undersigned further executes, acknowledges and presents for
filing this Certificate of Correction in accordance with Section 103(f) of the
General Corporation Law of the State of Delaware for the purpose of correctly
restating Article SIXTH, Paragraph B of the Certificate of Amendment as follows:
"SIXTH: B. The number of Directors shall be not less than seven nor
more than nine, and the exact number of Directors shall be fixed from
time
<PAGE>
to time exclusively by the Board of Directors acting pursuant to a
resolution adopted by affirmative vote of a majority of the total
number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time of any
such resolution).
The Board of Directors shall be divided into three classes, designated
as Class I, Class II and Class III. The number of directors in each
class shall be determined by the Board of Directors and shall consist
of as nearly equal a number of directors as practicable. The term of
the Class I directors initially shall expire at the first annual
meeting of stockholders ensuing after the 1998 Annual Meeting of
Stockholders; the term of Class II directors initially shall expire at
the second Annual Meeting of Stockholders ensuing after the 1998 Annual
Meeting of Stockholders; and the term of Class III directors initially
shall expire at the third Annual Meeting of Stockholders ensuing after
the 1998 Annual Meeting of Stockholders. In the case of each class, the
directors shall serve until their respective successors are duly
elected and qualified. At each Annual Meeting of Stockholders,
directors of the respective class whose term expires shall be elected,
and the directors chosen to succeed those whose terms shall have
expired shall be elected to hold office for a term to expire at the
third ensuing Annual Meeting of Stockholders after their election, and
until their respective successors are elected and qualified.
Any vacancy in the office of a director shall be filled by the vote of
the majority of the remaining directors, regardless of any quorum
requirements set forth in the Bylaws of the corporation. Any director
appointed to fill a vacancy in the office of director shall serve until
the next Annual Meeting of Stockholders at which directors of the class
for which such director shall have been chosen are to be elected, and
until his or her successor is elected and qualified. Newly created
directorships shall be filled by the Board of Directors."
2
<PAGE>
IN WITNESS WHEREOF, this Corporation has caused this Certificate of
Correction to be signed by Anton C. Garnier, its President, and Peter J.
Moerbeek, its Secretary, this 14th day of September, 1998.
SOUTHWEST WATER COMPANY,
a Delaware corporation
By: /s/ANTON C. GARNIER
----------------------------------------
Anton C. Garnier, President
By: /s/PETER J. MOERBEEK
-----------------------------------------
Peter J. Moerbeek, Secretary
3
<PAGE>
EXHIBIT 3.1E
CERTIFICATE OF DESIGNATION
OF
SERIES E CONVERTIBLE
PREFERRED STOCK
OF
SOUTHWEST WATER COMPANY
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Southwest Water Company, a Delaware corporation (the "Corporation"), certifies
that pursuant to the authority contained in Article Fourth of its Restated
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation at a telephonic
meeting called and held on January 12, 2000 adopted the following resolution,
which resolution remains in full force and effect on the date hereof;
RESOLVED, that there is hereby established a series of authorized
preferred stock having a par value of $.01 per share, which series shall be
designated as "Series E Convertible Preferred Stock" (the "Series E
Preferred Stock"), shall consist of Three Thousand (3,000) shares and shall
have voting rights, preferences, privileges and restrictions thereof as
follows:
(1) Designation and Number of Shares. Three Thousand (3,000) shares
--------------------------------
of Preferred Stock shall be designated and known as the "Series E
Convertible Preferred Stock," par value $.01 per share (the "Series E
Preferred Stock").
(2) Issue Value. Each share of Series E Preferred Stock shall be
-----------
issued at a price (the "Issue Value") established from time to time by the
Board of Directors.
(3) Dividends.
---------
(a) Right to Dividends. The holders of the then outstanding
------------------
Series E Preferred Stock shall be entitled to receive dividends, when, as
and if declared by the Board. Dividends on the Series E shall not be
cumulative and shall not accrue and the Corporation shall not be obligated
to pay dividends unless and until declared by the Board, whether or not the
earnings of the Corporation in that or any previous fiscal year are
sufficient to pay dividends in whole or in part.
<PAGE>
(b) Rank. Each share of the Series E Preferred Stock shall rank
----
on a parity with each other share of the Series E Preferred Stock but shall
be subordinate with respect to dividends to the rank of (i) the Series A
Preferred Stock, (ii) the Series D Preferred Stock and (iii) any other
class or series of stock ranking senior to the Series E Preferred Stock as
to dividends. Unless full dividends on all outstanding shares of Series A
Preferred Stock, Series D Preferred Stock and any other class or series of
stock ranking senior to the Series E Preferred Stock as to dividends which
have previously become due and payable, have been paid or are
contemporaneously declared and paid (or declared and a sum sufficient for
the payment thereof is set apart for such payment), the Corporation shall
not declare or pay any dividend on the Series E Preferred Stock. Unless
full dividends on all outstanding shares of Series E Preferred Stock which
have previously become due and payable, have been paid or are
contemporaneously declared and paid (or declared and a sum sufficient for
the payment thereof is set apart for such payment), the Corporation shall
not declare or pay any dividend on (A) the Common Stock or (B) on any other
class or series of stock ranking junior to the Series E Preferred Stock as
to dividends.
(c) Upon Conversion. Upon conversion of any shares of Series E
---------------
Preferred Stock, dividends declared by the Board but not paid shall be paid
to the holders of record of such shares.
(4) Voting Rights. The holders of the Series E Preferred Stock shall
-------------
not be entitled to vote on any matter.
(5) Conversion Rights.
-----------------
(a) Optional Conversion. The holder of any shares of Series E
-------------------
Preferred Stock (on which any vesting or other restrictions imposed by the
Board have lapsed) shall have the right, at such holder's option, at any
time or from time to time, to convert any or all of such holder's shares of
Series E Preferred Stock into such number of fully paid and nonassessable
shares of Common Stock (the "Conversion Shares") at a conversion rate of
one thousand (1,000) shares of Common Stock for each one (1) share of
Series E Preferred Stock converted (the "Conversion Rate"). Should the
Corporation at any time subdivide ("Split") or combine ("Reverse Split")
its outstanding shares of Common Stock into a greater or smaller number of
shares, respectively, the Conversion Rate in effect immediately prior to
such Split or Reverse Split shall be proportionately adjusted.
(b) Mandatory Conversion. Each and every share of Series E
--------------------
Preferred Stock shall automatically be converted into shares of Common
Stock at the then applicable Conversion Rate if (i) the Board of Directors
of the Corporation directs that the shares be converted or (ii) the
Corporation completes a Change of Control Event.
(c) Delivery of Stock Certificates; Conversion Date. The holder
-----------------------------------------------
of any shares of Series E Preferred Stock may exercise the optional
conversion right pursuant to Section 5(a) above by delivering to the
Corporation or its duly authorized transfer agent during regular business
hours at the office of the Corporation the certificate or certificates for
the shares to be converted, duly endorsed or assigned either in blank or to
the
2
<PAGE>
Corporation (if required by it), accompanied by written notice stating
that such holder elects to convert such shares and shall provide a
certificate to the Corporation or its duly authorized transfer agent as to
the date of such conversion. Upon the occurrence of a mandatory conversion
pursuant to Section 5(b) above, the Corporation shall deliver notice to
each holder of Series E Preferred Stock and each holder of shares of Series
E Preferred Stock shall deliver to the Corporation at the office of the
Corporation the certificate or certificates for all shares of Series E
Preferred Stock then held by such holder, duly endorsed or assigned either
in blank or to the Corporation (if requested by it). Conversion shall be
deemed to have been effected (1) in the case of an optional conversion, on
the date when the aforesaid delivery of stock certificates is made if such
day is a Business Day and otherwise on the Business Day following the date
of the aforesaid delivery, or (2) in the case of an automatic conversion
pursuant to Section 5(b)(i), upon the effective date established by the
Board of Directors, or (3) in the case of an automatic conversion pursuant
to Section 5(b)(ii), upon the effective date of the Change of Control
Event; and in each case such date is referred to herein as the "Conversion
Date." As promptly as practicable thereafter, the Corporation, through its
transfer agent, shall issue and deliver to or upon the written order of
such holder, to the place designated by such holder, a certificate or
certificates for the number of full shares of Common Stock to which such
holder is entitled and a check or cash in respect of any fractional
interest in a share of Common Stock, as provided in Section 5(e) below.
The person in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become the stockholder of record
in respect of such Common Stock on the applicable Conversion Date unless
the transfer books of the Corporation are closed on that date, in which
event such holder shall be deemed to have become the stockholder of record
in respect of such Common Stock on the next succeeding date on which the
transfer books are open; provided that notwithstanding the date the
stockholder is deemed to become a stockholder of record, the Conversion
Rate shall be that in effect on the Conversion Date. Upon conversion of
only a portion of the number of shares covered by a stock certificate
representing shares of Series E Preferred Stock surrendered for conversion,
the Corporation shall issue and deliver to or upon the written order of the
holder of the stock certificate so surrendered for conversion, at the
expense of the Corporation, a new stock certificate covering the number of
shares of Series E Preferred Stock representing the unconverted portion of
the certificate so surrendered. Immediately following such conversion, the
rights of the holders of converted Series E Preferred Stock (other than the
right to receive dividends declared by the Board but not paid to the date
of such conversion) shall cease and the persons entitled to receive the
Common Stock upon the conversion of Series E Preferred Stock shall be
treated for all purposes (other than the right to receive dividends
declared by the Board but not paid on the Common Stock to the date of such
conversion) as having become the owners of such Common Stock.
(d) Taxes. Any transfer taxes applicable to the above described
-----
transactions shall be paid by such transferee. The Corporation shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of Common Stock or the reissuance of
the Preferred Stock in a name other than that in which the shares of Series
E Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person requesting such
3
<PAGE>
issuance has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has been
paid.
(e) No Fractional Shares of Common Stock. No fractional shares
------------------------------------
of Common Stock shall be issued upon conversion of shares of Series E
Preferred Stock and, in lieu thereof, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the
then current Market Price (as defined in Section 5(f) below) of a share of
Common Stock multiplied by such fractional interest. The holders of
fractional interests shall not be entitled to any rights as stockholders of
the Corporation in respect of such fractional interests. In determining
the number of shares of Common Stock and the payment, if any, in lieu of
fractional shares that a holder of Series E Preferred Stock shall receive,
the total number of shares of Series E Preferred Stock surrendered for
conversion by such holder shall be aggregated.
(f) Market Price. "Market Price" shall mean the last reported
------------
sale price of the applicable security as reported by the National
Association of Securities Dealers, Inc. Automatic Quotations System,
National Market System, or, if the applicable security is listed or
admitted for trading on a securities exchange, the last reported sales
price of the applicable security on the principal exchange on which the
applicable security is listed or admitted for trading (which shall be for
consolidated trading if applicable to such exchange), or if neither so
reported or listed or admitted for trading, the last reported bid price of
the applicable security in the over-the-counter market. In the event that
the Market Price cannot be determined as aforesaid, the Board of Directors
of the Corporation shall determine the Market Price on the basis of such
quotations as it in good faith considers appropriate.
(g) Change of Control Event. A "Change of Control Event" shall
-----------------------
mean (i) the acquisition by any Person or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership, direct or indirect, of securities
of the Corporation representing fifty percent (50%) or more of the combined
voting power of the Corporation's then outstanding equity securities or
(ii) the acquisition of the Corporation, or all or substantially all of its
assets, by, or the combination of the Corporation or all or substantially
all of its assets, with, another Person, unless the acquiring or surviving
Person shall be a corporation, limited liability company, partnership or
other entity more than 50% of the combined voting power of which entity's
then outstanding equity securities, after such acquisition or combination,
are owned, immediately after such acquisition or combination, by the owners
of more than 50% of the voting securities of the Corporation immediately
prior to such acquisition or combination. When used herein the term
"Person" shall mean and include an individual, a corporation, a limited
liability company, an association, a partnership, a trust or estate, a
government or any department or agency thereof.
(h) Changes in Common Stock. If any capital reorganization or
-----------------------
reclassification of the capital stock of the Corporation, or consolidation
or merger of the Corporation with another corporation, or the sale,
transfer or other disposition of all or substantially all of its assets to
another corporation for cash or stock of such other corporation, shall be
effected, then, as a condition of such reorganization, reclassification,
4
<PAGE>
consolidation, merger, sale, transfer or other disposition, lawful and
adequate provision shall be made whereby each holder of Series E Preferred
Stock shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions herein specified and in lieu of the
shares of the Common Stock of the Corporation immediately theretofore
issuable upon conversion of the Series E Preferred Stock, such shares of
stock, securities or properties as may be issuable or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such Common Stock immediately theretofore
issuable upon conversion of the Series E Preferred Stock (on which any
vesting or other restrictions imposed by the Board have lapsed) had such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition not taken place, and in any such case appropriate
provisions shall be made with respect to the shares of stock, securities or
properties deliverable upon such conversion to give each holder of Series E
Preferred Stock rights and interests as nearly equivalent to those granted
herein as may be practicable. The Corporation shall not effect any such
consolidation, merger, sale, transfer or other disposition, unless prior to
or simultaneously with the consummation thereof the successor corporation
(if other than the Corporation) resulting from such consolidation or merger
or the corporation purchasing or otherwise acquiring such properties shall
assume, by written instrument executed and mailed or delivered to the
holders of Series E Preferred Stock at the last addresses of such holders
appearing on the books of the Corporation, the obligation to deliver to
such holders such shares of stock, securities or properties as, in
accordance with the foregoing provisions, such holders may be entitled to
acquire. The above provisions of this subparagraph shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
sales, transfers or other dispositions.
(i) Stock to be Reserved. The Corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon the conversion of Series E Preferred Stock as
herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding Series E Preferred Stock.
The Corporation covenants that all shares of Common Stock which shall be so
issuable shall, upon issuance, be duly authorized, validly issued, fully
paid and nonassessable, free from preemptive or similar rights on the part
of the holders of any shares of capital stock or securities of the
Corporation, and free from all liens and charges with respect to the issue
thereof. The Corporation will take all such action as may be necessary to
assure that such shares of Common Stock may be so issued without violation
by the Corporation of any applicable law or regulation or agreement, or of
any requirements of any domestic securities exchange upon which the Common
Stock may be listed.
(j) Registration and Listing of Common Stock. If any shares of
----------------------------------------
Common Stock required to be reserved for purposes of conversion of Series E
Preferred Stock hereunder require registration with or approval of any
governmental authority under any Federal or state law (other than the
Securities Act of 1933, as amended (the "Securities Act")) before such
shares may be issued upon conversion, the Corporation will, at its expense
and as expeditiously as possible, use its best efforts to cause such shares
to be duly registered or approved, as the case may be. Shares of Common
Stock issuable upon conversion of the Series E Preferred Stock shall be
registered by the
5
<PAGE>
Corporation under the Securities Act or similar statute then in force if
required before such shares may be issued upon conversion. If and so long
as the Common Stock is listed on any national securities exchange, the
Corporation will, at its expense, obtain promptly and maintain the approval
for listing on each such exchange upon official notice of issuance, of
shares of Common Stock issuable upon conversion of the then outstanding
Series E Preferred Stock and maintain the listing of such shares after
their issuance; and the Corporation will also list on such national
securities exchange, will register under the Exchange Act and will maintain
such listing of, any other securities that at any time are issuable upon
conversion of the Series E Preferred Stock, if and at the time that any
securities of the same class shall be listed on such national securities
exchange by the Corporation.
(6) Fractional Shares. Shares of Series E Preferred Stock may be
-----------------
issued in fractions of shares; provided, however, that the fractions of
Series E Preferred Stock must be capable of conversion into a whole number
of shares of Common Stock at the Conversion Rate (e.g. shares of Series E
Preferred Stock may be divided into whole tenths, fifths, quarters or
halves of shares but not thirds of shares).
(7) Vesting and Other Restrictions. The Board of Directors may, at
------------------------------
its discretion, but subject to any contractual rights or limitations
relating to the Series E Preferred Stock, establish vesting criteria,
restrictions on transferability and/or other restrictions (including,
without limitation, conditions which may cause shares of Series E Preferred
Stock, or any right or preference pertaining to such shares, to lapse or be
terminated) on the rights and preferences of the Series E Preferred Stock
and may as a condition to receipt of Series E Preferred Stock require
persons to sign a stockholders or other agreement acknowledging and
agreeing to be bound by such criteria and restrictions.
(8) Exclusion of Other Rights. Except as may otherwise be required by
-------------------------
law, the shares of Series E Preferred Stock shall not have any preferences
or other rights other than those specifically set forth in this resolution
and in the Certificate of Incorporation. The shares of Series E Preferred
Stock shall have no preemptive or subscription rights.
IN WITNESS WHEREOF, Southwest Water Company has caused these presents to be
signed in its name and on its behalf by its President on January 12, 2000.
SOUTHWEST WATER COMPANY
By /s/ ANTON C. GARNIER
-----------------------
Name: Anton C. Garnier
Title: President
6
<PAGE>
EXHIBIT 10.1B
EXHIBIT "C"
RESOLUTIONS
ADOPTED AT A MEETING OF
THE BOARD OF DIRECTORS OF
SOUTHWEST WATER COMPANY
HELD ON AUGUST 5, 1999
Cessation of Benefit Accruals and Termination of the Retirement Plan
- --------------------------------------------------------------------
WHEREAS, The Utility Employees' Retirement Plan (the "Plan") and the
trust agreement pursuant thereto (the "Trust Agreement") were established
effective as of December 31, 1957 for the benefit of the employees of this
corporation and certain affiliated companies;
WHEREAS, the Plan and the trust established pursuant thereto are
intended to constitute a qualified defined benefit pension plan and a tax-exempt
trust under the provisions of Sections 401 and 501 of the Internal Revenue Code
of 1986, as amended (the "Code");
WHEREAS, under the terms of the Plan, this corporation retains the
right to amend or terminate the Plan;
WHEREAS, this corporation now finds it desirable and in the best
interests of Southwest Water Company to cease all benefit accruals under the
Plan and to terminate the Plan, effective as of December 30, 1999;
WHEREAS, pursuant to the requirements of Section 204(h) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), notice of
the cessation of benefit accruals under the Plan must be provided to each Plan
participant, each Plan beneficiary who is an alternate payee under a qualified
domestic relations order and each employee organization representing any Plan
participant, following the adoption of the amendment to the Plan ceasing benefit
accruals and not less than 15 days before the effective date of such amendment
to the Plan; and
WHEREAS, pursuant to the requirement of Section 4041(a)(2) of ERISA,
notice of intent to terminate the Plan must be provided to each Plan
participant, each Plan beneficiary of a deceased Plan participant, each Plan
beneficiary who is an alternate payee under a qualified domestic relations
order, and each employee organization representing any Plan participant, not
less than 60 days before the proposed effective date of the Plan termination.
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended to
cease all future benefit accruals under the Plan, effective as of December 30,
1999, subject to any amendment to the Plan that is adopted and effective on or
prior to December 30, 1999.
RESOLVED FURTHER, that the Plan is hereby terminated effective as of
December 30, 1999.
RESOLVED FURTHER, that the officers of this corporation be, and each
hereby is, authorized and directed to prepare and distribute a notice of the
cessation of benefit accruals, in accordance with the provisions of Section
204(h) of ERISA, to each Plan participant, each Plan beneficiary who is an
alternate payee under a qualified domestic relations order and each employee
organization representing any Plan participant, not less than 15 days before
December 30, 1999.
RESOLVED FURTHER, that the officers of this corporation be, and each
hereby is, authorized and directed to prepare and distribute a notice of intent
to terminate the Plan, in accordance with the provisions of ERISA Section
4041(a)(2), to each Plan participant, each Plan beneficiary of a deceased Plan
participant, each Plan beneficiary who is an alternate payee under a qualified
domestic relations order, and each employee organization representing any Plan
participant, not less than 60 days before December 30, 1999.
RESOLVED FURTHER, that said officers be, and each hereby is,
authorized and directed to provide the trustees of the trust established
pursuant to the Plan with a certified copy of these resolutions.
Further Actions
- ---------------
RESOLVED FURTHER, that said officers be, and each hereby is,
authorized and directed to prepare and execute any further documents and to take
any further actions as may be necessary to accomplish the purposes of the
foregoing resolutions.
<PAGE>
EXHIBIT 10.1C
SIXTEENTH 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,
December 12, 1996, October 30, 1997 and August 5, 1999.
The Plan is maintained by Southwest Water Company, Suburban Water
Systems, New Mexico Utilities, Inc. and East Pasadena Water Company for the
benefit of their eligible employees.
The Plan will be terminated effective as of December 30, 1999, and
benefit accruals under the Plan will cease as of December 30, 1999. In order to
amend the Plan to comply with changes to the Internal Revenue Code made by the
Uniformed Services Employment and Reemployment Rights Act of 1992, the Small
Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the
Internal Revenue Service Restructuring and Reform Act of 1998, and make certain
other changes to the Plan, prior to the termination of the Plan, this Sixteenth
Amendment to the Plan has been adopted by the Board of Directors of Southwest
Water Company, effective as of December 30, 1999, except as otherwise provided
herein.
1. Section 1.3 of the Plan is hereby amended to read in its entirety
as follows:
Section 1.3 - Actuarial Equivalent
----------- --------------------
(a) "Actuarial Equivalent" shall mean the equivalent of a given
Benefit or a given amount payable in another manner or by other means,
determined by or under the direction of the Administrator in accordance
with the actuarial assumptions prescribed in this Section and actuarial
principles and methods which are found to be appropriate by the Enrolled
Actuary, acting independently of the Administrator or the Companies and in
the exercise of his sole professional judgment (and which principles,
methods and assumptions may differ from those used for the purposes of
Section 3.1). Such principles, methods and assumptions, however, shall be
reasonable in the aggregate and shall constitute the Enrolled Actuary's
best estimate of anticipated experience under the Plan. On such basis,
the "Actuarial Equivalent" of a Benefit payable as a monthly payment to an
annuitant on the first day of each calendar
<PAGE>
month and ending on the calendar month in which the death of such
annuitant occurs, shall mean such Benefit, multiplied by the actuarial
equivalency factor determined as follows:
(i) in the case of a distribution, other than a lump
sum distribution under Section 4.7, 4.8, 4.9 or 4.13, the
actuarial equivalency factor determined by
a an interest assumption of 7 1/2%, and
-
b the UP-84 Mortality Table (with no setback for
-
Participants and a three year setback for Spouses and/or
Beneficiaries), and
(ii) in the case of a lump sum distribution under
Section 4.7, 4.8, 4.9 or 4.13, the actuarial equivalency factor
determined by
a an interest assumption equal to the Applicable
-
Interest Rate (as defined in subsection (c)) with respect to
such distribution, and
b the Applicable Mortality Table (as defined in
-
subsection (c)) with respect to such distribution.
(b) Notwithstanding subsection (a), for the purposes of any
determination under Section 4.12, the "Actuarial Equivalent" of a given
amount, and the adjustments in the limitation under Section 4.12(a)(i),
shall be determined as is prescribed in regulations promulgated by the
Secretary under Code Section 415(b), as follows:
(i) for purposes of determining, with respect to any
Benefit, the "Actuarial Equivalent" of a straight life annuity in
an annual amount determined under Section 4.12(a), in accordance
with the provisions of Code Section 415(b)(2)(B), such "Actuarial
Equivalent" shall be the amount determined using the lesser of
the actuarial equivalency factor determined under subsection (a),
and the actuarial equivalency factor determined by
a an interest assumption of 5%; provided,
-
however, that, in the case of a lump sum distribution under
Sections 4.7, 4.8, 4.9 or 4.13, the Applicable Interest Rate
(as defined in subsection (c)) with respect to such
distribution shall be substituted for 5%, and
b the Applicable Mortality Table (as defined in
-
subsection (c)) with respect to such distribution,
(ii) for purposes of determining any limitation under
Section 4.12(a)(i), in accordance with the provisions of Code
Section 415(b)(2)(C), in
<PAGE>
the case of Benefit payments beginning prior to the applicable
Social Security Retirement Age, the limitation applicable to
distributions commencing on or after age 62 shall be the
limitation applicable to distributions commencing at Social
Security Retirement Age, reduced to the age at which the
distribution commences using factors that are consistent with the
factors used to reduce old-age insurance benefits under the
Social Security Act, which factors are presently
a 5/9 of 1% for each of the first 36 months by
-
which the distribution commences before the month in which
the Participant or Former Participant attains Social
Security Retirement Age, and
b 5/12 of 1% for each additional month (up to 24
-
months) by which such distribution commences before the
month in which the Participant or Former Participant attains
Social Security Retirement Age,
(iii) for purposes of determining any limitation under
Section 4.12(a)(i), in accordance with the provisions of Code
Section 415(b)(2)(C), in the case of Benefit payments beginning
prior to age 62, the limitation applicable to distributions
commencing prior to age 62 shall be the actuarial equivalent of
the limitation applicable to distributions commencing at age 62,
determined using the lesser of the actuarial equivalency factor
determined by the early reduction factors under Section 4.5(b)(i)
(to the extent applicable), and the actuarial equivalency factor
determined by
a an interest assumption of 5%, and
-
b the Applicable Mortality Table (as defined in
-
subsection (c)) with respect to such distribution, and
(iv) for purposes of determining any limitation under
Section 4.12(a)(i), in accordance with the provisions of Code
Section 415(b)(2)(D), in the case of Benefit payments beginning
after the applicable Social Security Retirement Age, the
limitation applicable to distributions commencing after the
applicable Social Security Retirement Age shall be the actuarial
equivalent of the limitation based on the applicable Social
Security Retirement Age, determined using the actuarial
equivalency factor determined by
a an interest assumption of 5%, and
-
b the Applicable Mortality Table (as defined in
-
subsection (c)) with respect to such distribution.
(c) For purposes of this Section,
<PAGE>
(i) the "Applicable Interest Rate" with respect to
any distribution shall mean the "applicable interest rate",
within the meaning of Code Section 417(e)(3)(A)(ii)(II) and Temp.
Reg. Section 1.417(e)-1T(d)(3), for the Lookback Month for such
distribution,
(ii) the "Applicable Mortality Table" with respect to
any distribution shall mean the "applicable mortality table",
within the meaning of Code Section 417(e)(3)(A)(ii)(I) and Temp.
Reg. Section 1.417(e)-1T(d)(2), for the Lookback Month for such
distribution, and
(iii) the "Lookback Month" with respect to any
distribution shall mean the October next preceding the first day
of the Plan Year in which the Annuity Starting Date of the
distribution occurs.
2. Section 1.5 of the Plan is hereby amended to read in its
entirety as follows:
Section 1.5 - Annuity Starting Date
----------- ---------------------
"Annuity Starting Date" shall mean the first day of the
first period for which a Benefit is payable as an annuity to a Participant
or Former Participant, or the date with respect to which a Benefit is
payable as a lump sum distribution to a Participant or Former Participant,
as the case may be, by reason of his Separation from the Service or the
termination of the Plan.
3. Section 1.7 of the Plan is hereby amended to read in its
entirety as follows:
Section 1.7 - Benefit
----------- -------
"Benefit" shall mean a monthly or lump sum payment payable
at the times and over the applicable periods specified in Article IV.
4. Effective as of December 30, 1997, Section 1.12 of the Plan
is hereby amended to read in its entirety as follows:
Section 1.12 - Compensation
------------ ------------
"Compensation" of a Participant for any Plan Year, expressed
as a monthly rate, shall mean his fixed, basic monthly rate of pay from
the Companies as of July 1 of such Plan Year if he was then an Employee,
or (if not) as of the date during such Plan Year nearest to July 1 on
which nearest date he was an Employee, but shall exclude all payments from
overtime hours, bonuses, incentive pay, special allowances, workers'
compensation, retainers, insurance or pension benefits and any other
special payments, but in no event shall such monthly rate exceed one
twelfth of $160,000 (adjusted for increases in the cost of living
described in Code Section 401(a)(17)).
<PAGE>
5. Section 1.18 of the Plan is hereby amended to read in its
entirety as follows:
Section 1.18 - Election Period
------------ ---------------
"Election Period" means, in the case of an election under
Section 4.7(f) to waive the Joint and Survivor Annuity, the period
beginning ninety days before the Participant's or Former Participant's
Annuity Starting Date and ending on the later of
(a) the Participant's or Former Participant's Annuity Starting
Date,
(b) the ninetieth day after the latest mailing or personal
delivery to him of the explanation described in Section 4.7(d)(i), or
(c) the sixtieth day after the mailing or personal delivery to
him of the information he has requested under Section 4.7(d)(ii).
6. Effective as of December 30, 1997, Section 1.24 of the Plan is
hereby amended to read in its entirety as follows:
Section 1.24 - Highly Compensated Employee
------------ ---------------------------
For any Plan Year, a "Highly Compensated Employee" shall mean
any Employee who
(a) in the previous Plan Year, or the current Plan Year,
was a 5% owner of the Company (within the meaning of Code Section
414(q)(2)), or
(b) in the previous Plan Year, had Statutory Compensation
in excess of $80,000 (adjusted as described in Code Section
414(q)(1)(B)) and was in the group consisting of the top 20% of
Employees (excluding for such purpose such Employees described in
Code Section 414(q)(5) as are excluded under the Rules of the Plan)
when ranked by Statutory Compensation for the previous Plan Year.
For each Plan Year, the "top-paid group election" shall be applied for
purposes of the determination under this section.
7. Section 4.3(a) of the Plan is hereby amended as follows:
a. Except as otherwise provided below, for each Participant who
is an Employee as of December 30, 1999, Section 4.3(a)(i)a 1 of the Plan
- -
is hereby amended to read as follows: "1 the factor 0.0215."
-
b. Notwithstanding the foregoing, and except as otherwise
provided in paragraph c. below, for all Participants who are Employees as
of December
<PAGE>
30, 1999 and who are Highly Compensated Employees for the Plan Year ended
as of December 30, 1999, the factor set forth in Section 4.3(a)(i)a 1 of
- -
the Plan for such Participants is hereby amended to be the greatest factor
(rounded down to the nearest 0.0001), that is not less than 0.0150 and not
greater than 0.0215, for which the Plan satisfies the requirements of the
Code and ERISA (including, without limitation, the requirements of
Sections 401(a)(4) and 410(b) of the Code and the Treasury Regulations
thereunder). Such factor shall be applied uniformly to all such
Participants.
c. In the case of a Participant is an Employee as of December
30, 1999 and whose Compensation for any Plan Year ended on or before
December 30, 1994 exceeded $150,000, the amount determined under Section
4.3(a)(i) of the Plan for such Participant shall not exceed the greater of
the following amounts:
i. the sum of:
A. the amount determined under Section 4.3(a)(i) of the
Plan (determined without regard to the amendment under paragraph
a. or b. above (as applicable) to the factor set forth in
Section 4.3(a)(i)a 1 of the Plan), based on such Participant's
- -
Credited Service as of December 30, 1994, and such Participant's
Final Average Compensation as of December 30, 1994, and
B. the amount determined under Section 4.3(a)(i) of the
Plan (determined after taking into account the amendment under
paragraph a. or b. (as applicable) to the factor set forth in
Section 4.3(a)(i)a 1 of the Plan), based on such Participant's
- -
Credited Service accrued after December 30, 1994 and such
Participant's Final Average Compensation as of December 30, 1999
(determined assuming that such Participant's Compensation for
any Plan Year ended on or before December 30, 1994 was not in
excess of $150,000), and
ii. the amount determined under Section 4.3(a)(i) of the
Plan (determined taking into account the amendment under paragraph a.
or b. above (as applicable) to the factor set forth in Section
4.3(a)(i)a 1 of the Plan), based on such Participant's Credited
- -
Service as of December 30, 1999, and such Participant's Final Average
Compensation as of December 30, 1999 (determined assuming that such
Participant's Compensation for any Plan Year ended on or before
December 30, 1994 was not in excess of $150,000).
d. In no event shall a Participant's or Former Participant's
"accrued benefit," within the meaning of Section 411(a)(7) of the Code and
the Treasury Regulations thereunder, be reduced or eliminated, to the
extent accrued as of December 30, 1999.
<PAGE>
The Plan was previously amended to cease all benefit accruals under the Plan as
of December 30, 1999.
8. Subsection 4.4(b) of the Plan is hereby amended to read in its
entirety as follows:
(b) A Former Participant with a Vested Retirement Benefit may on
or after attainment of his fifty-fifth birthday and upon not less than two
months prior written notice to the Administrator elect Early Retirement in
accordance with this Section.
9. Subsection 4.6(e) of the Plan is hereby amended to read in its
entirety as follows:
(e) The Vested Retirement Benefit of a Participant who dies
prior to his Early or Normal Retirement (and prior to receiving a lump sum
distribution under Section 4.8(a)(v) or an immediate annuity distribution
under Section 4.8(e)), or of a Former Participant who dies prior to his
Annuity Starting Date (whichever is applicable) shall be forfeited as
provided in Section 2.5, but a Survivor Annuity shall be payable under
Section 4.9 or 4.10 with regard to such a Participant or Former
Participant.
10. Section 4.7(a) of the Plan is hereby amended to read in its
entirety as follows:
(a) Notwithstanding anything in the Plan to the contrary, the
Benefit, if any, of a married Participant or of a married Former
Participant not referred to in subsection (l), commencing on his Early or
Normal Retirement Date (or, in the case of a Participant or Former
Participant eligible to elect a lump sum distribution under Section
4.8(a)(v), commencing on the Annuity Starting Date of such distribution)
shall be a Joint and Survivor Annuity, as described in subsection (b), if
(i) he was legally married to his Spouse on his Annuity
Starting Date,
(ii) he notified the Administrator, in writing, prior to
his Annuity Starting Date that he was married,
(iii) the then Actuarial Equivalent of such Benefit as
determined under Section 1.2(a)(ii) is more than $5,000, and
(iv) he has not otherwise elected under subsection (f).
11. Subsection 4.7(d) of the Plan is hereby amended to read in its
entirety as follows:
<PAGE>
(d) At least nine months prior to his qualifying for Early
Retirement (or, if later, upon his becoming a Participant), and again not
more than 90 days before (and not less than 30 days before) the Annuity
Starting Date, each Participant or Former Participant (including a Former
Participant referred to in subsection (m)) who may be affected by this
Section shall be furnished, by mail or personal delivery (and consistent
with such regulations as the Secretary may prescribe), with
(i) a written explanation of the terms and conditions of
the Joint and Survivor Annuity, including
a the right of the Participant or Former Participant
-
to make, and the effect of, an election under subsection (f) to
waive the Joint and Survivor Annuity,
b the relative financial effect on his Benefit of
-
an election under subsection (f),
c the right of the Participant's or Former
-
Participant's Spouse under subsection (g),
d the right of the Participant or Former Participant
-
under subsection (h) to revoke an election made under subsection
(f) and the effect thereof, and
(ii) a statement that the Administrator will furnish the
Participant or Former Participant, upon his first written request
within 60 days after the mailing or personal delivery to him of the
notice required under this subsection, a detailed statement as to the
financial effect upon his Benefit of making an election under
subsection (f).
12. Subsection 4.7(f) of the Plan is hereby amended to read in its
entirety as follows:
(f) A Participant or Former Participant referred to in
subsection (a) may elect in writing, at any time during his Election
Period, not to receive a Joint and Survivor Annuity (in which case, he
shall receive his Normal Retirement Benefit, Optional Retirement Benefit or
other Benefit as provided in the Plan). Notwithstanding the requirement
under subsection (d) that the written explanation described in paragraph
(d)(i) be provided not less than 30 days before the Annuity Starting Date,
a Participant or a Former Participant, after having received the written
explanation of the Joint and Survivor Annuity described in paragraph
(d)(i), may make an election under this subsection, with Spousal Consent
thereto, less than 30 days after the written explanation was provided to
the Participant or Former Participant, provided, that
(i) the Administrator shall provide information to the
Participant or Former Participant clearly indicating that the
Participant or Former Participant has the right during the Election
Period to consider whether
<PAGE>
to waive the Joint and Survivor Annuity and consent to a distribution
other than the Joint and Survivor Annuity and that such period shall
be at least 30 days in duration,
(ii) the Participant or the Former Participant shall be
permitted to revoke the distribution election under this subsection at
least until the Annuity Starting Date or, if later, at any time prior
to the expiration of the seven-day period that begins the day after
the written explanation of the Joint and Survivor Annuity is provided
to the Participant or Former Participant,
(iii) the Annuity Starting Date is after the date that the
written explanation of the Joint and Survivor Annuity is provided to
the Participant or Former Participant, and
(iv) the distribution in accordance with the election under
this subsection does not commence before the expiration of the seven-
day period that begins the day after the explanation of the Joint and
Survivor Annuity is provided to the Participant or Former Participant.
13. Section 4.8 of the Plan is hereby amended to read as follows:
Section 4.8 - Optional Retirement Benefit
----------- ---------------------------
(a) In lieu of his Vested, Early or Normal Retirement Benefit, a
Participant or Former Participant may elect, with Spousal Consent, to
receive an Optional Retirement Benefit. A Participant or Former Participant
must make such an election in writing in accordance with the Rules of the
Plan and deliver it to the Administrator prior to his Early or Normal
Retirement Date (or, in the case of a lump sum distribution under paragraph
(v), the Annuity Starting Date of such distribution), as the case may be.
Subject to Section 4.15, the Optional Retirement Benefit of a Participant
or Former Participant shall be one of
(i) a monthly Benefit, reduced as provided in subsection
(b), payable during each month of the period of his Early or Normal
Retirement with the provision that if he dies after his Annuity
Starting Date, and if his properly designated Contingent Annuitant
survives him, such Contingent Annuitant shall receive a monthly
payment beginning on the first day of the calendar month next
following the Participant's death and ending with the calendar month
in which the Contingent Annuitant's death occurs, in the same amount
(or in one-half, two-thirds or three-quarters of that amount as the
Participant may elect); provided, however, that this election shall
not take effect if the Contingent Annuitant does not survive until the
Participant's Annuity Starting Date,
(ii) a monthly Benefit, reduced as provided in subsection
(b), payable during each month of the period of his Early or Normal
Retirement
<PAGE>
with the provision that if he dies after his Annuity Starting Date and
before receiving thirty-six, sixty or one hundred-twenty monthly
payments, as the Participant may elect, his Beneficiaries as
designated for this purpose under Section 4.14 will receive the
remainder of such monthly payments,
(iii) solely with respect to a Participant or Former
Participant who elects to retire on his Early Retirement Date, monthly
payments increased before the then anticipated commencement date of
his old age benefits under the federal Social Security Act and
decreased or, if necessary, eliminated after such date in order to
provide monthly payments to the Participant which, when added to his
then anticipated old age benefits under said Act would provide monthly
payments for his life which are as nearly uniform as possible,
(iv) solely with respect to a Participant or Former
Participant who has an Account, the amount of his Account in cash in a
lump sum Benefit and the remainder of his Benefit, as actuarially
determined under Section 1.3, in accordance with Sections 4.3, 4.5,
4.6, 4.7 or this Section as applicable, or
(v) a lump sum Benefit pursuant to the termination of the
Plan, determined as provided in subsection (b), payable as of an
Annuity Starting Date after the termination of the Plan as follows:
a in the case of a Participant who is an Employee
-
on his Annuity Starting Date (other than a Participant who is
employed by East Pasadena Water Company), such lump sum
distribution shall be made in the form of an elective transfer of
such Participant's lump sum Benefit from the Plan to The 401(k)
Retirement and Savings Plan for Southwest Water Company (the
"Southwest Savings Plan") in accordance with subsection (f), or
b in the case of any other Participant or Former
-
Participant, in the form of a lump sum distribution to such
Participant or Former Participant;
provided, however, that any lump sum distribution under paragraph (v)
shall be made in accordance with the Code and ERISA.
(b) A Participant's or Former Participant's Optional Retirement
Benefit (other than a lump sum distribution under paragraph (a)(v)) shall
be the Actuarial Equivalent of his Vested, Early or Normal Retirement
Benefit, said Equivalent being computed as of his Early or Normal
Retirement Date, whichever is applicable. A Participant's or a Former
Partnership's Optional Retirement Benefit distributed in the form of a
lump sum distribution under paragraph (a)(v) shall be the Actuarial
Equivalent of his Normal Retirement Benefit, such Actuarial Equivalent
being computed as of the Annuity Starting Date of such distribution.
<PAGE>
(c) Notwithstanding any other provision of this Section, no
Optional Retirement Benefit shall be provided under which any Beneficiary
or Contingent Annuitant (other than the Participant's or Former
Participant's spouse or incompetent child) can receive a Benefit having an
Actuarial Equivalent on the date such Benefits commence greater than the
then present Actuarial Equivalent of the Participant's Benefit under said
election.
(d) Notwithstanding subsection (a) and Section 4.7(g), if a
Participant or Former Participant elects to receive any one of the
Optional Retirement Benefits specified in paragraph (a)(i) and his
Contingent Annuitant is his Spouse, Spousal Consent shall not be required.
(e) Notwithstanding anything in this Section to the contrary, a
Participant or Former Participant who is eligible to elect a lump sum
distribution under paragraph (a)(v) may elect to receive, in lieu thereof,
the Actuarial Equivalent of his Vested, Early or Normal Retirement Benefit
(whichever is greatest) in the form of a monthly payment on the first day
of each calendar month commencing on or after the Annuity Starting Date on
which such lump sum distribution is otherwise payable and ending on the
calendar month in which his death occurs, or, if required under Section
4.7, in the form of a Joint and Survivor Annuity.
(f) If a Participant elects to receive lump sum distribution
under subparagraph 4.8(a)(v)a, such lump sum distribution shall be made in
-
the form of an elective transfer of such Participant's lump sum Benefit
from the Plan to the Southwest Savings Plan in accordance with Treasury
Regulation Section 1.411(d)-4 Q/A-3(b). Such Participant's lump sum
Benefit as of his Annuity Starting Date shall be transferred in a transfer
of assets and liabilities from the Plan to the Southwest Savings Plan
satisfying the requirements of Code Sections 401(a)(12) and 414(l),
Treasury Regulation Section 1.414(l)-1 and ERISA Section 208. Upon such
transfer, the Trustees shall transfer from the Trust an amount, in cash,
equal to the amount of such Participant's lump sum Benefit as of the
Annuity Starting Date to the trust established pursuant to the Southwest
Savings Plan. Such lump sum distribution shall be conditioned upon the
voluntary, fully informed election by the Participant of the transfer of
such Participant's lump sum Benefit to the Southwest Savings Plan. Such
lump sum distribution shall only be made if such Participant has elected
not to receive a life annuity or a Joint and Survivor Annuity in
accordance with subsection 4.7(e) and has elected such lump sum
distribution with Spousal Consent. Such lump sum distribution shall be
credited to an account under the Southwest Savings Plan and such
Participant shall be fully vested in the amount credited to such account.
The amount credited to such account shall be distributable under the terms
of the Southwest Savings Plan.
14. Section 4.13(a) of the Plan is hereby amended to read in its
entirety as follows:
<PAGE>
(a) Notwithstanding any other provision of the Plan to the
contrary, upon a Participant's Separation from the Service, or following
the termination of the Plan, the Administrator shall cause payment to him
or on his account the Actuarial Equivalent in cash of his Vested, Normal
or Early Retirement Benefit if it is not more than $5,000 (and at no time
exceeded such amount at the time of a prior distribution under Section
4.15(a)).
15. Effective as of December 30, 1995, Article IV of the Plan is
hereby amended by adding Section 4.18 as follows at the end thereof:
Section 4.18 - Limitation on Distributions other than Life Annuities
------------ -----------------------------------------------------
(a) Notwithstanding any other provision of the Plan, no payment
described in subsection (b) shall be made to any Participant, Former
Participant, Beneficiary or Contingent Annuitant during a period in which
the Plan has a "liquidity shortfall" (as defined in Code Section
401(a)(32)(C)).
(b) The payments described in this subsection shall include
(i) any payment, in excess of the monthly amount paid
under a single life annuity (plus any Social Security supplements
described in the last sentence of Code Section 411(a)(9)), to a
Participant, Former Participant, Beneficiary or Contingent Annuitant
whose "annuity starting date" (as defined in Code Section 417(f)(2))
occurs during the period referred to in subparagraph (a),
(ii) any payment for the purchase of an irrevocable
commitment from an insurer to pay Benefits, and
(iii) any other payment specified by the Secretary by
regulations under Code Section 401(a)(32).
16. Section 7.1 of the Plan is hereby amended by adding the following
new subsection (e) to the end thereof to read as follows:
(e) In the event of the termination of the Plan, the Benefit of
a Participant, Former Participant, Beneficiary and Contingent Annuitant
who is a "missing participant" (as defined in ERISA Section 4050(b)(1))
shall be distributed by transferring the "designated benefit" (as defined
in ERISA Section 4050(b)(2)) of such Participant, Former Participant,
Beneficiary or Contingent Annuitant to the Pension Benefit Guaranty
Corporation, or by purchasing irrevocable commitments from an insurer with
respect to such "designated benefit" in accordance with ERISA Section
4041(b)(3)(A)(i). Any such transfer and purchase of an irrevocable
commitment shall be in accordance with regulations promulgated by the
Pension Benefit Guaranty Corporation. The Administrator shall provide to
the Pension Benefit Guaranty Corporation such information and
certifications regarding the "designated benefits" or
<PAGE>
irrevocable commitments with respect to such Participants, Former
Participants, Beneficiaries and Contingent Annuitants as are required under
ERISA Section 4050 and the regulations thereunder. This subsection shall be
effective with respect to distributions that occur in Plan Years commencing
after final regulations implementing ERISA Section 4050 are promulgated by
the Pension Benefit Guaranty Corporation.
17. Section 7.12 of the Plan is hereby amended to read in its
entirety as follows:
Section 7.12 - Use of Funds
------------ ------------
Except as provided in Section 7.03 of the Trust Agreement, under
no circumstances shall any contribution by a Company under the Plan or any
part of any fund created thereby, be recoverable by such Company from the
Trust or from any Participant or Former Participant, Beneficiary,
Contingent Annuitant, or other person, or be used for or diverted to for
purposes other than for the exclusive benefit of Participants, Former
Participants and their Beneficiaries and Contingent Annuitants, except that
the portion of the funds not required for the satisfaction of all
liabilities to Participants, Former Participants and their Beneficiaries
and Contingent Annuitants shall, upon termination of the Plan, be
transferred to the Southwest Savings Plan in accordance with the Code and
ERISA (prior to any reversion to any Company, and in such amount as is
determined by the Board) and revert to the applicable Company (to the
extent not so transferred).
<PAGE>
18. Effective as of October 13, 1996, Article VII of the Plan is
hereby amended by adding the following new Section 7.20 to the end thereof to
read as follows:
Section 7.20 - Qualified Military Service
------------ --------------------------
Notwithstanding any provision of the Plan to the contrary,
benefits and service credits with respect to qualified military service
shall be provided in accordance with Code Section 414(u).
Executed at West Covina, California as of December 30, 1999.
SOUTHWEST WATER COMPANY
By /s/ PETER J. MOERBEEK
------------------------
Title Chief Financial Officer and Secretary
-------------------------------------------
<PAGE>
EXHIBIT 10.11
CREDIT AGREEMENT
between
SOUTHWEST WATER COMPANY
and
BANK OF AMERICA, N.A.
July 30, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
ARTICLE I............................................................... 1
SECTION 1.01. Defined Terms............................................ 1
SECTION 1.02. Other Definitional Provisions............................ 5
ARTICLE II.............................................................. 5
SECTION 2.01. The Revolving Loans...................................... 6
(a) The Revolving Commitment................................... 6
(b) Making the Revolving Loans................................. 6
(c) Reduction of the Revolving Commitment...................... 6
(d) Revolving Note............................................. 6
SECTION 2.02. Mandatory Repayment...................................... 6
SECTION 2.03. Interest Computation and Payment......................... 7
ARTICLE III............................................................. 7
SECTION 3.01. Use of Proceeds.......................................... 7
SECTION 3.02. [Intentionally Omitted].................................. 7
SECTION 3.03. Payments................................................. 7
SECTION 3.04. Payment on Non-Business Days............................. 7
SECTION 3.05. Reduced Return........................................... 7
SECTION 3.06. Indemnities.............................................. 8
SECTION 3.07. Funding Sources.......................................... 8
ARTICLE IV.............................................................. 8
SECTION 4.01. Conditions Precedent to Initial Loan..................... 8
SECTION 4.02. Conditions Precedent to Each Borrowing................... 9
ARTICLE V............................................................... 10
SECTION 5.01. Representations and Warranties........................... 10
(a) Organization............................................... 10
(b) Authorization; No Conflict................................. 10
(c) Governmental Consents...................................... 10
(d) Validity................................................... 11
(e) Financial Condition........................................ 11
(f) Litigation................................................. 11
(g) Employee Benefit Plans..................................... 11
(h) Disclosure................................................. 11
(i) Environmental Matters...................................... 11
(j) Employee Matters........................................... 12
(k) Solvency................................................... 12
(l) Title to Properties........................................ 12
(m) Tax Returns................................................ 12
(n) Compliance with Other Agreements and Applicable Laws....... 13
ARTICLE VI.............................................................. 13
SECTION 6.01. Affirmative Covenants.................................... 13
(a) Financial Information...................................... 13
(b) Notices and Information.................................... 14
(c) Corporate Existence, Etc................................... 15
(d) Payment of Taxes and Claims................................ 15
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(e) Maintenance of Properties; Insurance....................... 16
(f) Inspection................................................. 16
(g) Compliance with Laws Etc................................... 16
(h) Hazardous Waste Studies.................................... 16
(i) Year 2000 Compliance....................................... 16
SECTION 6.02. Negative Covenants....................................... 17
(a) Leverage Ratio............................................. 17
(b) Consolidated Tangible Net Worth............................ 17
(c) Consolidated Net Profit.................................... 17
(d) EBITDA Coverage Ratio...................................... 17
(e) Liens Etc.................................................. 17
(f) Debt....................................................... 18
(g) Consolidation, Merger or Dissolution....................... 18
(h) Loans, Investments, Secondary Liabilities.................. 18
(i) Asset Sales................................................ 19
(j) Hostile Tender Offers...................................... 19
(k) Distributions.............................................. 20
(l) Transactions with Affiliates............................... 20
(m) Books and Records.......................................... 20
(n) Restructure................................................ 20
ARTICLE VII............................................................. 20
SECTION 7.01. Events of Default........................................ 20
ARTICLE VIII............................................................ 23
SECTION 8.01. Amendments, Etc.......................................... 23
SECTION 8.02. Notices, Etc............................................. 23
SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts.. 23
SECTION 8.04. No Waiver; Remedies...................................... 24
SECTION 8.05. Costs and Expenses....................................... 24
SECTION 8.06. Participations........................................... 24
SECTION 8.07. Effectiveness: Binding Effect............................ 24
SECTION 8.08. Governing Law............................................ 24
SECTION 8.09. Arbitration.............................................. 24
(a) Arbitration................................................ 24
(b) Governing Rules............................................ 25
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. 25
(d) Arbitrator Qualification and Powers; Awards................ 25
(e) Judicial Review............................................ 26
(f) Real Property Collateral, Judicial Reference............... 26
(g) Miscellaneous.............................................. 26
SECTION 8.10. Waiver of Notices........................................ 26
SECTION 8.11. Entire Agreement......................................... 27
SECTION 8.12. Separability of Provisions............................... 27
SECTION 8.13. Execution in Counterparts................................ 27
</TABLE>
ii
<PAGE>
Schedules
- ---------
5.01(f) - Litigation
5.01(i) - Environmental Matters
6.02(e) - Liens
Exhibits
- --------
A - Form of Note
B - Form of Legal Opinion
iii
<PAGE>
CREDIT AGREEMENT
This Credit Agreement dated as of July 30, 1999 is entered into
between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower") and
--------
BANK OF AMERICA, N.A. (the "Bank").
----
RECITALS
--------
WHEREAS, the Borrower has requested that the Bank extend certain
credit facilities to the Borrower in the place of Wells Fargo Bank, National
Association; and
WHEREAS, the Bank is willing to extend such credit facilities to the
Borrower on the terms and conditions set forth below.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the
-------------
following terms have the following meanings:
"Agreement": This Credit Agreement, as amended, supplemented or
---------
modified from time to time.
"Bank": As set forth in the introductory paragraph of this Agreement.
----
"Borrower": As set forth in the introductory paragraph of this
--------
Agreement.
"Borrowing": As defined in Section 2.01.
---------
"Business Day": Has the meaning set forth in the Revolving Note.
------------
"Capital Leases": As applied to any Person, any lease of any property
--------------
(whether real, personal or mixed) by that Person as lessee which would, in
accordance with GAAP, be required to be accounted for as a capital lease on the
balance sheet of that Person.
"Change of Control": Shall be deemed to have occurred at such times
-----------------
as: (a) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Act of 1934), becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than thirty percent (30%) of the total voting power of all
classes of stock then outstanding of Borrower normally entitled to vote in the
election of directors; or (b) the Borrower shall fail to own directly one
hundred percent (100%) of the issued and outstanding common stock of Suburban,
NMUI or ECO or shall lose voting control of Suburban's, NMUI's or ECO's issued
and outstanding common stock. A change of control shall not include a transfer
of NMUI's operating assets through a condemnation or sale in lieu of
condemnation.
1
<PAGE>
"Commitment": The Bank's obligation to make Loans to the Borrower
----------
pursuant to Article II in the amount or amounts referred to therein.
"Consolidated EBITDA" means, for any period of Borrower and its
-------------------
Subsidiaries on a consolidated basis, Consolidated Net Profit for such period,
plus interest expense (net of capitalized interest expense) and provision for
income taxes for such period, plus depreciation and amortization for such
period.
"Consolidated Liabilities": At any date of determination, the total
------------------------
liabilities of the Borrower and its Subsidiaries on a consolidated basis
determined in accordance with GAAP (including, without limitation, (1) any
balance sheet liability with respect to a Pension Plan recognized pursuant to
Financial Accounting Standards Board Statements 87 or 88 and (2) any withdrawal
liability under Section 4201 of ERISA with respect to a withdrawal from a
Multiemployer Plan, as such liability may be set forth in a notice of withdrawal
liability under Section 4219 (and as adjusted from time to time subsequent to
the date of such notice) less (1) deferred taxes, (2) contributions in aid of
----
construction ("CIAC"), (3) unamortized investment tax credits, (4) deferred
revenue on CIAC, and (5) deposits for CIAC for capital improvement projects.
"Consolidated Net Profit" means, in respect of any period of the
-----------------------
Borrower and its Subsidiaries, the consolidated net profit after taxes of the
Borrower and its Subsidiaries as such would appear on the consolidated statement
of earnings of Borrower and its Subsidiaries prepared in accordance with GAAP,
consistently applied, minus nonrecurring or extraordinary income.
-----
"Consolidated Tangible Net Worth": At any date of determination, the
-------------------------------
sum of the capital stock and additional paid-in capital plus retained earnings
(or minus accumulated deficit) of the Borrower and its consolidated Subsidiaries
minus (i) treasury stock, (ii) intangible assets (including, without limitation,
- -----
franchises, patents, patent applications, trademarks, brand names, goodwill,
purchased contracts, water rights and deferred charges (including unamortized
debt discount and expense and organization costs) and research and development
expenses) and (iii) receivables, advances, loans and all other amounts due from
employees, officers, shareholders and/or affiliates (excluding Borrower's
wholly-owned Subsidiaries), on a consolidated basis determined in conformity
with GAAP.
"Debt": As applied to any Person, (i) all indebtedness for borrowed
----
money, (ii) that portion of obligations with respect to Capital Leases which is
properly classified as a liability on a balance sheet in conformity with GAAP,
(iii) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money, (iv) any obligation
owed for all or any part of the deferred purchase price of property or services
which purchase price is (y) due more than six months from the date of incurrence
of the obligation in respect thereof, or (z) evidenced by a note or similar
written instrument; (v) all indebtedness secured by any Lien on any property or
asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is non-recourse to the
credit of that person; (vi) reimbursement obligations under letters of credit;
and (vii) other contingent liabilities.
"Distribution": With respect to any Person shall mean that such
------------
Person has paid any dividend or returned any capital to, its stockholders or
equity holders as such or authorized or made any other distribution, payment or
delivery of property or cash to its stockholders or
2
<PAGE>
equity holders as such, or redeemed, retired, purchased, or otherwise acquired,
directly or indirectly, for consideration, any shares of any class of its
capital stock or equity interests (or any options, warrants or rights issued by
such Person with respect to its capital stock or equity interests), or set aside
any funds for any of the foregoing purposes, or shall have permitted any of its
Subsidiaries to purchase or otherwise acquire for a consideration any shares of
any class of the capital stock or any equity interests of such Person (or any
options, warrants or rights issued by such Person with respect to its capital
stock or equity interests). Without limiting the foregoing, "Distributions" with
respect to any Person shall also include all payments made or required to be
made by such Person with respect to any stock appreciation rights plans, equity
incentive or the setting aside of any funds for the foregoing purposes.
"Dollars and $": Dollars in lawful currency of the United States of
-------------
America.
"EBITDA Coverage Ratio" means, for any period of Borrower and its
---------------------
Subsidiaries on a consolidated basis, Consolidated EBITDA divided by the sum of
the total interest expense plus current portion of long-term Debt plus current
---- ----
portion of advances for construction plus Distributions.
----
"ECO": ECO Resources, Inc., a Texas corporation.
---
"Employee Benefit Plan": Any Pension Plan, any employee welfare
---------------------
benefit plan, or any other employee benefit plan which is described in Section
3(3) of ERISA and which is maintained for employees of the Borrower or any ERISA
Affiliate of the Borrower.
"ERISA": The Employee Retirement Income Security Act of 1974, as
-----
amended to the date hereof and from time to time hereafter.
"ERISA Affiliate": As applied to any Person, any trade or business
---------------
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) and (c) of the Internal Revenue Code.
"GAAP": Generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession or any public commission having regulatory responsibility over the
Borrower or any Subsidiary.
"Internal Revenue Code": The Internal Revenue Code of 1986, as
---------------------
amended to the date hereof and from time to time hereafter and any successor
statute.
"Lien": Any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Loans": Loans made to the Borrower pursuant to Section 2.01.
-----
3
<PAGE>
"Loan Documents": This Agreement, the Revolving Note and each
--------------
agreement, document, instrument and guarantee required by the Bank in connection
with this Agreement and/or the credit extended hereunder.
"Maturity Date": July 31, 2001.
-------------
"Mellon": means Mellon Bank, N.A.
------
"Multiemployer Plan": A "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA which is maintained for employees of the Borrower or any
ERISA Affiliate of the Borrower.
"NAIC" means National Association of Insurance Companies.
----
"NMUI": New Mexico Utilities, Inc., a New Mexico corporation.
----
"Pension Plan": Any employee plan which is subject to Section 412 of
------------
the Internal Revenue Code and which is maintained for employees of the Borrower
or any ERISA Affiliate of the Borrower, other than a Multiemployer Plan.
"Person": An individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"Potential Event of Default": A condition or event which, after
--------------------------
notice or lapse of time or both, would constitute an Event of Default if that
condition or event were not cured or removed within any applicable grace or cure
period.
"Regulations G, T, U and X": Regulations G, T, U and X, respectively,
-------------------------
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"Revolving Commitment": The amount of $4,000,000 as such amount may
--------------------
be reduced pursuant to Section 2.01(c).
"Revolving Loans": As defined in Section 2.01(a).
---------------
"Revolving Note": As defined in Section 2.01(d).
--------------
"S.E.C.": The United States Securities and Exchange Commission and
------
any successor institution or body which performs the functions or substantially
all of the functions thereof.
"Solvent": When used with respect to any Person that as of the date
-------
as to which the Person's solvency is to be measured:
(i) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities) as
they become absolute and matured;
4
<PAGE>
(ii) it has sufficient capital to conduct its business; and
(iii) it is able to meet its debts as they mature.
"Subsidiary": A corporation of which shares of stock having ordinary
----------
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly, or indirectly
through one or more intermediaries, or both, by the Borrower.
"Suburban": Suburban Water Systems, a California corporation.
--------
"Suburban Loan Documents" means that Credit Agreement dated as of the
-----------------------
date hereof between the Bank and Suburban, and each agreement, document,
instrument and guarantee required by the Bank in connection with such Credit
Agreement and/or the credit extended thereunder.
"Termination Event": (i) a "Reportable Event" described in Section
----------------- ----------------
4043 of ERISA and the regulations issued thereunder (other than a "Reportable
Event" not subject to the provision for 30-day notice to the Pension Benefit
Guaranty Corporation under such regulations) with respect to any Pension Plan,
or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a
Pension Plan during a plan year in which it was a "substantial employer" as
--------------------
defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of
intent to terminate a Pension Plan or the treatment of a Pension Plan amendment
as a termination under Section 4041 of ERISA, or (iv) the institution of
proceedings to terminate a Pension Plan by the Pension Benefit Guaranty
Corporation under Section 4042 of ERISA, or (v) any other event or condition
which might constitute grounds under ERISA for the termination of, or the
appointment of a trustee to administer, any Pension Plan under Section 4042 of
ERISA, or (vi) the imposition of a lien with respect to any Pension Plan
pursuant to Section 412(n) of the Internal Revenue Code.
SECTION 1.02. Other Definitional Provisions.
-----------------------------
(a) All terms defined in this Agreement shall have the defined
meanings when used in the Revolving Note or any certificate or other document
made or delivered pursuant hereto.
(b) As used herein and in the Revolving Note, and any certificate
or other document made or delivered pursuant hereto, accounting terms not
defined in subsection 1.01, and accounting terms partly defined in subsection
1.01 to the extent not defined, shall have the respective meanings given to them
under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section,
subsection, schedule and exhibit references are to this Agreement unless
otherwise specified.
(d) So long as the Borrower does not have any Subsidiaries,
references to a Subsidiary or Subsidiaries in this Agreement shall be deemed to
be deleted.
ARTICLE II
5
<PAGE>
THE CREDIT
SECTION 2.01. The Revolving Loans.
-------------------
(a) The Revolving Commitment. The Bank agrees, on the terms and
------------------------
conditions hereinafter set forth, to make loans ("Revolving Loans") to the
---------------
Borrower from time to time during the period from the date hereof to and
including the Maturity Date in an aggregate amount not to exceed the Revolving
Commitment, as such amount may be reduced pursuant to Section 2.01(c). Within
the limits of the Revolving Commitment and prior to the Maturity Date, the
Borrower may borrow, repay, and reborrow subject to the terms of this Agreement.
(b) Making the Revolving Loans. The Borrower may borrow under the
--------------------------
Revolving Commitment on any Business Day, provided that the Borrower shall give
the Bank notice pursuant to the terms of the Note specifying (i) the amount of
the proposed Borrowing and (ii) the requested date of the Borrowing. Upon
satisfaction of the applicable conditions set forth in Article IV, the proceeds
of all such Loans will then be made available to the Borrower by the Bank by
crediting the account of the Borrower on the books of the Bank, or as otherwise
directed by the Borrower.
(c) Reduction of the Revolving Commitment. The Borrower shall have
-------------------------------------
the right, upon at least two Business Days' notice to the Bank, to terminate in
whole or reduce in part the unused portion of the Revolving Commitment, without
premium or penalty, provided that each partial reduction shall be in the
aggregate amount of $100,000 or an integral multiple thereof and that such
reduction shall not reduce the Revolving Commitment to an amount less than the
amount outstanding hereunder on the effective date of the reduction. Such
notice shall be irrevocable and such reduction shall not be reinstated.
(d) Revolving Note. The Loans made by the Bank pursuant hereto shall
--------------
be evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to
- --------- --------------
the order of the Bank and representing the obligation of the Borrower to pay the
aggregate unpaid principal amount of all Revolving Loans made by the Bank, with
interest thereon as prescribed in Section 2.03. The Bank is hereby authorized to
record in its books and records and on any schedule annexed to the Revolving
Note, the date and amount of each Revolving Loan made by the Bank, the date and
amount of each payment of principal thereof, and the applicable interest rate,
and any such recordation shall constitute prima facie evidence of the accuracy
----- -----
of the information so recorded; provided that failure by the Bank to effect such
recordation shall not affect the Borrower's obligations hereunder. Prior to the
transfer of a Revolving Note, the Bank shall record such information on any
schedule annexed to and forming a part of such Revolving Note.
SECTION 2.02. Mandatory Repayment.. The aggregate principal amount
-------------------
of the Revolving Loans outstanding on the Maturity Date, together with accrued
interest thereon, shall be due and payable in full on the Maturity Date. If at
any time the aggregate outstanding Borrowings exceed the Revolving Commitment
then in effect, the Borrower shall immediately repay the excess to the Bank
without penalty or premium.
SECTION 2.03. Interest Computation and Payment. The outstanding
--------------------------------
principal balance of the Revolving Loans shall bear interest at the rates of
interest set forth in the Revolving Note. Interest shall be computed on the
basis of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in the Revolving Note.
6
<PAGE>
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOANS
SECTION 3.01. Use of Proceeds. The proceeds of the initial Loan
---------------
hereunder shall be used to pay off obligations owing to Wells Fargo Bank,
National Association under that certain Amended and Restated Credit Agreement
dated December 23, 1997, as amended. The proceeds of subsequent Loans hereunder
shall be used by the Borrower (i) for general corporate purposes, working
capital and acquisitions of the Borrower and its wholly-owned Subsidiaries, and
(ii) to finance capital additions to the water utility and other operations of
the Borrower and its wholly-owned Subsidiaries.
SECTION 3.02. [Intentionally Omitted]
SECTION 3.03. Payments. Borrower authorizes Bank to collect all
--------
principal, interest and fees due under this Agreement and the Revolving Note by
charging Borrower's demand deposit account number 14599-07501 with Bank, or any
other demand deposit account maintained by Borrower with Bank, for the full
amount thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency shall
be immediately due and payable by Borrower.
SECTION 3.04. Payment on Non-Business Days. Whenever any payment to
----------------------------
be made hereunder or under the Revolving Note shall be stated to be due on a day
which is not a Business Day, such payment may be made on the next succeeding
Business Day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
SECTION 3.05. Reduced Return. If the Bank shall have determined that
--------------
any applicable law, regulation, rule or regulatory requirement generally
applicable to banks located in California and (collectively in this Section 3.05
"Requirement") regarding capital adequacy, or any change therein, or any change
-----------
in the interpretation or administration thereof by any United States federal or
state governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on the Bank's capital as a
consequence of its Commitment and obligations hereunder to a level below that
which would have been achieved but for such Requirement, change or compliance
(taking into consideration the Bank's policies with respect to capital adequacy)
by an amount deemed by the Bank to be material (which amount shall be determined
by the Bank's reasonable allocation of the aggregate of such reductions
resulting from such events), then from time to time, within five (5) Business
Days after demand by the Bank, the Borrower shall pay to the Bank such
additional amount or amounts as will compensate the Bank for such reduction.
The Bank does not presently have knowledge of any new Requirement or any pending
change in any existing Requirement which would result in such additional amounts
being owed.
SECTION 3.06. Indemnities. Whether or not the transactions
-----------
contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay
and hold the Bank, and the shareholders, officers, directors, employees and
agents of the Bank ("Indemnified Persons"), harmless from and against any and
-------------------
all claims, liabilities, losses, damages, costs and
7
<PAGE>
expenses (whether or not any of the foregoing Indemnified Persons is a party to
any litigation), including, without limitation, reasonable attorneys' fees and
costs (including, without limitation, the reasonable estimate of the allocated
cost of in-house legal counsel and staff) and costs of investigation, document
production, attendance at a deposition, or other discovery, prior to the
assumption of defense by the Borrower, with respect to or arising out of any
proposed acquisition by the Borrower or any of its Subsidiaries of any Person or
any securities (including a self-tender), this Agreement or any use of proceeds
hereunder, or any claim, demand, action or cause of action being asserted
against the Borrower or any of its Subsidiaries (collectively, the "Indemnified
-----------
Liabilities"), provided that the Borrower shall have no obligation hereunder
- -----------
with respect to Indemnified Liabilities arising from the gross negligence or
willful misconduct of any such Indemnified Persons. If any claim is made, or any
action, suit or proceeding is brought, against any Indemnified Person pursuant
to this Section, the Indemnified Person shall notify the Borrower within thirty
(30) days of the Bank being notified in writing of any such claim or the
commencement of such action, suit or proceeding, and the Borrower will assume
the defense of such action, suit or proceeding, employing counsel selected by
Borrower's insurance carrier, or selected by the Borrower and reasonably
satisfactory to the Indemnified Person, and pay the fees and expenses of such
counsel. This covenant shall survive termination of this Agreement and payment
of the outstanding Revolving Note for a period of six (6) years.
SECTION 3.07. Funding Sources. Nothing in this Agreement shall be
---------------
deemed to obligate the Bank to obtain the funds for any Loan in any particular
place or manner or to constitute a representation by the Bank that it has
obtained or will obtain the funds for any Loan in any particular place or
manner.
ARTICLE IV
CONDITIONS OF LENDING
SECTION 4.01. Conditions Precedent to Initial Loan. The obligation
------------------------------------
of the Bank to make its initial Loan is subject to the conditions precedent
that:
(a) The Bank shall have received on or before the day of the initial
Borrowing the following, each dated prior to or as of such day, in form and
substance satisfactory to the Bank:
(i) The Revolving Note issued by the Borrower to the order of
the Bank;
(ii) Copies of the Articles, Certificate of Incorporation,
partnership agreement or other organizational document of the Borrower,
certified as of a recent date by the Secretary of State of its state of
formation or incorporation;
(iii) Copies of the Bylaws, if any, of the Borrower, certified
by the Secretary or an Assistant Secretary of the Borrower;
(iv) Copies of resolutions of the Board of Directors or other
authorizing documents of the Borrower, in form and substance satisfactory to the
Bank, approving the Loan Documents and the Borrowings hereunder;
(v) An incumbency certificate executed by the Secretary or an
Assistant Secretary of the Borrower or equivalent document, certifying the names
and signatures of the
8
<PAGE>
officers of the Borrower or other Persons authorized to sign the Loan Documents
and the other documents to be delivered hereunder;
(vi) Executed copies of all Loan Documents;
(vii) Opinion from Borrower's counsel substantially in the
form of Exhibit B hereto;
---------
(b) The Bank shall have completed its due diligence review of the
Borrower, and the scope and results thereof shall be satisfactory to Bank in its
discretion;
(c) All information previously furnished by Borrower to Bank shall
be true and correct in all material respects;
(d) All fees required to be paid at closing shall have been paid;
(e) All corporate and legal proceedings and all instruments and
documents in connection with the transactions contemplated by this Agreement
shall be reasonably satisfactory in content, form and substance to the Bank and
its counsel, and the Bank and such counsel shall have received any and all
further information and documents which the Bank or such counsel may reasonably
have requested in connection therewith, such documents where appropriate to be
certified by proper corporate or governmental authorities; and
(f) Nothing shall have occurred and the Bank shall not have become
aware of any fact or condition not previously known, which the Bank shall
determine has, or could reasonably be expected to have, a material adverse
effect on the rights or remedies of the Bank, or on the ability of the Borrower
to perform its obligations to the Bank or which has, or could reasonably be
expected to have, a materially adverse effect on the performance, business,
property, assets, condition (financial or otherwise) or prospects of Borrower
and its Subsidiaries taken as a whole.
SECTION 4.02. Conditions Precedent to Each Borrowing. The obligation
--------------------------------------
of the Bank to make a Loan on the occasion of each Borrowing (including the
initial Borrowing) shall be subject to the further conditions precedent that on
the date of such Borrowing (a) the following statements shall be true and the
Bank shall have received the notice required by Section 2.01(b), which notice
shall be deemed to be a certification by the Borrower that:
(i) The representations and warranties
contained in Section 5.01 are correct on and as of
the date of such Borrowing as though made on and
as of such date,
(ii) No event has occurred and is continuing, or
would result from such Borrowing, which
constitutes an Event of Default or Potential Event
of Default; and
(iii) Nothing shall have occurred and the Bank
shall not have become aware of any fact or
condition not previously known, which the Bank
shall determine has, or could reasonably be
expected to have, a material adverse effect on the
rights or remedies of the Bank, or on the ability
of the Borrower to perform
9
<PAGE>
its obligations to the Bank or which has, or could
reasonably be expected to have, a material adverse
effect on the performance, business, property,
assets, condition (financial or otherwise) or
prospects of Borrower and its Subsidiaries taken
as a whole; and
(iv) All Loan Documents are in full force and effect,
and (b) the Bank shall have received such other approvals, opinions or documents
as the Bank may reasonably request.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Representations and Warranties. The Borrower
------------------------------
represents and warrants as follows:
(a) Organization. The Borrower and each of its Subsidiaries is
------------
duly organized, validly existing and in good standing under the laws of the
state of its incorporation. The Borrower and each of its Subsidiaries is also
duly authorized, qualified and licensed in all applicable jurisdictions, and
under all applicable laws, regulations, ordinances or orders of public
authorities, to carry on its business in the locations and in the manner
presently conducted.
(b) Authorization; No Conflict. The execution, delivery and
--------------------------
performance by the Borrower of the Loan Documents, and the making of Borrowings
hereunder, are within the Borrower's corporate powers, have been duly authorized
by all necessary corporate action, do not contravene (i) the Borrower's charter,
by-laws or other organizational document or (ii) any law or regulation
(including, without limitation, Regulations G, T, U and X and regulations of
public utility commissions or similar regulatory authorities) binding on or
affecting the Borrower or its properties, and will not constitute an event of
default under any material agreement to which Borrower is a party or by which
its assets or properties may be bound.
(c) Governmental Consents. No authorization or approval or other
---------------------
action by, and no notice to or filing with, any governmental authority or
regulatory body (except routine reports required pursuant to the Securities
Exchange Act of 1934, as amended (if such act is applicable to the Borrower),
which reports will be made in the ordinary course of business) is required for
the due execution, delivery and performance by the Borrower of the Loan
Documents.
(d) Validity. The Loan Documents are the binding obligations of
--------
the Borrower or other executing Person, if any, enforceable in accordance with
their respective terms; except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights.
(e) Financial Condition. The balance sheets of the Borrower and
-------------------
its consolidated Subsidiaries as at March 31, 1999,and the related consolidated
statements of income and changes in common stockholders' equity of the Borrower
and its consolidated Subsidiaries for the fiscal three months then ended, copies
of which have been furnished to the
10
<PAGE>
Bank, fairly present the financial condition of the Borrower and its
consolidated Subsidiaries as at such dates and the results of the operations of
the Borrower and its consolidated Subsidiaries for the period ended on such
date, all in accordance with GAAP, consistently applied, and since March 31,
1999 there has been no material adverse change in the business, operations,
properties, assets or condition (financial or otherwise) of the Borrower and its
Subsidiaries, taken as a whole.
(f) Litigation. Except as set forth in the Form 10-Q dated March 31,
----------
1999, and on Schedule 5.01(f) hereto, there is no known pending or threatened
----------------
action or proceeding affecting the Borrower or any of its Subsidiaries before
any court, governmental agency or arbitrator, which may materially adversely
affect the consolidated financial condition or operations of the Borrower or
which may have a material adverse effect on the Borrower's ability to perform
its obligations under the Loan Documents, having regard for its other financial
obligations.
(g) Employee Benefit Plans. The Borrower and each of its ERISA
----------------------
Affiliates is in compliance in all material respects with any applicable
provisions of ERISA and the regulations and published interpretations thereunder
with respect to all Employee Benefit Plans. No Termination Event has occurred
with respect to any Pension Plan. The excess of the actuarial present value of
all benefit liabilities under all Pension Plans (excluding in such computation
Pension Plans with assets greater than benefit liabilities) over the fair market
value of the assets allocable to such benefit liabilities are not greater than
five percent (5%) of Consolidated Tangible Net Worth. For purposes of the
preceding sentence, the term "benefit liabilities" shall have the meaning
specified in Section 4001 of ERISA.
(h) Disclosure. No representation or warranty of the Borrower
----------
contained in this Agreement or any other document, certificate or written
statement furnished to the Bank by or on behalf of the Borrower for use in
connection with the transactions contemplated by this Agreement contains any
known untrue statement of a material fact or omits to state a known material
fact (known to the Borrower in the case of any document not furnished by it)
necessary in order to make the statements contained herein or therein not
misleading. There is no fact known to the Borrower (other than matters of a
general economic nature) which materially adversely affects the business,
operations, property, assets or condition (financial or otherwise) of the
Borrower and its Subsidiaries, taken as a whole, which has not been disclosed
herein or in such other documents, certificates and statements furnished to the
Bank for use in connection with the transactions contemplated hereby.
(i) Environmental Matters. Except as set forth in Schedule 5.01(i)
--------------------- ----------------
hereto, neither the Borrower nor any Subsidiary, nor any of their respective
officers, employees, representatives or agents, nor, to the best of their
knowledge, any other person, has treated, stored, processed, discharged,
spilled, or otherwise disposed of any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
directive, or any waste or by-product thereof, at any real property or any other
facility owned, leased or used by the Borrower or any Subsidiary, in violation
of any applicable statutes, regulations, ordinances or directives of any
governmental authority or court, which violations may result in liability to the
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $500,000 for all
such violations; and the unresolved violations set forth in said Schedule
5.01(i) will not result in liability to the Borrower or any Subsidiary or any of
their respective officers, employees, representatives, agents or shareholders in
an amount exceeding $500,000 for all such
11
<PAGE>
unresolved violations. Except as set forth in said Schedule, no employee or
other person has made a claim or demand against the Borrower or any Subsidiary
based on alleged damage to health caused by any such hazardous or toxic
substance or by any waste or by-product thereof; and the unsatisfied claims or
demands against the Borrower or any Subsidiary set forth in said Schedule
5.01(i) will not result in uninsured liability to the Borrower or any Subsidiary
or any of their respective officers, employees, representatives, agents or
shareholders in an amount exceeding $250,000 in excess of reserves on the books
of the Borrower for all such unsatisfied claims or demands. Except as set forth
in said Schedule 5.01(i), neither the Borrower nor any Subsidiary has been
charged by any governmental authority with improperly using, handling, storing,
discharging or disposing of any such hazardous or toxic substance or waste or
by-product thereof or with causing or permitting any pollution of any body of
water; and the outstanding related charges set forth in said Schedule 5.01(i)
will not result in liability to the Borrower or any Subsidiary or any of their
respective officers, employees, representatives, agents or shareholders in an
amount exceeding $500,000 for all such outstanding charges.
(j) Employee Matters. There is no known strike or work stoppage in
----------------
existence or threatened involving the Borrower or its Subsidiaries that may
materially adversely affect the consolidated financial condition or operations
of the Borrower or that may have a material adverse effect on the Borrower's
ability to perform its obligations under the Loan Documents, having regard for
its other financial obligations.
(k) Solvency. Borrower and each of its Subsidiaries is Solvent.
--------
(l) Title to Properties. Borrower and each of its Subsidiaries has
-------------------
good and marketable title to or interests in all of its properties and assets
subject to no liens, mortgages, pledges, security interests, encumbrances or
charges of any kind, except those granted to Bank and such others as are
permitted under Section 6.02(e) hereof.
(m) Tax Returns. Borrower and each of its Subsidiaries has filed, or
-----------
caused to be filed, in a timely manner all tax returns, reports and declarations
which are required to be filed by it (without requests for extension except as
previously disclosed in writing to Bank). All information in such tax returns,
reports and declarations is complete and accurate in all material respects.
Borrower and each of its Subsidiaries has paid or caused to be paid all taxes
due and payable or claimed due and payable in any assessment received by it,
except taxes the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower or its
Subsidiaries and with respect to which adequate reserves have been set aside on
its books. Adequate provision has been made for the payment of all accrued and
unpaid Federal, State, county, local, foreign and other taxes whether or not yet
due and payable and whether or not disputed.
(n) Compliance with Other Agreements and Applicable Laws. Neither
----------------------------------------------------
Borrower nor any of its Subsidiaries is in default in any material respect
under, or in violation in any material respect of any of the terms of, any
agreement, contract, instrument, lease or other commitment (including, but not
limited to any such agreement involving the debts or investments of Borrower or
liens upon its assets) to which it is a party or by which it or any of its
assets are bound and Borrower and each of its Subsidiaries is in compliance in
all material respects with all applicable provisions of laws, rules,
regulations, licenses, permits, approvals and orders of any foreign, Federal,
State or local governmental authority.
12
<PAGE>
ARTICLE VI
COVENANTS
SECTION 6.01. Affirmative Covenants. So long as any Revolving Note
---------------------
shall remain unpaid or the Bank shall have any Commitment hereunder, the
Borrower will, unless the Bank shall otherwise consent in writing:
(a) Financial Information. Furnish to the Bank:
---------------------
(i) as soon as available, but in any event within 120 days
after the end of each fiscal year of the Borrower, (1) a copy of the
Borrower's annual report to shareholders containing the audited
consolidated balance sheets of itself and its consolidated
Subsidiaries as at the end of each fiscal year and the related
consolidated statements of income and changes in common stockholders'
equity (or comparable statement) employed in the business and changes
in financial position and cash flow for such year, in each case
prepared in accordance with GAAP, setting forth in each case in
comparative form the figures for the previous year, accompanied by an
unqualified report and opinion thereon of independent certified public
accountants acceptable to the Bank and, if prepared, such accountants'
letter to management, and (2) a copy of the Borrower prepared
consolidating financial statements prepared in connection with each of
the statements provided in subpart (1) above; and
(ii) as soon as available, but in any event within forty-five
(45) days after the end of each fiscal quarter, the Borrower's
unaudited consolidated and consolidating balance sheets of itself and
its consolidated Subsidiaries as at the end of such period and the
related unaudited consolidated and consolidating statements of income
and changes in common stockholders' equity (or comparable statement)
and changes in financial position and cash flow for such period and
year to date, setting forth in each case in comparative form the
figures as at the end of the previous fiscal year as to the balance
sheet and the figures for the previous corresponding period as to the
other statements, certified by a duly authorized officer of the
Borrower as being fairly stated in all material respects subject to
year end adjustments; all such financial statements to be complete and
correct in all material respects and to be prepared in reasonable
detail acceptable to the Bank and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as
approved by such accountants and disclosed therein and except for the
exclusion of certain information and footnote disclosures omitted
pursuant to the rules and regulations of the S.E.C.); and
(iii) as soon as available, copies of all reports which the
Borrower sends to any of its security holders, and copies of all
reports and registration statements which the Borrower or any
Subsidiary files with the S.E.C. or any national securities exchange;
and
(iv) (a) together with each delivery of financial statements of
Borrower and its Subsidiaries pursuant to subdivision (i) above, a
certificate, executed by the Borrower's chairman of the board (if an
officer) or its president or one of its
13
<PAGE>
vice presidents or by its chief financial officer stating that the
signers have reviewed the terms of this Agreement and have made, or
caused to be made under their supervision, a review in reasonable
detail of the transactions and condition of Borrower and its
Subsidiaries during the accounting period covered by such financial
statements and that such review has not disclosed the existence during
or at the end of such accounting period, and that the signers do not
have knowledge of the existence as at the date of such certificate, of
any condition or event that constitutes an Event of Default or
Potential Event of Default, or, if any such condition or event existed
or exists, specifying the nature and period of existence thereof and
what action Borrower has taken, is taking and proposes to take with
respect thereto; and (b) together with each delivery of financial
statements of Borrower and its Subsidiaries pursuant to subdivision
(i) and (ii) above, a certificate demonstrating in reasonable detail
compliance during and at the end of the applicable accounting periods
with the restrictions contained in Section 6.02 hereof.
(b) Notices and Information. Deliver to the Bank:
-----------------------
(i) promptly upon any officer of the Borrower obtaining
knowledge (a) of any condition or event which constitutes an Event of
Default or Potential Event of Default, (b) that any Person has given
any notice to the Borrower or any Subsidiary of the Borrower or taken
any other action with respect to a claimed default or event or
condition of the type referred to in Section 7.01(e), (c) of the
institution of any litigation involving an alleged liability
(including possible forfeiture of property) of the Borrower or any of
its Subsidiaries equal to or greater than $500,000 which is not,
except for deductibles and self insurance reserves, fully covered by
insurance maintained by Borrower or any adverse determination in any
litigation involving a potential liability of the Borrower or any of
its Subsidiaries equal to or greater than $500,000 which is not,
except for deductibles and self insurance reserves, fully covered by
insurance maintained by Borrower or (d) of a material adverse change
in the business, operations, properties, assets or condition
(financial or otherwise) of the Borrower and its Subsidiaries, taken
as a whole, an officers' certificate specifying the nature and period
of existence of any such condition or event, or specifying the notice
given or action taken by such holder or Person and the nature of such
claimed default, Event of Default, Potential Event of Default, event
or condition, and what action the Borrower has taken, is taking and
proposes to take with respect thereto;
(ii) promptly upon becoming aware of the occurrence of any (a)
Termination Event, or (b) non-exempt "prohibited transaction", as such
term is defined in Section 4975 of the Internal Revenue Code or a
transaction prohibited by Section 406 of ERISA, in connection with any
Employee Benefit Plan or any trust created thereunder, a written
notice specifying the nature thereof, what action the Borrower has
taken, is taking or proposes to take with respect thereto, and, when
known, any action taken or threatened by the Internal Revenue Service,
the Department of Labor, or the Pension Benefit Guaranty Corporation
with respect thereto;
(iii) with reasonable promptness copies of (a) all notices
received by the Borrower or any of its ERISA Affiliates of the Pension
Benefit Guaranty
14
<PAGE>
Corporation's intent to terminate any Pension Plan or to have a
trustee appointed to administer any Pension Plan and (b) all notices
received by the Borrower or any of its ERISA Affiliates from a
Multiemployer Plan sponsor concerning the imposition or amount of
withdrawal liability pursuant to Section 4202 of ERISA;
(iv) promptly, and in any event within 30 days after receipt
thereof, a copy of any notice, summons, citation, directive, letter or
other form of communication from any governmental authority or court
in any way concerning any action or omission on the part of the
Borrower or any of its Subsidiaries in connection with any substance
defined as toxic or hazardous by any applicable federal, state or
local law, rule, regulation, order or directive or any waste or
byproduct thereof, or concerning the filing of a lien upon, against or
in connection with the Borrower, its Subsidiaries, or any of their
leased or owned real or personal property, in connection with a
Hazardous Substance Superfund or a Post-Closure Liability Fund as
maintained pursuant to (S) 9507 of the Internal Revenue Code; and
(v) promptly, and in any event within 30 days after request,
such other information and data with respect to the Borrower or any of
its Subsidiaries as from time to time may be reasonably requested by
the Bank and is reasonably available to Borrower.
(c) Corporate Existence, Etc. At all times preserve and keep in full
-------------------------
force and effect its and its Subsidiaries' corporate existence and rights,
licenses and franchises material to its business and those of each of its
Subsidiaries; provided, however, that the corporate existence of any such
-------- -------
Subsidiary (except Suburban) may be terminated if such termination is in the
best interest of the Borrower and is not materially disadvantageous to the
holder of any Revolving Note.
(d) Payment of Taxes and Claims. Pay, and cause each of its
---------------------------
Subsidiaries to pay, all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or property before any penalty or interest accrues
thereon, and all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become due and payable and
which by law have or may become a lien upon any of its properties or assets,
prior to the time when any penalty or fine shall be incurred with respect
thereto; provided that no such charge or claim need be paid if being contested
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if such reserve or other appropriate provision, if any, as shall
be required in conformity with GAAP shall have been made therefor.
(e) Maintenance of Properties; Insurance. Maintain or cause to be
------------------------------------
maintained in good repair, working order and condition all material properties
used or useful in the business of the Borrower and its Subsidiaries and from
time to time will make or cause to be made all appropriate repairs, renewals and
replacements thereof. The Borrower will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to its
properties and business and the properties and business of its Subsidiaries
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or similar businesses and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations.
15
<PAGE>
The Borrower will comply with any other insurance requirement set forth in any
other Loan Document.
(f) Inspection. Permit any authorized representatives designated by
----------
the Bank to visit and inspect any of the properties of the Borrower or any of
its Subsidiaries, including its and their financial and accounting records, and
to make copies and take extracts therefrom, and to discuss its and their
affairs, finances and accounts with its and their officers and independent
public accountants, all at such reasonable times during normal business hours
and as often as may be reasonably requested.
(g) Compliance with Laws Etc. Exercise, and cause each of its
-------------------------
Subsidiaries to exercise, all due diligence in order to comply with the
requirements of all applicable laws, rules, regulations and orders of any
governmental authority, including, without limitation, all rules and regulations
of public utility commissions or similar regulatory authorities, and all
environmental laws, rules, regulations and orders, noncompliance with which
would materially adversely affect the business, properties, assets, operations
or condition (financial or otherwise) of the Borrower and its Subsidiaries,
taken as a whole.
(h) Hazardous Waste Studies. Promptly, and in any event within thirty
-----------------------
(30) days after submission, provide the Bank with copies of all such
investigations, studies, samplings and testings as may be requested by any
governmental or regulatory authority relative to any substance defined as
hazardous or toxic by any applicable federal, state or local law, rule,
regulation, order or directive, or any waste or by-product thereof, at or
affecting any real property or any facility owned, leased or used by the
Borrower or any Subsidiary. The foregoing shall not include sampling and
testing of water, waste water and effluent conducted by the Subsidiaries of
Borrower on periodic bases as a normal part of their water delivery and
wastewater treatment businesses.
(i) Year 2000 Compliance. Perform all acts reasonably necessary to
---------------------
ensure that Borrower and any business in which Borrower holds a substantial
interest, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used herein,
"Year 2000 Compliant" shall mean, in regard to any entity, that all software,
-------------------
hardware, firmware, equipment, goods or systems utilized by or material to the
business operations or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year 2000. Borrower
shall, immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from time to
time require.
SECTION 6.02. Negative Covenants. So long as any Revolving Note
------------------
shall remain unpaid or the Bank shall have any Commitment hereunder, the
Borrower will not, without the written consent of the Bank:
(a) Leverage Ratio. At any time, permit the ratio of Consolidated
--------------
Liabilities to Consolidated Tangible Net Worth to be more than 2.30:1.00.
(b) Consolidated Tangible Net Worth. At any time, permit Consolidated
-------------------------------
Tangible Net Worth to be less than $28,500,000.
16
<PAGE>
(c) Consolidated Net Profit. At the end of any fiscal quarter of the
-----------------------
Borrower, permit Consolidated Net Profit, determined on a four quarter rolling
basis, to be less than $1.00.
(d) EBITDA Coverage Ratio. At the end of any fiscal quarter of
---------------------
Borrower, permit the EBITDA Coverage Ratio, determined on a four quarter rolling
basis, to be less than 1.25:1.0.
(e) Liens Etc. Create or suffer to exist, or permit any of its
---------
Subsidiaries to create or suffer to exist, any Lien upon or with respect to any
of its properties, whether now owned or hereafter acquired, or assign, or permit
any of its Subsidiaries to assign, any right to receive income, in each case to
secure any Debt of any Person other than (i) Liens in favor of the Bank; (ii)
Liens reflected on the financial statements referred to in Section 5.01(e)
hereof and other Liens existing on the date hereof and set forth in Schedule
--------
6.02(e) hereto; (iii) purchase money Liens upon or in any equipment acquired or
- -------
held by the Borrower or any Subsidiary in the ordinary course of business up to
a maximum of $500,000 to secure the purchase price of such equipment or to
secure indebtedness incurred solely for the purpose of financing the acquisition
of such equipment: (iv) Liens existing on property acquired by the Borrower or
any Subsidiary, and all refundings and extensions of any such Liens, and (v)
Liens, deposits and/or pledges made to secure the performance of operating
leases; provided that the principal amount of Debt secured by any such Lien
permitted hereunder shall not exceed an amount equal to (x) one hundred percent
(100%) of the cost of the real property subject to such lien or security
interest or (y) one hundred percent (100%) of the cost of the personal property
subject to such lien or security interest, and further provided that none of
such liens or security interests shall extend to other assets of the Borrower or
its Subsidiaries. The Bank acknowledges that (A) Suburban has an existing first
mortgage indenture encumbering substantially all of its assets to secure three
series (A, B and C) of first mortgage bonds and (B) NMUI has an existing first
mortgage indenture encumbering substantially all of its assets to secure its
Series A and Series B first mortgage bonds.
(f) Debt. Create, incur, assume or permit to exist, or permit any
----
Subsidiary to create, incur, assume or permit to exist, any indebtedness or
liabilities resulting from borrowings, loans or advances, whether matured or
unmatured, liquidated or unliquidated, joint or several, secured or unsecured,
except for (i) Debt incurred pursuant to this Agreement and the other Loan
Documents, (ii) Debt incurred pursuant to the Suburban Loan Documents; (iii)
Debts, revolving lines of credit and lease obligations of Borrower existing as
of, and disclosed to Bank prior to, the date of this Agreement (including
$4,000,000 of unsecured debt of the Borrower to Mellon, $4,000,000 of unsecured
debt of Suburban to Mellon, and $4,000,000 of unsecured debt of NMUI to First
Security Bank), (iv) secured indebtedness for purchase money financing of
equipment which is permitted under Section 6.02(e)(iii) not to exceed an
aggregate of $500,000, (v) unsecured funded bank debt not to exceed an aggregate
of $20,000,000 at any time (including, without limitation, unsecured funded bank
debt incurred pursuant to the Loan Documents and the Suburban Loan Documents and
unsecured funded bank debt to Mellon as described in clause (iii) above) and
(vi) intercompany Debt between Borrower and its wholly-owned Subsidiaries or
between such wholly-owned Subsidiaries.
(g) Consolidation, Merger or Dissolution. (i) Consolidate with or
------------------------------------
merge into any other Person, unless Borrower is the surviving entity and no
event has occurred and is continuing, or would result from such consolidation or
merger, which constitutes an Event of Default or Potential Event of Default,
(ii) wind up, liquidate or dissolve or (iii) agree to do any of the foregoing.
17
<PAGE>
(h) Loans, Investments, Secondary Liabilities. Make or permit to
-----------------------------------------
remain outstanding, or permit any Subsidiary to make or permit to remain
outstanding, any loan or advance to, or guarantee, induce or otherwise become
contingently liable, directly or indirectly, in connection with the obligations,
stock or dividends of, or own, purchase or acquire any stock, obligations or
securities of or any other interest in, or make any capital contribution to, any
other Person, except that the Borrower and its Subsidiaries may:
(i) own, purchase or acquire certificates of deposit issued by
a bank, commercial paper rated Moody's P-1, municipal bonds rated
Moody's AA or better, direct obligations of the United States of
America or its agencies, and obligations guaranteed by the United
States of America;
(ii) continue to own the existing capital stock of the
Borrower's Subsidiaries and make new purchases of the capital stock of
other entities as long as such new investments do not exceed in the
aggregate Five Million Dollars ($5,000,000) outstanding at any one
time, without the Bank's prior written approval;
(iii) endorse negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business;
(iv) allow the Borrower's wholly-owned Subsidiaries to make or
permit to remain outstanding advances from the Borrower's wholly-owned
Subsidiaries to the Borrower;
(v) make or permit to remain outstanding loans or advances to
the Borrower's wholly-owned Subsidiaries or enter into or permit to
remain outstanding guarantees in connection with the obligations of
the Borrower's wholly-owned Subsidiaries; provided, however, that any
-------- -------
outstanding loans or advances by Borrower to its wholly-owned
Subsidiaries shall be evidenced by negotiable promissory notes, in
form and substance satisfactory to Bank, and which notes shall provide
for the assignment thereof to the Bank as collateral security for the
repayment of the Loans and any other obligations of the Borrower
hereunder upon the demand of the Bank;
(vi) make or permit to remain outstanding loans and advances to
any of its officers, shareholders or affiliates or enter into or
permit to remain outstanding guarantees in connection with the
obligations of its officers, shareholders or affiliates, in an
aggregate amount for all such loans, advances and guarantees not
exceeding $100,000 in addition to the loans outstanding and reflected
on the Borrower's financial statements dated March 31, 1999;
(vii) guaranty the indebtedness of Suburban under the Suburban
Loan Documents;
(viii) guaranty the indebtedness of Suburban under that certain
Credit Agreement between Suburban and Mellon dated as of the date
hereof in a maximum amount at any one time not to exceed $4,000,000
for principal, plus all interest thereon and costs and expenses
pertaining to the enforcement of the guaranty and/or the collection of
such indebtedness; and
18
<PAGE>
(ix) guaranty the unsecured bank indebtedness of NMUI in a
maximum amount at any one time not to exceed $4,000,000 for principal,
plus all interest thereon and all costs and expenses pertaining to the
enforcement of the guaranty and/or the collection of such
indebtedness.
(i) Asset Sales. Convey, sell, lease, transfer or otherwise dispose
-----------
of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, all or any part of
its or its Subsidiary's business, property or fixed assets outside the ordinary
course of business, whether now owned or hereafter acquired, except that the
Borrower and its Subsidiaries may convey, sell, lease, transfer or otherwise
dispose of business, property or fixed assets for consideration which in the
aggregate does not exceed $500,000 per year. The foregoing covenant shall not
extend to any property taken by eminent domain by any governmental authority or
other person or entity having the power of eminent domain or to any sale in lieu
of condemnation to a governmental authority or other person or entity having the
power of eminent domain made after threat of condemnation by such governmental
authority or other person or entity, or to the pending sale by Suburban of that
certain parcel of real estate commonly known as 16340 East Maplegrove Street, La
Puente, California, which property was the site of the former headquarters
facility of Borrower and Suburban.
(j) Hostile Tender Offers. Make any offer to purchase or acquire, or
---------------------
consummate a purchase or acquisition of, five percent (5%) or more of the
capital stock of any publicly held corporation or other publicly held business
entity, unless the board of directors of such corporation or business entity has
notified the Borrower that it invites or does not oppose such offer or purchase.
(k) Distributions. Upon the occurrence and during the continuance of
-------------
an Event of Default or Potential Event of Default, authorize, declare or pay, or
permit any of its Subsidiaries to authorize, declare or pay, any Distributions.
(l) Transactions with Affiliates. Neither Borrower nor any of its
----------------------------
Subsidiaries shall enter into any transaction for the purchase, sale or exchange
of property or the rendering of any service to or by any affiliate, except in
the ordinary course of and pursuant to the reasonable requirements of Borrower's
or its Subsidiary's business and upon fair and reasonable terms no less
favorable to the Borrower or its Subsidiary than Borrower or its Subsidiary
would obtain in a comparable arm's length transaction with an unaffiliated
person.
(m) Books and Records. Borrower will, and will cause each of its
-----------------
Subsidiaries to, keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of applicable law
shall be made of all dealings and transactions in relation to its business and
activities.
(n) Restructure. Make any change in Borrower's financial restructure,
-----------
the principal nature of Borrower's business operations (taken as a whole), or
the date of its fiscal year.
ARTICLE VII
EVENTS OF DEFAULT
19
<PAGE>
SECTION 7.01. Events of Default. If any of the following events
-----------------
("Events of Default") shall occur and be continuing:
- --------------------
(a) Borrower shall fail to pay within three (3) days of the date when
due, any principal, interest, fees or other amounts payable under any of the
Loan Documents; or
(b) Any representation or warranty made by the Borrower herein or by
the Borrower (or any of its officers) in connection with the Loan Documents
shall prove to have been incorrect in any material respect when made; or
(c) Borrower shall fail to perform or observe any term, any
affirmative or negative covenant, including, but not limited to, those covenants
set forth in Sections 6.01 and 6.02 hereof, or any other agreement contained in
this Agreement on its part to be performed or observed (other than those
referred to in subsections (a) and (b) above); and with respect to any such
default which by its nature can be cured, such default shall continue for a
period of twenty (20) days from its occurrence; or
(d) The Borrower or any of its Subsidiaries shall default in the
performance of or compliance with any term contained in any Loan Document other
than this Agreement and such default shall not have been remedied or waived
within any applicable grace period in such Loan Document or in (c) above; or
(e) an Event of Default shall occur under the Suburban Loan Documents;
or
(f) (i) The Borrower or any of its Subsidiaries shall (A) fail to pay
any principal of, or premium or interest on, any Debt (including, without
limitation, Debt owing to Mellon), the aggregate outstanding principal amount of
which is at least $100,000 (excluding Debt evidenced by the Revolving Note),
when due (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise) and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such Debt,
or (B) fail to perform or observe any term, covenant or condition on its part to
be performed or observed under any agreement or instrument relating to any such
Debt or material to the performance, business, property, assets, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries taken
as a whole, when required to be performed or observed, and such failure shall
continue after the applicable grace period, if any, specified in such agreement
or instrument; or
(g) (i) The Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or any substantial part of its assets, or the Borrower or any
of its Subsidiaries shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against the Borrower or any of its
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of sixty (60) days (Bank may, in its discretion, cease
making Revolving Loans during the pendency of such action or
20
<PAGE>
proceeding); or (iii) there shall be commenced against the Borrower or any of
its Subsidiaries any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof (Bank may,
in its discretion, cease making Revolving Loans during the pendency of such
action or proceeding); or (iv) the Borrower or any of its Subsidiaries shall
take any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clauses (i), (ii) and (iii) above;
or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due;
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability (not
paid or fully covered by insurance or reserves) equal to or greater than
$250,000 and all such judgments or decrees shall not have been vacated,
discharged, or stayed or bonded pending appeal within thirty (30) days from the
entry thereof; or
(i) (i) The Borrower or any of its ERISA Affiliates fails to make
full payment when due of all material amounts which, under the provisions of any
Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of
its ERISA Affiliates is required to pay as contributions thereto and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(ii) any material accumulated funding deficiency occurs or
exists, whether or not waived, with respect-to any Pension Plan and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(iii) the excess of the actuarial present value of all benefit
liabilities under all Pension Plans over the fair market value of the assets of
such Pension Plans (excluding in such computation Pension Plans with assets
greater than benefit liabilities) allocable to such benefit liabilities are
greater than five percent (5%) of Consolidated Tangible Net Worth and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(iv) the Borrower or any of its ERISA Affiliates enters into any
transaction which has as its principal purpose the evasion of liability under
Subtitle D of Title IV of ERISA:
(v) (A) Any Pension Plan maintained by the Borrower or any of
its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA
in a distress termination, or (B) a trustee shall be appointed by an appropriate
United States district court in accordance with Section 4042 of ERISA to
administer any Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or
any successor thereto) shall institute proceedings to terminate any Pension Plan
or to appoint a trustee to administer any Pension Plan in accordance with
Section 4042 of ERISA, or (D) the Borrower or any of its ERISA Affiliates shall
withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date of
the event listed in subclauses (A)-(D) above or any subsequent date, either the
Borrower or its ERISA Affiliates has any material liability (such liability to
include, without limitation, any liability to the Pension Benefit Guaranty
Corporation, or any successor thereto, or to any other party under Sections
4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or
otherwise associated with the events listed in subclauses (A)-(D) above;
21
<PAGE>
(vi) As used in this subsection 7.01(h) the term "accumulated
funding deficiency" has the meaning specified in Section 412 of the Internal
Revenue Code, and the term "benefit liabilities" has the meaning specified in
Section 4001 of ERISA;
(j) There shall be instituted against the Borrower or any Subsidiary,
or against any guarantor, any proceeding for which forfeiture of any property
with a value of $250,000 or more is a potential penalty and such proceeding
remains undismissed, undischarged or unbonded for a period of thirty (30) days
from the date the Borrower knows of such proceeding;
(k) A Change of Control shall have occurred; or
(l) The mortgage bonds of Suburban or NMUI shall fail to maintain a
NAIC rating of 1 or 2.
Then, (i) upon the occurrence of any Event of Default described in
clause 7.01(g) above, the Commitment shall immediately terminate and all Loans
hereunder with accrued interest thereon, and all other amounts owing under the
Loan Documents shall automatically become due and payable, and (ii) upon the
occurrence of any other Event of Default, the Bank may, by notice to the
Borrower, declare the Commitment to be terminated forthwith, whereupon the
Commitment shall immediately terminate; and, by notice to the Borrower, declare
the Loans hereunder, with accrued interest thereon, and all other amounts owing
under the Loan Documents to be due and payable forthwith, whereupon the same
shall immediately become due and payable. Bank shall have all rights, powers
and remedies available under each of the Loan Documents, or accorded by law,
including, without limitation, the right to resort to any or all security for
any credit accommodation from the Bank subject hereto and to exercise any or all
of the rights of a beneficiary or secured party pursuant to applicable law. All
rights, powers and remedies of Bank in connection with each of the Loan
Documents may be exercised at any time by Bank and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity. Except as expressly provided above in this Section, presentment,
demand, protest and all other notices of any kind are hereby expressly waived.
Notwithstanding any other provision of this Agreement, including Section 8.02,
notices to the Borrower under this Section shall be communicated in writing
(including telex or facsimile transmissions).
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any
---------------
provision of the Loan Documents nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION 8.02. Notices, Etc. Except as otherwise set forth in this
------------
Agreement, all notices and other communications provided for hereunder shall be
in writing (including facsimile communication) and mailed certified mail, return
receipt requested or sent by facsimile
22
<PAGE>
or delivered, if to the Borrower, at its address set forth on the signature page
hereof; and if to the Bank, at its address set forth on the signature page
hereof; or, as to each party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and
communications shall be effective upon personal delivery or upon receipt when
sent by facsimile, or on the date of receipt or refusal indicated on the return
receipt if sent by certified mail, except that notices and communications to the
Bank pursuant to Article II or VII shall not be effective until received by the
Bank.
SECTION 8.03. Right of Setoff: Security Interest in Deposit
----------------------------------------------
Accounts. Upon and only after the occurrence of any Event of Default not cured
- --------
within any applicable grace period, the Bank is hereby authorized by the
Borrower, at any time and from time to time, without notice, (a) to set off
against, and to appropriate and apply to the payment of, the obligations and
liabilities of the Borrower under the Loan Documents (whether matured or
unmatured, fixed or contingent or liquidated or unliquidated) any and all
amounts owing by the Bank to the Borrower (whether payable in Dollars or any
other currency, whether matured or unmatured, and, in the case of deposits,
whether general or special, time or demand and however evidenced) and (b)
pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn against any
deposits so held as the Bank in its sole discretion may elect. The Borrower
hereby grants to the Bank a security interest in all deposits and accounts
maintained with the Bank and with any other financial institution. The Bank is
authorized to debit any account maintained with it by the Borrower for any
amount of principal, interest or fees which are then due and owing to the Bank.
SECTION 8.04. No Waiver; Remedies. No failure on the part of either
-------------------
party hereto to exercise, and no delay in exercising, any right under any of the
Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under any of the Loan Documents preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
SECTION 8.05. Costs and Expenses. Borrower shall pay to Bank
------------------
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel), incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and each other of the Loan
Documents, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents (including, without
limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization,
moratorium or other similar proceedings) or the restructuring of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including, without limitation, any action for
declaratory relief.
SECTION 8.06. Participations. The Bank may sell, assign, transfer,
--------------
negotiate or grant participations to other financial institutions in all or part
of the obligations of the Borrower outstanding under the Loan Documents,
provided that any such sale, assignment, transfer, negotiation or participation
shall be in compliance with the applicable federal and state securities laws;
and provided further that any assignee or transferee agrees to be bound by the
terms and conditions of this Agreement. The Bank may, in connection with any
actual or
23
<PAGE>
proposed assignment or participation, disclose to the actual or proposed
assignee or participant, any information relating to the Borrower or any of its
Subsidiaries.
SECTION 8.07. Effectiveness: Binding Effect. This Agreement shall
-----------------------------
become effective when it shall have been executed by the Borrower and the Bank
and thereafter shall be binding upon and inure to the benefit of the Borrower,
the Bank and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
without the prior written consent of the Bank.
SECTION 8.08. Governing Law. The validity, interpretation and
-------------
enforcement of this Agreement and the other Loan Documents and any dispute
arising out of the relationship between the parties hereto, whether in contract,
tort, equity or otherwise, shall be governed by the internal laws of the State
of California (without giving effect to principles of conflicts of law).
SECTION 8.09. Arbitration.
-----------
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
---------------
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in the County of
Los Angeles, California selected by the AAA or other administrator. If there is
any inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant to
the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction
24
<PAGE>
before, after or during the pendency of any arbitration or other proceeding. The
exercise of any such remedy shall not waive the right of any party to compel
arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
---------------
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (A) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (B) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (C) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (1) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (2) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
--------------------------------------------
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be
25
<PAGE>
entered in the court in which such proceeding was commenced in accordance with
California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
SECTION 8.10. Waiver of Notices. Borrower hereby expressly waives
-----------------
demand, presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments, included in or evidencing any of the
obligations, and any and all other demands and notices of any kind or nature
whatsoever with respect to the obligations and this Agreement, except such as
are expressly provided for herein. No notice to or demand on Borrower which
Bank may elect to give shall entitle Borrower to any other or further notice or
demand in the same, similar or other circumstances.
SECTION 8.11. Entire Agreement. This Agreement with Exhibits and
----------------
Schedules and the other Loan Documents embody the entire agreement and
understanding between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof.
SECTION 8.12. Separability of Provisions. In case any one or more of
--------------------------
the provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
SECTION 8.13. Execution in Counterparts. This Agreement may be
-------------------------
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BANK OF AMERICA, N.A. SOUTHWEST WATER COMPANY
By: /s/ PAUL F. SUTHERLEN By: /s/ THOMAS C. TEKULVE
------------------------------- ------------------------------------
Name: Paul F. Sutherlen Name: Thomas C. Tekulve
Title: Vice President Title: Vice President - Finance
By: /s/ STEPHEN J. MUZI
------------------------------------
Name: Stephen J. Muzi
Title: Corporate Controller
Address: Address:
Los Angeles Regional Commercial 225 North Barranca Avenue, Suite 200
Banking Office West Covina, California 91791-1605
525 South Flower Street Attention: Thomas C. Tekulve
Mezzanine Level Vice President - Finance
Los Angeles, California 90071 Facsimile: (626) 915-1558
Attention: Paul F. Sutherlen
Title: Vice President
Facsimile (213) 345-6983
27
<PAGE>
SCHEDULE 5.01(f) - LITIGATION
-----------------------------
None other than as reported on Form 10-Q of Borrower for quarter ended March 31,
1999, and Form 10-K of Borrower for year ended December 31, 1998.
28
<PAGE>
SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS
----------------------------------------
See Form 10-Q of Borrower for quarter ended March 31, 1999, and Form 10-K of
Borrower for year ended December 31, 1998.
29
<PAGE>
SCHEDULE 6.02(e) - LIENS
------------------------
None except as disclosed in the audited consolidated financial statements of
Borrower for the fiscal year ended December 31, 1998.
30
<PAGE>
EXHIBIT A
REVOLVING NOTE
$4,000,000 Los Angeles, California
July 30, 1999
FOR VALUE RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware
corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A.
("Bank") at its office at 525 South Flower Street, Mezzanine Level, Los Angeles,
California, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Four Million Dollars ($4,000,000), or so much thereof as may be
advanced and be outstanding, with interest thereon, to be computed on each
advance from the date of its disbursement (computed on the basis of a 360-day
year and actual days elapsed, which results in more interest than if a 365-day
year were used) either (i) at a fluctuating rate per annum equal to the
Reference Rate minus one quarter (0.25) of a percentage point in effect from
time to time, or (ii) at an optional rate per annum determined by Bank to be one
and one-quarter (1.25%) percentage points above Bank's IBOR in effect on the
first day of the applicable IBOR Rate Term. When interest is determined in
relation to the Reference Rate, each change in the rate of interest hereunder
shall become effective on the opening of business on the day specified in the
public announcement of a change in Bank's Reference Rate. With respect to each
IBOR option selected hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and applicable IBOR Rate Term thereto and any
payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday or any other
day designated as a holiday under Federal or California statute or regulation,
or for amounts bearing interest at an offshore rate, a Business Day is any day
except a Saturday, Sunday or any other day designated as a holiday under Federal
or California statute or regulation on which Bank is open for business in
California and dealing in offshore dollars.
2. "IBOR Rate Portion" means a portion of the principal amount
outstanding under this Note which is bearing interest at a rate related to IBOR.
No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars
($250,000).
3. "IBOR Rate Term" means a period commencing on a Business Day and
continuing for no shorter than one (1) month and no longer than six (6) months,
as designated by Borrower, during which all or a portion of the outstanding
principal balance of this Note bears interest determined in relation to Bank's
IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled
Maturity Date hereof. The last day of the interest period will be determined by
Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would
end on a day which is not a Business Day, then such IBOR Rate Term shall be
extended to the next succeeding Business Day.
i
<PAGE>
4. "IBOR Rate" means the interest rate determined by the following
formula, rounded upward, if necessary, to the nearest 1/100 of one percent.
(All amounts in the calculation will be determined by Bank as of the first day
of the interest period.)
IBOR Rate = IBOR Base Rate
--------------------------------------------
(1.00 - Reserve Percentage)
(a) "IBOR Base Rate" means the interest rate at which Bank's Grand
Cayman Branch, Grand Cayman, British West Indies, would offer U.S.
dollar deposits for the applicable interest period to other major
banks in the offshore dollar inter-bank market.
(b) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
5. "Reference Rate" means the rate of interest publicly announced from
time to time by Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by Bank based on various factors, including Bank's costs
and desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. Bank may price loans to its
customers at, above or below the Reference Rate.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable
-------------------
on the first day of each month, commencing September 1, 1999.
2. Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to Bank's IBOR, it may be continued
by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Reference Rate or
in relation to Bank's IBOR for a new IBOR Rate Term designated by Borrower. At
any time any portion of this Note bears interest determined in relation to the
Reference Rate, Borrower may convert all or a portion thereof so that it bears
interest determined in relation to Bank's IBOR for a IBOR Rate Term designated
by Borrower. At the time each advance is requested hereunder or Borrower wishes
to select the IBOR option for all or a portion of the outstanding principal
balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank
notice specifying (a) the interest rate option selected by Borrower, (b) the
principal amount subject thereto, and (c) if the IBOR option is selected, the
length of the applicable IBOR Rate Term. Any such notice may be given by
telephone so long as, with respect to each IBOR selection, such notice is given
to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate
Term. For each IBOR option requested hereunder, Bank will quote the applicable
IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first
day of the IBOR Rate Term. If Borrower does not immediately accept the rate
quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re-
determination by Bank of the applicable IBOR Rate; provided however, that if
Borrower fails
ii
<PAGE>
to accept any such rate by 11:00 a.m., California time, on the Business Day such
quotation is given, then the quoted rate shall expire and Bank shall have no
obligation to permit a IBOR option to be selected on such day. If no specific
designation of interest is made at the time any advance is requested hereunder
or at the end of any IBOR Rate Term, Borrower shall be deemed to have made a
Reference Rate interest selection for such advance or the principal amount to
which such IBOR Rate Term applied.
3. Additional IBOR Provisions.
--------------------------
(a) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining Bank's IBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until
such notice has been withdrawn by Bank, than (i) no new IBOR option may be
selected by Borrower, and (ii) any portion of the outstanding principal balance
hereof which bears interest determined in relation to Bank's IBOR, subsequent to
the end of the IBOR Rate Term applicable thereto, shall bear interest determined
in relation to the Reference Rate.
(b) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(i) to make IBOR options available hereunder, or (ii) to maintain interest
rates based on Bank's IBOR, then in the former event, any obligation of Bank to
make available such unlawful IBOR options shall immediately be cancelled, and in
the latter event, any such unlawful IBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Reference Rate; provided however, that if any such Change in Law shall permit
any IBOR-based interest rates to remain in effect until the expiration of the
IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates
shall continue in effect until the expiration of such IBOR Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any IBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(c) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(i) subject Bank to any tax, duty or other charge with respect to any
IBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(ii) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of advances or
loans by, or any other acquisition of funds by any office of Bank; or
(iii) impose on Bank any other condition;
iii
<PAGE>
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any IBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such IBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any IBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
4. Default Interest. During the continuance of an Event of Default, the
----------------
outstanding principal balance of this Note shall bear interest until paid in
full at an increased rate per annum (computed on the basis of a 360-day year and
actual days elapsed, which results in more interest than if a 365-day year were
used) equal to two percent (2%) above the rate of interest from time to time
applicable to this Note.
C. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and re-borrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for Borrower, which balance may be endorsed hereon from time to time by
the holder. The outstanding principal balance of this Note shall be due and
payable in full on the "Maturity Date" (as defined in the Credit Agreement).
2. Advances. Advances hereunder, to the total amount of the principal
--------
sum stated above, may be made by the holder at the oral or written request of
(a) Anton C. Garnier, Peter J. Moerbeek, Thomas C. Tekulve , Stephen J. Muzi or
Leslie Ward-Cline, any one acting alone, who are authorized to request advances
and direct the disposition of any advances until written notice of the
revocation of such authority is received by the holder at the office designated
above, or (b) any person, with respect to advances deposited to the credit of
any account of Borrower with the holder, which advances, when so deposited,
shall be conclusively presumed to have been made to or for the benefit of
Borrower regardless of the fact that persons other than those authorized to
request advances may have authority to draw against such account. The holder
shall have no obligation to determine whether any person requesting an advance
is or has been authorized by Borrower.
3. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. Unless instructed otherwise by Borrower, all payments
credited to principal shall be applied first, to the outstanding principal
balance of this Note which bears interest determined in relation to the
Reference Rate, if any, and second, to the outstanding principal balance of this
Note which bears interest determined in relation to Bank's IBOR, with such
payments applied to the oldest IBOR Rate Term first.
4. Prepayment.
----------
iv
<PAGE>
(a) Reference Rate. Borrower may prepay principal on any portion of this
--------------
Note which bears interest determined in relation to the Reference Rate at any
time, in any amount and without penalty.
(b) IBOR. Each prepayment of an IBOR Rate Portion, whether voluntary, by
----
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described
below. A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement. The
prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by Bank
by placing the amount prepaid on deposit in the domestic certificate
of deposit market, the eurodollar deposit market, or other appropriate
money market selected by Bank for a period starting on the date on
which it was prepaid and ending on the last day of the interest period
for such Portion (or the scheduled payment date for the amount
prepaid, if earlier).
Bank will have no obligation to accept an election of an IBOR
Rate Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not
available in the offshore dollar inter-bank market; or
(ii) the IBOR Rate does not accurately reflect the cost of
an IBOR Rate Portion.
Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the
Reference Rate in effect from time to time (computed on the basis of a 360-day
year, actual days elapsed).
D. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of July 30,
1999, as amended from time to time, including, without limitation, those terms
relating to arbitration of Disputes (the "Credit Agreement"). Any default in
the payment or performance of any obligation under this Note, or any defined
event of default under the Credit Agreement, shall constitute an "Event of
Default" under this Note.
E. MISCELLANEOUS:
v
<PAGE>
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, without notice upon the occurrence of an
Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with
notice upon the occurrence of any other Event of Default, may declare all sums
of principal and interest outstanding hereunder to be immediately due and
payable without presentment, demand, protest or notice of dishonor, all of which
are expressly waived by Borrower, and the obligation, if any, of the holder to
extend any further credit hereunder shall immediately cease and terminate.
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in-house counsel), incurred by the holder in connection with the enforcement of
the holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, and including any of the foregoing incurred in connection with any
bankruptcy proceeding relating to Borrower.
2. Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
3. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California.
iv
<PAGE>
4. Defined Terms. All capitalized terms not herein defined shall have
-------------
the meanings given to them in the Credit Agreement.
"Borrower"
SOUTHWEST WATER COMPANY,
a Delaware corporation
By: /s/THOMAS C. TEKULVE
------------------------------------------
Thomas C. Tekulve
Vice President - Finance
By: /s/STEPHEN J. MUZI
------------------------------------------
Stephen J. Muzi
Corporate Controller
vii
<PAGE>
EXHIBIT 10.12
CREDIT AGREEMENT
between
SUBURBAN WATER SYSTEMS
and
BANK OF AMERICA, N.A.
July 30, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
ARTICLE I............................................................ 1
SECTION 1.01. Defined Terms.......................................... 1
SECTION 1.02. Other Definitional Provisions.......................... 5
ARTICLE II........................................................... 6
SECTION 2.01. The Revolving Loans.................................... 6
(a) The Revolving Commitment.................................. 6
(b) Making the Revolving Loans................................ 6
(c) Reduction of the Revolving Commitment..................... 6
(d) Revolving Note............................................ 6
SECTION 2.02. Mandatory Repayment.................................... 7
SECTION 2.03. Interest Computation and Payment....................... 7
ARTICLE III.......................................................... 7
SECTION 3.01. Use of Proceeds........................................ 7
SECTION 3.02. [Deliberately Omitted]................................. 7
SECTION 3.03. Payments............................................... 7
SECTION 3.04. Payment on Non-Business Days........................... 7
SECTION 3.05. Reduced Return......................................... 7
SECTION 3.06. Indemnities............................................ 8
SECTION 3.07. Funding Sources........................................ 8
ARTICLE IV........................................................... 8
SECTION 4.01. Conditions Precedent to Initial Loan................... 8
SECTION 4.02. Conditions Precedent to Each Borrowing.................10
ARTICLE V............................................................10
SECTION 5.01. Representations and Warranties.........................10
(a) Organization..............................................10
(b) Authorization; No Conflict................................10
(c) Governmental Consents.....................................11
(d) Validity..................................................11
(e) Financial Condition.......................................11
(f) Litigation................................................11
(g) Employee Benefit Plans....................................11
(h) Disclosure................................................11
(i) Environmental Matters.....................................12
(j) Employee Matters..........................................12
(k) Solvency..................................................12
(l) Title to Properties.......................................12
(m) Tax Returns...............................................13
(n) Compliance with Other Agreements and Applicable Laws......13
ARTICLE VI...........................................................13
SECTION 6.01. Affirmative Covenants.................................13
(a) Financial Information.....................................13
(b) Notices and Information...................................15
(c) Corporate Existence, Etc..................................16
(d) Payment of Taxes and Claims...............................16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(e) Maintenance of Properties; Insurance...........................16
(f) Inspection.....................................................17
(g) Compliance with Laws Etc.......................................17
(h) Hazardous Waste Studies........................................17
(i) Year 2000 Compliance...........................................17
SECTION 6.02. Negative Covenants.........................................17
(a) Leverage Ratio.................................................17
(b) Consolidated Tangible Net Worth of Borrower....................17
(c) Consolidated Tangible Net Worth of Southwest...................18
(d) Consolidated Net Profit of Borrower............................18
(e) Consolidated Net Profit of Southwest...........................18
(f) EBITDA Coverage Ratio of Southwest.............................18
(g) Funded Debt of Borrower........................................18
(h) Liens Etc......................................................18
(i) Debt...........................................................18
(j) Consolidation, Merger or Dissolution...........................19
(k) Loans, Investments, Secondary Liabilities......................19
(l) Asset Sales....................................................19
(m) Hostile Tender Offers..........................................20
(n) Distributions..................................................20
(o) Transactions with Affiliates...................................20
(p) Books and Records..............................................20
(q) Restructure....................................................20
ARTICLE VII...............................................................20
SECTION 7.01. Events of Default..........................................20
ARTICLE VIII..............................................................23
SECTION 8.01. Amendments, Etc............................................23
SECTION 8.02. Notices, Etc...............................................23
SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts.....23
SECTION 8.04. No Waiver; Remedies........................................24
SECTION 8.05. Costs and Expenses.........................................24
SECTION 8.06. Participations.............................................24
SECTION 8.07. Effectiveness: Binding Effect..............................24
SECTION 8.08. Governing Law..............................................24
SECTION 8.09. Arbitration................................................24
SECTION 8.10. Waiver of Notices..........................................26
SECTION 8.11. Entire Agreement...........................................26
SECTION 8.12. Separability of Provisions.................................27
SECTION 8.13. Execution in Counterparts..................................27
</TABLE>
Schedules
- ---------
5.01(f) - Litigation
5.01(i) - Environmental Matters
6.02(h) - Liens
ii
<PAGE>
Exhibits
- --------
A - Form of Note
B - Form of Legal Opinion
C - Form of Continuing Guaranty
iii
<PAGE>
CREDIT AGREEMENT
This Credit Agreement dated as of July 30, 1999 is entered into
between SUBURBAN WATER SYSTEMS, a California corporation (the "Borrower") and
---------
BANK OF AMERICA, N.A. (the "Bank").
-----
RECITALS
--------
WHEREAS, the Borrower has requested that the Bank extend certain
credit facilities to the Borrower in the place of Wells Fargo Bank, National
Association; and
WHEREAS, the Bank is willing to extend such credit facilities to the
Borrower on the terms and conditions set forth below.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the
-------------
following terms have the following meanings:
"Agreement": This Credit Agreement, as amended, supplemented or
----------
modified from time to time.
"Bank": As set forth in the introductory paragraph of this Agreement.
-----
"Bondable Capacity": has the meaning as set forth in Section 4.02(A)
------------------
of that certain Indenture of Mortgage and Deed of Trust dated October 1, 1986,
executed by Suburban Water Systems to First Trust of California, National
Association, as Trustee, as amended by First Supplemental Indenture of Mortgage
dated February 7, 1990, Second Amendment and Supplement to Indenture of Mortgage
dated January 24, 1992 and Third Amendment and Supplement to Indenture of
Mortgage dated October 9, 1996.
"Borrower": As set forth in the introductory paragraph of this
---------
Agreement.
"Borrowing": As defined in Section 2.01.
----------
"Business Day": Has the meaning set forth in the Revolving Note.
-------------
"Capital Leases": As applied to any Person, any lease of any property
---------------
(whether real, personal or mixed) by that Person as lessee which would, in
accordance with GAAP, be required to be accounted for as a capital lease on the
balance sheet of that Person.
"Change of Control": Shall be deemed to have occurred at such times
------------------
as: (a) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Act of 1934), becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than thirty percent (30%) of the total voting power of all
classes of stock then outstanding of Borrower normally entitled to vote in the
election of directors; or (b) Southwest shall fail to own directly one hundred
percent (100%) of the issued
-1-
<PAGE>
and outstanding common stock of the Borrower, NMUI or ECO or shall lose voting
control of the Borrower's, NMUI's or ECO's issued and outstanding common stock.
A change of control shall not include a transfer of NMUI's operating assets
through a condemnation or sale in lieu of condemnation.
"Commitment": The Bank's obligation to make Loans to the Borrower
-----------
pursuant to Article II in the amount or amounts referred to therein.
"Consolidated EBITDA of Southwest" means, for any period of Southwest
---------------------------------
and its Subsidiaries on a consolidated basis, Consolidated Net Profit of
Southwest for such period, plus interest expense (net of capitalized interest
expense) and provision for income taxes for such period, plus depreciation and
amortization for such period.
"Consolidated Liabilities of Southwest": At any date of
-------------------------------------
determination, the total liabilities of Southwest and its Subsidiaries on a
consolidated basis determined in accordance with GAAP (including, without
limitation, (1) any balance sheet liability with respect to a Pension Plan
recognized pursuant to Financial Accounting Standards Board Statements 87 or 88
and (2) any withdrawal liability under Section 4201 of ERISA with respect to a
withdrawal from a Multiemployer Plan, as such liability may be set forth in a
notice of withdrawal liability under Section 4219 (and as adjusted from time to
time subsequent to the date of such notice) less (1) deferred taxes, (2)
----
contributions in aid of construction ("CIAC"), (3) unamortized investment tax
credits, (4) deferred revenue on CIAC, and (5) deposits for CIAC for capital
improvement projects.
"Consolidated Net Profit of Southwest" means, in respect of any period
-------------------------------------
of Southwest and its Subsidiaries, the consolidated net profit after taxes of
Southwest and its Subsidiaries as such would appear on the consolidated
statement of earnings of Southwest and its Subsidiaries prepared in accordance
with GAAP, consistently applied, minus nonrecurring or extraordinary income.
-----
"Consolidated Tangible Net Worth of Borrower": At any date of
--------------------------------------------
determination, the sum of the capital stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of the Borrower and its
consolidated Subsidiaries minus (i) treasury stock, (ii) intangible assets
-----
(including, without limitation, franchises, patents, patent applications,
trademarks, brand names, goodwill, purchased contracts, water rights and
deferred charges (including unamortized debt discount and expense and
organization costs) and research and development expenses) and (iii)
receivables, advances, loans and all other amounts due from employees, officers,
shareholders and/or affiliates (excluding Southwest), on a consolidated basis
determined in conformity with GAAP.
"Consolidated Tangible Net Worth of Southwest": At any date of
---------------------------------------------
determination, the sum of the capital stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of Southwest and its
consolidated Subsidiaries minus (i) treasury stock, (ii) intangible assets
-----
(including, without limitation, franchises, patents, patent applications,
trademarks, brand names, goodwill, purchased contracts, water rights and
deferred charges (including unamortized debt discount and expense and
organization costs) and research and development expenses) and (iii)
receivables, advances, loans and all other amounts due from employees, officers,
shareholders and/or affiliates (excluding Southwest's wholly-owned
Subsidiaries), on a consolidated basis determined in conformity with GAAP.
"Debt": As applied to any Person, (i) all indebtedness for borrowed
-----
money, (ii) that portion of obligations with respect to Capital Leases which is
properly classified as a
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<PAGE>
liability on a balance sheet in conformity with GAAP, (iii) notes payable and
drafts accepted representing extensions of credit whether or not representing
obligations for borrowed money, (iv) any obligation owed for all or any part of
the deferred purchase price of property or services which purchase price is (y)
due more than six months from the date of incurrence of the obligation in
respect thereof, or (z) evidenced by a note or similar written instrument; (v)
all indebtedness secured by any Lien on any property or asset owned or held by
that Person regardless of whether the indebtedness secured thereby shall have
been assumed by that Person or is non-recourse to the credit of that person;
(vi) reimbursement obligations under letters of credit; and (vi) other
contingent liabilities.
"Distribution": With respect to any Person shall mean that such
-------------
Person has paid any dividend or returned any capital to, its stockholders or
equity holders as such or authorized or made any other distribution, payment or
delivery of property or cash to its stockholders or equity holders as such, or
redeemed, retired, purchased, or otherwise acquired, directly or indirectly, for
consideration, any shares of any class of its capital stock or equity interests
(or any options, warrants or rights issued by such Person with respect to its
capital stock or equity interests), or set aside any funds for any of the
foregoing purposes, or shall have permitted any of its Subsidiaries to purchase
or otherwise acquire for a consideration any shares of any class of the capital
stock or any equity interests of such Person (or any options, warrants or rights
issued by such Person with respect to its capital stock or equity interests).
Without limiting the foregoing, "Distributions" with respect to any Person shall
also include all payments made or required to be made by such Person with
respect to any stock appreciation rights plans, equity incentive or the setting
aside of any funds for the foregoing purposes.
"Dollars and $": Dollars in lawful currency of the United States of
--------------
America.
"EBITDA Coverage Ratio of Southwest" means, for any period of
----------------------------------
Southwest and its Subsidiaries on a consolidated basis, Consolidated EBITDA
divided by the sum of the total interest expense plus current portion of long-
----
term Debt plus current portion of advances for construction plus Distributions.
---- ----
"ECO": ECO Resources, Inc., a Texas corporation.
----
"Employee Benefit Plan": Any Pension Plan, any employee welfare
----------------------
benefit plan, or any other employee benefit plan which is described in Section
3(3) of ERISA and which is maintained for employees of the Borrower or any ERISA
Affiliate of the Borrower.
"ERISA": The Employee Retirement Income Security Act of 1974, as
------
amended to the date hereof and from time to time hereafter.
"ERISA Affiliate": As applied to any Person, any trade or business
----------------
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) and (c) of the Internal Revenue Code.
"Funded Debt of Borrower" means, without duplication, all with respect
------------------------
to Borrower and its Subsidiaries on a consolidated basis, all Debt for borrowed
money, including without limitation: (i) Debt evidenced by Borrower's mortgage
bonds; (ii) unsecured Debt; (iii) all amounts owing under the Loan Documents;
and (iv) all amounts owing to Wells Fargo (including, without limitation,
unsecured Debt to Wells Fargo as permitted hereunder).
-3-
<PAGE>
"GAAP": Generally accepted accounting principles set forth in the
-----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession or any public commission having regulatory responsibility over the
Borrower or any Subsidiary.
"Internal Revenue Code": The Internal Revenue Code of 1986, as
----------------------
amended to the date hereof and from time to time hereafter and any successor
statute.
"Lien": Any lien, mortgage, deed of trust, pledge, security interest,
-----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Loans": Loans made to the Borrower pursuant to Section 2.01.
------
"Loan Documents": This Agreement, the Revolving Note and each
---------------
agreement, document, instrument and guarantee required by the Bank in connection
with this Agreement and/or the credit extended hereunder.
"Maturity Date": July 31, 2001.
--------------
"Mellon": means Mellon Bank, N.A.
-------
"Multiemployer Plan": A "multiemployer plan" as defined in Section
-------------------
4001(a)(3) of ERISA which is maintained for employees of the Borrower or any
ERISA Affiliate of the Borrower.
"NAIC" means National Association of Insurance Companies.
-----
"NMUI": New Mexico Utilities, Inc., a New Mexico corporation.
-----
"Pension Plan": Any employee plan which is subject to Section 412 of
-------------
the Internal Revenue Code and which is maintained for employees of the Borrower
or any ERISA Affiliate of the Borrower, other than a Multiemployer Plan.
"Person": An individual, partnership, corporation, limited liability
-------
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"Potential Event of Default": A condition or event which, after
---------------------------
notice or lapse of time or both, would constitute an Event of Default if that
condition or event were not cured or removed within any applicable grace or cure
period.
"Regulations G, T, U and X": Regulations G, T, U and X, respectively,
--------------------------
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"Revolving Commitment": The amount of $4,000,000 as such amount may
---------------------
be reduced pursuant to Section 2.01(c).
"Revolving Loans": As defined in Section 2.01(a).
----------------
-4-
<PAGE>
"Revolving Note": As defined in Section 2.01(d).
---------------
"S.E.C.": The United States Securities and Exchange Commission and
-------
any successor institution or body which performs the functions or substantially
all of the functions thereof.
"Solvent": When used with respect to any Person that as of the date
--------
as to which the Person's solvency is to be measured:
(i) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities) as
they become absolute and matured;
(ii) it has sufficient capital to conduct its business; and
(iii) it is able to meet its debts as they mature.
"Southwest": Southwest Water Company, a Delaware corporation and the
----------
parent company of the Borrower.
"Southwest Loan Documents" means that Credit Agreement dated as of the
-------------------------
date hereof between the Bank and Southwest, and each agreement, document,
instrument and guarantee required by the Bank in connection with such Credit
Agreement and/or the credit extended thereunder.
"Subsidiary": A corporation of which shares of stock having ordinary
-----------
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly, or indirectly
through one or more intermediaries, or both, by the Borrower.
"Termination Event": (i) a "Reportable Event" described in Section
------------------ -----------------
4043 of ERISA and the regulations issued thereunder (other than a "Reportable
Event" not subject to the provision for 30-day notice to the Pension Benefit
Guaranty Corporation under such regulations) with respect to any Pension Plan,
or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a
Pension Plan during a plan year in which it was a "substantial employer" as
---------------------
defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of
intent to terminate a Pension Plan or the treatment of a Pension Plan amendment
as a termination under Section 4041 of ERISA, or (iv) the institution of
proceedings to terminate a Pension Plan by the Pension Benefit Guaranty
Corporation under Section 4042 of ERISA, or (v) any other event or condition
which might constitute grounds under ERISA for the termination of, or the
appointment of a trustee to administer, any Pension Plan under Section 4042 of
ERISA, or (vi) the imposition of a lien with respect to any Pension Plan
pursuant to Section 412(n) of the Internal Revenue Code.
SECTION 1.02. Other Definitional Provisions.
-----------------------------
(a) All terms defined in this Agreement shall have the defined
meanings when used in the Revolving Note or any certificate or other document
made or delivered pursuant hereto.
(b) As used herein and in the Revolving Note, and any certificate or
other document made or delivered pursuant hereto, accounting terms not defined
in subsection 1.01,
-5-
<PAGE>
and accounting terms partly defined in subsection 1.01 to the extent not
defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
schedule and exhibit references are to this Agreement unless otherwise
specified.
(d) So long as the Borrower does not have any Subsidiaries, references
to a Subsidiary or Subsidiaries in this Agreement shall be deemed to be deleted.
ARTICLE II.
THE CREDIT
SECTION 2.01. The Revolving Loans.
-------------------
(a) The Revolving Commitment. The Bank agrees, on the terms and
------------------------
conditions hereinafter set forth, to make loans ("Revolving Loans") to the
----------------
Borrower from time to time during the period from the date hereof to and
including the Maturity Date in an aggregate amount not to exceed the Revolving
Commitment, as such amount may be reduced pursuant to Section 2.01(c). Within
the limits of the Revolving Commitment and prior to the Maturity Date, the
Borrower may borrow, repay, and reborrow subject to the terms of this Agreement.
(b) Making the Revolving Loans. The Borrower may borrow under the
--------------------------
Revolving Commitment on any Business Day, provided that the Borrower shall give
the Bank notice pursuant to the terms of the Note specifying (i) the amount of
the proposed Borrowing and (ii) the requested date of the Borrowing. Upon
satisfaction of the applicable conditions set forth in Article IV, the proceeds
of all such Loans will then be made available to the Borrower by the Bank by
crediting the account of the Borrower on the books of the Bank, or as otherwise
directed by the Borrower.
(c) Reduction of the Revolving Commitment. The Borrower shall have
-------------------------------------
the right, upon at least two Business Days' notice to the Bank, to terminate in
whole or reduce in part the unused portion of the Revolving Commitment, without
premium or penalty, provided that each partial reduction shall be in the
aggregate amount of $100,000 or an integral multiple thereof and that such
reduction shall not reduce the Revolving Commitment to an amount less than the
amount outstanding hereunder on the effective date of the reduction. Such
notice shall be irrevocable and such reduction shall not be reinstated.
(d) Revolving Note. The Loans made by the Bank pursuant hereto shall
--------------
be evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to
- --------- ---------------
the order of the Bank and representing the obligation of the Borrower to pay the
aggregate unpaid principal amount of all Revolving Loans made by the Bank, with
interest thereon as prescribed in Section 2.03. The Bank is hereby authorized to
record in its books and records and on any schedule annexed to the Revolving
Note, the date and amount of each Revolving Loan made by the Bank, and the date
and amount of each payment of principal thereof, and the applicable interest
rate, and any such recordation shall constitute prima facie evidence of the
----- -----
accuracy of the information so recorded; provided that failure by the Bank to
effect such recordation shall not affect the Borrower's obligations hereunder.
Prior to the transfer of a Revolving Note, the Bank shall record such
information on any schedule annexed to and forming a part of such Revolving
Note.
-6-
<PAGE>
SECTION 2.02. Mandatory Repayment. The aggregate principal amount
-------------------
of the Revolving Loans outstanding on the Maturity Date, together with accrued
interest thereon, shall be due and payable in full on the Maturity Date. If at
any time the aggregate outstanding Borrowings exceed the Revolving Commitment
then in effect, the Borrower shall immediately repay the excess to the Bank
without penalty or premium.
SECTION 2.03. Interest Computation and Payment. The outstanding
--------------------------------
principal balance of the Revolving Loans shall bear interest at the rates of
interest set forth in the Revolving Note. Interest shall be computed on the
basis of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in the Revolving Note.
ARTICLE III.
GENERAL PROVISIONS CONCERNING THE LOANS
SECTION 3.01. Use of Proceeds. The proceeds of the initial Loan
---------------
hereunder shall be used to pay off obligations owing to Wells Fargo Bank,
National Association under that certain Amended and Restated Credit Agreement
dated December 23, 1997, as amended. The proceeds of subsequent Loans hereunder
shall be used by the Borrower (i) for general corporate purposes, working
capital and acquisitions of the Borrower and its wholly-owned Subsidiaries, and
(ii) to finance capital additions to the water utility and other operations of
the Borrower and its wholly-owned Subsidiaries.
SECTION 3.02. [Deliberately Omitted]
SECTION 3.03. Payments. Borrower authorizes Bank to collect all
--------
principal, interest and fees due under this Agreement and the Revolving Note by
charging Borrower's demand deposit account number 14595-07503 with Bank, or any
other demand deposit account maintained by Borrower with Bank, for the full
amount thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency shall
be immediately due and payable by Borrower.
SECTION 3.04. Payment on Non-Business Days. Whenever any payment to
----------------------------
be made hereunder or under the Revolving Note shall be stated to be due on a day
which is not a Business Day, such payment may be made on the next succeeding
Business Day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
SECTION 3.05. Reduced Return. If the Bank shall have determined that
--------------
any applicable law, regulation, rule or regulatory requirement generally
applicable to banks located in California and (collectively in this Section 3.05
"Requirement") regarding capital adequacy, or any change therein, or any change
------------
in the interpretation or administration thereof by any United States federal or
state governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on the Bank's capital as a
consequence of its Commitment and obligations hereunder to a level below that
which would have been achieved but for such Requirement, change or compliance
(taking into consideration the Bank's policies with respect to capital adequacy)
by an amount deemed by the Bank to be material (which amount shall be determined
by the Bank's reasonable allocation of the aggregate of such reductions
resulting from such events), then from time to time, within five (5) Business
Days after demand by the Bank, the Borrower
-7-
<PAGE>
shall pay to the Bank such additional amount or amounts as will compensate the
Bank for such reduction. The Bank does not presently have knowledge of any new
Requirement or any pending change in any existing Requirement which would result
in such additional amounts being owed.
SECTION 3.06. Indemnities. Whether or not the transactions
-----------
contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay
and hold the Bank, and the shareholders, officers, directors, employees and
agents of the Bank ("Indemnified Persons"), harmless from and against any and
--------------------
all claims, liabilities, losses, damages, costs and expenses (whether or not any
of the foregoing Indemnified Persons is a party to any litigation), including,
without limitation, reasonable attorneys' fees and costs (including, without
limitation, the reasonable estimate of the allocated cost of in-house legal
counsel and staff) and costs of investigation, document production, attendance
at a deposition, or other discovery, prior to the assumption of defense by the
Borrower, with respect to or arising out of any proposed acquisition by the
Borrower or any of its Subsidiaries of any Person or any securities (including a
self-tender), this Agreement or any use of proceeds hereunder, or any claim,
demand, action or cause of action being asserted against the Borrower or any of
its Subsidiaries (collectively, the "Indemnified Liabilities"), provided that
------------------------
the Borrower shall have no obligation hereunder with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of any such
Indemnified Persons. If any claim is made, or any action, suit or proceeding is
brought, against any Indemnified Person pursuant to this Section, the
Indemnified Person shall notify the Borrower within thirty (30) days of the Bank
being notified in writing of any such claim or the commencement of such action,
suit or proceeding, and the Borrower will assume the defense of such action,
suit or proceeding, employing counsel selected by Borrower's insurance carrier,
or selected by the Borrower and reasonably satisfactory to the Indemnified
Person, and pay the fees and expenses of such counsel. This covenant shall
survive termination of this Agreement and payment of the outstanding Revolving
Note for a period of six (6) years.
SECTION 3.07. Funding Sources. Nothing in this Agreement shall be
---------------
deemed to obligate the Bank to obtain the funds for any Loan in any particular
place or manner or to constitute a representation by the Bank that it has
obtained or will obtain the funds for any Loan in any particular place or
manner.
ARTICLE IV.
CONDITIONS OF LENDING
SECTION 4.01. Conditions Precedent to Initial Loan. The obligation
------------------------------------
of the Bank to make its initial Loan is subject to the conditions precedent
that:
(a) The Bank shall have received on or before the day of the initial
Borrowing the following, each dated prior to or as of such day, in form and
substance satisfactory to the Bank:
(i) The Revolving Note issued by the Borrower to the order of
the Bank;
(ii) Copies of the Articles, Certificate of Incorporation,
partnership agreement or other organizational document of the Borrower,
certified as of a recent date by the Secretary of State of its state of
formation or incorporation;
(iii) Copies of the Bylaws, if any, of the Borrower, certified
by the Secretary or an Assistant Secretary of the Borrower;
-8-
<PAGE>
(iv) Copies of resolutions of the Board of Directors or other
authorizing documents of the Borrower, in form and substance satisfactory to the
Bank, approving the Loan Documents and the Borrowings hereunder;
(v) An incumbency certificate executed by the Secretary or an
Assistant Secretary of the Borrower or equivalent document, certifying the names
and signatures of the officers of the Borrower or other Persons authorized to
sign the Loan Documents and the other documents to be delivered hereunder;
(vi) a guaranty executed by Southwest in the form attached
hereto as Exhibit C;
---------
(vii) Executed copies of all Loan Documents;
(viii) Opinion from Borrower's counsel substantially in the form
of Exhibit B hereto;
---------
(b) The Bank shall have completed its due diligence review of the
Borrower, and the scope and results thereof shall be satisfactory to Bank in its
discretion;
(c) All information previously furnished by Borrower to Bank shall be
true and correct in all material respects;
(d) All fees required to be paid at closing shall have been paid;
(e) All corporate and legal proceedings and all instruments and
documents in connection with the transactions contemplated by this Agreement
shall be reasonably satisfactory in content, form and substance to the Bank and
its counsel, and the Bank and such counsel shall have received any and all
further information and documents which the Bank or such counsel may reasonably
have requested in connection therewith, such documents where appropriate to be
certified by proper corporate or governmental authorities; and
(f) Nothing shall have occurred and the Bank shall not have become
aware of any fact or condition not previously known, which the Bank shall
determine has, or could reasonably be expected to have, a material adverse
effect on the rights or remedies of the Bank, or on the ability of the Borrower
to perform its obligations to the Bank or which has, or could reasonably be
expected to have, a materially adverse effect on the performance, business,
property, assets, condition (financial or otherwise) or prospects of Borrower
and its Subsidiaries taken as a whole.
SECTION 4.02. Conditions Precedent to Each Borrowing. The obligation
--------------------------------------
of the Bank to make a Loan on the occasion of each Borrowing (including the
initial Borrowing) shall be subject to the further conditions precedent that on
the date of such Borrowing (a) the following statements shall be true and the
Bank shall have received the notice required by Section 2.01(b), which notice
shall be deemed to be a certification by the Borrower that:
(i) The representations and warranties contained in Section 5.01 are
correct on and as of the date of such Borrowing as though made on and
as of such date;
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<PAGE>
(ii) No event has occurred and is continuing, or would result from
such Borrowing, which constitutes an Event of Default or Potential
Event of Default;
(iii) Southwest and its Subsidiaries are in compliance with all
financial covenants under the Southwest Loan Documents;
(iv) Nothing shall have occurred and the Bank shall not have become
aware of any fact or condition not previously known, which the Bank
shall determine has, or could reasonably be expected to have, a
material adverse effect on the rights or remedies of the Bank, or on
the ability of the Borrower to perform its obligations to the Bank or
which has, or could reasonably be expected to have, a material adverse
effect on the performance, business, property, assets, condition
(financial or otherwise) or prospects of Borrower and its Subsidiaries
taken as a whole; and
(iv) All Loan Documents are in full force and effect,
and (b) the Bank shall have received such other approvals, opinions or documents
as the Bank may reasonably request.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Representations and Warranties. The Borrower
------------------------------
represents and warrants as follows:
(a) Organization. The Borrower and each of its Subsidiaries is duly
------------
organized, validly existing and in good standing under the laws of the state of
its incorporation. The Borrower and each of its Subsidiaries is also duly
authorized, qualified and licensed in all applicable jurisdictions, and under
all applicable laws, regulations, ordinances or orders of public authorities, to
carry on its business in the locations and in the manner presently conducted.
(b) Authorization; No Conflict. The execution, delivery and
--------------------------
performance by the Borrower of the Loan Documents, and the making of Borrowings
hereunder, are within the Borrower's corporate powers, have been duly authorized
by all necessary corporate action, do not contravene (i) the Borrower's charter,
by-laws or other organizational document or (ii) any law or regulation
(including, without limitation, Regulations G, T, U and X and regulations of
public utility commissions or similar regulatory authorities) binding on or
affecting the Borrower or its properties, and will not constitute an event of
default under any material agreement to which Borrower is a party or by which
its assets or properties may be bound.
(c) Governmental Consents. No authorization or approval or other
---------------------
action by, and no notice to or filing with, any governmental authority or
regulatory body (except routine reports required pursuant to the Securities
Exchange Act of 1934, as amended (if such act is applicable to the Borrower),
which reports will be made in the ordinary course of business) is required for
the due execution, delivery and performance by the Borrower of the Loan
Documents.
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<PAGE>
(d) Validity. The Loan Documents are the binding obligations of the
--------
Borrower or other executing Person, if any, enforceable in accordance with their
respective terms; except in each case as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws of general application and equitable principles relating to or affecting
creditors' rights.
(e) Financial Condition. The balance sheets of the Borrower and its
-------------------
consolidated Subsidiaries as at March 31, 1999,and the related consolidated
statements of income and changes in common stockholders' equity of the Borrower
and its consolidated Subsidiaries for the fiscal three (3) months then ended,
copies of which have been furnished to the Bank, fairly present the financial
condition of the Borrower and its consolidated Subsidiaries as at such date and
the results of the operations of the Borrower and its consolidated Subsidiaries
for the period ended on such date, all in accordance with GAAP, consistently
applied, and since March 31, 1999 there has been no material adverse change in
the business, operations, properties, assets or condition (financial or
otherwise) of the Borrower and its Subsidiaries, taken as a whole.
(f) Litigation. Except as set forth in the Form 10-Q of Southwest
----------
dated March 31, 1999, and on Schedule 5.01(f) hereto, there is no known pending
----------------
or threatened action or proceeding affecting the Borrower or any of its
Subsidiaries before any court, governmental agency or arbitrator, which may
materially adversely affect the consolidated financial condition or operations
of the Borrower or which may have a material adverse effect on the Borrower's
ability to perform its obligations under the Loan Documents, having regard for
its other financial obligations.
(g) Employee Benefit Plans. The Borrower and each of its ERISA
----------------------
Affiliates is in compliance in all material respects with any applicable
provisions of ERISA and the regulations and published interpretations thereunder
with respect to all Employee Benefit Plans. No Termination Event has occurred
with respect to any Pension Plan. The excess of the actuarial present value of
all benefit liabilities under all Pension Plans (excluding in such computation
Pension Plans with assets greater than benefit liabilities) over the fair market
value of the assets allocable to such benefit liabilities are not greater than
five percent (5%) of Consolidated Tangible Net Worth. For purposes of the
preceding sentence, the term "benefit liabilities" shall have the meaning
specified in Section 4001 of ERISA.
(h) Disclosure. No representation or warranty of the Borrower
----------
contained in this Agreement or any other document, certificate or written
statement furnished to the Bank by or on behalf of the Borrower for use in
connection with the transactions contemplated by this Agreement contains any
known untrue statement of a material fact or omits to state a known material
fact (known to the Borrower in the case of any document not furnished by it)
necessary in order to make the statements contained herein or therein not
misleading. There is no fact known to the Borrower (other than matters of a
general economic nature) which materially adversely affects the business,
operations, property, assets or condition (financial or otherwise) of the
Borrower and its Subsidiaries, taken as a whole, which has not been disclosed
herein or in such other documents, certificates and statements furnished to the
Bank for use in connection with the transactions contemplated hereby.
(i) Environmental Matters. Except as set forth in Schedule 5.01(i)
--------------------- ----------------
hereto, neither the Borrower nor any Subsidiary, nor any of their respective
officers, employees, representatives or agents, nor, to the best of their
knowledge, any other person, has treated, stored, processed, discharged,
spilled, or otherwise disposed of any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
-11-
<PAGE>
directive, or any waste or by-product thereof, at any real property or any other
facility owned, leased or used by the Borrower or any Subsidiary, in violation
of any applicable statutes, regulations, ordinances or directives of any
governmental authority or court, which violations may result in liability to the
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $500,000 for all
such violations; and the unresolved violations set forth in said Schedule
5.01(i) will not result in liability to the Borrower or any Subsidiary or any of
their respective officers, employees, representatives, agents or shareholders in
an amount exceeding $500, 000 for all such unresolved violations. Except as set
forth in said Schedule, no employee or other person has made a claim or demand
against the Borrower or any Subsidiary based on alleged damage to health caused
by any such hazardous or toxic substance or by any waste or by-product thereof;
and the unsatisfied claims or demands against the Borrower or any Subsidiary set
forth in said Schedule 5.01(i) will not result in uninsured liability to the
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $250,000 in
excess of reserves on the books of the Borrower for all such unsatisfied claims
or demands. Except as set forth in said Schedule 5.01(i), neither the Borrower
nor any Subsidiary has been charged by any governmental authority with
improperly using, handling, storing, discharging or disposing of any such
hazardous or toxic substance or waste or by-product thereof or with causing or
permitting any pollution of any body of water; and the outstanding related
charges set forth in said Schedule 5.01(i) will not result in liability to the
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $500,000 for all
such outstanding charges.
(j) Employee Matters. There is no known strike or work stoppage in
----------------
existence or threatened involving the Borrower or its Subsidiaries that may
materially adversely affect the consolidated financial condition or operations
of the Borrower or that may have a material adverse effect on the Borrower's
ability to perform its obligations under the Loan Documents, having regard for
its other financial obligations.
(k) Solvency. Borrower and each of its Subsidiaries is Solvent.
--------
(l) Title to Properties. Borrower and each of its Subsidiaries has
-------------------
good and marketable title to or interests in all of its properties and assets
subject to no liens, mortgages, pledges, security interests, encumbrances or
charges of any kind, except those granted to Bank and such others as are
permitted under Section 6.02(h) hereof.
(m) Tax Returns. Borrower and each of its Subsidiaries has filed, or
-----------
caused to be filed, in a timely manner all tax returns, reports and declarations
which are required to be filed by it (without requests for extension except as
previously disclosed in writing to Bank). All information in such tax returns,
reports and declarations is complete and accurate in all material respects.
Borrower and each of its Subsidiaries has paid or caused to be paid all taxes
due and payable or claimed due and payable in any assessment received by it,
except taxes the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower or its
Subsidiaries and with respect to which adequate reserves have been set aside on
its books. Adequate provision has been made for the payment of all accrued and
unpaid Federal, State, county, local, foreign and other taxes whether or not yet
due and payable and whether or not disputed.
(n) Compliance with Other Agreements and Applicable Laws. Neither
----------------------------------------------------
Borrower nor any of its Subsidiaries is in default in any material respect
under, or in violation in any material respect of any of the terms of, any
agreement, contract, instrument, lease or other commitment (including, but not
limited to any such agreement involving the debts or
-12-
<PAGE>
investments of Borrower or liens upon its assets) to which it is a party or by
which it or any of its assets are bound and Borrower and each of its
Subsidiaries is in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority.
ARTICLE VI.
COVENANTS
SECTION 6.01. Affirmative Covenants. So long as any Revolving Note
---------------------
shall remain unpaid or the Bank shall have any Commitment hereunder, the
Borrower will, unless the Bank shall otherwise consent in writing:
(a) Financial Information. Furnish to the Bank:
---------------------
(i) as soon as available, but in any event within 120 days
after the end of each fiscal year of the Borrower, a copy of the
Borrower's audited consolidated balance sheets of itself and its
consolidated Subsidiaries as at the end of each fiscal year and the
related consolidated statements of income and changes in common
stockholders' equity (or comparable statement) employed in the
business and changes in financial position and cash flow for such
year, in each case prepared in accordance with GAAP, setting forth in
each case in comparative form the figures for the previous year,
accompanied by an unqualified report and opinion thereon of
independent certified public accountants acceptable to the Bank and,
if prepared, such accountants' letter to management; and
(ii) as soon as available, but in any event within forty-five
(45) days after the end of each fiscal quarter, the Borrower's
unaudited consolidated and consolidating balance sheets of itself and
its consolidated Subsidiaries as at the end of such period and the
related unaudited consolidated and consolidating statements of income
and changes in common stockholders' equity (or comparable statement)
and changes in financial position and cash flow for such period and
year to date, setting forth in each case in comparative form the
figures as at the end of the previous fiscal year as to the balance
sheet and the figures for the previous corresponding period as to the
other statements, certified by a duly authorized officer of the
Borrower as being fairly stated in all material respects subject to
year end adjustments; all such financial statements to be complete and
correct in all material respects and to be prepared in reasonable
detail acceptable to the Bank and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as
approved by such accountants and disclosed therein and except for the
exclusion of information and footnote disclosures omitted pursuant to
the rules and regulations of the S.E.C.); and
(iii) as soon as available, but in any event within 120 days
after the end of each fiscal year of Southwest, (1) a copy of
Southwest's annual report to shareholders containing the consolidated
balance sheets of itself and its consolidated Subsidiaries as at the
end of each fiscal year and the related consolidated statements of
income and changes in common stockholders' equity (or comparable
statement) employed in the business and changes in financial position
and cash flow for such year, setting forth in each case in comparative
-13-
<PAGE>
form the figures for the previous year, accompanied by an unqualified
report and opinion thereon of independent certified public accountants
acceptable to the Bank and, if prepared, such accountants' letter to
management, and (2) a copy of Southwest's prepared consolidating
financial statements prepared in connection with each of the
statements provided in subpart (1) above; and
(iv) as soon as available, but in any event within forty-five
(45) days after the end of each fiscal quarter, Southwest's unaudited
consolidated and consolidating balance sheets of itself and its
consolidated Subsidiaries as at the end of such period and the related
unaudited consolidated and consolidating statements of income and
changes in common stockholders' equity (or comparable statement) and
changes in financial position and cash flow for such period and year
to date, setting forth in each case in comparative form the figures as
at the end of the previous fiscal year as to the balance sheet and the
figures for the previous corresponding period as to the other
statements, certified by a duly authorized officer of Southwest as
being fairly stated in all material respects subject to year end
adjustments; all such financial statements to be complete and correct
in all material respects and to be prepared in reasonable detail
acceptable to the Bank and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as
approved by such accountants and disclosed therein and except for the
exclusion of information and footnote disclosures omitted pursuant to
the rules and regulations of the S.E.C.); and
(v) as soon as available, copies of all reports which Southwest
sends to any of its security holders, and copies of all reports and
registration statements which Southwest or any of its Subsidiaries
files with the S.E.C. or any national securities exchange; and
(vi) (a) together with each delivery of financial statements of
Borrower, Southwest and their respective Subsidiaries pursuant to
subdivision (i) or subdivision (iii) above, a certificate, executed by
the Borrower's chairman of the board (if an officer) or its president
or one of its vice presidents or by its chief financial officer
stating that the signers have reviewed the terms of this Agreement and
have made, or caused to be made under their supervision, a review in
reasonable detail of the transactions and condition of Borrower and
its Subsidiaries during the accounting period covered by such
financial statements and that such review has not disclosed the
existence during or at the end of such accounting period, and that the
signers do not have knowledge of the existence as at the date of such
certificate, of any condition or event that constitutes an Event of
Default or Potential Event of Default, or, if any such condition or
event existed or exists, specifying the nature and period of existence
thereof and what action Borrower has taken, is taking and proposes to
take with respect thereto; and (b) together with each delivery of
financial statements pursuant to subdivision (i), (ii), (iii), and
(iv) above, a certificate demonstrating in reasonable detail
compliance during and at the end of the applicable accounting periods
with the restrictions contained in Section 6.02 hereof.
(b) Notices and Information. Deliver to the Bank:
-----------------------
(i) promptly upon any officer of the Borrower obtaining
knowledge (a) of any condition or event which constitutes an Event of
Default or Potential Event of
-14-
<PAGE>
Default, (b) that any Person has given any notice to the Borrower or
any Subsidiary of the Borrower or taken any other action with respect
to a claimed default or event or condition of the type referred to in
Section 7.01(e), (c) of the institution of any litigation involving an
alleged liability (including possible forfeiture of property) of the
Borrower or any of its Subsidiaries equal to or greater than $500,000
which is not, except for deductibles and self insurance reserves,
fully covered by insurance maintained by Borrower or any adverse
determination in any litigation involving a potential liability of the
Borrower or any of its Subsidiaries equal to or greater than $500,000
which is not, except for deductibles and self insurance reserves,
fully covered by insurance maintained by Borrower or (d) of a material
adverse change in the business, operations, properties, assets or
condition (financial or otherwise) of the Borrower and its
Subsidiaries, taken as a whole, an officers' certificate specifying
the nature and period of existence of any such condition or event, or
specifying the notice given or action taken by such holder or Person
and the nature of such claimed default, Event of Default, Potential
Event of Default, event or condition, and what action the Borrower has
taken, is taking and proposes to take with respect thereto;
(ii) promptly upon becoming aware of the occurrence of any (a)
Termination Event, or (b) non-exempt "prohibited transaction", as such
term is defined in Section 4975 of the Internal Revenue Code or a
transaction prohibited by Section 406 of ERISA, in connection with any
Employee Benefit Plan or any trust created thereunder, a written
notice specifying the nature thereof, what action the Borrower has
taken, is taking or proposes to take with respect thereto, and, when
known, any action taken or threatened by the Internal Revenue Service,
the Department of Labor, or the Pension Benefit Guaranty Corporation
with respect thereto;
(iii) with reasonable promptness copies of (a) all notices
received by the Borrower or any of its ERISA Affiliates of the Pension
Benefit Guaranty Corporation's intent to terminate any Pension Plan or
to have a trustee appointed to administer any Pension Plan and (b) all
notices received by the Borrower or any of its ERISA Affiliates from a
Multiemployer Plan sponsor concerning the imposition or amount of
withdrawal liability pursuant to Section 4202 of ERISA;
(iv) promptly, and in any event within 30 days after receipt
thereof, a copy of any notice, summons, citation, directive, letter or
other form of communication from any governmental authority or court
in any way concerning any action or omission on the part of the
Borrower or any of its Subsidiaries in connection with any substance
defined as toxic or hazardous by any applicable federal, state or
local law, rule, regulation, order or directive or any waste or
byproduct thereof, or concerning the filing of a lien upon, against or
in connection with the Borrower, its Subsidiaries, or any of their
leased or owned real or personal property, in connection with a
Hazardous Substance Superfund or a Post-Closure Liability Fund as
maintained pursuant to (S) 9507 of the Internal Revenue Code; and
(v) promptly, and in any event within 30 days after request,
such other information and data with respect to the Borrower or any of
its Subsidiaries as from time to time may be reasonably requested by
the Bank and is reasonably available to Borrower.
-15-
<PAGE>
(c) Corporate Existence, Etc. At all times preserve and keep in full
-------------------------
force and effect its and its Subsidiaries' corporate existence and rights,
licenses and franchises material to its business and those of each of its
Subsidiaries; provided, however, that the corporate existence of any such
-------- -------
Subsidiary may be terminated if such termination is in the best interest of the
Borrower and is not materially disadvantageous to the holder of any Revolving
Note.
(d) Payment of Taxes and Claims. Pay, and cause each of its
---------------------------
Subsidiaries to pay, all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or property before any penalty or interest accrues
thereon, and all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become due and payable and
which by law have or may become a lien upon any of its properties or assets,
prior to the time when any penalty or fine shall be incurred with respect
thereto; provided that no such charge or claim need be paid if being contested
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if such reserve or other appropriate provision, if any, as shall
be required in conformity with GAAP shall have been made therefor.
(e) Maintenance of Properties; Insurance. Maintain or cause to be
------------------------------------
maintained in good repair, working order and condition all material properties
used or useful in the business of the Borrower and its Subsidiaries and from
time to time will make or cause to be made all appropriate repairs, renewals and
replacements thereof. The Borrower will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to its
properties and business and the properties and business of its Subsidiaries
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or similar businesses and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations. The Borrower will
comply with any other insurance requirement set forth in any other Loan
Document.
(f) Inspection. Permit any authorized representatives designated by
----------
the Bank to visit and inspect any of the properties of the Borrower or any of
its Subsidiaries, including its and their financial and accounting records, and
to make copies and take extracts therefrom, and to discuss its and their
affairs, finances and accounts with its and their officers and independent
public accountants, all at such reasonable times during normal business hours
and as often as may be reasonably requested.
(g) Compliance with Laws Etc. Exercise, and cause each of its
-------------------------
Subsidiaries to exercise, all due diligence in order to comply with the
requirements of all applicable laws, rules, regulations and orders of any
governmental authority, including, without limitation, all rules and regulations
of public utility commissions or similar regulatory authorities, and all
environmental laws, rules, regulations and orders, noncompliance with which
would materially adversely affect the business, properties, assets, operations
or condition (financial or otherwise) of the Borrower and its Subsidiaries,
taken as a whole.
(h) Hazardous Waste Studies. Promptly, and in any event within thirty
-----------------------
(30) days after submission, provide the Bank with copies of all such
investigations, studies, samplings and testings as may be requested by any
governmental or regulatory authority relative to any substance defined as
hazardous or toxic by any applicable federal, state or local law, rule,
regulation, order or directive, or any waste or by-product thereof, at or
affecting any real property or any facility owned, leased or used by the
Borrower or any Subsidiary. The foregoing shall not include sampling and
testing of water, waste water and effluent conducted by
-16-
<PAGE>
the Subsidiaries of Borrower on periodic bases as a normal part of their water
delivery and wastewater treatment businesses.
(i) Year 2000 Compliance. Perform all acts reasonably necessary to
--------------------
ensure that Borrower and any business in which Borrower holds a substantial
interest, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used herein,
"Year 2000 Compliant" shall mean, in regard to any entity, that all software,
-------------------
hardware, firmware, equipment, goods or systems utilized by or material to the
business operations or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year 2000. Borrower
shall, immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from time to
time require.
SECTION 6.02. Negative Covenants. So long as any Revolving Note
------------------
shall remain unpaid or the Bank shall have any Commitment hereunder, neither
Borrower nor Southwest will, without the written consent of the Bank:
(a) Leverage Ratio. At any time, permit the ratio of Consolidated
--------------
Liabilities of Southwest to Consolidated Tangible Net Worth of Southwest to be
more than 2.30:1:00
(b) Consolidated Tangible Net Worth of Borrower. At any time, permit
-------------------------------------------
Consolidated Tangible Net Worth of Borrower to be less than $24,500,000.
(c) Consolidated Tangible Net Worth of Southwest. At any time, permit
--------------------------------------------
Consolidated Tangible Net Worth of Southwest to be less than $28,500,000.
(d) Consolidated Net Profit of Borrower. At the end of any fiscal
-----------------------------------
quarter of the Borrower, permit Consolidated Net Profit of Borrower, determined
on a four quarter rolling basis, to be less than $1.00.
(e) Consolidated Net Profit of Southwest of Southwest. At the end of
-------------------------------------------------
any fiscal quarter of the Borrower, permit Consolidated Net Profit of Southwest,
determined on a four quarter rolling basis, to be less than $1.00.
(f) EBITDA Coverage Ratio of Southwest. At the end of any fiscal
----------------------------------
quarter of Borrower, permit the EBITDA Coverage Ratio of Southwest, determined
on a four quarter rolling basis, to be less than 1.25:1.0.
(g) Funded Debt of Borrower. At any time, permit Funded Debt of
-----------------------
Borrower to exceed Bondable Capacity.
(h) Liens Etc. Create or suffer to exist, or permit any of its
---------
Subsidiaries to create or suffer to exist, any Lien upon or with respect to any
of its properties, whether now owned or hereafter acquired, or assign, or permit
any of its Subsidiaries to assign, any right to receive income, in each case to
secure any Debt of any Person other than (i) Liens in favor of the Bank; (ii)
Liens reflected on the financial statements referred to in Section 5.01(e)
hereof and other Liens existing on the date hereof and set forth in Schedule
--------
6.02(h) hereto; (iii) purchase money Liens upon or in any equipment acquired or
- -------
held by the Borrower or any Subsidiary in the ordinary course of business up to
a maximum of $500,000 to secure the purchase price of such equipment or to
secure indebtedness incurred solely for the purpose of
-17-
<PAGE>
financing the acquisition of such equipment: (iv) Liens existing on property
acquired by the Borrower or any Subsidiary, and all refundings and extensions of
any such Liens, and (v) Liens, deposits and/or pledges made to secure the
performance of operating leases; provided that the principal amount of Debt
secured by any such Lien permitted hereunder shall not exceed an amount equal to
(x) one hundred percent (100%) of the cost of the real property subject to such
lien or security interest or (y) one hundred percent (100%) of the cost of the
personal property subject to such lien or security interest, and further
provided that none of such liens or security interests shall extend to other
assets of the Borrower or its Subsidiaries. The Bank acknowledges that the
Borrower has an existing first mortgage indenture encumbering substantially all
of its assets to secure three series (A, B and C) of first mortgage bonds.
(i) Debt. Create, incur, assume or permit to exist, or permit any
----
Subsidiary to create, incur, assume or permit to exist, any indebtedness or
liabilities resulting from borrowings, loans or advances, whether matured or
unmatured, liquidated or unliquidated, joint or several, secured or unsecured,
except for (i) Debt incurred pursuant to this Agreement and the other Loan
Documents, (ii) Debts, revolving lines of credit and lease obligations of
Borrower existing as of, and disclosed to Bank prior to the date of this
Agreement (including $4,000,000 of unsecured debt of the Borrower to Mellon),
(iii) secured indebtedness for purchase money financing of equipment which is
permitted under Section 6.02(h)(iii) not to exceed an aggregate of $500,000, and
(iv) unsecured funded bank debt not to exceed an aggregate of $8,000,000 at any
time (including, without limitation, unsecured funded bank debt incurred
pursuant to the Loan Documents and unsecured funded bank debt to Mellon as
described in clause (ii) above).
(j) Consolidation, Merger or Dissolution. (i) Consolidate with or
------------------------------------
merge into any other Person, (ii) wind up, liquidate or dissolve or (iii) agree
to do any of the foregoing.
(k) Loans, Investments, Secondary Liabilities. Make or permit to
-----------------------------------------
remain outstanding, or permit any Subsidiary to make or permit to remain
outstanding, any loan or advance to, or guarantee, induce or otherwise become
contingently liable, directly or indirectly, in connection with the obligations,
stock or dividends of, or own, purchase or acquire any stock, obligations or
securities of or any other interest in, or make any capital contribution to, any
other Person, except that the Borrower and its Subsidiaries may:
(i) own, purchase or acquire certificates of deposit issued by
a bank, commercial paper rated Moody's P-1, municipal bonds rated
Moody's AA or better, direct obligations of the United States of
America or its agencies, and obligations guaranteed by the United
States of America;
(ii) continue to own the existing capital stock of the
Borrower's Subsidiaries;
(iii) endorse negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business;
(iv) make or permit to remain outstanding loans or advances to
Southwest; provided, however, that any such outstanding loans or
-------- -------
advances by Borrower to Southwest shall be evidenced by negotiable
promissory notes, in form and substance satisfactory to Bank, and
which notes shall provide for the assignment thereof to the Bank as
collateral security for the repayment of the Loans and any other
obligations of the Borrower hereunder upon the demand of the Bank; and
-18-
<PAGE>
(v) make or permit to remain outstanding loans and advances to
any of its officers, shareholders or affiliates or enter into or
permit to remain outstanding guarantees in connection with the
obligations of its officers, shareholders or affiliates, in an
aggregate amount for all such loans, advances and guarantees not
exceeding $100,000 in addition to the loans outstanding and reflected
on the Borrower's financial statement dated March 31, 1999.
(l) Asset Sales. Convey, sell, lease, transfer or otherwise dispose
-----------
of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, all or any part of
its or its Subsidiary's business, property or fixed assets outside the ordinary
course of business, whether now owned or hereafter acquired, except that
Borrower and its Subsidiaries may convey, sell, lease, transfer or otherwise
dispose of business, property or fixed assets for consideration which in the
aggregate does not exceed $500,000 per year. The foregoing covenant shall not
extend to any property taken by eminent domain by any governmental authority or
other person or entity having the power of eminent domain or to any sale in lieu
of condemnation to a governmental authority or other person or entity having the
power of eminent domain made after threat of condemnation by such governmental
authority or other person or entity, or to the pending sale by Borrower of that
certain parcel of real estate commonly known as 16340 East Maplegrove Street, La
Puente, California, which property was the site of the former headquarters
facility of Borrower and Southwest.
(m) Hostile Tender Offers. Make any offer to purchase or acquire, or
---------------------
consummate a purchase or acquisition of, five percent (5%) or more of the
capital stock of any publicly held corporation or other publicly held business
entity, unless the board of directors of such corporation or business entity has
notified the Borrower that it invites or does not oppose such offer or purchase.
(n) Distributions. Upon the occurrence and during the continuance of
-------------
an Event of Default or Potential Event of Default, authorize, declare or pay, or
permit any of its Subsidiaries to authorize, declare or pay, any Distributions.
(o) Transactions with Affiliates. Neither Borrower nor any of its
----------------------------
Subsidiaries shall enter into any transaction for the purchase, sale or exchange
of property or the rendering of any service to or by any affiliate, except in
the ordinary course of and pursuant to the reasonable requirements of Borrower's
or its Subsidiary's business and upon fair and reasonable terms no less
favorable to the Borrower or its Subsidiary than Borrower or its Subsidiary
would obtain in a comparable arm's length transaction with an unaffiliated
person.
(p) Books and Records. Borrower will, and will cause each of its
-----------------
Subsidiaries to, keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of applicable law
shall be made of all dealings and transactions in relation to its business and
activities.
(q) Restructure. Make any change in Borrower's financial restructure,
-----------
the principal nature of Borrower's business operations (taken as a whole), or
the date of its fiscal year.
ARTICLE VII.
EVENTS OF DEFAULT
-19-
<PAGE>
SECTION 7.01. Events of Default. If any of the following events
-----------------
("Events of Default") shall occur and be continuing:
-----------------
(a) Borrower shall fail to pay within three (3) days of the date when
due, any principal, interest, fees or other amounts payable under any of the
Loan Documents; or
(b) Any representation or warranty made by the Borrower herein or by
the Borrower (or any of its officers) in connection with the Loan Documents
shall prove to have been incorrect in any material respect when made; or
(c) Borrower shall fail to perform or observe any term, any
affirmative or negative covenant, including, but not limited to, those covenants
set forth in Sections 6.01 and 6.02 hereof, or any other agreement contained in
this Agreement on its part to be performed or observed (other than those
referred to in subsections (a) and (b) above); and with respect to any such
default which by its nature can be cured, such default shall continue for a
period of twenty (20) days from its occurrence; or
(d) The Borrower or any of its Subsidiaries shall default in the
performance of or compliance with any term contained in any Loan Document other
than this Agreement and such default shall not have been remedied or waived
within any applicable grace period in such Loan Document or in (c) above; or
(e) an Event of Default shall occur under the Southwest Loan
Documents; or
(f) (i) The Borrower or any of its Subsidiaries shall (A) fail to pay
any principal of, or premium or interest on, any Debt (including, without
limitation, Debt owing to Mellon), the aggregate outstanding principal amount of
which is at least $100,000 (excluding Debt evidenced by the Revolving Note),
when due (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise) and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such Debt,
or (B) fail to perform or observe any term, covenant or condition on its part to
be performed or observed under any agreement or instrument relating to any such
Debt or material to the performance, business, property, assets, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries taken
as a whole, when required to be performed or observed, and such failure shall
continue after the applicable grace period, if any, specified in such agreement
or instrument; or
(g) (i) The Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or any substantial part of its assets, or the Borrower or any
of its Subsidiaries shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against the Borrower or any of its
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of sixty (60) days (Bank may, in its discretion, cease
making Revolving Loans during the pendency of such action or proceeding); or
(iii) there shall be commenced against the Borrower or any of its Subsidiaries
any case, proceeding or other action seeking issuance of a warrant of
attachment, execution,
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<PAGE>
distraint or similar process against all or any substantial part of its assets
which results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within sixty (60)
days from the entry thereof (Bank may, in its discretion, cease making Revolving
Loans during the pendency of such action or proceeding); or (iv) the Borrower or
any of its Subsidiaries shall take any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the acts set forth in
clauses (i), (ii) and (iii) above; or (v) the Borrower or any of its
Subsidiaries shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability (not
paid or fully covered by insurance or reserves) equal to or greater than
$250,000 and all such judgments or decrees shall not have been vacated,
discharged, or stayed or bonded pending appeal within thirty (30) days from the
entry thereof; or
(i) (i) The Borrower or any of its ERISA Affiliates fails to make
full payment when due of all material amounts which, under the provisions of any
Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of
its ERISA Affiliates is required to pay as contributions thereto and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(ii) any material accumulated funding deficiency occurs or
exists, whether or not waived, with respect-to any Pension Plan and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(iii) the excess of the actuarial present value of all benefit
liabilities under all Pension Plans over the fair market value of the assets of
such Pension Plans (excluding in such computation Pension Plans with assets
greater than benefit liabilities) allocable to such benefit liabilities are
greater than five percent (5%) of Consolidated Tangible Net Worth and such
development is not remedied or reversed within fifteen (15) days after the
Borrower knows of such development;
(iv) the Borrower or any of its ERISA Affiliates enters into any
transaction which has as its principal purpose the evasion of liability under
Subtitle D of Title IV of ERISA:
(v) (A) Any Pension Plan maintained by the Borrower or any of
its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA
in a distress termination, or (B) a trustee shall be appointed by an appropriate
United States district court in accordance with Section 4042 of ERISA to
administer any Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or
any successor thereto) shall institute proceedings to terminate any Pension Plan
or to appoint a trustee to administer any Pension Plan in accordance with
Section 4042 of ERISA, or (D) the Borrower or any of its ERISA Affiliates shall
withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date of
the event listed in subclauses (A)-(D) above or any subsequent date, either the
Borrower or its ERISA Affiliates has any material liability (such liability to
include, without limitation, any liability to the Pension Benefit Guaranty
Corporation, or any successor thereto, or to any other party under Sections
4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or
otherwise associated with the events listed in subclauses (A)-(D) above;
(vi) As used in this subsection 7.01(h) the term "accumulated
funding deficiency" has the meaning specified in Section 412 of the Internal
Revenue Code, and the term "benefit liabilities" has the meaning specified in
Section 4001 of ERISA;
-21-
<PAGE>
(j) There shall be instituted against the Borrower or any Subsidiary,
or against any guarantor, any proceeding for which forfeiture of any property
with a value of $250,000 or more is a potential penalty and such proceeding
remains undismissed, undischarged or unbonded for a period of thirty (30) days
from the date the Borrower knows of such proceeding;
(k) A Change of Control shall have occurred; or
(l) The mortgage bonds of the Borrower shall fail to maintain a NAIC
rating of 1 or 2.
Then, (i) upon the occurrence of any Event of Default described in
clause 7.01(g) above, the Commitment shall immediately terminate and all Loans
hereunder with accrued interest thereon, and all other amounts owing under the
Loan Documents shall automatically become due and payable, and (ii) upon the
occurrence of any other Event of Default, the Bank may, by notice to the
Borrower, declare the Commitment to be terminated forthwith, whereupon the
Commitment shall immediately terminate; and, by notice to the Borrower, declare
the Loans hereunder, with accrued interest thereon, and all other amounts owing
under the Loan Documents to be due and payable forthwith, whereupon the same
shall immediately become due and payable. Bank shall have all rights, powers
and remedies available under each of the Loan Documents, or accorded by law,
including, without limitation, the right to resort to any or all security for
any credit accommodation from the Bank subject hereto and to exercise any or all
of the rights of a beneficiary or secured party pursuant to applicable law. All
rights, powers and remedies of Bank in connection with each of the Loan
Documents may be exercised at any time by Bank and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity. Except as expressly provided above in this Section, presentment,
demand, protest and all other notices of any kind are hereby expressly waived.
Notwithstanding any other provision of this Agreement, including Section 8.02,
notices to the Borrower under this Section shall be communicated in writing
(including telex or facsimile transmissions).
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any
---------------
provision of the Loan Documents nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION 8.02. Notices, Etc. Except as otherwise set forth in this
------------
Agreement, all notices and other communications provided for hereunder shall be
in writing (including facsimile communication) and mailed certified mail, return
receipt requested or sent by facsimile or delivered, if to the Borrower, at its
address set forth on the signature page hereof; and if to the Bank, at its
address set forth on the signature page hereof; or, as to each party, at such
other address as shall be designated by such party in a written notice to the
other parties. All such notices and communications shall be effective upon
personal delivery or upon receipt when sent by facsimile, or on the date of
receipt or refusal indicated on the return receipt if sent by certified mail,
except that notices and communications to the Bank pursuant to Article II or VII
shall not be effective until received by the Bank.
-22-
<PAGE>
SECTION 8.03. Right of Setoff: Security Interest in Deposit
----------------------------------------------
Accounts. Upon and only after the occurrence of any Event of Default not cured
- --------
within any applicable grace period, the Bank is hereby authorized by the
Borrower, at any time and from time to time, without notice, (a) to set off
against, and to appropriate and apply to the payment of, the obligations and
liabilities of the Borrower under the Loan Documents (whether matured or
unmatured, fixed or contingent or liquidated or unliquidated) any and all
amounts owing by the Bank to the Borrower (whether payable in Dollars or any
other currency, whether matured or unmatured, and, in the case of deposits,
whether general or special, time or demand and however evidenced) and (b)
pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn against any
deposits so held as the Bank in its sole discretion may elect. The Borrower
hereby grants to the Bank a security interest in all deposits and accounts
maintained with the Bank and with any other financial institution. The Bank is
authorized to debit any account maintained with it by the Borrower for any
amount of principal, interest or fees which are then due and owing to the Bank.
SECTION 8.04. No Waiver; Remedies. No failure on the part of either
-------------------
party hereto to exercise, and no delay in exercising, any right under any of the
Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under any of the Loan Documents preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
SECTION 8.05. Costs and Expenses. Borrower shall pay to Bank
------------------
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel), incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and each other of the Loan
Documents, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents (including, without
limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization,
moratorium or other similar proceedings) or the restructuring of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including, without limitation, any action for
declaratory relief.
SECTION 8.06. Participations. The Bank may sell, assign, transfer,
--------------
negotiate or grant participations to other financial institutions in all or part
of the obligations of the Borrower outstanding under the Loan Documents,
provided that any such sale, assignment, transfer, negotiation or participation
shall be in compliance with the applicable federal and state securities laws;
and provided further that any assignee or transferee agrees to be bound by the
terms and conditions of this Agreement. The Bank may, in connection with any
actual or proposed assignment or participation, disclose to the actual or
proposed assignee or participant, any information relating to the Borrower or
any of its Subsidiaries.
SECTION 8.07. Effectiveness: Binding Effect. This Agreement shall
-----------------------------
become effective when it shall have been executed by the Borrower and the Bank
and thereafter shall be binding upon and inure to the benefit of the Borrower,
the Bank and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
without the prior written consent of the Bank.
SECTION 8.08. Governing Law. The validity, interpretation and
-------------
enforcement of this Agreement and the other Loan Documents and any dispute
arising out of the relationship
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<PAGE>
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of California (without
giving effect to principles of conflicts of law).
SECTION 8.09. Arbitration.
-----------
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
---------------
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in the County of
Los Angeles, California selected by the AAA or other administrator. If there is
any inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant to
the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in
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<PAGE>
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages, costs,
fees and expenses). By submission to a single arbitrator, each party expressly
waives any right or claim to recover more than $5,000,000. Any Dispute in which
the amount in controversy exceeds $5,000,000 shall be decided by majority vote
of a panel of three arbitrators; provided however, that all three arbitrators
must actively participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
---------------
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (A) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (B) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (C) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (1) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (2) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
--------------------------------------------
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
SECTION 8.10. Waiver of Notices. Borrower hereby expressly waives
-----------------
demand, presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments, included in or evidencing any of the
obligations, and any and all other demands
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<PAGE>
and notices of any kind or nature whatsoever with respect to the obligations and
this Agreement, except such as are expressly provided for herein. No notice to
or demand on Borrower which Bank may elect to give shall entitle Borrower to any
other or further notice or demand in the same, similar or other circumstances.
SECTION 8.11. Entire Agreement. This Agreement with Exhibits and
----------------
Schedules and the other Loan Documents embody the entire agreement and
understanding between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof.
SECTION 8.12. Separability of Provisions. In case any one or more of
--------------------------
the provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
SECTION 8.13. Execution in Counterparts. This Agreement may be
-------------------------
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BANK OF AMERICA SUBURBAN WATER SYSTEMS
NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/ PAUL F. SUTHERLEN By: /s/ DANIEL N. EVANS
---------------------- -------------------
Name: Name: Daniel N. Evans
Title: Vice President Title: Vice President - Finance
Chief Financial Officer
By: /s/ STEPHEN J. MUZI
-------------------
Name: Stephen J. Muzi
Title: Treasurer
Address: Address:
Los Angeles Regional Commercial 1211 E. Center Court Drive
Commercial Banking Office Covina, California 91724-3603
525 South Flower Street Attention: Daniel N. Evans
Mezzanine Level Vice President of Finance
Los Angeles, CA 90071 Chief Financial Officer
Attention: Paul F. Sutherlen
Title: Vice President Facsimile: (626) 915-1558
Facsimile: (213) 345-6983
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<PAGE>
SCHEDULE 5.01(f) - LITIGATION
-----------------------------
None other than as reported on Form 10-Q of Southwest for quarter ended March
31, 1999, and Form 10-K of Southwest for year ended December 31, 1998.
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<PAGE>
SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS
----------------------------------------
See Form 10-Q of Southwest for quarter ended March 31, 1999, and Form 10-K of
Southwest for year ended December 31, 1998.
-28-
<PAGE>
SCHEDULE 6.02(h) - LIENS
------------------------
None except as disclosed in the audited consolidated financial statements of
Southwest for the fiscal year ended December 31, 1998.
-29-
<PAGE>
EXHIBIT A
REVOLVING NOTE
$4,000,000 Los Angeles, California
July 30, 1999
FOR VALUE RECEIVED, the undersigned SUBURBAN WATER SYSTEMS, a California
corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A.
("Bank") at its office at 525 South Flower Street, Mezzanine Level, Los Angeles,
California, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Four Million Dollars ($4,000,000), or so much thereof as may be
advanced and be outstanding, with interest thereon, to be computed on each
advance from the date of its disbursement (computed on the basis of a 360-day
year and actual days elapsed, which results in more interest than if a 365-day
year were used) either (i) at a fluctuating rate per annum equal to the
Reference Rate minus one quarter (0.25) of a percentage point in effect from
time to time, or (ii) at an optional rate per annum determined by Bank to be one
and one-quarter (1.25%) percentage points above Bank's IBOR in effect on the
first day of the applicable IBOR Rate Term. When interest is determined in
relation to the Reference Rate, each change in the rate of interest hereunder
shall become effective on the opening of business on the day specified in the
public announcement of a change in Bank's Reference Rate. With respect to each
IBOR option selected hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and applicable IBOR Rate Term thereto and any
payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday or any other
day designated as a holiday under Federal or California statute or regulation,
or for amounts bearing interest at an offshore rate, a Business Day is any day
except a Saturday, Sunday or any other day designated as a holiday under Federal
or California statute or regulation on which Bank is open for business in
California and dealing in offshore dollars.
2. "IBOR Rate Portion" means a portion of the principal amount
outstanding under this Note which is bearing interest at a rate related to IBOR.
No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars
($250,000).
3. "IBOR Rate Term" means a period commencing on a Business Day and
continuing for no shorter than one (1) month and no longer than six (6) months,
as designated by Borrower, during which all or a portion of the outstanding
principal balance of this Note bears interest determined in relation to Bank's
IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled
Maturity Date hereof. The last day of the interest period will be determined by
Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would
end on a day which is not a Business Day, then such IBOR Rate Term shall be
extended to the next succeeding Business Day.
-1-
<PAGE>
4. "IBOR Rate" means the interest rate determined by the following
formula, rounded upward, if necessary, to the nearest 1/100 of one percent.
(All amounts in the calculation will be determined by Bank as of the first day
of the interest period.)
IBOR Rate = IBOR Base Rate
--------------------------------------------
(1.00 - Reserve Percentage)
(a) "IBOR Base Rate" means the interest rate at which Bank's Grand
Cayman Branch, Grand Cayman, British West Indies, would offer U.S.
dollar deposits for the applicable interest period to other major
banks in the offshore dollar inter-bank market.
(b) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
5. "Reference Rate" means the rate of interest publicly announced from
time to time by Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by Bank based on various factors, including Bank's costs
and desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. Bank may price loans to its
customers at, above or below the Reference Rate.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable
-------------------
on the first day of each month, commencing September 1, 1999.
2. Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to Bank's IBOR, it may be continued
by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Reference Rate or
in relation to Bank's IBOR for a new IBOR Rate Term designated by Borrower. At
any time any portion of this Note bears interest determined in relation to the
Reference Rate, Borrower may convert all or a portion thereof so that it bears
interest determined in relation to Bank's IBOR for a IBOR Rate Term designated
by Borrower. At the time each advance is requested hereunder or Borrower wishes
to select the IBOR option for all or a portion of the outstanding principal
balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank
notice specifying (a) the interest rate option selected by Borrower, (b) the
principal amount subject thereto, and (c) if the IBOR option is selected, the
length of the applicable IBOR Rate Term. Any such notice may be given by
telephone so long as, with respect to each IBOR selection, such notice is given
to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate
Term. For each IBOR option requested hereunder, Bank will quote the applicable
IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first
day of the IBOR Rate Term. If Borrower does not immediately accept the rate
quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re-
determination by Bank of the applicable IBOR Rate; provided however, that if
Borrower fails to accept any such rate by 11:00 a.m., California time, on the
Business Day such quotation is
-2-
<PAGE>
given, then the quoted rate shall expire and Bank shall have no obligation to
permit a IBOR option to be selected on such day. If no specific designation of
interest is made at the time any advance is requested hereunder or at the end of
any IBOR Rate Term, Borrower shall be deemed to have made a Reference Rate
interest selection for such advance or the principal amount to which such IBOR
Rate Term applied.
3. Additional IBOR Provisions.
--------------------------
(a) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining Bank's IBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until
such notice has been withdrawn by Bank, than (i) no new IBOR option may be
selected by Borrower, and (ii) any portion of the outstanding principal balance
hereof which bears interest determined in relation to Bank's IBOR, subsequent to
the end of the IBOR Rate Term applicable thereto, shall bear interest determined
in relation to the Reference Rate.
(b) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(i) to make IBOR options available hereunder, or (ii) to maintain interest
rates based on Bank's IBOR, then in the former event, any obligation of Bank to
make available such unlawful IBOR options shall immediately be cancelled, and in
the latter event, any such unlawful IBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Reference Rate; provided however, that if any such Change in Law shall permit
any IBOR-based interest rates to remain in effect until the expiration of the
IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates
shall continue in effect until the expiration of such IBOR Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any IBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(c) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(i) subject Bank to any tax, duty or other charge with respect to any IBOR
options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(ii) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of advances or
loans by, or any other acquisition of funds by any office of Bank; or
(iii) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any IBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon
-3-
<PAGE>
demand such amounts as may be necessary to compensate Bank for any additional
costs incurred by Bank and/or reductions in amounts received by Bank which are
attributable to such IBOR options. In determining which costs incurred by Bank
and/or reductions in amounts received by Bank are attributable to any IBOR
options made available to Borrower hereunder, any reasonable allocation made by
Bank among its operations shall be conclusive and binding upon Borrower.
4. Default Interest. During the continuance of an Event of Default, the
----------------
outstanding principal balance of this Note shall bear interest until paid in
full at an increased rate per annum (computed on the basis of a 360-day year and
actual days elapsed, which results in more interest than if a 365-day year were
used) equal to two percent (2%) above the rate of interest from time to time
applicable to this Note.
C. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and re-borrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for Borrower, which balance may be endorsed hereon from time to time by
the holder. The outstanding principal balance of this Note shall be due and
payable in full on the "Maturity Date" (as defined in the Credit Agreement).
2. Advances. Advances hereunder, to the total amount of the principal
--------
sum stated above, may be made by the holder at the oral or written request of
(a) Anton C. Garnier, Peter J. Moerbeek, Thomas C. Tekulve, Michael O. Quinn,
Daniel N. Evans or Stephen J. Muzi, any one acting alone, who are authorized to
request advances and direct the disposition of any advances until written notice
of the revocation of such authority is received by the holder at the office
designated above, or (b) any person, with respect to advances deposited to the
credit of any account of Borrower with the holder, which advances, when so
deposited, shall be conclusively presumed to have been made to or for the
benefit of Borrower regardless of the fact that persons other than those
authorized to request advances may have authority to draw against such account.
The holder shall have no obligation to determine whether any person requesting
an advance is or has been authorized by Borrower.
3. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. Unless instructed otherwise by Borrower, all payments
credited to principal shall be applied first, to the outstanding principal
balance of this Note which bears interest determined in relation to the
Reference Rate, if any, and second, to the outstanding principal balance of this
Note which bears interest determined in relation to Bank's IBOR, with such
payments applied to the oldest IBOR Rate Term first.
4. Prepayment.
----------
(a) Reference Rate. Borrower may prepay principal on any portion of this
--------------
Note which bears interest determined in relation to the Reference Rate at any
time, in any amount and without penalty.
-4-
<PAGE>
(b) IBOR. Each prepayment of an IBOR Rate Portion, whether voluntary, by
----
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described
below. A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement. The
prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by Bank
by placing the amount prepaid on deposit in the domestic certificate
of deposit market, the eurodollar deposit market, or other appropriate
money market selected by Bank for a period starting on the date on
which it was prepaid and ending on the last day of the interest period
for such Portion (or the scheduled payment date for the amount
prepaid, if earlier).
Bank will have no obligation to accept an election of an IBOR
Rate Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not
available in the offshore dollar inter-bank market; or
(ii) the IBOR Rate does not accurately reflect the cost of
an IBOR Rate Portion.
Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the
Reference Rate in effect from time to time (computed on the basis of a 360-day
year, actual days elapsed).
D. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of July 30,
1999, as amended from time to time, including, without limitation, those terms
relating to arbitration of Disputes (the "Credit Agreement"). Any default in
the payment or performance of any obligation under this Note, or any defined
event of default under the Credit Agreement, shall constitute an "Event of
Default" under this Note.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, without notice upon the occurrence of an
Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with
notice upon the occurrence of any other Event of Default, may declare all sums
of principal and interest outstanding hereunder to be immediately due and
payable without presentment, demand, protest or notice of dishonor, all of
-5-
<PAGE>
which are expressly waived by Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Borrower shall pay to the holder immediately upon demand the full
amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel), incurred by the holder in connection
with the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or defense
of any action in any way related to this Note, including without limitation, any
action for declaratory relief, and including any of the foregoing incurred in
connection with any bankruptcy proceeding relating to Borrower.
2. Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
3. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California.
4. Defined Terms. All capitalized terms not herein defined shall have
-------------
the meanings given to them in the Credit Agreement.
"Borrower"
SUBURBAN WATER SYSTEMS,
a California corporation
By:/s/DANIEL N. EVANS
-------------------
Daniel N. Evans
Vice President - Finance
Chief Financial Officer
By:/s/STEPHEN J. MUZI
-------------------
Stephen J. Muzi
Treasurer
-6-
<PAGE>
EXHIBIT 10.13B
--------------
EXHIBIT A
---------
SOUTHWEST WATER COMPANY
SECOND AMENDED AND RESTATED
PROMISSORY NOTE
$4,000,000.00 September 29, 1999
West Covina, California
FOR VALUE RECEIVED, SOUTHWEST WATER COMPANY, a Delaware corporation
(the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (the "Bank")
-------- ----
on the Maturity Date (as defined in the Credit Agreement referred to below) the
principal amount of Four Million Dollars ($4,000,000.00), or, if less, the
aggregate amount of Revolving Loans (as defined in the Credit Agreement referred
to below) made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below outstanding on the Maturity Date.
The Borrower also promises to pay interest on the unpaid principal
amount hereof from the date hereof until paid at the rates and at the times
which shall be determined in accordance with the provisions of the Credit
Agreement.
All unpaid amounts of principal and interest shall be due and payable
in full on the Maturity Date.
All payments of principal and interest in respect of this Note shall
be made in lawful money of the United States of America in same day funds at the
office of the Bank located at Three Mellon Bank Center, 23rd Floor/Loan
Administration, Pittsburgh, Pennsylvania 15259 or at such other place as shall
be designated in writing for such purpose in accordance with the terms of the
Credit Agreement. Until notified of the transfer of this Note, the Borrower
shall be entitled to deem the Bank or such person who has been so identified by
the transferor in writing to the Borrower as the holder of this Note, as the
owner and holder of this Note. Each of the Bank and any subsequent holder of
this Note agrees that before disposing of this Note or any part hereof, it will
make a notation hereon of all principal payments previously made hereunder and
of the date to which interest hereon has been paid on the schedule attached
hereto, if any; provided, however, that the failure to make notation of any
-------- -------
payment made on this Note shall not limit or otherwise affect the obligation of
the Borrower hereunder with respect to payments of principal or interest on this
Note.
This Note is referred to in, and is entitled to the benefits of, the
Amended and Restated Credit Agreement dated as of December 23, 1997, as amended
from time to time (the "Credit Agreement") between the Borrower and the Bank.
----------------
The Credit Agreement, among other things, (i) provides for the making of
advances (the "Loans") by the Bank to the Borrower from time to time in an
-----
aggregate amount not to exceed at any time outstanding the U.S. dollar amount
first above mentioned, the indebtedness of the Borrower resulting from each such
Loan being
<PAGE>
evidenced by this Note, and (ii) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified.
The terms of this Note are subject to amendment only in the manner
provided in the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this
Note or the Credit Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the currency
herein prescribed.
The Borrower promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred in the collection and enforcement of this
Note. The Borrower hereby consents to renewals and extensions of time at or
after the maturity hereof, without notice, and hereby waives diligence,
presentment, protest, demand and notice of every kind and, to the full extent
permitted by law, the right to plead any statute of limitations as a defense to
any demand hereunder.
This Note amends and restates in its entirety that certain Amended and
Restated Promissory Note dated as of September 1, 1998 in the amount of Two
Million Dollars ($2,000,000) made by Borrower payable to the order of Bank
pursuant to the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Notice to be executed
and delivered by its duly authorized officers, as of the date and the place
first above-written.
SOUTHWEST WATER COMPANY
By: /s/ THOMAS C. TEKULVE
-------------------------------------
Name: Thomas C. Tekulve
Title: Vice President - Finance
By: /s/ STEPHEN J. MUZI
-------------------------------------
Name: Stephen J. Muzi
Title: Corporate Controller
Exhibit A-2
<PAGE>
TRANSACTIONS
ON
NOTE
<TABLE>
<CAPTION>
Amount of Amount of Interest Paid Principal Notation
Loan Made Principal Paid Interest Paid Through Balance Made By
- --------- -------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exhibit A-3
<PAGE>
EXHIBIT 10.14B
EXHIBIT A
---------
SUBURBAN WATER SYSTEMS
SECOND AMENDED AND RESTATED
PROMISSORY NOTE
$4,000,000.00 September 29, 1999
Covina, California
FOR VALUE RECEIVED, SUBURBAN WATER SYSTEMS, a California corporation
(the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (the "Bank")
-------- ----
on the Maturity Date (as defined in the Credit Agreement referred to below) the
principal amount of Four Million Dollars ($4,000,000.00), or, if less, the
aggregate amount of Revolving Loans (as defined in the Credit Agreement referred
to below) made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below outstanding on the Maturity Date.
The Borrower also promises to pay interest on the unpaid principal
amount hereof from the date hereof until paid at the rates and at the times
which shall be determined in accordance with the provisions of the Credit
Agreement.
All unpaid amounts of principal and interest shall be due and payable
in full on the Maturity Date.
All payments of principal and interest in respect of this Note shall
be made in lawful money of the United States of America in same day funds at the
office of the Bank located at Three Mellon Bank Center, 23rd Floor/Loan
Administration, Pittsburgh, Pennsylvania 15259 or at such other place as shall
be designated in writing for such purpose in accordance with the terms of the
Credit Agreement. Until notified of the transfer of this Note, the Borrower
shall be entitled to deem the Bank or such person who has been so identified by
the transferor in writing to the Borrower as the holder of this Note, as the
owner and holder of this Note. Each of the Bank and any subsequent holder of
this Note agrees that before disposing of this Note or any part hereof, it will
make a notation hereon of all principal payments previously made hereunder and
of the date to which interest hereon has been paid on the schedule attached
hereto, if any; provided, however, that the failure to make notation of any
-------- -------
payment made on this Note shall not limit or otherwise affect the obligation of
the Borrower hereunder with respect to payments of principal or interest on this
Note.
This Note is referred to in, and is entitled to the benefits of, the
Credit Agreement dated as of December 23, 1997, as amended from time to time
(the "Credit Agreement") between the Borrower and the Bank. The Credit
----------------
Agreement, among other things, (i) provides for the making of advances (the
"Loans") by the Bank to the Borrower from time to time in an aggregate amount
- ------
not to exceed at any time outstanding the U.S. dollar amount first above
mentioned, the indebtedness of the Borrower resulting from each such Loan being
evidenced by
<PAGE>
this Note, and (ii) contains provisions for acceleration of the maturity hereof
upon the happening of certain stated events and also for prepayments on account
of principal hereof prior to the maturity hereof upon the terms and conditions
therein specified.
The terms of this Note are subject to amendment only in the manner
provided in the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this
Note or the Credit Agreement shall alter or impair the obligation of the
Borrower, which is absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the currency
herein prescribed.
The Borrower promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred in the collection and enforcement of this
Note. The Borrower hereby consents to renewals and extensions of time at or
after the maturity hereof, without notice, and hereby waives diligence,
presentment, protest, demand and notice of every kind and, to the full extent
permitted by law, the right to plead any statute of limitations as a defense to
any demand hereunder.
This Note amends and restates in its entirety that certain Amended
and Restated Promissory Note dated as of September 1, 1998 in the amount of Four
Million Dollars ($4,000,000) made by Borrower payable to the order of Bank
pursuant to the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Notice to be executed
and delivered by its duly authorized officers, as of the date and the place
first above-written.
SUBURBAN WATER SYSTEMS
By: /s/ DANIEL N. EVANS
-------------------------------------
Name: Daniel N. Evans
Title: Vice President - Finance
Chief Financial Officer
By: /s/ STEPHEN J. MUZI
-------------------------------------
Name: Stephen J. Muzi
Title: Treasurer
Exhibit A-2
<PAGE>
TRANSACTIONS
ON
NOTE
<TABLE>
<CAPTION>
Amount of Amount of Interest Paid Principal Notation
Loan Made Principal Paid Interest Paid Through Balance Made By
- --------- -------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exhibit A-3
<PAGE>
AGREEMENT
BETWEEN
SUBURBAN WATER SYSTEMS
AND
THE CITY OF
WEST COVINA, CALIFORNIA
FOR THE ACQUISITION OF
THE CITY'S WATER UTILITY SYSTEM
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. Definitions and Statement of Purpose............................... 2
1.1 Statement of Purpose............................................... 2
1.2 Definitions........................................................ 2
ARTICLE 2. PROCEDURES FOR PURCHASE............................................ 4
2.1 Closing............................................................ 4
2.2 Closing Conveyances................................................ 4
2.3 Escrow and Escrow Agent............................................ 4
2.4 Closing Costs...................................................... 5
2.5 Certain Assets..................................................... 5
2.6 Plant 118.......................................................... 8
2.7 Hassen Facilities.................................................. 8
ARTICLE 3. Purchase Price, ALLOCATION OF REVENUES and costs................... 9
3.1 Purchase of Water System........................................... 9
3.2 Purchase Price..................................................... 9
3.3 Allocation of Costs................................................ 9
3.4 Allocation of Revenues............................................. 10
3.5 Adjustments Outside of Escrow...................................... 10
3.6 Possession......................................................... 10
3.7 Claims............................................................. 11
ARTICLE 4. Water rates and Service Provisions................................. 11
4.1 City Rates......................................................... 11
4.2 Water Rates and Billing By Company................................. 11
4.3 Fire Hydrant Services.............................................. 12
4.4 Connections or Main Extensions Subsequent to Closing............... 12
4.5 Capital Additions.................................................. 12
4.6 Water Supply From Company Subsequent to Closing.................... 13
4.7 Reclaimed Water.................................................... 13
ARTICLE 5. Conditions to Obligations.......................................... 13
5.1 Statutory Prerequisites............................................ 13
5.2 Defeasance of Water Revenue Bonds.................................. 14
5.3 Approval of Property, Books and Records............................ 15
5.4 Consents........................................................... 15
5.5 Easements.......................................................... 15
5.6 Franchises to Operate.............................................. 16
5.7 Other Approvals.................................................... 16
5.8 Title Approval and Commitment...................................... 16
5.9 Absence of Certain Events.......................................... 17
</TABLE>
i
<PAGE>
<TABLE>
Page
----
<S> <C>
5.10 Lender Matters..................................................... 17
5.11 Accuracy of Representations and Warranties......................... 18
ARTICLE 6. Representations and Warranties of the City......................... 19
6.1 Political Existence................................................ 19
6.2 Authorization...................................................... 19
6.3 No Breach.......................................................... 19
6.4 Financial Statements............................................... 20
6.5 Title to Assets.................................................... 20
6.6 Warranty to Preserve and Maintain.................................. 20
6.7 Contractual Freeze................................................. 21
6.8 Insurance.......................................................... 21
6.9 Pending Litigation................................................. 21
6.10 Transfer of Operational Authority.................................. 21
6.11 Compliance with Applicable Laws.................................... 21
6.12 Opinion of City Attorney........................................... 22
6.13 Indemnification.................................................... 23
6.14 Notice by City..................................................... 23
ARTICLE 7. Representations and Warranties of the Company...................... 24
7.1 Existence and Power................................................ 24
7.2 Authorization of Agreement......................................... 24
7.3 Agreement to Create No Default..................................... 24
7.4 Pending Litigation................................................. 24
7.5 Opinion of Company Attorney........................................ 25
ARTICLE 8. Covenants of the Company........................................... 25
8.1 Local Telephone Lines.............................................. 25
8.2 Indemnification.................................................... 25
8.3 Holding Costs to Customers......................................... 26
8.4 Property Taxes..................................................... 26
ARTICLE 9. Covenants of the city.............................................. 26
9.1 Performance........................................................ 26
9.2 Books and Records.................................................. 26
9.3 Conduct of Business................................................ 27
9.4 Taxes and Fees..................................................... 27
9.5 Accounts Payable................................................... 27
9.6 Utilities.......................................................... 27
ARTICLE 10. Miscellaneous...................................................... 27
10.1 Company's and City's Liability for Fees............................ 27
10.2 Survival of Representations and Warranties......................... 28
10.3 Bulk Sales......................................................... 28
10.4 Notices............................................................ 28
10.5 Section Headings................................................... 29
</TABLE>
ii
<PAGE>
<TABLE>
Page
----
<S> <C>
10.6 Governing Law...................................................... 29
10.7 Entire Agreement and Amendment..................................... 29
10.8 Expense of Litigation.............................................. 29
10.9 Counterparts....................................................... 30
10.10 Effectiveness...................................................... 30
10.11 Interest........................................................... 30
10.12 Severability....................................................... 30
10.13 City Employees..................................................... 30
10.14 Exclusive Negotiating Agreement and LOI............................ 30
10.15 Indemnities........................................................ 31
10.16 Escrow Agent Not to be Concerned................................... 31
10.17 Brokers............................................................ 31
10.18 Arm's Length Transaction........................................... 31
10.19 Further Instruments................................................ 31
10.20 Exhibits To Be Added............................................... 32
</TABLE>
iii
<PAGE>
EXHIBIT 10.16
AGREEMENT BETWEEN SUBURBAN WATER SYSTEMS AND THE CITY OF
WEST COVINA, CALIFORNIA FOR THE ACQUISITION OF THE
CITY'S WATER UTILITY SYSTEM
- --------------------------------------------------------------------------------
THIS AGREEMENT (the "Agreement") is made and entered into this 1st day
of February, 2000, by and between SUBURBAN WATER SYSTEMS, a California
corporation (the "Company") and THE CITY OF WEST COVINA, CALIFORNIA, a municipal
corporation (the "City"), with respect to the following:
RECITALS
--------
A. The City is a municipal corporation operating a municipal water
utility system pursuant to California Public Utilities Code (S) 10001, et seq.,
as amended (the "Code"), as modified, with respect to the City, by the special
legislation contained in Code (S) 10061.3.
B. The Company is a California corporation and a public utility water
corporation regulated by the California Public Utilities Commission ("CPUC")
providing retail water service to customers in portions of Los Angeles and
Orange Counties, California.
C. The Company is willing and able to deliver retail water service to
the City's current and future water customers.
D. The parties have entered into a letter of intent dated August 3,
1999, as amended on September 9, 1999 (collectively, the "LOI"), setting out the
principal terms upon which the Company shall acquire the water utility system of
the City.
E. As required by the special legislation covering the sale, on
December 7, 1999, a majority of those customers of the City's water system
located within the City and casting ballots voted in favor of the sale based
upon the terms and conditions set forth in the LOI. On such date, the City
Council certified such vote and approved the sale.
F. The City has determined to sell and the Company wishes to purchase
the entire City water system. The City and the Company enter into this
Agreement to carry out such purchase and sale.
AGREEMENT
---------
NOW, THEREFORE, for good and valuable consideration described herein,
the receipt and adequacy of which are hereby acknowledged, the City and the
Company agree as follows:
<PAGE>
ARTICLE 1.
DEFINITIONS AND STATEMENT OF PURPOSE
1.1 Statement of Purpose. The City is entering into this Agreement for
--------------------
the benefit of the Customers, as defined below, by divesting itself of the Water
System, as defined below, and its operation in order to stabilize rates and
assure water availability, quality and delivery to Customers.
1.2 Definitions. The following definitions shall apply to the following
-----------
terms as used herein:
(a) "Capital Additions" -- water system additions, improvements and
replacements which are or upon completion will become a part of the Water
System, whether built by the City or dedicated by a developer.
(b) "City's Water Rates" or "Rates" -- the rates in effect on
February 1, 2000 for water service provided by the Water System as approved by
the City Council and attached hereto as Exhibit A.
---------
(c) "Closing" -- the consummation of the sale of the Water System, as
defined below, pursuant to Section 2.1.
(d) "Closing Date" -- the date upon which the Closing occurs pursuant
to Section 2.1.
(e) "Customer Service Connection" -- the point of connection of the
customer's piping with the meter and service pipe of the Water System, but not
including the meter (meter box and meter keystop service).
(f) "Customer Service Deposits" -- funds, if any, collected by the
City as security for the payment of bills for water service.
(g) "Customers" -- all persons, firms, associations, corporations and
governmental authorities supplied or entitled to be supplied with water service
for compensation through the Water System on the Date of this Agreement, and
those added prior to and after the Closing.
(h) "Date of this Agreement" -- the Date of this Agreement identified
in the first paragraph hereof.
(i) "LOI" -- has the meaning set forth in Recital D.
(j) "Purchase Price" -- the purchase price payable by the Company for
the Water System at the Closing pursuant to Section 3.2 below.
(k) "Reclaimed Water" -- non-potable water which cannot be used for
human consumption but which is of sufficient quality to be used for irrigation
purposes.
2
<PAGE>
(l) "Water Revenue Bonds" -- all outstanding bonds or certificates of
participation issued by the City (i) payable from revenues arising from the
operation of the Water System, (ii) constituting a lien or encumbrance on such
revenues or on the property of the Water System, and/or (iii) which have terms
limiting the ability of the City to sell or convey the Water System or either
the Walnut Portion or West Covina Portion thereof. Water Revenue Bonds do not
include the City's participation agreement with Walnut Valley Water District and
Valencia Heights Water Company, which participation agreement shall be treated
pursuant to Section 2.5 of this Agreement.
(m) "Water System" -- all water mains and related appurtenances,
pumping stations, reservoirs, service lines, meters, hydrants, equipment, real
property, easements, and permits and all other assets of whatsoever kind,
regardless of whether located within or outside the City's municipal limits,
which are, or in the future would be, part of the transmission, storage and
distribution system utilized to provide water service to the Customers generally
as set out on the City's June 30, 1998 balance sheet attached hereto as Exhibit
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B (the "Balance Sheet"). The term "Water System" excludes (a) Customer Service
- -
Connections which are and shall remain the property of Customers, (b) cash and
accounts receivable and Customer Service Deposits (which shall remain the
property of the City or the Customers, as applicable), (c) liabilities incurred
prior to the Closing Date, contingent or otherwise, which shall remain the
responsibility of the City except as expressly provided herein to the contrary,
(d) vehicles and tools used in the operation of the Water System (which shall
remain the property of the City) and (e) the City's inventory of pipe, meters,
meter boxes, fire hydrants and other parts used by the City in the operation of
the Water System (which inventory shall remain the property of the City). The
Water System shall include, and there shall be transferred to the Company on the
Closing Date, copies of books and records relating to the Water System as
reasonably requested by the Company and all capital stock (i.e., water rights)
of Covina Irrigating Company owned by the City and the City's connection,
through the Upper District, to the Metropolitan Water District. The Water System
also includes, without limitation, each asset which, pursuant to Section 2.5
below, is to be transferred to the Company.
The Water System consists of two components for purposes of this sale.
One component consists of those portions of the Water System located outside of
the geographical boundaries of the City and includes approximately 2,800
Customer Service Connections (the "Walnut Portion") as set out on the system map
attached hereto as Exhibit C. The other component consists of those portions of
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the Water System located inside of the geographical boundaries of the City and
includes approximately 4,200 Customer Service Connections (the "West Covina
portion") as set out on the system map attached hereto as Exhibit D. As part of
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this sale, the Company is purchasing all Water System assets of both the Walnut
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Portion and the West Covina Portion, except as specified to the contrary in this
subsection (m) and in Section 2.5 below.
Other terms used in this Agreement and defined at various places in
this Agreement shall have the meanings given to such terms in the definitions
thereof.
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ARTICLE 2.
PROCEDURES FOR PURCHASE
2.1 Closing. The City agrees to sell and transfer to the Company, and the
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Company agrees to purchase and pay for, the Water System. Except as otherwise
expressly set forth herein, the Water System shall be free and clear of all
liens, claims and encumbrances. The sale of the Water System shall occur on or
before February 25, 2000. If, however, the parties are unable to close on such
date, the parties shall use all reasonable efforts to close as soon thereafter
as possible.
2.2 Closing Conveyances. The Closing shall be held on the Closing Date at
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a mutually acceptable location in Los Angeles County or Orange County. At the
Closing, the City shall deliver to the Company such deeds, bills of sale,
assignments, easements, and other instruments of transfer or conveyance
(including those provided for in Section 2.5) as may be necessary to vest in the
Company all of the City's title to the Water System. All such transfer documents
shall be prepared by the attorneys for the Company and shall be in form and
substance satisfactory to the City and the Company. The City shall draft the
necessary documentation for the defeasance of the Water Revenue Bonds, and all
transfer documents relating to real property and interests therein or releasing
or reconveying the lien securing the Water Revenue Bonds shall be satisfactory
to the Company and Chicago Title Company ("Chicago" or "Escrow Agent"). At the
Closing, the Company shall also deliver to Escrow Agent the relevant Purchase
Price and the reimbursement due to the City pursuant to Section 5.1 below (if
not previously delivered to the City) in immediately available funds and each
party shall deliver to Escrow Agent all other documents to be delivered by
either party to the other pursuant to this Agreement. Promptly following such
deliveries, the Escrow Agent shall record or file all documents to be recorded
or filed, shall issue the policy of title insurance provided for in Section 5.8,
shall, except as set forth in Section 5.2, deliver the Purchase Price to the
City and shall deliver to the parties all other documents to be delivered to the
parties pursuant to this Agreement. All documents to be delivered and the
Purchase Price shall be deemed delivered concurrently.
2.3 Escrow and Escrow Agent. The Closing of the transaction provided for
-----------------------
herein shall be effected through a sale escrow (the "Escrow") to be established
at Chicago as "Escrow Agent," 16969 Von Karman Avenue, Irvine, California 92614.
The provisions of this Agreement shall also constitute escrow instructions to
Escrow Agent. In addition, the parties agree to promptly execute and deliver to
Escrow Agent such supplemental instructions and such Escrow Agent's general
terms and conditions as shall not be inconsistent with the terms and provisions
of this Agreement and as shall be requested by Escrow Agent.
Escrow shall be opened by delivery of fully executed counterparts of
this Agreement to Escrow Agent within three (3) business days after the
execution and delivery of this Agreement by the parties. All deliveries
required to be made pursuant to this Agreement shall be made through the Escrow
and all deliveries shall be made at the Closing.
2.4 Closing Costs. Except as expressly provided to the contrary herein,
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the City shall pay all costs incurred to satisfy all conditions for which the
City is responsible. The Company shall pay all Escrow Agent's fees and costs,
the title insurance premium, any and all additional
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premiums or costs required for ALTA coverage and for any title endorsements
requested by the Company, for all recording and filing fees, for all costs
incurred to satisfy all conditions for which the Company is responsible and
those costs to be paid by the Company pursuant to Section 5.1. Any additional
closing costs shall be paid by the party which causes such costs to be incurred
or in accordance with Southern California escrow practice if one party is not
clearly responsible for a particular cost. The Company shall deposit at Closing,
in addition to the Purchase Price, the Company's share of closing costs pursuant
to this Section and not paid outside of Escrow. The City's share of such closing
costs, to the extent not paid outside of Escrow, shall be deducted by Escrow
Agent from the Purchase Price prior to delivery of the Purchase Price to the
City. The Company agrees that all title and escrow work with respect to the
Water System being performed by Chicago at the request of the Company shall be
paid for by the Company.
2.5 Certain Assets. For the purposes of the sale of the Water System it
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is agreed that:
(a) Grand Avenue Pipeline. The City is a party to a certain Grand
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Avenue Pipeline Participation Agreement dated November 14, 1988 (the
"Participation Agreement"), pursuant to which a certain pipeline (the "Grand
Avenue Line") was constructed by a non-profit corporation formed by one of the
parties to the Participation Agreement. The City and the Company agree that the
City's interest under the Participation Agreement (the "Interest") is an asset
of the Water System. In connection with the Interest, the parties shall proceed
as follows:
(i) Each of Walnut Valley Water District ("Walnut Valley") and
Valencia Heights Water Company ("Valencia"), the other parties to the
Participation Agreement, had a right of first refusal to purchase a portion of
the Interest. Valencia has, by letter to the City dated September 30, 1999,
declined to purchase its portion of the Interest upon a sale thereof by the
City. The City has, by letter dated January 7, 2000 and in form and substance
satisfactory to the Company, notified Walnut Valley in writing that:
(A) The City proposes to sell the Interest to the Company as
a part of the Water System on the terms and conditions set forth in this
Agreement;
(B) The portion of the Purchase Price allocated to the
Interest is $2,946,143;
(C) Valencia has declined to exercise its right of first
refusal and that Walnut Valley has indicated its intention to acquire the entire
Interest;
(D) Subject to Walnut Valley confirming its exercise of its
right of first refusal, payment for the Interest will be in cash in the amount
of $2,946,143 payable into the Escrow on the Closing Date against delivery of a
mutually approved assignment and assumption agreement with Walnut Valley.
The form and substance of the notice was approved in advance by the Company.
Walnut Valley has exercised its right of first refusal by letter dated January
24, 2000. A copy of such letter shall be furnished to the Company.
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(ii) Assuming that Walnut Valley timely and properly confirms the
exercise of its right of first refusal by deposit of such funds into Escrow,
then:
(A) Concurrently with the Closing, the City shall sell and
assign the interest to Walnut Valley for $2,946,143; and
(B) The Purchase Price paid by the Company shall be reduced
by $2,946,143 (to $8,553,857).
(iii) If Walnut Valley declines to confirm its exercise of the
right of first refusal and fails to complete the purchase of the Interest at the
time and in the manner set forth in the City's notice, then:
(A) At the Closing, the City shall assign to the Company all
right, title and interest of the City in the Interest and the Company shall
assume all obligations of the City pursuant to the Participation Agreement
accruing subsequent to the Closing Date. The Company shall not assume any
obligation with respect to any bonds or other financing issued by the City with
respect to the facilities which are the subject of the Participation Agreement.
The assignment and assumption agreement shall be in form and substance
reasonably satisfactory to the City and the Company.
(B) The Company shall cooperate with the City as reasonably
requested by the City in effecting such transfer, but such cooperation covenant
shall not require the Company to bear any costs which are the responsibility of
the City or to assume any obligations in addition to those to be assumed by the
Company pursuant to this Agreement.
(C) There shall be no reduction in the Purchase Price
provided for in Sections 2.5 and 3.1.
(D) The Company agrees that any issues between the City and
Walnut Valley as to bond payments relating to the Grand Avenue Line are between
the City and Walnut Valley only, are outside the scope of this Agreement and are
not to involve the Company.
(iv) The City is a party to a reimbursement agreement associated
with the Participation Agreement pursuant to which the City pays to Walnut
Valley the sum of approximately $23,000 per year (the "District Payment").
Responsibility for the District Payment shall be assumed by the Company as a
part of the purchase of the Water System if but only if the Company acquires the
City's Interest.
(b) Galster Pump Station. Included within the Water System is a
--------------------
pumping station (the "Galster Facility") located within Galster Park, a public
park owned and operated by the City. As a part of the sale of the Water System,
the City shall:
(i) Convey the Galster Facility (without the real property) to
the Company by means of a bill of sale;
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(ii) Grant to the Company an exclusive easement to use, maintain
and operate the Galster Facility in its present location;
(iii) Grant to the Company a non-exclusive easement to operate,
maintain, repair, replace, etc. any service line located within Galster Park and
running to or from the Galster Facility; and
(iv) Confirm the Company's rights as a franchisee to use the
public right of way in Galster Way.
Such bill of sale and easement agreements shall be prepared by the Company at
its cost and shall be subject to the approval of the City, not to be
unreasonably withheld or delayed. The area encompassed by the easement
described in clause (ii) shall be sufficient in size to encompass the Galster
Facility and building enclosure, to permit repair and replacement thereof and to
permit vehicular access from the adjacent public street. The easement provided
for in clause (iii) shall be sufficient to reasonably accommodate all permitted
activities with respect to such service line. The Company shall prepare all
legal descriptions and depictions required with respect to such easements, at
the expense of the Company.
(c) Fire Hydrants. Without limiting the generality of the
-------------
definition thereof, the Water System shall include all fire hydrants owned and
served by the City as of the Closing Date. All such fire hydrants (and the
pipelines serving such hydrants) shall be transferred to the Company by means of
a bill of sale. To the extent that any such hydrant is not located in a public
right-of-way, the City shall, (i) to the extent such hydrant is located in an
area covered by a single purpose easement, assign such easement to the Company
and (ii) to the extent such hydrant is located in a general utility easement
area, grant to the Company an easement to maintain such hydrant and pipeline in
such easement area. All such instruments shall be prepared by the Company at its
expense and shall be subject to the approval of the City, not to be unreasonably
withheld or delayed.
(d) Sites For Future Improvements. The Water System shall also
-----------------------------
include all, if any, sites acquired and owned by the City for future use of the
Water System. Title to all such sites shall be transferred to the Company by
quitclaim deed on the Closing Date.
(e) Intertie. The City is a party to a certain Agreement For An
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Emergency Intertie dated March 16, 1976 with Walnut Valley, as amended in 1978
the "Intertie." The Intertie is a part of the Water System and shall be assigned
to the Company at the Closing. The Company shall also assume all obligations of
the City under the Intertie accruing from and after the Closing Date. The form
and substance of such assignment and assumption shall be subject to the
reasonable approval of each of the City and the Company. Such assignment and
assumption agreement shall be prepared by the attorneys for the Company, at its
expense. The City shall have no responsibility to obtain any consent or approval
of Walnut Valley to such assignment and assumption. Any such consent or approval
shall be the sole responsibility of the Company, and failure to obtain such
consent shall not relieve the Company of its obligations hereunder.
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<PAGE>
2.6 Plant 118. The City and the Company jointly developed a certain
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pumping station commonly known as "Plant 118." The Company owns the real
property on which Plant 118 is located. Each of the Company and the City own
one-half (1/2) of the building located thereon and each owns the pumping
equipment located in its one-half of the building. The City's one-half of the
building and pumping equipment is included in the Water System, and on the
Closing Date the City shall transfer to the Company, by bill of sale, the City's
one-half of the building and pumping equipment.
2.7 Hassen Facilities. Included within the Water System are certain
-----------------
facilities developed by Hassen Development and consisting of two water
reservoirs, a service line to the reservoirs and a branch or loop line (the
"Hassen Facilities"). The City has accepted the reservoirs, the service line and
the branch line but has not accepted the developer's irrevocable offer of
dedication of the large open space area in which the Hassen Facilities are
located. The City and Company agree that:
(a) On the Closing Date, the City shall transfer title to the
reservoirs, service line and branch line to the Company by means of a bill of
sale.
(b) The City shall, prior to the Closing Date, accept or otherwise
obtain sufficient rights in and to the open space area to enable the City, on
the Closing Date, to grant or assign to the Company (i) an exclusive easement as
to the portion of such open space area on which the reservoirs are located and
(ii) a non-exclusive easement as to the areas in which the service line and
branch line are located.
(c) On the Closing Date, the City shall execute, acknowledge and
deliver to the Company the easements described in subsection (b) above.
(d) Within two (2) years after the Closing Date, the City shall (i)
accept or otherwise acquire legal title to the entire open space area, (ii) at
the Company's expense, prepare and process a parcel map to constitute the area
containing the reservoirs as a separate legal parcel and (iii) transfer such
legal parcel to the Company by grant deed.
The bill of sale, easements and grant deed shall be prepared by the
Company at its expense and shall be subject to the approval of the City, not to
be unreasonably withheld or delayed. The parcel map shall be prepared and
processed by the City, but the size and configuration of the reservoir parcel
shall be subject to the approval of the Company, not to be unreasonably withheld
or delayed. The Company shall also reimburse the City for all reasonable fees
and costs incurred to prepare and process the parcel map, with such
reimbursement to be made periodically not more frequently than monthly within
ten (10) days after delivery to the Company of documentary evidence as to the
costs and fees incurred reasonably satisfactory to the Company.
8
<PAGE>
ARTICLE 3.
PURCHASE PRICE, ALLOCATION OF REVENUES AND COSTS
3.1 Purchase of Water System. The City hereby agrees to sell to the
------------------------
Company for the Purchase Price and, except as otherwise expressly set forth
herein, free and clear of all liens, claims and encumbrances, and the Company
hereby agrees to purchase from the City, the Water System, which includes, among
other things, all real property described on Exhibit E, all easements described
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on Exhibit F, all tangible personal property (including but not limited to
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mains, hydrants, all other operating facilities and distribution system)
described on Exhibit G, all intangible property (leases, permits, licenses,
---------
etc.) described on Exhibit H and those assets provided for in Section 2.5 to be
---------
transferred to the Company. Title to and possession of the Water System shall be
delivered to the Company on the Closing Date.
3.2 Purchase Price. The Purchase Price shall be Eleven Million Five
--------------
Hundred Thousand Dollars ($11,500,000.00), payable as provided in Sections 2.2
and 5.2 and subject to adjustment as provided in Section 2.5. There shall be no
adjustments to the Purchase Price for Capital Additions to the Water System
prior to the Closing or for accumulated depreciation prior to Closing. There
shall be no adjustment to the purchase price on account of the prorations,
adjustments and allocations provided for in Sections 3.3 and 3.4, all of which
shall be handled outside of Escrow.
3.3 Allocation of Costs. As of the Closing Date, the parties shall cause
-------------------
Southern California Edison Company and Southern California Gas Company to read
all meters serving the Water System and, in each case, to render final bills to
the City and to switch the billings for such services to the Company at the
Closing Date. The parties shall give the same notice to all water suppliers to
the City.
The City shall be responsible for all utilities usage by the Water
System through the Closing Date and for the cost of all water purchased by the
City through the Closing Date. The City shall also be responsible for all costs
of operating the Water System, including employee compensation and related
costs, through the Closing Date.
The Company shall be responsible for all utilities costs with respect
to the Water System subsequent to the Closing Date and shall supply, at its
expense, all water necessary to operate the Water System subsequent to the
Closing Date. As to all other costs of operating the Water System, including
but not limited to the Company's employee compensation and related costs, the
Company shall be responsible for all such costs incurred subsequent to the
Closing Date. All billings to the City's Customers for the period which
includes the Closing Date shall be pursuant to the City's normal billing cycle.
3.4 Allocation of Revenues. Consistent with the last sentence of Section
----------------------
3.3, all billings to the City's Customers for the period which includes the
Closing Date shall be by the Company but pursuant to the City's normal billing
cycle. All revenue on such billings (i.e., those which include the Closing Date)
shall be allocated and paid, upon collection by the Company, between the City
and the Company based upon the number of days prior to and including the
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Closing Date (to the City) and the number of days thereafter (to the Company).
Bad debts shall be allocated and charged to the City and the Company in the same
manner, when such debts are determined to be uncollectible.
The City and the Company contemplate that the Company will bill
Customers for all water service rendered by the Water System for the billing
period which includes the Closing Date. In the event, however, that the Company
is unable to implement such billings immediately following the Closing Date, the
City shall, upon request by the Company, perform such billings for the Company
for up to three (3) two (2) month billing cycles subsequent to the Closing Date.
Such bills shall be prepared based upon information supplied by the Company, and
the Company shall reimburse the City for all costs incurred by the City to
prepare and deliver such bills. Such costs shall include the allocated
compensation costs of the City's employees who prepare such bills, the postage
costs incurred to deliver such bills to such Customers and the direct and
indirect overhead of the City in performing such service for the Company.
3.5 Adjustments Outside of Escrow. The prorations and adjustments
-----------------------------
provided for in Sections 3.3 and 3.4 shall be made by the City and the Company
outside of the Escrow. The only proration to be made in Escrow shall be real
property taxes and assessments, if any, with respect to the Water System. Such
proration shall be made by Escrow Agent based upon the latest available
information provided by the City and the Company. Any proration in favor of the
City shall be deposited by the Company in Escrow at the Closing in addition to
the Purchase Price for the Water System. Any proration in favor of the Company
shall reduce the Purchase Price payable by the Company for the Water System. To
the extent that any adjustment, allocation or proration provided for in this
Section cannot be effected at or prior to the Closing Date, the parties shall
make such adjustment, allocation or proration as promptly as practicable
thereafter.
3.6 Possession. Possession of the entire Water System shall be delivered
----------
to the Company on the Closing Date. Such delivery of possession shall include
delivery of all keys to all facilities comprising a part of the Water System.
3.7 Claims. Any liability claims against or involving the Water System
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and arising out of occurrences on or prior to the Closing Date shall be the
responsibility of the City. All liability claims arising out of occurrences
thereafter shall be the responsibility of the Company. Each party shall hold the
other harmless under Sections 6.13 and 8.2 from and against all claims for which
the indemnifying party is responsible.
ARTICLE 4.
WATER RATES AND SERVICE PROVISIONS
4.1 City Rates.
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(a) Except as provided in subsection (b) below, the City shall,
between the Date of this Agreement and the Closing Date, maintain in effect the
City's Rates (as set forth on Exhibit A) without change.
---------
10
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(b) Notwithstanding subsection (a) above, the City shall, effective
as of the Closing Date, (i) decrease the commodity portion of the City's Rates
applicable to Customers located within the boundaries of the City by 15.0% and
(ii) decrease the commodity portion of the City's rates applicable to all other
Customers by 0.2%. The City shall make no other changes to the City's Rates.
4.2 Water Rates and Billing By Company.
----------------------------------
(a) From and after the Closing Date, the Company shall:
(i) As to those Customers located within the boundaries of the
City, maintain in effect the City's Rates (after the reduction effected pursuant
to Section 4.1(b), for a period of four (4) years subsequent to the Closing Date
without increase in such Rates but with the addition of the 1.4% CPUC surcharge
described in clause (ii) below.
(ii) As to those Customers located outside of the boundaries of
the City, maintain in effect the City's Rates (after the reduction effected
pursuant to Section 4.1(b), for a period of four (4) years subsequent to the
Closing Date without increase in such Rates. However, subsequent to the Closing
Date the charges to such Customers may be increased by a CPUC surcharge
(currently approximately 1.4% of Customer bills) designed to cover certain
operating expenses of the CPUC.
(iii) Advise the CPUC by advice letter of the additional
geographical area to be served. Moreover, and subject to CPUC approval, the
Company shall include the entire Purchase Price in the Company's rate base. The
Company and the City recognize that, pursuant to an order of the CPUC issued on
October 21, 1999 (the "Order"), the Company's advice letter to the CPUC must
justify the reasonableness of the reduced City's Rates and that such reduced
City's Rates require the approval of the CPUC. The Company shall obtain such
CPUC approval and shall use its best efforts to obtain such approval before the
Closing Date.
(iv) As to all Customers of the Water System, provide service of
a quality and level at least equal to that provided by the City prior to the
Closing. The quality of the water provided shall meet all federal and state
requirements, and all water service shall be in accordance with the rules and
regulations of the CPUC.
(v) The Company shall not file for rate increases for the West
Covina Portion or the Walnut Portion to be effective earlier then four (4) years
after the Closing Date. If the CPUC requires the Company to increase the rates
provided for in Section 4.1(b) above effective prior to the end of such four
(4) year period, from the date of the increase to the end of the four (4) year
period the Company shall take such action as shall be legally permitted and
which shall provide to the City's Customers (both within and outside of the
City's boundaries) the same economic benefit as if the CPUC had not required
such increase(s).
(b) The City is not liable for, nor does it guarantee payment of, any
amounts charged by the Company to Customers, except to the extent that the City
is provided water service by the Company for its own use or on its own behalf.
The Company shall not be
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precluded from adjusting customer billing periods from the bi-monthly billing
period used by the City to the monthly billing used by the Company.
(c) The provisions of subsections (a) and (b) above shall be subject
to all CPUC policies and practices as to water service provided by CPUC
regulated water purveyors.
4.3 Fire Hydrant Services. Subject to Section 4.6, from and after the
---------------------
Closing Date, the Company, without additional charge, shall provide water for
fire protection in the Water System. The Company will maintain all fire hydrants
and install others as reasonably required by fire agencies.
4.4 Connections or Main Extensions Subsequent to Closing. After the
----------------------------------------------------
Closing, all applicable rules and orders of the CPUC and other agencies having
jurisdiction of the Water System or the Company shall govern present and future
Customer connections and main extensions to the Water System.
4.5 Capital Additions. Pending the Closing, the City is authorized to
-----------------
continue to completion all additions, betterments and improvements commenced by
the City prior to the Date of this Agreement. Such pending work (i.e., Capital
Additions currently in process at the Date of this Agreement) is set forth on
Exhibit I and is approved by the Company. The City further agrees that between
- ---------
the Date of this Agreement and the Closing Date it will consult with the Company
and obtain the written approval of the Company prior to commencing any
additional betterments or improvements. Subsequent to the Date of this
Agreement, the City will not approve any main extensions without the prior
written approval of the Company. All main extensions to which the City has title
as of the close of sale of the Water System shall be transferred to the Company
as a part of the Water System. All main extensions to which the City receives
title after the close of sale of the Water System shall be transferred to the
Company upon receipt of title thereto by the City.
4.6 Water Supply From Company Subsequent to Closing. After the Closing,
-----------------------------------------------
water service shall be provided by the Company in the Water System, also subject
to the approval of the CPUC and all applicable rules and orders of the CPUC and
other agencies having jurisdiction thereof. Water provided by the Company shall
be available at the pressure which is normally available but not less than that
which may be required by State and Federal regulatory agencies. The Company
EXPRESSLY does not guarantee a supply of water for fire protection to ANY of its
Customers (whether within the Walnut Portion or the West Covina Portion), and
makes no warranty or guarantee whatsoever in this Agreement with respect to the
quantity or quality of water for fire protection available in the Water System.
4.7 Reclaimed Water. The City and the Company acknowledge that BKK, the
---------------
City and certain other Customers located within the area served by the Water
System desire to obtain Reclaimed Water for irrigation purposes. In the event
that the City and/or such Customers desire to obtain or construct a delivery
system for such Reclaimed Water within the area served by the Water System, the
City shall in writing offer to the Company the opportunity to participate in
such delivery system on an equitable basis, including the rate for reclaimed
water delivered, to be determined at the time of planning for such delivery
system. The Company may participate, on
12
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the basis offered and at the same rate(s) set forth in the proposal delivered to
the Company, by accepting such offer by written notice to the City within thirty
(30) days after receipt of such offer, and if the Company so elects to
participate, the customers for such delivery system shall become Customers of
the Water System as to such Reclaimed Water. If the Company declines to
participate or does not accept the City's offer within such thirty (30) day
period, the City and/or such Customers shall be free to install such delivery
system and obtain Reclaimed Water therefrom without objection or challenge by
the Company. If the Company declines to participate or fails to timely accept
such offer, the Company waives all rights which it may have to object to or
challenge such Reclaimed Water delivery system. If the Company declines to
participate or fails to timely accept such offer, the City shall not offer the
opportunity to participate to third parties on terms more favorable to such
third parties than those offered to the Company.
ARTICLE 5.
CONDITIONS TO OBLIGATIONS
The obligation of the parties to close the purchase and sale
transaction shall be contingent on satisfaction of each of the following
conditions.
5.1 Statutory Prerequisites. The City has obtained special legislation,
-----------------------
codified as Section 10061.3 of the Code (the "Special Statute"), permitting the
sale to the Company of the entire Water System without compliance with Section
10061 et seq. of the Code and subject to (i) approval of such sale by a majority
of the City Council and (ii) approval of such sale by a majority of those West
Covina Portion Customers returning ballots based upon a mail ballot sent to all
West Covina Portion Customers along with information as to the sale as specified
in the Special Statute. In connection with the sale of the Water System:
(A) The City prepared a ballot and information notice which met
the requirements of the Special Statute, mailed or caused to be mailed such
ballot and notice to all West Covina Customers and held a City Council meeting
to tabulate the ballots returned as required by the Special Statute. The
tabulation indicated approval of the sale by more than the required majority of
West Covina Customers returning ballots.
(B) The ballot and information notice were approved by the
Company. The Company shall reimburse to the City all out-of-pocket costs
incurred by the City in complying with clause (A) above. Such costs shall
include the fees and costs of a consultant retained by the City to prepare,
distribute, collect and tabulate the ballot and notice, mailing and printing
costs and the costs and fees of the City's legal counsel with respect to such
ballot and notice process. Payment of such costs shall be made, if not made
prior thereto, on the Closing Date as provided for in Section 2.2.
(C) By executing and delivering this Agreement, the City
represents and warrants that the City Council has approved the sale of the Water
System to the Company upon the terms and at the Purchase Price set forth herein.
There shall not have been any amendment to, modification of, rescission of or
repeal of such approval prior to the Closing Date unless the
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Company fails to obtain the CPUC approval described in Section 4.2 prior to
Closing or otherwise fails to perform hereunder in some material respect.
(D) At the Closing, the City shall deliver a certificate
executed by the Public Services Director and the City Clerk of the City
certifying:
(1) That each of the factual statements set forth in
clauses (A) and (B) above is accurate and each action described in such clauses
(A) and (B) has in fact been taken.
(2) The number of ballots received by the City from the
West Covina Portion Customers, the number of ballots voted in favor of the
within sale and the number of ballots voted against the within sale.
(3) The resolutions adopted by the City Council with
respect to clauses (A), (B) and (D) (2) above and attaching copies of such
resolutions to such certificate.
The certificate shall be prepared by the attorneys for the Company and shall be
subject to the approval of the City and the Company, in each case not to be
unreasonably withheld or delayed.
5.2 Defeasance of Water Revenue Bonds. The City shall defease, or pay and
---------------------------------
satisfy all Water Revenue Bonds as set forth in this Section. The City will make
available to the Company for inspection and copying prior to the Closing Date
documentary evidence that all steps necessary to defease such Water Revenue
Bonds have been taken as of or prior to the Closing Date. The City shall also
provide to the Company on the Closing Date a written agreement to indemnify and
hold the Company harmless from any claims, loss or damage, including expenses
and reasonable attorneys' fees, sustained as a result of failure to effectively
retire all Water Revenue Bonds. The indemnity agreement to be delivered at the
Closing shall be in the form attached hereto as Schedule 1. It is expressly
----------
agreed that the Water Revenue Bonds are to be defeased prior to or concurrently
with the Closing, that the Water Revenue Bonds are not to constitute a lien,
claim or encumbrance on the Water System acquired by the Company, or any portion
thereof, and that the Water Revenue Bonds and any obligations or liabilities
relating thereto are not assumed by the Company in any respect.
5.3 Approval of Property, Books and Records.
---------------------------------------
(a) The City shall allow the Company to inspect all books, records,
contracts and property of the City constituting or relating to the Water System,
which said inspection may be undertaken by the Company at a time convenient to
the Company and the City prior to the Closing Date. The City further agrees to
permit the Company and its representatives full access to the City's property
and records constituting or relating to the Water System at any time prior to
the Closing Date during normal business hours and to supply all information
concerning the Water System and its affairs as the Company may reasonably
request.
(b) The Company shall, in its sole but reasonable discretion before
the Closing Date, approve the financial condition of the Water System and the
physical condition of the assets comprising the Water System.
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(c) The City and the Company acknowledge that the City has used
Bookman-Edmonston Engineering as the City's outside civil engineering firm. The
City hereby consents to retention by the Company of such firm in connection with
the Water System, or any portion thereof, after the Closing and, to the extent
of the City's ability to do so, waives any actual or apparent conflict of
interest which such firm might otherwise have due to its prior retention by the
City.
5.4 Consents. All necessary consents, if any, for the assignment or
--------
transfer of all contracts, leases, licenses, easements and permits which form a
part of or relate to the Water System shall be obtained by the City and shall be
in form and substance reasonably satisfactory to the Company, unless the Company
agrees to specifically waive such requirement with respect to one or more of the
contracts, licenses, leases, easements or permits.
5.5 Easements. The City shall provide to the Company easements which are
---------
in form and substance reasonably satisfactory to the Company for all water
mains, reservoir access, facilities and appurtenances which are a part of the
Water System and which are not located on public rights-of-way or in easements
assigned to the Company. The Company will assist the City in its attempt to
acquire such easements to the extent that such easements do not exist at the
Date of this Agreement, and the obligations of the Company hereunder shall be
contingent upon its ability to acquire transferable property rights for all of
the City's watermains, reservoir access, facilities and appurtenances not
located on public rights of way. Prior to the Closing, the City shall also amend
the existing water franchise agreement previously granted by the City to the
Company to include the use of the streets and other public places of the City
incident thereto as reasonably necessary for the Company to operate the West
Covina Portion of the Water System and without change in the terms, conditions
and franchise fee rate thereof. The covenants of the City contained in this
Section shall include those easements and other rights to be granted or assigned
pursuant to Section 2.5 above.
5.6 Franchises to Operate. At or before the Closing Date, the Company
---------------------
shall either (a) receive a water franchise agreement from the City of Walnut
sufficient for the Company to operate the Walnut Portion without fee or charge
to the Company by the City of Walnut or (b) receive a letter from the City
Manager of the City of Walnut providing, in substance, that no such franchise
agreement is required for the Company to operate the Walnut Portion of the Water
System.
5.7 Other Approvals. The Company and the City shall receive all consents,
---------------
approvals and authorizations of all governmental bodies, authorities and
agencies, if any, having jurisdiction over the transaction provided for in this
Agreement, free of conditions or restrictions which would impair the ability of
either party to consummate the transaction contemplated by this Agreement in
accordance with its terms.
5.8 Title Approval and Commitment. Approval by the Company of the title to
-----------------------------
the real property and real property interests (and all operating facilities
therein or thereon) included in the Water System and the written commitment of
Chicago to issue, upon the closing, a policy of CLTA Owner's title insurance in
favor of the Company, insuring title to such real property and real property
interests (and all operating facilities therein or thereon) in the Company with
a
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liability amount equal to the Purchase Price, plus costs of defense as permitted
by such policy, subject only to such matters as are approved by the Company.
Promptly upon the execution of this Agreement, the Company (with the City's
consent, which hereby is given) shall cause Chicago to issue and deliver to the
Company a preliminary title report (the "PTR") with respect to all real property
and real property interests included in the Water System, together with legible
copies of all exceptions described therein. The PTR and exceptions shall be
subject to the approval of the Company, which approval shall not be unreasonably
withheld and shall be deemed given unless the Company shall disapprove the PTR
and exceptions by written notice to the City and Escrow Agent within thirty (30)
days after receipt by the Company of the entire PTR and exceptions. Such notice
shall specify with particularity the item or items disapproved. For the purposes
of this provision, the Company shall not be entitled to disapprove (a) the
standard printed exceptions to the PTR form, (b) real property taxes a lien not
delinquent, (c) the lien of the Water Revenue bonds (which shall be released or
reconveyed at or prior to Closing) and (d) any lien, claim or encumbrance
created or suffered by the Company. If the Company timely and properly
disapproves the PTR and exceptions, the City shall, within fifteen (15) days
after receipt of such notice, notify the Company and Escrow Agent in writing
whether the City elects to remove or cure the item(s) disapproved. If the City
so elects to remove or cure such disapproved item(s), it shall proceed to do so
and shall complete such removal and cure to the reasonable satisfaction of the
Company and Chicago at least ten (10) days prior to the Closing. If the City
elects not to remove or cure such item(s) or makes no written election within
such time period, the Company shall have thirty (30) days from receipt of the
City's election or the expiration of the fifteen (15) day period, as applicable,
to either (i) elect to accept title with such disapproved item(s) or (ii) elect
to terminate this Agreement. Promptly following approval by the Company of title
to the real property and real property interests included in the Water System,
the Company (with City's consent, hereby given) shall cause Chicago to issue and
deliver to the Company the written commitment provided for in this Section
subject only to the exceptions approved (or disapproved but accepted) by the
Company. Upon the closing, the Company (with the City's consent) at the expense
of the Company, shall cause Chicago to issue to the Company a policy of title
insurance in accordance with the commitment.
5.9 Absence of Certain Events. There shall not have occurred any damage to
-------------------------
or destruction of any material portion of the Water System between the Date of
this Agreement and the Closing Date. For this purpose, a "material portion"
shall mean a portion or portions of the Water System with an aggregate repair or
replacement cost of $100,000 or more. However, in the event of the occurrence of
damage to or destruction of a material portion of the Water System, the Company
may, by written notice to the City and Escrow Agent given within thirty (30)
days after receipt by the Company of written notice of such occurrence, elect to
waive the satisfaction of this condition and proceed to close the purchase. In
such event the City shall, at the election of the Company, either (a) repair or
replace the damaged or destroyed property(ies) prior to the Closing (if such
repair or replacement can be accomplished prior to the Closing), (b) assign to
the Company at the Closing all rights of the City to the proceeds of all
insurance maintained by the City with respect to such damaged or destroyed
property or (c) transfer the damaged property to the Company in its then
condition, with a reduction in the Purchase Price equal to the mutually agreed
cost of repair or replacement.
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5.10 Lender Matters. The Company shall have obtained (a) financing in an
--------------
amount equal to the Purchase Price from a lender selected by the Company and
upon terms and provisions satisfactory to the Company and such lender and (b)
all consents to the purchase by the Company of the Water System and/or such new
financing required by all existing credit agreements to which the Company and/or
the Company's parent are parties and which require such consent prior to such
purchase and/or new financing.
5.11 Accuracy of Representations and Warranties.
------------------------------------------
(a) All representations and warranties of the City and all
representations and warranties of the Company shall be accurate as of the Date
of this Agreement and the Closing Date and all covenants of the City and the
Company to be performed by the Closing Date shall have been performed by the
Closing Date or waived.
(b) The Company shall be responsible to satisfy those conditions set
forth in Sections 5.3, 5.6, 5.7 (to the extent of approvals, consents and
authorizations required due to the Company's operations), 5.8, 5.10 and 5.11(a)
(to the extent of representations, warranties and covenants of the Company). The
City shall be responsible to satisfy those conditions set forth in Sections 5.1,
5.2, 5.4, 5.5, 5.7 (to the extent of approvals, consents and authorizations
required due to the City's operations) and 5.11(a) (to the extent of
representations, warranties and covenants of the City).
(c) Each party shall use its respective best efforts to satisfy each
condition for which such party is responsible. Nothing herein, however, shall
require either party to pay any expense or to assume any obligation in addition
to those expenses and obligations which such party agrees to pay or assume
pursuant to the provisions of this Agreement. Moreover, nothing in this section
or this Agreement shall be deemed or construed to limit any approval right or
other right given to either party with respect to satisfaction of any condition,
except that any approval required shall not be unreasonably withheld. Each party
agrees to cooperate as reasonably requested by the other in connection with the
satisfaction of the conditions set forth in each of such Sections.
(d) The conditions set forth in Sections 5.2, 5.3, 5.5, 5.6, 5.8, 5.9
and 5.10 have been included for the benefit of the Company. The conditions set
forth in Sections 5.1, 5.4, 5.7 and 5.11 (for the City as to the
representations, warranties and covenants of the Company and for the Company as
to the representations, warranties and covenants of the City) have been included
for the benefit of both the City and the Company. As to those conditions which
are solely for the benefit of the Company, only the Company can waive the
satisfaction thereof. As to those conditions which are for the benefit of both
the City and the Company, any waiver thereof, to be effective, must, except as
to Section 5.11, be by both parties. As to any waiver of Section 5.11, each
party may waive only the accuracy of a representation and warranty of the other
party or the breach of a covenant by the other party. Any waiver of a condition
pursuant to this Article must be in a written notice to the other party and to
Escrow Agent.
(e) In the event of failure of any of the conditions set forth in
Sections 5.1 through 5.11, a party for whose benefit such condition is included
shall have the right to terminate
17
<PAGE>
this Agreement. Such termination shall be effected by written notice from the
terminating party to the other party and to Escrow Agent given promptly
following the failure of such condition and, in any event, prior to the Closing
Date. In the event that this Agreement is terminated pursuant to this subsection
(e), this Agreement shall terminate on the third (3rd) business day following
the date of such termination notice (unless such failed condition is satisfied
within such period). Upon such termination, Escrow Agent shall promptly return
to each party all funds and instruments deposited by such party; the Company
shall bear the escrow cancellation fee; each party shall bear all fees and costs
incurred by it in the negotiation and preparation of this Agreement and in
performing its respective obligations hereunder through the date of termination;
the Company shall return to the City all information and documents provided by
the City with respect to the Water System; and except as provided herein,
neither party shall have any further rights or obligations pursuant to this
Agreement. Pending any such termination, each party shall diligently pursue its
obligations hereunder.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF THE CITY
The City represents and warrants to the Company as follows:
6.1 Political Existence. The City is a duly constituted, validly existing
-------------------
municipal corporation, in good standing, and authorized to do business under the
laws of the State of California. The City has all necessary power and authority
to execute and deliver this Agreement and to perform its obligations hereunder.
6.2 Authorization. The execution and delivery of this Agreement, and all
-------------
other instruments and documents contemplated hereunder, and the performance by
the City of its obligations and duties hereunder and thereunder have been duly
authorized by the City Council of the City. Those persons executing and
delivering this Agreement and such other instruments on behalf of the City are
duly authorized to so execute and deliver on behalf of the City.
6.3 No Breach.
---------
(a) The execution, delivery and performance of this Agreement do not
and will not constitute a breach or violation of or a default under any
ordinances or the governing code of the City or any other agreement, contract,
mortgage or other instrument to which the City or its properties are bound, nor
will such execution, delivery and performance result in the creation of any
lien, charge or encumbrance upon any property or assets of the City, nor will
such actions violate any statute, ordinance, regulation, judgment, order or
ruling to which the City or its properties are subject, except for such
exceptions as are specifically stated in the opinion of the City Attorney and as
are reasonably approved by the Company.
(b) Without limiting the generality of the foregoing, the City
specifically represents and warrants that (i) the City has full power and
authority to sell to the Company reservoir R-2 in the Walnut Portion ("R-2"),
(ii) no consent to or approval of such sale is required from the United States
government or any agency thereof and (iii) the City is entitled to retain all
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<PAGE>
amounts paid by the Company to the City for R-2. The City agrees specifically
that it shall indemnify, defend and hold the Company harmless from any and all
claims by the United States (or any agency thereof) to any portion of the
Purchase Price and any and all claims to the effect that the United States (or
any agency thereof) has any interest in R-2 or any claim or lien thereon.
(c) The City represents and warrants that it does not collect and
therefore does not have any customer deposits to transfer to the Company.
(d) The City shall not, prior to the Closing Date, reduce the City's
Rates for water service, except as provided in Section 4.1 above.
6.4 Financial Statements. The Balance Sheet accurately and completely sets
--------------------
forth the assets of and the liabilities of the Water System as of the date of
the Balance Sheet. There have been no material adverse changes in the financial
condition or business of the Water System since the date of the Balance Sheet.
All assets set forth in Exhibits E, F, G and H are used and useful in the
----------------------
operation of the Water System. Exhibits E, F, G and H were compiled jointly by
----------------------
the City and the Company, and the City does not warrant the accuracy or
completeness of such Exhibits. However, employees of the City familiar with the
Water System have reviewed (without independent investigation) such Exhibits
and, on the basis of their knowledge, the City is not aware of any omissions
from or inaccuracies in such Exhibits. If, however, it is determined after the
Closing that any asset of the Water System was not included in the appropriate
Exhibit and was not transferred to the Company, the City shall promptly transfer
the same to the Company without additional charge by means of an appropriate
conveyance (grant deed, bill of sale or assignment) in form and substance
reasonably satisfactory to the City and the Company.
6.5 Title to Assets. The City has good and merchantable title to all
---------------
assets comprising the Water System, subject only to the lien of the Water
Revenue Bonds and those related to the Grand Avenue Line. The City will convey
title to all real property and real property interests included in the Water
System free and clear of all liens, claims and encumbrances, by deed, except in
the case of easements, the conveyance of which may be by grant in a form
satisfactory as to form and content to the Company and Chicago. As to all other
assets, conveyance shall be made by instruments appropriate thereto and
reasonably satisfactory to the Company as to form and content. Neither any
review by the Company of the City's books and records pertaining to or the
assets comprising the Water System nor any title insurance obtained by the
Company with respect to the assets comprising the Water System shall relieve the
City from liability for the inaccuracy of the representation contained in this
Section.
6.6 Warranty to Preserve and Maintain. The City shall, between the Date of
---------------------------------
this Agreement and the Closing Date, operate, maintain and preserve the Water
System in a careful and proper manner, and deliver the same to the Company in as
good condition as it now is, reasonable wear and tear expected. Between the Date
of this Agreement and the Closing Date, the City shall operate the Water System
in the same manner as operated on the Date of this Agreement. As set out in
Section 5.9, all risk of loss or damage prior to the Closing to the Water System
or any part thereof by fire, tornado, windstorm, explosion or any other casualty
whatsoever shall be assumed by the City.
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6.7 Contractual Freeze. The City shall not enter into any contractual
------------------
agreements prior to the Closing which relate to the Water System or the
provision of water service thereby without the Company's written consent except
in connection with normal and usual commitments in the ordinary course of
business for the purchase of materials, services and supplies, which such
commitments shall be terminable upon not more than thirty (30) days written
notice unless otherwise approved by the Company.
6.8 Insurance. The City shall continue to maintain its current insurance
---------
or self-insurance coverage on the Water System through and including the Closing
Date, after which time all insurance coverage with respect to the Water System
shall be the obligation of the Company.
6.9 Pending Litigation. To the best of the City's knowledge without
------------------
independent investigation, there are no actions, suits or proceedings pending or
threatened against the City, its properties, or the assets constituting the
Water System, at law or in equity, before or by any federal, state, county,
municipal or other government court, department, commission, board, bureau,
agency or instrumentality in which an adverse judgment, assessment or liability
would have a material adverse effect on the City's title to any of the assets
comprising the Water System, the rights of the City or the Company to own and
operate the Water System, or the ability of the City to execute and deliver this
Agreement or to perform its obligations under this Agreement or the other
agreements contemplated hereunder.
6.10 Transfer of Operational Authority. The City shall use its best
---------------------------------
efforts to transfer to the Company all licenses, permits, and other
authorizations, if any, necessary to operate the Water System in the manner and
method in which operated prior to the Closing Date.
6.11 Compliance with Applicable Laws. To the best knowledge of the City,
-------------------------------
without independent investigation, and except as disclosed in written materials
(the "Materials") supplied by Rutan & Tucker, legal counsel to the City, to
Latham & Watkins, legal counsel to the Company, the Water System, and all
facilities and other components thereof, comply with all applicable federal and
state statutes, laws and other requirements, including but not limited to all
statutes, laws, regulations, rulings and other governmental pronouncements and
requirements dealing with or regulating (a) the quality of water delivered by
the Water System, (b) the operation, maintenance and repair of the Water System
and the various facilities and other assets comprising the Water System, (c)
provision of water service to the City's Customers and the charges therefor and
(d) the presence, use, discharge, storage or release of all materials (whether
solid, liquid or gaseous) determined by any governmental authority to be
hazardous or dangerous to persons or property.
For the purposes of the Materials, responsibility for any fines or
penalties resulting from any action or inaction by the City with respect to the
Water System shall remain with the City, all testing required subsequent to the
Closing Date shall be the responsibility of the Company and responsibility for
any other matters shall be as agreed by the City and the Company, applying the
other provisions of this Agreement.
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6.12 Opinion of City Attorney. The City shall deliver to the Company at
------------------------
the Closing an opinion of the City Attorney for the City, dated the Closing Date
and in form and substance reasonably satisfactory to the Company, to the effect
that:
(a) The City is a duly constituted, validly existing municipal
corporation, in good standing, and authorized to do business under the laws of
the State of California. The City has all necessary power and authority to
execute and deliver this Agreement and all other agreements provided for herein
and to perform its obligations hereunder and thereunder.
(b) All consents, approvals and authorizations of all governmental
bodies, authorities, agencies and citizens which are required for the execution
and delivery by the City of this Agreement and all other agreements provided for
herein and for the City's performance of its obligations pursuant to this
Agreement and all other agreements provided for herein have been received, free
from any conditions and restrictions. All statutory prerequisites to the sale of
the Water System to the Company on the terms described herein have been fully
complied with. Without limiting the generality of the foregoing, all
requirements of the Code and the Special Statute applicable to the sale of the
Water System provided for herein have been complied with.
(c) The execution and delivery of this Agreement and all agreements
contemplated hereunder by the City and the consummation of the transactions
contemplated hereby and thereby are within the corporate power of the City, have
been duly authorized by all necessary action on behalf of the City, and this
Agreement has been duly executed by the City, and constitutes the valid and
binding obligation of the City enforceable in accordance with its terms. Those
persons executing and delivering this Agreement on behalf of the City are duly
authorized to so execute and deliver on behalf of the City.
(d) The deeds, easements, bills of sale and all other instruments of
conveyance delivered by the City to the Company at the Closing are legally valid
and enforceable by the Company in accordance with their respective terms and
conditions and are effective to convey to the Company all of the City's right,
title and interest in the Water System, free and clear of all liens, claims and
encumbrances.
(e) The execution, delivery and performance of this Agreement and all
other agreements provided for herein by the City do not and will not constitute
a breach or violation of or a default under any ordinances or the governing code
of the City or, to the best of her knowledge, any other agreement, contract,
mortgage or other instrument to which the City or its properties are bound nor,
to the best of her knowledge, will such execution, delivery and performance by
the City result in the creation of any lien, charge or encumbrance upon any
property or assets of the City, nor will such actions violate any statue,
ordinance, regulation, judgment, order or ruling to which the City or its
properties are subject.
(f) To the best of her knowledge, but without independent
investigation, there are no actions, suits or proceedings pending or threatened
against the City, its properties, or the assets constituting the Water System,
at law or in equity, before or by any federal, state, county, municipal or other
governmental court, department, commission, board, bureau, agency or
instrumentality in which an adverse judgment, assessment or liability would have
a material
21
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adverse effect on the City's title to any of the assets comprising the Water
System, the rights of the City or the Company to own and operate the Water
System, or the ability of the City to execute and deliver this Agreement or the
other agreements provided for herein or to perform its obligations under this
Agreement and the other agreements contemplated hereunder.
6.13 Indemnification. The City shall indemnify, defend and hold harmless
---------------
the Company from and against any and all claims, causes of action (whether
administrative or judicial), liabilities, losses, damages, fines, penalties,
costs and expenses of any kind or nature whether current, deferred or contingent
(including, but not limited to, court costs and reasonable attorneys' fees)
which arise out of or are in connection with:
(a) The City's breach, nonperformance, or nonfulfillment of any
representation, warranty, covenant, or obligation of the City under this
Agreement, including but not limited to those in Sections 3.3, 3.4, 3.5, 3.6 and
3.7;
(b) The failure of the City to comply with any statutes, regulations,
codes or ordinances (including, but not limited to, any and all environmental or
public health laws) applicable to the Water System and the operation thereof
through the Closing Date, including items disclosed in the Materials subject to
the second paragraph of Section 6.11;
(c) Any actions, transactions, failure to act, and any negligence or
willful misconduct by the City, its employees, agents and independent
contractors in the ownership, use, maintenance or operation of the Water System
prior to the Closing;
(d) The employment by the City of those city employees engaged in the
management, operation, maintenance and repair of the Water System through the
Closing Date, including but not limited to all claims by such employees
resulting from transfer to another position as of the Closing Date; and
(e) Any placement, discharge, release or maintenance by the City of
hazardous material or hazardous waste in the City's operation of the Water
System.
6.14 Notice by City. In the event that, during the period from the Date of
--------------
this Agreement through the Closing Date, (a) there occurs any casualty to the
Water System or any facility or other significant asset thereof, or (b) the City
receives notice or knowledge of any lawsuit, claim, legal notice, notice of
violation or any other event which will or may result in the inaccuracy of any
representation or warranty by the City or the breach of any covenant by the City
contained herein, then, in any such event, the City shall promptly notify the
Company in writing of the occurrence and nature of such event or occurrence. The
City shall include with such notice a copy of any summons, complaint, notice,
claim or other writing received by the City and constituting, or received by the
City in connection with, such event or occurrence. Following the delivery of any
such notice, the City shall cooperate with the Company as reasonably requested
in connection with the review or examination of such event or occurrence and the
determination of whether such event or occurrence renders inaccurate any
representation or warranty by the City.
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ARTICLE 7.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the City as follows:
7.1 Existence and Power. The Company is a California Corporation duly
-------------------
organized and validly existing under the laws of the State of California, has
full power and authority to own and use its properties and to transact the
business in which it is engaged and, subject to the grant of the water franchise
agreements described herein and receipt of all requisite approvals as described
herein, it will have the authority to purchase, own and operate the Water
System.
7.2 Authorization of Agreement. The Board of Directors of the Company has
--------------------------
duly authorized the execution and delivery of this Agreement and the performance
by the Company of its obligations pursuant to this Agreement, all as provided
herein, and no other approvals or authorizations other than those specified
herein are necessary or required for the execution and delivery of this
Agreement by the Company or the performance by the Company of its obligations
hereunder. Those persons executing and delivering this Agreement on behalf of
the Company are duly authorized to so execute and deliver on behalf of the
Company.
7.3 Agreement to Create No Default. Subject to Section 5.10, the execution
------------------------------
and delivery of this Agreement by the Company and the performance by the Company
of its obligations herein contained do not, and will not as of the Closing Date,
result in any breach of any of the terms, conditions or provisions of or
constitute a default under any indenture, agreement or other instrument to which
the Company is a party or by which it may be bound or affected.
7.4 Pending Litigation. To the best of the Company's knowledge without
------------------
independent investigation, there are no actions, suits or proceedings pending or
threatened against the Company or its properties, in law or in equity, before or
by any federal, state, county, municipal or other government court, department,
commission, board, bureau, agency or instrumentality in which an adverse
judgment, assessment or liability would have a material adverse effect on the
rights of the Company to own and to operate the Water System or the ability of
the Company to execute and deliver this Agreement and perform its obligations
under this Agreement.
7.5 Opinion of Company Attorney. The Company shall deliver to the City at
---------------------------
the Closing an opinion of Latham & Watkins, counsel to the Company, dated the
Closing Date and in form and substance reasonably satisfactory to the City, to
the effect that:
(a) The Company is a California corporation duly incorporated and
validly existing under the laws of the State of California. Subject to the grant
of the water franchise agreements and other approvals, consents and
authorizations provided for herein, the Company has the authority to purchase,
own and operate the Water System.
(b) The Board of Directors of the Company has duly authorized the
execution and delivery of this Agreement by the Company and the performance by
the Company of its
23
<PAGE>
obligations pursuant to this Agreement. No other corporate authorization is
required for the execution and delivery by the Company of this Agreement or the
performance by the Company of its obligations under this Agreement. Those
persons who have executed and delivered this Agreement on behalf of the Company
have been duly authorized to so execute and deliver on behalf of the Company.
(c) To the knowledge of such counsel, and subject to the satisfaction
of the condition set forth in Section 5.10, the execution and delivery of this
Agreement by the Company and the performance by the Company of its obligations
herein will not result in the breach of or in a default under any Material
Agreement, as defined in such opinion, to which the Company or its properties
are bound.
ARTICLE 8.
COVENANTS OF THE COMPANY
The Company covenants with the City as follows:
8.1 Local Telephone Lines. The Company shall maintain at all times after
---------------------
the Closing Date local telephone lines which will enable the City's Customers to
contact the Company by telephone without charge.
8.2 Indemnification. The Company shall indemnify, defend and hold harmless
---------------
the City from and against any and all claims, causes of action (whether
administrative or judicial), liabilities, losses, damages, fines, penalties,
costs or expenses of any kind or nature (including, but not limited to, court
costs and reasonable attorney's fees) which arise out of or are in connection
with:
(a) The Company's breach, nonperformance, or nonfulfillment of any
representation, warranty, covenant, or obligation of the Company under this
Agreement, including but not limited to those in Sections 3.3, 3.4, 3.5 and 3.7;
(b) The failure by the Company to comply with applicable statutes,
regulations, codes or ordinances (including, but not limited to, any and all
environmental or public health laws) in the operation of the Water System
subsequent to the Closing;
(c) Any actions, transactions, failure to act, and any negligence or
willful misconduct by its employees, agents and independent contractors in the
ownership, use, maintenance or operation of the Water System subsequent to the
Closing Date; and
(d) Any placement, discharge, release or maintenance by the Company
of hazardous materials or hazardous waste in the Company's operation of the
Water System. For this purpose, the Company specifically acknowledges that the
Company has elected not to perform a Phase I Environmental Assessment with
respect to the Water System or any portion thereof.
24
<PAGE>
8.3 Holding Costs to Customers. For a period of four (4) years subsequent
--------------------------
to the Closing Date, the Company shall provide water service to the Customers at
costs to the Customers not in excess of the reduced rates provided for in
Section 4.1.
8.4 Property Taxes. The Company shall pay all real and personal property
--------------
taxes and assessments assessed against the Water System from and after the
Closing Date.
ARTICLE 9.
COVENANTS OF THE CITY
The City covenants with the Company as follows:
9.1 Performance. The City shall perform its obligations under all
-----------
contracts, leases, licenses, easements and permits which form a part of the
Water System without default until the Closing Date.
9.2 Books and Records. The City shall deliver to the Company on the
-----------------
Closing Date copies of all books and records of the City, held or controlled by
the City or its agents relating to the Water System, including but not limited
to customer lists, billing/collection history, technical information,
distribution system maps, continuing property records, hydrant records, valve
records, customer service records, monthly reports submitted to state agencies,
maintenance records on tanks, mains and services, and all other records and
documents relating to the Water System.
9.3 Conduct of Business. Until the Closing Date, the City shall not,
-------------------
without the written consent of the Company, dispose of or encumber any of the
assets comprising the Water System except (a) for transactions in the ordinary
course of business and (b) as provided in Section 2.5(a). Pending the Closing,
the City shall operate and maintain the Water System in the ordinary course of
business, consistent with good past business practices.
9.4 Taxes and Fees. The City agrees not to impose after the Closing Date
--------------
any taxes, franchise fees, license fees, or other similar charges or assessments
on the Company relating to the operation of the Water System and the use of the
public rights-of-way within the City for the operation of such system other than
lawful fees for street excavation or encroachment permits, building permits, and
real and personal property taxes and assessments and the extension of the
Company's franchise agreement to cover the West Covina Portion of the Water
System.
9.5 Accounts Payable. The City shall pay and satisfy in full all accounts
----------------
payable relating to the Water System which are accrued or accruable as of the
Closing Date if they represent services or goods received by the City prior to
the Closing Date. The City agrees to indemnify and hold the Company harmless for
all accounts payable relating to the Water System which are accrued or accruable
as of the Closing Date.
9.6 Utilities. The City shall pay all utility charges for which the City
---------
is responsible pursuant to Section 3.3 as soon as practicable after the Closing,
but in no event later than sixty
25
<PAGE>
(60) days after the Closing. The City agrees to indemnify and hold the Company
harmless from all liability with respect to all utility charges and accounts
payable for which the City is responsible pursuant to Sections 3.3, 9.5 and this
Section 9.6.
ARTICLE 10.
MISCELLANEOUS
10.1 Company's and City's Liability for Fees. The Company and the City
---------------------------------------
will each be responsible for all fees and charges of their respective
accountants, technical consultants (except as provided in clause (B) of Section
5.1), appraisers, attorneys, and other advisors employed with respect to the
transactions provided for herein, whether or not the transactions provided for
herein take place.
10.2 Survival of Representations and Warranties. All agreements,
------------------------------------------
representations, and warranties contained in this Agreement shall, to the extent
applicable, apply as of the Closing Date and shall survive the Closing,
notwithstanding any investigation or other due diligence performed by either
party hereto.
10.3 Bulk Sales. It is the opinion of both parties that the Bulk Sales Law
----------
of the State of California does not apply to this transaction. Should any claim
or legal proceeding be made or commenced by a creditor of the City based on the
applicability of said Bulk Sales Law to this transaction, the City shall
indemnify and hold harmless the Company from and against any and all claims of
such creditors under the Bulk Sales Law.
10.4 Notices. All notices, requests, demands, approvals, consents,
-------
waivers, or other communications required or permitted to be given hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or mailed by registered or certified mail, return receipt requested,
postage prepaid, addressed to the mailing addresses set forth below (or to such
other addresses as the parties hereto may from time to time designate in writing
in a notice given in the same manner):
Suburban Water Systems:
1211 E. Center Court Drive
Covina, CA 91724-3603
Attn: President
Fax: (818) 331-6363
with a copy to:
Latham & Watkins
650 Town Center Drive, Suite 2000
Costa Mesa, CA 92626
Attn: James W. Daniels, Esq.
Fax: (714) 755-8290
26
<PAGE>
City of West Covina:
1444 W. Garvey Avenue South
P.O. Box 1440
West Covina, CA 91793
Attn: Mr. Jeff Collier
Fax: (626) 813-8667
with a copy to:
Rutan & Tucker
611 Anton Boulevard, Suite 1400
Costa Mesa, CA 92626
Attn: Elizabeth Martyn, Esq.
Fax: (714) 546-9035
Notices which are personally delivered shall be effective upon delivery.
Notices sent by registered or certified mail as provided herein and properly
addressed and sent postage prepaid shall be effective on the date of delivery or
refusal indicated on the return receipt. Each party may also send notices by
facsimile transmission. Any notices sent by facsimile transmission shall be
effective upon acknowledgment of receipt of a legible copy thereof. Each party
may change its address for notices by written notice given in the manner
provided in this Section.
10.5 Section Headings. All article and section headings herein are
----------------
inserted for convenience of reference only and shall not control, affect or
modify the meaning or construction of any of the terms or provisions hereof.
10.6 Governing Law. This Agreement shall be governed by, enforced under,
-------------
and interpreted in accordance with, the laws of the State of California.
10.7 Entire Agreement and Amendment. This Agreement and the Exhibits and
------------------------------
Schedule hereto set forth the entire understanding reached between the parties
hereto with respect to the transactions contemplated hereby. Any previous
agreements or understandings between the parties hereto regarding the subject
matter hereof are merged into and superseded by this Agreement. This Agreement
may not be amended except by a written instrument executed by the parties
hereto. All Exhibits and the Schedule are incorporated into and made a part of
this Agreement by this reference.
10.8 Expense of Litigation. If either party incurs any expense, including
---------------------
reasonable attorneys' fees, in connection with any action or proceeding,
including any arbitration proceeding, instituted by either party by reason of
any default or alleged default of the other party hereunder, to seek damages, to
prevent a breach or continued breach of this Agreement, to determine the rights
and obligations of the parties hereunder or in which this Agreement is asserted
as a defense, the party prevailing in such action or proceeding shall be
entitled to recover its reasonable expenses from the other party, including
expenses of investigation and enforcement.
27
<PAGE>
10.9 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall be deemed a single instrument. It shall not be necessary for both
parties to execute the same counterpart(s) of this Agreement for this Agreement
to become effective.
10.10 Effectiveness. This Agreement shall become effective upon the last
-------------
execution and delivery of this Agreement by the City and the Company.
10.11 Interest. Any amount due from either party to the other party
--------
hereunder which is not paid when due shall bear interest at the rate of seven
percent (7%) per annum from the date due until payment in full.
10.12 Severability. In the event that any portion of this Agreement is
------------
determined to be illegal, void or unenforceable in total or as applied to any
particular circumstance(s) by a court of competent jurisdiction or in any
arbitration proceeding, such provision shall be enforced as to any other
circumstance where not so illegal, void or unenforceable and such determination
shall not affect the validity or enforceability of any other provision of this
Agreement.
10.13 City Employees. The Company shall not be required to hire any City
--------------
employees engaged in the operation of the Water System. The City shall
indemnify, defend and hold the Company harmless from and against any and all
claims and actions brought by City employees arising out of or resulting from or
alleged to arise out of or result from the sale of the Water System to the
Company.
10.14 Exclusive Negotiating Agreement and LOI. The City and the Company
---------------------------------------
have previously executed and delivered a certain Exclusive Negotiating Agreement
dated as of August 3, 1998 (as amended, the "Exclusive Agreement") and the LOI.
Upon execution and delivery of this Agreement, this Agreement shall supersede,
in their entireties, the Exclusive Agreement and the LOI, and such Exclusive
Agreement and LOI shall each terminate.
10.15 Indemnities. The obligations of the indemnifying party under each
-----------
and every indemnification and hold harmless provision contained in this
Agreement shall survive the Closing or any termination of this Agreement to and
until the last to occur of (a) the last date permitted by law for the bringing
of any claim or action with respect to which indemnification may be claimed by
the indemnified party against the indemnifying party under such provision or (b)
the date on which any claim or action for which indemnification may be claimed
under such provision is fully and finally resolved and, if applicable, any
compromise thereof or judgment or award thereon is paid in full by the
indemnifying party and the indemnified party is reimbursed by the indemnifying
party for any amounts paid by the indemnified party in compromise thereof or
upon a judgment or award thereon and in defense of such action or claim,
including reasonable attorneys' fees incurred. Payment shall not be a condition
precedent to recovery upon any indemnification provision contained in this
Agreement.
10.16 Escrow Agent Not to be Concerned. The provisions of Sections 1.1,
--------------------------------
3.3, 3.4, 3.6, 3.7, 4.1 through 4.7, 6.13, 8.1, 8.2, 9.4, 9.5, 9.6, 10.3, 10.13,
10.14 and 10.18 are strictly
28
<PAGE>
between the City and the Company, and Escrow Agent need not be concerned with
such provisions.
10.17 Brokers. Each of the City and the Company shall be responsible for
-------
any fee or commission payable to any broker, finder or agent retained by it in
connection with the transaction provided for in this Agreement. Each of the City
and the Company shall indemnify, defend and hold the other harmless from and
against all claims for a fee or commission with respect to the transaction
described in this Section made by any broker, finder or agent claiming through
the indemnifying party. Payment shall not be a condition precedent to recovery
upon the foregoing indemnification provision. Each indemnifying party shall
defend the indemnified party against all claims for which indemnification is
available pursuant to this Section with legal counsel appointed by the liability
carrier for the indemnifying party or otherwise reasonably satisfactory to the
indemnified party.
10.18 Arm's Length Transaction. The purchase and sale provided for in this
------------------------
Agreement is the result of a negotiated and arm's length sale of the Water
System. In connection with the negotiation and execution of this Agreement, each
party has been represented and advised by such attorneys, accountants and other
professional advisors as such party desired, all of whom were selected and
retained by the retaining party.
10.19 Further Instruments. Each of the parties shall, upon the request of
-------------------
the other party, promptly execute (and acknowledge if required) and deliver such
other and further instruments as shall reasonably be required to carry out the
purpose and intent of this Agreement. Such instruments shall be prepared by the
party requesting the same at its cost and expense. Nothing in this Section shall
be deemed or construed to require any party to assume or discharge any
obligation in addition to or other than those which such party expressly agrees
to assume or discharge pursuant to this Agreement.
10.20 Exhibits To Be Added. To the extent that any Exhibits described
--------------------
herein are not completed and included with this Agreement at execution, such
Exhibits shall be supplied during the escrow and shall be subject to the
approval of both parties.
29
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement for the
Acquisition of the City's Water Utility System as of the date first written
above.
SUBURBAN WATER SYSTEMS,
a California corporation
By:/s/ MICHAEL O. QUINN
--------------------
Title: President
---------
By:/s/ DANIEL N. EVANS
-------------------
Title: V.P. Finance and CFO
---------------------
"Company"
CITY OF WEST COVINA, a Municipal
corporation
ATTEST:
By:/s/ JANET BERRY By: /s/ KATHRYN HOWARD
--------------------- ---------------------------
City Clerk Mayor
"City"
APPROVED AS TO FORM:
By:/s/ ELIZABETH MARBYN
---------------------
City Attorney
30
<PAGE>
PENDING CAPITAL ADDITIONS TO WATER SYSTEM
-----------------------------------------
None.
EXHIBIT I
<PAGE>
Exhibits to Acquisition Agreement
---------------------------------
Exhibit Content Responsibility
- --------- ------- --------------
A Current City Water Rates City
B June 30, 1998 Water System Balance Sheet City
C System Map - Walnut Portion City
D System Map - West Covina Portion City
E Real Property Company
F Easements Company
G Tangible Personal Property City
H Intangible Personal Property City
I Pending Capital Additions to Water System City
Sched. 1 Indemnity re Water Revenue Bonds Done
iv
<PAGE>
AGREEMENT TO INDEMNIFY (the "Agreement")
----------------------------------------
WHEREAS, Suburban Water Systems (the "Company") and the City of West
Covina, California (the "City") have entered into that certain agreement (the
"Contract"), dated February 1, 2000, for the sale of certain water utility
assets (the "Assets"); and
WHEREAS, the City has in the past caused to be issued certain water
revenue bonds (the "Bonds"), at __%, due September 1, 2010, which constitute a
lien or encumbrance on some or all of the Assets subject to the Contract, and
the full redemption and payoff of which is required to release the lien or
encumbrance on the Assets; and
WHEREAS, the City has represented in the Contract that prior to, or
concurrently with, but no later than the Closing Date pursuant to the Contract,
it will establish an escrow for the payment and redemption of the Bonds in full,
pay all charges to the Bond trustee(s), provide and send out all required
notices, complete all required paperwork, fully satisfy and defease all claims
of the holders of the Bonds (the "Bondholders"), act in a manner such that all
Bondholders have no further claim in equity or law with respect to the Bonds and
the Bond issuance and satisfaction, and otherwise act to successfully fulfill
all legal obligations it has with respect to the Bonds;
The Company and the City hereby agree as follows:
1. Intent of the Agreement. It is the intent of the parties to this
------------------------
Agreement that the Company, its parent company, subsidiaries, officers,
directors, employees, shareholders, agents, affiliates, representatives, and
successors in interest (collectively, "Indemnitees"), shall not bear any costs
---
whatsoever, direct or indirect, under any conditions, resulting from any claims
--- ---
by any person or party, arising from or under the obligations City has incurred
---
by issuing the Bonds. In the event of any dispute over the terms and meaning of
this Agreement, such disputed terms or meaning shall be construed in a manner
that strictly fulfills the intent of the Agreement.
2. Persons to be Indemnified. City agrees to and shall indemnify
--------------------------
Indemnitees pursuant to this Agreement.
3. Promise to Defend Against Third Party Claims. City shall
--------------------------------------------
indemnify, defend, and hold harmless Indemnitees against any and all
liabilities, demands, claims, costs, losses, damages, recoveries, settlements,
and expenses (including, but not limited to, interest, penalties, attorneys'
fees, accounting fees, expert witness fees, costs, and expenses) incurred by
Indemnitees ("Losses"), known or unknown, contingent or otherwise, directly or
indirectly arising from or related to (i) any suits, actions, and claims arising
from the Bond issuance and retirement; (ii) the contracts and agreements
relating to the Bond issuance and retirement, and any related agreements; and
(iii) the contracts and agreements made pursuant to the Contract and this
Agreement.
<PAGE>
4. No time Limitations on Survival of Representations, Warranties,
---------------------------------------------------------------
and Agreements. All representations, warranties, and agreements in this
- --------------
Agreement and those made in the Contract which reasonably relate to the terms,
spirit, and intent of this Agreement, shall survive indefinitely until, by their
respective terms, they are no longer operative or are otherwise limited by any
applicable statute of limitations. All statements in any certificate, schedule,
or exhibit delivered by the City under this Agreement or in the Contract which
reasonably relate to the terms, spirit, and intent of this Agreement, or in
connection with the transactions contemplated by this Agreement, shall
constitute representations and warranties by the City under this Agreement.
5. Failure to Defend; Settlement. In the event the City fails to
-----------------------------
defend Indemnitees against any claim(s) according to the intent and terms of
this Agreement and the Contract, and if Indemnitees choose to, in good faith and
upon reasonable terms, settle any claim(s) brought or asserted against them, or
any of them, then such settlement(s) shall be conclusive against the City as
indemnifiable Losses.
6. Counsel Representation, Review, and Participation. The City and
-------------------------------------------------
the Company agree that each has been represented by legal counsel, and that this
Agreement is the result of a negotiated compromise between them. The City and
the Company and their respective counsel have participated fully in the review
and revision of this Agreement. Any rule of construction to the effect that
ambiguities are to be resolved against the drafting party or the Indemnitees
shall not apply in interpreting this Agreement or those terms in the Contract
which reasonably relate to the terms, spirit, and intent of this Agreement.
7. Severability. If a court or an arbitrator of competent
------------
jurisdiction holds any provision of this Agreement to be illegal, unenforceable,
or invalid in whole or in part for any reason, the validity and enforceability
of the remaining provisions, or portions of them, will not be affected, unless
the essential purpose of the intent of the Agreement, as stated in paragraph 1
above, would be defeated by the loss of the illegal, unenforceable, or invalid
provision.
8. Incorporation of Contract by Reference. All the provisions of the
---------------------------------------
Contract not inconsistent with the intent and terms of this Agreement are
incorporated herein by reference.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement to
Indemnify as of the date first written above.
SUBURBAN WATER SYSTEMS,
a California corporation
By_______________________________
Title:___________________________
By_______________________________
Title:___________________________
"Company"
CITY OF WEST COVINA, a Municipal corporation
ATTEST:
By____________________________ By_______________________________
City Clerk Mayor
"City"
APPROVED AS TO FORM:
By____________________________
for the City Attorney
3
<PAGE>
EXHIBIT 10.17
IPWC STOCKHOLDERS AGREEMENT
THIS IPWC STOCKHOLDERS AGREEMENT (this "Agreement") is made as of
January 1, 2000 among Southwest Water Company, a Delaware corporation ("SWC"),
Inland Pacific Partners, LLC, a Delaware limited liability company ("Inland"),
and Inland Pacific Water Company, a California corporation ("IPWC"). SWC and
Inland are collectively referred to herein as the "Stockholders."
W I T N E S S E T H:
WHEREAS, pursuant to the terms of that certain Agreement Regarding
Formation of Companies, dated September 22, 1999, by and between SWC and Inland,
IPWC has issued 99% of its common stock to SWC and 1% of its common stock to
Inland, and;
WHEREAS, the Stockholders desire to more particularly set forth in
writing their agreements with respect to (i) certain matters relating to the
corporate governance of IPWC, (ii) specific restrictions on the transfer of
their interests in IPWC and (iii) terms under which the parties would be willing
to sell their stock interests in IPWC to one another;
NOW, THEREFORE, in consideration of the premises and undertakings
hereinafter set forth, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS AND INTERPRETATION
Section 1.1. Definitions. As used in this Agreement:
----------- -----------
"Affiliate" of a Holder means (a) a Person directly or indirectly
---------
(through one or more intermediaries) controlling, controlled by or under common
control with that Holder; (b) an officer, director, partner, shareholder or
member of that Holder; (c) a member of the immediate family of an officer,
director, partner, shareholder, or member of that Holder; (d) a Person directly
or indirectly controlled by or under common control with any member of Inland;
or (e) any of the individuals designated by Inland that are listed on Schedule
2.4. For these purposes "control" means the possession, direct or indirect, 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.
"Annual Election" means the annual election of Directors held in
---------------
accordance with the By-laws, including any such election by stockholders'
consent.
"Board" means the Board of Directors of IPWC.
-----
"By-laws" mean the By-laws of IPWC.
-------
<PAGE>
"Certificate of Incorporation" means the Articles of Incorporation of
----------------------------
IPWC in the form filed with the California Secretary of State on July 9, 1999.
"Common Stock" means the common stock of IPWC.
------------
"Director" means a director of IPWC.
--------
"Disposition" has the meaning given to such term in Section 3.1.
----------- -----------
"Effective Date" means January 1, 2000.
--------------
"Holder" means a record and beneficial owner of any Shares.
------
"Initial Inland Directors" mean Robb Quincey ("Quincey") and William
------------------------
McIntyre.
"Initial SWC Directors" mean Anton C. Garnier, Maurice Gallarda, and
---------------------
Steve Richardson.
"Inland Director" means the Initial Inland Directors and each Person
---------------
nominated by the Inland Holders pursuant to Section 2.4 and elected as a
-----------
Director.
"Inland Holder" means Inland (so long as it is a Holder) and each
-------------
Permitted Transferee of Inland who becomes a Holder by acquiring any Inland
Shares.
"Inland Shares" means the shares of IPWC Common Stock owned of record
-------------
and beneficially by the Inland Holders.
"IPDC" means Inland Pacific Development Company, a Delaware limited
----
liability company.
"Permitted Transferee" means, in the case of any SWC Holder, (i) a
--------------------
successor to a SWC Holder by Reorganization or operation of law pursuant to a
statutory merger, consolidation, dissolution or liquidation (ii) a purchaser of
all or substantially all of a SWC Holder's assets, or (iii) a Person owning,
directly or indirectly, a majority of the Voting Securities or other comparable
equity interests of a SWC Holder, a Person under common control with such Person
or a Person of which SWC Holder owns, directly or indirectly, a majority of the
outstanding Voting Securities or other comparable equity interests; and in the
case of any Inland Holder, a Person to whom SWC has given its written consent to
become a transferee of all or any part of the Inland Shares which consent shall
not be unreasonably withheld if such transfer is to an Affiliate of Inland;
provided, however, that in each case the Permitted Transferee has become a party
to and has agreed to be bound by this Agreement as to all Shares then being
transferred to it. "Permitted Transferee" includes successive transferees in
transactions described in the preceding sentence.
"Person" means an individual, partnership, corporation, limited
------
liability company, unincorporated organization or association, trust, government
or department, unit or political subdivision of a government, or other such
entity.
2
<PAGE>
"Reorganization" means any merger or consolidation of IPWC or SWC with
--------------
or into any other Person, any recapitalization or reclassification of capital
stock or other equity interests of IPWC or SWC or any sale of all or
substantially all of the assets of IPWC or SWC in any one or a series of related
transactions.
"Shares" means the shares of IPWC Common Stock owned by the
------
Stockholders on the date hereof and any shares of Common Stock acquired by any
Holder in any capacity after the date hereof and prior to the termination of
this Agreement. "Shares" shall include Shares acquired upon the exercise of
options, warrants or rights, the conversion or exchange of convertible or
exchangeable securities, or by means of purchase, dividend, distribution, gift,
bequest, inheritance or as a successor in interest in any capacity or otherwise.
In the event of a stock dividend or distribution, or any change in the Common
Stock by reason of any stock dividend, split-up, recapitalization,
reclassification, combination, exchange of shares or the like, the term "Shares"
shall be deemed to refer to and include the Shares as well as all such stock
dividends and distributions and any shares into which or for which any or all of
the Shares may be changed, reclassified or exchanged and appropriate adjustments
shall be made to the terms and provisions of this Agreement. "Shares" shall also
include voting trust certificates issued in respect of any Shares.
"SWC Director" means any Person nominated by the SWC Holders and
------------
elected as a Director.
"SWC Holder" means SWC (so long as it is a Holder) and each Permitted
----------
Transferee of SWC who becomes a Holder by acquiring any SWC Shares.
"SWC Shares" means the Shares of IPWC Common Stock owned of record and
----------
beneficially by the SWC Holders.
"Voting Securities" means shares of capital stock or equity interests
-----------------
the holders of which are at the time entitled to elect a majority of the
issuer's board of directors or other comparable body.
Additional terms are defined where used in this Agreement.
Section 1.2. Interpretation. Each definition in this Agreement
----------- --------------
includes the singular and the plural, and references to the neuter gender
include the masculine and feminine whenever appropriate. References to any
statute mean such statute as amended at the time and include any successor
legislation. References to a business day mean any day other than a Saturday,
Sunday or legal holiday where IPWC's principal office is located. The words
"herein," "hereof" and "hereunder" refer to this Agreement as a whole. The
headings of the Articles and Sections are for convenience of reference only and
shall not affect the meaning or interpretation of this Agreement. Unless the
context otherwise requires, references to Articles, Sections and Subsections
mean the Articles, Sections and Subsections of this Agreement.
3
<PAGE>
Section 1.3. Changes in IPWC Common Stock. If during the term of this
----------- ----------------------------
Agreement the outstanding shares of IPWC Common Stock shall be changed into a
different number of shares or a different class or classes of shares by reason
of any split-up, combination, reclassification or other recapitalization, or if
a stock dividend shall be declared on shares of IPWC Common Stock with a record
date during such term, the terms of this Agreement (including its definitions)
shall be appropriately modified to give effect to such occurrence.
ARTICLE II. VOTING OF SHARES AND GOVERNANCE
Section 2.1. Composition of Board. From and after the date hereof:
----------- --------------------
(a) The number of Directors comprising the whole Board shall
initially be five (5), subject to increase as provided in Section 2.1(b). On the
--------------
date hereof, SWC shall appoint the three (3) Initial SWC Directors and Inland
shall appoint the two (2) Initial Inland Directors.
(b) From time to time, upon the unanimous written consent of the SWC
Directors and Inland Directors, the number of Directors comprising the Board may
be increased to any odd number larger than five (5) and the Board shall be
constituted so that the number of SWC Directors is at least one (1) larger than
the number of Inland Directors.
(c) Each of the SWC Holders and Inland Holders agree to vote its
Shares (or sign written consents in lieu thereof) at each Annual Election, and
at all other times when required to fill a vacancy on the Board, however
arising, and to take all such other action as may be reasonably necessary
(including, without limitation, causing one or more of the Directors nominated
by it to be removed or resign promptly after any change in ownership of Shares),
so that the Board shall be constituted as provided in Section 2.1(a) or (b), as
-------------- ---
applicable, and to the extent herein provided shall consist of the appropriate
number of Directors in accordance with this Section 2.1, and of SWC Directors
------------
and Inland Directors nominated in accordance with Sections 2.3 and 2.4.
--------------------
Section 2.2. Election of Initial Board.
----------- --------------------------
(a) Subject to Section 2.1(a), each of SWC and Inland hereby
--------------
authorize, consent to and approve the election of each of the Initial Directors
as Directors to serve until their respective successors have been duly elected
pursuant to this Agreement, the Articles of Incorporation, the By-laws and
applicable law.
(b) Each of SWC and Inland shall take reasonable efforts to ensure
that their Initial Directors authorize, consent to and approve the election of
Anton C. Garnier as "Chairman" and Quincey as "Vice Chairman" of the IPWC Board.
Section 2.3. Changes in SWC Directors.
----------- -------------------------
(a) The SWC Holders may designate the individual to fill any vacancy
on the Board resulting from the death, resignation or removal of any SWC
Director by giving written notice to IPWC (which shall promptly forward a copy
of such notice to each Director and
4
<PAGE>
Holder). Within not more than 10 days after the notice described in the
preceding sentence is so forwarded, the Holders will use their best efforts to
cause the election to the Board of the nominee named in such notice.
(b) The SWC Holders may nominate the individual to succeed any SWC
Director who will not stand for re-election, and may change any such nomination,
at any Annual Election by giving written notice to IPWC of its nominees as SWC
Directors not less than 45 days (or, in the case of unforeseen circumstances,
such shorter period as may be permitted by law) prior to the date fixed for any
Annual Election. If the notice specified in the preceding sentence is not given
within the time required, the incumbent SWC Directors shall be deemed to be the
nominees for election as SWC Directors at such Annual Election.
Section 2.4. Changes in Inland Directors.
----------- ----------------------------
(a) The Inland Holders may designate the individual, subject to SWC's
reasonable approval, to fill any vacancy on the Board resulting from the death,
resignation or removal of any Inland Director by giving written notice to IPWC
(which shall promptly forward a copy of such notice to each Director and
Holder). Within not more than 10 days after the notice described in the
preceding sentence is so forwarded, the Holders will use their best efforts to
cause the election to the Board of the nominee named in such notice.
(b) The Inland Holders may nominate the individual, subject to SWC's
reasonable approval, to succeed any Inland Director who will not stand for re-
election, and may change any such nomination, at any Annual Election by giving
written notice to IPWC of its nominee as Inland Director not less than 45 days
(or, in the case of unforeseen circumstances, such shorter period as may be
permitted by law) prior to the date fixed for any Annual Election. If the Notice
specified in the preceding sentence is not given within the time required, the
incumbent Inland Directors shall be deemed to be the nominees for election as
Inland Directors at such Annual Election. All of the individual listed on
Schedule 2.4 attached hereto are approved by SWC to serve as Inland Directors as
designated by Inland.
Section 2.5. Removal of Directors. A SWC Director may not be removed
----------- --------------------
from the Board except by delivery to IPWC and all Holders of a written notice of
such removal signed by the SWC Holders. An Inland Director may not be removed
from the Board except by delivery to IPWC and all Holders of a written notice of
such removal signed by the Inland Holders. Within not more than 10 days after
such notice is given, each of the Holders shall execute and deliver to IPWC its
written consent to the removal specified in such notice or, if requested by
whichever of the SWC Holders or the Inland Holders shall have given such notice
in accordance with this Section 2.5, shall vote its Shares in favor of such
removal.
Section 2.6. IPWC Officers. The IPWC Board shall, at a minimum,
----------- -------------
appoint a president, vice president, secretary, and treasurer of IPWC. Unless
terminated for cause, Quincey shall be the Vice President, Director of Business
Development of IPWC, or other title as an officer of IPWC as reasonably approved
by SWC, for a period consistent with the terms of that certain Quincey
Employment Agreement between Quincey and IPDC dated January 1, 2000, but not in
excess of 5 years unless approved by the IPWC Board of Directors; provided,
however,
5
<PAGE>
that if the Cooperative Services Agreement has been terminated, Quincey may be
terminated as Vice President in SWC's sole discretion.
Section 2.7. Agent for Affiliated Holders. If a portion or all of the
----------- ----------------------------
Shares held by Inland shall be transferred to one or more Permitted Transferees,
resulting in the Shares which were theretofore held by such Holder being held by
more than one Holder, then the Inland Holders shall: (i) pre-approve an attorney
in fact to act as agent and proxy for all purposes of this Agreement (including
without limitation the voting of Shares, the nomination of Directors, the giving
of consents, the approval of amendments, the receipt of notices, etc.) for all
of the Inland Holders, as the case may be, and (ii) specify in writing to the
other parties that it (or such other Holder) is to act as such agent and proxy,
and thereafter the other parties shall be entitled to look solely to, and to
deal solely with, the person so specified for all purposes of this Agreement as
if such Holder held all the Shares held by the party providing such notice and
its Permitted Transferees.
Section 2.8. Related Party Transactions. Any contract or transaction
------------ --------------------------
between IPWC and one or more of its Directors or officers or between IPWC and
any other Person in which one or more of its Directors or officers are
shareholders, partners, members, directors, or officers, or have a material
financial interest, shall be void unless: (1) the material facts as to the
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors, and the Board of Directors in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the Directors and (2) the contract or transaction is at arms' length and fair as
to IPWC as of the time it is authorized, approved or ratified by the Board of
Directors. Interested Directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors at which the contract or
transaction is authorized and in determining whether the action received the
requisite approval.
Section 2.9. Conflicts of Interest. SWC and Inland acknowledge that
----------- ---------------------
Quincey, and/or an entity wholly owned by Quincey, is a member of Inland and
that Quincey will be performing services for IPWC, IPDC and Inland. SWC further
acknowledges that the Quincey Employment Agreement shall permit Quincey to
devote sufficient time to the business of IPDC and Inland in order to
effectively and efficiently manage IPDC and Inland. It is the intention of the
parties that Quincey, in his capacity as a member and the President of Inland,
will attempt to negotiate agreements for IPWC to lease, manage or operate
municipal water and wastewater systems. In return, Inland will receive certain
fees from IPWC and preferred stock from SWC.
ARTICLE III. RESTRICTIONS ON TRANSFERS OF SHARES
Section 3.1. No Dispositions. No Holder shall (a) sell, assign,
----------- ---------------
transfer by operation of law or otherwise, pledge, hypothecate, grant any
security interest or other lien in or otherwise dispose of any of its Shares, or
make or permit any indirect transfer of such Shares through an issuance of such
Holder's capital stock or other equity interests resulting in a direct or
indirect change in the beneficial ownership of a majority of its Voting
Securities or other equity interests (a "Disposition"), or (b) agree or
otherwise become obligated to take any action referred to in clause (a) of this
Section 3.1; provided, however, that such restrictions shall not apply to (i) a
- -----------
Disposition of Shares to a Permitted Transferee of the SWC Holders, (ii) a
change of control of
6
<PAGE>
SWC, (iii) the hypothecation or pledge of the SWC Shares to a bank or other
financial institution or under any indenture, or (iv) the granting of a security
interest in or other lien on the SWC Shares to a bank or other financial
institution or under any indenture. In the event that the Inland Holders
transfer their shares in violation of this Section 3.1, other than if approved
-----------
by SWC, such transfer shall result in the termination of all of the rights of
the Inland Holders under Article II of this Agreement. Such termination will be
effective sixty (60) days after written notice of termination is delivered to
Inland unless the Inland Holder rescinds the purported transfer.
Section 3.2. Legend on Share Certificates.
----------- ----------------------------
(a) All certificates for Shares which are subject to the terms and
provisions of this Agreement shall bear the following legend:
The shares represented by this certificate (the "Shares")
have not been registered under the Securities Act of 1933,
as amended, and no sale, transfer or other disposition may
be made of the Shares unless they have been so registered or
Inland Pacific Water Company (the "Company") has been
furnished with a legal opinion from a nationally recognized
law firm satisfactory to it that such registration is not
required. The Shares are also subject to certain
restrictions on transfer and requirements as to voting
contained in the IPWC Stockholders Agreement dated as of
January 1, 2000 among the Company, the registered holder of
the Shares and certain other stockholders, a copy of which
is on file with the Secretary of the Company.
(b) Upon the termination of this Agreement pursuant to Section 5.7,
-----------
each Holder shall be entitled to receive, in exchange for any certificate for
IPWC Common Stock bearing the legend set forth in subsection (a) of this Section
-------
3.2, a certificate bearing a legend containing only the first sentence of such
- ---
legend, unless IPWC shall have determined (based upon the advice of legal
counsel) that such legend is then no longer required.
Section 3.3. Put-Call Rights.
----------- ---------------
(a) At any time, or from time to time, any Inland Holder may require
the SWC Holders to purchase from it all of the Shares held by such Holder (the
"Put Right"), and upon termination of this Agreement under Section 5.7 hereof,
-----------
the SWC Holders may deliver notice to the Inland Holders requiring that the
Inland Holders sell all of their Shares to SWC (the "Call Right").
(b) Should a Put or Call Right be exercised for Shares pursuant to
this Section 3.3, the purchase price (the "Purchase Price") to be paid by the
-----------
SWC Holders to the Inland Holders for such Shares shall be determined as
follows:
7
<PAGE>
(1) The parties shall first negotiate in good faith for a price
that a willing buyer would pay and a willing seller would accept for the
Shares for which the Put or Call Right is being exercised.
(2) If the parties do not agree on a Purchase Price within 15
business days after the delivery of the Put Notice or Call Notice, as
applicable, the dispute shall be submitted to an arbitrator selected in
accordance with Section 5.4(b) of this Agreement. Each party shall submit a
--------------
proposed Purchase Price and a brief in support of its proposed Purchase
Price and the arbitrator shall select one party's proposed Purchase Price
as the price to be paid by the SWC Holders to the Inland Holders for such
Shares. Each party shall be responsible for its own costs and fees in
connection with such arbitration.
(c) The Inland Holders may exercise such Put Right by delivering to
the SWC Holders a written notice (a "Put Notice") stating that such Put Right is
being exercised and specifying the number of Shares held by the Inland Holders
for which the Put Right is being exercised. The SWC Holders shall be obligated
to purchase the Shares specified in the Put Notice on the later of sixty (60)
days after receipt of the Put Notice or ten (10) business days after the
Purchase Price is determined in accordance with Section 3.3 (b) (the "Put
Date").
(d) The SWC Holders may, from and after the Termination Notice Date,
exercise such Call Right by delivering to the Inland Holders a written notice (a
"Call Notice") stating that such Call Right is being exercised and specifying
the number of Shares held by the Inland Holders for which the Call Right is
being exercised. The Inland Holders shall be obligated to sell the Shares
specified in the Call Notice on the later of thirty (30) days after receipt of
the Call Notice or ten (10) business days after the Purchase Price is determined
in accordance with Section 3.3 (b) (the "Call Date").
(e) On a Put Date or a Call Date, the SWC Holders shall be obligated
to pay to the Holder an amount equal to the applicable Purchase Price upon
surrender of the certificates representing such Shares.
Section 3.4. First Right of Refusal. In the event hat the SWC Holders
----------- ----------------------
desire to make a disposition of the SWC Shares to a Person other than to a
Permitted Transferee, SWC, on behalf of the SWC Holders, shall give Inland, on
behalf of the Inland Holders, a first right of refusal to acquire the SWC Shares
by giving Inland written notice of the identity of the proposed transferee, the
proposed purchase price and the proposed payment terms and shall offer to sell
such SWC Shares on the same terms. Inland shall have seven (7) days to notify
SWC in writing if the Inland Holders will purchase the SWC Shares proposed to be
transferred by the SWC Holders on the terms set forth in such notice from SWC.
Failure of Inland to provide written notice by 5:00 p.m. Pacific Time on the
seventh day shall be deemed to be a rejection of the SWC Holders' offer to sell
the SWC Shares to the Inland Holders, and the first right of refusal shall be
extinguished with respect to such SWC Shares and the SWC Holders may proceed
with its sale of the SWC Shares to the proposed transferee in accordance with
the terms as noticed; provided, however, that any material changes to the terms
as noticed will trigger a new first right of refusal with respect to such new
terms. If Inland provides timely written notice accepting the offer to
8
<PAGE>
sell, the SWC Holders shall sell such SWC Shares to the Inland Holders on the
same terms as noticed instead of to the proposed transferee.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties. Each Holder hereby
----------- ------------------------------
acknowledges, represents, warrants and/or agrees as follows:
(a) The issuance of the Shares has not been nor will it be registered
under the Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws, and that the Shares are being issued pursuant to
exemptions from registration under the Securities Act for issuance of securities
not involving a public offering;
(b) The Holder is acquiring Shares solely for its own account for
investment and not with a view to resale or distribution and has no present
intention of transferring the Shares to any other person or entity, and the
Holder was not formed for the specific purpose of acquiring or holding the
Shares;
(c) The Holder is a sophisticated investor and has such knowledge and
experience in financial, tax, business matters, securities and investments
including, without limitation, experience in investments by actual
participation, so as to evaluate the merits and risks of investing in and
holding the Shares and to make an informed investment decision with respect
thereto, and has made such investigation into IPWC as is necessary to make an
informed investment decision;
(d) The Holder has not received any advertisement or general
solicitation with respect to the issuance of the Shares;
(e) Neither the Securities and Exchange Commission (the "SEC") nor
any state securities commission has approved the Shares or passed upon or
endorsed the merits of the Shares;
(f) The Holder is aware that an investment in the Shares involves a
number of very significant risks and, in particular, acknowledges that IPWC is
in the development stage, has no products or services, and has not commenced
significant operations;
(g) The Holder must bear the economic risk of the investment
indefinitely because none of the Shares have been registered under applicable
securities laws and therefore, none of the Shares may be sold, hypothecated or
otherwise disposed of unless subsequently registered under the Securities Act
and applicable state securities laws or an exemption from registration is
available;
(h) The Holder will not sell or transfer any of the Shares without
(i) registration under applicable securities laws or a valid exemption therefrom
and (ii) complying with the requirements of this Agreement;
9
<PAGE>
(i) The legends set forth in Section 3.2 shall be placed on the
certificates representing the Shares and notations thereof will be made in
IPWC's books and stock transfer records;
(j) The information contained herein is accurate and may be relied
upon by IPWC in determining the availability of an exemption from registration
under federal and state securities laws; and
(k) The execution, delivery and performance of this Agreement by the
Holder have been duly authorized and this Agreement is a valid and legally
binding agreement of the Holder.
ARTICLE V. GENERAL PROVISIONS
Section 5.1. Notices. All notices, requests or demands required or
----------- -------
permitted by this Agreement: (i) shall be in writing; (ii) shall be deemed to
have been given, forwarded, made or delivered: (x) if delivered in person or by
overnight courier service, when received, (y) if transmitted by telefax, when so
transmitted if evidence of completed transmission is received, and (z) if sent
by prepaid registered or certified mail, return receipt requested, and properly
addressed on the earlier of the date of receipt or refusal or the seventh day
after it is mailed; and (iii) shall be addressed:
If to IPWC, addressed to:
Inland Pacific Water Company
225 North Barranca Ave., Suite 200
West Covina, California 91791-1605
Attention: President
Telecopier: (626) 915-1558
If to SWC, addressed to:
Southwest Water Company
225 North Barranca Ave., Suite 200
West Covina, California 91791-1605
Attention: Tom Tekulve
Telecopier: (626) 915-1558
with a copy to:
Latham & Watkins
650 Town Center Drive
Costa Mesa, California 92626-1925
Attention: James W. Daniels, Esq.
Telecopier: (714) 755-8290
10
<PAGE>
If to Inland, addressed to:
The Quincey Companies
8300 Utica Avenue, Third Floor
Rancho Cucamonga, California 91730
Attention: Mr. Robb Quincey
Telecopier: (909) 635-2048
with copies to:
Lewis Investment Company, LLC
1156 North Mountain Avenue
P.O. Box 670
Upland, California 91785-0670
Attention: Mr. Richard A. Lewis
Telecopier: (909) 949-6700
Mr. Bill McIntyre
Mr. Steven Reenders
c/o Canyon Water Company
300 E. Rowland
Covina, California 91723
Telecopier: (626) 966-1274
Mr. Michael J. Bidart
600 S. Indian Hill Boulevard
Claremont, California 91711
Telecopier: (909) 625-6915
or to such other place and with such other copies as any party may designate as
to itself by written notice to the others.
Section 5.2. Holder List. IPWC shall maintain a list (the "Holder
----------- ----------- ------
List") of the name and address of each Holder and the number of Shares held by
- -----
it. The initial Holder List is attached hereto as Exhibit A. Each Holder shall
give prompt notice to IPWC of any change in the information pertaining to it in
the Holder List, but in the absence of such notice IPWC and each other Holder
may treat the information reflected in the current Holder List as correct. IPWC
shall furnish a copy of the Holder List to any Holder upon request.
Section 5.3. Amendments, Waivers and Consents. This Agreement may be
----------- --------------------------------
amended only by a document executed (which may be in counterparts) by IPWC and
all of the Holders. Any Holder may waive the benefit of any provision of this
Agreement, either in a specific instance or generally, by delivering to IPWC and
each other Holder a consent to such waiver. All consents required or permitted
by this Agreement shall be in writing and signed by the party to be charged
therewith. For purposes of this Agreement, the written consent of any of the
11
<PAGE>
SWC appointees to the IPWC Board of Directors shall constitute the consent of
SWC where required herein.
Section 5.4. Equitable Remedies; Submission to Arbitration.
----------- ---------------------------------------------
(a) Each Holder, by becoming a party to this Agreement, acknowledges
and agrees that its breach or nonperformance of any provision of this Agreement
in accordance with the specific terms hereof would result in irreparable harm to
IPWC and to each other Holder for which money damages would not provide an
adequate remedy. Accordingly, each Holder (i) agrees that IPWC and each other
Holder shall be entitled to specific performance or injunctive or other
equitable relief against such Holder in the event of its breach or other non-
performance of any of the provisions of this Agreement; and (ii) waives any
requirement for the securing or posting of any bond in connection with such
remedy.
(b) EXCEPT AS OTHERWISE PROVIDED IN SECTION 5.4(a), EACH HOLDER
--------------
IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT ARISING OUT
OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED
HEREBY SHALL BE RESOLVED BY ARBITRATION IN THE CITY OF LOS ANGELES, STATE OF
CALIFORNIA, UNDER THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION. EACH
HOLDER HEREBY WAIVES ALL RIGHTS (IF ANY) SUCH HOLDER MAY HAVE TO A TRIAL BY
JURY.
(c) The arbitrator shall be selected by the Holders who are involved
in the dispute, shall have expertise and experience in the resolution of
disputes similar to the dispute to be resolved and shall not be an Affiliate of
any Holder. If such Holders are unable to agree on the selection of an
arbitrator, each such Holder shall select one arbitrator and such arbitrators
shall select an arbitrator meeting the criteria set forth in the immediately
preceding sentence to resolve such dispute, subject to the provisions of Section
-------
3.3(b). The fees and expenses of any arbitrator selected by any Holder shall be
- ------
paid by such Holder; the fees and expenses of any other arbitrators shall be
shared equally by the Holders who are involved in the dispute. All other
expenses of such arbitration shall be paid by the Holder incurring the same.
Section 5.5. Successors and Assigns. This Agreement shall inure to
----------- ----------------------
the benefit of and be binding upon the permitted successors and assigns of IPWC
and each Holder; provided, however, that IPWC may not assign this Agreement
-------- -------
except by operation of law or to a purchaser of all or substantially all of its
business and assets; and provided further, that no Holder may assign this
-------- -------
Agreement except in connection with a transfer of Shares by such transferring
Holder to another Person which thereupon becomes a Holder with respect to such
Shares, all in accordance with Section 3.1 and Section 5.6.
----------- -----------
Section 5.6. Counterparts; Additional Parties. This Agreement may be
----------- --------------------------------
executed in counterparts, all of which together shall constitute a single
agreement. Prior to any Disposition of Shares to a Permitted Transferee, the
Holder effecting such Disposition shall cause such Permitted Transferee to
execute and deliver to IPWC and all of the Holders a supplemental agreement to
this Agreement, in form and substance reasonably satisfactory to IPWC and such
other Holders, whereby such Permitted Transferee shall agree to become a party
to and be bound
12
<PAGE>
by all of the terms and conditions of this Agreement applicable to a Holder of
Shares and confirm that all of the Shares to be acquired by such Permitted
Transferee shall continue to be subject to this Agreement. As promptly as
practicable, IPWC shall cause a fully executed counterpart of this Agreement or
any supplemental agreement referred to in this Section 5.6 to be delivered to
-----------
each Holder.
Section 5.7. Term; Termination.
----------- -----------------
(a) Each party to this Agreement shall remain bound by this Agreement
for so long as such party is a Holder of Shares. This Agreement shall remain in
effect for the maximum duration permitted by law and for so long as there is
more than one Holder, unless terminated in accordance with this Section 5.7.
-----------
(b) This Agreement may only be terminated with the written consent of
all the parties hereto or by the following special termination right afforded
SWC and Inland (or SWC's Permitted Transferees). From and after the expiration
of six (6) months following the Effective Date, either SWC or Inland can deliver
written notice to the other (the "Termination Notice") electing to terminate
such party's obligation hereunder and under Section 8.2 of the Cooperative
Services Agreement. Upon delivery of the Termination Notice (the "Termination
Notice Date"), the provisions of Section 3.3 shall apply. Such termination
-----------
shall not be effective until 270 days following the Termination Notice Date (the
"Termination Date"), and until such Termination Date, all of the terms of
Article II shall continue to apply.
(c) The termination of this Agreement or any provision hereof shall
not affect any action taken or agreement entered into prior to such termination
or any liability under any obligation previously incurred under this Agreement,
all of which shall survive such termination.
Section 5.8. Insurance. IPWC shall at all times during the term of
----------- ---------
this Agreement maintain (i) a commercial general liability policy in the minimum
amount of Five Million Dollars ($5,000,000) per occurrence for claims incurred,
(ii) workers' compensation insurance and (iii) directors and officers liability
insurance. SWC, Inland and such other parties as SWC shall from time to time
designate shall be named as an additional insured on all policies of insurance.
The insurance provided for in clause (i) shall be on an occurrence rather than a
claims made basis.
Section 5.9. Ethics Policy. Inland and each of its members agree to
----------- -------------
be bound by the spirit of SWC's ethics policy, a copy of which appears as
Exhibit B, and as may be amended from time to time.
Section 5.10. Partial Invalidity. Each provision of this Agreement
------------ ------------------
shall be interpreted so as to render it valid and enforceable under applicable
law. A finding that any such provision is invalid or unenforceable in any
jurisdiction or in any particular circumstance shall not affect its validity or
enforceability under the laws of any other jurisdiction or in any other
circumstances.
13
<PAGE>
Section 5.11. Governing Law. This Agreement shall be governed by and
------------ -------------
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
For Southwest Water Company For Inland Pacific Water Company
/s/ANTON C. GARNIER /s/MAURICE GALLARDA
- ------------------------ -----------------------------
Anton C. Garnier Maurice Gallarda
President President
For Inland Pacific Partners, LLP
/s/RICHARD A. LEWIS
- -------------------
By: Richard A. Lewis
Its: Manager
/s/MICHAEL J. BIDART
- --------------------
By: Michael J. Bidart
Its: Manager
/s/WILLIAM MCINTYRE
- -------------------
By: William McIntyre
Its: Manager
/s/ROBB QUINCEY
- ---------------
By: Robb Quincey
Its: Manager
14
<PAGE>
EXHIBIT A
HOLDER LIST
-----------
Name of Holder Number of Shares
-------------- ----------------
Southwest Water Company 990
Inland Pacific Partners, LLC 10
<PAGE>
EXHIBIT B
ETHICS POLICY
-------------
<PAGE>
SCHEDULE 2.4
INLAND REPRESENTATIVES
----------------------
Michael J. Bidart
William McIntyre
Steve Reenders
Robb Quincey
Richard A. Lewis
Robert E. Lewis
Roger G. Lewis
Randall W. Lewis
John M. Goodman
17
<PAGE>
LIABILITY COMPANY AGREEMENT
OF
INLAND PACIFIC DEVELOPMENT COMPANY, LLC
A DELAWARE LIMITED LIABILITY COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1 DEFINITIONS............................................................................................ 1
1.1 "Accountant"........................................................................................ 1
1.2 "Act"............................................................................................... 1
1.3 "Affiliate"......................................................................................... 1
1.4 "Agreement"......................................................................................... 2
1.5 "Bankruptcy"........................................................................................ 2
1.6 "Base Rate"......................................................................................... 2
1.7 "Capital Account"................................................................................... 2
1.8 "Capital Contribution".............................................................................. 2
1.9 "Certificate of Formation".......................................................................... 2
1.10 "Code".............................................................................................. 2
1.11 "Company"........................................................................................... 2
1.12 "Company Budget".................................................................................... 2
1.13 "Distributable Cash" and "Start-Up Distributable Cash".............................................. 2
1.14 "Distribution"...................................................................................... 2
1.15 "Economic Interest"................................................................................. 2
1.16 "Fair Market Value"................................................................................. 3
1.17 "Fiscal Year"....................................................................................... 3
1.18 "Formation Date".................................................................................... 3
1.19 "Former Member"..................................................................................... 3
1.20 "Former Member's Interest".......................................................................... 3
1.21 "IPWC".............................................................................................. 3
1.22 "IPWC Contract"..................................................................................... 3
1.23 "IPWC Development Fees"............................................................................. 3
1.24 "Laws".............................................................................................. 3
1.25 "Management Committee".............................................................................. 3
1.26 "Member"............................................................................................ 3
1.27 "Membership Interest"............................................................................... 4
1.28 "Membership Termination Event"...................................................................... 4
1.29 "Percentage Interest"............................................................................... 4
1.30 "Person"............................................................................................ 4
1.31 "Preferred Return".................................................................................. 4
1.32 "Preferred Return Account".......................................................................... 4
1.33 "President"......................................................................................... 4
1.34 "Project"........................................................................................... 5
1.35 "Project Budget and Plan"........................................................................... 5
1.36 "Related IPWC Agreements"........................................................................... 5
1.37 "Start-Up Capital".................................................................................. 5
1.38 "Start-Up Distributable Cash"....................................................................... 5
1.39 "Start-Up Period"................................................................................... 5
1.40 "Start-Up Percentages".............................................................................. 5
1.41 "Tax Credits"....................................................................................... 5
1.42 "Tax Matters Member"................................................................................ 5
1.43 "Tax Supplement".................................................................................... 5
1.44 "Transfer".......................................................................................... 6
1.45 "Treasury Regulations".............................................................................. 6
</TABLE>
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Article 2 ORGANIZATIONAL MATTERS................................................................................... 6
2.1 Name.................................................................................................. 6
2.2 Term.................................................................................................. 6
2.3 Office and Agent...................................................................................... 7
2.4 Purpose of Company.................................................................................... 7
2.5 Intent................................................................................................ 7
2.6 Absence of Other Restrictions......................................................................... 7
Article 3 CAPITAL CONTRIBUTIONS.................................................................................... 7
3.1 Initial Capital Contributions......................................................................... 7
3.2 Project Capital Contributions......................................................................... 9
3.3 Call Notice/Bank Accounts............................................................................. 10
3.4 Capital Accounts...................................................................................... 10
3.5 Preferred Return...................................................................................... 10
3.6 Contribution Accounts and Preferred Return Accounts................................................... 10
3.7 Capital Matters....................................................................................... 11
3.8 IPWC Development Fees................................................................................. 11
3.9 Failure to Contribute Capital......................................................................... 11
Article 4 MEMBERS.................................................................................................. 12
4.1 Limited Liability..................................................................................... 12
4.2 Admission of Additional Members....................................................................... 12
4.3 Withdrawal............................................................................................ 12
4.4 Lack of Member Authority.............................................................................. 13
Article 5 MANAGEMENT AND CONTROL OF THE COMPANY.................................................................... 13
5.1 Management of the Company by Management Committee..................................................... 13
5.2 President of Company.................................................................................. 15
5.3 Performance of Duties; Liability of Members and Officers.............................................. 16
5.4 Major Decisions....................................................................................... 17
5.5 Competing Activities.................................................................................. 18
5.6 Contracts with Affiliates............................................................................. 19
5.7 Company Opportunities................................................................................. 19
5.8 Expenses.............................................................................................. 19
Article 6 PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS........................................................... 20
6.1 Allocation of Income and Losses....................................................................... 20
6.2 Definition of "Distributable Cash".................................................................... 20
6.3 Timing of Distributions............................................................................... 20
6.4 Order of Distribution................................................................................. 20
6.5 Start-Up Period Distributions......................................................................... 21
6.6 Form of Distribution.................................................................................. 21
Article 7 TRANSFER OF INTERESTS.................................................................................... 21
7.1 Transfer of Interests................................................................................. 21
7.2 Permitted Transfers................................................................................... 21
7.3 Substitution of Members............................................................................... 22
7.4 Further Restrictions on Transfer of Interests......................................................... 22
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7.5 Election to Dissolve.................................................................................. 22
Article 8 CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS............................................................ 22
8.1 Dissolution of Company................................................................................ 22
8.2 Admission or Conversion............................................................................... 23
8.3 Optional Buy-Out...................................................................................... 23
Article 9 ACCOUNTING, RECORDS, REPORTING BY MEMBERS................................................................ 25
9.1 Books and Records/Financial Reports................................................................... 25
9.2 Bank Accounts; Invested Funds......................................................................... 25
9.3 Accounting Matters.................................................................................... 25
Article 10 DISSOLUTION AND WINDING UP.............................................................................. 26
10.1 Dissolution........................................................................................... 26
10.2 Date of Dissolution................................................................................... 26
10.3 Winding Up............................................................................................ 26
10.4 Distributions in Kind................................................................................. 26
10.5 Order of Payment of Proceeds Upon Dissolution......................................................... 27
10.6 Limitations on Payments Made in Dissolution........................................................... 27
10.7 Certificate of Cancellation........................................................................... 27
10.8 Compensation for Services............................................................................. 27
Article 11 INDEMNIFICATION......................................................................................... 27
11.1 Indemnification....................................................................................... 27
11.2 Contract Right; Expenses.............................................................................. 28
11.3 Insurance............................................................................................. 28
Article 12 BUY/SELL................................................................................................ 28
12.1 Put/Call Offering Notice.............................................................................. 28
12.2 Exercise of Put/Call.................................................................................. 29
12.3 Notice................................................................................................ 29
12.4 Designee.............................................................................................. 30
12.5 Closing............................................................................................... 30
12.6 Company Accountant.................................................................................... 31
12.7 Timing of Put/Call and Default Buy-Out................................................................ 31
Article 13 MISCELLANEOUS........................................................................................... 31
13.1 Amendments............................................................................................ 31
13.2 Offset Privilege...................................................................................... 31
13.3 Arbitration........................................................................................... 31
13.4 Notices............................................................................................... 33
13.5 Attorney's Fees....................................................................................... 33
13.6 Jurisdiction.......................................................................................... 33
13.7 Complete Agreement.................................................................................... 33
13.8 Binding Effect........................................................................................ 33
13.9 Section Headings...................................................................................... 34
13.10 Interpretation........................................................................................ 34
13.11 Severability.......................................................................................... 34
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13.12 Multiple Counterparts................................................................................. 34
13.13 Securities Representations and Warranties............................................................. 34
Article 14 DEFAULT REMEDIES........................................................................................ 34
14.1 Events of Default..................................................................................... 34
14.2 Remedies.............................................................................................. 35
14.3 Cumulative Remedies................................................................................... 36
14.4 Litigation Without Termination........................................................................ 36
14.5 No Waiver............................................................................................. 36
</TABLE>
iv
<PAGE>
LIABILITY COMPANY AGREEMENT
OF
INLAND PACIFIC DEVELOPMENT COMPANY, LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Limited Liability Company Agreement ("Agreement") is dated as of January 1,
2000 (the "Effective Date"), and is made by and between Inland Pacific Partners,
LLC, a Delaware limited liability company ("Inland") and Southwest Water
Company, a Delaware corporation ("SWC") (collectively, the "Members" and
individually, a "Member") with reference to the following facts:
A. The parties desire to form Inland Pacific Development, LLC (the "Company")
as a limited liability company under the laws of the State of Delaware.
B. In furtherance thereof, the parties filed a Certificate of Formation on
November 13, 1999 (the "Formation Date") with the Secretary of State for
the State of Delaware and desire to adopt a limited liability company
agreement to govern their respective rights and obligations as Members of
the Company from and after the Formation Date (as defined in Section 1.18).
NOW, THEREFORE, in consideration of the mutual covenants contained herein and
for other good and valuable consideration, the receipt of which is acknowledged,
the Members agree that the following shall be the Limited Liability Company
Agreement of the Company.
ARTICLE 1
DEFINITIONS
When used in this Agreement, the following terms have the following meanings:
1.1 "Accountant" shall mean the Company's independent certified public
----------
accounting firm, which initially shall be Ernst & Young Kenneth
Leventhal, but may be replaced by the Management Committee from time
to time.
1.2 "Act" means the Limited Liability Company Act of the State of
---
Delaware, as amended from time to time (or any corresponding
provisions of any succeeding law).
1.3 "Affiliate" of a Member means (a) a Person directly or indirectly
---------
(through one or more intermediaries) controlling, controlled by or
under common control with that Member; (b) an officer, director,
partner, shareholder, member or immediate family member of that
Member; (c) a member of the immediate family of an officer, director,
partner, shareholder, or member of that Member, or (d) a Person
directly or indirectly controlled by or under common control with any
member of Inland. For these purposes "control" means the possession,
direct or indirect, of the power to direct or cause the direction of
<PAGE>
the management and policies of a Person, whether through the ownership
of voting securities, by contract, or otherwise.
1.4 "Agreement" means this Limited Liability Company Agreement of Inland
---------
Pacific Development Company, LLC, as originally executed and as
amended from time to time.
1.5 "Bankruptcy" of a Member means the occurrence of any event of
----------
bankruptcy specified in Section 18-304(a) and (b) of the Act.
1.6 "Base Rate" means the commercial loan rate of interest announced
---------
publicly from time to time by Bank of America in San Francisco,
California, as such bank's "reference rate" or "prime rate" from time
to time in effect.
1.7 "Capital Account" shall mean with respect to each Member, the
---------------
"Adjusted Capital Account" which the Company establishes and maintains
for that Member pursuant to Article 1 of the Tax Supplement.
1.8 "Capital Contribution" of a Member, at any particular time, means the
--------------------
amount of money or the value of property which that Member has
contributed to the capital of the Company. The value of any Capital
Contribution of property (other than money) shall be its Fair Market
Value as determined by the Management Committee using such reasonable
methods of valuation as it may adopt.
1.9 "Certificate of Formation" means the Certificate of Formation of the
------------------------
Company as filed under the Act with the Delaware Secretary of State on
November 13, 1999.
1.10 "Code" means the Internal Revenue Code of 1986, as amended from time
----
to time (or any corresponding provisions of any succeeding law).
1.11 "Company" means Inland Pacific Development Company, LLC, a Delaware
-------
limited liability company.
1.12 "Company Budget" means the annual budget of the projected costs (i) to
--------------
fund the day to day administration and operation of the Company,
including, without limitation, the Quincey Employment Agreement, and
(ii) to assist in the business development of Inland Pacific Water
Company. All costs identified in the Company Budget are referred to
herein as "Operating Costs".
1.13 "Distributable Cash" and "Start-Up Distributable Cash" have the
------------------ ---------------------------
meanings specified in Section 6.2.
1.14 "Distribution" means the transfer of money or property by the Company
------------
to one or more Members without separate consideration.
1.15 "Economic Interest" means a share, expressed as a percentage, of one
-----------------
or more of the Company's Net Income, Net Losses, Distributable Cash or
other
Page 2
<PAGE>
Distributions, but does not include any other rights of a Member,
including, without limitation, the right to vote or participate in the
management of the Company or the right to information concerning the
business and affairs of the Company.
1.16 "Fair Market Value" shall mean the value of the Company's assets if
-----------------
sold for all cash in an arms-length negotiated sale as determined by
the Members (or the appraised value if the Members are unable to agree
on that value), or as determined by the Management Committee where
stated herein.
1.17 "Fiscal Year" means the Company's fiscal year, which shall be the
-----------
calendar year.
1.18 "Formation Date" means the date the Certificate of Formation is filed
--------------
with the Delaware Secretary of State.
1.19 "Former Member" has the meaning specified in Section 8.2.
-------------
1.20 "Former Member's Interest" has the meaning specified in Section 8.2.
------------------------
1.21 "IPWC" means Inland Pacific Water Company, a California corporation.
----
1.22 "IPWC Contract" means a municipal water or wastewater contract
-------------
entered into by IPWC.
1.23 "IPWC Development Fees" has the meaning set forth in Section 3.8.
---------------------
1.24 "Laws" means all federal, state and local laws, statutes, moratoria,
----
initiatives, referenda, ordinances, rules, regulations, standards,
orders, judicial decisions, common law and other governmental, quasi-
governmental and utility company requirements (including those
relating to the environment, health and safety, or handicapped
persons).
1.25 "Management Committee" means the committee appointed by the Members to
--------------------
manage the overall business and affairs of the Company and to make all
policy decisions of the Company. Initially, the Management Committee
shall be comprised of those individuals named in Schedule 1.25 hereto.
The initial appointees (and all subsequent appointees) to the
Management Committee are referred to in this Agreement collectively as
the "Managers." As used herein, the terms "approval by the Managers"
or "approval by the Management Committee" means approval by a majority
in number of the Managers, except where this Agreement expressly
requires the unanimous approval of the Managers.
1.26 "Member" means each Person who is an initial signatory to this
------
Agreement and any Person who is subsequently admitted as a Member in
accordance with Sections 7.3 or 8.2(a) of this Agreement. A Person who
holds a mere Economic Interest but who has not been admitted as a
Member is referred to herein as an "Interest Holder". Except where
"unanimous approval" is
Page 3
<PAGE>
expressly required, "approval by the Members" or "approval of a
majority-in-interest of the Members" as used herein means approval by
Members that own, individually or collectively, a majority of the
Percentage Interests owned by all Members then authorized to vote.
1.27 "Membership Interest" means a Member's total interest as a Member of
-------------------
the Company, including that Member's Economic Interest, its right to
inspect the books and records of the Company and its right, to the
extent specifically provided in this Agreement, to participate in the
business, affairs and management of the Company and to vote or grant
consent with respect to matters coming before the Company.
1.28 "Membership Termination Event" with respect to any Member means one or
----------------------------
more of the following: the death, insanity, permanent disability,
withdrawal, resignation, expulsion, Bankruptcy, dissolution, Transfer,
or occurrence of any other event which terminates the continued
membership of that Member in the Company, including the occurrence of
any of the events set forth in Section 18-304 of the Act, excepting a
Transfer of a Member's Membership Interest which is made in accordance
with the provisions of Section 7.2 shall not constitute a Membership
Termination Event.
1.29 "Percentage Interest" means the percentage of a Member's Membership
-------------------
Interest in Company set forth opposite the name of that Member in
Schedule 1.29, as such percentage may be adjusted from time to time
pursuant to the provisions of this Agreement, or, as to an Interest
Holder who owns a mere Economic Interest in Company, the percentage of
that Person's Economic Interest. The Percentage Interest of the
Members for all matters of Net Income and Net Loss related to the
Start-Up Capital, Operating Costs, and IPWC Development Fees during
the Start-Up Period shall be SWC -55%, Inland - 45% (the "Start-Up
Percentages")); thereafter such Percentage Interests for all matters
under this Agreement shall adjust to and remain SWC - 25%; Inland -
75%, unless further adjusted by reason of Transfer or dilution
pursuant to the terms of this Agreement.
1.30 "Person" means any entity, corporation, company, association, joint
------
venture, joint stock company, partnership, trust, limited liability
company, limited liability partnership, real estate investment trust,
organization, individual (including personal representatives,
executors and heirs of a deceased individual), nation, state,
government (including agencies, departments, bureaus, boards,
divisions and instrumentalities thereof), trustee, receiver or
liquidator.
1.31 "Preferred Return" shall have the meaning specified in Section 3.5
----------------
hereof.
1.32 "Preferred Return Account" shall have the meaning given such term in
------------------------
Section 3.6(b) hereof.
1.33 "President" means the individual employed by the Company to supervise
---------
the day to day operations of the Company and to carry out the policy
decisions of
Page 4
<PAGE>
the Management Committee. The initial President of the Company shall
be Robb Quincey ("Quincey") in accordance with the terms of that
certain Employment Agreement attached hereto as Appendix B (the
"Quincey Employment Agreement").
1.34 "Project" means a specific water or wastewater related opportunity or
-------
other opportunity for investment by Company in utility (sewer, water,
gas, electric, phone, CATV, solid waste, water treatment, etc.) and
natural resource management projects, including, without limitation,
the acquisition, lease and/or sale of water rights, water rights
transfers, the acquisition and/or operation of utility companies,
including water or wastewater companies, the financing, construction,
and/or operation of water and wastewater infrastructure and other
utilities, groundwater retention, recharge and management, NPDES
projects, wetlands management, air quality projects, and/or operating
as a utility purveyor.
1.35 "Project Budget and Plan" means, for each Project, a plan for the
-----------------------
acquisition, development, management, operation, marketing and/or
disposition of the Project and a proforma budget which identifies
projected capital requirements, costs, and revenues for the Project.
1.36 "Related IPWC Agreements" means the Certificate of Formation, the
-----------------------
Cooperative Services Agreement dated December 31, 1999, the IPWC
Stockholders Agreement dated December 31, 1999, and the Agreement for
Services dated December 31, 1999.
1.37 "Start-Up Capital" means all Capital Contributions made by Inland and
----------------
SWC during the Start-Up Period to pay the Operating Costs.
1.38 "Start-Up Distributable Cash" has the meaning specified in Section
---------------------------
6.2.
1.39 "Start-Up Period" means the period commencing upon the Formation
----------------
Date and ending two(2) years after the Effective Date.
1.40 "Start-Up Percentages" means SWC - 55%, Inland - 45% as further
---------------------
described in Sections 1.29, 3.1(b), 3.8, Appendix A, and Schedule
1.29.
1.41 "Tax Credits" means all credits against income or franchise taxes and
-----------
credits allowable to Members under state, federal, or other tax
statutes.
1.42 "Tax Matters Member" means the Member appointed pursuant to the
------------------
provisions of Section 5.5 of the Tax Supplement to serve as the "Tax
Matters Member" of the Company for purposes of Sections 6221-6233 of
the Code. Initially, the Tax Matters Partner shall be the Member named
on Schedule 1.41 hereto.
1.43 "Tax Supplement" means Appendix A attached hereto.
--------------
Page 5
<PAGE>
1.44 "Transfer" means, with respect to a Membership Interest or any
--------
interest therein, including the Economic Interest, the sale,
assignment, transfer, disposition, pledge, hypothecation or
encumbrance, whether direct or indirect, voluntary, involuntary or by
operation of law, and whether or not for value, of (a) all or any part
of that Membership Interest or interest therein or (b) a controlling
interest in any Person which directly or indirectly through one or
more intermediaries holds that Membership Interest or interest
therein, provided a Transfer of a controlling interest in SWC shall
not constitute a Transfer for purposes of this Agreement. Further, the
addition or substitution of any member of Inland where such new member
acquires more than a twenty-five percent (25%) interest in Inland
shall constitute a Transfer. A Transfer referred to in clause (b)
above, except to an "Affiliate," is referred to in this Agreement as a
"Change in Control".
1.45 "Treasury Regulations" means the regulations of the United States
--------------------
Treasury Department pertaining to income tax.
References in this Agreement to "Articles," "Sections," "Appendices" and
"Schedules," shall be to the Articles, Sections, Appendices and Schedules of
this Agreement, unless otherwise specifically provided; all Appendices and
Schedules to this Agreement are incorporated herein by reference; any of the
terms defined in this Agreement may, unless the context otherwise requires, be
used in the singular or the plural and in any gender depending on the reference;
the words "herein", "hereof" and "hereunder" and words of similar import, when
used in this Agreement, shall refer to this Agreement as a whole and not to any
particular provision of this Agreement; and except as otherwise specified in
this Agreement, all references in this Agreement (a) to any Person shall be
deemed to include such Person's permitted heirs, personal representatives,
successors and assigns; and (b) to any agreement, any document or any other
written instrument shall be a reference to such agreement, document, or
instrument together with all exhibits, schedules, attachments and appendices
thereto, and in each case as amended, restated, supplemented or otherwise
modified from time to time in accordance with the terms thereof; and (c) to any
Law(s) shall be deemed references to such Law(s) as the same may be
supplemented, amended, consolidated, superseded or modified from time to time.
ARTICLE 2
ORGANIZATIONAL MATTERS
2.1 Name. The name of the Company shall be "Inland Pacific Development
----
Company, LLC." The business of the Company may be conducted under that
name or, upon compliance with applicable law, under any other name
approved by the Members.
2.2 Term. The term of the Company's existence shall commence upon the
----
Formation Date, and shall continue until such time as it is terminated
pursuant to Article 10.
Page 6
<PAGE>
2.3 Office and Agent. The principal office of the Company shall be at 1156
----------------
N. Mountain Avenue, Upland, California 91786, or at such other place
as a majority of the Managers may determine from time to time. The
Company may also have such offices within and without the State of
California as a majority of the Managers may from time to time
determine. The name and business address of the Company's agent for
service of process in the State of Delaware is Corporation Service
Company, or as may otherwise be determined by approval of the Managers
from time to time.
2.4 Purpose of Company. Subject to any express limitation set forth in
------------------
this Agreement, the Company may engage in any lawful activity in
furtherance of, or related to any Projects (as defined in Section
1.34) with an emphasis on the Inland Empire region of Southern
California.
2.5 Intent. It is the intent of the Members that the Company shall always
------
be operated in a manner consistent with its treatment as a
"partnership" for Federal and state income tax purposes. It also is
the intent of the Members that the Company not be operated or treated
as a "partnership" for purposes of Section 303 of the United States
Bankruptcy Code. No Member, Manager, President, or other officer of
Company shall take any action inconsistent with that express intent.
2.6 Absence of Other Restrictions. The Members acknowledge that as of the
-----------------------------
date of this Agreement, the only restrictions on SWC and its
Affiliates and Inland and its Affiliates regarding the conducting of
their respective businesses are set forth in Section 5.5 hereof and in
that certain Cooperative Services Agreement between SWC and Inland
dated December 31, 1999, and that no other restrictions on their
activities have been created hereby or shall be deemed to exist, as a
matter of fiduciary duty, corporate opportunity or otherwise.
ARTICLE 3
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contributions.
-----------------------------
(a) Pre-Formation Capital. Pursuant to the terms of Section 5.3 of
---------------------
that certain Agreement Regarding Formation of Companies between
Inland and SWC dated September 22, 1999 (the "Formation
Agreement"), Inland and SWC shall pay all of the "Consultant Fees"
and related Operating Costs between August 1, 1999 and the
Effective Date in accordance with the following percentages:
Inland 45%
SWC 55%
As of the Effective Date, SWC has paid $110,000 and Inland has
paid $90,000 toward such Consultant Fees and Operating Costs and
SWC and
Page 7
<PAGE>
Inland shall each be credited with Start-Up Capital Contributions
in those respective amounts.
(b) Start-Up Capital Contributions. In addition to the Pre-Formation
------------------------------
Treasury Department pertaining to Section 3.1(a), SWC and Inland
agree to contribute, as required by the Management Committee, all
capital required to fund the Company Budget during the Start-Up
Period in accordance with the following percentages to a maximum,
in the aggregate, of Five Hundred Thirty-five Thousand Dollars
($535,000.00) per year; provided the Company Budget may be
increased in the aggregate a maximum of five percent (5%) over
the previous Company Budget approved by the Management Committee
in any twelve-month period by majority approval of the Management
Committee and any further increase in the Company Budget shall be
a Major Decision and require the unanimous vote of the SWC
Manager and Inland Senior Manager.
SWC 55%
Inland 45%
(c) Termination of Cooperative Services Agreement. In the event that
---------------------------------------------
Treasury Department pertaining to terminate the Cooperative
Services Agreement, then SWC shall, within thirty (30) days
following the delivery or receipt of such notice of termination,
elect, by written notice to Inland (the "Election Notice"), to
either withdraw as a Member of Company, whereupon the terms of
Article 8 herein shall apply, or remain as a Member of Company
notwithstanding such termination of the Cooperative Services
Agreement. In the event SWC fails to deliver that Election Notice
to Inland, SWC shall conclusively be deemed to have elected to
withdraw.
Upon the election by SWC (or deemed election) to withdraw as a
Member, and notwithstanding anything to the contrary in this
Article 3, SWC shall cease to have any further obligation to pay
for any Operating Costs of Company except SWC shall pay Company a
percentage of the lump sum amount of Two Hundred Seventeen
Thousand Five Hundred Dollars ($217,500) (the "Termination
Payment") ($217,500 equals nine (9) months of a total one-time
annual severance payment of Two Hundred Ninety Thousand Dollars
($290,000) which would be payable to Quincey in twenty-four (24)
semi-monthly installments under the Quincey Employment Agreement
assuming such Agreement was terminated without cause at the same
time as termination of the Cooperative Services Agreement) as
follows:
(i) During any portion of the nine (9) month period following
the delivery or receipt of the notice terminating the
Cooperative Services Agreement which is within the two (2)
year Start-Up Period, SWC shall pay fifty-five percent
(55%) of the Termination Payment, and
Page 8
<PAGE>
(ii) During any portion of such nine (9) month period following
the Start-Up Period, SWC shall pay twenty-five percent
(25%) of the Termination Payment.
For example, if a notice terminating the Cooperative Services
Agreement is delivered by SWC to Inland eighteen (18) months
after the Effective Date, and SWC elected to withdraw as a Member
of the Company, then SWC would cease to have any further
obligation to make any further Capital Contributions to Company
except, SWC would be required to pay Company its Termination
Payment equal to Ninety-seven Thousand Eight Hundred Sixty-nine
Dollars ($97,869) calculated as follows:
(i) Six (6) months at $13,291 ($217,500 / 9 x 55%)
(ii) Three (3) months at $6,041 ($217,500 / 9 x 25%)
Such Termination Payment would be due and payable in full fifteen
(15) days after SWC's election to withdraw (or deemed election to
withdraw).
If SWC elects not to withdraw as a Member of Company upon the
termination of the Cooperative Services Agreement, then SWC shall
continue to make all Capital Contributions as required in
Sections 3.1(b) and 3.2 at the percentages set forth in those
Sections.
Company shall not be required to terminate or amend the Quincey
Employment Agreement by reason of the termination of the
Cooperative Services Agreement; rather SWC and Inland have agreed
herein to calculate the Termination Payment payable by SWC as if
the Quincey Employment Agreement was terminated concurrent with
termination of the Cooperative Services Agreement. The
Termination Payment shall be paid by SWC whether or not the
Quincey Employment Agreement is terminated if SWC elects to
withdraw as a Member of Company upon termination of the
Cooperative Services Agreement.
3.2 Project Capital Contributions. In addition to the Start-Up Capital
-----------------------------
Contributions set forth in Section 3.1, the Members shall contribute
from time to time, in accordance with their Percentage Interests, cash
in amounts as required by the Management Committee to fund all Project
Budgets, to fund the Company Budget after the Start-Up Period, and
otherwise pay the costs of the Company (a "Project Capital
Contribution"). As of the Formation Date, such Percentage Interests,
for all matters under this Agreement, excepting (i) Start-Up Capital
Contributions under Section 3.1(b), and (ii) Net Loss, Net Income, and
Distributions related to such Start-Up Capital Contributions as set
forth in the Tax Supplement (Sections 2.2 and 2.3) and Section 6.5 of
this Agreement, are: SWC- 25%, Inland - 75% (which Percentages are
subject to adjustment by reason of Transfer or dilution pursuant to
the terms of this
Page 9
<PAGE>
Agreement). Upon the Formation Date, SWC and Inland shall contribute
the following initial Project Capital Contributions to the Company to
fund future Projects:
SWC $10,000
Inland $30,000
3.3 Call Notice/Bank Accounts. Notice requesting a Capital Contribution
-------------------------
(a "Call Notice") shall, upon unanimous approval of the Management
Committee in accordance with Section 5.4, be sent to each Member by
the President and within thirty (30) days after the mailing of such
notice, each Member shall contribute its respective Percentage
Interest) of such Capital, in cash or by certified check, to the
Company. During the Start-Up Period, Company shall maintain separate
bank accounts for deposit of Start-Up Capital Contributions and
Project Capital Contributions, respectively. Upon distribution of the
Start-Up Distributable Cash (as defined in Section 6.2) pursuant to
Section 6.5, the Start-Up Capital Contribution account shall be closed
by Company. All requests for Capital Contributions are "Major
Decisions" which require unanimous written approval of the Management
Committee in accordance with Section 5.4.
3.4 Capital Accounts. The Company shall establish and maintain an
----------------
individual Capital Account for each Member as set forth in the Tax
Supplement.
3.5 Preferred Return. Each Member shall earn a preferred return on its
----------------
Capital Contributions, except for the Start-Up Capital, in an amount
calculated like interest and accrued on the balance outstanding from
time to time in each Members' Contribution Account (as defined in
Section 3.6(a) below) at Bank of America's Base Rate, compounded
monthly, and determined on a cumulative basis.
3.6 Contribution Accounts and Preferred Return Accounts.
---------------------------------------------------
(a) Contribution Account. The Company shall maintain for accounting
--------------------
purposes the following memorandum account ("Contribution
Account") for each Member. The initial balance of such account
shall be the Member's Initial Capital Contributions set forth in
Section 3.1. The balance of such account shall be increased by,
and as of the date of, each additional Capital Contribution made
by such Member. The balance of the Contribution Account of each
Member shall be decreased by any Distributions to such Member
under Sections 6.4(b) and 10.5.
(b) Preferred Return Account. The Company shall maintain for
------------------------
accounting purposes the following memorandum account ("Preferred
Return Account") for each Member. The initial balance of such
account shall be zero; and the balance of such account shall be
increased by the accrued Preferred Return of each Member. Such
return shall commence as of the funding of a Members' Capital
Contributions
Page 10
<PAGE>
pursuant hereto (excepting any Start-Up Capital shall not earn a
Preferred Return), shall be cumulative, and shall compound
monthly (as of the last date of each calendar month). Further,
the balance of the Preferred Return Account of each Member (as
the same may be increased by such compounding) shall be decreased
by any Distributions to such Member under Sections 6.4(a) and
10.5, but only to the extent any Distribution relates to
Distribution of the Preferred Return.
3.7 Capital Matters. Except as otherwise expressly provided in this
---------------
Agreement or as otherwise agreed in writing by the Members, (i) no
Member shall be entitled to receive interest on such Members' Capital
Contributions, (ii) no Member shall be required or obligated to
contribute additional Capital to the Company, (iii) no Capital
Contributions of any Member may be withdrawn by such Member, (iv) no
Member shall have the right to demand or receive property other than
cash in return for such Members' Capital Contributions, and (v) except
as provided in Section 6.4(b), no Member shall have the right to the
return of all or any portion of its Capital Contributions before the
dissolution and termination of the Company and then only to the extent
of the cash and other property, if any, distributable to the Members
upon Company liquidation.
3.8 IPWC Development Fees. IPWC will pay Company an annual fee (a "IPWC
---------------------
Development Fee") in accordance with the Cooperative Services
Agreement during each year of an IPWC Contract. Company shall use all
IPWC Development Fees to first pay all Operating Costs identified in
the Company Budget. All such IPWC Development Fees paid during the
Start-Up Period shall be allocated to the Adjusted Capital Accounts of
the Members for purposes of Net Income, Net Loss, and Distributions in
accordance with the Start-Up Percentages. All IPWC Development Fees
paid after the Start-Up Period shall be allocated in accordance with
the Member's Percentage Interests at that time.
3.9 Failure to Contribute Capital. If a Member fails to timely contribute
-----------------------------
(the "Non-Contributing Member") all or any portion of the cash amounts
required of it by a Call Notice delivered pursuant to Section 3.3 (the
"Default Amount"), then the other Member (the "Contributing Member")
(provided such other Member has contributed all of the capital
required of such Member pursuant to Section 3.3 with respect to that
particular Call Notice) shall have the right, but not the obligation,
at its sole discretion, to either (a) loan to the Non-Contributing
Member all or any portion of the Default Amount within thirty (30)
days following such default (a "Member Loan") with a proportional
amount of the Non-Contributing Member's Membership Interest as
security for such Member Loan and an assignment of any Distributions
otherwise payable to the Non-Contributing Member under Sections 6.4
and 6.5 until the Member Loan is repaid in full; the Member Loan shall
earn Interest equal to the lesser of four hundred (400) basis points
over the Base Rate, or the maximum rate permitted by law (the "Default
Rate"); the Non-Contributing Member hereby
Page 11
<PAGE>
irrevocably appoints the Contributing Member as its attorney-in-fact
with full power and authority to prepare, execute, acknowledge,
deliver, file and/or record, as appropriate, any documents,
instruments and agreements reasonably necessary to memorialize the
Member Loan, including, without limitation, any note evidencing the
Member Loan, or (b) contribute all or any portion of the Default
Amount to the Company as an additional Capital contribution whereupon
the Percentage Interests of the Non-Contributing Member shall be
decreased at a dilution ratio of 1.25:1 (the "Dilution Ratio")
determined by dividing the Default Amount paid by Contributing Member
by the total amount of all Capital Contributions of all Members
(including the Default Amount paid by Contributing Member) and
multiplying the quotient by the Dilution Ratio; the resulting
percentage is the amount by which the Percentage Interest of the Non-
Contributing Member is decreased, and the Percentage Interest of the
Contributing Member, increased; the Non-Contributing Member shall have
no right to cure this default after the Default Amount is contributed
by the Contributing Member. In addition to the remedies provided in
this Section 3.9, the Contributing Member shall also have the right to
exercise all other rights and remedies at law or in equity.
ARTICLE 4
MEMBERS
4.1 Limited Liability. Except as required under the Act or as expressly
-----------------
set forth in this Agreement, no Member or Manager shall be personally
liable for any debt, obligation or liability of the Company, whether
that liability or obligation arises in contract, tort or otherwise,
except intentional misconduct, fraud, or gross negligence.
4.2 Admission of Additional Members. Subject to compliance with applicable
-------------------------------
law, additional Members may be admitted to the Company from time to
time upon the unanimous vote of all Members and upon such terms and
conditions as the Members may determine unanimously, and any such
additional Members shall be granted Membership Interests and may
participate in the management, Net Income, Net Losses, Tax Credits and
Distributions of the Company on such terms as the Members unanimously
approve.
4.3 Withdrawal. From and after the date which is six (6) months after the
----------
Effective Date, any Member may withdraw or resign from the Company at
any time and for any reason upon two hundred seventy (270) days prior
written notice to the other Members. Any such withdrawal or
resignation shall constitute a Membership Termination Event and shall
be subject to the provisions of Article 8. Any Member who effects a
voluntary withdrawal or resignation other than as permitted in the
preceding sentence, or as set forth in Section 3.1(c), shall cease to
be a Member, and shall forfeit its rights to receive any further
Distributions, including any Distributions under Article 6 and Article
10 herein, and forfeit its right to receive the fair value of its
Membership Interest as of the date of such withdrawal as otherwise
provided in Section 18-604 of the Act, and the Percentage Interests of
the remaining
Page 12
<PAGE>
Member(s) shall be increased, pro rata, based upon the relative
Percentage Interest(s) of such remaining Members, by the total amount
of the Membership Interest forfeited by the withdrawing Member.
4.4 Lack of Member Authority. Unless otherwise expressly stated in this
------------------------
Agreement, no Member, except the Management Committee, has the power
to act for or on behalf of the Company, to do any act that would be
binding on the Company or to make any expenditures or incur any
obligations on behalf of the Company. The Management Committee may
delegate certain powers to act on behalf of the Company to officers,
agents and other Persons.
ARTICLE 5
MANAGEMENT AND CONTROL OF THE COMPANY
5.1 Management of the Company by Management Committee. Except as otherwise
-------------------------------------------------
expressly provided herein, the business and affairs of the Company
shall be managed and controlled exclusively by the Management
Committee.
(a) Management and Management Committee.
-----------------------------------
(i) The Management Committee shall consist of three (3)
individuals, each of whom shall be an Affiliate of a Member
or a senior employee of a Member. SWC shall appoint one
Person to serve on the Management Committee (the "SWC
Manager") and Inland shall appoint two Persons
(collectively, the "Inland Managers", and individually,
each, an "Inland Manager"); Robb Quincey may be an Inland
Manager notwithstanding his employment by Company. The
members of the Committee are referred to herein as the
"Managers". Each Manager shall serve on the Management
Committee until replaced by the Member appointing such
Manager or removed pursuant to Section 8.2(b). The
Management Committee initially shall consist of the
following persons: Anthony Garnier (SWC Manager), Bill
McIntyre (Inland Senior Manager), and Robb Quincey (Inland
Manager). Each Member shall also designate an alternate
Person(s) to act for it if its appointed Manager is
unavailable. Any written act, approval, consent, or vote of
a Manager or alternate(s) so designated shall be deemed to
be the act, approval, consent, or vote of the Member which
designated such Manager and alternate(s) and neither the
Company, Manager, nor any Member shall be required to
inquire into the authority of such Manager or alternate(s)
as to such written act, approval, consent, or vote on
behalf of the Member which designated such Manager and
alternate(s). Any such Manager or alternate(s) may be
replaced by a successor Manager or alternate(s) by written
notice delivered to the Management Committee and to the
other Member. Any such notice from Inland shall identify
whether the successor Manager
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<PAGE>
is serving in the capacity of "Senior Manager" or "Manager"
for purposes of Section 5.4. Until such further written
notice, the designated Managers and alternates of the
Members shall be as set forth in Schedule 1.25 attached
hereto. In the event SWC acquires more than a fifty percent
(50%) Membership Interest in Company under this Agreement
after the Start-Up Period, then SWC shall have the right to
appoint a second Manager and Inland shall have the right to
appoint only one Manager.
(ii) All powers of the Company shall be exercised by or under
the authority of the Management Committee. Decisions of the
Management Committee within its scope of authority shall be
binding upon the Company and each Member, in its capacity
as a Member of Company. Except as otherwise expressly
provided in this Agreement, no action may be taken by any
Member to bind the Company without the approval of the
Management Committee.
(iii) Meetings of the Management Committee shall be held at the
principal place of business of the Company or at any other
place that a majority of the Managers determine. In the
alternative, meetings may be held by conference telephone,
provided that each Manager can hear the others and it has
been confirmed so, and it has been confirmed that there are
no unauthorized people on the telephone. The presence of
the SWC Manager and either of the Inland Managers in person
or via telephone conference shall constitute a quorum for
the transaction of business. Meetings shall be held once
each month, or otherwise in accordance with a schedule
established by the Management Committee. In addition, any
Manager or Member may convene a meeting of the Management
Committee at the Company's principal place of business upon
at least three (3) business days' prior written notice to
all Members and Managers. The Management Committee also may
make decisions, without holding a meeting, by unanimous
written consent of all of the Managers. Minutes of each
meeting and a record of each decision shall be kept by the
President (defined herein) and shall be given to the
Members promptly after the meeting.
(iv) Decisions of the Management Committee shall require the
approval of a majority of the Managers, except that "Major
Decisions" (as defined in Section 5.4) shall require the
written consent of the SWC Manager and the Senior Inland
Manager.
(b) Agency Authority. Subject to Section 5.4 below, Inland, any two
-----------------
(2) Managers, or, subject to Section 5.2(c), President, acting
alone, is/are
Page 14
<PAGE>
authorized to endorse all checks, drafts and other evidences of
indebtedness made payable to the order of the Company and to
execute, on behalf of the Company, all agreements, contracts,
commitments, checks, instruments and other documents approved by
the Management Committee. The Management Committee shall have the
right to delegate in writing any or all of their authority,
rights and/or obligations, whether arising hereunder, under the
Act or otherwise, to any one or more officers, agents or other
duly authorized Persons. Any note, mortgage, deed of trust,
evidence of indebtedness, contract, certificate, statement,
conveyance or other instrument or obligation in writing, and any
assignment or endorsement thereof, executed or entered into
between the Company and any other Person, when signed by Inland,
any two (2) Managers, or by President is not invalidated as to
the Company by any lack of authority of such Persons in the
absence of actual knowledge on the part of the other Person that
such Persons had no authority to execute the same on behalf of
the Company.
(c) Meetings of Members; Written Consent. Annual Meetings of the
---------------------------------------
Members shall be held at such time and place within or without
the State of California as the Members shall determine. No
regular meetings of Members are required, but if such meetings
are held, they shall be noticed, held and conducted pursuant to
the Act. Members may participate in any meeting through the use
of conference telephones or similar communications equipment as
long as all Members participating can hear one another. A Member
so participating is deemed to be present in person at the
meeting. Any action which may be taken by the Members at a
meeting may also be taken without a meeting, if a consent in
writing setting forth the action so taken is signed by Members
having not less than the minimum votes that would be necessary to
authorize that action at a meeting of the Members duly called and
noticed.
5.2 President of Company.
--------------------
(a) Appointment of President. The Management Committee shall appoint
------------------------
an individual to supervise the day-to-day operations of the
Company and such person shall be designated as "President." Such
appointment, if the appointee is other than one of the
individuals listed in Schedule 1.25, shall be a "Major Decision"
pursuant to Section 5.4. The President shall be subject to the
general supervision and control of the Management Committee and
shall carry out the policy decisions made by the Managers. At all
meetings of the Management Committee and meetings of the Members,
the President shall be present and shall report to the Management
Committee and Members on the operation of the Company including
all Projects, or any other matters as any Manager or Member may
request. Robb Quincey shall be employed by Company pursuant to
the terms of the Quincey
Page 15
<PAGE>
Employment Agreement as the initial President of the Company and
shall continue to serve as the President until terminated by the
vote of the SWC Manager and Inland Senior Manager (other than
Quincey) in accordance with the Quincey Employment Agreement.
(b) Project Plan and Budgets. The President shall prepare a
------------------------
Project Plan and Budget for each Project, and submit the Project
Plan and Budget to the Management Committee for approval by the
SWC Manager and Inland Senior Manager. The President shall also
prepare and submit annual, operating budgets (a "Company Budget")
to the Company and Management Committee for its approval. The
initial Company Budget approved by the Management Committee is
attached hereto as Schedule 5.2(b). All subsequent Company
Budgets and any amendments thereto shall require the majority
approval of the Management Committee, except any aggregate
------
increase in the Company Budget in excess of five percent (5%)
over the previous Company Budget approved by the Management
Committee in any twelve-month period shall be a Major Decision
requiring the unanimous consent of the SWC Manager and Inland
Senior Manager.
(c) Signing Authority of President. Subject to prior approval by the
------------------------------
Management Committee and Section 5.4 below, the President shall
have the full power to execute, for and on behalf of the Company,
any and all documents and instruments which may be necessary to
carry on the business of the Company, including, without
limitation, any and all deeds, contracts, leases, mortgages,
deeds of trust, promissory notes, guarantees, security
agreements, and financing statements pertaining to the Company's
assets or obligations.
5.3 Performance of Duties; Liability of Members and Officers. No Member,
--------------------------------------------------------
Manager, or President shall be liable to the Company or to any other
Member for any losses or damages suffered by them, as a result of
actions taken within the scope of authority conferred upon them by
this Agreement, or by the Management Committee and in the ordinary
course of business of the Company, except as the result of fraud,
deceit, gross negligence, reckless or intentional misconduct or a
knowing violation of law or this Agreement by that Member, Manager or
President or as a result of acts from which that Member, Manager, or
President derives an improper personal benefit either directly or
indirectly. The Managers and President shall perform their duties in
good faith, in a manner they reasonably believe to be in the best
interests of the Company and the Members. In performing their duties,
the Managers and President shall be entitled to rely on information,
opinions, reports or statements, including financial statements and
other financial data, of the following persons or groups unless they
have knowledge concerning the matter in question that would cause such
reliance to be unwarranted and provided that the Managers and
President act in good faith and after reasonable inquiry when the need
therefor is indicated by the circumstances:
Page 16
<PAGE>
(a) one or more agents of the Company whom the Managers or President,
as the case may be, reasonably believe to be reliable and
competent in the matters presented; or
(b) any attorney, independent accountant or other Person as to
matters which the Managers or President, as the case may be,
reasonably believe to be within such Person's professional or
expert competence.
5.4 Major Decisions. Neither President, nor any Member or Manager, may,
---------------
without the unanimous written consent of the SWC Manager and Inland
Senior Manager, take any of the following actions (in each case the
taking of which shall be referred to as a "Major Decision"):
(a) Spend or commit to be spent any of the Company's capital or funds
for a Project until the Project Plan and Project Budget for the
Project is approved by unanimous consent of the SWC Manager and
Inland Senior Manager;
(b) Incur any expenses or liabilities in excess of $25,000 not
identified in a Company Budget or Project Budget previously
approved by unanimous consent of SWC Manager and Inland Senior
Manager;
(c) Sell or encumber any property or assets of the Company not
identified for sale or encumbrance in an approved Project Plan;
(d) Contract on behalf of, or otherwise bind, the Company in
furtherance of a Project until the Project Plan and Project
Budget is approved by unanimous consent of the SWC Manager and
Inland Senior Manager including, making any binding commitments
on behalf of the Company to representatives of any City, County,
or other governmental agency;
(e) Issue any public announcement or press release relating to the
Company, or any Project;
(f) Do any act in contravention of this Agreement;
(g) Possess, assign, or use funds or other property of the Company
for other than a Company purpose;
(h) Make, execute, or deliver on behalf of the Company an assignment
for the benefit of creditors, or cause the Company to be subject
to the authority of any trustee, custodian, or receiver or to be
subject to any proceeding for bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, relief of
debtors, dissolution, or liquidation or similar proceedings;
(i) Employ or contract with any Affiliate of a Member or any other
person or entity in which any Member or Affiliate of a Member has
a direct or indirect financial interest where such contract
provides for the payment
Page 17
<PAGE>
for materials or services at a rate which exceeds the rate that
would be charged by a third party contractor in a competitive
arms-length transaction and/or includes any profit-mark-up;
(j) Except where any of such matters is only civil in nature and does
not involve amounts in excess of $25,000, (i) confess a judgment
against the Company, (ii) settle or adjust any claims against the
Company; or (iii) defend, or discontinue the defense of, or
prosecute, or discontinue the prosecution of, any legal action or
proceedings against, or on behalf or in the name of, the Company;
(k) Do any act which would make it impossible to carry on the
business of the Company;
(l) Take any action or make any decision not reasonably contemplated
in this Agreement;
(m) Make any in-kind distributions as provided for in Section 10.4;
(n) Call for any Capital Contributions;
(o) Effectuate any change in number of the Managers;
(p) Sell or otherwise issue any additional Membership Interests in
the Company except as permitted in Section 7.2;
(q) Make any amendment to this Agreement; or
(r) Increase the Company Budget in excess of five percent (5%) over
the previous Company Budget approved by the Management Committee
in any twelve-month period.
5.5 Competing Activities. Each Member and Manager shall be obligated to
--------------------
present any investment opportunity to the Company if the opportunity
concerns a Project within the Inland Empire region of Southern
California (Riverside/San Bernardino Counties and incorporated cities
therein other than the City of Barstow). Each such Project shall be
presented to the Company for consideration by the Management
Committee. The election to proceed with a Project shall be a Major
Decision. If the SWC Manager does not approve of a Project and/or
related Project Budget and Plan then Inland may proceed with the
Project independent of the Company for its own account or recommend
such opportunity to Persons other than the Company or the other
Members. Likewise, if Inland's Senior Manager does not approve of a
Project and/or related Project Budget and Plan then SWC may proceed
with the Project independent of the Company for its own account or
recommend such opportunity to Persons other than the Company or the
other Members. Without limiting the foregoing, any water rights
acquired by Company which Company elects to lease, sell, or transfer
shall first be offered for lease or sale, at the election of Company,
to IPWC at a market rate. In the event IPWC elects not to lease or
purchase such water rights, the rights shall next
Page 18
<PAGE>
be offered for lease or sale by Company to SWC; if SWC elects not to
lease or purchase such water rights, the rights may then be offered to
unaffiliated third parties at a price equal to or greater than the
price offered to IPWC and SWC. Notwithstanding any of the foregoing
restrictions in this Section 5.5, any opportunity by a Member or
Manager outside the scope of this covenant does not need to be
presented by a Member or Manager to the Company; provided Quincey may
not proceed with any opportunity independent of the Company if such
conduct would violate any of Quincey's obligations under the Quincey
Employment Agreement.
5.6 Contracts with Affiliates. If the Company uses the personnel or
-------------------------
resources of an Affiliate of a Member or Manager, or otherwise
contracts directly or indirectly with an Affiliate of a Member or
Manager for services or materials, the payment or compensation
therefor shall be at competitive arm's-length rates, and such services
and materials shall be comparable in quality, type, size, and
specifications as would be obtained in a competitive arm's-length
transaction with third-party contractors. All contracts or agreements
with Affiliates of Managers or Members shall be subject to the prior
written approval of the Managers appointed by the non-affiliated
Members in their reasonable discretion. The non-affiliated Managers
acting alone shall have the right on behalf of the Company to send any
appropriate notice of default or termination, to institute legal
proceedings and/or to take such other action as may be necessary or
appropriate to enforce the rights and protect the interests of the
Company pursuant to any agreement now or hereafter entered into
between the Company and an Affiliate of a Member or Manager with
respect to any other rights or remedies of the Company running against
or in connection with any Affiliate of a Member or Manager. Non-
affiliated Members shall mean those Members without a direct or
indirect interest in the contracts or agreements with the Affiliate,
financial or otherwise.
5.7 Company Opportunities. Except as provided in Section 5.5 above, and
---------------------
except as otherwise provided in any contract to which Company is a
party, no Member shall be obligated to present any prospective
project, business venture, investment opportunity or economic
advantage to the Company or to any other Members or Managers, even if
the opportunity is one of the character that, if presented to the
Company or the other Members or Managers, could be taken by the
Company or the other Members or Managers, and each Member or Manager
shall have the right to hold any such prospective project, business
venture, investment opportunity or economic advantage for its own
account or to recommend the same to Persons other than the Company or
the other Members or Managers.
5.8 Expenses. Subject to Sections 5.4 and 5.6 above, the Company shall
--------
reimburse the Members and Managers, for all reasonable out-of-pocket
costs and expenses incurred by them (or by their Affiliates with
approval of the Management Committee) in connection with the business
and affairs of the Company; provided all organizational expenses
(including, without limitation,
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<PAGE>
legal and accounting fees and costs) incurred by each Member to form
the Company shall not be reimbursed by Company.
ARTICLE 6
PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS
6.1 Allocation of Income and Losses. The agreement of the Members
-------------------------------
concerning the maintenance of Capital Accounts, the allocation of
income and loss, deficit restoration, and other related matters is set
forth in Appendix A, attached hereto and made a part hereof.
6.2 Definition of "Distributable Cash". The term "Distributable Cash"
---------------------------------
means all cash of the Company on hand and in banks, saving and loan
associations and cash equivalents, on the date of any proposed
distribution pursuant to this Agreement, after payment or provision
for payment of Company obligations (actual and anticipated),
including, without limitation, provision for working capital needs and
reserves, interest carry, warranties and contingent liabilities of the
Company as reasonably determined by President and approved by the
Management Committee. The term "Start-Up Distributable Cash" as used
herein means Distributable Cash generated from any IPWC Development
Fees paid to Company by IPWC during the Start-Up Period (as prorated
through the expiration of the Start-Up Period) or from any Start-Up
Capital Contributions. The President shall prepare and deliver to the
Management Committee a quarterly report summarizing the sources and
uses of such reserve funds. Notwithstanding anything provided in
Section 6.4 to the contrary, no Distributions shall be made to the
Members until the Company's outstanding debts, if any, to the Members
have been fully repaid.
6.3 Timing of Distributions. Subject to the provisions of this Article 6
-----------------------
and Article 10 (Dissolution and Winding Up), payments and
distributions to the Members of Distributable Cash shall be made at
such times as approved by the Management Committee, but in no event no
less frequently than annually.
6.4 Order of Distribution. Except as provided in Section during the Start-
---------------------
Up Period, and Sections 3.9 and 10.5, Distributable Cash shall be
distributed in the following order of priority (taking into account,
as applicable, the Members then existing Preferred Return Account and
Contribution Account balances);
(a) First: To the Members, pro rata in accordance with the ratios of
-----
their respective accrued and unpaid Preferred Returns until each
Member's respective Preferred Return Account is zero.
(b) Second. To the Members pro rata in accordance with the ratios of
------
their respective Capital Contributions which have not yet been
repaid until each Member's respective Contribution Account is
zero.
(c) Third. To the Members in proportion to the positive balance, if
-----
any, in each such Member's Capital Account.
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<PAGE>
(d) Remainder. Subject to a Member's repayment of any such Member's
---------
outstanding Member Loan pursuant to Section 3.9, all Distributable
Cash in excess thereof shall be distributed to the Members pro rata in
accordance with their respective Percentage Interest.
6.5 Start-Up Period Distributions. All Start-Up Distributable Cash Fees shall,
-----------------------------
be distributed 55% to SWC and 45% to Inland and Section 6.4 above shall not
apply to such distributions of Start-Up Distributable Cash. Upon expiration
of the Start-Up Period, Company shall make a special distribution to Inland
and SWC of all remaining Start-Up Distributable Cash of Company as of such
expiration date in accordance with the Start-Up Percentages (SWC - 55%,
Inland - 45%). Thereafter, all Distributable Cash distributed after the
Start-Up Period under Section 6.4(d) shall be distributed in accordance
with the then Percentage Interests of the Members (SWC - 25%, Inland -
75%), as such percentages may be adjusted upon Transfer or dilution.
6.6 Form of Distribution. No Member has any right to demand and receive any
--------------------
Distribution from the Company in any form other than money. No Member may
be compelled to accept from the Company a Distribution of any asset in kind
in lieu of a proportionate Distribution of money being made to other
Members.
ARTICLE 7
TRANSFER OF INTERESTS
7.1 Transfer of Interests. Except as permitted by Sections 7.2 and 8.3, no
---------------------
Member shall be entitled to Transfer all or any part of its Membership
Interest except with the prior written consent of the other Member(s),
which consent may be given or withheld, conditioned or delayed as the other
Member(s) may determine in its sole and absolute discretion. Any attempted
Transfer without such prior written consent shall constitute a Membership
Termination Event (as of the date of such attempted Transfer) and shall be
null and void ab initio, and the transferee shall not become a Member. A
-- ------
Member who elects to Transfer its Membership Interest is referred to herein
as a "Transferring Member"; the remaining Member(s) is referred to as the
"Remaining Member."
7.2 Permitted Transfers. Subject to the provisions of Section 7.3, the
-------------------
restrictions upon Transfer specified in Section 7.1 shall not apply to any
Transfer of all or any part of a Transferring Member's Membership Interest
to an Affiliate of such Transferring Member (an "Affiliate Transferee") nor
shall it include a Change in Control, merger or sale of all assets of SWC.
The Remaining Member shall receive a minimum of sixty (60) days prior
written notice from Transferring Member of the proposed transfer to an
Affiliate (a "Transfer Notice"). Any Affiliate Transferee permitted under
the preceding sentence shall, subject to Section 7.3(b) and (c), hold the
Membership Interest or part thereof transferred by the Transferring Member
subject to all the provisions of this Agreement. Except for any Transfer to
an Affiliate Transferee permitted
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<PAGE>
under the initial sentence of this Section 7.2, no Member shall Transfer
all or any part of its Membership Interest until such Transferring Member
first offers that Membership Interest for sale to the other Remaining
Member by written notice (the "Withdrawal Offer") whereupon the terms of
Section 8.3 shall apply. For purposes of this Section 7.2, the Member
seeking to transfer its interest shall be deemed to be the "Withdrawing
Member" as used in Section 8.3.
7.3 Substitution of Members. Notwithstanding anything in this Agreement to the
-----------------------
contrary, any transferee of the whole or any part of a Membership Interest
shall hold only the Economic Interest of the Transferring Member as an
Interest Holder and shall not become a substituted Member in the place of a
Transferring Member unless and until all of the following conditions are
satisfied:
(a) The Remaining Member(s) unanimously consents to the admission of the
transferee as a Member;
(b) The Transferring Member and the transferee execute and acknowledge
such other instrument or instruments as the Management Committee may
deem necessary or desirable to effectuate the admission, including the
written acceptance and adoption by the transferee of all of the terms
and conditions of this Agreement as the same may have been amended;
and
(c) At the election of the other Members, the transferee pays to the
Company a transfer fee which is sufficient, in the reasonable
discretion of the other Members, to cover all expenses incurred by the
Company in connection with the Transfer and substitution.
7.4 Further Restrictions on Transfer of Interests. In addition to other
---------------------------------------------
restrictions set forth in this Agreement, no Member shall Transfer all or
any part of such Member's Membership Interest: (i) without compliance with
all federal and state securities laws, (ii) if the Transfer would cause the
tax termination of the Company under Code Section 708, (iii) or if the
Transfer would otherwise result in adverse tax consequences to the Company
and/or the non-transferring Members.
7.5 Election to Dissolve. The Remaining Member(s) may vote to dissolve the
--------------------
Company in accordance with Section 10.1 in the event of a Transfer.
ARTICLE 8
CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS
8.1 Dissolution of Company. The occurrence of a Membership Termination Event as
----------------------
to any Member other than the last and only remaining Member shall not
dissolve the Company unless the Remaining Member(s) votes to dissolve in
accordance with Section 10.1. Upon the occurrence of a Membership
Termination Event as to the last and only remaining Member, the Company
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shall dissolve unless the personal representative or other successor-in-
interest of the last and only remaining Member consents in writing within
ninety (90) days of that Membership Termination Event to the continuation
of the Company and to the admission of such personal representative or
other successor-in-interest, or its designee or nominee, as a Member.
8.2 Admission or Conversion. Upon the occurrence of a Membership Termination
-----------------------
Event with respect to a Member under circumstances where the Company does
not dissolve, the Remaining Member(s) shall determine which one of the
following shall occur and give written notice thereof, within sixty (60)
days after the Membership Termination Event, to the Member who suffered the
Membership Termination Event (the "Former Member"):
(a) the Former Member's personal representative or other successor-in-
interest shall be admitted as a Member of the Company in the place and
stead of the Former Member to the extent of the Former Member's
Membership Interest (the "Former Member's Interest"); or
(b) the Former Member's Interest shall be converted to a bare Economic
Interest, with no voting rights and no rights to appoint a Manager
(except the right to participate in decisions regarding confessions,
judgments and suits against Members), and the Former Member's
representative or other successor-in-interest shall become the
Interest Holder of that Economic Interest. The Former Member's
Interest shall also be converted if the Remaining Member(s) fails to
approve a substitution under Section 8.2(a) within the aforementioned
60-day period. Additionally, the Former Member shall not be subject to
additional Capital Contributions, following the expiration of the 270-
day period set forth in Section 4.3.
8.3 Optional Buy-Out.
----------------
(a) The Member causing the Membership Termination Event (the "Withdrawing
Member") shall be deemed to offer for sale (the "Withdrawal Offer") to
the other Member (the "Remaining Member") the Membership Interest of
the Withdrawing Member (the "Withdrawal Interest").
(b) The Withdrawal Offer shall be and remain irrevocable for a period (the
"Withdrawal Offer Period") ending at 11:59 p.m. local time at the
Company's principal office on the sixtieth (60th) day following the
date of the Membership Termination Event provided that the sixty (60)
day period shall be extended during a period of automatic stay
pursuant to bankruptcy. At any time during the Withdrawal Offer
Period, the Remaining Member may accept the Withdrawal Offer by
notifying the Withdrawing Member (the "Withdrawal Notice") of its
acceptance.
(c) If the Remaining Member accepts the Withdrawal Offer (the "Purchasing
Member"), the Withdrawal Notice shall fix a closing date
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(the "Withdrawal Closing Date") for the purchase that shall not be
earlier than ten (10) or later than sixty (60) days after
determination of the Withdrawal Purchase Price (as defined in (d)
below).
(d) The Purchasing Member shall purchase the Withdrawal Interest for a
price (the "Withdrawal Purchase Price") equal to the amount the
Withdrawing Member would be entitled to receive pursuant to Section
6.4 (taking into account Section 10.5) if the Company sold all of the
Company assets to a third party at their Fair Market Value as of the
date of the Withdrawal Notice. If the Withdrawing Member and
Purchasing Member are unable to reach agreement on the Withdrawal
Purchase Price within thirty (30) days after expiration of the
Withdrawal Offer Period, then the Fair Market Value shall be
determined within thirty (30) days by an independent M.A.I. appraiser
or other qualified appraiser; each Member shall select an appraiser
from a list of five (5) appraisers to be prepared by the Company's
Accountant; if the Members each select a different appraiser, the
Company Accountant shall select one of the remaining three (3)
appraisers to conduct the appraisal; if the Members select the same
appraiser, then that appraiser shall complete the appraisal. The Fair
Market Value shall be determined by Appraiser as of the date of the
Withdrawal Notice. Upon completion of the appraisal, the Company's
Accountant (defined in Section 1.1) shall, within 30 days, determine
the Withdrawal Purchase Price based upon the Fair Market Value. The
Purchasing Member shall approve or disapprove of the Withdrawal
Purchase Price on or before the Withdrawal Closing Date. If approved,
the Withdrawal Purchase Price shall be paid in cash on the Withdrawal
Closing Date. Company shall pay the cost of the appraisal. The
determination of the Appraiser and Accountant shall, for purposes of
this Agreement, be binding and conclusive on the parties.
(e) If the Remaining Member fails to accept the Withdrawal Offer, or if
the Purchasing Member disapproves of the Withdrawal Purchase Price, or
if not all of the Withdrawal Interest is purchased by the Purchasing
Member, then the Withdrawing Member or the Withdrawing Member's
successor, as the case may be, shall continue to be a Former Member
pursuant to Section 8.2 as to that portion of the Withdrawal Interest
retained by the Withdrawing Member, and Withdrawing Member may sell or
otherwise Transfer all or any part of its Membership Interest to any
Person, including any other Member, provided such Membership Interest
shall be converted to a mere Economic Interest pursuant to Section
7.3.
(f) If the Purchasing Member fails to complete its purchase on the
Withdrawal Closing Date (a "Defaulting Purchaser"), then the
Withdrawing Member may either sell or Transfer its Membership Interest
in accordance with (e) above, or elect to dissolve the Company in
accordance with Article 10.
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ARTICLE 9
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
9.1 Books and Records/Financial Reports. The books and records of the Company
-----------------------------------
shall be kept, and the financial position and the results of its operations
recorded by the President (or by Inland, if no President has been appointed
or if otherwise elected by Inland), in accordance with the accounting
method of the Company approved by the Management Committee. The books and
records of the Company shall reflect all the Company transactions and shall
be appropriate and adequate for the Company's business. Each Member and its
duly authorized representative shall have complete access to all such books
and records at any time. The President (or Inland if no President has been
appointed or if otherwise elected by Inland) shall cause the Company to
deliver to each Member the following:
(a) Quarterly Tax Information: Within forty-five (45) days following the
--------------------------
end of each calendar quarter, a statement of pre-tax net income (loss)
of the Company for the then most recently completed calendar quarter
and the current balance of each Member's Capital Account; and
(b) Annual Tax Information. Within ninety (90) days following the end of
----------------------
each calendar year, a final financial statement of the Company for the
previous calendar year prepared in accordance with generally accepted
accounting principles, consistently applied. Management Committee may
elect to cause the Accountant to audit the Financial Statements of the
Company at the Company's expense. Further, any Member may elect to
cause the Accountant to audit such statements at such Member's
expense; provided, however, that under all circumstances, the
statements of the Company shall only be audited once a year. The year
end financial statements of the Company shall include a balance sheet,
an income statement, statement of cash flow, statement of sources and
uses of funds and such other information and reports as the Management
Committee may reasonably request.
9.2 Bank Accounts; Invested Funds. All funds of the Company shall be deposited
-----------------------------
in such account or accounts of the Company as approved by the Management
Committee and shall not be commingled with the funds of any other Person.
All withdrawals therefrom shall be made upon checks signed by such Persons
and in such manner as the Management Committee may approve. Temporary
surplus funds of the Company may be invested in commercial paper, time
deposits, short-term government obligations or other investments approved
by the Management Committee.
9.3 Accounting Matters. All decisions as to accounting matters shall be
------------------
approved by the Management Committee.
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<PAGE>
ARTICLE 10
DISSOLUTION AND WINDING UP
10.1 Dissolution. The Company shall be dissolved, its assets disposed of and
-----------
its affairs wound up upon the first to occur of the following:
(a) the unanimous vote of the Members or unanimous vote of the Remaining
Member(s) after (i) receipt of a Transfer Notice or Withdrawal Offer,
or (ii) a Membership Termination Event;
(b) the occurrence of a Membership Termination Event as to the last and
only remaining Member if that Member's personal representative or
other successor-in-interest fails to consent to the continuation of
the Company in accordance with Section 8.1 within ninety (90) days
after the occurrence of that event;
(c) the Company's Bankruptcy;
(d) the occurrence of an event which makes it unlawful for the business of
the Company to be continued; and
(e) the expiration of twenty-five (25) years from the Formation Date.
10.2 Date of Dissolution. Dissolution of the Company shall be effective on the
-------------------
day on which the event occurs giving rise to the dissolution, but the
Company shall not terminate until the assets of the Company have been
liquidated and distributed as provided herein. Notwithstanding the
dissolution of the Company, prior to the termination of the Company the
business of the Company and the rights and obligations of the Members, as
such, shall continue to be governed by this Agreement.
10.3 Winding Up. Upon the occurrence of any event specified in Section 10.1, the
----------
Company shall continue solely for the purpose of winding up its affairs in
an orderly manner, liquidating its assets and satisfying the claims of its
creditors. The President, or any other person designated by the Management
Committee, shall be responsible for overseeing the winding up and
liquidation of the Company, shall take full account of the liabilities and
assets of the Company, shall cause its assets either to be sold or
distributed, as they may determine, and shall cause the proceeds therefrom,
to the extent sufficient, to be applied and distributed as provided in
Section 10.5. The President shall give written notice of the commencement
of winding up by mail to all known creditors and claimants whose addresses
appear on the records of the Company.
10.4 Distributions in Kind. Any non-cash assets distributed to any Members shall
---------------------
require the approval of the SWC Manager and Inland Senior Manager in
accordance with Section 5.4. Following such approval, any non-cash asset
distributed to one or more Members shall first be valued at its Fair Market
Value to determine the Net Income or Net Loss that would have resulted if
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<PAGE>
that asset had been sold for that value, the Net Income or Net Loss shall
then be allocated pursuant to the Tax Supplement, and the Members' Capital
Accounts shall be adjusted to reflect those allocations. The amount
distributed and charged to the Capital Account of each Member receiving an
interest in the distributed asset shall be the Fair Market Value of the
interest (net of any liability secured by the asset that the Member assumes
or takes subject to). The Fair Market Value of that asset shall be
determined by an independent M.A.I. appraiser or other qualified appraiser
selected by the Members in accordance with the selection process set forth
in Section 8.3(d).
10.5 Order of Payment of Proceeds Upon Dissolution.
---------------------------------------------
(a) Liquidating Distributions. After determining that all known debts and
-------------------------
liabilities of the Company, including, without limitation, debts and
liabilities to Members who are creditors of the Company, have been
paid or adequately provided for, the remaining assets shall promptly
be distributed to the Members in accordance with Section 6.4, after
taking into account income and loss allocations for the Company's
taxable year during which the liquidation occurs.
(b) No Liability. No Member shall have any liability to the Company,
------------
any other Member, or any creditor of the Company on account of any
deficit balance in its Capital Account.
10.6 Limitations on Payments Made in Dissolution. Except as otherwise
-------------------------------------------
specifically provided in this Agreement, each Member shall be entitled to
look only to the assets of the Company for the return of that Member's
positive Capital Account balance and shall have no recourse for its Capital
Contributions and/or share of Net Income (upon dissolution or otherwise)
against any other Member.
10.7 Certificate of Cancellation. Upon completion of the winding up of the
---------------------------
Company's affairs, the Members shall cause a Certificate of Cancellation to
be filed with the Delaware Secretary of State.
10.8 Compensation for Services. The Persons winding up the affairs of the
-------------------------
Company shall be entitled to reasonable compensation from the Company for
their services.
ARTICLE 11
INDEMNIFICATION
11.1 Indemnification. The Company shall indemnify and hold harmless each of the
---------------
Members, and each of their respective Managers, officers, directors,
shareholders, partners, members, trustees, beneficiaries, employees,
agents, heirs, assigns, successors-in-interest and Affiliates, together
with all officers, employees, or agents of the Company, including President
(collectively, "Indemnified Persons") from and against any and all losses,
damages, liabilities and expenses, (including costs and reasonable
attorneys' fees),
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<PAGE>
judgments, fines, settlements and other amounts (collectively
"Liabilities") reasonably incurred by any such Indemnified Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil, criminal, administrative or investigative and
whether threatened, pending or completed (collectively a "Proceeding"), in
which any such Indemnified Person may be involved or with which any such
Indemnified Person may be threatened, with respect to or arising out of any
act performed by the Indemnified Person or any omission or failure to act
if the performance of the act or the omission or failure was done in good
faith and within the scope of the authority conferred upon the Indemnified
Person by this Agreement or by the Act, except for acts of willful
misconduct, gross negligence or reckless disregard of duty, or acts which
constitute a material breach of this Agreement, or acts from which such
Indemnified Person derived an improper personal benefit. The Company's
indemnification obligations hereunder shall apply not only with respect to
any Proceeding brought by the Company or a Member but also with respect to
any Proceeding brought by a third party.
11.2 Contract Right; Expenses. The right to indemnification conferred in this
------------------------
Article 11 shall be a contract right and shall include the right to require
the Company to advance the expenses incurred by the Indemnified Person in
defending any such Proceeding in advance of its final disposition;
provided, however, that, if the Act so requires, the payment of such
-------- -------
expenses in advance of the final disposition of a Proceeding shall be made
only upon receipt by the Company of an undertaking, by or on behalf of the
indemnified Person, to repay all amounts so advanced if it shall ultimately
be determined that such Person is not entitled to be indemnified under this
Article 11 or otherwise.
11.3 Insurance. The Company may purchase and maintain insurance on behalf of any
---------
Person who is or was an agent of the Company against any liability asserted
against that Person and incurred by that Person in any such capacity or
arising out of that Person's status as an agent, whether or not the Company
would have the power to indemnify that Person against liability under the
provisions of Section 11.1 or under applicable law. IPDC shall procure
commercial general liability insurance in the minimum amount of Five
Million Dollars ($5,000,000.00) per occurrence, workers' compensation
insurance, and officers and directors coverage and Inland and SWC shall be
named as additional insured parties.
ARTICLE 12
BUY/SELL
12.1 Put/Call Offering Notice. At any time after the second anniversary of the
------------------------
Effective Date, a Member (the "Initiating Member"), may give written notice
(the "Offering Notice") to the other Member (the "Responding Member") of
its intent to implement the provisions of this Article 12 and to purchase
all, but not less than all, of the Responding Member's Membership Interest.
In such event, the provisions set forth in this Article 12 shall apply. The
Initiating
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<PAGE>
Member shall specify in its Offering Notice the price ("Company Price") the
Initiating Member would be willing in its sole discretion to pay for all of
the assets of the Company free of any monetary liens or encumbrances as of
the date the Offering Notice is given ("Date of Value").
12.2 Exercise of Put/Call. Upon receipt of the Offering Notice, the Responding
--------------------
Member shall then be obligated to either (subject to any required lender
approval): (i) sell to the Initiating Member its Membership Interest at a
price (the "Sales Price") equal to the amount the Responding Member would
have been entitled to receive pursuant to Section 6.4, (taking into account
the terms of Section 10.5) (as determined by the Company's Accountant at
the expense of the Initiating Member), if the Company had sold the Company
assets in a hypothetical sale to a third party for the Company Price on the
Date of Value and liquidated the Company in accordance with Section 10.5
with the proceeds remaining after the application of Paragraph 10.5
distributed in accordance with Paragraph 6.4 of this Agreement; or (ii) to
purchase the Membership Interest of the Initiating Member at a price (the
"Purchase Price") equal to the amount the Initiating Member would have been
entitled to receive pursuant to Section 6.4, (taking into account the terms
of Section 10.5) (as determined by the Accountant at the expense of
Initiating Member), if the Company had sold the Company assets in a
hypothetical sale to a third party for the Company Price on the Date of
Value and liquidated the Company in accordance with Section 10.5 with the
proceeds remaining after the application of Section 10.5 distributed in
accordance with Section 6.4 of this Agreement.
(a) If the Responding Member elects to purchase under (ii) above, then the
Responding Member shall purchase the Initiating Member's entire
Membership Interest and shall pay the Purchase Price as determined in
(ii) above, and shall deposit, within ten (10) days after the election
to purchase is made, ten percent (10%) of the Purchase Price into
escrow at Chicago Title Company, 560 East Hospitality Lane, San
Bernardino, CA 92608, or such other Title Company approved by both
Members ("Escrow Holder")
(b) If the Responding Member elects to sell under (i) above, the
Initiating Member shall purchase all of the Responding Member's
Membership Interests at the Sales Price determined in (i) above, and
shall deposit ten percent (10%) of the Sales Price into escrow within
ten (10) days after such election.
12.3 Notice. The Responding Member shall notify the Initiating Member of its
------
election under (i) and (ii) above within sixty (60) days after the Date of
Value (the "Election Notice"). In the event the Responding Member fails to
give the Election Notice within the required time period, the Initiating
Member shall be obligated to purchase the Responding Member's Membership
Interest according to the terms of Section 12.2(b). For purposes of this
Article 12 the term "Purchasing Member" shall mean the Member who is
obligated to
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<PAGE>
purchase the other Member's Membership Interest (whether such Member is the
Initiating Member or the Responding Member) and the term "Non-Purchasing
Member" shall mean the Member who is obligated to sell its Membership
Interest to the Purchasing Member.
12.4 Designee. In the event that any Member purchases another Member's
--------
Membership Interest pursuant to this Article 12, such Purchasing Member
shall be entitled to designate any third party to be the Transferee of such
Membership Interest and such Transferee shall be a Member without further
consent of the other Members.
12.5 Closing.
-------
(a) The Members shall meet and exchange documents and pay any amounts due,
and otherwise do all things reasonably necessary to conclude the
transaction set forth herein at the closing of such purchase (the
"Closing"). The Closing shall occur at Escrow Holder on the date that
is sixty (60) days after the date of the Election Notice unless that
day is a Saturday, Sunday, or national or state holiday and, in that
event, on the next business day. At the Closing, the Non-Purchasing
Member shall deliver to the Purchasing Member a duly executed
assignment of its Membership Interest and shall also, upon the
reasonable request of the Purchasing Member, concurrently therewith
(or at any time and from time to time thereafter) execute and deliver
such other documents and records as the Purchasing Member reasonably
determines is necessary or desirable to conclude the Closing and to
transfer the Non-Purchasing Member's Membership Interest. The
Purchasing Member shall deliver the Purchase Price or Sales Price, as
applicable, to the Non-Purchasing Member for the full amount of
consideration for such Membership Interest in accordance with Section
12.5(b) below, and each Member shall deliver any documents reasonably
necessary to conclude the Closing. The Non-Purchasing Member shall
Transfer its Membership Interest free of all liens or encumbrances.
(b) The Purchase Price or Sales Price shall be paid in all cash, by
certified or bank cashier's checks, made payable to the Non-Purchasing
Member, or by a wire transfer of immediately available funds.
(c) If the Purchasing Member fails to close as aforesaid, in addition to
any other remedies available at law or in equity, the Non-Purchasing
Member shall have the right, exercisable by written notice to the
Purchasing Member given within thirty (30) days of the date set for
the Closing, to purchase under this Section 12 the Membership Interest
of that defaulting Member. If the Non-Purchasing Member exercises such
option, the Company Price used for the purposes of this Section
12.5(b) shall be ninety percent (90%) of the Company Price.
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<PAGE>
12.6 Company Accountant. The Company's Accountant shall determine the
------------------
proper application of Section 6.4 (taking into account the terms of
Section 10.5) to arrive at the Purchase Price or Sales Price as
applicable. Each of the Members shall cooperate fully with the
Accountant to assist in such determination. The Accountant shall make
its determination of the Purchase Price or Sales Price within ten (10)
days after submission to the Accountant and the results thereof shall
be binding on the Members. The Initiating Member shall bear the costs
and fees of the Company's Accountant in making its determinations
under this Article 12..
12.7 Timing of Put/Call and Default Buy-Out. If any Member shall have given
--------------------------------------
the other Member notice of the first Member's exercise of its rights
under Section 12.1, then the other Member shall have the right to give
a subsequent notice under Section 12.1, until that first transaction
is completed or terminates.
Article 13
MISCELLANEOUS
13.1 Amendments. All amendments to this Agreement must be in writing and
----------
executed by all of the Members.
13.2 Offset Privilege. Any monetary obligation owing from the Company to
----------------
any Member may be offset by the Company against any monetary
obligation then owing from that Member to the Company.
13.3 Arbitration. Notwithstanding anything to the contrary set forth in
-----------
this Agreement, in the event of any dispute between the Members with
respect to this Agreement, then the Members shall promptly and in good
faith attempt to resolve such dispute by mutual agreement. In the
event the Members are unable to resolve such dispute by mutual
agreement, the matter shall be settled exclusively by a binding
arbitration ("Arbitration"), conducted by a single arbitrator (the
"Arbitrator") chosen by the parties to the litigation as described
below. Any party may initiate the Arbitration by written notice to the
other and to the Arbitration Tribunal. The date on which the notice is
given is called the "Arbitration Initiation Date". The fees and
expenses of the Arbitration Tribunal and the Arbitrator shall be
shared equally by the parties and advanced by them from time to time
as required; provided, however, that at the conclusion of the
Arbitration, the Arbitrator may award costs and expenses (including
the costs of the Arbitration previously advanced and the fees and
expenses of attorneys, accountants and other experts) to the
prevailing party. Except as expressly modified herein, the Arbitration
shall be conducted in accordance with the provisions of Section 1280
et seq. of the California Code of Civil Procedure or their successor
sections ("CCP"), and shall constitute the exclusive remedy for the
determination of any Claim, including whether the Claim is subject to
arbitration; provided the following time periods in the CCP shall be
shortened as follows: Sections 1284, 1288.4, 1290.2 and 1290.6 -
halved, Section 1288 - 4 years to 30 days, and 100 days to 15 days;
Section 1288.2 - 100 days to 30 days. The Arbitration
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<PAGE>
shall be conducted under the procedures of the Arbitration Tribunal,
except as modified herein. The Arbitration Tribunal shall be the Los
Angeles Office of JAMS/ENDISPUTE ("JAMS"), unless the parties to the
dispute cannot agree on a JAMS arbitrator, in which case the
Arbitration Tribunal shall be the Los Angeles Office of the American
Arbitration Association ("AAA"). The Arbitrator shall be a retired
judge or other arbitrator employed by JAMS selected by mutual
agreement of the parties to the dispute, and if they cannot so agree
within thirty (30) days after the Arbitration Initiation Date, then
the Arbitrator shall be selected from the Large and Complex Case
Project ("LCCP") panel of the AAA, by mutual agreement of the parties
to the dispute. If the parties to the dispute cannot agree on the
Arbitrator within sixty (60) days after the Arbitration Initiation
Date, the Arbitrator shall be selected by the AAA, from its LCCP
panel, through such procedures as the AAA regularly follows. In all
events, the Arbitrator must have had not less than fifteen (15) years
experience as a practitioner or arbitrator of complex business
transactions. If, for any reason, the AAA does not so act, any party
to the dispute may apply to the Superior Court in and for Los Angeles
County, California, for the appointment of a single arbitrator. No
pre-arbitration discovery shall be permitted, except that the
Arbitrator shall have the power in his or her discretion, upon either
party's motion but not on his or her own initiative, to order the
parties to engage in pre-arbitration mediation for a period not
exceeding thirty (30) days before a mediator mutually acceptable to
the parties. The Arbitrator shall try any and all issues of law or
fact and be prepared to make the award within ninety (90) days after
the close of evidence in the Arbitration. When prepared to make the
award, the Arbitrator shall first so inform the parties, who shall
have ten (10) days to attempt to resolve the matter by a binding
agreement between them. If the parties do not resolve the matter, the
Arbitrator shall make the award on the eleventh day following his
notice of being prepared to make the award. The Arbitrator's award
shall dispose of all of the claims that are the subject of the
Arbitration and shall follow California law, unless the Claim concerns
the Act, in which event Delaware law shall be applied, and the award
shall include written statements of fact and conclusions of law. The
Arbitrator shall be empowered to (i) enter equitable as well as legal
relief, (ii) provide all temporary and/or provisional remedies, and
(iii) enter binding equitable orders. The award rendered by the
Arbitrator shall be final and not subject to judicial review, and
judgment thereon may be entered in any court of competent
jurisdiction. The prevailing party, as determined by the Arbitrator,
shall be entitled to recover from the other party all reasonable fees,
costs and expenses of enforcing any right of the prevailing party,
including, without limitation, actual attorneys' fees and expenses,
and the other costs of such arbitration. The Arbitrator shall award to
the prevailing party: (i) the reasonable attorneys' fees which the
prevailing party has paid or is obligated to pay; and (ii) the
reasonable costs and expenses which the prevailing party has paid or
is obligated to pay. The "prevailing party," for purposes of this
Agreement, shall be the party who, in light of the issues litigated
and the Arbitrator's decision on these issues, was more successful in
the action. The
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<PAGE>
party who is more successful need not be determined to be the party
who receives the judgment in the action.
13.4 Notices. Any notice to be given to the Company or any Member in
-------
connection with this Agreement must be in writing and will be deemed
to have been given and received when delivered to the address
specified by the party to receive the notice by courier or other means
of personal service, when received if sent by facsimile, or three (3)
days after deposit of the notice by first class mail, postage prepaid,
or certified mail, return receipt requested. Any such notice must be
given to the Company at its principal place of business, and to any
Member at the address specified in Appendix C. Any party may, at any
time by giving five (5) days' prior written notice to the other
parties, designate any other address as the new address to which
notice must be given.
13.5 Attorney's Fees. In the event that any dispute between the Company
---------------
and/or the Members should result in litigation or arbitration, the
prevailing party in that dispute shall be entitled to recover from the
other party all reasonable fees, costs and expenses of enforcing any
right of the prevailing party, including without limitation,
reasonable attorneys' fees and expenses, subject, however to the
provisions of Section 13.3.
13.6 Jurisdiction. Subject to Section 13.3, each Member consents to the
------------
exclusive jurisdiction of the state and federal courts sitting in
Orange, Los Angeles, or San Bernardino, California in any action on a
claim arising out of, under or in connection with this Agreement or
the transactions contemplated by this Agreement. Each Member further
agrees that personal jurisdiction over it may be effected by service
of process by registered or certified mail addressed as provided in
Section 13.4 and that when so made shall be as if served upon it
personally.
13.7 Complete Agreement. This Agreement and the Related IPWC Agreements
------------------
constitute the complete and exclusive statement of agreement among the
Members with respect to their respective subject matters and supersede
all prior written and oral agreements or statements by and among the
Members including that certain Agreement Regarding Formation of
Companies between SWC and Inland dated September 22, 1999 (the
"Formation Agreement"). The Formation Agreement is merged herein and
is of no further force or effect. No representation, statement,
condition or warranty not contained in this Agreement or the
Certificate of Formation shall be binding on the Members or have any
force or effect whatsoever. To the extent that any provision of the
Certificate of Formation conflicts with any provision of this
Agreement, the Certificate of Formation shall control.
13.8 Binding Effect. Subject to the provisions of this Agreement relating
--------------
to Transfers, this Agreement shall be binding upon and inure to the
benefit of the Members and their respective successors and assigns.
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<PAGE>
13.9 Section Headings. All Section headings are inserted only for
----------------
convenience of reference and are not to be considered in the
interpretation or construction of any provision of this Agreement.
13.10 Interpretation. The Members acknowledge and agree that each has been
--------------
given the opportunity to review this Agreement with legal counsel
independently, and/or has the requisite experience and sophistication
to understand, interpret, and agree to the particular language of the
provisions hereof. The Members have equal bargaining power, and intend
the plain meaning of the provisions herein. All words in this Agreement
(including any Exhibit attached to and made a part of this Agreement),
other than those specifically defined, shall have the meanings assigned
to them in American English dictionaries of common usage; there are no
secret meanings or code words. The term "including", whenever used in
this Agreement, shall be deemed to be followed by the words "without
limitation." Words used in the singular number shall include the
plural, and vice versa, and any gender shall be deemed to include each
other gender. Any captions and headings in this Agreement are for
convenience of reference only, and they shall not be deemed to define
or limit the provisions of this Agreement. In the event of an ambiguity
in or dispute regarding the interpretation of same, the interpretation
of this Agreement shall not be resolved by any rule of interpretation
providing for interpretation against the Member who causes the
uncertainty to exist or against the draftsman. This Agreement shall be
interpreted in accordance with the Act, if applicable, and otherwise in
accordance with the internal laws of the State of California without
regard to any choice of law provisions of California law.
13.11 Severability. If any provision of this Agreement or the application of
------------
that provision to any person or circumstance shall be held invalid, the
remainder of this Agreement or the application of that provision to
persons or circumstances other than those to which it is held invalid
shall not be affected.
13.12 Multiple Counterparts. This Agreement may be executed in two or more
---------------------
counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
13.13 Securities Representations and Warranties. Concurrently with the
-----------------------------------------
formation of the Company, each Member makes the securities
representations and warranties set forth on Appendix D attached hereto.
All representations and warranties contained in Appendix D shall
survive the execution of this Agreement, the formation of the Company,
and the liquidation of the Company.
ARTICLE 14
DEFAULT REMEDIES
14.1 Events of Default. The occurrence of any of the following events (or
any other events set forth herein which are deemed to cause a Member to
be in default of this Agreement) by or with respect to a Member or the
Manager
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<PAGE>
appointed by a Member (the "Defaulting Member") shall be defaults
under this Agreement, and if not cured within the applicable notice
and cure period provided below, if any, to such default shall
constitute an "Event of Default" hereunder:
(a) Failure to Perform. Except as provided in Section 14.1(b) below,
------------------
the failure of a Member or Manager appointed by a Member (or any
Affiliate thereof) to comply with or perform any of its (or such
Affiliate's) material obligations under this Agreement and a
continuation of such failure or breach for more than thirty (30)
days after notice to the Defaulting Member that such Member or
Manager (or such Affiliate) has failed to perform any such
obligations under this Agreement; provided, however, if such
failure is of a nature that can be cured but cannot reasonably be
cured within such thirty (30) day period, such period shall be
extended for up to an additional one hundred twenty (120) days so
long as the Defaulting Member (or such Affiliate) in good faith
commences all reasonable curative efforts within such thirty (30)
day period and diligently and expeditiously continues its
curative efforts to completion. "Material" shall mean having a
significant financial impact on the Company through operations or
otherwise.
(b) Failure to Make Capital Contribution. The failure of a Member to
------------------------------------
pay a Capital Contribution within thirty (30) days after receipt
of a Call Notice pursuant to Section 3.3.
(c) Defaults of Individuals. If a Member or its officers, directors,
-----------------------
shareholders, members, or senior employees thereof shall be
convicted of a criminal felony or convicted of an act of fraud or
other abuse subject to material civil penalty, in each case which
causes the Company to suffer material and adverse effects to its
business reputation or purpose.
14.2 Remedies. Upon the occurrence of any Event of Default, the Company
--------
and the other Member (who is not the Defaulting Member) shall have the
following rights and remedies except where such rights and remedies
are expressly limited by the terms and conditions of this Agreement:
(a) Dissolution. The non-Defaulting Member may elect to dissolve the
-----------
Company in accordance with Article 10.
(b) Optional Buy-Out. The non-Defaulting Member may elect to buy-out
----------------
the Defaulting Member's Membership Interest in accordance with
Section 8.3.
(c) Other Rights and Remedies. All other rights and remedies
-------------------------
available to the Members and the Company at law or in equity,
unless expressly limited in this Agreement.
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<PAGE>
14.3 Cumulative Remedies. Except as otherwise stated expressly in this
-------------------
Agreement, no remedy conferred upon the Company or any Member in this
Agreement is intended to be exclusive of any other remedy herein or by
law provided or permitted, but rather each shall be cumulative and
shall be in addition to every other remedy given hereunder or now or
hereafter existing at law, in equity or by statute.
14.4 Litigation Without Termination. Subject to the arbitration provisions
------------------------------
set forth above in Section 13.3, any Member shall be entitled to
maintain, on its own behalf or on behalf of the Company, any action or
proceeding against any other Member or the Company (including, without
limitation, any action for damages, specific performance or
declaratory relief) for or by reason of breach by such party of this
Agreement, notwithstanding the fact that any or all of the parties to
such proceeding may then be Members in the Company, and without
dissolving the Company.
14.5 No Waiver. No waiver by a Member or the Company of any breach of or
---------
default under this Agreement shall be deemed to be a waiver of any
other breach or default of any kind or nature, and no acceptance of
payment or performance by a Member or the Company after any such
breach or default shall be deemed to be a waiver of any breach or
default of this Agreement, whether or not such Member or the Company
knows of such breach or default at the time it accepts such payment or
performance. No failure or delay on the part of a Member or the
Company to act at any time such other may continue to be so in
default, and no such failure or delay shall operate as a waiver of any
default.
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
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IN WITNESS WHEREOF, all of the Members of Inland Pacific Development
Company, LLC have executed this Agreement, effective as of the
Effective Date.
INLAND PACIFIC DEVELOPMENT COMPANY, LLC,
a Delaware limited liability company
By: INLAND PACIFIC PARTNERS, LLC,
a Delaware limited liability company
Its Member
By: /s/ RICHARD A. LEWIS
--------------------------
Richard A. Lewis, Manager
By: /s/ WILLIAM MCINTYRE
--------------------------
William McIntyre, Manager
By: /s/ MICHAEL J. BIDART
---------------------------
Michael J. Bidart, Manager
By: /s/ ROBB QUINCEY
---------------------------
Robb Quincey, Manager
By: SOUTHWEST WATER COMPANY,
a California corporation,
Its Member
By: /s/ ANTON C. GAR
-----------------
Name: Anton C.
President
List of Appendices/Schedules
- ----------------------------
Appendix A - Tax and Related Matters
Appendix B - Quincey Employment Agreement
Appendix C - Member Notice Addresses
Appendix D - Investment Representations
Schedule 1.25 - Management Committee
Schedule 1.29 - Percentage Interests
Schedule 1.41 - Tax Matters Member
Schedule 5.2(b) - Initial Company Budget
Page 37
<PAGE>
APPENDIX A
TAX AND RELATED MATTERS
("Tax Supplement")
Article 1
CAPITAL ACCOUNTS
1.1 Book Capital Accounts. A capital account (the "Book Capital Account")
---------------------
for each Member shall be maintained at all times during the Term in
accordance with this Section 1.1 and the capital accounting rules set
forth in Section 1.704-1(b)(2)(iv) of the Treasury Regulations, as the
same may be amended from time to time ("Regulations") (excluding
however, Section 1.704-1(b)(2)(iv)(f) of the Regulations [permitting
an optional revaluation of Company property in certain circumstances]
except with respect to Company property as to which an election to
revalue the same shall have been made pursuant to subsection (d)
below) except as otherwise specifically provided herein. The Company
shall make all adjustments required by said Section 1.704-1(b)(2)(iv).
In the event that at any time during the term of the Company it shall
be determined that the Book Capital Accounts shall not have been
maintained as required by this Section 1.1, then said accounts shall
be retroactively adjusted so that the same shall conform to this
Section 1.1. The Company shall make all adjustments required by said
Section 1.704-1(b)(2)(iv). In the event that the Company acquires an
interest in another limited liability company or partnership by way of
contribution or owns an interest in any other limited liability
company or partnership at the time of a revaluation of Company
property, the allocation of the Company's distributive share of the
income, gain, loss or deduction of any such subsidiary limited
liability company or partnership shall, to the extent possible, be
made for purposes of this Company as if the subsidiary limited
liability company or partnership's assets were owned directly by the
Company and the property of the subsidiary limited liability company
or partnership was revalued. In addition, the provisions of Section
1.704-2(k) shall be applied in connection with Nonrecourse Deductions
and Member Risk Nonrecourse Deductions when the Company is a partner
in another partnership or a member in another limited liability
company.
(a) Maintenance of Book Capital Accounts. Each Member's Capital
------------------------------------
Account shall be maintained on the Company's books and records in
accordance with the following provisions:
(i) To each Member's Book Capital Account there shall be added
(a) such Member's Capital Contributions, (b) such Member's
allocable share of Net Income and any items in the nature of
income or gain that are specially allocated to such Member
pursuant to Section 2.4 of this Tax Supplement or other
provisions of this Agreement, and (c) the amount of any
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Company liabilities assumed by such Member or which are
secured by any property distributed to such Member.
(ii) From each Member's Book Capital Account there shall be
subtracted (a) the amount of (1) cash and (2) the Fair
Market Value of any Company property (other than cash)
distributed to such Member (other than any payment of
principal and/or interest to such Member pursuant to the
terms of a Member Loan made by the Member to the Company)
pursuant to any provision of this Agreement, (b) such
Member's allocable share of Net Losses and any other items
in the nature of expenses or losses that are specially
allocated to such Member pursuant to Section 2.4 of this
Tax Supplement, or other provisions of this Agreement, and
(c) liabilities of such Member assumed by the Company or
which are secured by any property contributed by such
Member to the Company.
(iii) In determining the amount of any liability for purposes of
subsections (i) and (ii) above, there shall be taken into
account Code Section 752(c) and any other applicable
provisions of the Code and Regulations.
(b) Book Basis. As used herein, "Book Basis" of an item of Company
----------
property means the adjusted basis of such item as reflected in
the books of the Company, determined and maintained in accordance
with the capital accounting rules contained in Section 1.704-
1(b)(2)(iv) of the Regulations (excluding, however,
Section 1.704-1(b)(2)(iv)(f) thereof [permitting an optional
revaluation of
Company property in certain circumstances] except with respect to
Company property as to which an election to revalue the same
shall have been made pursuant to subsection (d) below).
(c) Initial Book Capital Accounts. The initial Book Capital Account
-----------------------------
balances of the Members as of the date hereof shall, based upon
the Capital Contributions made by the Members under Sections
3.1(a) and 3.2, be as follows:
SWC $120,000
Inland $120,000
(d) Optional Revaluations of Company Property. The Management
-----------------------------------------
Committee may cause the Company to make the election to revalue
Company property permitted under Section 1.704-1(b)(2)(iv)(f) of
the Regulations. Should such election be made, the Book Capital
Account of each Member shall be adjusted in accordance with
Section 1.704-1(b)(2)(iv)(g) of the Regulations.
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(e) Book Items. Consistent with the provisions of Section 1.704-
----------
1(b)(2)(iv)(g)(3) of the Regulations, "Book Depreciation"
(which means the depreciation, depletion or amortization [as
the case may be], deduction or allowance that shall be
allowable to the Company with respect to an item of Company
property, determined in the manner hereinafter set forth) for
each item of Company property shall be the amount that bears
the same relationship to the "Adjusted Book Basis" (which means
with respect to an item of Company property, the Book Basis of
such item as the same may be adjusted from time to time by Book
Depreciation allowed with respect to such item of Company
property) of such item of Company property as the depreciation,
depletion or amortization, as the case may be, allowable for
federal income tax purposes with respect to such item of
Company property for such year bears to the "adjusted basis"
(within the meaning of Section 1011(a) of the Code of such item
of Company property). If an item of Company property shall have
an "adjusted basis" (as defined in the preceding sentence)
equal to zero, Book Depreciation shall be determined under a
reasonable method, which method shall be selected by the
Management Committee. Also consistent with the provisions of
Section 1.704-1(b)(2)(iv)(g)(1) of the Regulations, Book Gain
or Book Loss (which means the gain or loss with respect to an
item of Company property with a Book Basis on the Company's
books that differs from the adjusted tax basis of such
property) shall be allocated to the Members' Book Capital
Accounts in lieu of gain or loss with respect to such property
as determined for federal income tax purposes.
(f) Book Adjustments on Distributions. With respect to all
---------------------------------
distributions of Company property to Members, the Company shall
comply with the provisions contained in Section 1.704-
1(b)(2)(iv)(e) of the Regulations (relating to adjustments to
the Members' Book Capital Accounts in connection with such
distributions) and all allocations and adjustments made in
connection therewith shall be in accordance with Article 2 of
this Tax Supplement.
ARTICLE 2
ALLOCATION OF PROFITS AND LOSSES
For purposes of maintaining Book Capital Accounts and in determining the rights
of the Members among themselves, the Company's items of income, gain, loss and
deduction for any taxable year (or portion thereof) shall be allocated to the
Members as provided hereinbelow.
2.1 Preliminary Definitions. When used herein, the following terms shall
-----------------------
have the respective meanings assigned to them in this Article 2:
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(a) Adjusted Capital Account. "Adjusted Capital Account" shall mean the
------------------------
Book Capital Account maintained for each Member as of the end of each
taxable year of the Company (a) increased by any amounts which such
Member is deemed obligated to restore under Regulation Section 1.704-
2(g)(1) and Section 1.704-2(i)(5), and (b) decreased by such Member's
share of the items described in Regulations Sections 1.704-
1(b)(2)(ii)(d)(4), (5) and (6).
(b) Economic Risk of Loss. "Economic Risk of Loss" shall have the meaning
----------------------
set forth in Regulation Section 1.704-2(b)(4).
(c) Minimum Gain Attributable to Member Risk Non-recourse Debt. "Minimum
----------------------------------------------------------
Gain Attributable to Member Risk Non-recourse Debt" shall mean the
amount determined in accordance with the principles of Regulation
Section 1.704-2(i).
(d) Net Income/Net Loss. "Net Income" or "Net Loss", as the case may be,
-------------------
shall mean, for any taxable period, the difference between the
Company's items of income and gain and the Company's items of loss and
deduction for such taxable period. The determination of Net Income or
Net Loss shall be made generally in accordance with Section 703(a) of
the Code; however, (i) all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the
Code will be included in the determination; (ii) any income and gain
that is exempt from tax, and all expenditures described in Section
705(a)(2)(B) of the Code (or treated as expenditures so described
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) shall be included
in such determination; (iii) Book Gain, Book Loss and Book
Depreciation will be included in such determination in lieu of tax
gain or loss or depreciation; and (iv) the items allocated under
Section 2.4 of this Tax Supplement shall be excluded from such
determination.
(e) Nonrecourse Deductions. "Nonrecourse Deductions" shall have the
-----------------------
meaning set forth in Regulation Section 1.704-2(b)(1).
(f) Nonrecourse Liability. "Nonrecourse Liability" shall have the meaning
----------------------
set forth in Regulation Section 1.704-2(b)(3).
(g) Member Risk Nonrecourse Debt. "Member Risk Nonrecourse Debt" shall
have the meaning set forth in Regulation Section 1.704-2(b)(4) for
"partner nonrecourse debt."
(h) Member's Share of Minimum Gain. "Member's Share of Minimum Gain" shall
--------------------------------
be calculated as set forth in Regulation Section 1.704-2(g)(1).
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(i) Member's Share of Minimum Gain Attributable to Member Risk Nonrecourse
----------------------------------------------------------------------
Debt. "Member's Share of Minimum Gain Attributable to Member Risk
----
Nonrecourse Debt" shall be calculated as set forth in Regulation
Section 1.704-2(i)(5).
(j) Company Minimum Gain. "Company Minimum Gain" shall mean that amount
---------------------
determined in accordance with the principles of Regulation Section
1.704-2(d).
(k) Member Risk Nonrecourse Deductions. "Member Risk Nonrecourse
----------------------------------
Deductions" shall mean any and all items of loss, deduction or
expenditure described in Section 705(a)(2)(B) of the Code (or treated
as an expenditure so described pursuant to Regulation Section 1.704-
1(b)(2)(iv)(i)) that, in accordance with the principles of Regulation
Section 1.704-2(i), are attributable to Member Risk Nonrecourse Debt.
2.2 Net Loss. After giving effect to the allocations set forth in Section 2.4
--------
of this Tax Supplement hereof, and the special allocations for Start-Up
Losses and Start-Up Income (as defined below), all items of income, gain,
loss and deduction taken into account in computing Net Loss for a
particular taxable period shall be allocated in the same manner as such Net
Loss is allocated hereunder, to wit:
(a) First. To the Members to offset any Net Income allocated pursuant to
-----
Sections 2.3(c) and (b) of this Tax Supplement, in that order, pro
rata among the Members in proportion to their respective shares of the
Net Income being offset. To the extent any allocation of Net Income is
offset pursuant to this Section 2.2 of this Tax Supplement, such Net
Income shall be disregarded in making subsequent allocations pursuant
to Section 2.3 of this Tax Supplement.
(b) Second. To the Members in proportion to their respective Percentage
------
Interests; provided, notwithstanding subsection (a) above, net losses
attributable to the expenditure of the Start-Up Capital Contributions
during the Start-Up Period (the "Start-Up Losses") shall be allocated
55% to SWC and 45% to Inland, in accordance with Section 6.5 of the
Agreement, after first offsetting any Start-Up Income allocated
pursuant to Section 2.3 of this Tax Supplement.
2.3 Net Income. After giving effect to the allocations set forth in Section 2.4
----------
of this Tax Supplement, and the special allocation of Start-Up Losses and
Start-Up Income as defined herein, all items of income, gain, loss and
deduction taken into account in computing Net Income shall be allocated in
the same manner as such Net Income is allocated hereunder, to wit:
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(a) First. To the Members to offset any Net Loss allocated pursuant to
-----
Section 2.2(b) of this Tax Supplement pro rata among the Members in
proportion to their respective amount of Net Loss being offset.
(b) Second. To the Members, pro rata, in the same proportion and to the
------
extent of each such Member's accrued Preferred Return during the term
of the Company.
(c) Third. To the Members in accordance with their Percentage Interests;
-----
provided, notwithstanding subsections (a) and (b) above, net income
attributable to the IPWC Contracts and IPWC Development Fees earned
during the Start-Up Period shall be allocated 55% to SWC and 45% to
Inland, in accordance with Section 6.5 of the Agreement, after first
offsetting any Start-Up Losses allocated pursuant to Section 2.2 of
this Tax Supplement.
2.4 Overriding Allocation Provisions. Notwithstanding any other provision of
--------------------------------
this Article 2, the following allocations shall be made:
(a) Qualified Income Offset. Except as provided in Section 2.4(b) of this
-----------------------
Tax Supplement, in the event any Member unexpectedly receives any
adjustments, allocations or distributions described in Regulation
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-
1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially
allocated to such Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted
Capital Account deficit created by such adjustments, allocations or
distributions as quickly as possible; provided, however, that an
allocation pursuant to this Section 2.4(a) shall be made only if and
to the extent that such Member would have an Adjusted Capital Account
deficit after all other allocations provided for in this Article 2
have been tentatively made as if this Section 2.4(a) were not in this
Tax Supplement.
(b) Minimum Gain Chargeback. Notwithstanding the other provisions of this
-----------------------
Article 2, except as provided otherwise in Regulation Section 1.704-
2(f) if there is a net decrease in Company Minimum Gain for any
Company taxable period, each Member shall be allocated items of
Company income and gain for such period (and, if necessary, subsequent
periods) in an amount equal to such Member's share of the net decrease
in Company Minimum Gain for such taxable period.
(c) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period
-----------------------
shall be allocated in accordance with the Members' respective
Percentage Interests in effect during such taxable period.
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(d) Code Section 754 Adjustments. To the extent an adjustment to the
----------------------------
adjusted tax basis of any Company asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Regulations Section 1.704-
1(b)(2)(iv)(m), to be taken into account in determining Book Capital
Accounts, the amount of such adjustment to the Book Capital Accounts
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis),
and such item of gain or loss shall be specially allocated to the
Members in a manner consistent with the manner in which their Book
Capital Accounts are required to be adjusted pursuant to such Section
of the Regulations.
(e) Member Risk Nonrecourse Deductions. Member Risk Nonrecourse Deductions
----------------------------------
for any taxable period shall be allocated to the Member that bears the
Economic Risk of Loss for such Member Risk Nonrecourse Debt. If more
than one Member bears such Economic Risk of Loss, such Member Risk
Nonrecourse Deductions shall be allocated between or among such
Members in accordance with the ratios in which such Members share such
Economic Risk of Loss.
(f) Member Risk Minimum Gain Chargeback. Notwithstanding the other
-----------------------------------
provisions of this Article 2, except as provided otherwise in
Regulation Section 1.704-2(i) if there is a net decrease in Minimum
Gain Attributable to Member Risk Nonrecourse Debt for any Company
taxable period, each Member with a Member's Share of Minimum Gain
Attributable to Member Risk Nonrecourse Debt at the beginning of such
taxable period shall be allocated items of Company income and gain for
such period (and, if necessary, subsequent periods) in an amount equal
to such Member's share of the net decrease in the Minimum Gain
Attributable to Member Risk Nonrecourse Debt. The items to be so
allocated shall be determined in a manner consistent with the
principles of Regulation Section 1.704-2(f)(5).
(g) Curative Allocations. The allocations set forth in Sections 2.4(a)
--------------------
through (f) of this Tax Supplement (the "Regulatory Allocations") are
intended to comply with certain requirements of Regulations Sections
1.704-1(b) and 1.704-2(i). The Regulatory Allocations may not be
consistent with the manner in which the Members intend to distribute
the cash of the Company or allocate Company income or loss.
Accordingly, the Management Committee is hereby authorized and
directed to cause the allocation of Net Income, Net Loss and other
items of income, gains, loss and deductions to the Members so as to
prevent the Regulatory Allocations from distorting the manner in which
Company distributions will be divided among the Members. In general,
the Members anticipate that this will be accomplished by specially
allocating other Net Profits, Net Losses and other items of income,
gain, loss and deduction to the Members so that, to the extent
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possible, the net amount of such allocations of other Net Income, Net
Loss, and other items and the Regulatory Allocations to the Members
shall be equal to the net amount that would have been allocated among
the Members if the Regulatory Allocations had not occurred.
(h) Liquidation Allocations. It is intended that the amount to be
-----------------------
distributed to a Member pursuant to Section 10.3 of the Agreement
shall equal the amount such Member would receive if liquidation
proceeds were instead distributed in accordance with Section 6.4 of
the Agreement. This intended distribution amount for a member is
referred to as such Member's "Targeted Distribution Amount".
Notwithstanding anything to the contrary in this Tax Supplement, if
upon a termination and liquidation of the Company, any Member's ending
Book Capital Account balance immediately prior to the distributions to
be made pursuant to Section 10.3 of the Agreement is less than the
"Targeted Distribution Amount," then such Member shall be specially
allocated items of gross income or gain for Book Capital Account
purposes for such year (or for prior years to the extent amended tax
returns can be filed for the Company), and items of loss or deduction
for Book Capital Account purposes for such year (or for prior years to
the extent amended tax returns can be filed for the Company), shall be
allocated away from such Member to the other Members, until such
Member's actual Book Capital Account balance equals the Targeted
Distribution Amount for such Member. The special allocation provisions
provided by this Section 2.4(h) shall be applied in such a manner so
as to cause the difference between any Member's Targeted Distribution
Amount and the balance in its Book Capital Account (determined after
this allocation, but immediately prior to the distributions pursuant
to Section 10.3 of the Agreement) to be the smallest dollar amount
possible.
2.5 Allocation of Nonrecourse Liabilities. Nonrecourse Liabilities of the
-------------------------------------
Company in excess of the sum of the amount of Company Minimum Gain and any
tax gain allocable to the Members under Section 704(c) of the Code shall be
allocated in accordance with their respective Percentage Interests.
2.6 Protective Allocations. In the event that any amount claimed by the Company
----------------------
to constitute a deductible expense in any taxable year is recharacterized
for federal income tax purposes as a distribution made to a Member in its
capacity as a member of the Company and not a Section 707(c) Payment or a
payment to a Member not acting in his capacity as a member under Code
Section 707(a), then, in the taxable year of such recharacterization, the
Member who is deemed to have received such distribution shall first be
allocated an amount of Company gross income equal to such payment, its
Capital Account shall be reduced to reflect the distribution, and for
purposes of this Article 2 (other than the allocations in Section 2.4 of
this Tax
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Supplement) Net Income and Net Loss shall be determined after making the
allocation required by this Section 2.6.
ARTICLE 3
DETERMINATIONS OF FAIR MARKET VALUE
FOR BOOK AND TAX PURPOSES
The determination of the Fair Market Value of Company property for book and tax
purposes shall be made by the Company Accountant and approved by the Management
Committee.
ARTICLE 4
DEFICIT FUNDING OBLIGATION
No Member shall be obligated to eliminate any deficit balance in its final Book
Capital Account on the liquidation of the Company.
ARTICLE 5
MISCELLANEOUS
5.1 Allocations to Periods. For purposes of determining the income, gain, loss
----------------------
and deductions allocable to any period, such items shall be determined on
the interim closing the books method.
5.2 Definitions. Terms utilized herein but not defined herein shall have the
-----------
same meanings specified therefor in the Agreement.
5.3 Federal Income Tax Allocations. The following provisions are applicable for
------------------------------
federal and state income tax purposes:
(a) Tax Allocations Follow Book Allocations. Except as otherwise provided
---------------------------------------
herein, and to the extent permitted by Section 1.704-1(b)(4)(i) of the
Regulations, for federal and state income tax purposes each Company
item of income, gain, loss and deduction shall be allocated to the
Members in the same manner as its corresponding item of "book" income,
gain, loss or deduction has been allocated under Article 2 of this Tax
Supplement.
(b) Section 704(c) Allocations. Notwithstanding any provisions hereof to
--------------------------
the contrary, income, gain, loss and deductions with respect to
Section 704(c) Property shall, solely for tax purposes, be allocated
between the Members so as to take account of any variation between the
adjusted tax basis of such property to the Company for federal income
tax purposes and its initial Book Basis. As used herein, "Section
704(c) Property" means (1) each item of Company property which is
contributed to the Company and to which Section 704(c) of the Code or
Section 1.704-1(b)(2)(iv)(d) of the Regulations applies, and (2) each
item of Company property which, as contemplated by Section 1.704-
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1(b)(4)(i) and other analogous provisions of the Regulations, is
governed by the principles of Section 704(c) of the Code (or
principles analogous to the principles contained in Section 704(c) of
the Code) by virtue of (a) an increase or decrease in the Book Capital
Accounts of the Members to reflect a revaluation of Company property
on the company's books as provided by Section 1.704-1(b)(2)(iv)(f) of
the Regulations, (b) the fact that it constitutes a receivable,
account payable, or other accrued but unpaid item which, under
principles analogous to those applying to an item of Company property
having an adjusted tax basis that differs from its Book Basis, is
treated as an item of property described in Section 1.704-
1(b)(2)(iv)(g)(2) of the Regulations, (c) the constructive liquidation
and reconstitution of the Company under Section 708(b)(1)(B) of the
Code (see, e.g., Section 1.704-1(b)(2)(iv)(1) of the Regulations) as
----
the same may from time to time be construed, to the extent that, and
for so long as, such item of Company property continues to be governed
by the principles of Section 704(c) of the Code (or principles
analogous to the principles contained in Section 704(c) of the Code).
Similar principles should be followed in allocating tax items for
state income tax purposes.
(c) Ordinary Income Recapture. If, in the event of a gain on any sale,
-------------------------
exchange or other disposition of Company property, all or a portion of
such gain is characterized as ordinary income ("Recapture") by virtue
of the recapture rules of Section 1250, Section 1245 or otherwise,
then the Recapture shall be allocated to the Members as follows (i.e.,
the portion of the gain allocated to a Member which constitutes
Recapture shall be determined as follows): to the extent possible,
there shall be allocated to each Member that portion of such Recapture
which is equal to the fraction, the numerator of which is the
depreciation deductions (or other items of deduction that generated
such Recapture) allowable with respect to the Company property being
sold theretofore allocated to such Member or its predecessor in
interest for federal income tax purposes, and the denominator of which
is the total depreciation deductions (or other items of deduction that
generated such Recapture) allowable with respect to the Company
property being sold theretofore allocated to any Member or its
predecessor in interest for federal income tax purposes (including, in
the case of property which is contributed to the Company, depreciation
deductions taken or claimed by the contributing Member prior to such
contribution); provided, however, that under no circumstances shall
there be allocated to any Member, Recapture in excess of the gain
allocated to such Member (and such excess shall be allocated instead
to the other Members).
5.4 Tax Elections. All elections required or permitted to be made by the
-------------
Company under the Code and state revenue laws shall be made jointly by the
Members.
A-10
<PAGE>
5.5 Tax Matters Member.
------------------
(a) Identity, Etc.. Inland is designated the tax matters member ("TMM")
--------------
for the Company as defined in Section 6231(a)(7) of the Code. The
Manager may resign as TMM for one (1) or more specified Company
taxable years upon thirty (30) days prior notice to the Members. In
the event of any change in TMM, the Member serving as TMM for a given
taxable year shall continue as TMM with respect to all matters
concerning such year. The TMM and the Members shall use their
reasonable efforts to comply with the responsibilities outlined in
this Section 5.5 and in Sections 6222 through 6232 of the Code and in
doing so shall incur no liability to any Members. Notwithstanding
TMM's obligation to use its reasonable efforts in the fulfillment of
its responsibilities, TMM shall not be required to incur any expenses
for the preparation for or pursuance of administrative or judicial
proceedings unless the Members agree on a method for sharing such
expenses.
(b) Inconsistent Treatment. If any Member intends to file a notice of
----------------------
inconsistent treatment under Section 6222(b) of the Code, then such
Member shall give reasonable notice under the circumstances to the
Members of such intent and the manner in which the Member's intended
treatment of an item is (or may be) inconsistent with the treatment of
that item by the Company.
(c) Extension of Limitations. The TMM shall not enter into any extension
------------------------
of the period of limitations for making assessments on behalf of
Members without first obtaining the written consent of the Members,
which consent may not be unreasonably withheld.
(d) Administrative Adjustment. No Member shall file, pursuant to Section
--------------------------
6227 of the Code, a request for an administrative adjustment of items
for any Company taxable year without first notifying the Management
Committee. If the Management Committee agrees with the requested
adjustment, then the TMM shall file the request for administrative
adjustment on behalf of the Company. If unanimous consent is not
obtained within thirty (30) days from such notice, or within the
period required to timely file the request for administrative
adjustment, if shorter, any Member, including the TMM, may file a
request for administrative adjustment on its own behalf.
(e) Judicial Proceedings. Any Member intending to file a petition under
--------------------
Section 6226, 6228, or other section of the Code with respect to any
item or other matters involving the Company shall notify the Members
of such intention and the nature of the contemplated proceeding. In
the case in which the TMM is the Member intending to file such
petition on behalf of the Company, such notice shall be given within a
A-11
<PAGE>
reasonable period of time to allow the Members to participate in the
choosing of the forum in which such petition will be filed. If any
Member intends to seek review of any court decision rendered as a
result of a proceeding instituted under the preceding part of this
Section, then such Member shall notify the Members of such intended
action.
(f) Settlements. The TMM shall not bind the Members to a settlement
-----------
agreement without obtaining the written concurrence of the Members.
For purposes of this paragraph, the term "settlement agreement" shall
include a settlement agreement at either the administrative or
judicial level. Any Member who enters into a settlement agreement with
respect to any partnership items, as defined by Section 6231(a)(3) of
the Code, shall notify the Members of such settlement agreement and
its terms within ninety (90) days from the date of settlement.
(g) Survival. The provisions of this Section 5.5 shall survive the
--------
termination of the Company or the termination of any Member's interest
in the Company and shall remain binding on the Members for a period of
time necessary to resolve with the Internal Revenue Service of the
United States of America or the Department of Treasury any and all
matters regarding the federal income taxation of the Company.
A-12
<PAGE>
APPENDIX B
QUINCEY EMPLOYMENT AGREEMENT
----------------------------
B-1
<PAGE>
APPENDIX C
----------
MEMBER NOTICE ADDRESSES
-----------------------
Inland: Mr. Robb Quincey
Inland Pacific Partners, LLC
8300 Utica Avenue, Third Floor
Rancho Cucamonga, CA 91730
Fax No.: 909/635-2048
SWC: Mr. Tony Garnier
Southwest Water Company
225 Barranca Avenue, Suite 200
West Covina, CA 91791-1605
Fax No.: 626/915-1558
<PAGE>
APPENDIX D
----------
INVESTMENT REPRESENTATIONS
--------------------------
Each Member acknowledges and agrees as follows with respect to investment
representations:
(a) Each Member understands:
(i) That the Membership Interests in the Company evidenced by
this Agreement have not been registered under the
Securities Act of 1933, 15 U.S.C. (SS) 15b et seq., the
-- ---
California Corporate Securities Law of 1968 or any other
state securities laws (collectively, the "Securities
Acts") because the Company is issuing Membership Interests
in the Company in reliance upon the exemptions from the
registration requirements of the Securities Acts providing
for issuance of securities not involving a public
offering.
(ii) That the Company has relied upon the representation made
by each Member that such Member's Membership Interest in
the Company is to be held by such Member for investment;
and
(iii) That exemption from registration under the Securities Acts
would not be available if any Membership Interest in the
Company was acquired by a Member with a view to
distribution. Each Member agrees that the Company is under
no obligation to register the Membership Interests in the
Company or to assist the Members in complying with any
exemption from registration under the Securities Acts if
the Member should at a later date desire to dispose of
such Member's Membership Interest in the Company.
(b) Each Member hereby represents to the Company that such Member is
acquiring such Member's Membership Interest in the Company for
such Member's own account, for investment and not with a view to
the resale or distribution.
(c) Each Member recognizes that no public market exists with respect
to the Membership Interests and no representation has been made
that such a public market will exist at a future date.
(d) Each Member hereby represents that such Member has not received
any advertisement or general solicitation with respect to the
sale of the Membership Interests.
D-1
<PAGE>
(e) Each Member acknowledges that such Member has a preexisting
personal or business relationship with the Company or its
officers, directors, or principal Membership Interest holders,
or, by reason of such Member's business or financial experience
or the business or financial experience of such Member's
financial advisors (who are not affiliated with the Company),
could be reasonably assumed to have the capacity to protect such
Member's own interest in connection with the purchase of the
Membership Interests. Each Member further acknowledges that such
Member is familiar with the financial condition and prospects of
the Company's business, and has discussed with the other Members
the current activities of the Company. Each Member believes that
the Membership Interests are securities of a kind such Member
wishes to purchase and hold for investment, and that the nature
and amount of the Membership Interests are consistent with such
Member's investment program.
(f) Before acquiring any Membership Interest in the Company, each
Member has investigated the Company and its business and the
Company has made available to each Member all information
necessary for the Member to make an informed decision to acquire
a Membership Interest in the Company. Each Member considers
itself to be a person or entity possessing experience and
sophistication as an investor adequate for the evaluation of the
merits and risks of the Member's investment in the Company.
(g) Each Member understands the meaning and consequences of the
representations and warranties made by such Member set forth in
this Appendix and that the Company has relied upon such
representations and warranties. Each Member hereby indemnifies,
defends, protects and holds wholly free and harmless the Company
and the other Members from and against any and all claims,
losses, damages, expenses or liabilities arising out of the
breach and/or inaccuracy of any such representation and warranty.
The indemnification contained in this paragraph shall survive the
execution of this Agreement, the formation of the Company, and
the liquidation of the Company.
D-2
<PAGE>
SCHEDULE 1.25
-------------
Initial Management Committee
----------------------------
Inland Representatives
- ----------------------
Bill McIntyre (Senior Manager)
Robb Quincey
Inland Alternates
- -----------------
Richard A. Lewis (Senior Manager)
Steve Reenders
Michael J. Bidart
John M. Goodman
SWC Representatives
- -------------------
Anthony Garnier
SWC Alternate(s)
- ----------------
Maurice Gallarda
<PAGE>
SCHEDULE 1.29
-------------
Percentage Interests
--------------------
Inland 75%
SWC 25%
Start-Up Percentages
--------------------
Inland 45%
SWC 55%
<PAGE>
SCHEDULE 1.41
-------------
Tax Matters Member
------------------
Inland Pacific Partners, LLC
<PAGE>
SCHEDULE 5.2(a)
---------------
Initial Company Budget
----------------------
<PAGE>
EXHIBIT 21.1
SOUTHWEST WATER COMPANY
SUBSIDIARIES OF THE REGISTRANT
As of March 13, 2000
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation
Name of Subsidiary Tax payer EIN Parent
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Suburban Water Systems 95-1371870 California Southwest Water Company
Water Suppliers Mobile Communication
Service 95-2394217 California Suburban Water Systems
New Mexico Utilities 85-0205040 New Mexico Southwest Water Company
ECO Resources, Inc. 74-1800544 Texas Southwest Water Company
Southwest Environmental Labs 76-0155825 Texas ECO Resources, Inc.
Wastewater Rehabilitation, Inc. 74-2894610 Texas Southwest Water Company
SW Utility Company 76-0332193 Texas Southwest Water Company
Southwest Resource Management 95-4169558 Delaware Southwest Water Company
SOCI, Inc. (1) 95-4107357 Delaware Southwest Water Company
SW Operating Services Co. (1) 95-4107349 Delaware Southwest Water Company
Inland Pacific Water Company Pending Delaware Southwest Water Company
</TABLE>
All above listed subsidiaries have been included in the Registrant's
consolidated financial statements.
(1) Inactive
<PAGE>
Exhibit 23.1
KPMG LLP (Company Letterhead)
725 South Figueroa Street
Los Angeles, CA 90017
To the Board of Directors and Stockholders
Southwest Water Company
We consent to 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, 333-18513 and 333-38935) on Form S-8 of Southwest Water Company of our
report dated January 27, 2000, relating to the consolidated balance sheets of
Southwest Water Company and subsidiaries as of December 31, 1999 and 1998 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, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Southwest Water Company.
/s/ KPMG LLP
Los Angeles, California
March 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,146,000
<SECURITIES> 0
<RECEIVABLES> 11,667,000
<ALLOWANCES> 1,202,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,311,000
<PP&E> 158,278,000
<DEPRECIATION> 44,581,000
<TOTAL-ASSETS> 142,950,000
<CURRENT-LIABILITIES> 16,606,000
<BONDS> 28,000,000
0
517,000
<COMMON> 64,000
<OTHER-SE> 39,896,000
<TOTAL-LIABILITY-AND-EQUITY> 142,950,000
<SALES> 0
<TOTAL-REVENUES> 80,849,000
<CGS> 0
<TOTAL-COSTS> 71,535,000
<OTHER-EXPENSES> (387,000)
<LOSS-PROVISION> 367,000
<INTEREST-EXPENSE> 2,925,000
<INCOME-PRETAX> 9,697,000
<INCOME-TAX> 3,878,000
<INCOME-CONTINUING> 5,819,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,792,000
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.87
</TABLE>
