-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPpttWSiHR+PjG0AhuW7OmfrsyIzMjP1mlDjavJmAI4UDNVhFlOBhUFevqNtJqHf BngDzm0prhP2H/wuXvWdDg== 0000898430-98-001109.txt : 19980330 0000898430-98-001109.hdr.sgml : 19980330 ACCESSION NUMBER: 0000898430-98-001109 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST WATER CO CENTRAL INDEX KEY: 0000092472 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951840947 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-08176 FILM NUMBER: 98575980 BUSINESS ADDRESS: STREET 1: 225 N BARRANCA AVE STE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 BUSINESS PHONE: 8189151551 MAIL ADDRESS: STREET 1: 225 N BARRANCA AVENUE STREET 2: SUITE 200 CITY: WEST COVINA STATE: CA ZIP: 91791-1605 FORMER COMPANY: FORMER CONFORMED NAME: SUBURBAN WATER SYSTEMS DATE OF NAME CHANGE: 19751202 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________________to___________________ COMMISSION FILE NUMBER 0-8176 [LOGO OF SOUTHWEST WATER COMPANY] SOUTHWEST WATER COMPANY (Exact name of registrant as specified in its charter) DELAWARE 95-1840947 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 NORTH BARRANCA AVENUE, SUITE 200 91791-1605 WEST COVINA, CALIFORNIA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (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 (2) Series A, 5-1/4% Preferred Shares, Cumulative, $.01 par value (Title of each class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On March 24, 1998, there were 3,338,406 common shares outstanding. The aggregate market value of the Registrant's common shares held by non- affiliates of Registrant (3,040,820 shares) was approximately $46,943,000 based upon the average of the high and low stock prices as of March 24, 1998. Registrant is unable to estimate the aggregate market value of its preferred shares held by non-affiliates of Registrant because there is no public market for such shares. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENTS FORM 10-K REFERENCE --------- ------------------- Portions of Registrant's 1997 Annual Report to Stockholders Part II Proxy Statement dated on or about April 24, 1998, for Annual Meeting of Stockholders on Thursday, May 28, 1998 Part III SEE PAGES 38 TO 42 FOR EXHIBIT INDEX FILED WITH THIS REPORT. SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX
PART I. PAGE NO. -------- Item 1: Business........................................................ 1-8 Item 2: Properties...................................................... 8-9 Item 3: Legal Proceedings............................................... 9-11 Item 4: Submission of Matters to a Vote of Security Holders............. 11 Item 4A: Executive Officers of the Registrant............................ 12 PART II. Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 13 Item 6: Selected Financial Data......................................... 13 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 13-17 Item 8: Financial Statements and Supplementary Data..................... 18-34 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 35 PART III. Item 10: Directors and Executive Officers of the Registrant.............. 35 Item 11: Executive Compensation.......................................... 35 Item 12: Security Ownership of Certain Beneficial Owners and Management.. 35 Item 13: Certain Relationships and Related Transactions.................. 35 PART IV. Item 14: Exhibits, Financial Statement Schedule and Reports on Form 8-K............................................. 36-37 Exhibit Index................................................... 38-42 Signatures...................................................... 43
SOUTHWEST WATER COMPANY AND SUBSIDIARIES PART I ITEM 1. BUSINESS General Development of Business Southwest Water Company (hereafter together with its subsidiaries referred to as the "Company" or "Registrant") was incorporated under the laws of the State of California on December 10, 1954. The Company reincorporated in the State of Delaware on June 30, 1988. The Company is engaged in the water management business, providing water and wastewater services to over half a million people located throughout California, New Mexico, Texas and Mississippi. Virtually all regulated water utility operations of the Company are conducted through two wholly owned subsidiaries, Suburban Water Systems ("Suburban") and New Mexico Utilities, Inc. ("NMUI"). The Company also owns an interest in Windermere Utility Company ("Windermere), a small regulated water utility in Texas. A third wholly owned subsidiary, ECO Resources, Inc. ("ECO"), operates and manages water and wastewater treatment facilities owned by cities, municipalities and private entities. General Information There were no significant changes in the way the Company does business during the year. The focus of the water management industry is customer service, not technology or manufacturing processes; therefore, the Company conducts no significant research or development activities and the Company has no patents, trademarks or licenses. In its daily operations, the Company uses certain commodities such as chemicals and supplies, which are currently readily available from a number of suppliers. There are no individual customers of the Company who generated revenues that exceeded 10-percent of the Company's consolidated revenues, or whose loss would have a material adverse effect on the Company's consolidated operations. To date, the Company has experienced no material adverse effects upon its operations or capital expenditures resulting from compliance with governmental regulations relating to protection of the environment. At December 31, 1997, the Company employed 535 persons, none of whom were represented by an employee union. A. REGULATED UTILITY OPERATIONS SUBURBAN WATER SYSTEMS Product and Business Suburban is a regulated public water utility that produces and supplies water for residential, business, industrial and public authority use, and for private and public fire protection service under jurisdiction of the California Public Utilities Commission (the "CPUC"). Suburban's service areas are located within Los Angeles and Orange Counties, California. Suburban or its predecessor entities have been engaged in supplying water since approximately 1907. From the mid-1950s to the late 1960s, Suburban's operations rapidly expanded as the transition from agricultural land use to residential, business and industrial use occurred throughout its service areas. Primarily due to the population saturation of its existing service areas, Suburban has experienced modest customer growth since the late 1960s. At December 31, 1997, Suburban served 66,715 customers, including 62,980 residential customers, 2,642 business and industrial customers, 268 public authority customers and 825 other customers. During 1997, Suburban's operating revenues were 74% from sales to residential customers, 18% from sales to business and industrial customers, and 8% from sales to other customers. 1 Seasonal temperature and rainfall variations subject Suburban's business to material revenue and profitability fluctuations. Since most of Suburban's residential customers use more water in hot, dry weather conditions, the third quarter of each year is usually the highest in terms of customer consumption, revenues and profitability. Wells and Other Water Sources Suburban owns 15 wells and operates one well that is owned by an unrelated entity. The 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 "Main Basin"). The Main Basin is the source of approximately 71% of Suburban's total water production. The rights to pump water from these basins have been fully adjudicated under the laws of the State of California. These adjudications have established Suburban's right to produce water at levels prescribed each year by the Watermaster Boards that manage the basins. As the water level in the Main Basin increases or decreases, the Watermaster Board adjusts the amount of water that Suburban and other producers may pump from this basin without paying an additional charge. When Suburban produces water from either basin in excess of prescribed levels, an additional payment is required to provide for the replenishment of the water supply; however, even with the additional payments, these basins provide the lowest cost of water for Suburban. During the past few years, Suburban has drilled deeper wells that have allowed it to discontinue using older, less efficient wells. These newer wells have successfully replaced the lost production of the older wells. However, in the future, no assurance can be given that Suburban will be able to replace wells having production problems. Suburban also purchases water from two mutual water companies. Suburban's ownership of shares in each of these mutual water companies has allowed it to increase its water entitlement and maintain a lower cost of water. In addition, Suburban leases basin pumping rights from other parties, which also helps reduce its cost of water. Supplementing this water supply are water purchases at a higher cost from external sources. Suburban has the ability to purchase primarily surface water from the Metropolitan Water District of Southern California ("MWD"). A significant source of MWD water is the Colorado River. Suburban also has interconnections with other water purveyors that can be used as supplemental and emergency sources of supply. Current water levels of the two major groundwater basins are sufficient to eliminate any drought concerns; however, there is no assurance that the current allowable pumping levels will continue in the future. Water Quality Regulation Suburban's water supply is subject to regulation by the United States Environmental Protection Agency (the "EPA") acting pursuant to the Federal Safe Drinking Water Act as reenacted in 1996, (the "US Act") and by the Office of Drinking Water of the California Department of Health Services (the "DOHS") acting pursuant to the California Safe Drinking Water Act (the "Cal Act"). The US Act provides for establishment of uniform minimum national water quality standards, as well as governmental authority to specify the type of treatment processes to be used for public drinking water. The EPA has an ongoing directive to issue regulations under the US Act and to require disinfection of drinking water, specification of maximum contaminant levels ("MCLs") and filtration of surface water supplies. The Cal Act and the mandate of the DOHS are similar to the US Act and the mandate of the EPA. In many instances MCLs and other requirements of the DOHS are more restrictive than those of the EPA. Both the EPA and the DOHS have promulgated regulations and other pronouncements that require periodic testing and sampling of water. These regulations specify permissible levels of radio nuclides (including radon), and rules governing lead and copper levels. The regulations mandate corrosion control studies and sampling, as well as specifying permissible levels of volatile organic compounds ("VOCs"), herbicides, pesticides and inorganic substances. 2 Suburban's water quality personnel regularly monitor and sample the quality of water being distributed. Samples of water from throughout Suburban's system are tested regularly by independent, state-certified laboratories for bacterial contamination, chemical contaminant content and for the presence of those pollutants and contaminants for which MCLs have been promulgated. In addition, independent engineers retained by the Boards of the Central Basin and the Main Basin conduct sampling and testing for certain pollutants such as VOCs. The results of the sampling and testing are made available to all producers, with the cost of such sampling and testing covered by Board assessments to the producers. Testing, sampling and inspections by Suburban are conducted at the intervals, locations and frequencies required by EPA and DOHS regulations. Chlorination is currently performed only to provide a chlorine residual required by the DOHS as a safeguard against bacteriological contamination. As discussed in the Company's Form 10-Q Report for the quarter ending September 30, 1997, Suburban was advised by the San Gabriel Basin Water Quality Authority that the DOHS was monitoring groundwater sources for the contaminant "perchlorate", which had been detected in the Main Basin. In June 1997, the contaminant was detected in a well that is operated but not owned by Surburban. Suburban continues to blend water produced from this well with other water sources, bringing the concentration within the DOHS standards. The potential impact of this contaminant on the results of operations for Suburban is not fully known at this time; however, 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 these costs will be recoverable from ratepayers in future rate increases; however, there is no assurance that recovery of these costs will be allowed. Water supplied by Suburban meets all current requirements of the US Act, the Cal Act and the regulations promulgated under such legislation. Suburban anticipates no significant capital expenditures to comply with current requirements. There can be no assurance, however, that water supplied by Suburban will meet future EPA or DOHS requirements or that such requirements will not require capital expenditures by Suburban. Main San Gabriel Basin Contamination In 1979, VOCs were discovered in the Main Basin. While most of the VOC contamination was found in areas not within 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 and from which Suburban produces approximately 33% of its total water production. Currently, the water produced from Suburban's wells does not contain VOCs in excess of established MCLs. The EPA has conducted numerous studies of underground water in the Main Basin (including the Bartolo Well Field). In 1984, the EPA named the Main Basin as a Super-fund site and named as potentially responsible parties ("PRPs") several large industrial companies that allegedly caused the contamination. Suburban's facilities were not named as sources of VOCs or other contamination in any portion of the Main Basin (i.e., Suburban's operations do not discharge VOCs into the ground or groundwater). However, some government officials have suggested that the Main Basin water producers may have clean-up liability with respect to contaminants in the Main Basin under applicable environmental statutes on various theories by virtue of their pumping operations. It is expected that the EPA will continue to identify sources of contamination in order to establish legal responsibility for clean-up costs. Currently, neither the EPA nor any 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 Item 3, Legal Proceedings. To date, water produced from the Bartolo Well Field and other wells maintained by Suburban in the Main Basin meets all applicable governmental requirements. The treatment proposed by the EPA, and other measures taken by or available to Suburban, are intended to ensure that Suburban continues to have an adequate supply of potable water which meets all applicable governmental standards. While technology exists to remove VOC contaminants from basin water, there can be no assurance that either 3 (i) such technology will be adequate in the future to reduce the amounts of VOCs and other contaminants in water produced by Suburban in the Main Basin to acceptable levels or (ii) the costs of such removal will be fully recoverable from Suburban's customers. To date, Suburban has been permitted to recover from its ratepayers all expenses associated with water quality maintenance. There can be no assurance that, in the future, governmental authorities will not seek to recover clean-up costs from Suburban or that source polluters will not seek contributions from water producers for clean-up costs which they may be required to pay. If Suburban were required to pay any such clean-up costs, Suburban would seek to recover such costs, and costs incurred in removing contaminants from water produced, through increased rates to its customers, a practice which has been permitted by the CPUC in the past. Moreover, there are over 100 water producers in the Main Basin, and the Company believes that Suburban's share of any clean-up costs assessed against the producers would only be a small fraction of the total. Due to the potential recovery of the clean-up costs through higher rates, such costs are not expected to have a material impact on Suburban's financial condition or results of operation. Competition and Rate Relief Suburban operates under long-term franchises and certificates of indefinite duration granted by the CPUC and other governmental authorities having jurisdiction over water service. The success of Suburban's water service business is dependent upon maintaining these franchises and certificates and upon various contracts and governmental and court decisions affecting Suburban's water rights and service areas. Under current CPUC practices, water rates may be increased by two methods; general rate increases and offsets for certain expense increases. General rate increases typically are for three years and include "step" increases in rates for the second and third years. General rate increases are authorized after formal proceedings with the CPUC in which the overall rate structure, expenses and rate base are examined by CPUC staff and public hearings are held. General rate proceedings require approximately 12 months from the filing of an application to the authorization of new rates by the CPUC. Rates are based on estimated expenses and capital costs for a forecasted two-year period and are established for each of the two years based on these estimates, as approved by the CPUC. Rates for the third year of the three-year rate period are set by assuming that costs and expenses will increase in the same proportion over the second year as the increase projected for the second year over the first. The step rate increases for the second and third years are allowed to compensate for projected expense increases, but are subject to later demonstration that earnings levels do not exceed the rate of return authorized at the general rate proceeding. In 1995, Suburban filed a general rate increase application with the CPUC and negotiated with the CPUC staff a 4.25% ($1,100,000) rate increase, which became effective April 24, 1996. On December 3, 1996, the CPUC approved Suburban's filing for a 2.62% ($705,000) step increase, which became effective January 1, 1997. On December 30, 1997, the CPUC approved Suburban's filing for another 2.62% ($740,000) step increase for inflation, which became effective on January 1, 1998. 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 for rate increases to the authorization of new rates. Suburban has been, and believes that it will continue to be, permitted to increase its rates as necessary to achieve a reasonable rate of return. However, any inability to increase rates in the event of increases for certain expenses would adversely affect Suburban's results of operations. On occasion, Suburban has filed for a rate decrease when actual water production costs incurred were less than CPUC-adopted water production costs. As permitted by the CPUC, Suburban records the difference between actual and CPUC-adopted water production costs in balancing accounts in the income statement, with a corresponding adjustment on the balance sheet. Suburban believes that these amounts will be recovered from or returned to the ratepayers through future CPUC-authorized rate adjustments. 4 Future Development In recent years, Suburban's growth has been limited to extensions into new subdivisions along the periphery of its service areas. Because there is little area available for new business or industrial construction and because of low levels of residential growth, significant increases in the number of customers in its current service territory are not expected in the future. The laws of the State of California provide that no public agency can install facilities within the service area of a public utility in order to compete with it, except upon payment of just compensation for all damages incurred by the public utility. Under California law, municipalities and certain other public bodies have the right to acquire private water utility plants and systems within their territorial limits by condemnation after proof of necessity is shown. Suburban is not aware of any impending proceeding relating to the condemnation of any portion of its facilities. 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; from periodic debt financing by Suburban; from lines of credit of the Company; from contributions in aid of construction received from developers, governmental agencies, municipalities or individuals; and from advances received from developers that are repaid under rules of the CPUC. During 1997, 1996 and 1995, capital expenditures approximated $5,853,000, $6,124,000 and $4,095,000, respectively. NEW MEXICO UTILITIES, INC. Product and Business In 1969, Suburban purchased NMUI. On June 1, 1987, the New Mexico Public Utility Commission ("NMPUC") authorized Suburban to transfer by stock dividend all of the stock of NMUI to Southwest Water Company, causing NMUI to become a wholly owned subsidiary of the Company. 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 NMPUC. NMUI's service area is located in the northwest part of the City of Albuquerque and in the northern portion of Bernalillo County, New Mexico. NMUI's service area contains a population of about 20,000 persons and covers approximately 34 square miles, of which an estimated 11% has been developed. Since 1969, NMUI has grown from approximately 800 customers to almost 6,000 customers. Most of this growth has come from extension of water services and sewage collection services into new residential subdivisions and from the development of commercial property. Continuing economic development in NMUI's service area is expected to increase the number of customers in the near future. At December 31, 1997, NMUI provided water service to 5,604 customers including 5,039 residential customers, 497 commercial and industrial customers, one golf course with five service connections, and 63 other customers. NMUI also provided sewer collection service to 5,205 customers including 4,908 residential customers and 297 commercial and industrial customers. During 1997, NMUI's operating revenues were 46% from sales to residential customers and 54% from sales to commercial and industrial customers. Seasonal temperature and rainfall variations subject NMUI's business to material fluctuations. Since most of NMUI's residential customers use more water in hot, dry weather conditions, the third quarter of each year is usually the highest in terms of customer consumption, revenues and profitability. The sewer operation revenues remain relatively constant throughout the year. 5 Wells and Other Water Sources NMUI believes that it has adequate water capacity to serve its current customer base as well as new customers in the foreseeable future. NMUI owns four wells and three reservoirs. If customer growth continues in NMUI's service area as projected, NMUI may have to increase its water supply capability through additional well construction. To ensure the availability of an emergency supply of water, NMUI has one interconnection with another water purveyor. NMUI wells produce good quality water from the Rio Grande Underground Basin. All water supplied by NMUI to its customers is subject to regulation by the EPA and by the State of New Mexico Environmental Improvement Division ("EID"). Samples of water from throughout the system are tested regularly by independent, state certified laboratories and the results of the tests are sent to the EID. Chlorination is performed to provide an allowable chlorine residual as a safeguard against bacteriological contamination. Water supplied by NMUI meets all current requirements of the EPA and the EID, and NMUI anticipates no significant capital expenditures to comply with current requirements. To date, NMUI has experienced no material effect upon its operations or capital expenditures resulting from compliance with governmental regulations relating to protection of the environment. There can be no assurance, however, that water supplied by NMUI will meet future EPA or EID requirements, or that such requirements will not require capital expenditures by NMUI. Competition, Regulation and Future Development NMUI operates under a Certificate of Public Convenience and Necessity granted by the NMPUC and is regulated by other state and local governmental authorities having jurisdiction over water and wastewater service and other aspects of its business. Requests for rate increases are submitted to the NMPUC with the test year typically being the previous years' 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. 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. The laws of the State of New Mexico also provide that no public agency can install facilities within the service area of a public utility in order to compete with it, except upon payment of just compensation for all damages incurred by the public utility. The City of Albuquerque (the "City") has annexed a significant portion of NMUI's service area; however, NMUI has continued to serve the customers located in the annexed areas. Currently, 52% of NMUI's customers are located within the city limits. As discussed in the Company's Form 10-Q Report for the period ending September 30, 1997, the City approached the Company during the first quarter of 1997 concerning a potential sale of NMUI to the City. During the second quarter of 1997, the City and NMUI hired independent third parties to perform separate appraisals of NMUI. Three separate appraisals were completed with values ranging from $22,000,000 to $39,000,000. On November 4, 1997, the City initiated legal action in New Mexico State Court to acquire the operations of NMUI by eminent domain. The City offered approximately $16,000,000 and agreed to the assumption of $6,000,000 of NMUI's First Mortgage Bonds. Based on the results of recent City elections and public statements made by City officials, the Company believes there is significant doubt as to whether the City will proceed with the eminent domain action against NMUI. The City's prior resolution to acquire NMUI was immediately set aside pending further examination by the City. If the City were to proceed with the condemnation, the Company believes that the fair market value of NMUI is substantially in excess of the amount offered by the City. If fair market value were to be determined by a court trial, the 6 Company would not anticipate rapid resolution of the matter. The Company would strongly object to any attempt for immediate possession by the City. NMUI's operations are capital intensive. This capital is generated from NMUI's operations; from periodic debt financing by NMUI; from lines of credit of NMUI and the Company; from contributions in aid of construction received from developers; and from advances received from developers which are repaid under rules of the NMPUC. During 1997, 1996 and 1995, capital expenditures approximated $8,916,000, $8,169,000 and $7,275,000, respectively. B. CONTRACT OPERATIONS ECO RESOURCES, INC. Product, Business and Regulation In 1985, the Company purchased all of the outstanding common shares of ECO, thereby diversifying into the management and operation of water and wastewater systems owned by others. In addition to managing and operating water and wastewater systems, ECO also performs associated specialized services, such as utility facility equipment maintenance and repair, sewer pipeline cleaning, billing and collection, and state-certified laboratory analysis. While ECO does not own any of the sources of water or wastewater treatment facilities, ECO assumes the responsibility for ensuring that the water delivered to customers and wastewater treated and returned to the environment meet applicable federal, state and local standards. ECO's contracts indemnify the municipal utility districts, private or city owned, of the water and wastewater facilities from certain liabilities that may arise from ECO's operations; however, all contracts contain specific language limiting ECO's liability to situations under its control as the facility operators. To date, the cost of any indemnification has not had a material impact on ECO's cost of operations. ECO has two distinct types of contractual relationships: municipal utility district contracts and operations and maintenance contracts with cities and municipalities. Municipal Utility District (MUDs) Contracts ECO has 138 contracts with MUDs in the suburbs of Houston and Austin, Texas. A MUD is a utility district created under the rules of the Texas Natural Resource Conservation Commission with an objective of providing water, wastewater and drainage services to areas where such municipal services are not available. ECO negotiates separate operating contracts with each MUD's Board of Directors. Many MUD contracts are short-term contracts and are cancelable on 30 or 60-day notice by either party. In a typical MUD contract, a monthly base fee is charged for a certain level of maintenance and operations services; billing, collection and customer services; and environmental monitoring and reporting. Additional services and specified services typically generate revenues usually determined on a time and material basis. As the large Texas cities expand their boundaries, they periodically condemn MUD-owned facilities and annex them to city-owned facilities. In 1997, two MUD contracts were canceled due to annexation, one MUD contract was canceled for competitive reasons, and 11 new MUD contracts were added. In addition, eight MUD contracts were consolidated into one operation and maintenance contract. Operations and Maintenance (O&M) Contracts ECO has 18 O&M contracts with cities, municipalities, and private entities located in Texas, Mississippi, New Mexico and California. Typical O&M contracts tend to average three to five years in duration and are generally cancelable during that period only upon a specific breach of the contract by either party. Typical O&M contracts provide for a specified level of services, such as facility operation and maintenance, meter reading and billing or management of the entire utility. Most contracts provide 7 for a fixed fee the specified service level with contractual limitations on ECO's liability in the event of a major system failure or catastrophe. For additional billings, ECO provides services beyond the scope of the contract or provides services after a dangerous system failure or catastrophe. Competition and Future Development ECO operates in an industry undergoing significant and rapid changes. Competition is based on both lowest cost and technical expertise. ECO's competition in the O&M portion of its business includes four significantly larger companies that provide O&M services on a national and international basis, as well as several regional competitors, both smaller and larger than ECO. In the MUD portion of the business, competitors include one large national company and at least five smaller, local companies. In the United States, the majority of water and wastewater utility operations are performed by municipal employees. 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 of benefit to the city. Typical sales efforts have an 18 to 36-month lead-time with no assurance that the city will select outsourcing or select ECO at the end of the sales effort. While industry renewal rates tend to be high, there have been instances of cities changing operators at the end of a contract and instances of cities ending outsourcing at the end of a contract. During 1998, O&M contracts with annual revenues of approximately $5,000,000 will be expiring. If ECO were not able to renew these contracts, revenues and profitability could be adversely affected. ECO intends to expand its current business base in Texas, Mississippi, New Mexico and California. In 1997, ECO restructured its executive team, appointing five regional vice presidents, each vested with the authority and accountability for strategy and decisions relative to staffing, operations, contract sales and financial performance. Management believes this revised structure will enable ECO to achieve its profitability and expansion goals. ITEM 2. PROPERTIES The Company leases approximately 5,500 square feet of office space for its corporate headquarters in West Covina, California. A. REGULATED UTILITY OPERATIONS The Company's regulated utility operations lease two office buildings for their headquarters in Covina, California, and Albuquerque, New Mexico. In addition, Suburban owns two buildings that house its district operations, and NMUI owns a warehouse building that houses its field supplies and equipment. SUBURBAN WATER SYSTEMS Suburban owns and operates water production and distribution systems consisting of well pumping plants, booster pumping stations, reservoir storage facilities, transmission and distribution mains, and service connections to individual customers. Suburban also holds and operates a water treatment facility, which was placed in service during 1997. Suburban has rights-of-way and easements in its service area necessary to provide water services. At December 31, 1997, Suburban owned 703 miles of transmission and distribution mains and 27 storage reservoirs with a total capacity of 56 million gallons. Suburban also owns 15 wells and operates one other well with a total pumping capacity of approximately 35,000 gallons per minute. These facilities vary as to age and quality, but each is believed by Suburban to be in good condition and adequate for current operations. Suburban has a master plan that provides for periodic evaluation of the adequacy of system operations. In accordance with this master plan, Suburban will continue its capital expenditure program and construct and replace reservoirs, wells and transmission and distribution lines in future years, as needed and approved by the CPUC. Employees of Suburban 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 repair 8 is performed by Suburban and constitutes a significant portion of its expenses (approximately $1,904,000 in 1997). Virtually all property of Suburban other than 11.4 acres of vacant land in La Puente, California is subject to the lien of an Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "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. The vacant land in La Puente, California is not necessary for utility operations and is currently in a sale escrow. 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, 1997, NMUI owned 126 miles of transmission and distribution mains and three storage reservoirs with a total capacity of eight million gallons. The four wells operated by NMUI have a total pumping capacity of 7,425 gallons per minute. In addition, NMUI owns and operates a sewer collection system consisting of one lift station and 95 miles of interceptor and collector lines. Wastewater is treated at a facility owned by the City of Albuquerque. These facilities vary as to age, and each is believed by NMUI to be adequate for current and foreseeable operations. Employees of NMUI or outside contractors perform normal maintenance and construction work on these facilities. Maintenance and repair expenses of approximately $178,000 were incurred in 1997. 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. B. CONTRACT OPERATIONS ECO RESOURCES, INC. ECO owns 4.3 acres and a 17,000 square-foot building that house fleet and maintenance operations in the Houston, Texas area, and 10 acres and a 10,000 square-foot building in Austin, Texas that house office, fleet and maintenance operations. In addition, ECO owns or leases 327 vehicles and other equipment used in daily operations. ECO leases approximately 34,000 square feet of office, warehouse and lab space in nine facilities in the Houston, Texas area; the Rio Grande Valley, Texas area; Mississippi; New Mexico; and California. ITEM 3. LEGAL PROCEEDINGS As described previously in the Company's Form 10-Q Report for the quarter ended September 30, 1997, on October 30, 1997, Suburban and the Company were served with a summons and an amended complaint in the Kristin Santamaria, et al. vs. Suburban Water Systems, et al. action. Information concerning these proceedings was included in the Company's Form 10-Q Report for the quarter ended June 30, 1997. The only changes from the original complaint filed in July 1997, but not served, were the addition of approximately 250 additional plaintiffs (claiming on behalf of themselves and for the alleged wrongful deaths of family members) and the addition of two additional water purveyors in the San Gabriel Valley (the "Valley") as defendants in the action. The plaintiffs contend, in essence, that they or deceased family members are or were long-time residents of the Valley and that, by virtue of their 9 residence in the Valley, they have suffered long-term exposure to various hazardous substances and, in some cases, wrongful deaths. Suburban annually takes over 4,000 water samples from reservoirs, wells and residences, which are then tested by independent, state-certified laboratories. Water tested by these laboratories has continued to comply with all state and Federal drinking water standards. Southwest Water Company is a holding company and not a water purveyor. The Company and Suburban will vigorously defend against all claims made by the plaintiffs and believe they are not liable for any damages to the plaintiffs. In addition, the Company and Suburban have requested that their liability carriers provide defense and indemnity with respect to this action. In February 1998, a primary liability insurance carrier for the Company and Suburban agreed to contribute to the costs of defense of this action, subject to a reservation of rights and defenses. Based on information available at this time, management does not expect that this matter will have a material effect on the Company's financial position or results of operations. In February 1998, the Company and Suburban were served with a summons and complaint in a second action entitled Christine Boswell et al vs. Suburban Water Systems etc., et al, No. KC027318 in the Los Angeles County Superior Court. In this action, the 14 plaintiffs contend that they or deceased family members are or were long-time residents of the San Gabriel Valley. The plaintiffs contend that there is a long history of chemical contamination of the groundwater in the San Gabriel Valley, that the Company and Suburban were aware of such contamination, that the Company and Suburban knowingly provided contaminated water to the plaintiffs and others and that the Company and Suburban intentionally withheld from plaintiffs the alleged knowledge that water supplied to them was contaminated. The plaintiffs allege, on the basis of these factual allegations, 12 causes of action including negligence, negligence per se, trespass, nuisance, wrongful death, strict liability, absolute liability and fraudulent concealment. The plaintiffs seek damages according to proof for alleged physical injury, damage to property, loss of earnings, loss of consortium, burial and other wrongful death losses and punitive damages. The Company and Suburban believe that their defense to this action will be similar to the defense of the first action and believe that they are not liable for any damages to the plaintiffs. The Company and Suburban intend to vigorously defend this action and have requested that their liability insurance carriers defend and indemnify the Company and Suburban. Based upon information available at this time, management does not expect that this action will have a material effect on the Company's financial position or results of operations. In accordance with a resolution of the CPUC, Suburban has applied for CPUC authority to establish and maintain a memorandum or tracking account to accumulate all costs and fees incurred by Suburban in defense of the Santamaria, Boswell and any similar actions which may be filed, costs and fees incurred in legal actions against industrial PRPs and costs and fees incurred in seeking recovery against Suburban's insurance carriers of costs and fees incurred with respect to the underlying actions and those against PRPs. Under the CPUC resolution, Suburban may, at some point in the future, seek CPUC authority to recover these costs and fees from Suburban's customers. Suburban has received CPUC approval for a memorandum account with respect to the Santamaria action (including claims against PRPs and insurance carriers with respect thereto), and expects to receive such approval for its costs and fees associated with the Boswell action and any similar claims hereafter arising. The Company and Suburban are unable to estimate or predict whether the CPUC will ultimately allow Suburban to recover these accumulated costs and fees from Suburban's customers or, if such recovery is allowed, how much of such costs and fees will be recoverable. In response to the Santamaria and Boswell actions, and similar actions against other water purveyors in California, the CPUC in March 1998 issued an order instituting investigation ("OII") directed to all Class A and B water utilities in California, including Suburban. The OII notes the constitutional and statutory jurisdiction of the CPUC and the DOHS to establish water quality standards for water delivered to utility customers, to enforce adherence to such standards and, in the case of the CPUC, to establish rates which permit water utilities to furnish safe water which meets the established quality standards at prices which are affordable to consumers while permitting the water 10 utilities to realize a reasonable profit. The OII provides for compliance reports to be submitted by all Class A and B water utilities by July 15, 1998, for a report by the Water Division of the CPUC (based upon these filings) to be submitted by November 16, 1998 and for a final determination by the CPUC by May 16, 1999 on a series of questions dealing with the safety of current drinking water standards, compliance by water utilities with such standards, appropriate remedies for failure to comply with safe drinking water standards and whether stricter or additional safe drinking water standards are required. The OII leaves open the possibility of evidentiary hearings and further action by the CPUC. At this time, the Company and Suburban are unable to predict what actions, if any, will be taken by the CPUC and/or the DOHS as the result of this investigation, or their impact on the operations or financial position of the Company and Suburban. The recent OII and the investigation initiated thereby do not, at this time, directly impact the Santamaria or Boswell actions. The CPUC did, however, in the OII set out at considerable length the jurisdiction of the CPUC and the DOHS on water quality and water safety issues and noted the "potentially enormous" implications to the water utilities, their customers and the jurisdiction of the CPUC if the plaintiffs in the several pending lawsuits prevail. One commissioner, in his published remarks concerning the OII, expressly noted that these lawsuits "directly affect" the ability of the CPUC to perform its statutory obligations and noted both potential water supply problems if the plaintiffs in these actions prevail and the cost to all water utility customers from mere prosecution of these actions. At this time, the CPUC has not intervened in these actions nor asserted dispute resolution authority with respect to them. It is uncertain whether the CPUC and/or the DOHS will attempt such intervention or assert such jurisdiction or, the likely results of such action. Suburban, the Company, and several unrelated parties were served with a complaint in September 1995, wherein the plaintiff claimed that while working in the 1950's and 1960's for an independent contractor hired by Suburban, he was exposed to asbestos fibers and contracted mesothelioma. Suburban and the Company denied all allegations in their response to the complaint. The plaintiff died in 1995 and in 1996 the plaintiff's widow and children filed a wrongful death action against Suburban and the Company. This complaint alleges the same facts as the first complaint, plus the wrongful death of the original plaintiff. The two actions have been consolidated. Information concerning this action, the other defendants therein and the efforts of the Company and Suburban to cause their insurers to defend the action is set forth in the Company's Form 10-Q Report for the quarter ended March 31, 1997. To date, there has been no specific claim for damages by the plaintiffs and discovery is moving slowly. Suburban and the Company maintain that they have no responsibility for the death of the original plaintiff and intend to contest these claims vigorously. As discussed on pages six and seven, the City of Albuquerque (the "City") on November 4, 1997 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 the City's complaint and that there is significant doubt whether the City will proceed with the action. Under New Mexico state law, there are procedures which would allow the City to take possession prior to a resolution of the fair market value issue; however, the Company believes that it has adequate defenses should the City choose to pursue these procedures. If the City pursues a final determination of fair market value and possession of NMUI through a court trial, the Company does not anticipate resolution of these matters in the near future. 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 affect its consolidated financial condition, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The Board of Directors elects the executive officers of the Company 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 types required to be disclosed pursuant to the instructions to this item involving any executive officer. The executive officers of the Company and its subsidiaries are as follows:
POSITIONS AND OFFICES CURRENTLY HELD AND NAME AGE BUSINESS EXPERIENCE DATE ELECTED ---- --- ------------------- ------------ Anton C. Garnier 57 Chief Executive Officer and President of the Company November 1968 Chairman of the Board August 1996 Peter J. Moerbeek 50 Vice President Finance and Chief Financial Officer August 1995 Chief Operating Officer of ECO January 1997 Director of Suburban and ECO October 1995 Secretary of the Company, Suburban and ECO October 1995 Previously Executive Vice President Finance and Operations of Pico Products, Inc. and Pico Macom, Inc. (1989 - 1995) Michael O. Quinn 51 President of Suburban May 1996 Director of Suburban May 1993 Chief Operating Officer of Suburban April 1992 Previously President of ECO (October 1985 - April 1992) Robert L. Swartwout 56 President and General Manager of NMUI March 1992 Director of NMUI May 1993 Previously Consulting Associate, Robert Witter & Associates, Inc. (1985 - 1992)
12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information with respect to the market for, and number of holders of, the Company's common shares as well as quarterly market and dividend information is set forth under the caption "Market and Dividend Information" in the Company's 1997 Annual Report to Stockholders and is hereby incorporated by reference. The number of holders of the Company's common shares was computed based on a count of record holders as of December 31, 1997. There were no equity securities of the Company sold by the Company during 1997 which were not registered under the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA The information included under the caption "Selected Financial Data" in the Company's 1997 Annual Report to Stockholders is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: Liquidity and capital resources of the Company are influenced primarily by construction expenditures at Suburban for the replacement and renovation of existing water utility facilities and by construction expenditures for new water and wastewater utility facilities at NMUI. At December 31, 1997, the Company had cash and cash equivalent balances totaling $1,237,000 and unused lines of credit of $8,869,000, with a total line of credit capacity of $16,000,000. The Company has three lines of credit from three commercial banks, all of which expire in 1999. The Company expects to renew its lines of credit in the normal course of business. During 1997, the Company's net borrowing of $1,942,000 was primarily to fund construction expenditures at its utility operations. The Company has remaining borrowing capacity under its First Mortgage Bond Indentures of approximately $31,050,000. However, the amount of additional borrowing available to the Company under its current short-term lines of credit is limited by financial covenants and available lines of credit that restricted additional borrowing at December 31, 1997 to the unused credit line amount. The Company's additions to property, plant and equipment totaled $15,202,000 during 1997, which approximates the additions in 1996. The additions were primarily utility plant additions. Developers made cash contributions in aid of construction ("CIAC") and advances totaling $1,948,000. In addition, $5,818,000 was received from developers through non-cash CIAC, such as plant and equipment. Capital expenditures at NMUI are expected to decrease approximately $2,000,000 in 1998 due to the completion of major projects in 1997. The Company anticipates short-term borrowing of approximately $3,000,000 in 1998 to meet construction requirements not funded by operations or CIAC. The Company anticipates that its available short-term borrowing capacity and its cash flow generated from operations will be sufficient to fund its activities during 1998. If additional cash were needed, the Company would consider alternative sources including long-term financing. The amount and timing of any future long-term financing will depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban and NMUI. If the Company were unable to renew its existing lines of credit or obtain additional long-term financing, capital spending would be reduced or delayed until new financing arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. Similarly, if the Company were to need additional cash to fund an acquisition, financing arrangements could include long-term borrowing or equity financing. 13 REGULATORY AFFAIRS AND INFLATION: Regulation: The CPUC and the NMPUC 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. The Company anticipates that future construction expenditures and increased direct operating expenses will require periodic requests for rate increases. Tax Legislation: In 1996, the California legislature enacted Senate Bill 1099, which became effective January 1, 1997. This legislation provides that a water utility that sells excess property and reinvests the sale proceeds in the utility's plant within an eight-year period does not need to allocate any portion of any gain on sale to the ratepayers. From 1990 through 1995, Suburban recorded pretax gains on land sales of four parcels of excess real property totaling $1,690,000. Since the proceeds of the four land sales were reinvested in utility plant, the gains should not be subject to allocation to the ratepayers. In 1996, legislation was enacted that changed the federal tax treatment of CIAC received after June 12, 1996. This legislation repealed the requirement to include CIAC as a component of taxable income, eliminating the requirement for the Company to pay taxes on CIAC when received. The new legislation also eliminates the depreciation deduction for CIAC and changes the depreciation method and useful lives for most non-CIAC water utility property. In 1997, the States of California and New Mexico adopted the federal treatment of CIAC and the related depreciation changes to their respective tax regulations. The Company does not believe that these tax law changes will have a material adverse impact on its ability to fund ongoing operations and capital requirements. Regulatory Developments: The California legislature has held hearings discussing the CPUC's organization and operation. Among other options, the CPUC has proposed consideration of performance-based rate making, which would provide incentives for utilities to operate more efficiently and improve productivity. If enacted, these changes are expected to reduce regulatory burden and promote efficiency among utilities which, if accomplished, would likely benefit both ratepayers and stockholders. Legislative and CPUC developments are closely monitored by the Company and by the various water industry associations in which the Company actively participates. Whether such legislative or CPUC changes will be enacted, or, if enacted, what the terms of such changes would be, are not known by the Company. Therefore, management cannot predict the impact of final legislative or CPUC developments on the Company's financial condition or results of operations. In 1996, the residents of the State of New Mexico passed a constitutional amendment to combine the NMPUC and the New Mexico Corporation Commission ("NMCC") and create the New Mexico Public Regulatory Commission ("NMPRC"). Presently, the NMPUC consists of three appointed officials and the NMCC consists of three elected officials. Under newly enacted legislation, the NMPRC will consist of five elected officials who will be elected in November 1998, and take office on January 1, 1999. A legislative committee is currently reviewing proposed changes to the Public Utilities Act (the "PUA"). The Company cannot predict if or when changes to the PUA will ultimately occur; or if changes are enacted, the impact on NMUI's financial position or result of operations. 14 Contract Operations: ECO's pricing is not subject to regulation by a public utilities commission. ECO's long-term water and wastewater service contracts typically include annual inflation adjustments. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. ENVIRONMENTAL AFFAIRS: The Company's operations are subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the EPA and various state regulatory agencies. The EPA and state regulatory agencies continue to promulgate new regulations mandated by the Federal Water Pollution Control Act, the Safe Drinking Water Act (as reenacted in 1996), and the Resource Conservation and Recovery Act. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. Costs associated with the testing of the Company's water supplies have, however, increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, if any, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. YEAR 2000 COMPUTER COMPLIANCE: The Company has completed a review of all computer systems and related software currently in use to determine whether they are year 2000 compliant. Most of the Company's computer systems and related software in use are already year 2000 compliant, and compliance of remaining computer systems and related software is expected to be completed in the coming months. Costs to be incurred in order for the Company to be year 2000 compliant are not expected to have a material effect on the Company's financial position or results of operations. NEW ACCOUNTING STANDARDS: In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued and are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. These standards increase disclosure in the financial statements and will have no impact on the Company's financial position or results of operations. FORWARD LOOKING STATEMENTS: Certain statements in this Form 10-K are forward looking and as such, involve risk and uncertainty. Uncertainties arise from weather, environmental issues, legal contingencies and other matters which management cannot predict. Information and footnote disclosures included in the Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles and should be read in conjunction with the Company's description of its business and management's discussion and analysis of financial condition. Actual results may vary from those projected or implied. 15 RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996 Diluted earnings per common share (adjusted for stock dividends of 5% on January 2, 1998 and 20% on January 2, 1997) increased 33% from $.57 in 1996 to $.76 in 1997. Operating income increased $1,481,000 or 26%, and, as a percentage of operating revenues, increased from 9% in 1996 to 10% in 1997. Operating income at the utilities increased $1,314,000, due primarily to increased water sales at Suburban and the positive effects of a water rate increase. ECO's operating results improved $714,000, due to increased revenue from new contracts, aggressive cost containment measures, and restructuring of marketing responsibilities. Parent company expenses increased $547,000, primarily due to increases in insurance expenses, legal reserves and payroll-related costs. Operating revenues Operating revenues increased $4,860,000 or 7%. Water utility revenues increased $2,248,000, primarily due to warmer weather in Southern California resulting in a 4.6% increase in water consumption by Suburban's customers. Suburban also benefited from a water rate increase. ECO's revenues increased $2,612,000, primarily as a result of revenues from new contracts and additional work performed outside the scope of existing contracts. Direct operating expenses Direct operating expenses increased $2,337,000 or 5%. As a percentage of operating revenues, these expenses decreased from 76% in 1996 to 74% in 1997. Water utility direct operating expenses increased $558,000, primarily reflecting the increase in water consumption by Suburban's customers. ECO's direct operating expenses increased $1,779,000, resulting primarily from higher expenses associated with new contracts and increased billable work. Selling, general and administrative Selling, general and administrative expenses increased $1,042,000 or 10%. As a percentage of operating revenues, these expenses increased from 15% in 1996 to 16% in 1997. General and administrative expenses at the utilities increased $376,000, primarily due to increased legal reserves, insurance, payroll-related benefits, and outside services. ECO's selling, general and administrative expenses increased $119,000, due to insurance, legal, payroll- related benefits, consulting expenses and increased sales and marketing. As discussed above, general and administrative expenses of the parent company increased $547,000. Other income and expense Interest expense increased $376,000, primarily due to increased line of credit balances. YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995 Diluted earnings per common share (adjusted for stock dividends of 5% on January 2, 1998 and 20% on January 2, 1997) increased 30% from $.44 in 1995 to $.57 in 1996. Operating income increased $1,302,000 or 29%, and, as a percentage of operating revenues, increased from 8% in 1995 to 9% in 1996. Operating income at the utilities increased $893,000, due primarily to increased water consumption and the effects of a rate increase implemented at Suburban in the second quarter of 1996. NMUI's customer base growth also contributed to the increase. ECO's operating results improved by $702,000 compared to 1995, due primarily to new contracts, additional work outside the scope of contracts and cost containment. Parent company expenses increased 16 $293,000, primarily due to additional corporate reserves, which were partially offset by a reduction in outside consulting fees. Operating revenues Operating revenues increased $9,338,000 or 16%. Water utility revenues increased $2,683,000, due to warmer weather resulting in a 7% increase in water consumption by customers at Suburban and NMUI. Suburban also benefited from a water rate increase, and NMUI benefited from a sewer rate increase. In addition, NMUI's increase in numbers of water and sewer customers in 1996 also contributed to the increase. ECO's revenues increased $6,655,000, primarily as a result of new contracts and additional revenues from work outside the scope of contracts. Direct operating expenses Direct operating expenses increased $6,986,000 or 16%. As a percentage of operating revenues, these expenses were 76% in 1996 and 1995. Water utility direct operating expenses increased $1,401,000, primarily reflecting the increase in water costs experienced to meet increased consumption by Suburban and NMUI customers. ECO's direct operating expenses increased $5,585,000, reflecting the corresponding increase in operating revenue. Selling, general and administrative Selling, general and administrative expenses increased $1,050,000 or 12%. As a percentage of operating revenues, these expenses decreased from 16% in 1995 to 15% in 1996. General and administrative expenses at the utilities increased $389,000 primarily due to increased legal reserves in 1996 and due to the impact of an ad valorem tax assessment recovery in 1995. ECO's selling, general and administrative expenses increased $368,000, due to insurance, legal and consulting expenses and from expanded sales and marketing activity. As discussed above, general and administrative expenses of the parent company increased $293,000. Other income and expense Interest expense increased $541,000, primarily due to higher line of credit balances. Other income increased $237,000 primarily due to consulting fees received as a result of the investment in Windermere. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report.................................................................... 19 Consolidated Statements of Income - Three Years Ended December 31, 1997......................... 20 Consolidated Balance Sheets - December 31, 1997 and 1996........................................ 21 Consolidated Statements of Changes in Common Stockholders' Equity - Three Years Ended December 31, 1997.......................................................... 22 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1997..................... 23 Notes to Consolidated Financial Statements...................................................... 24-34 Schedule II - Valuation and Qualifying Accounts - Three Years Ended December 31, 1997........... 37
18 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of Southwest Water Company We have audited the consolidated financial statements of Southwest Water Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest Water Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK LLP Los Angeles, California January 26, 1998 19 Southwest Water Company and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, =============================================================================== 1997 1996 1995 =============================================================================== (in thousands except per share amounts) Operating Revenues (Note 12) $71,005 $66,145 $56,807 Operating Expenses: Direct operating expenses (Note 12) 52,694 50,357 43,371 Selling, general and administrative 11,096 10,054 9,004 - ------------------------------------------------------------------------------- 63,790 60,411 52,375 Operating Income 7,215 5,734 4,432 Other Income (Expense): Interest expense (3,225) (2,849) (2,308) Interest income 94 100 76 Gain on sale of land 0 0 84 Other 367 313 76 - ------------------------------------------------------------------------------- (2,764) (2,436) (2,072) Income Before Income Taxes 4,451 3,298 2,360 Provision for income taxes (Note 7) 1,850 1,375 921 - ------------------------------------------------------------------------------- Net income 2,601 1,923 1,439 Dividends on Preferred Shares (Note 9) 27 27 27 - ------------------------------------------------------------------------------- Net Income Available for Common Shares $ 2,574 $ 1,896 $ 1,412 =============================================================================== Earnings per Common Share (Notes 8 and 9): Basic $ 0.78 $ 0.58 $ 0.44 Diluted $ 0.76 $ 0.57 $ 0.44 =============================================================================== Cash Dividends per Common Share (Note 9) $ 0.35 $ 0.32 $ 0.30 =============================================================================== Weighted Average Outstanding Common Shares (Notes 8 and 9): Basic 3,303 3,269 3,230 Diluted 3,374 3,322 3,230 ===============================================================================
See accompanying notes to consolidated financial statements. 20 Southwest Water Company and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, - ------------------------------------------------------------------------------- ASSETS 1997 1996 - ------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 1,237 $ 790 Customers' accounts receivable, less allowance for doubtful accounts; 1997, $711; 1996, $512 7,286 8,216 Other current assets 2,976 2,086 - ------------------------------------------------------------------------------- 11,499 11,092 Property, Plant and Equipment: Utility property, plant and equipment - at cost (Note 3) 133,936 119,731 Contract operations property, plant and equipment - at cost 4,854 6,448 - ------------------------------------------------------------------------------- 138,790 126,179 Less accumulated depreciation and amortization 36,654 34,765 - ------------------------------------------------------------------------------- 102,136 91,414 Other Assets (Note 2) 9,465 8,910 - ------------------------------------------------------------------------------- $123,100 $111,416 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 8,031 $ 6,089 Accounts payable 1,214 1,513 Other current liabilities (Note 5) 8,912 7,569 - ------------------------------------------------------------------------------- 18,157 15,171 Other Liabilities and Deferred Credits: Long-term debt (Note 6) 29,800 30,700 Advances for construction 7,931 7,719 Contributions in aid of construction 27,822 21,556 Deferred income taxes (Note 7) 4,130 3,398 Other liabilities and deferred credits 2,833 2,472 - ------------------------------------------------------------------------------- Total Liabilities and Deferred Credits 90,673 81,016 Commitments and Contingencies (Note 13) Stockholders' Equity (Notes 8, 9 and 10): Cumulative preferred stock 517 517 Common Stock 33 31 Paid-in capital 29,469 26,159 Retained Earnings 2,420 3,728 Unamortized value of restricted stock issued (12) (35) - ------------------------------------------------------------------------------- Total Stockholders' Equity 32,427 30,400 - ------------------------------------------------------------------------------- $123,100 $111,416 ===============================================================================
See accompanying notes to consolidated financial statements 21 Southwest Water Company and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1996, 1997 - ------------------------------------------------------------------------------------------- (in thousands) Common Stock Number of Paid-in Retained Shares Amount Capital Earnings ------------------------------------------------ Balance at January 1, 1995 2,414 $ 24 $17,241 $ 10,820 Dividend reinvestment and employee stock purchase 27 1 234 Conversion of $30 face amount of 9-1/2% convertible subordinated 12 30 5% stock dividend 123 1 1,210 (1,211) Net income 1,439 Cash dividends declared (1,003) - ------------------------------------------------------------------------------------------- Balance at December 31, 1995 2,576 26 18,715 10,045 Dividend reinvestment and employee stock purchase plans 25 287 Stock options exercised 1 8 20% stock dividend 520 5 7,149 (7,154) Net income 1,923 Cash dividends (1,086) - ------------------------------------------------------------------------------------------- Balance at December 31, 1996 3,122 31 26,159 3,728 Dividend reinvestment and employee stock purchase plans 29 383 Stock options exercised 20 194 5% stock dividend 159 2 2,733 (2,735) Net income 2,601 Cash dividends declared (1,174) - ------------------------------------------------------------------------------------------- Balance at December 31, 1997 3,330 $ 33 $29,469 $ 2,420 - -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 22 Southwest Water Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows from Operating Activities: Net income $ 2,601 $ 1,923 $ 1,439 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,162 3,887 3,701 Deferred income taxes 732 160 (22) Gain on sale of land 0 0 (84) Changes in assets and liabilities: Customer's accounts and receivable 930 (431) (1,764) Other current assets (890) 442 (517) Accounts payable (299) (756) 1,084 Other current liabilities 1,343 550 884 Other, net (210) 204 (209) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,369 5,979 4,512 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Additions to property, plant and equipment (9,384) (11,775) (9,858) Investment in Windermere Utility Company (Note 2) 0 (3,000) 0 Proceeds from sale of land 0 0 94 Other investments, net (338) 0 0 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (9,722) (14,775) (9,764) - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings (repayment) of short-term debt 1,942 (2,986) 5,725 Contributions in aid of construction 1,501 1,960 1,619 Advances for construction 447 89 0 Net proceeds from dividend reinvestment and stock purchase plans 370 271 231 Dividends paid (1,155) (1,050) (999) Payments on long-term debt (900) (900) (900) Payments on advances for construction (405) (582) (468) Proceeds from issuance of long-term debt 0 12,000 0 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,800 8,802 5,208 - --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 447 6 (44) Cash and cash equivalents at beginning of year 790 784 828 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,237 $ 790 $ 784 - --------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow information: Cash paid during the year for: Interest $ 3,189 $ 2,776 $ 2,351 Income $ 805 $ 1,573 $ 1,092 Non-cash contributions in aid of construction and advances for construction conveyed to Company by developers $ 5,818 $ 3,437 $ 2,008
See accompanying notes to consolidated financial statements. 23 SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: Southwest Water Company and its subsidiaries ("the Company") provide water management services through contract and utility operations. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The principal subsidiaries are Suburban Water Systems ("Suburban"), New Mexico Utilities, Inc. ("NMUI") and ECO Resources, Inc. ("ECO"). All significant intercompany transactions have been eliminated. REGULATION: Suburban and NMUI conform to the Uniform System of Accounts prescribed by the California Public Utilities Commission ("CPUC") and the New Mexico Public Utility Commission ("NMPUC"), respectively. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. This affects the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. RECOGNITION OF REVENUES: Water utility revenues include amounts billed to customers and an estimated amount of unbilled revenue for water used to the end of the accounting period. Revenues from contract operations are recognized as services are performed. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS: The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and short and long- term debt approximates fair value. At December 31, 1997, the Company had no derivative financial instruments, financial instruments with off-balance sheet risk or financial instruments with concentrations of credit risk that require disclosure under Statement of Financial Accounting Standards No. 119 ("SFAS"), "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments." PROPERTY, PLANT AND EQUIPMENT: The cost of additions to utility plant includes labor, material and interest. Interest of $63,000, $141,000 and $122,000 was capitalized in 1997, 1996 and 1995, respectively. The cost of utility plant retired, including net removal costs, is charged to accumulated depreciation. Depreciation expense on utility plant is recorded using the straight-line method. Depreciation expense of 3.2% of average gross depreciable plant was incurred during 1997, 1996 and 1995. 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. OTHER ASSETS: Included in other assets are regulatory assets representing amounts that will be recovered from utility customers through rate adjustments authorized by the CPUC and NMPUC. Other assets also include an investment in Windermere Utility Company ("Windermere") as described in Note 2 and land and its associated costs no longer used in utility operations. Additionally, other assets include deferred debt expenses that are being amortized over the lives of the related debt issues. Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company is required to review for impairment of long-lived assets, including regulatory assets, as well as costs excluded from rate base by regulators. Impairment of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such 24 assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. INCOME TAXES: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The most significant items are the tax effects of accelerated depreciation, advances for construction and contributions in aid of construction. When the Company adopted 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 NMPUC. The regulatory assets and regulatory liabilities will be recovered from or refunded to utility customers through future authorized rate adjustments. Unamortized investment tax credits have been deferred and are amortized over the estimated productive lives of the related assets as allowed by the CPUC and the NMPUC. PRODUCTION COST BALANCING ACCOUNTS: Suburban records the difference between actual water production costs incurred and CPUC-adopted water production costs in balancing accounts in the income statement with a corresponding liability or asset on the balance sheet. Under current regulations, the differences recorded will be refunded to or recovered from utility customers through future CPUC- authorized rate adjustments. ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION: Advances for construction represent amounts advanced by developers primarily for water pipeline extensions. Advance contracts issued after June 1982 are refundable to the depositor at a rate of 2.5% each year over a 40-year period. Advance contracts issued prior to July 1982 are refundable over a 20-year period. Contributions in aid of construction represent contributions in the form of cash, services or property received from developers, governmental agencies, municipalities or individuals for the purpose of constructing utility plant. Depreciation expense related to utility plant additions from contributions in aid of construction is charged as a reduction to contributions in aid of construction instead of depreciation expense. OTHER LIABILITIES AND DEFERRED CREDITS: Other liabilities and deferred credits include unamortized investment tax credits recorded by Suburban and NMUI as authorized by the CPUC and the NMPUC. Also included are regulatory liabilities representing amounts that will be refunded to utility customers through rate adjustments authorized by the CPUC and the NMPUC. NEW ACCOUNTING STANDARDS: In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued and are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. These standards increase disclosure in the financial statements and will have no impact on the Company's financial position or results of operations. RECLASSIFICATIONS: Certain reclassifications have been made to the 1996 and 1995 consolidated financial statement presentation to conform to the 1997 presentation. 25 NOTE 2. INVESTMENTS In June 1996, the Company purchased a 49% interest in Windermere for an investment of $3,000,000. The agreement permits the majority shareholder to acquire the Company's interest prior to June 1998 at an agreed-upon price. If the majority shareholder does not exercise his option, then the Company has the right to acquire 100% of Windermere for an agreed-upon price. The majority shareholder has expressed an intention to acquire the Company's interest. The Company also has a consulting agreement with Windermere and an additional agreement by which the Company may receive an annual payment based on Windermere's financial performance. The investment is carried at cost and is included in Other Assets in the Company's consolidated balance sheets. NOTE 3. UTILITY PROPERTY, PLANT AND EQUIPMENT The components of utility property, plant and equipment at December 31, 1997 and 1996 are as follows:
- -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- (in thousands) Land and land rights $ 598 $ 598 Source of supply 11,532 9,978 Pumping and purification 12,806 10,039 Transmission and distribution 98,180 86,158 General (including intangibles) 7,843 7,652 Construction work in progress 2,977 5,306 - -------------------------------------------------------------------------------- $133,936 $119,731 - --------------------------------------------------------------------------------
At December 31, 1997, substantially all of the Company's utility plant was pledged as collateral for the First Mortgage Bonds issued by the Company (Note 6). Included in the general utility plant amounts in 1997 and 1996 is $698,000 for investments in two not-for-profit mutual water companies. The investments are recorded at cost and entitle the Company to certain water rights. The Company's investment in the common stock of one of these mutual water companies is approximately 32%; however, the Company does not exercise significant operating and financial control over this mutual water company. The Company purchased water from these mutual water companies at a cost of approximately $1,835,000, $1,600,000 and $1,511,000 in 1997, 1996 and 1995, respectively. NOTE 4. LINES OF CREDIT At December 31, 1997, the Company had three revolving lines of credit totaling $16,000,000. All of the lines of credit expire in 1999, and all borrowings are unsecured. Interest is charged under two of the lines of credit at the banks' prime rates. These two line of credit agreements also allow the Company to borrow at a lower interest rate than the banks' existing prime rate. Certain minimum borrowing requirements exist 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. All of the lines of credit contain certain financial restrictions, and two of the lines of credit require a commitment fee of 1/2%, and 1/4% per year of the unused portion of the available lines of credit, calculated and payable on a quarterly basis. The third line of credit agreement requires a $6,000 annual fee. The Company expects to renew and update these lines of credit in the normal course of business. 26 A summary of borrowings on the lines of credit is presented below:
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (in thousands) Notes payable to banks at December 31 $ 7,131 $ 5,189 Weighted average interest rate at December 31 7.4% 7.6% Maximum amount of borrowings outstanding at any month end $ 8,340 $ 17,345 Average borrowings $ 6,910 $ 12,580 Weighted average interest rate 7.3% 7.7% - --------------------------------------------------------------------------------------------------------------------
NOTE 5. OTHER CURRENT LIABILITIES Included in other current liabilities at December 31, 1997 and 1996 are the following:
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (in thousands) Accrued salaries, wages and benefits $ 2,567 $ 1,815 Purchased water 1,969 1,872 Accrued interest payable 680 692 Franchise and other taxes 441 596 Current portion of advances for construction 431 482 Accrued dividends payable 307 288 Other 2,517 1,824 - -------------------------------------------------------------------------------------------------------------------- $ 8,912 $ 7,569 - --------------------------------------------------------------------------------------------------------------------
NOTE 6. LONG-TERM DEBT The long-term debt outstanding at December 31, 1997 and 1996 is summarized as follows:
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (in thousands) Suburban First Mortgage Bond, Series A, due 2006, at 8.93% interest rate, with semiannual interest payments $ 8,700 $ 9,600 Suburban First Mortgage Bond, Series B, due 2022, at 9.09% interest rate, with semiannual interest payments 8,000 8,000 Suburban First Mortgage Bond, Series C, due 2006, at 7.61% interest rate, with semiannual interest payments 8,000 8,000 NMUI First Mortgage Bond, Series A, due 2002, at 8.86% interest rate, with semiannual interest payments 2,000 2,000 NMUI First Mortgage Bond, Series B, due 2006, at 7.64% interest rate, with semiannual interest payments 4,000 4,000 - -------------------------------------------------------------------------------------------------------------------- 30,700 31,600 Less current maturities 900 900 - -------------------------------------------------------------------------------------------------------------------- Long-term debt $ 29,800 $ 30,700 - --------------------------------------------------------------------------------------------------------------------
27 Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments of $900,000. The bond is nonrefundable and may not be redeemed prior to October 2, 2000. After October 1, 2000, the bond may be redeemed at the option of the Company at a price of par plus a call premium. Suburban's First Mortgage Bonds, Series B and Series C, and NMUI's First Mortgage Bonds, Series A and Series B, do not require annual sinking fund payments. These bonds are nonrefundable and may be redeemed at any time by the Company at a price of par plus a call premium. Additional mortgage bonds may be issued, subject to the provisions of the indentures. Substantially all of the Company's utility plant is pledged as collateral for these bonds (Note 3). Each indenture limits the amount of cash and property dividends that Suburban and NMUI may pay to the Company. At December 31, 1997 and 1996, the combined indenture limits for dividends totaled $12,946,000 and $10,320,000, respectively. Aggregate annual maturities and sinking fund requirements of all long-term debt for the five years ending December 31, 2002, are $900,000 each year. NOTE 7. INCOME TAXES
The components of the current and deferred income tax provisions are as follows: - ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Current tax expense: Federal $ 978 $ 795 $ 803 State 371 509 356 - ----------------------------------------------------------------------------------------------------------------------------------- 1,349 1,304 1,159 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred income taxes (benefits): Depreciation 640 713 965 Production cost balancing accounts 342 185 80 Contributions in aid of construction and advances for construction 242 (405) (1,148) Investment tax credits 26 25 26 Reserves (440) (318) (56) Gains on condemnation of land (51) (25) (56) Deferred debt expenses (7) (6) (6) Other, net (19) (10) 173 - ----------------------------------------------------------------------------------------------------------------------------------- 733 159 (22) - ----------------------------------------------------------------------------------------------------------------------------------- Change in regulatory assets and regulatory liabilities, net (183) (39) (167) Investment tax credit amortization (49) (49) (49) - ----------------------------------------------------------------------------------------------------------------------------------- $1,850 $ 1,375 $ 921 - ----------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows: - ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Provision computed at statutory rates 34% 34% 34% Depreciation 1% 2% 3% Goodwill amortization and other non deductible expenses 3% 4% 4% State income taxes, net of Federal tax benefit 2% 3% 2% Investment tax credits (1%) (1%) (2%) Other, net 3% 0% (2%) - ----------------------------------------------------------------------------------------------------------------------------------- 42% 42% 39% - -----------------------------------------------------------------------------------------------------------------------------------
28 Net deferred income taxes consist of the following at December 31, 1997 and 1996:
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Deferred income tax assets: Contributions in aid of construction and advances for construction $ 3,556 $ 3,798 Investment tax credits 556 582 Reserves 951 511 Production cost balancing accounts (317) 25 Other 232 216 - ----------------------------------------------------------------------------------------------------------------------------------- 4,978 5,132 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Depreciation (7,895) (7,255) Gains on condemnation of land (806) (857) Deferred debt expenses (112) (119) Other (295) (299) - ----------------------------------------------------------------------------------------------------------------------------------- (9,108) (8,530) - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred income taxes $(4,130) $(3,398) - -----------------------------------------------------------------------------------------------------------------------------------
Management regularly reviews the recoverability of deferred income tax assets and has determined that no valuation allowances were necessary at December 31, 1997 or 1996. NOTE 8. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board Issued SFAS No. 128, "Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share ("EPS") with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effect of options. Diluted EPS is very similar to the previously reported primary EPS. All EPS amounts for the periods reported have been restated to conform to SFAS No. 128 requirements. The reconciliation of the numerators and denominators of the basic and diluted EPS computations are as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Dividends on Effect of Preferred Dilutive Net Income Shares Basic EPS Options Diluted EPS - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands except per share data) 1997 ---- Income (Numerator) $ 2,601 $ (27) $ 2,574 $ 0 $ 2,574 Shares (Denominator) 3,303 71 3,374 Per Share Amount $ 0.78 $ 0.76 =========== ============= 1996 ---- Income (Numerator) $ 1,923 $ (27) $ 1,896 $ 0 $ 1,896 Shares (Denominator) 3,269 53 3,322 Per Share Amount $ 0.58 $ 0.57 =========== ============= 1995 ---- Income (Numerator) $ 1,439 $ (27) $ 1,412 $ 0 $ 1,412 Shares (Denominator) 3,230 0 3,230 Per Share Amount $ 0.44 $ 0.44 =========== ============= - -----------------------------------------------------------------------------------------------------------------------------------
29 NOTE 9. STOCKHOLDERS' EQUITY The Company is currently authorized to issue 10,000,000 common shares at a par value of $.01 per share. There were 3,330,207 and 3,121,907 shares outstanding at December 31, 1997 and 1996, respectively. The Company is also currently authorized to issue 250,000 preferred shares at a par value of $.01 per share. There were 10,341 Series A-preferred shares outstanding at December 31, 1997 and 1996. The holders of Series A-preferred shares are entitled to annual dividends of $2.625 per share. Series A-preferred shares are callable by the Company at a price equal to $52 per share and have a preference in liquidation of $50 per share. In December 1997 and 1996, the Company declared stock dividends of 5% and 20%, respectively, or 158,581 and 520,317 shares, to stockholders of record on January 2, 1998 and 1997, respectively. At December 31, 1997 and 1996, retained earnings were charged approximately $2,735,000 and $7,154,000, respectively, which represents the market value of the shares issued using the closing price of the Company's common stock on January 2, 1998 ($17.50) and on January 2, 1997 ($13.214 after restatement for the stock dividends). Corresponding entries of approximately $2,733,000 and $7,149,000, respectively, were recorded to paid-in capital. The weighted-average numbers of outstanding common shares and cash dividends per common share have been restated to reflect the stock dividends. The 1995 basic and diluted EPS calculations reflect the 5% dividend to stockholders of record on January 2, 1998. The Company has a dividend reinvestment and stock purchase plan that allows common stockholders the option of receiving their dividends either in cash or in common stock at a 5% discount from the market value. The plan permits optional cash purchases of stock at current market values up to a maximum of $3,000 per quarter. At December 31, 1997, 193,603 common shares were reserved for issuance under this plan. NOTE 10. STOCK COMPENSATION PLANS At December 31, 1997, the Company had three stock-based compensation plans: a Stock Option Plan, a Director Stock Option Plan, and an Employee Stock Purchase Plan. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations in accounting for these plans. For the restricted stock issued under the Stock Option Plan, compensation expense of $24,000 was recorded in 1997, 1996 and 1995. Compensation expense of approximately $12,000, $16,500 and $3,300 was recorded in 1997, 1996 and 1995, respectively, for the Company's Employee Stock Purchase Plan. If compensation cost for the Company's three stock-based compensation plans had been determined using the alternative method described under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been as follows:
- ---------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------- (in thousands except per share data) Net income available for common shares As reported $2,574 $1,896 $1,412 Pro forma $2,516 $1,857 $1,403 - ---------------------------------------------------------------------------------------- Basic earnings per common share As reported $ 0.78 $ 0.58 $ 0.44 Pro forma $ 0.76 $ 0.57 $ 0.43 - ---------------------------------------------------------------------------------------- Diluted earnings per common share As reported $ 0.76 $ 0.57 $ 0.44 Pro forma $ 0.74 $ 0.56 $ 0.43 - ----------------------------------------------------------------------------------------
STOCK OPTION PLAN ("THE PLAN"): In 1988, the stockholders approved the Plan and reserved 150,000 shares for issuance under the Plan. In 1993, the stockholders approved an amendment to the Plan (the 1993 Amendment), which provided for an increase of 100,000 shares reserved for issuance under the 30 Plan, and extended the grant dates to February 17, 2003. In addition, the 1993 Amendment eliminated any future grants of restricted stock and amended certain provisions with respect to the outstanding restricted stock issued. In 1997, the stockholders approved another amendment to the Plan, which provided for an increase of 200,000 shares reserved for issuance under the Plan. A total of 540,750 shares (after adjusting for stock dividends of 5% on January 2, 1998, 20% on January 2, 1997, and 5% on January 2, 1996) are authorized for issuance under the Plan. The Plan allows the Company to grant non-qualified stock options to officers and employees at exercise prices not less than the fair market value of the Company's common stock on the last trading date preceding the date of grant. Prior to the approval and implementation of the Director Option Plan discussed below, the Company granted non-qualified options to certain non-employee directors under the Plan. Options vest equally over a period of five years and expire 10 years from the date of grant. Restricted stock issued to officers is held in escrow until the restrictions lapse. Restricted stock issued prior to October 22, 1991 vests 10 years after grant. Restricted stock issued after October 22, 1991 was subject to repurchase by the Company. Unearned compensation of $238,000 related to the issuance of 19,511 shares of restricted stock (adjusted for stock dividends of 5% on January 2, 1998, 20% on January 2, 1997, and 5% on January 2, 1996) is being amortized over the vesting periods. 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 1997, 1996 and 1995 are as follows:
- --------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------- Dividend yield 2.6% 3.3% 4.6% Expected volatility 33.1% 37.5% 34.0% Risk free interest rate 6.0% 6.6% 6.6% Expected life in years 8 8 8 - ---------------------------------------------------------
A summary of the status of the Plan as of December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below:
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 217,378 $ 9.93 173,101 $10.14 140,967 $11.22 Granted 40,530 12.88 46,419 9.06 40,010 6.69 Exercised (20,502) 9.31 (882) 6.90 0 0.00 Forfeited (10,034) 8.06 (1,260) 9.03 (7,876) 9.32 ------- ------- ------- Outstanding at end of year 227,372 10.59 217,378 9.93 173,101 10.14 ======= ======= ======= Options exercisable at year-end 127,146 $11.07 123,220 $11.35 101,394 $11.84 ======= ======= ======= Weighted average fair value of options granted during the year $4.99 $3.35 $1.94 ======= ======= ======= - -----------------------------------------------------------------------------------------------------------------------------------
31 The following table summarizes information about fixed stock options outstanding at December 31, 1997:
- ----------------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Life Average Exercisable Average Exercise Prices 1997 In Years Exercise Price 1997 Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- $ 6 to $10 89,354 7.6 $ 7.87 29,658 $ 7.53 10 to 13 47,083 3.9 11.45 47,083 11.45 13 to 15 90,935 5.6 12.83 50,405 12.78 ------- ------- $ 6 to $15 227,372 5.7 $10.59 127,146 $11.07 - -----------------------------------------------------------------------------------------------------------------------------------
DIRECTOR OPTION PLAN ("DOP"): In 1996, the stockholders approved the DOP for non-employee directors and reserved 50,000 shares for issuance under the plan. After adjusting for stock dividends of 5% on January 2, 1998 and 20% on January 2, 1997, 63,000 shares are authorized for issuance under the DOP. The DOP provides for an automatic grant of an option to purchase 1,260 shares (after adjustments for stock dividends) 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. New directors are granted an initial option to purchase 1,260 shares of the Company's common stock upon appointment to the Board of Directors. During 1997, 8,820 stock options were granted under the DOP with an average exercise price of $12.02 at December 31, 1997. The fair value of the options is estimated on the date of grant using the Black-Scholes option- pricing model and was $2.42 at December 31, 1997. This amount is included in the pro forma net income available for common shares amount shown in the table on page 30. The DOP options become exercisable in equal installments of 50% of the shares on the first and second anniversaries of the date of grant. The options expire ten years and one day from the date granted. Prior to approval of the DOP, non-employee directors were granted options under the Stock Option Plan above. EMPLOYEE STOCK PURCHASE PLAN ("ESPP"): The Company has an ESPP, approved by the stockholders, that allows eligible employees to purchase common stock through payroll deductions in an amount up to 10% of their salary (not to exceed $25,000 per year). The purchase price of the stock is 90% of the lower of the beginning of period or end of period stock price. Under the ESPP, the Company issued 5,013 shares, 4,877 shares and 3,277 shares to employees in 1997, 1996 and 1995, respectively. At December 31, 1997, 230,802 common shares were reserved for issuance under the ESPP (after adjustment for the stock dividend). Using the alternative method described under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the weighted average assumptions shown in the table on page 31. The weighted average fair value of those purchase rights granted in 1997, 1996 and 1995 was $3.19, $3.97 and $1.72, respectively, which resulted in compensation expense of $16,016, $23,240 and $5,640, respectively, and is included in the pro forma net income available for common shares amount shown in the table on page 30. NOTE 11. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLAN: The Company has a non-contributory pension plan ("the Pension Plan") under which employees of the parent company, Suburban and NMUI who have one or more years of service and have attained the age of 21 years are qualified to participate. The Company funds annually the minimum required statutory amount. In 1997, 1996 and 1995, the Company contributed $560,000, $556,000 and $531,000, respectively, to the Pension Plan. The benefits are based on employees' years of service and their average compensation during the highest five consecutive years of the last 10 years before retirement. Benefits are reduced if a participant retires early. 32
- --------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------- (in thousands) Service cost - benefits earned during the period $ 416 $ 436 $ 406 Interest cost on projected benefit obligation 585 573 556 Actual return on plan assets (1,707) (907) (912) Net amortization and deferral 817 110 243 - --------------------------------------------------------------------------------------------------- Net pension expense $ 111 $ 212 $ 293 - ---------------------------------------------------------------------------------------------------
The funded status at December 31, 1997 and 1996 is reconciled to accrued expense as follows: - --------------------------------------------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------- (in thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation $ (6,625) $ (6,134) Effect of increase in compensation levels (1,798) (1,664) - --------------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered through December 31 (8,423) (7,798) Plan assets at fair value 11,414 9,441 - --------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 2,991 1,643 Unrecognized net asset at transition date (622) (747) Unrecognized prior service cost (154) (164) Unrecognized net gain from past experience, different from that assumed and effects of changes in assumptions (1,853) (820) - --------------------------------------------------------------------------------------------------- Prepaid (accrued) expense $ 362 $ (88) - ---------------------------------------------------------------------------------------------------
Included in the accumulated benefit obligation are vested benefits of $6,431,000 and $6,069,000 at December 31, 1997 and 1996, respectively. Approximately 87% of Pension Plan assets are invested in two mutual funds consisting of investments in stocks, bonds and money market investments, in addition to a group retirement policy consisting of a guaranteed insurance contract. The remaining 13% of Pension Plan assets are invested primarily in the Company's common stock. The Pension Plan owns 84,756 common shares of the Company (after adjusting for the 5% stock dividend on January 2, 1998), which had a market value of approximately $1,483,230 and $1,122,000 at December 31, 1997 and 1996, respectively. The Pension Plan received dividends on these shares of approximately $30,000 in 1997 and $27,000 in 1996. The following represent actuarial assumptions used at December 31, 1997, 1996 and 1995:
- --------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.5% 7.5% Compensation level increase 3.5% 3.5% 4.5% Expected long-term rate of return on assets 8.0% 8.0% 8.0% - ---------------------------------------------------------------------------------------------------
DEFINED CONTRIBUTION PLANS: The Company has established a 401(k) profit sharing plan ("ECO 401(k) Plan") covering employees of its contract operations business. The ECO 401(k) Plan provides for monthly enrollment by employees after the completion of three months of service. Participants may elect 33 to contribute up to 15% of their salary to the ECO 401(k) Plan. The Company matches a participant's contribution for an amount up to 50% of the first 4% of the participant's salary. Company contributions vest immediately. Company contributions to the ECO 401(k) Plan were $133,000, $141,000 and $104,000 in 1997, 1996 and 1995, respectively. The assets of the ECO 401(k) Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds and money market investments. The Company also has established a 401(k) plan ("the Utility 401(k) Plan") covering employees of the parent company, Suburban and NMUI. The Utility 401(k) Plan provides for monthly enrollment after the completion of three months of service and allows participants to contribute up to 15% of their salary. The Utility 401(k) Plan does not provide for Company contributions. The assets of the Utility 401(k) Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds and money market investments. NOTE 12. OPERATING REVENUES AND DIRECT OPERATING EXPENSES Included in operating revenues and direct operating expenses are the following:
- ---------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------- Utility operating revenues $36,020 $33,772 $31,089 Service operating revenues 34,985 32,373 25,718 ----------------------------------------- Total operating revenues $71,005 $66,145 $56,807 ========================================= Utility direct operating expenses $20,824 $20,266 $18,865 Service direct operating expenses 31,870 30,091 24,506 ----------------------------------------- Total direct operating expenses $52,694 $50,357 $43,371 ==================================================================================
NOTE 13. COMMITMENTS AND CONTINGENCIES The Company leases certain equipment and office facilities under operating leases that expire through 2003. Aggregate rental expense under all operating leases approximated $2,225,000 in 1997, $2,220,000 in 1996, and $1,989,000 in 1995. At December 31, 1997, the future minimum rental commitments under existing non-cancelable operating leases are as follows: 1998 - $2,007,000; 1999 - - $1,608,000; 2000 - $1,191,000; 2001 - $541,000; 2002 - $425,000; and thereafter - $281,000. The Company is the subject of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its consolidated financial condition, results of operations or cash flow. 34 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 Commission dated on or about April 24, 1998, under the caption "Information About the Board of Directors and Committees of the Board," and is hereby incorporated by reference. In addition, information appearing under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934, as Amended" is in the Company's definitive Proxy Statement, dated on or about April 24, 1998, 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 24, 1998, under the captions "Executive Compensation and Other Information," and "Information About the Board of Directors and Committees of the Board," and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management of the Company's voting securities is set forth in the Company's definitive Proxy Statement, to be filed with the Commission dated on or about April 24, 1998, under the caption "Beneficial Ownership of the Company's Securities," and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is set forth under the captions "Information About the Board of Directors and Committees of the Board," "Executive Severance Compensation Agreements," and "Certain Transactions" in the Company's definitive Proxy Statement, to be filed with the Commission dated on or about April 24, 1998, and is hereby incorporated by reference. 35 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, 1997, 1996 and 1995 Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Changes in Common Stockholders' Equity - Three Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (a)(2) The supplementary financial statement schedule required to be filed with this report is as follows:
Page ---- Schedule II - Valuation and Qualifying Accounts....................37 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...................................................38-42
(b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended December 31, 1997. 36 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Balance at Provision Balance Beginning of Charged Accounts at End Year to Income Written Off of Year ---------------------------------------------------------------------- (in thousands) 1997 Allowance for Doubtful Accounts $ 512 $ 247 $ (48) $711 ====================================================================== 1996 Allowance for Doubtful Accounts $ 192 $ 614 $(294) $512 ====================================================================== 1995 Allowance for Doubtful Accounts $ 141 $ 245 $(194) $192 ======================================================================
37 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). 3.2 Registrant's Bylaws as amended April 4, 1988 (incorporated by reference to Exhibit 3.2 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988). 3.2A Amendment to Registrant's Bylaws dated March 15, 1991 (incorporated by reference to Exhibit 3.2A to Registrant's Form 10-K Report for the year ended December 31, 1990). 3.2B Amendment to Registrant's Bylaws dated June 27, 1995 (incorporated by reference to Exhibit 3.2A to Registrant's Form 10-Q Report for the quarter ended June 30, 1995). 3.2C Amendment to Registrant's Bylaws dated December 12, 1996 (incorporated by reference to Exhibit 3.2C to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.1 Indenture dated as of August 15, 1975, between Registrant and Bank of America, formerly Security Pacific National Bank (incorporated by reference to Exhibit 6(g) to Registrant's Form S-14 Registration Statement filed with the Commission on June 19, 1975). 4.2 Indenture of Mortgage and Deed of Trust dated October 1, 1986, between Suburban Water Systems and First Trust of California, formerly Security Pacific National Bank (incorporated by reference to Exhibit 4.3 to Registrant's Form 10-K Report for the year ended December 31, 1986). 4.2A First Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and First Trust of California, formerly Security Pacific National Bank, dated February 7, 1990 (incorporated by reference to Exhibit 4.2A to Registrant's Form 10-K Report for the year ended December 31, 1989). 4.2B Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and First Trust of California, formerly Security Pacific National Bank, dated January 24, 1992 (incorporated by reference to Exhibit 4.2B to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.2C Third Amendment and Supplement to Indenture of Mortgage dated October 9, 1996, between Suburban Water Systems and First Trust of California, N.A. (incorporated by reference to Exhibit 4.7 to Registrant's Form 10-Q Report for the quarter ended September 30, 1996). 4.3 Bond Purchase Agreement dated October 1, 1986, for Suburban Water Systems (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1986).
38 4.3A Bond Purchase Agreement dated February 20, 1992, for Suburban Water Systems (incorporated by reference to Exhibit 4.3A to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.3B Bond Purchase Agreement dated October 21, 1996, for Suburban Water Systems (incorporated by reference to Exhibit 4.3B to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.4 Indenture of Mortgage dated February 14, 1992, between New Mexico Utilities, Inc., and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.4A First Supplement to Indenture of Mortgage dated May 15, 1992, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4A to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.4B Second Amendment and Supplement to Indenture of Mortgage dated October 21, 1996, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.8 to Registrant's Form 10-Q Report for the quarter ended September 30, 1996). 4.5 Bond Purchase Agreement dated March 12, 1992, for New Mexico Utilities, Inc. (incorporated by reference to Exhibit 4.5 to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.5A Bond Purchase Agreement dated November 8, 1996, for New Mexico Utilities, Inc. (incorporated by reference to Exhibit 4.5A to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.6 Article Four of the Restated Certificate of Incorporation of the Registrant as to the rights, preferences, privileges and restrictions of all classes of stock (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988.) 4.6A 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). 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). 10.2 Amended and Restated Employee Qualified Stock Purchase Plan dated November 11, 1991 (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-Q Report for the quarter ended September 30, 1991). 10.3 Dividend Reinvestment and Stock Purchase Plan dated December 1, 1992 (incorporated by reference to Registrant's Form S-3 Registration Statement filed with the Commission on December 1, 1992). 10.4 Line of Credit Agreement dated December 2, 1992, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.6 to Registrant's Form 10-K Report for the year ended December 31, 1992).
39 10.4A First Amendment to Credit Agreement dated December 1, 1993, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.4B Second Amendment to Credit Agreement dated December 1, 1994, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.4B to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.4C Third Amendment to Credit Agreement dated December 1, 1995, between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.4C to Registrant's Form 10-K Report for the year ended December 31, 1995). 10.4D Fourth Amendment to Credit Agreement dated May 14, 1996 between Registrant and Wells Fargo Bank (incorporated by reference to Exhibit 10.4D to Registrant's Form 10-Q Report for the quarter ended June 30,1996). 10.4E Letter of Extension to Credit Agreement dated June 30, 1997 between Registrant and Wells Fargo Bank (incorporated by reference to Registrant's Form 10-Q Report for the quarter ended June 30, 1997). 10.4F Letter of Extension to Credit Agreement dated September 1, 1997 between Registrant and Wells Fargo Bank (incorporated by reference to Registrant's Form 10-Q Report for the quarter ended September 30, 1997). 10.4G Letter of Extension to Credit Agreement dated November 1, 1997 between Registrant and Wells Fargo Bank (incorporated by reference to Registrant's Form 10-Q Report for the quarter ended September 30, 1997). 10.5 Line of Credit Agreement dated December 2, 1992, between Registrant and First Interstate Bank of California (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-K Report for the year ended December 31, 1992). 10.5A First Amendment to Credit Agreement and Promissory Note dated July 29, 1993, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.5B Second Amendment to Credit Agreement and Promissory Note dated June 24, 1994, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.16 to Registrant's Form 10-Q Report for the quarter ended June 30, 1994). 10.5C Third Amendment to Credit Agreement and Promissory Note dated June 30, 1995, between Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.5C to Registrant's Form 10-Q Report for the quarter ended June 30, 1995). 10.5D Fourth Amendment to Credit Agreement and Promissory Note dated March 26, 1996, between the Registrant and First Interstate Bank (incorporated by reference to Exhibit 10.5D to Registrant's Form 10-Q Report for the quarter ended June 30, 1996). 10.6 Amended and Restated Stock Option and Restricted Stock Plan dated November 11, 1991, and First Amendment to the Amended and Restated Stock Option and Restricted Stock Plan dated March 21, 1993 (incorporated by reference to Registrant's Form S-8 Registration Statement filed with the Commission on December 21, 1993). 10.7 Stock Purchase Agreement and First Amendment to Stock Purchase Agreement dated August 13, 1993, between ECO Resources, Inc., and Robert E. Hebert (incorporated by
40 reference to Exhibit 10.11 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.8 Utility Employees' 401(k) Plan dated January 7, 1994 (incorporated by reference to Exhibit 10.13 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.8A 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). 10.9 Comprehensive Amendment to the Profit Sharing 401(k) Plan for the Southwest Water Company's Related Companies dated March 10, 1994 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.9A 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). 10.10 Line of Credit Agreement dated January 25, 1995, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10 to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.10A First Amendment to Loan Agreement dated October 10, 1995, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by reference to Registrant's Form 10-Q Report for the quarter ended March 31, 1996). 10.10B Second Amendment to Loan Agreement and Promissory Note dated April 17, 1996, between New Mexico Utilities, Inc., and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10B to Registrant's Form 10-Q Report for the quarter ended March 31, 1996). 10.10C Third Amendment to Loan Agreement dated July 16, 1996, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10C to Registrant's Form 10-Q Report for the quarter ended June 30, 1996). 10.10D Fourth Amendment to Credit Agreement dated January 25, 1997, between New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10D to Registrant's Form 10-K Report for the year ended December 31, 1996). 10.10E Fifth Amendment to Loan Agreement and Promissory Note dated June 20, 1997, between New Mexico Utilities, Inc., and Sunwest Bank of Albuquerque (incorporated by reference to Exhibit 10.10E to the Registrant's Form 10- Q Report for the quarter ended June 30, 1997). 10.11 Form of Severance Compensation Agreement between Registrant and certain executive officers approved by the Compensation Committee of the Board of Directors on February 21, 1995 (incorporated by reference to Exhibit 10.11 to Registrant's Form 10-Q Report for the quarter ended March 31, 1995). 10.12 Equity Investment Agreement dated May 23, 1996, between the Registrant and RTNT, Inc., covering Windermere Utility Company, together with two First Refusal Agreements and Call Purchase Agreements between the Registrant and RTNT, Inc. (incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K Report for the year ended December 31, 1996). 10.13 Credit Agreement dated June 30, 1996 between Suburban Water Systems and Wells Fargo Bank (incorporated by reference to Exhibit 10.13 to Registrant's Form 10-Q Report for the quarter ended September 30, 1996).
41 10.13A Letter of Extension to Credit Agreement dated June 30, 1997, between Suburban Water Systems and Wells Fargo Bank (incorporated by reference to Exhibit 10.13A to Registrant's Form 10-Q Report for the quarter ended June 30, 1997). 10.13B Letter of Extension to Credit Agreement dated September 1, 1997 between Suburban Water Systems and Wells Fargo Bank (incorporated by reference to Exhibit 10.13B to Registrant's Form 10-Q Report for the quarter ended September 30, 1997). 10.13C Letter of Extension to Credit Agreement dated November 1, 1997 between Suburban Water Systems and Wells Fargo Bank (incorporated by reference to Exhibit 10.13C to Registrant's Form 10-Q Report for the quarter ended September 30, 1997). 10.14 Credit Agreement dated August 29, 1996 between Registrant and Mellon Bank, N.A. (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-Q Report for the quarter ended September 30, 1996). 10.14A First Amendment to Credit Agreement dated March 31, 1997 between Registrant and Mellon Bank (incorporated by reference to Exhibit 10.14A to Registrant's Form 10-Q Report for the quarter ended June 30, 1997). 10.14B Second Amendment to Credit Agreement dated June 17, 1997 between Registrant and Mellon Bank (incorporated by reference to Exhibit 10.14B to Registrant's Form 10-Q Report for the period ended June 30, 1997). 10.14C Third Amendment to Credit Agreement dated June 17, 1997 between Registrant and Mellon Bank (incorporated by reference to Exhibit 10.14C to Registrant's Form 10-Q Report for the period ended September 30, 1997). 10.15 Credit Agreement dated December 23, 1997 between Registrant and Wells Fargo Bank, filed herewith. 10.16 Credit Agreement dated December 23, 1997 between Suburban Water Systems and Wells Fargo Bank, filed herewith. 10.17 Credit Agreement dated December 23, 1997 between Registrant and Mellon Bank, N.A., filed herewith. 10.18 Credit Agreement dated December 23, 1997 between Suburban and Mellon Bank, N.A., filed herewith. 13.1 Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1997. 21.1 Listing of Registrant's subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule.
42 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 24, 1998 By: /s/ Peter J. Moerbeek -------------------------- PETER J. MOERBEEK Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) March 24, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ H. Frederick Christie /s/ Donovan D. Huennekens - ------------------------- ------------------------- H. FREDERICK CHRISTIE DONOVAN D. HUENNEKENS Director Director March 24, 1998 March 24, 1998 /s/ Michael J. Fasman /s/ Richard Kelton - --------------------- ------------------ MICHAEL J. FASMAN RICHARD KELTON Director Director March 24, 1998 March 24, 1998 /s/ Anton C. Garnier /s/ Maureen A. Kindel - -------------------- --------------------- ANTON C. GARNIER MAUREEN A. KINDEL Director Director March 24, 1998 March 24, 1998 /s/ Monroe Harris /s/ Richard G. Newman - ----------------- --------------------- MONROE HARRIS RICHARD G. NEWMAN Director Director March 24, 1998 March 24, 1998 43 EX-10.15 2 CREDIT AGREEMENT DATED 12-23-97 EXHIBIT 10.15 AMENDED AND RESTATED CREDIT AGREEMENT BETWEEN SOUTHWEST WATER COMPANY AND WELLS FARGO BANK, NATIONAL ASSOCIATION DECEMBER 23, 1997 TABLE OF CONTENTS -----------------
PAGE(S) ------- ARTICLE I DEFINITIONS............................................ 1 SECTION 1.01. Defined Terms.......................................... 1 SECTION 1.02. Other Definitional Provisions.......................... 6 ARTICLE II THE CREDIT............................................. 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........... 7 (d) Revolving Note.................................. 7 SECTION 2.02. Mandatory Repayment.................................... 7 SECTION 2.03. Interest Computation and Payment....................... 7 SECTION 2.04. Commitment Fee......................................... 7 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS................ 8 SECTION 3.01. Use of Proceeds........................................ 8 SECTION 3.02. [Intentionally Omitted]................................ 8 SECTION 3.03. Payments............................................... 8 SECTION 3.04. Payment on Non-Business Days........................... 8 SECTION 3.05. Reduced Return......................................... 8 SECTION 3.06. Indemnities............................................ 8 SECTION 3.07. Funding Sources........................................ 9 ARTICLE IV CONDITIONS OF LENDING.................................. 9 SECTION 4.01. Conditions Precedent to Initial Loans.................. 9 SECTION 4.02. Conditions Precedent to Each Borrowing................. 10 ARTICLE V REPRESENTATIONS AND WARRANTIES......................... 11 SECTION 5.01. Representations and Warranties......................... 11 (a) Organization.................................... 11 (b) Authorization; No Conflict...................... 11 (c) Governmental Consents........................... 11 (d) Validity........................................ 12 (e) Financial Condition............................. 12 (f) Litigation...................................... 12
i TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- (g) Employee Benefit Plans............................... 12 (h) Disclosure........................................... 12 (i) Environmental Matters................................ 13 (j) Employee Matters..................................... 13 (k) Solvency............................................. 13 (l) Title to Properties.................................. 13 (m) Tax Returns.......................................... 14 (n) Compliance with Other Agreements and Applicable Laws. 14 ARTICLE VI COVENANTS................................................... 14 SECTION 6.01. Affirmative Covenants....................................... 14 (a) Financial Information................................ 14 (b) Notices and Information.............................. 15 (c) Corporate Existence, Etc............................. 17 (d) Payment of Taxes and Claims.......................... 17 (e) Maintenance of Properties; Insurance................. 17 (f) Inspection........................................... 17 (g) Compliance with Laws Etc............................. 17 (h) Hazardous Waste Studies.............................. 18 SECTION 6.02. Negative Covenants.......................................... 18 (a) Leverage Ratio....................................... 18 (b) Consolidated Tangible Net Worth...................... 18 (c) Consolidated Net Profit.............................. 18 (e) Liens Etc............................................ 18 (f) Debt................................................. 19 (g) Consolidation, Merger or Dissolution................. 19 (h) Loans, Investments, Secondary Liabilities............ 19 (i) Asset Sales.......................................... 20 (j) Hostile Tender Offers................................ 21 (k) Distributions........................................ 21 (l) Transactions with Affiliates......................... 21 (m) Books and Records.................................... 21 (n) Restructure.......................................... 21 ARTICLE VII. EVENTS OF DEFAULT........................................... 21 SECTION 7.01. Events of Default........................................... 21
ii TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- ARTICLE VIII. MISCELLANEOUS............................................... 25 SECTION 8.01. Amendments, Etc............................................. 25 SECTION 8.02. Notices, Etc................................................ 25 SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts..... 25 SECTION 8.04. No Waiver; Remedies......................................... 25 SECTION 8.05. Costs and Expenses.......................................... 25 SECTION 8.06. Participations.............................................. 26 SECTION 8.07. Effectiveness: Binding Effect............................... 26 SECTION 8.08. Governing Law............................................... 26 SECTION 8.10. Waiver of Notices........................................... 28 SECTION 8.11. Entire Agreement............................................ 29 SECTION 8.12. Separability of Provisions.................................. 29 SECTION 8.13. Execution in Counterparts................................... 29
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 AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement dated as of December 23, 1997 is entered into between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION (the "Bank"). - --------- ---- RECITALS -------- WHEREAS, the Borrower has previously entered into with First Interstate Bank of California, the successor by merger of which is the Bank, a Credit Agreement dated as of December 22, 1992, as amended by First Amendment dated July 29, 1993, Second Amendment dated June 24, 1994, Third Amendment dated June 30, 1995, Fourth Amendment dated March 26, 1996 and Letter Extensions dated June 30, 1997, September 1, 1997 and November 1, 1997 (collectively, the "Original Credit Agreement"), pursuant to which the Bank has provided a revolving credit facility to the Borrower; and WHEREAS, the Borrower and the Bank desire to amend the Original Credit Agreement to, among other things (i) extend the Maturity Date to July 1, 1999; (ii) revise the financial covenants; and (iii) revise the Events of Default. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree to amend and restate the Original Credit Agreement in its entirety as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following ------------- terms have the following meanings: "Agreement": This Amended and Restated 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. ------------ 1 "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. "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 Income 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 Income" means, in respect of any period of the Borrower ----------------------- and its Subsidiaries, the consolidated net income 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 2 (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 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. 3 "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. ----- "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 1, 1999. ------------- "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. 4 "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. 5 "Regulation 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 $2,000,000 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; (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 Amended and Restated 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 Amended and Restated 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 6 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 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 pursuant to Section 2.02(b) and reborrow under this Section. (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 7 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 8 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 an amended and restated 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. SECTION 2.04. Commitment Fee. Borrower shall pay to Bank a fee for the -------------- Revolving Commitment equal to one-quarter of one percent (0.25%) per annum of the daily unused balance of the Revolving Commitment, calculated on the basis of a 360-day year, actual days elapsed, which fee shall be due and payable by Borrower to Bank, or debited to Borrower's account with Bank, if so maintained, not later than ten (10) days after billing is sent by Bank. 9 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the 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 4619-041657 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 10 the shareholders, officers, directors, employees and agents of the Bank ("Indemnified Person"), 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 Loans. 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; 11 (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 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: 12 (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 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; 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 13 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 September 30, 1997,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal nine 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 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 September 30, 1997 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 September 30, ---------- 1997, 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. 14 (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 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. 15 (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(d) 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 Subsidiary 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. 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 16 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; (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 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 17 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 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; 18 (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 19 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 the Subsidiaries of Borrower on periodic bases as a normal part of their water delivery and wastewater treatment businesses. 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. (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. 20 (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 $2,000,000 of unsecured debt of the Borrower to Mellon and $4,000,000 of unsecured debt of Suburban to Mellon), (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 $16,000,000 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. 21 (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 September 30, 1997; (vii) guaranty the indebtedness of Suburban under the Suburban Loan Documents; 22 (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 (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. 23 (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 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 24 or observed under any agreement or instrument relating to any such Debt or material to the performance, business, property, assets, condition (financing 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, 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; 25 (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; (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. 26 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. 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 27 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 28 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 29 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 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 30 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 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. 31 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. WELLS FARGO BANK, SOUTHWEST WATER COMPANY NATIONAL ASSOCIATION By: /s/ DEBORAH DILLARD BELL By: /s/ PETER J. MOERBEEK ------------------------ --------------------- Name: Name: Peter J. Moerbeek Title: Title: Vice President - Finance Chief Financial Officer By: /s/ STEPHEN J. MUZI ------------------- Name: Stephen J. Muzi Title: Corporate Controller
Address: Address: San Gabriel Valley Regional Commercial 225 North Barranca Avenue, Suite 200 Banking Office West Covina, California 91791-1605 1000 East Garvey Avenue South, Suite 250 Attention: Peter J. Moerbeek West Covina, California 91790 Vice President - Finance Attention: Deborah Dillard Bell Chief Financial Officer Title: Facsimile (626) 919-2909 Facsimile: (626) 915-1558
32 SCHEDULE 5.01(f) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Borrower for quarter ended September 30, 1997. 33 SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Borrower for quarter ended September 30, 1997. Also, there may have been minor hydraulic fluid leakage at the Maplegrove Street site formerly operated by Southwest and Suburban as their headquarters. Southwest and Suburban are currently investigating this matter but anticipate that any remediation required will have a cost of less than $100,000. 34 SCHEDULE 6.02(e) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Borrower for the fiscal year ended December 31, 1996. 35 EX-10.16 3 CREDIT AGREEMENT DATED 12-23-97 EXHIBIT 10.16 AMENDED AND RESTATED CREDIT AGREEMENT BETWEEN SUBURBAN WATER SYSTEMS AND WELLS FARGO BANK, NATIONAL ASSOCIATION DECEMBER 23, 1997 TABLE OF CONTENTS -----------------
PAGE(S) ------- ARTICLE I. DEFINITIONS............................................ 1 SECTION 1.01. Defined Terms.......................................... 1 SECTION 1.02. Other Definitional Provisions.......................... 6 ARTICLE II. THE CREDIT............................................. 7 SECTION 2.01. The Revolving Loans.................................... 7 (a) The Revolving Commitment.......................... 7 (b) Making the Revolving Loans........................ 7 (c) Reduction of the Revolving Commitment............. 7 (d) Revolving Note.................................... 7 SECTION 2.02. Mandatory Repayment.................................... 7 SECTION 2.03. Interest Computation and Payment....................... 8 SECTION 2.04. Commitment Fee......................................... 8 ARTICLE III. GENERAL PROVISIONS CONCERNING THE LOANS................ 8 SECTION 3.01. Use of Proceeds........................................ 8 SECTION 3.02. [Deliberately Omitted]................................. 8 SECTION 3.03. Payments............................................... 8 SECTION 3.04. Payment on Non-Business Days........................... 8 SECTION 3.05. Reduced Return......................................... 8 SECTION 3.06. Indemnities............................................ 9 SECTION 3.07. Funding Sources........................................ 9 ARTICLE IV. CONDITIONS OF LENDING.................................. 10 SECTION 4.01. Conditions Precedent to Initial Loans.................. 10 SECTION 4.02. Conditions Precedent to Each Borrowing................. 11 ARTICLE V. REPRESENTATIONS AND WARRANTIES......................... 12 SECTION 5.01. Representations and Warranties......................... 12 (a) Organization..................................... 12 (b) Authorization; No Conflict....................... 12 (c) Governmental Consents............................ 12 (d) Validity......................................... 12 (e) Financial Condition.............................. 12 (f) Litigation....................................... 13 (g) Employee Benefit Plans........................... 13
i TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- (h) Disclosure............................................. 13 (i) Environmental Matters.................................. 13 (j) Employee Matters....................................... 14 (k) Solvency............................................... 14 (l) Title to Properties.................................... 14 (m) Tax Returns............................................ 14 (n) Compliance with Other Agreements and Applicable Laws... 14 ARTICLE VI. COVENANTS................................................... 15 SECTION 6.01. Affirmative Covenants....................................... 15 (a) Financial Information.................................. 15 (b) Notices and Information................................ 17 (c) Corporate Existence, Etc............................... 18 (d) Payment of Taxes and Claims............................ 18 (e) Maintenance of Properties; Insurance................... 18 (f) Inspection............................................. 19 (g) Compliance with Laws Etc............................... 19 (h) Hazardous Waste Studies................................ 19 SECTION 6.02. Negative Covenants.......................................... 19 (a) Leverage Ratio......................................... 19 (b) Consolidated Tangible Net Worth of Borrower............ 19 (c) Consolidated Tangible Net Worth of Southwest........... 19 (d) Consolidated Net Profit of Borrower.................... 19 (e) Consolidated Net Profit................................ 19 (f) EBITDA Coverage Ratio of Southwest..................... 20 (g) Funded Debt of Borrower................................ 20 (h) Liens Etc.............................................. 20 (i) Debt................................................... 20 (j) Consolidation, Merger or Dissolution................... 20 (k) Loans, Investments, Secondary Liabilities.............. 20 (l) Asset Sales............................................ 21 (m) Hostile Tender Offers.................................. 22 (n) Distributions.......................................... 22 (o) Transactions with Affiliates........................... 22 (p) Books and Records...................................... 22 (q) Restructure............................................ 22
ii TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- ARTICLE VII. EVENTS OF DEFAULT........................................... 22 SECTION 7.01. Events of Default........................................... 22 ARTICLE VIII. MISCELLANEOUS............................................... 25 SECTION 8.01. Amendments, Etc............................................. 25 SECTION 8.02. Notices, Etc................................................ 26 SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts..... 26 SECTION 8.04. No Waiver; Remedies......................................... 26 SECTION 8.05. Costs and Expenses.......................................... 26 SECTION 8.06. Participations.............................................. 27 SECTION 8.07. Effectiveness: Binding Effect............................... 27 SECTION 8.08. Governing Law............................................... 27 SECTION 8.10. Waiver of Notices........................................... 29 SECTION 8.11. Entire Agreement............................................ 29 SECTION 8.12. Separability of Provisions.................................. 29 SECTION 8.13. Execution in Counterparts................................... 30
Schedules - --------- 5.01(f) - Litigation 5.01(i) - Environmental Matters 6.02(h) - Liens Exhibits - -------- A - Formal Revolving Note B - Form of Legal Opinion iii AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement dated as of December 23, 1997 is entered into between SUBURBAN WATER SYSTEMS, a California corporation (the "Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION (the "Bank"). - --------- ---- RECITALS -------- WHEREAS, the Borrower has previously entered into with Bank a Credit Agreement dated as of June 30, 1996, as amended by letter extensions dated June 30, 1997, September 1, 1997 and November 1, 1997 (collectively, the "Original Credit Agreement"), pursuant to which the Bank has provided a revolving credit facility to the Borrower; and WHEREAS, the Borrower and the Bank desire to amend the Original Credit Agreement to, among other things (i) extend the Maturity Date to July 1, 1999; (ii) revise the financial covenants; and (iii) revise the Events of Default. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree to amend and restate the Original Credit Agreement in its entirety as follows: ARTICLE I. DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following ------------- terms have the following meanings: "Agreement": This Amended and Restated 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 Amended and Supplement to Indenture of Mortgage dated January 24, 1992 and Third Amendment and Supplement to Indenture Mortgage dated October 9, 1996. "Borrower": As set forth in the introductory paragraph of this Agreement. -------- "Borrowing": As defined in Section 2.01. --------- 1 "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 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 Income 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 Income of Southwest" means, in respect of any period of ------------------------------------ Southwest and its Subsidiaries, the consolidated net income 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, ----- 2 (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 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. 3 "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). "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. 4 "Maturity Date": July 1, 1999. ------------- "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. "Regulation 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; 5 (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 Amended and Restated 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 Amended and Restated 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, 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 6 particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. 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 pursuant to Section 2.02(b) and reborrow under this Section. (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 an amended and restated 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 ----- ----- 7 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. SECTION 2.04. Commitment Fee. Borrower shall pay to Bank a fee for the -------------- Revolving Commitment equal to one-quarter of one percent (0.25%) per annum of the daily unused balance of the Revolving Commitment, calculated on the basis of a 360-day year, actual days elapsed, which fee shall be due and payable by Borrower to Bank, or debited to Borrower's account with Bank, if so maintained, not later than ten (10) days after billing is sent by Bank. ARTICLE III. GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the Loans hereunder shall --------------- be used by the Borrower (i) for general corporate purposes and working capital of the Borrower, and (ii) to finance capital additions to the water utility and other operations of the Borrower. Subject to the terms of Section 6.02(h)(ii) hereof, Borrower may also lend proceeds of the Loans to Southwest for (i) general corporate purposes and working capital of Southwest and; (ii) to finance capital additions to the water utility and other operations of Southwest and Southwest's 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 4919-041608 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. 8 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 Person"), 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 9 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 Loans. 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 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 form and substance satisfactory to Bank; (vii) Executed copies of all Loan Documents; 10 (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; (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, 11 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; 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. 12 (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 September 30, 1997,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal nine 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 September 30, 1997 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 ---------- September 30, 1997, 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 13 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 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(d) hereof. 14 (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 Subsidiary 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. 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; 15 (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 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; (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 16 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 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 17 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. (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 18 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 19 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. 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. 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 financing the acquisition of such equipment: (iv) Liens existing on property acquired by the 20 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 $12,000,000 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; 21 (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 (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 September 30, 1997. (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 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 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 22 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 EVENTS OF DEFAULT 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 23 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 (financing 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, 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 24 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; (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 25 (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. 26 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. 27 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, 28 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 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 29 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 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. 30 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. WELLS FARGO BANK, SUBURBAN WATER SYSTEMS NATIONAL ASSOCIATION By: /s/ DEBORAH DILLARD BELL By: /s/ DANIEL N. EVANS ---------------------------- ------------------------------ Name: Name: Daniel N. Evans Title: Title: Vice President - Finance Chief Financial Officer By: /s/ PETER J. MOERBEEK ------------------------------ Name: Peter J. Moerbeck Title: Secretary Address: Address: San Gabriel Valley Regional 1211 E. Center Court Drive Commercial Banking Office Covina, California 91724-3603 1000 E. Garvey Avenue South Attention: Daniel N. Evans Suite 250 Vice President of Finance West Covina, CA 91790 Chief Financial Officer Attention: Deborah Dillard-Bell Title: Facsimile: (626) 915-1558 Facsimile: (626) 919-2909 31 SCHEDULE 5.01(f) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Southwest for quarter ended September 30, 1997. 32 SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Southwest for quarter ended September 30, 1997. Also, there may have been minor hydraulic fluid leakage at the Maplegrove Street site formerly operated by Southwest and Suburban as their headquarters. Southwest and Suburban are currently investigating this matter but anticipate that any remediation required will have a cost of less than $100,000. 33 SCHEDULE 6.02(h) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Southwest for the fiscal year ended December 31, 1996. 34 EX-10.17 4 CREDIT AGREEMENT DATED 12-23-97 EXHIBIT 10.17 AMENDED AND RESTATED CREDIT AGREEMENT BETWEEN SOUTHWEST WATER COMPANY AND MELLON BANK, N.A. DECEMBER 23, 1997 TABLE OF CONTENTS -----------------
PAGE(S) ------- ARTICLE I DEFINITIONS............................................ 1 SECTION 1.01 Defined Terms.......................................... 1 SECTION 1.02 Other Definitional Provisions.......................... 7 ARTICLE II THE CREDIT............................................. 8 SECTION 2.01 The Revolving Loans.................................... 8 (a) The Revolving Commitment......................... 8 (b) Making the Revolving Loans....................... 8 (c) Reduction of the Revolving Commitment............ 8 (d) Revolving Note................................... 9 SECTION 2.02 Repayment.............................................. 9 (a) Mandatory Repayments............................. 9 (b) Optional Prepayment.............................. 9 SECTION 2.03 Interest Rate and Payment Dates........................ 9 (a) Payment.......................................... 9 (b) Interest Rate.................................... 10 (c) Rate Periods..................................... 10 (d) Interest After Event of Default or Maturity...... 10 (e) Selection, Conversion or Renewal of Rate Options. 11 (f) Prime Rate Fallback.............................. 11 SECTION 2.04 Commitment Fee......................................... 11 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS................ 11 SECTION 3.01 Use of Proceeds........................................ 11 SECTION 3.02 Computation of Interest and Fees....................... 12 (a) Calculations..................................... 12 (b) Determination by Bank............................ 12 SECTION 3.03 Payments............................................... 12 SECTION 3.04 Payment on Non-Business Days........................... 12 SECTION 3.05 Reduced Return......................................... 12 SECTION 3.06 Indemnities and Losses................................. 13 (a) Indemnities...................................... 13 (b) Funding Losses................................... 13 SECTION 3.07 Funding Sources........................................ 14 SECTION 3.08 Requirements of Law.................................... 14
i TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- ARTICLE IV CONDITIONS OF LENDING.................................. 15 SECTION 4.01 Conditions Precedent to Initial Loans.................. 15 SECTION 4.02 Conditions Precedent to Each Borrowing................. 16 ARTICLE V REPRESENTATIONS AND WARRANTIES......................... 17 SECTION 5.01 Representations and Warranties......................... 17 (a) Organization..................................... 17 (b) Authorization; No Conflict....................... 17 (c) Governmental Consents............................ 17 (d) Validity......................................... 17 (e) Financial Condition.............................. 17 (f) Litigation....................................... 18 (g) Employee Benefit Plans........................... 18 (h) Disclosure....................................... 18 (i) Environmental Matters............................ 18 (j) Employee Matters................................. 19 (k) Solvency......................................... 19 (l) Title to Properties.............................. 19 (m) Tax Returns...................................... 19 (n) Compliance with Other Agreements and Applicable Laws.................................. 19 ARTICLE VI COVENANTS.............................................. 20 SECTION 6.01 Affirmative Covenants.................................. 20 (a) Financial Information............................ 20 (b) Notices and Information.......................... 21 (c) Corporate Existence, Etc......................... 22 (d) Payment of Taxes and Claims...................... 22 (e) Maintenance of Properties; Insurance............. 23 (f) Inspection....................................... 23 (g) Compliance with Laws Etc......................... 23 (h) Hazardous Waste Studies.......................... 23 SECTION 6.02 Negative Covenants..................................... 23 (a) Leverage Ratio................................... 23 (b) Consolidated Tangible Net Worth.................. 24 (c) Consolidated Net Profit.......................... 24
ii TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- (d) EBITDA Coverage Ratio............................ 24 (e) Liens Etc........................................ 24 (f) Debt............................................. 24 (g) Consolidation, Merger or Dissolution............. 25 (h) Loans, Investments, Secondary Liabilities........ 25 (i) Asset Sales...................................... 26 (j) Hostile Tender Offers............................ 26 (k) Distributions.................................... 26 (l) Transactions with Affiliates..................... 26 (m) Books and Records................................ 27 (n) Restructure...................................... 27 ARTICLE VII EVENTS OF DEFAULT...................................... 27 SECTION 7.01 Events of Default...................................... 27 ARTICLE VIII MISCELLANEOUS.......................................... 30 SECTION 8.01 Amendments, Etc........................................ 30 SECTION 8.02 Notices, Etc........................................... 30 SECTION 8.03 Right of Setoff: Security Interest in Deposit Accounts. 30 SECTION 8.04 No Waiver; Remedies.................................... 31 SECTION 8.05 Costs and Expenses..................................... 31 SECTION 8.06 Participations......................................... 31 SECTION 8.07 Effectiveness: Binding Effect.......................... 31 SECTION 8.08 Governing Law.......................................... 31 SECTION 8.09 Arbitration............................................ 32 SECTION 8.10 Waiver of Notices...................................... 34 SECTION 8.11 Entire Agreement....................................... 34 SECTION 8.12 Separability of Provisions............................. 34 SECTION 8.13 Execution in Counterparts.............................. 34
Schedules - --------- 5.01(f) Litigation 5.01(i) Environmental Matters 6.02(e) Liens Exhibits - -------- iii TABLE OF CONTENTS ----------------- (continued)
PAGES(S) -------- A - Form of Revolving Note B - Form of Legal Opinion
iv AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement dated as of December 23, 1997 is entered into between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower") and MELLON BANK, N.A. (the "Bank"). - --------- ---- RECITALS -------- WHEREAS, the Borrower has previously entered into with the Bank a Credit Agreement dated as of August 29, 1996, as amended by the First Amendment to Credit Agreement effective as March 31, 1997, Second Amendment to Credit Agreement dated as of June 17, 1997, Third Amendment to Credit Agreement dated as of August 11, 1997 and Fourth Amendment to Credit Agreement dated as of December 2, 1997 (collectively, the "Original Credit Agreement"), pursuant to which the Bank has provided a revolving credit facility to the Borrower; and WHEREAS, the Borrower and the Bank desire to amend the Original Credit Agreement to, among other things (i) reduce from Six Million Dollars ($6,000,000) to Two Million Dollars ($2,000,000) the maximum amount of Revolving Commitment; (ii) extend the Maturity Date to July 1, 1999; (iii) revise the financial covenants set forth in Section 6.02; and (iv) revise the Events of Default set forth in Section 7.01; NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree to amend and restate the Original Credit Agreement in its entirety as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following ------------- terms have the following meanings: "Agreement": This Amended and Restated 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": Any day on which the Bank is open for business at the ------------ location where the Revolving Note is payable unless otherwise stated. 1 "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. "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 Income 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 Income" means, in respect of any period of the Borrower ----------------------- and its Subsidiaries, the consolidated net income 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 2 (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 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. 3 "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. "Interest Rate Options": Has the meaning set forth in Section 2.03(b) --------------------- hereof. "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). "Libor Rate": For any day for any proposed or existing Rate Segment ---------- corresponding to a Rate Period shall mean the rate per annum determined by Bank to be the rate per annum obtained by dividing (the resulting quotient to be rounded upward to the nearest 1/16 of 1%) (A) the rate of interest (which shall be the same for each day in such Rate Period) estimated in good faith by Bank in accordance with its usual procedures (which determination shall be conclusive) to be the average of the rates per annum for deposits in United States dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such Rate Period for delivery on the first day of such Rate Period in amounts comparable to such Rate Segment (or, if there are no such comparable amounts actively traded, the smallest amounts actively traded) and have maturities comparable to such Rate Period by (B) a number equal to 1.00 minus the Libor Rate Reserve Percentage for such day. The "Libor Rate" may also be expressed by the following formula: ---------- [average of rates offered to major] [money banks in the London inter-] Libor Rate = [bank market estimated by the Bank] ----------------------------------- [1.00 - Libor Rate Reserve Percentage] 4 "Libor Rate Reserve Percentage": For any day shall mean the percentage ----------------------------- (rounded upward to the nearest 1/16 of 1%), as determined in good faith by Bank (which determination shall be conclusive) as representing for such day the maximum effective reserve requirement (including, without limitation, supplemental, marginal and emergency requirements ) for member banks of the Federal Reserve System with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of any maturity. Each Libor Rate shall be ------------------------ adjusted automatically as of the effective date of any change in the Libor Rate Reserve Percentage. "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. "London Business Day": A day for dealing in deposits in United States ------------------- dollars by and among banks in the London interbank market. "Maturity Date": July 1, 1999. ------------- "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. "Portion": "Prime Rate Portion" shall mean at any time the part, including ------- ------------------ the whole, of the unpaid principal amount of the Revolving Note bearing interest at such time under the Prime Rate Option, in accordance with the first sentence of Section 2.03(d) hereof, or in accordance with Section 2.03(f) hereof. "Libor ----- Rate Portion" shall mean at any time, the part, including the whole, of the - ------------ unpaid principal amount of the Revolving Note bearing interest at such time under the Libor Rate Option or in accordance with the second sentence of Section 2.03(d) hereof. 5 "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. "Prime Rate": The interest rate per annum announced from time to time by ---------- Bank as its Prime Rate. The Prime Rate may be greater or less than other interest rates charged by Bank to other borrowers and is not solely based or dependent upon the interest rate which Bank may charge any particular borrower or class of borrowers. Information concerning the Prime Rate may be obtained from the Bank. "Rate Period": As defined in Section 2.03(c). ----------- "Rate Segment": Of the Libor Rate Portion at any time shall mean the ------------ entire principal amount of such Portion to which at such time there is applicable a particular Rate Period beginning on a particular day and ending on another particular day. (By definition, each Portion is at all times composed of an integral number of discrete Rate Segments, each corresponding to a particular Rate Period, and the sum of the principal amounts of all Rate Segments of a particular Portion at any time equals the principal amount of such Portion at such time). "Regulation 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 $2,000,000 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; (ii) it has sufficient capital to conduct its business; and (iii) it is able to meet its debts as they mature. 6 "Standard Notice": An irrevocable notice provided to the Bank on a --------------- Business Day which is: (i) at least one Business Day in advance in the case of selection of, conversion to or renewal of the Prime Rate Option or prepayment of any Prime Rate Portion; and (ii) at least three London Business Days in advance in the case of selection of, conversion to or renewal of the Libor Rate Option or prepayment of any Libor Rate Portion. Standard Notice must be provided no later than 12:00 p.m., Los Angeles time, on the last day permitted for such notice. "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. "Wells Fargo" means Wells Fargo Bank, National Association. ----------- 7 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 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). Each borrowing under this Section (a "Borrowing") shall be in a minimum amount of $1.00; provided --------- that every selection of, conversion to or renewal of the Libor Rate Option shall be in a minimum principal amount of $250,000 or an integral multiple of $50,000 above such amount. Within the limits of the Revolving Commitment and prior to the Maturity Date, the Borrower may borrow, repay pursuant to Section 2.02(b) and reborrow under this Section. (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 Standard Notice 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. 8 The Standard Notice may be given in writing (including facsimile transmission) signed by the President, Vice President, Chief Financial Officer, Secretary or Corporate Controller of Borrower or orally by one of the aforementioned persons, but if the Standard Notice is provided orally, Borrower shall same day confirm the oral Standard Notice in writing (including facsimile transmission) no later than 2:00 p.m., Los Angeles time, and any conflict regarding a written or oral notice and the Bank's books and records applicable to the same Borrowing shall be conclusively determined by the Bank's books and records. The Bank shall not incur any liability to the Borrower in acting upon any oral or written notice of Borrowing which the Bank believes in good faith to have been given by a Person duly authorized to borrow on behalf of 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 in the case of Libor Rate Option Loans, the Libor Rate, the Libor Rate Portion, and the Rate Period with respect thereto, 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. Repayment. --------- (a) Mandatory Repayments. 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. (b) Optional Prepayment. Borrower shall have the right at its option from ------------------- time to time to prepay the Prime Rate Portion in whole or in part without penalty or premium. Borrower shall have no right to prepay any part of the Libor Rate Portion at any time without 9 the prior written consent of Bank except that Borrower may prepay any part of any Rate Segment at the expiration of the Rate Period corresponding to such Rate Segment. Prepayments shall be made by giving the Bank Standard Notice thereof (which shall be irrevocable), specifying the date, and amount and type of prepayment, and upon such date the amount so specified, accrued interest thereon, and any amounts payable under Section 3.06(b) hereof shall be due and payable. SECTION 2.03. Interest Rate and Payment Dates. ------------------------------- (a) Payment. The principal balance of the Revolving Note shall be paid in ------- accordance with the terms set forth in the Revolving Note. Accrued interest on the Prime Rate Portion shall be due and payable on the last day of each month commencing on December 31, 1997. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period equal to or less than three months shall be due and payable on the last day of the corresponding Rate Period. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period greater than three months shall be due and payable on the third and sixth month anniversary date of the first day of the corresponding Rate Period, if any, and on the last day of the corresponding Rate Period. After maturity of any part of the Revolving Note (by acceleration or otherwise), interest on such part of the Revolving Note shall be due and payable ON DEMAND. (b) Interest Rate. The unpaid principal amount of the Revolving Note shall ------------- bear interest for each day until due on one or more bases selected by Borrower from among the interest rate options (the "Interest Rate Options") set forth --------------------- below. Borrower understands and agrees: (i) that Bank may in its sole discretion from time to time determine that the right of Borrower to select, convert to or renew the Prime Rate Option or the Libor Rate Option is not available and (ii) that subject to the provisions hereof Borrower may select any number of Options to apply simultaneously to different parts of the unpaid principal amount of the Revolving Note and may select any number of Rate Segments to apply simultaneously to different parts of the Libor Rate Portion. Available Interest Rate Options ------------------------------- Prime Rate Option: A rate per annum for each day equal to the Prime Rate. - ----------------- Libor Rate Option: A rate per annum for each day equal to the Libor Rate for - ----------------- such day plus one and one-half (1.5) percentage points. (c) Rate Periods. At any time when Borrower selects, converts to or renews ------------ the Libor Rate Option, Borrower shall fix a period (the "Rate Period") which ----------- shall be one, two, three or six months, which shall be acceptable to Bank in Bank's sole discretion, during which the Libor Rate Option shall apply to the corresponding Rate Segment; provided, that Borrower may not elect a Rate Period -------- which will end after the Maturity Date. Bank's right to payment of principal and interest under the Revolving Note shall in no way be affected by the fact that one or more Rate Periods may be in effect. 10 Interest Rate Options shall be selected in a manner which shall ensure that Borrower shall be able to make scheduled payments of principal under the Revolving Note without incurring liability under Section 3.06(b) below; provided, however, that in the event that Borrower prepays any Rate Segment - -------- ------- bearing interest under the Libor Rate Portion in order to make a scheduled payment of principal under the Revolving Note, Borrower shall indemnify the Bank as provided in Section 3.06(b) below. (d) Interest After Event of Default or Maturity. After the occurrence of ------------------------------------------- an Event of Default or the principal amount of any part of the Prime Rate Portion shall have become due and payable, the outstanding principal amount of such Prime Rate Portion shall bear interest for each day until paid (before and after judgment) at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be the greater of (a) two (2) percentage points above the Prime Rate Option on the day such Event of Default or such amount become due, and (b) two (2) percentage points above the Prime Rate Option, such interest rate to change automatically from time to time effective as of the effective date of each change in the Prime Rate. After the occurrence of an Event of Default or the principal amount of any part of the Libor Rate Portion shall have become due and payable, the outstanding principal amount of such Libor Rate Portion amount shall bear interest for each day until paid (before and after judgment) (a) until the end of the applicable then current Rate Period at a rate per annum (based on a year of 360 days and actual days elapsed) two (2) percentage points above the Libor Rate Option otherwise applicable to such part, and (b) thereafter in accordance with the previous sentence. (e) Selection, Conversion or Renewal of Rate Options. Subject to the other ------------------------------------------------ provisions hereof, Borrower may select any Interest Rate Option to apply to the borrowings evidenced by the Revolving Note. Subject to the other provisions hereof, Borrower may convert any part of the unpaid principal amount of the Revolving Note from either Interest Rate Option to the other Interest Rate Option: (a) at any time with respect to the conversion from the Prime Rate Option to the Libor Rate Option and (b) at the expiration of any Rate Period with respect to conversion from or renewals of the Libor Rate Option as to the Rate Segment corresponding to such expiring Rate Period. Whenever Borrower desires to select, convert or renew the Libor Rate Option, Borrower shall give Bank Standard Notice thereof (which shall be irrevocable), specifying the date, amount and type of the proposed new Rate Option. If such notice has been duly given, and if Bank in its sole discretion approves the proposed selection, conversion or renewal, on and after the date specified in such notice, interest shall be calculated upon the unpaid principal amount of the Revolving Note taking into account such selection, conversion or renewal. (f) Prime Rate Fallback. If any Rate Period expires, any part of the Rate ------------------- Segment corresponding to such Rate Period which has not been converted or renewed in accordance with Section 2.03(e) hereof automatically shall be converted to the Prime Rate Option. If Borrower fails to select, or if Bank fails to approve an Interest Rate Option to apply to the borrowings evidenced by the Revolving Note, such borrowings shall be deemed to be at the Prime Rate Option. If at any time the Bank shall have determined in good faith (which determination shall be conclusive) that the accrual of interest at the Libor Rate Option 11 has been made unascertainable, impractical or unlawful by compliance by the Bank in good faith with any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic, or administration thereof by any official body charged with the interpretation or administration thereof or with any request or directive of any such authority, the outstanding principal amount of the Revolving Note subject to the Libor Rate Option shall accrue interest at the Prime Rate Option and the Borrower shall not have the right to select the Libor Rate Option. SECTION 2.04. Commitment Fee. Borrower shall pay to Bank a fee for the -------------- Revolving Commitment equal to one-half of one percent (0.5%) per annum of the daily unused balance of the Revolving Commitment, calculated on a calendar quarter basis, which fee shall be due and payable by Borrower to Bank, or debited to Borrower's account with Bank, if so maintained, not later than ten (10) days after billing is sent by Bank. ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the 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. Computation of Interest and Fees. -------------------------------- (a) Calculations. Interest in respect of the Prime Rate Option Loans shall ------------ be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the interest rate on a Prime Rate Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate shall become effective. Interest in respect of the Libor Rate Option Loans, and any fees payable hereunder, shall be calculated on the basis of a 360 day year for the actual days elapsed. (b) Determination by Bank. Each determination of an interest rate or fee --------------------- by the Bank pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error. SECTION 3.03. Payments. The Borrower shall make each payment of -------- principal, interest and fees hereunder and under the Revolving Note, without setoff or counterclaim, not later than 12:00 p.m. (Los Angeles time) on the day when due in lawful money of the United States of America to the Bank at the office of the Bank designated in writing in immediately available funds. 12 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 Pennsylvania (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 and Losses. ---------------------- (a) 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 Person"), 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 13 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. (b) Funding Losses. The Borrower agrees to indemnify the Bank and to hold -------------- the Bank harmless from any loss or expense including, but not limited to, any such loss or expense arising from interest or fees payable by the Bank to lenders of funds obtained by it in order to maintain its Libor Rate Option Loans hereunder, which the Bank may sustain or incur as a consequence of (i) payment, prepayment or conversion of any part of any Rate Segment of the Libor Rate Portion on a day other than the last day of the corresponding Rate Period (whether or not any such payment is pursuant to demand by Bank under the Revolving Note and whether or not any such payment, prepayment or conversion is consented to by Bank, unless Bank shall have expressly waived such indemnity in writing); (ii) default by the Borrower in making a conversion or continuation after the Borrower has given a notice thereof, (iii) default by the Borrower in making any payment after the Borrower has given a notice of payment, (iv) attempt by Borrower to revoke in whole or part any irrevocable notice given pursuant to Section 2.03(e) hereof; or (v) breach of or default by any obligor in the performance or observance of any covenant or condition in the Revolving Note, any separate security, guarantee or suretyship agreement between Bank and any obligor, or any other document executed and delivered to Bank by any obligor in connection with the indebtedness evidenced by the Revolving Note. If Bank sustains any such loss or expense, it shall from time to time notify Borrower of the amount determined in good faith by Bank (which determination shall be conclusive) to be necessary to indemnify Bank for such loss or expense. Such amount shall be due and payable by Borrower within five (5) Business Days after demand. This covenant shall survive termination of this Agreement and payment of the outstanding Revolving Note. 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. SECTION 3.08. Requirements of Law. In the event that any law, regulation ------------------- or directive generally applicable to banks located in California or Pennsylvania or any change therein or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any United States federal or state central bank or other governmental authority, agency or instrumentality: (a) does or shall impose, modify or hold applicable any reserve, assessment rate, special deposit, compulsory loan or other requirement (collectively in this Section 3.08 "Requirements") against assets held by, or ------------ deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any 14 office of the Bank which are not otherwise included in the determination of any Libor Rate at the last Borrowing, conversion or continuation date of a Loan; (b) does or shall impose, modify or hold applicable any of the Requirements against Commitments to extend credit; (c) does or shall impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of making, renewing or maintaining its Revolving Commitment, or the Libor Rate Option Loans or to reduce any amount receivable thereunder (which increase or reduction shall be determined by the Bank's reasonable allocation of the aggregate of such cost increases or reduced amounts receivable resulting from such events), then, in any such case, the Borrower shall pay to the Bank, within five (5) Business Days of its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount receivable as determined by the Bank with respect to Sections 3.05 and 3.08 of this Agreement. If the Bank becomes entitled to claim any additional amounts pursuant to this Section, it shall notify the Borrower of the event by reason of which it has become so entitled. Such notice shall contain a statement incorporating the calculation as to any additional amounts payable pursuant to the foregoing sentence, and such statement submitted by the Bank to the Borrower shall be conclusive in the absence of manifest error. 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. To the extent that the Bank recovers under either Section 3.05 or Section 3.08 of this Agreement, the Bank shall not be entitled to duplicative recovery under the other of Sections 3.05 or 3.08. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Conditions Precedent to Initial Loans. 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; 15 (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 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: 16 (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 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; 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 17 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 September 30, 1997,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal nine 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 September 30, 1997 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 September 30, ---------- 1997, 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. 18 (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 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. 19 (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(d) 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 Subsidiary 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. 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 20 position and cash flow for such year, setting forth in each case in comparative form the figures for the previous year, in each case prepared in accordance with GAAP, 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; (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 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 21 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 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; 22 (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 23 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 the Subsidiaries of Borrower on periodic bases as a normal part of their water delivery and wastewater treatment businesses. 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. (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. 24 (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 $2,000,000 of unsecured debt of the Borrower to Wells Fargo and $4,000,000 of unsecured debt of Suburban to Wells Fargo), (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 $16,000,000 at any time (including, without limitation, unsecured funded bank debt incurred pursuant to the Loan Documents and unsecured funded bank debt to Wells Fargo 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. 25 (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 September 30, 1997; (vii) guaranty the indebtedness of Suburban under the Suburban Loan Documents; 26 (viii) guaranty the indebtedness of Suburban under that certain Amended and Restated Credit Agreement between Suburban and Wells Fargo 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 Debt; and (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 the 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. 27 (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 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 Wells Fargo), 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 28 performed or observed under any agreement or instrument relating to any such Debt or material to the performance, business, property, assets, condition (financing 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, 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; 29 (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; (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 1 or 2. 30 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. 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 31 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 32 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 33 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 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 34 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 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. 35 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. MELLON BANK, N.A. SOUTHWEST WATER COMPANY By: /s/ KEVIN D. KELLY By: /s/ PETER J. MOERBEEK ------------------- ----------------------------- Name: Kevin D. Kelly Name: Peter J. Moerbeek Title: Vice President Title: Vice President - Finance Chief Financial Officer By: /s/ STEPHEN J. MUZI ----------------------------- Name: Stephen J. Muzi Title: Corporate Controller
Address: Address: Middle Market Banking 225 North Barranca Avenue, Suite 200 400 South Hope Street West Covina, California 91791-1605 5th Floor Attention: Peter J. Moerbeek Los Angeles, California 90071 Vice President - Finance Attention: Kevin D. Kelly Chief Financial Officer Vice President Facsimile: (213) 629-0484 Facsimile: (626) 915-1558
36 SCHEDULE 5.01(f) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Borrower for quarter ended September 30, 1997. 37 SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Borrower for quarter ended September 30, 1997. Also, there may have been minor hydraulic fluid leakage at the Maplegrove Street site formerly operated by Southwest and Suburban as their headquarters. Southwest and Suburban are currently investigating this matter but anticipate that any remediation required will have a cost of less than $100,000. 38 SCHEDULE 6.02(e) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Borrower for the fiscal year ended December 31, 1996. 39 EX-10.18 5 CREDIT AGREEMENT DATED 12-23-97 EXHIBIT 10.18 CREDIT AGREEMENT BETWEEN SUBURBAN WATER SYSTEMS AND MELLON BANK, N.A. DECEMBER 23, 1997 TABLE OF CONTENTS -----------------
PAGE(S) ------- ARTICLE I DEFINITIONS............................................ 1 SECTION 1.01. Defined Terms.......................................... 1 SECTION 1.02. Other Definitional Provisions.......................... 7 ARTICLE II THE CREDIT............................................. 8 SECTION 2.01. The Revolving Loans.................................... 8 (a) The Revolving Commitment........................... 8 (b) Making the Revolving Loans......................... 8 (c) Reduction of the Revolving Commitment.............. 9 (d) Revolving Note..................................... 9 SECTION 2.02. Repayment.............................................. 9 (a) Mandatory Repayments............................... 9 (b) Optional Prepayment................................ 9 SECTION 2.03. Interest Rate and Payment Dates........................ 9 (a) Payment............................................ 9 (b) Interest Rate...................................... 10 (c) Rate Periods....................................... 10 (d) Interest After Event of Default or Maturity........ 10 (e) Selection, Conversion or Renewal of Rate Options... 11 (f) Prime Rate Fallback................................ 11 SECTION 2.04. Commitment Fee......................................... 11 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS................ 12 SECTION 3.01. Use of Proceeds........................................ 12 SECTION 3.02. Computation of Interest and Fees....................... 12 (a) Calculations....................................... 12 (b) Determination by Bank.............................. 12 SECTION 3.03. Payments............................................... 12 SECTION 3.04. Payment on Non-Business Days........................... 12 SECTION 3.05. Reduced Return......................................... 12 SECTION 3.06. Indemnities and Losses................................. 13 (a) Indemnities........................................ 13 (b) Funding Losses..................................... 13 SECTION 3.07. Funding Sources........................................ 14 SECTION 3.08. Requirements of Law.................................... 14
i TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- ARTICLE IV CONDITIONS OF LENDING.................................. 15 SECTION 4.01. Conditions Precedent to Initial Loans.................. 15 SECTION 4.02. Conditions Precedent to Each Borrowing................. 16 ARTICLE V REPRESENTATIONS AND WARRANTIES......................... 17 SECTION 5.01. Representations and Warranties......................... 17 (a) Organization........................................... 17 (b) Authorization; No Conflict............................. 17 (c) Governmental Consents.................................. 17 (d) Validity............................................... 17 (e) Financial Condition.................................... 18 (f) Litigation............................................. 18 (g) Employee Benefit Plans................................. 18 (h) Disclosure............................................. 18 (i) Environmental Matters.................................. 18 (j) Employee Matters....................................... 19 (k) Solvency............................................... 19 (l) Title to Properties.................................... 19 (m) Tax Returns............................................ 19 (n) Compliance with Other Agreements and Applicable Laws... 20 ARTICLE VI COVENANTS.............................................. 20 SECTION 6.01. Affirmative Covenants.................................. 20 (a) Financial Information.................................. 20 (b) Notices and Information................................ 22 (c) Corporate Existence, Etc............................... 23 (d) Payment of Taxes and Claims............................ 23 (e) Maintenance of Properties; Insurance................... 23 (f) Inspection............................................. 24 (g) Compliance with Laws Etc............................... 24 (h) Hazardous Waste Studies................................ 24 SECTION 6.02. Negative Covenants..................................... 24 (a) Leverage Ratio......................................... 24 (b) Consolidated Tangible Net Worth of Borrower............ 24 (c) Consolidated Tangible Net Worth of Southwest........... 25 (d) Consolidated Net Profit................................ 25 ii
TABLE OF CONTENTS ----------------- (continued)
PAGE(S) ------- (e) Consolidated Net Profit of Southwest................... 25 (f) EBITDA Coverage Ratio of Southwest..................... 25 (h) Liens Etc.............................................. 25 (i) Debt................................................... 25 (j) Consolidation, Merger or Dissolution................... 26 (k) Loans, Investments, Secondary Liabilities.............. 26 (l) Asset Sales............................................ 26 (m) Hostile Tender Offers.................................. 27 (n) Distributions.......................................... 27 (o) Transactions with Affiliates........................... 27 (p) Books and Records...................................... 27 (q) Restructure............................................ 27 ARTICLE VII EVENTS OF DEFAULT...................................... 27 SECTION 7.01. Events of Default...................................... 27 ARTICLE VIII MISCELLANEOUS.......................................... 31 SECTION 8.01. Amendments, Etc........................................ 31 SECTION 8.02. Notices, Etc........................................... 31 SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts 31 SECTION 8.04. No Waiver; Remedies.................................... 31 SECTION 8.05. Costs and Expenses..................................... 31 SECTION 8.06. Participations......................................... 32 SECTION 8.07. Effectiveness: Binding Effect.......................... 32 SECTION 8.08. Governing Law.......................................... 32 SECTION 8.09. Arbitration............................................ 32 SECTION 8.10. Waiver of Notices...................................... 34 SECTION 8.11. Entire Agreement....................................... 35 SECTION 8.12. Separability of Provisions............................. 35 SECTION 8.13. Execution in Counterparts.............................. 35
Schedules - --------- 5.01(f) Litigation 5.01(i) Environmental Matters 6.02(h) Liens iii TABLE OF CONTENTS ----------------- (continued) PAGE(S) ------- Exhibits - -------- A - Form of Revolving Note B - Form of Legal Opinion iv CREDIT AGREEMENT This Credit Agreement dated as of December 23, 1997 is entered into between SUBURBAN WATER SYSTEMS, a California corporation (the "Borrower") and MELLON -------- BANK, N.A. (the "Bank"). The Borrower and the Bank 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 Indentured 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": Any day on which the Bank is open for business at the ------------ location where the Revolving Note is payable unless otherwise stated. "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 and outstanding common stock of Borrower, NMUI or ECO or shall lose voting control of Borrower's, NMUI's or ECO's issued and outstanding common stock. A 1 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 Income 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 Income of Southwest" means, in respect of any period of ------------------------------------ Southwest and its Subsidiaries, the consolidated net income 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 2 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 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 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. 3 "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). "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. "Interest Rate Options": Has the meaning set forth in Section 2.03(b) --------------------- hereof. "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). "Libor Rate": For any day for any proposed or existing Rate Segment ---------- corresponding to a Rate Period shall mean the rate per annum determined by Bank to be the rate per annum obtained by dividing (the resulting quotient to be rounded upward to the nearest 1/16 of 1%) (A) the rate of interest (which shall be the same for each day in such Rate Period) estimated in good faith by Bank in accordance with its usual procedures (which determination shall be conclusive) to be the average of the rates per annum for deposits in United States dollars offered to major money center banks in the London interbank market at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such Rate Period for delivery on the first day of such Rate Period in amounts comparable to such Rate Segment (or, if there are no such comparable amounts actively traded, the smallest amounts actively traded) and have maturities comparable to such Rate Period by (B) a number equal to 1.00 minus the Libor Rate Reserve Percentage for such day. 4 The "Libor Rate" may also be expressed by the following formula: ---------- [average of rates offered to major] [money banks in the London inter-] Libor Rate = [bank market estimated by the Bank] ----------------------------------- [1.00 - Libor Rate Reserve Percentage] "Libor Rate Reserve Percentage": For any day shall mean the percentage ----------------------------- (rounded upward to the nearest 1/16 of 1%), as determined in good faith by Bank (which determination shall be conclusive) as representing for such day the maximum effective reserve requirement (including, without limitation, supplemental, marginal and emergency requirements ) for member banks of the Federal Reserve System with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of any maturity. Each Libor Rate shall be ------------------------ adjusted automatically as of the effective date of any change in the Libor Rate Reserve Percentage. "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. "London Business Day": A day for dealing in deposits in United States ------------------- dollars by and among banks in the London interbank market. "Maturity Date": July 1, 1999. ------------- "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. "Portion": "Prime Rate Portion" shall mean at any time the part, including ------- ------------------ the whole, of the unpaid principal amount of the Revolving Note bearing interest at such time under the Prime Rate Option, in accordance with the first sentence of Section 2.03(d) hereof, 5 or in accordance with Section 2.03(f) hereof. "Libor Rate Portion" shall mean ------------------ at any time, the part, including the whole, of the unpaid principal amount of the Revolving Note bearing interest at such time under the Libor Rate Option or in accordance with the second sentence of Section 2.03(d) hereof. "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. "Prime Rate": The interest rate per annum announced from time to time by ---------- Bank as its Prime Rate. The Prime Rate may be greater or less than other interest rates charged by Bank to other borrowers and is not solely based or dependent upon the interest rate which Bank may charge any particular borrower or class of borrowers. Information concerning the Prime Rate may be obtained from the Bank. "Rate Period": As defined in Section 2.03(c). ----------- "Rate Segment": Of the Libor Rate Portion at any time shall mean the ------------ entire principal amount of such Portion to which at such time there is applicable a particular Rate Period beginning on a particular day and ending on another particular day. (By definition, each Portion is at all times composed of an integral number of discrete Rate Segments, each corresponding to a particular Rate Period, and the sum of the principal amounts of all Rate Segments of a particular Portion at any time equals the principal amount of such Portion at such time). "Regulation 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: 6 (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": means Southwest Water Company, a Delaware corporation and the --------- parent company of Borrower. "Southwest Loan Documents" means that Amended and Restated 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 Amended and Restated Credit Agreement and/or the credit extended thereunder. "Standard Notice": An irrevocable notice provided to the Bank on a --------------- Business Day which is: (i) at least one Business Day in advance in the case of selection of, conversion to or renewal of the Prime Rate Option or prepayment of any Prime Rate Portion; and (ii) at least three London Business Days in advance in the case of selection of, conversion to or renewal of the Libor Rate Option or prepayment of any Libor Rate Portion. Standard Notice must be provided no later than 12:00 p.m., Los Angeles time, on the last day permitted for such notice. "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 7 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. "Wells Fargo" means Wells Fargo Bank, National Association. ----------- 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 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). Each borrowing under this Section (a "Borrowing") shall be in a minimum amount of $1.00; provided --------- that every selection of, conversion to or renewal of the Libor Rate Option shall be in a minimum principal amount of $250,000 or an integral multiple of $50,000 above such amount. Within the limits of the Revolving Commitment and prior to the Maturity Date, the Borrower may borrow, repay pursuant to Section 2.02(b) and reborrow under this Section. (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 8 Standard Notice 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. The Standard Notice may be given in writing (including facsimile transmission) signed by the President, Vice President, Chief Financial Officer, Secretary or Treasurer of Borrower or orally by one of the aforementioned persons, but if the Standard Notice is provided orally, Borrower shall same day confirm the oral Standard Notice in writing (including facsimile transmission) no later than 2:00 p.m., Los Angeles time, and any conflict regarding a written or oral notice and the Bank's books and records applicable to the same Borrowing shall be conclusively determined by the Bank's books and records. The Bank shall not incur any liability to the Borrower in acting upon any oral or written notice of Borrowing which the Bank believes in good faith to have been given by a Person duly authorized to borrow on behalf of 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 an 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 in the case of Libor Rate Option Loans, the Libor Rate, the Libor Rate Portion, and the Rate Period with respect thereto, 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. Repayment. --------- (a) Mandatory Repayments. 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 9 Borrowings exceed the Revolving Commitment then in effect, the Borrower shall immediately repay the excess to the Bank without penalty or premium. (b) Optional Prepayment. Borrower shall have the right at its option from ------------------- time to time to prepay the Prime Rate Portion in whole or in part without penalty or premium. Borrower shall have no right to prepay any part of the Libor Rate Portion at any time without the prior written consent of Bank except that Borrower may prepay any part of any Rate Segment at the expiration of the Rate Period corresponding to such Rate Segment. Prepayments shall be made by giving the Bank Standard Notice thereof (which shall be irrevocable), specifying the date, and amount and type of prepayment, and upon such date the amount so specified, accrued interest thereon, and any amounts payable under Section 3.06(b) hereof shall be due and payable. SECTION 2.03. Interest Rate and Payment Dates. ------------------------------- (a) Payment. The principal balance of the Revolving Note shall be paid in ------- accordance with the terms set forth in the Revolving Note. Accrued interest on the Prime Rate Portion shall be due and payable on the last day of each month commencing on December 31, 1997. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period equal to or less than three months shall be due and payable on the last day of the corresponding Rate Period. Interest on each Rate Segment of the Libor Rate Portion which has a Rate Period greater than three months shall be due and payable on the third and sixth month anniversary date of the first day of the corresponding Rate Period, if any, and on the last day of the corresponding Rate Period. After maturity of any part of the Revolving Note (by acceleration or otherwise), interest on such part of the Revolving Note shall be due and payable ON DEMAND. (b) Interest Rate. The unpaid principal amount of the Revolving Note shall ------------- bear interest for each day until due on one or more bases selected by Borrower from among the interest rate options (the "Interest Rate Options") set forth --------------------- below. Borrower understands and agrees: (i) that Bank may in its sole discretion from time to time determine that the right of Borrower to select, convert to or renew the Prime Rate Option or the Libor Rate Option is not available and (ii) that subject to the provisions hereof Borrower may select any number of Options to apply simultaneously to different parts of the unpaid principal amount of the Revolving Note and may select any number of Rate Segments to apply simultaneously to different parts of the Libor Rate Portion. Available Interest Rate Options ------------------------------- Prime Rate Option: A rate per annum for each day equal to the Prime Rate. - ----------------- Libor Rate Option: A rate per annum for each day equal to the Libor Rate for - ----------------- such day plus one and one-half (1.5) percentage points. 10 (c) Rate Periods. At any time when Borrower selects, converts to or renews ------------ the Libor Rate Option, Borrower shall fix a period (the "Rate Period") which ----------- shall be one, two, three or six months, which shall be acceptable to Bank in Bank's sole discretion, during which the Libor Rate Option shall apply to the corresponding Rate Segment; provided, that Borrower may not elect a Rate Period -------- which will end after the Maturity Date. Bank's right to payment of principal and interest under the Revolving Note shall in no way be affected by the fact that one or more Rate Periods may be in effect. Interest Rate Options shall be selected in a manner which shall ensure that Borrower shall be able to make scheduled payments of principal under the Revolving Note without incurring liability under Section 3.06(b) below; provided, however, that in the event that Borrower prepays any Rate Segment - -------- ------- bearing interest under the Libor Rate Portion in order to make a scheduled payment of principal under the Revolving Note, Borrower shall indemnify the Bank as provided in Section 3.06(b) below. (d) Interest After Event of Default or Maturity. After the occurrence of ------------------------------------------- an Event of Default or the principal amount of any part of the Prime Rate Portion shall have become due and payable, the outstanding principal amount of such Prime Rate Portion shall bear interest for each day until paid (before and after judgment) at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be the greater of (a) two (2) percentage points above the Prime Rate Option on the day such Event of Default or such amount become due, and (b) two (2) percentage points above the Prime Rate Option, such interest rate to change automatically from time to time effective as of the effective date of each change in the Prime Rate. After the occurrence of an Event of Default or the principal amount of any part of the Libor Rate Portion shall have become due and payable, the outstanding principal amount of such Libor Rate Portion amount shall bear interest for each day until paid (before and after judgment) (a) until the end of the applicable then current Rate Period at a rate per annum (based on a year of 360 days and actual days elapsed) two (2) percentage points above the Libor Rate Option otherwise applicable to such part, and (b) thereafter in accordance with the previous sentence. (e) Selection, Conversion or Renewal of Rate Options. Subject to the other ------------------------------------------------ provisions hereof, Borrower may select any Interest Rate Option to apply to the borrowings evidenced by the Revolving Note. Subject to the other provisions hereof, Borrower may convert any part of the unpaid principal amount of the Revolving Note from either Interest Rate Option to the other Interest Rate Option: (a) at any time with respect to the conversion from the Prime Rate Option to the Libor Rate Option and (b) at the expiration of any Rate Period with respect to conversion from or renewals of the Libor Rate Option as to the Rate Segment corresponding to such expiring Rate Period. Whenever Borrower desires to select, convert or renew the Libor Rate Option, Borrower shall give Bank Standard Notice thereof (which shall be irrevocable), specifying the date, amount and type of the proposed new Rate Option. If such notice has been duly given, and if Bank in its sole discretion approves the proposed selection, conversion or renewal, on and after the date specified in such notice, interest shall be calculated upon the unpaid principal amount of the Revolving Note taking into account such selection, conversion or renewal. 11 (f) Prime Rate Fallback. If any Rate Period expires, any part of the Rate ------------------- Segment corresponding to such Rate Period which has not been converted or renewed in accordance with Section 2.03(e) hereof automatically shall be converted to the Prime Rate Option. If Borrower fails to select, or if Bank fails to approve an Interest Rate Option to apply to the borrowings evidenced by the Revolving Note, such borrowings shall be deemed to be at the Prime Rate Option. If at any time the Bank shall have determined in good faith (which determination shall be conclusive) that the accrual of interest at the Libor Rate Option has been made unascertainable, impractical or unlawful by compliance by the Bank in good faith with any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic, or administration thereof by any official body charged with the interpretation or administration thereof or with any request or directive of any such authority, the outstanding principal amount of the Revolving Note subject to the Libor Rate Option shall accrue interest at the Prime Rate Option and the Borrower shall not have the right to select the Libor Rate Option. SECTION 2.04. Commitment Fee. Borrower shall pay to Bank a fee for the -------------- Revolving Commitment equal to one-half of one percent (0.5%) per annum of the daily unused balance of the Revolving Commitment, calculated on a calendar quarter basis, which fee shall be due and payable by Borrower to Bank, or debited to Borrower's account with Bank, if so maintained, not later than ten (10) days after billing is sent by Bank. ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the Loans hereunder shall --------------- be used by the Borrower (i) for general corporate purposes and working capital of the Borrower, and (ii) to finance capital additions to the water utility and other operations of the Borrower. Subject to the terms of Section 6.02(h)(iv) hereof, Borrower may also lend proceeds of the Loans to Southwest for (i) general corporate purposes and working capital of Southwest and (ii) to finance capital addition to the water utility and other operations of Southwest and Southwest's wholly-owned Subsidiaries. SECTION 3.02. Computation of Interest and Fees. -------------------------------- (a) Calculations. Interest in respect of the Prime Rate Option Loans shall ------------ be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the interest rate on a Prime Rate Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate shall become effective. Interest in respect of the Libor Rate Option Loans, and any fees payable hereunder, shall be calculated on the basis of a 360 day year for the actual days elapsed. 12 (b) Determination by Bank. Each determination of an interest rate or fee --------------------- by the Bank pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error. SECTION 3.03. Payments. The Borrower shall make each payment of -------- principal, interest and fees hereunder and under the Revolving Note, without setoff or counterclaim, not later than 12:00 p.m. (Los Angeles time) on the day when due in lawful money of the United States of America to the Bank at the office of the Bank designated in writing in immediately available funds. 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 (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 and Losses. ---------------------- (a) 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 Person"), 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, 13 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. (b) Funding Losses. The Borrower agrees to indemnify the Bank and to hold -------------- the Bank harmless from any loss or expense including, but not limited to, any such loss or expense arising from interest or fees payable by the Bank to lenders of funds obtained by it in order to maintain its Libor Rate Option Loans hereunder, which the Bank may sustain or incur as a consequence of (i) payment, prepayment or conversion of any part of any Rate Segment of the Libor Rate Portion on a day other than the last day of the corresponding Rate Period (whether or not any such payment is pursuant to demand by Bank under the Revolving Note and whether or not any such payment, prepayment or conversion is consented to by Bank, unless Bank shall have expressly waived such indemnity in writing); (ii) default by the Borrower in making a conversion or continuation after the Borrower has given a notice thereof, (iii) default by the Borrower in making any payment after the Borrower has given a notice of payment, (iv) attempt by Borrower to revoke in whole or part any irrevocable notice given pursuant to Section 2.03(e) hereof; or (v) breach of or default by any obligor in the performance or observance of any covenant or condition in the Revolving Note, any separate security, guarantee or suretyship agreement between Bank and any obligor, or any other document executed and delivered to Bank by any obligor in connection with the indebtedness evidenced by the Revolving Note. If Bank sustains any such loss or expense, it shall from time to time notify Borrower of the amount determined in good faith by Bank (which determination shall be conclusive) to be necessary to indemnify Bank for such loss or expense. Such amount shall be due and payable by Borrower within five (5) Business Days after demand. This covenant shall survive termination of this Agreement and payment of the outstanding Revolving Note. 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. 14 SECTION 3.08. Requirements of Law. In the event that any law, regulation ------------------- or directive generally applicable to banks located in California or any change therein or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any United States federal or state central bank or other governmental authority, agency or instrumentality: (a) does or shall impose, modify or hold applicable any reserve, assessment rate, special deposit, compulsory loan or other requirement (collectively in this Section 3.08 "Requirements") against assets held by, or ------------ deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of the Bank which are not otherwise included in the determination of any Libor Rate at the last Borrowing, conversion or continuation date of a Loan; (b) does or shall impose, modify or hold applicable any of the Requirements against Commitments to extend credit; (c) does or shall impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of making, renewing or maintaining its Revolving Commitment, or the Libor Rate Option Loans or to reduce any amount receivable thereunder (which increase or reduction shall be determined by the Bank's reasonable allocation of the aggregate of such cost increases or reduced amounts receivable resulting from such events), then, in any such case, the Borrower shall pay to the Bank, within five (5) Business Days of its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount receivable as determined by the Bank with respect to Sections 3.05 and 3.08 of this Agreement. If the Bank becomes entitled to claim any additional amounts pursuant to this Section, it shall notify the Borrower of the event by reason of which it has become so entitled. Such notice shall contain a statement incorporating the calculation as to any additional amounts payable pursuant to the foregoing sentence, and such statement submitted by the Bank to the Borrower shall be conclusive in the absence of manifest error. 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. To the extent that the Bank recovers under either Section 3.05 or Section 3.08 of this Agreement, the Bank shall not be entitled to duplicative recovery under the other of Sections 3.05 or 3.08. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Conditions Precedent to Initial Loans. The obligation of ------------------------------------- the Bank to make its initial Loan is subject to the conditions precedent that: 15 (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 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 form and substance satisfactory to Bank; (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 16 (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; (iii) Southwest and its Subsidiaries are in compliance with all financial covenants under the Southwest Loan Documents; and (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 materially adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole; and (v) 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 17 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 September 30, 1997,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal nine 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 September 30, 1997 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. 18 (f) Litigation. Except as set forth in the Form 10-Q of Southwest dated ---------- September 30, 1997, 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 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 19 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(d) 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 Subsidiary 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 20 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; (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, but in any event within 120 days after the end of each fiscal year of Southwest, (1) a copy of Southwest's audited consolidated 21 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 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 consolidated financial statements prepared in connection with each of the statements provided in subpart (1) above; (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 certain 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 22 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 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 23 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 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 24 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 the Subsidiaries of Borrower on periodic bases as a normal part of their water delivery and wastewater treatment businesses. SECTION 6.02. Negative Covenants. So long as any Revolving Note shall ------------------ remain unpaid or the Bank shall have any Commitment hereunder, neither Southwest nor Borrower 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. 25 (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. 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 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 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 Borrower to Wells Fargo), (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 $12,000,000 at any time (including, without limitation, unsecured funded bank 26 debt incurred pursuant to the Loan Documents and unsecured funded bank debt to Wells Fargo 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 (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 statements dated September 30, 1997. (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 27 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 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 SECTION 7.01. Events of Default. If any of the following events ("Events ----------------- ------ of Default") shall occur and be continuing: - ---------- 28 (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 Wells Fargo), 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 (financing 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 29 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, 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 30 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; (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 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, 31 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. 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 32 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 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, 33 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 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 34 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 35 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. 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. MELLON BANK, N.A. SUBURBAN WATER SYSTEMS By:_/S/ KEVIN D. KELLY_____________ By:__/S/ DANIEL N. EVANS_____________ Name: Kevin D. Kelly Name: Daniel N. Evans Title: Vice President Title: Vice President - Finance Chief Financial Officer By:__/S/ PETER J. MOERBEEK Name: Peter J. Moerbeek Title: Secretary Address: Address: 36 Middle Market Banking 1211 E. Center Court Drive 400 South Hope Street Covina, California 91724-3603 5th Floor Attention: Daniel N. Evans Los Angeles, California 90071-2806 Vice President of Finance Attention: Kevin D. Kelly Chief Financial Officer Vice President Facsimile: (213) 629-0484 Facsimile: (626) 915-1558 37 SCHEDULE 5.01(F) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Southwest for quarter ended September 30, 1997. 38 SCHEDULE 5.01(I) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Southwest for quarter ended September 30, 1997. Also, there may have been minor hydraulic fluid leakage at the Maplegrove Street site formerly operated by Southwest and Suburban as their headquarters. Southwest and Suburban are currently investigating this matter but anticipate that any remediation required will have a cost of less than $100,000. 39 SCHEDULE 6.02(H) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Southwest for the fiscal year ended December 31, 1996. 40 EX-13.1 6 PORTIONS OF REGISTRANT'S ANNUAL REPORT EXHIBIT 13.1 UNAUDITED QUARTERLY FINANCIAL INFORMATION Southwest Water Company
(in thousands except per share data) 1997 Quarter Ended (1) March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 15,432 $ 18,469 $ 19,975 $ 17,129 Operating income 804 2,104 2,727 1,580 Net income 64 807 1,192 538 Net income available for common shares 57 800 1,186 531 Basic earnings per common share 0.02 0.24 0.36 0.16 Diluted earnings per common share 0.01 0.24 0.35 0.16 1996 Quarter Ended (1) March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 13,989 $ 17,438 $ 18,476 $ 16,242 Operating income 403 1,163 2,109 1,609 Net income (loss) (125) 563 866 619 Net income (loss) available for common shares (132) 556 860 612 Basic earnings (loss) per common share (0.04) 0.17 0.26 0.19 Diluted earnings (loss) per common share (0.04) 0.17 0.26 0.18
(1) The fluctuations in operating revenues and operating income between quarters reflect the seasonal nature of the water utility and contract operations. Earnings (loss) per common and diluted share have been restated to reflect stock dividends of five percent on January 2, 1998 and 20 percent on January 2, 1997. SELECTED FINANCIAL DATA Southwest Water Company
(in thousands except per share data) Years Ended December 31, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Operating revenues $ 71,005 $ 66,145 $ 56,807 $ 50,932 $ 48,218 Operating income $ 7,215 $ 5,734 $ 4,432 $ 3,849 $ 3,421 Gains on sale of land $ - $ - $ 84 $ - $ 67 Net income $ 2,601 $ 1,923 $ 1,439 $ 1,057 $ 127 Net income available for common shares $ 2,574 $ 1,896 $ 1,412 $ 1,029 $ 99 - -------------------------------------------------------------------------------------------------------------------------- COMMON SHARE DATA (1) Earnings per common share: Basic $ 0.78 $ 0.58 $ 0.44 $ 0.32 $ 0.03 Diluted $ 0.76 $ 0.57 $ 0.44 $ 0.32 $ 0.03 Cash dividends per common share $ 0.35 $ 0.32 $ 0.30 $ 0.30 $ 0.50 Weighted average outstanding common shares: Basic 3,303 3,269 3,230 3,183 3,140 Diluted 3,374 3,322 3,230 3,240 3,140 STATISTICAL DATA Working capital (deficit) (6,658) (4,079) (7,266) (1,951) 1,161 Capital additions 15,202 15,212 11,866 8,684 7,133 Property, plant and equipment, net 102,136 91,414 80,267 72,136 67,076 Total assets 123,100 111,416 97,456 86,834 85,848 Long-term debt 29,800 30,700 19,600 20,500 21,550 Stockholders' equity 32,427 30,400 29,246 28,532 28,176 Return on average common equity 8.3% 6.5% 5.0% 3.7% 0.4% Number of utility customers 72,319 70,976 70,023 69,012 68,721
(1) Earnings per common share, cash dividends per common share and weighted average outstanding common shares have been adjusted to reflect stock dividends of five percent on January 2, 1998 and 20 percent on January 2, 1997. MARKET AND DIVIDEND INFORMATION Southwest Water Company The following table sets forth the range of market prices of Southwest Water Company's common shares. The prices reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions. High and low market price ranges shown below, as well as cash dividends, have been restated to reflect stock dividends of five percent on January 2, 1998, and 20 percent on January 2, 1997. The shares are traded on the NASDAQ stock market - symbol SWWC. The current quarterly dividend rate is $.09 per common share after adjusting for the five percent stock dividend on January 2, 1998. At December 31, 1997, there were 2,077 stockholders of record.
1997 1996 ------------------------------------------------------------------------------------ Market Price Range Market Price Range --------------------- --------------------- Dividends High Low Dividends High Low - ------------------------------------------------------------------------------------------------------------------------------------ 1st Quarter $ 0.086 $ 14.762 $ 11.429 $ 0.079 $ 9.722 $ 7.440 2nd Quarter $ 0.086 $ 13.333 $ 11.071 $ 0.079 $ 9.921 $ 7.738 3rd Quarter $ 0.086 $ 13.571 $ 9.762 $ 0.079 $ 12.698 $ 8.730 4th Quarter $ .09 $ 18.810 $ 12.619 $ 0.086 $ 14.048 $ 9.524
FINANCIAL HIGHLIGHTS Southwest Water Company
For the Years Ended December 31, 1997 1996(1)(2) Change - ------------------------------------------------------------------------------------------------------------------------ Operating revenues $ 71,005 $ 66,145 7% Net income 2,601 1,923 35% Basic earnings per common share 0.78 0.58 34% Diluted earnings per common share 0.76 0.57 33% Cash dividends per common share 0.35 0.32 9% Total assets 123,100 111,416 10% Stockholders' equity 32,427 30,400 7% Book value per common share 9.58 9.11 5%
(1) Earnings per common share and book value per common share have been adjusted to reflect stock dividends of five percent on January 2, 1998 and 20% on January 2, 1997. (2) Cash dividends of $.365 and $.408 per share paid in 1997 and 1996, respectively, have been restated to reflect the stock dividends of five percent on January 2, 1998 and 20 percent on January 2, 1997. EX-21.1 7 LISTING OF REGISTRANT'S SUBSIDIARIES EXHIBIT 21.1 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT (1)
Jurisdiction of Name of Subsidiary Incorporation Parent - ------------------ ------------- ------ Suburban Water Systems California Southwest Water Company New Mexico Utilities, Inc. New Mexico Southwest Water Company ECO Resources, Inc. Texas Southwest Water Company Water Suppliers Mobile Communication Service California Southwest Water Systems SW Resource Management Company Delaware Southwest Water Company SW Utility Company (2) Texas Southwest Water Company SOCI, Inc. (3) Delaware Southwest Water Company SW Operating Services Co. (3) Delaware Southwest Water Company Southwest Environmental Laboratories, Inc. (3) Texas ECO Resources, Inc.
All above listed subsidiaries have been consolidated in the Registrant's consolidated financial statements. (1) As of March 31, 1998 (2) Formerly Southern Municipal Services, Inc. (3) Inactive EX-23.1 8 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 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 and 333-38935) on Form S-8 of Southwest Water Company of our report dated January 26, 1998, relating to the consolidated balance sheets of Southwest Water company and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997, annual report on Form 10-K of Southwest Water Company. /s/ KPMG Peat Marwick LLP Los Angeles, California March 27, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,237,000 0 7,286,000 711,000 0 11,499,000 138,790,000 36,654,000 123,100,000 18,157,000 29,800,000 0 517,000 33,000 31,877,000 123,100,000 0 71,005,000 0 63,790,000 367,000 311,000 3,225,000 4,451,000 1,850,000 2,601,000 0 0 0 2,601,000 0.78 0.76 REPRESENTS EPS-BASIC
-----END PRIVACY-ENHANCED MESSAGE-----