-----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, OOWbdnsOFWJlVs2ZNuxy+Hlfj8MUKadjD7F0lWTAqIjYCQ7OG97YFa33XkCkiU/u nwLRvKvHMQ6BsqNRBX7Umw== 0000898430-00-000791.txt : 20000316 0000898430-00-000791.hdr.sgml : 20000316 ACCESSION NUMBER: 0000898430-00-000791 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000314 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: 569417 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-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 or ----------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________ Commission file number 0-8176 Southwest Water Company (Exact name of registrant as specified in its charter) Delaware 95-1840947 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (626) 915-1551 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: (1) Common Shares, $.01 par value Nasdaq (2) Series A, 5-1/4%, Cumulative Preferred Shares None $.01 par value (Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]. On February 29, 2000, there were 6,462,609 common shares outstanding. The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $72,029,084 based upon the average high and low stock prices as of February 29, 2000. The registrant is unable to estimate the aggregate market value of its preferred shares held by non-affiliates of the registrant because there is no public market for such shares. Documents incorporated by reference: Form 10-K Reference - ----------------------------------- ------------------- Proxy Statement dated on or about April 7, 2000 for Annual Meeting of Stockholders on Tuesday, May 23, 2000 Part III Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III in this Form 10-K or any amendment to this Form 10-K. [X] SOUTHWEST WATER COMPANY AND SUBSIDIARIES INDEX PART I Item 1. Business.......................................................................... 1 Item 2. Properties........................................................................ 8 Item 3. Legal Proceedings................................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............................... 11 Item 4a Executive Officers of the Registrant.............................................. 11 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters......... 12 Item 6: Selected Financial Data........................................................... 13 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 13 Item 8: Financial Statements and Supplementary Data....................................... 20 Item 9: Changes and Disagreements with Accountants on Accounting and Financial Disclosure. 41 PART III Item 10: Directors and Executive Officers of the Registrant................................ 41 Item 11: Executive Compensation............................................................ 41 Item 12: Security Ownership of Certain Beneficial Owners and Management.................... 41 Item 13: Certain Relationships and Related Transactions.................................... 41 PART IV Item 14: Exhibits, Financial Statement Schedule and Reports on Form 8-K.................... 42 Exhibit Index..................................................................... 44 Signatures........................................................................ 49
SOUTHWEST WATER COMPANY AND SUBSIDIARIES Certain statements contained in this Annual Report on Form 10-K that are not based on historical fact are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are only predictions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any performance or achievements planned, expressed or implied by such forward-looking statements. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations are discussed in Part II, Item 7, Management's Discussion and Analysis, Risk Factors. PART I Item 1. Business General Description of Business Southwest Water Company (hereafter, together with its subsidiaries, referred to as the "Company" or "Registrant") was incorporated under the laws of the State of California on December 10, 1954. The Company reincorporated in the State of Delaware on June 30, 1988. The Company is engaged in the business of managing all aspects of water and wastewater systems, and provides these services to more than three-quarters of a million people located throughout California, New Mexico, Texas and Mississippi. Through its wholly owned subsidiary, ECO Resources, Inc. ("ECO"), the Company operates and manages water and wastewater treatment facilities owned by cities, municipal utility districts and private entities. The Company operates and manages water utilities that it owns (regulated water operations) through two wholly owned subsidiaries, Suburban Water Systems ("Suburban"), and New Mexico Utilities, Inc. ("NMUI"). The Company also owns an interest in Windermere Utility Company ("Windermere"), a small, regulated water utility located near Austin, Texas. General Information The primary focus of the water and wastewater management industry is customer service, and the industry does not rely heavily on technological or proprietary manufacturing processes. The Company does not conduct significant research and development activities, and has no patents, licenses or trademarks (except for certain logos and artwork used in marketing). In its daily operations, the Company uses certain commodities such as chemicals and supplies that are currently readily available from a number of suppliers. During the past year, there were no significant changes in the way the Company does business. There are no individual customers of the Company who generated revenues that exceeded 10 percent of the Company's consolidated revenues, or whose loss would have a material adverse effect on the Company's consolidated operations. The Company is subject to the requirements of various regulatory agencies with respect to its water and wastewater treatment services. To date, the Company has experienced no material adverse effects upon its operations or capital expenditures resulting from compliance with governmental regulations relating to protection of the environment. At December 31, 1999, the Company employed 560 people, none of whom are represented by an employee union. 1 A. Contract Operations ECO Resources, Inc. Development of Business, Product and Regulation In 1985, by purchasing all of the outstanding common stock of ECO, the Company entered into the contract water and wastewater management industry. ECO was established in 1970, and incorporated under the laws of the State of Texas in 1974. ECO provides all aspects of water and wastewater operations and maintenance services and performs related services which include facility and equipment maintenance and repair, sewer pipeline cleaning, billing and collection and state-certified laboratory analyses. As a contract operator, ECO does not own any of the water sources, water production facilities or water distribution systems that it operates for its clients, nor does ECO own any of the wastewater collection systems or wastewater treatment facilities that it operates for its clients. Although not the owner, ECO is responsible for operating these water and wastewater facilities in compliance with all federal, state and local health standards and regulations. ECO has two distinct types of contractual relationships: time and material contracts primarily with municipal utility districts, and fixed fee operations and maintenance contracts. Municipal Utility District Contracts A Municipal Utility District ("MUD") is a utility district created under the rules of the Texas Natural Resource Conservation Commission in order to provide water, wastewater and drainage services to areas where existing municipal services are not available. ECO has MUD contracts in the suburbs of Houston, Austin and El Paso, Texas. ECO negotiates each MUD contract with the MUD's Board of Directors. As the large Texas cities expand their boundaries, they periodically acquire MUD-owned facilities through condemnation and annex them to city-owned facilities. As of January 1, 1999, ECO had 150 MUD contracts. During 1999, 18 new MUD contracts were added, one MUD contract was canceled due to annexation and two MUD contracts were canceled for competitive reasons, bringing the total to 165 MUD contracts as of December 31, 1999. Typically, a MUD contract provides for a monthly base fee that ensures a certain basic level of maintenance and operations services, billing, collection and customer services, and environmental monitoring and reporting. Additional services provided at a level beyond the basic contracted services typically generate revenues on a time and materials basis as such services are rendered. Most MUD contracts are short-term and are cancelable on 30 or 60-day notice by either party. Most contracts allow ECO to increase its monthly fee as the number of connections increases. Operations and Maintenance Contracts Operations and maintenance ("O&M") contracts are agreements with cities and private entities located in Texas, Mississippi, New Mexico and California that provide for a specified level of services such as facility operation and maintenance, meter reading and billing, or management of the entire water or wastewater system. Most contracts provide for a fee that covers the specified level of services, and provides limits on ECO's contractual liability in the event of a major system failure or catastrophe. ECO provides services beyond the scope of the contract and would generally provide services after a system failure or catastrophe. Additional billings are generated when services beyond the scope of the contract are provided. ECO may seek fee increases from the city or private entity and may request specific payment for services when the cost of such services exceeds a reasonable amount beyond the scope of the contract. Most contracts provide for annual cost of living increases and ECO typically has the right to increase its fixed operations fee if the system undergoes growth beyond a specified level. Typical O&M contracts are cancelable only upon a specific breach of the contract by either party. As of December 31, 1999, ECO had 27 O&M contracts compared to 20 O&M contracts as of December 31, 1998. 2 Competition and Future Development ECO provides contract water and wastewater services in Texas, Mississippi, New Mexico and California. It continues to improve its market position by adding new MUD and O&M contracts and aggressively pursuing renewal of its existing contracts. The contract water and wastewater management industry continues to undergo rapid growth and change. New contracts are awarded based on both lowest cost and technical expertise. ECO's competition in the O&M portion of its business includes a number of significantly larger companies that provide O&M services on a national and international basis, as well as several regional competitors. In the Texas MUD market, competitors include four large national companies and several smaller, local companies. At December 31, 1999, ECO's anticipated future revenue from firm contractual commitments was over $100,000,000. Industry renewal rates tend to be high; however, the contract water and wastewater management business is very competitive. ECO intends to continue expanding its current business base in the southwestern and southern United States. B. Regulated Utility Operations Suburban Water Systems Development of Business, Product and Regulation Suburban is a regulated public water utility that produces and supplies water for residential, business, industrial and public authority use, and for private and public fire protection service under jurisdiction of the California Public Utilities Commission (the "CPUC"). Suburban's service area contains a population of approximately 250,000 people within Los Angeles and Orange counties, California. Suburban or its predecessor entities have supplied water since approximately 1907. From the mid-1950s to the late 1960s, Suburban's operations rapidly expanded as the transition from agricultural land use to residential, business and industrial use occurred throughout its service area. Primarily due to the population saturation of its existing service area, Suburban has experienced only modest customer growth since the late 1960s. At December 31, 1999, Suburban served 67,153 customers, including 63,386 residential customers, 2,793 business and industrial customers, 317 public authority customers and 657 other customers. During 1999, Suburban's operating revenues were 74 percent from sales to residential customers, 18 percent from sales to business and industrial customers, and eight percent from sales to other customers. Seasonal temperature and rainfall variations subject Suburban's business to significant revenue and profitability fluctuations. Since most of Suburban's residential customers use more water in hot, dry weather, the third quarter of each year is usually the highest in terms of customer water consumption and revenues. Profitability is determined by the mix of the source of water sold and could be higher in unseasonably warm winter months compared to typically hot, dry summer months. Wells and Other Water Sources Suburban's wells pump water from two of the major groundwater basins in the Southern California coastal watershed: the Central Basin and the Main San Gabriel Basin (the "Basins"). The Basins are the source of approximately 71 percent of Suburban's water supply. The rights to pump water from the Basins have been fully adjudicated under the laws of the State of California. These adjudications have established Suburban's right to produce water at levels prescribed each year by the Watermaster Boards (the "Boards") that manage the Basins. As the water levels in the Basins increase or decrease, the Boards may adjust the amount of water that Suburban and other producers are allowed to pump without paying additional charges. Suburban is allowed to produce a certain amount of water from the Basins in excess of the set amount, but when Suburban does so, an additional payment is required to provide for the replenishment of the water supply. However, even when additional payments are required, the Basins provide Suburban with water at a cost that is lower than other available sources. The Boards establish the prices that Suburban pays for water it produces from the Basins each year. The Basins' 3 current water levels are sufficient to eliminate any foreseeable drought concerns. However, there is no assurance that the current allowable pumping levels set by the Boards will continue in the future. Suburban also purchases water from two mutual water companies that also produce their water from the Main San Gabriel Basin. Suburban's ownership of shares in each of these mutual water companies has allowed it to increase its water entitlement and purchase water at a lower cost. In addition, Suburban leases Basin pumping rights from other parties, which also helps reduce its cost of water. Suburban's water supply is further supplemented by water purchased at a higher cost from external sources. Suburban has the right to purchase water from the Metropolitan Water District of Southern California. Suburban also has interconnections with other water purveyors that can be used as supplemental and emergency sources of supply. Water Quality Regulation A stated responsibility of the CPUC is to ensure an adequate supply of affordable, healthful, potable water to residents of the state. Accordingly, Suburban's water quality is under the regulatory jurisdiction of the CPUC. Suburban's water supply is also subject to regulation by the United States Environmental Protection Agency (the "EPA") under the 1996 Federal Safe Drinking Water Act (the "US Act"), and by the Office of Drinking Water of the California Department of Health Services (the "DOHS") under the California Safe Drinking Water Act (the "Cal Act"). The US Act establishes uniform minimum national water quality standards, as well as specification of the types of treatment processes to be used for public drinking water. The EPA, as mandated under the US Act, issues regulations, which require, among other things, disinfection of drinking water, specification of maximum contaminant levels ("MCLs") and filtration of surface water supplies. The Cal Act and the rules of the DOHS are similar to the US Act and the mandates of the EPA, while in many instances, the requirements of the DOHS are more restrictive than those of the EPA. Both the EPA and the DOHS have put into effect regulations and other pronouncements that require periodic testing and sampling of water to ensure that only permissible levels of volatile organic compounds ("VOCs"), herbicides, pesticides and inorganic substances are present in water supplied to the public. Suburban's water quality personnel regularly sample and monitor the quality of water being distributed throughout the system. Suburban conducts testing, sampling and inspections at the intervals, locations and frequencies required by EPA and DOHS regulations. Chlorination is currently performed to provide chlorine residuals required by the DOHS as a safeguard against bacteriological contamination. In addition to water sampling and testing performed by Suburban personnel, independent engineers retained by the Boards conduct sampling and testing for certain pollutants such as VOCs. Water samples from throughout Suburban's system are tested regularly by independent, state-certified laboratories for bacterial contamination, chemical contaminant content and for the presence of pollutants and contaminants for which MCLs have been put into effect. The results of the sampling and testing are made available to all water purveyors that produce water from the Basins. The cost of such sampling and testing is covered by Board assessments to the producers. Water supplied by Suburban meets all current requirements of the US Act, the Cal Act and the regulations put into effect under the related legislation. Suburban provides its customers with an annual water quality report, which, among other things, informs them of the source and quality of the water being provided. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates. However, there is no assurance that recovery of such costs will be allowed. In June 1998, Suburban detected in one of its wells a substance called N- nitrosodimethylamine ("NDMA") in excess of the EPA reference dosage for health risks. Upon detection, the well was immediately removed from service. In 1999, Suburban completed construction of a treatment facility that is intended to reduce the NDMA to non-detectable levels. Suburban is awaiting final regulatory approval of the facility and anticipates that operation of the treatment facility will begin in mid-2000. Costs associated with testing of Suburban's water supplies have increased and are expected to increase further as regulatory agencies adopt additional monitoring requirements. Suburban believes that costs associated with the additional monitoring and testing of its water will be recoverable from ratepayers 4 in future rate increases. There can be no assurance that water sources currently available to Suburban will meet future EPA or DOHS requirements, that recovery of additional costs will be allowed, or that new or revised monitoring requirements will not necessitate additional capital expenditures by Suburban in the future. Competition and Rate Relief Suburban operates under a Certificate of Public Convenience and Necessity granted by the CPUC and is regulated by other state and local governmental authorities having jurisdiction over water service and other aspects of its business. Suburban's water business is dependent upon maintaining this certificate and upon various governmental and court decisions affecting Suburban's water rights and service area. Under current CPUC practices, water rates may be increased through general rate increases or by offsets for certain expense increases. Typically, general rate increases are for three years and include "step" increases in the second and third years. General rate increases require formal proceedings with the CPUC in which overall rate structure, expenses and rate base are examined by CPUC staff. Public hearings are also held. General rate proceedings require approximately 12 months from the time an application is filed to the CPUC's authorization of new rates. The step increases for the second and third years are intended to compensate for projected expense increases. Prior to their approval, step increases are subject to verification that earnings levels have not exceeded the rate of return authorized at the general rate proceeding. Rate increases to offset increases in certain expenses such as the cost of purchased water and energy costs to pump water are accomplished through an abbreviated "offset" proceeding that requires approximately two months from the time of filing a request to the authorization of new rates. Suburban filed its last general rate increase request in 1995. In recent years, Suburban has succeeded in achieving efficiencies and cost savings that resulted in the deferral of rate requests. However, in February 2000, the CPUC directed Suburban to file a general rate application by July 1, 2001. The Company and Suburban are unable to predict the outcome of such rate proceedings at this time. Suburban has been, and believes that it will continue to be permitted to increase its rates as necessary to achieve a reasonable rate of return. However, the inability to increase rates in the event of increases for certain expenses could adversely affect Suburban's results of operations. As permitted by the CPUC, Suburban records the difference between actual and CPUC-adopted water production costs in balancing accounts in the income statement, with a corresponding adjustment on the balance sheet. Suburban believes that these amounts will be recovered from or returned to the ratepayers through future CPUC-authorized rate adjustments. Future Development In recent years, Suburban's growth has been limited to extensions into new subdivisions along the periphery of its service area. There is little area available for new business, industrial construction or residential growth, and as such, significant increases in the number of customers in Suburban's current service area are not expected. In 1999, Suburban successfully completed negotiations to purchase the City of West Covina's ("West Covina") water distribution system and facilities for approximately $11,500,000. The sale closed February 25, 2000 with Suburban assuming ownership and operation of the water system on that date. The actual purchase price paid by Suburban was approximately $8,500,000 due to the exercise by another water purveyor of a right to purchase West Covina's interest in certain facilities for approximately $3,000,000. These facilities are not critical to Suburban's operation of this system; however, Suburban may negotiate a lease to use these facilities. The transaction added approximately 7,000 connections to Suburban's customer base, an increase of approximately 11 percent. The laws of the State of California provide that no public or private agency can install facilities within the service area of a public utility in order to compete with it, except upon payment of just compensation for all damages incurred by the public utility. Under California law, municipalities and certain other public bodies have the right to acquire private water utility plants and systems within their territorial limits by condemnation but must pay fair value for the condemned system. Suburban is not aware of any impending proceeding for the condemnation of any portion of its facilities. 5 Water utilities require substantial amounts of capital for the construction, extension and replacement of water distribution facilities. This capital is generated from Suburban's operations, periodic debt financing by Suburban, lines of credit of Suburban, contributions in aid of construction received from developers, governmental agencies, municipalities or individuals, and from advances received from developers that are repaid under rules of the CPUC. For the years ended December 31, 1999, 1998 and 1997, capital expenditures approximated $4,865,000, $5,636,000 and $5,853,000, respectively. New Mexico Utilities, Inc. Development of Business, Product and Regulation NMUI is a regulated public water utility that provides water supply and sewage collection services for residential, commercial, irrigation, and fire protection customers under jurisdiction of the New Mexico Public Regulation Commission ("NMPRC"). NMUI's service area is located in the northwest part of the City of Albuquerque and in the northern portion of Bernalillo County, New Mexico. NMUI's service area contains a population of about 26,000 people and covers approximately 34 square miles, of which an estimated 24 percent has been developed. In 1969, Suburban purchased NMUI. In 1987, NMUI became a wholly owned subsidiary of the Company after the New Mexico Public Utility Commission, the NMPRC's predecessor agency, authorized Suburban to transfer by stock dividend all of the stock of NMUI to the Company. Since 1969, NMUI has grown from approximately 800 customers to over 7,600 customers. Most of this growth has come from the extension of water services and sewage collection services into new residential subdivisions and from new commercial property. During 1999, NMUI added 1,050 new water customers, and 928 new wastewater customers. Because of the continuing economic development in NMUI's service area, NMUI expects to add a similar number of customers in 2000. At December 31, 1999, NMUI provided water service to 7,689 customers including 7,035 residential customers, 577 commercial and industrial customers and 77 other customers. NMUI also provided sewer collection service to 7,152 customers including 6,802 residential customers and 350 commercial and industrial customers. During 1999, NMUI's operating revenues were 51 percent from sales to residential customers and 49 percent from sales to commercial and industrial customers. Seasonal temperature and rainfall variations subject NMUI's business to significant revenue and profitability fluctuations. Since most of NMUI's residential customers use more water in hot, dry weather, the third quarter of each year is usually the highest in terms of customer consumption, revenues and profitability. The sewer operation revenues and profitability remain relatively constant throughout the year. Wells, Other Water Sources, and Water Quality Regulation NMUI owns five wells and four reservoirs and believes that it has adequate water capacity to serve its current customer base as well as new customers in the foreseeable future. NMUI's wells produce water from the Rio Grande Underground Basin. The water supplied by NMUI to its customers is subject to regulation by the EPA and by the State of New Mexico Environmental Improvement Division ("EID"). Samples of water from throughout the system are tested regularly by independent, state-certified laboratories, and the results of the tests are sent to the EID. Chlorination is performed to provide allowable chlorine residuals as a safeguard against bacteriological contamination. Water supplied by NMUI meets all current requirements of the EPA and the EID, and NMUI anticipates no significant capital expenditures to comply with the requirements of these agencies. There can be no assurance, however, that water sources currently available to NMUI will meet future EPA or EID requirements, or that such requirements will not require future capital expenditures by NMUI. If customer growth continues in NMUI's service area, NMUI may have to increase its water supply capability through additional well construction. To ensure the availability of an emergency supply of water, NMUI has one interconnection with another water purveyor. 6 Competition, Rate Relief and Future Development NMUI operates under a Certificate of Public Convenience and Necessity granted by the NMPRC and is regulated by other state and local governmental authorities having jurisdiction over water and wastewater service and other aspects of its business. NMUI's water and sewer business is dependent upon maintaining this certificate and upon various governmental and court decisions affecting NMUI's water rights and service area. Requests for rate increases are submitted to the NMPRC with the test year typically being the previous year's actual results. NMUI has been, and believes that it will continue to be, permitted to increase its rates as necessary to achieve a reasonable rate of return. However, any inability to increase rates in the event of increased cost of certain expenses would adversely affect NMUI's results of operations. The laws of the State of New Mexico provide that no public or private agency can install facilities within the service area of a public utility in order to compete with it, except upon payment of just compensation for all damages incurred by the utility. Under New Mexico law, municipalities and certain other public bodies have the right to acquire private water utility plants and systems within their territorial limits by condemnation but must pay fair value for the condemned system. In recent years, the City of Albuquerque ("Albuquerque") has annexed a significant portion of NMUI's service area; however, NMUI has continued to serve the customers located in the annexed areas. Currently, 70 percent of NMUI's customers are located within the city limits. As discussed in the Company's 1998 Annual Report on Form 10-K ("the 1998 Annual Report") and in Part I, Item 3, Legal Proceedings, Albuquerque initiated, but is not currently prosecuting, an action in eminent domain to acquire the operations of NMUI. Discussions with Albuquerque are ongoing; however, there is no assurance that these discussions will lead to a settlement of the legal action, or that the action will be resolved quickly. NMUI's operations are capital intensive. Capital is generated from NMUI's operations, periodic debt financing by NMUI, lines of credit of NMUI and the Company, contributions in aid of construction received from developers, and from advances received from developers, which are repaid under rules of the NMPRC. For the years ended December 31, 1999, 1998 and 1997, capital expenditures approximated $3,569,000, $5,727,000 and $8,916,000, respectively. The decrease in capital expenditures in 1999 compared to 1998 was primarily due to the completion of a new reservoir in 1998. Windermere Utility Company As previously discussed, the Company owns a 49 percent interest in Windermere, a small regulated water utility located near Austin, Texas. The Company is currently holding discussions with the majority shareholder of Windermere to purchase its interest in Windermere along with two other utilities, also located near Austin, Texas and anticipates that negotiations will be completed in 2000. C. New Business In January 2000, the Company announced the formation of Inland Pacific Water Company ("IPWC") and Inland Pacific Development Company, LLC ("IPDC"). Both are joint ventures designed to develop water and wastewater-related opportunities in Southern California's San Bernardino and Riverside counties. IPWC will market and sell a wide range of services that include financing, design and construction of water and wastewater facilities, water rights development and full contract operation, maintenance and management of water and wastewater systems. As previously discussed, on February 25, 2000, Suburban purchased West Covina's water distribution system and facilities, assuming ownership and operation of the water system on that date. The transaction added approximately 7,000 connections to Suburban's customer base, an increase of approximately 11 percent. 7 Item 2. Properties The Company's corporate headquarters are located in West Covina, California, where the parent company leases approximately 7,500 square feet of office space. A. Facilities Contract Operations Facilities ECO owns 4.3 acres and a 17,000 square-foot building for its fleet and maintenance operations in the Houston, Texas area, and 10 acres and a 10,000 square-foot building for its office, fleet and maintenance operations in Austin, Texas. In addition, ECO owns or leases 343 vehicles and other equipment used in daily operations. ECO leases approximately 38,000 square feet of office, warehouse and laboratory space in eight facilities in the Houston, Texas area; the Rio Grande Valley, Texas area; Mississippi; New Mexico; and California. Regulated Utility Operations Facilities Suburban leases an office building with approximately 14,600 square feet of office space for its headquarters in Covina, California. Suburban also owns a 3,550 square foot building in La Puente, California, and a 3,200 square foot building in La Mirada, California that are used for its district operations. In September 1999, Suburban sold a parcel of surplus land for a sales price of approximately $4,000,000. The transaction involved approximately 11 acres of vacant land in La Puente, California, formerly the site of Suburban's main office and equipment yard. The transaction resulted in a pretax gain of $2,747,000. The sale of land, net of tax, added $1,648,000 to net income, or $.25 per diluted common share. For federal income tax purposes, Suburban elected to treat the sale of the land as an Internal Revenue Code ("Code") Section 1031 like-kind exchange. Net proceeds of approximately $3,900,000 were transferred to an accommodator serving as the intermediary in this transaction. The net proceeds were used to pay a portion of the purchase price for the acquisition of the West Covina water distribution system and facilities on February 25, 2000, thereby satisfying the Code like-kind property reinvestment requirement. NMUI leases 4,000 square feet of space in an office building for its headquarters in Albuquerque, New Mexico, and owns a 2,400 square foot warehouse that is used for its field supplies and equipment. B. Water Distribution Systems Suburban Water Systems Suburban owns and operates water production and distribution systems consisting of well pumping plants, booster pumping stations, a water treatment facility, reservoir storage facilities, transmission and distribution mains, and service connections to individual customers. Suburban has rights-of-way and easements in its service area necessary to provide water services. At December 31, 1999, Suburban owned 705 miles of transmission and distribution mains and 27 storage reservoirs with a total capacity of 56 million gallons. Suburban also owns 14 active wells with a total pumping capacity of approximately 25,000 gallons per minute. While these facilities vary as to age and quality, each is believed by Suburban to be in good condition and adequate for current and foreseeable operations. Suburban intends to continue its capital expenditure program and construct and replace reservoirs, wells and transmission and distribution lines in future years, as needed and approved by the CPUC. Suburban's employees perform normal maintenance and construction work on these facilities, and major construction projects are performed by outside contractors chosen through competitive bidding. Ongoing maintenance and repairs performed by Suburban were approximately $1,597,000 in 1999 and constituted approximately eight percent of its operating expenses. As previously discussed, on February 25, 2000, Suburban acquired the West Covina water distribution system, which added 87 miles of transmission and distribution mains and four storage reservoirs with a total capacity of 15 million gallons to Suburban's production and distribution systems. 8 Virtually all of Suburban's property is subject to the lien of an Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Suburban Indenture"), as amended February 7, 1990, January 24, 1992 and October 9, 1996, securing Suburban's First Mortgage Bonds. The Suburban Indenture contains certain restrictions common to such types of instruments regarding the disposition of property and includes various covenants and restrictions, including limitations on the amount of cash dividends that Suburban may pay to the Company. In addition to its regular quarterly dividends, in December 1999, Suburban paid a specially authorized $3,000,000 dividend to the Company. As of December 31, 1999, Suburban was in compliance with dividend limitations mandated by the Suburban Indenture. New Mexico Utilities, Inc. NMUI owns and operates a water production and distribution system consisting of well pumping plants, reservoir storage facilities, booster pumping stations, transmission and distribution mains, and service connections to individual customers. NMUI has rights-of-way and easements in its service area necessary to provide water and sewer services. At December 31, 1999, NMUI owned five wells, 140 miles of transmission and distribution mains and four storage reservoirs with a total capacity of 10 million gallons. NMUI's wells have a total pumping capacity of 9,525 gallons per minute. In addition, NMUI owns and operates a sewer collection system consisting of one lift station and 106 miles of interceptor and collector lines. Wastewater is treated at a facility owned by the City of Albuquerque. While these facilities vary as to age and quality, each is believed by NMUI to be in good condition and adequate for current and foreseeable operations. NMUI's employees or outside contractors perform normal maintenance and construction work on these facilities, and major construction projects are performed by outside contractors chosen through competitive bidding. Ongoing maintenance and repairs performed by NMUI were approximately $233,000 in 1999 and constituted approximately seven percent of NMUI's operating expenses. Virtually all of NMUI's property is subject to the lien of an Indenture of Mortgage and Deed of Trust (the "NMUI Indenture") dated February 14, 1992, as amended May 15, 1992 and October 21, 1996, securing NMUI's First Mortgage Bonds. The NMUI Indenture contains certain restrictions common to such types of instruments regarding the disposition of such property and includes various covenants and other restrictions, including limitations on the amount of cash dividends that NMUI may pay to the Company. NMUI pays regular quarterly dividends to the Company. At December 31, 1999, NMUI was in compliance with dividend limitations mandated by the NMUI Indenture. Item 3. Legal Proceedings In 1998, ECO was named as a defendant in four lawsuits alleging injury and damages as the result of a sewage spill, which occurred at an Austin, Texas sewage pumping station. The case is presently in the discovery stage. No oral depositions have been taken and there have been no court hearings. The Company and ECO intend to vigorously defend against these claims and have requested defense and indemnification by their insurance carrier. At this time, the Company does not believe this matter will have a material adverse effect on the Company's financial position or results of operations. As discussed in the Company's 1998 Annual Report the Company has been named in several complaints alleging water contamination in the Main San Gabriel Basin in Southern California. In September 1999, the California 2/nd/ District Court of Appeal ordered that the lawsuits be dismissed. A three-judge panel ruled that the CPUC had final regulatory authority in water quality matters. The plaintiffs petitioned the California Supreme Court for review of this decision and the petition was granted. The Company anticipates that the California Supreme Court will hear the case during 2000. The Company and Suburban have requested defense and indemnification from their liability insurance carriers for these lawsuits. Several of the liability insurance carriers are currently contributing to the costs of defense of the lawsuits. Based upon information available at this time, management does not expect that these actions will have a material adverse effect on the Company's financial position or results of operations. As discussed in the Company's 1998 Annual Report, in October 1998, the Company and ECO were sued in an action in Texas arising out of a fatal auto accident. The Company believes that its maximum exposure in 9 this action is limited to the self-insured retention under its umbrella liability policy. Based on the information available at this time, management does not expect that this action will have a material adverse effect on the Company's financial position or results of operations. As discussed in the Company's 1998 Annual Report, Albuquerque initiated an action in eminent domain to acquire the operations of NMUI. The Company believes that the fair market value of NMUI is substantially in excess of the amount offered in Albuquerque's complaint. Under New Mexico state law, there are procedures that would allow Albuquerque to take possession of NMUI prior to the resolution of the fair market issue; however, the Company believes that it has adequate defenses should Albuquerque choose to pursue these procedures. At present, discussions are ongoing; however, there is no assurance that these discussions will lead to a settlement of the legal action. Albuquerque is not currently prosecuting this action. The Company and its subsidiaries are the subjects of certain litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially adversely affect its consolidated financial position, results of operations or cash flow. 10 Item 4. Submission Of Matters To A Vote Of Security Holders None. Item 4a. Executive Officers Of The Registrant The Company's Board of Directors elects the executive officers each year at its first meeting following the Annual Meeting of Stockholders. There are no family relationships among any of the executive officers of the Company, nor are there any agreements or understandings between any such officer and another person pursuant to which he or she was elected an officer. There are no legal proceedings of the type required to be disclosed pursuant to the instructions to this item involving any executive officer. The executive officers of the Company and its subsidiaries are as follows, with information about the Chairman of the Board and President of the Company incorporated by reference to the Company's definitive Proxy Statement dated on or about April 7, 2000.
Position and Offices Currently Held Name Age and Business Experience Date Elected - ---------------------------------------------------------------------------------------------------------------------- Peter J. Moerbeek 52 President of ECO November 1998 Director of Suburban and ECO October 1995 Secretary of the Company, Suburban and ECO October 1995 Chief Financial Officer of the Company August 1995 Previously Executive Vice President Finance and Operations of Pico Products, Inc. and Pico Macom, Inc. (1989-1995) Thomas C. Tekulve 48 Vice President Finance of the Company January 1999 Previously Vice President, Chief Financial Officer SafeGuard Health Enterprises Inc. (1995-1998) Previously (and most recently serving as) Director of Finance International Operations, Beckman Instruments, Inc. (1984-1995) Maurice W. Gallarda 46 President of Inland Pacific Water Company January 2000 Vice President New Business Development of the Company August 1999 Previously Strategic Planning Consultant (1997-1998) Previously CEO Watershed Holdings, Inc. (1990-1997) Michael O. Quinn 53 President of Suburban May 1996 Director of Suburban May 1993 Chief Operating Officer of Suburban April 1992 Previously President of ECO (1985-1992)
11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company is in the process of drafting an S-3 Registration Statement to register approximately 159,000 shares held by the Utility Employees' Retirement Plan ("UERP"). These shares were issued to the UERP beginning in the early 1960s and were not registered under the Securities Act of 1933. The Company anticipates the S-3 filing will be completed by April 30, 2000. No proceeds will be remitted to the Company as a result of this filing. The following table shows the range of market prices of Southwest Water Company's common shares. The prices shown reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions. The price ranges shown in the table, as well as cash dividends, reflect a 3-for-2 stock split in the form of a stock dividend on October 1, 1999, and a 5-for-4 stock split in the form of a stock dividend on October 1, 1998, as well as a five percent stock dividend on January 2, 1998. The shares are traded on the Nasdaq Stock Market - symbol SWWC. The current quarterly dividend rate is $.06 per common share. At December 31, 1999, there were 2,218 stockholders of record.
1999 1998 ------------------------------------------------------------------ Market Price Range Market Price Range ------------------ --------------------- Dividends High Low Dividends High Low - --------------------------------------------------------- --------------------------------- 1st Quarter $ 0.053 $ 10.92 $ 8.33 $ 0.048 $ 9.20 $ 7.80 2nd Quarter $ 0.053 $ 12.00 $ 7.38 $ 0.048 $ 9.33 $ 7.93 3rd Quarter $ 0.053 $ 17.96 $ 11.33 $ 0.053 $ 9.73 $ 7.00 4th Quarter $ 0.060 $ 18.63 $ 11.50 $ 0.053 $ 11.33 $ 8.40 - --------------------------------------------------------------------------------------------
12 ITEM 6. SELECTED FINANCIAL DATA Earnings per common share, cash dividends per common share and basic and diluted weighted average outstanding common shares reflect a 3-for-2 stock split in the form of a stock dividend on October 1, 1999, a 5-for-4 stock split in the form of a stock dividend on October 1, 1998, and stock dividends of five percent on January 2, 1998, 20 percent on January 2, 1997, and five percent on January 2, 1996.
(in thousands except per share amounts and numbers of customers) Years Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Summary of Operations Operating revenues $ 80,849 $ 72,146 $ 71,005 $ 66,145 $ 56,807 Operating income $ 9,314 $ 8,055 $ 7,215 $ 5,734 $ 4,432 Gains on sale of land $ 2,855 $ 110 $ - $ - $ 84 Net income $ 5,819 $ 3,349 $ 2,601 $ 1,923 $ 1,439 Net income available for common shares $ 5,792 $ 3,322 $ 2,574 $ 1,896 $ 1,412 - ------------------------------------------------------------------------------------------------------------------ Common Share Data Earnings per common share: Basic before land sale $ 0.65 $ 0.53 $ 0.41 $ 0.31 $ 0.23 Land sale, net of taxes $ 0.25 $ - $ - $ - $ - Basic $ 0.90 $ 0.53 $ 0.41 $ 0.31 $ 0.23 Diluted before land sale $ 0.62 $ 0.51 $ 0.41 $ 0.31 $ 0.23 Land sale, net of taxes $ 0.25 $ - $ - $ - $ - Diluted $ 0.87 $ 0.51 $ 0.41 $ 0.31 $ 0.23 Cash dividends per common share $ 0.22 $ 0.20 $ 0.19 $ 0.17 $ 0.16 Weighted average outstanding common shares: Basic 6,404 6,304 6,217 6,137 6,070 Diluted 6,655 6,453 6,350 6,186 6,070 Statistical Data Working capital (deficit) $ 1,705 $ (2,678) $ 473 $ (4,079) $ (7,266) Capital additions $ 9,509 $ 11,921 $ 15,202 $ 15,212 $ 11,866 Property, plant and equipment, net $ 113,697 $ 109,238 $ 102,136 $ 91,414 $ 80,267 Total assets $ 142,950 $ 129,927 $ 123,100 $ 111,416 $ 97,456 Long-term debt $ 28,000 $ 28,900 $ 29,800 $ 30,700 $ 19,600 Stockholders' equity $ 40,477 $ 35,143 $ 32,427 $ 30,400 $ 29,246 Return on average common equity before land sale 11.1% 10.0% 8.3% 6.5% 5.0% Return on average common equity 15.5% 10.0% 8.3% 6.5% 5.0% Number of utility customers 74,842 73,482 72,319 70,976 70,023
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: Liquidity and capital resources of the Company are influenced primarily by construction expenditures at Suburban and NMUI for the addition, replacement and renovation of water utility facilities. The Company's capital resources may also be influenced by investments to acquire new business opportunities. At December 31, 1999, the Company had cash and cash-equivalent balances totaling $4,146,000. Included in cash and cash equivalents was approximately $3,900,000 of proceeds from a sale of surplus 13 land no longer used in utility operations. As previously discussed, the proceeds from the sale were being held by an accommodator serving as intermediary for the Company's Code Section 1031 like-kind exchange transaction. On February 25, 2000, the Company completed the purchase of West Covina's water distribution system and the proceeds from the land sale were used as part of the purchase price. The remaining funds for the purchase of West Covina's water system were obtained from line of credit borrowing. The Company has three separate unsecured lines of credit from three commercial banks with total line of credit capacity of $20,000,000. One of the lines expires in 2000, and two of the lines expire in 2001. The Company expects to renew expiring lines of credit in the normal course of business. At December 31, 1999, outstanding borrowing was $6,593,000, and the unused borrowing capacity was $13,407,000. In 1999, the Company's outstanding line of credit borrowing increased a net $1,314,000 primarily due to additional cash requirements for certain investments made by the Company and for tax payments in the fourth quarter. Under two of the line of credit agreements, interest is charged at each banks' prime rates less one-quarter percent. The Company may also borrow at an interest rate that is lower than this rate; however, the amount borrowed must remain outstanding for a fixed period of time. Interest charged under the third line of credit is lower than the bank's prime rate and contains no restrictions as to minimum borrowing or borrowing for a fixed period of time. Two of the lines of credit require a $6,000 annual fee and the remaining line of credit requires no annual fee. Each of the line of credit agreements, as amended, contains certain financial restrictions. As of December 31, 1999, the Company was in compliance with all applicable financial covenants of the line of credit agreements. In addition to its lines of credit, the Company has existing borrowing capacity under its First Mortgage Bond Indentures. Under these indentures, the Company has remaining borrowing capacity of approximately $41,869,000. However, the amount of additional borrowing available to the Company under its current lines of credit is limited by financial covenants that restricted additional borrowing at December 31, 1999 to the unused credit line amount. During 1999, the Company's additions to property, plant and equipment were $9,509,000, representing a decrease of $2,412,000 from 1998. The decrease was due primarily to the completion of major capital projects during 1998. Developers made contributions in aid of construction ("CIAC"), and advances totaling $4,166,000, of which $1,548,000 was received in cash. Company-financed capital additions were $5,343,000, which was funded primarily by cash flow from operations. For 2000, the Company estimates that its capital additions will be approximately $8,200,000 and that cash flow from operations and CIAC will fund these additions. Line of credit borrowing is also available to meet construction requirements if needed. The Company anticipates that its available line of credit borrowing capacity and the cash flow generated from operations will be sufficient to fund its activities during the next 12 months, including certain new business investments. If additional cash were needed, the Company would consider alternative sources, including long-term financing. The amount and timing of any future long-term financing would depend on various factors, including the timeliness and adequacy of rate increases, the availability of capital, and the Company's ability to meet interest and fixed charge coverage requirements. Regulatory approval is required for any long-term financing by Suburban or NMUI. If the Company were unable to renew its existing lines of credit or unable to obtain additional long-term financing, capital spending would be reduced or delayed until new financing arrangements were secured. Such financing arrangements could include seeking equity financing through a private placement or a public offering. Similarly, if the Company needed additional cash to fund an acquisition, financing arrangements could include long-term borrowing or equity financing. REGULATORY AFFAIRS: Regulation and Regulatory Developments ECO's pricing is not subject to regulation by a public utilities commission. Most contracts with MUDs are short-term contracts and do not generally include inflation adjustments. Changes in prices are 14 negotiated on a contract-by-contract basis. ECO's O&M contracts are generally longer-term water and wastewater service contracts, primarily with cities, and typically include inflation adjustments. The CPUC and the NMPRC regulate the rates and operations of Suburban and NMUI, respectively. The rates allowed are intended to provide the utilities an opportunity to recover costs and earn a reasonable return on common equity. Although the Company is not currently seeking any rate increase, future construction expenditures and increased operating expenses may require periodic requests for rate increases. As previously discussed, the CPUC has directed Suburban to file a general rate application by July 1, 2001. Regulatory Developments: The Company closely monitors legislative, CPUC, and NMPRC developments. The various water industry associations in which the Company actively participates also monitor these developments. The Company does not know the future possible legislative, CPUC or NMPRC changes that will be enacted or the terms of such changes if enacted. Therefore, management cannot predict the impact, if any, of future legislative changes, CPUC or NMPRC developments or changes on the Company's financial position or results of operations. ENVIRONMENTAL AFFAIRS: As a contract operator, ECO does not own any of the water sources, water production facilities, or water distribution systems that it operates for its clients, nor does ECO own any of the wastewater collection systems or wastewater treatment facilities that it operates for its clients. Although not the owner, ECO is responsible for operating these water and wastewater facilities in compliance with all federal, state and local health standards and regulations. Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC and the NMPRC, respectively. The responsibilities of both regulatory agencies are to ensure an adequate supply of affordable, healthful, potable water to residents of their respective states. The Company's operations are also subject to water and wastewater pollution prevention standards and water and wastewater quality regulations of the EPA and various state regulatory agencies. Both the EPA and state regulatory agencies require periodic testing and sampling of water. Costs associated with the testing of the Company's water supplies have increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. The Company believes that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates and contract operations revenues. However, there is no assurance that recovery of such costs will be allowed. To date, the Company has not experienced any material adverse effects upon its operations resulting from compliance with governmental regulations. As discussed in the Company's 1998 Annual Report, and in Part I, Item 3, Legal Proceedings, the Company has been named in several complaints alleging water contamination in the Main San Gabriel Basin in Southern California. In September 1999, the California 2/nd/ District Court of Appeal ordered that the lawsuits be dismissed. A three-judge panel ruled that the CPUC has final regulatory authority in water quality matters. The plaintiffs petitioned the California Supreme Court for review of this decision and the petition was granted. The Company anticipates that the Supreme Court will hear the case during 2000. As discussed in the Company's 1998 Annual Report, in March 1998, the CPUC issued an order instituting investigation ("OII") directed to all Class A and B water utilities in California, including Suburban. The purpose of the OII is to address a series of questions dealing with the safety of current drinking water standards and compliance with those standards. Additional information about the OII is set forth in the 1998 Annual Report. In February 2000, the CPUC issued a draft opinion finding that the DOHS requirements governing drinking water quality adequately protect the public health and safety, and that the regulated water utilities have complied with past and present drinking water quality requirements. While the CPUC continues to investigate the issues concerned with water quality, the Company and Suburban are unable to predict what final actions, if any, will be taken by the CPUC and/or the DOHS as 15 the result of this investigation, or their impact on the operations or financial position of the Company and Suburban. YEAR 2000 COMPUTER COMPLIANCE: The Company did not experience any Year 2000 ("Y2K") related problems in any of its critical systems. The Company will watch for any date related problems in the future, although none are expected. No further expenditures related to the Y2K issue are anticipated. RISK FACTORS Certain statements contained in this Annual Report on Form 10-K that are not based on historical fact are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are only projections. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any performance or achievements planned, expressed or implied by such forward-looking statements. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. The forward-looking information referred to above includes, but is not limited to, revenue backlog information, expectations regarding sales growth and new contracts, and potential acquisitions, weather conditions, changes in business conditions, legal and other contingencies. Weather There is seasonality to the water services industry; thus the results of operations for one period do not necessarily indicate results to be expected in another period. Rainfall and weather conditions affect utility operations, with most water consumption occurring during the third quarter of each year when weather tends to be hot and dry. Drought conditions would have the effect of lowering revenue due to conservation efforts of the consumer and less water available to the utilities. The Company's contract operations business can also be seasonal in nature. Heavy rainfall tends to hamper the Company's ability to perform billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. Moderate rainfall by contrast may create opportunities for additional billable work outside the scope of existing contracts. Drought conditions would not necessarily affect the Company's contract operations because of the base fee and fixed fee contracts, but could affect the Company's opportunities for additional billable work outside the scope of the contracts. Contract Operations The water and wastewater management business is highly competitive. In the United States, municipal employees perform the majority of water and wastewater utility operations. As a result, a significant portion of ECO's sales and marketing efforts require convincing elected officials and city staff persons that outsourcing of the utility operations is beneficial to the city. There is no assurance that any city will choose to outsource, or will select ECO as its operator at the end of the sales effort. While industry renewal rates tend to be high, periodically cities change operators or terminate outsourcing at the end of a contract. An inability to renew its existing contracts could have a material adverse impact on the Company. In addition, a city or MUD could cancel a long-term contract without notice, and in breach of the contract. This would not only result in loss of revenue and operating profits, but could potentially involve the Company in litigation. In addition, ECO competes with several larger competitors whose size, customer base and capital resources may restrict ECO's ability to successfully compete for certain O&M contracts. 16 Risk of Failure to Manage Growth The Company continues to expand its business and is actively seeking acquisitions and joint ventures to improve the Company's position in the contract water and wastewater business. This kind of growth demands experienced and qualified personnel to manage the transition as the Company expands. The success of future business development and growth relies heavily on the Company's ability to retain qualified personnel to operate and manage its new business ventures. There can be no assurance that the Company will successfully manage this growth, and failure to do so could have a material adverse effect on the Company. Water Quality and Contamination As previously discussed in the Company's 1998 Annual Report, Suburban detected a substance called NDMA in one of its wells in excess of the EPA reference dosage for health risks. Upon detection, the well was immediately removed from service. During 1999, Suburban completed construction of a treatment facility that is intended to reduce the NDMA to non-detectable levels. In 1997, the San Gabriel Basin Water Quality Authority advised Suburban that the DOHS had detected the contaminant "perchlorate" in the Main San Gabriel Basin. The contaminant was later detected in a well that is operated but not owned by Suburban. Subsequently, NDMA was detected in this well, at which time Suburban removed the well from service. The potential impact of these contaminants on the results of operations for Suburban is not fully known at this time. Costs associated with testing of Suburban's water supplies have increased and are expected to increase further as regulatory agencies adopt additional monitoring requirements. The EPA has conducted numerous studies of underground water in the Main San Gabriel Basin (the "Main Basin") and in 1984 named the Main Basin as a Super- fund site. Several large industrial companies were named as potentially responsible parties ("PRPs") for allegedly causing the contamination. Suburban's facilities were not named as sources of the contamination in the Main Basin. However, individual government officials have suggested that, because of their pumping operations, the Main Basin water producers may have clean-up liability under certain environmental statutes. The EPA is expected to continue to identify sources of contamination in order to establish legal responsibility for clean-up costs. Currently, neither the EPA nor any other governmental agency has identified Suburban or other water producers as PRPs. However, the Company currently is involved in litigation concerning the quality of the Main Basin groundwater as described in Part 1, Item 3, Legal Proceedings. In 1979, VOCs were discovered in the Main Basin. While most of the VOC contamination was found outside Suburban's service areas, subsequent underground water sampling resulted in the discovery of four large areas of groundwater VOC contamination. One of the areas includes Suburban's Bartolo Well Field, which contains four of Suburban's producing wells. Suburban produces approximately 27 percent of its total water production from these wells. Currently, the water delivered to Suburban's wells does not contain VOCs in excess of established MCLs, and to date, water produced from the Bartolo Well Field and other wells owned by Suburban in the Main Basin meets all applicable governmental requirements. Suburban has taken measures to ensure that it has an adequate supply of potable water that meets all applicable governmental standards. Technology exists to remove VOC contaminants from basin water. However, there is no assurance that either such technology will be adequate in the future to reduce the amounts of VOCs and other contaminants in the Main Basin to acceptable levels or the costs of such removal will be fully recoverable from Suburban's customers. To date, Suburban has been permitted to recover all expenses associated with water quality maintenance from its ratepayers. In addition to the matters set forth, there can be no assurance that there are no other water quality and contamination issues which exist but are not known to the Company at this time. There is no assurance that, in the future, governmental authorities will not seek to recover clean-up costs from Suburban or that PRPs will not seek contributions from water producers for clean-up costs. If Suburban were required to pay clean-up costs, it would seek to recover such costs through increased rates to its customers. This practice has been permitted by the CPUC in the past; however, there can be no assurance that Suburban would be allowed to recover such costs in the future. 17 RESULTS OF OPERATIONS: Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Diluted earnings per common share before a gain on a land sale (after adjustment for a 3-for-2 stock split in the form of a stock dividend on October 1, 1999), net of taxes were $.62 in 1999 compared to $.51 in 1998. Diluted earnings per common share including the gain on sale of land, net of taxes, were $.87 in 1999. Operating income increased $1,259,000 or 16 percent, and, as a percentage of operating revenues, was 12 percent in 1999 compared to 11 percent in 1998. ECO's operating income increased $697,000 due to the addition of new contracts and increases in project work performed outside the scope of existing contracts. Operating income at the utilities increased $1,139,000, due primarily to a 12 percent increase in water consumption by Suburban's customers as a result of warmer, dryer weather in 1999, especially in the fourth quarter, compared to cooler weather in 1998. At NMUI, there was a five percent increase in water consumption due to warmer, dryer weather, and an increase in the number of customers. Parent company expenses increased $577,000 due primarily to self- insured retention reserves, health insurance reserves and other compensation- related expenses. Operating revenues Operating revenues increased $8,703,000 or 12 percent in 1999 compared to 1998. ECO's revenues increased $5,805,000 or 16 percent, primarily due to the addition of new contracts and to additional project work. Utility revenues increased $2,898,000 or eight percent due primarily to increased water consumption by Suburban's customers as a result of unseasonably warm, dry winter weather. NMUI revenues were higher due to a five percent increase in water consumption, primarily from the addition of new customers. Direct operating expenses Direct operating expenses increased $6,839,000 or 13 percent. As a percentage of operating revenues, these expenses were 74 percent in 1999 and 73 percent in 1998. The percentage increase in operating expenses from 1998 to 1999 was primarily due to the cost of water sold at the California utility. ECO's direct operating expenses increased $4,885,000 due to the addition of new contracts and to additional project work performed outside the scope of existing contracts. Utility direct operating expenses increased $1,954,000, primarily reflecting the increase in customer water consumption at both Suburban and NMUI, and to the increase in the number of NMUI's customers. Selling, general and administrative Selling, general and administrative expenses increased $605,000 or five percent in 1999 compared to 1998. As a percentage of operating revenues, these expenses were 14 percent in 1999 and 15 percent in 1998. ECO's selling, general and administrative expenses increased $223,000, primarily due to increased regional marketing costs associated with new business development opportunities. General and administrative expenses at the utilities decreased $195,000, primarily as a result of decreased legal fees. As discussed above, general and administrative expenses of the parent company increased $577,000. Other income and expense Interest income decreased $25,000 as a result of a centralized cash management system, which effectively utilized excess cash to pay off line of credit balances. Interest expense decreased $59,000 as the result of decreases in line of credit balances during 1999 and also due to lower average interest rates in 1999 compared to 1998. Other income increased $119,000, primarily due to fees paid to extend the closing of the sale of surplus land no longer used in utility operations. 18 Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997 Diluted earnings per common share (adjusted for a 3-for-2 stock split in the form of a stock dividend on October 1, 1999) were $.51 in 1998 compared to $.41 in 1997. Operating income increased $840,000 or 12 percent, and, as a percentage of operating revenues, was 11 percent in 1998 compared to 10 percent in 1997. ECO's operating income increased $615,000 due to increased revenue from new contracts, additional billable work performed outside the scope of the existing contracts, and aggressive cost containment measures that reduced operating costs as a percentage of revenue. Operating income at the utilities increased $87,000. The increase in operating income was primarily due to the addition of new customers and increased customer water consumption at NMUI. The increase was offset by decreased water sales at Suburban because of inclement weather in California as a result of El Nino-generated storms. Parent company expenses decreased $138,000, primarily due to decreases in compensation-related expenses. Operating revenues Operating revenues increased $1,141,000 or two percent. ECO's revenues increased $1,859,000, primarily as a result of revenues from new contracts and additional work performed outside the scope of existing contracts. ECO's net increase in revenue reflects a loss of approximately $2,400,000 in revenue with respect to an O&M contract in New Mexico, which was not renewed in 1998. Water utility revenues decreased $718,000, primarily due to a 10 percent reduction in water consumption by Suburban's customers because of El Nino-generated storms. The decrease was partially offset by the positive effects of a rate increase, and also by the addition of new customers at NMUI. Direct operating expenses Direct operating expenses increased $317,000. As a percentage of operating revenues, these expenses decreased to 73 percent in 1998 from 74 percent in 1997. ECO's direct operating expenses increased $855,000 due primarily to higher expenses associated with new contracts and increased billable work. Water utility direct operating expenses decreased $538,000, due primarily to the decrease in water consumption by Suburban's customers. The decrease was partially offset by additional direct operating expenses at NMUI as a result of increased consumption and new customers. Selling, general and administrative Selling, general and administrative expenses decreased $16,000. As a percentage of operating revenues, these expenses were 15 percent in 1998 and 16 percent in 1997. ECO's selling, general and administrative expenses increased $389,000, due primarily to expanded marketing efforts. General and administrative expenses at the utilities decreased $267,000, primarily due to cost containment measures intended to offset the effect of the reduction in revenue. As discussed above, parent company expenses decreased $138,000. Other income and expense Interest expenses decreased $183,000, primarily due to the reduction in line of credit balances, and lower average interest rates in 1998 compared to 1997. In October 1998, Suburban sold two parcels of land no longer used in utility operations, and recorded a gain of $110,000. 19 Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedule Independent Auditors' Report .............................................................. 21 Consolidated Statements of Income - Three Years Ended December 31, 1999.................... 22 Consolidated Balance Sheets - December 31, 1999 and 1998................................... 23 Consolidated Statements of Changes in Common Stockholders' Equity - Three Years Ended December 31, 1999..................................................... 24 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1999................ 25 Notes to Consolidated Financial Statements................................................. 26 Schedule II - Valuation and Qualifying Accounts - Three Years Ended December 31, 1999...... 43
20 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of Southwest Water Company: We have audited the consolidated financial statements of Southwest Water Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the supplementary financial statement Schedule II, as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest Water Company and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Los Angeles, California January 27, 2000 21 Southwest Water Company and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, - --------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- (in thousands except per share data) Operating Revenues $ 80,849 $ 72,146 $ 71,005 Operating Expenses: Direct operating expenses 59,850 53,011 52,694 Selling, general and administrative 11,685 11,080 11,096 - --------------------------------------------------------------------------------------------------------- 71,535 64,091 63,790 - --------------------------------------------------------------------------------------------------------- Operating Income 9,314 8,055 7,215 Other Income (Expense): Interest expense (2,925) (2,984) (3,167) Interest income 66 91 94 Gain on sales of land 2,855 110 0 Other 387 268 309 - --------------------------------------------------------------------------------------------------------- 383 (2,515) (2,764) - --------------------------------------------------------------------------------------------------------- Income Before Income Taxes 9,697 5,540 4,451 Provision for income taxes (Note 7) 3,878 2,191 1,850 - --------------------------------------------------------------------------------------------------------- Net Income 5,819 3,349 2,601 Dividends on Preferred Shares (Note 9) 27 27 27 - --------------------------------------------------------------------------------------------------------- Net Income Available for Common Shares $ 5,792 $ 3,322 $ 2,574 - --------------------------------------------------------------------------------------------------------- Earnings per Common Share (Notes 8 and 9): Basic $ 0.90 $ 0.53 $ 0.41 Diluted $ 0.87 $ 0.51 $ 0.41 - --------------------------------------------------------------------------------------------------------- Cash Dividends per Common Share (Note 9) $ 0.22 $ 0.20 $ 0.19 ========================================================================================================= Weighted Average Outstanding Common Shares (Notes 8 and 9): Basic 6,404 6,304 6,217 Diluted 6,655 6,453 6,350 =========================================================================================================
See accompanying notes to consolidated financial statements. 22 Southwest Water Company and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, - ------------------------------------------------------------------------------------------------------- Assets 1999 1998 - ------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents (Note 1) $ 4,146 $ 394 Customers' accounts receivable, less allowance for doubtful accounts ($1,202 in 1999 and $895 in 1998) 10,465 8,630 Other current assets 3,700 2,586 - ------------------------------------------------------------------------------------------------------- 18,311 11,610 Property, Plant and Equipment: Utility property, plant and equipment -- at cost (Note 3) 152,624 144,690 Contract operations property, plant and equipment -- at cost 5,654 4,678 - ------------------------------------------------------------------------------------------------------- 158,278 149,368 Less accumulated depreciation and amortization 44,581 40,130 - ------------------------------------------------------------------------------------------------------- 113,697 109,238 Other Assets (Note 2) 10,942 9,079 - ------------------------------------------------------------------------------------------------------- $ 142,950 $ 129,927 - ------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------- Current Liabilities: Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 2,039 $ 1,679 Accounts payable 2,081 2,782 Other current liabilities (Note 5) 12,486 9,827 - ------------------------------------------------------------------------------------------------------- 16,606 14,288 Other Liabilities and Deferred Credits: Long-term debt (Note 6) 28,000 28,900 Bank notes payable (Note 4) 5,454 4,500 Advances for construction 7,930 8,049 Contributions in aid of construction 34,519 31,706 Deferred income taxes (Note 7) 6,146 4,430 Other liabilities and deferred credits 3,818 2,911 - ------------------------------------------------------------------------------------------------------- Total Liabilities and Deferred Credits 102,473 94,784 Commitments and Contingencies (Note 13) Stockholders' Equity (Notes 8, 9 and 10): Cumulative preferred stock 517 517 Common stock 64 42 Paid-in capital 31,080 30,127 Retained earnings 8,816 4,457 - ------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 40,477 35,143 - ------------------------------------------------------------------------------------------------------- $ 142,950 $ 129,927 =======================================================================================================
See accompanying notes to consolidated financial statements. 23 SouthWest Water Company and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) Common Stock Total ---------------------- Number of Preferred Paid-In Retained Stockholders' Shares Amount Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 3,122 $ 31 $ 517 $ 26,159 $ 3,728 $ 30,435 Dividend reinvestment and employee stock purchase plans 29 383 383 Stock options exercised 20 194 194 5% stock dividend 159 2 2,733 (2,735) 0 Net income 2,601 2,601 Cash dividends declared (1,174) (1,174) - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 3,330 33 517 29,469 2,420 32,439 Dividend reinvestment and employee stock purchase plans 28 1 432 433 Stock options exercised 20 226 226 5 -for-4 stock split in the form of a stock 843 8 (8) 0 dividend Net income 3,349 3,349 Cash dividends declared (1,304) (1,304) - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 4,221 42 517 30,127 4,457 35,143 Dividend reinvestment and employee stock purchase plans 33 498 498 Stock options exercised 51 1 455 456 3-for-2 stock split in the form of a stock dividend 2,142 21 (21) 0 Net income 5,819 5,819 Cash dividends declared (1,439) (1,439) - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 6,447 $ 64 $ 517 $ 31,080 $ 8,816 $ 40,477 =========================================================================================================================
See accompanying notes to consolidated financial statements. 24 SouthWest Water Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows from Operating Activities: Net income $ 5,819 $ 3,349 $ 2,601 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,448 4,265 4,162 Deferred income taxes 1,716 300 732 Gain on sales of land (2,855) (110) 0 Changes in assets and liabilities: Customers' accounts receivable (1,835) (1,344) 930 Other current assets (1,114) 390 (890) Accounts payable (701) 1,568 (299) Other current liabilities 2,659 916 1,343 Other, net (1,892) 176 (417) - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,245 9,510 8,162 - ------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Proceeds from sales of land 4,000 116 0 Additions to property, plant and equipment (6,891) (10,146) (9,384) Other investments, net (533) 120 (338) - ------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,424) (9,910) (9,722) - ------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Contributions in aid of construction 1,345 2,799 1,501 Net borrowings on (repayments of) bank notes payable 1,314 (1,852) 1,942 Net proceeds from dividend reinvestment, employee stock purchase and stock option plans 953 658 577 Advances for construction 203 595 447 Dividends paid (1,389) (1,266) (1,155) Payments on long-term debt (900) (900) (900) Payments on advances for construction (595) (477) (405) - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 931 (443) 2,007 - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (including $3,883 cash held in escrow at December 31, 1999) 3,752 (843) 447 Cash and cash equivalents at beginning of year 394 1,237 790 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,146 $ 394 $ 1,237 ============================================================================================================= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 2,861 $ 3,029 $ 3,189 Income taxes $ 2,540 $ 1,355 $ 805 Non-cash contributions in aid of construction and advances for construction conveyed to Company by developers $ 2,618 $ 1,775 $ 5,818
See accompanying notes to consolidated financial statements. 25 Southwest Water Company And Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Significant Accounting Policies Description of Business: Southwest Water Company and its subsidiaries ("the Company") operate and manage water supply and wastewater treatment systems. Some of the systems are owned by the Company and are regulated public utilities, while the remainder are owned by cities, utility districts and private companies and managed under contract. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The principal subsidiaries are ECO Resources, Inc. ("ECO"), Suburban Water Systems ("Suburban") and New Mexico Utilities, Inc. ("NMUI"). All significant intercompany transactions have been eliminated. Regulation: Suburban and NMUI conform to the Uniform System of Accounts prescribed by the California Public Utilities Commission ("CPUC") and the New Mexico Public Regulation Commission ("NMPRC"), respectively. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period could be affected. Actual results may differ from these estimates. Recognition of Revenues: Revenues from contract operations are recognized as services are performed. Water utility revenues include amounts billed to customers and an estimated amount of unbilled revenue for water used to the end of the accounting period. Cash and Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. During 1999, the Company sold a parcel of surplus land that had formerly been used in utility operations. The sale of land was treated as an Internal Revenue Code ("Code") Section 1031 like-kind exchange. The proceeds from the sale were transferred to an accommodator and held until the completion of reinvestment of the proceeds into utility plant. The proceeds were reinvested on February 25, 2000. As of December 31, 1999, approximately $3,900,000 was held by the accommodator which is reflected as cash and cash equivalents on the balance sheet. Financial Instruments: The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and short and long- term debt approximates fair value. At December 31, 1999, the Company had no derivative financial instruments, financial instruments with off-balance sheet risk or financial instruments with concentrations of credit risks requiring disclosure. Property, Plant and Equipment: Property, plant and equipment used in contract operations are depreciated on the straight-line method over estimated useful lives ranging from five to 30 years. The cost of additions to utility plant includes labor, material and capitalized interest. Interest of $43,000, $147,000 and $63,000 was capitalized in 1999, 1998 and 1997, respectively. The cost of utility plant retired, including net removal costs, is charged to accumulated depreciation. Depreciation expense on utility plant is recorded using the straight-line method over the useful lives of the assets as prescribed by the CPUC and NMPRC, respectively, and as permitted by Statement of Financial Accounting Standards ("SFAS") No. 71 "Accounting for the Effects of Certain Types of Regulation." Depreciation expense on average gross depreciable plant was approximately three percent in 1999, 1998 and 1997. Other Assets: The Company includes in other assets its investment in Windermere Utility Company ("Windermere") as described in Note 2, and a note receivable from Windermere. Other assets also include regulatory assets recorded by Suburban and NMUI and land no longer used in utility operations. Additionally, other assets include deferred debt expenses that are being amortized over the 26 lives of the related debt issues. In 1999, the Company incurred initial costs in the development of Inland Pacific Water Company ("IPWC") and Inland Pacific Development Company, LLC. Both are joint ventures designed to develop water and wastewater-related opportunities in the San Bernardino and Riverside counties of Southern California (Note 15). Additionally, in October 1999, the Company invested in Metro H\\2\\O, another partnership, in order to supply wholesale water and wastewater services to several communities in an area just east of Austin, Texas. The partnership currently owns land that will be used for the construction of water wells and a wastewater treatment plant. The initial costs of these investments are currently included in other assets in the Company's consolidated balance sheet. The Company regularly reviews its long-lived assets for impairment. This review includes regulatory assets and assets excluded from rate base by regulators. Potential impairment of assets held for use is determined by comparing the carrying amount of an asset to the future undiscounted cash flows expected to be generated by that asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded in order to recognize future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as the recognition of operating losses and tax credit carry- forwards. The most significant items for which deferred taxes have been recorded are the tax effects of a Code Section 1031 like-kind exchange gain on the sale of property, accelerated depreciation, advances for construction and contributions in aid of construction. Deferred tax assets and liabilities are recorded using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that the enactment occurs. When the Company adopted SFAS No. 109, "Accounting for Income Taxes," Suburban and NMUI recorded additional deferred income taxes, as well as corresponding regulatory assets and regulatory liabilities as permitted by the CPUC and NMPRC, respectively. Unamortized investment tax credits have been deferred and are amortized over the estimated productive lives of the related assets as allowed by the CPUC and the NMPRC. Production Cost Balancing Accounts: As permitted by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation", Suburban records the difference between actual water production costs incurred and CPUC-adopted water production costs in balancing accounts in the income statement with a corresponding liability or asset on the balance sheet. Under current regulations, the differences recorded will be refunded to or recovered from utility customers through future CPUC-authorized rate adjustments. Advances for Construction and Contributions in Aid of Construction: Advances for construction represent amounts advanced by developers primarily for water pipeline extensions. Advance contracts issued after June 1982 are refundable to the depositor at a rate of two and one-half percent each year over a 40-year period. Advance contracts issued prior to July 1982 are refundable over a 20- year period. Contributions in aid of construction represent contributions in the form of cash, services or property received from developers, governmental agencies, municipalities or individuals for the purpose of constructing utility plant. Depreciation expense related to utility plant additions from contributions in aid of construction is charged as a reduction to contributions in aid of construction instead of depreciation expense. Other Liabilities and Deferred Credits: Other liabilities and deferred credits include unamortized investment tax credits and regulatory liabilities recorded by Suburban and NMUI. Reclassifications: Certain reclassifications have been made to the 1998 and 1997 consolidated financial statement presentation to conform to the 1999 presentation. 27 NOTE 2. INVESTMENTS In 1996, the Company purchased a 49 percent interest in Windermere for an investment of $3,000,000. The agreement, as amended, permits the majority shareholder to acquire the Company's interest in Windermere at an agreed-upon price. If the majority shareholder does not exercise his purchase option, then the Company has the right to acquire 100 percent of Windermere for an agreed- upon price. The Company also has a consulting agreement with Windermere and an additional agreement by which the Company may receive an annual payment based upon Windermere's financial performance. The agreement extends to March 31, 2000, the date by which the majority shareholder may exercise his purchase option and also increases the agreed-upon purchase price for the majority shareholder. The Company is currently holding discussions with the majority shareholder of Windermere to purchase its interest in Windermere along with two other utilities, also located near Austin, Texas and the Company anticipates that negotiations will be completed in 2000. However, there is no assurance that an agreement will be reached or that the purchase of Windermere from the majority shareholder will be successfully completed. The investment is carried at cost and is included in other assets in the Company's consolidated balance sheets. As described in Note 1, in 1999, the Company invested in the development of IPWC and IPDC, which are partnerships designed to develop water and wastewater- related opportunities and in Metro H\\2\\O a partnership, which currently owns land that will be used for the construction of water wells and a wastewater treatment plant. The Company also has an investment of $698,000 in two not-for- profit mutual water companies ("mutuals"), which entitles the Company to certain water rights. The Company's investment in one of these mutuals is approximately 32 percent of the outstanding stock. However, the Company does not exercise significant operating and financial control over either of these mutuals. The investments are recorded at cost and are reflected in the Company's general utility property account (Note 3). The Company purchased water from these companies at a cost of approximately $2,359,000, $1,747,000 and $1,835,000 in 1999, 1998 and 1997, respectively. NOTE 3. UTILITY PROPERTY, PLANT, AND EQUIPMENT The components of utility property, plant and equipment at December 31, 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------- (in thousands) Land and land rights $ 600 $ 598 Source of supply 11,466 11,440 Pumping and purification 15,537 14,710 Transmission and distribution 112,155 105,690 General (including intangibles) 8,888 8,045 Construction work in progress 3,978 4,207 - --------------------------------------------------------------------------------- $ 152,624 $ 144,690 =================================================================================
At December 31, 1999, substantially all of the Company's utility plant and equipment was pledged as collateral for the First Mortgage Bonds issued by the Company (Note 6). NOTE 4. LINES OF CREDIT At December 31, 1999, the Company had three unsecured lines of credit from three commercial banks with a total borrowing capacity of $20,000,000. One of the lines of credit expires in 2000 and the remaining two lines of credit expire in 2001. The Company expects to renew and update expiring lines of credit in the normal course of business. Under two of the lines of credit, interest is charged at the banks' prime rates less one-quarter percent. The Company may also borrow at an interest rate that is lower than this; however, certain minimum borrowing requirements must be maintained for a fixed period of time. Interest charged under the third line of credit is lower than the bank's prime rate and contains no restrictions as to minimum borrowing or borrowing for a fixed period of time. Two of the line of credit 28 agreements require a commitment fee of one-quarter percent per year of the unused portion of the available lines of credit, calculated and payable on a quarterly basis. Two of the lines of credit require a $6,000 annual fee, and the third line requires no annual fee. Each of the line of credit agreements, as amended, contains certain financial restrictions and the Company was in compliance with all applicable restrictions at December 31, 1999. A summary of borrowing on the lines of credit is presented below:
- -------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------- (in thousands) Notes payable to banks at December 31 $ 6,593 $ 5,279 Weighted average interest rate at December 31 7.75% 7.03% Maximum amount of borrowings outstanding at any month end $ 6,593 $ 7,840 Average borrowings $ 5,398 $ 6,283 Weighted average interest rate 6.77% 7.11% ========================================================================================================
NOTE 5. OTHER CURRENT LIABILITIES Included in other current liabilities at December 31, 1999 and 1998 are the following:
- -------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------- (in thousands) Accrued salaries, wages and benefits $ 3,725 $ 2,748 Water purchased for sale 2,749 1,569 Drafts payable 1,008 696 Accrued interest payable 671 671 Franchise and other taxes 663 943 Current portion of advances for construction 398 399 Accrued dividends payable 394 344 Other 2,878 2,457 - -------------------------------------------------------------------------------------------------------- $ 12,486 $ 9,827 ========================================================================================================
29 NOTE 6. LONG-TERM DEBT The long-term debt outstanding at December 31, 1999 and 1998 is as follows:
- ------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------ (in thousands) Suburban First Mortgage Bond, Series A, due 2006, at 8.93% interest rate, with semi-annual interest payments $ 6,900 $ 7,800 Suburban First Mortgage Bond, Series B, due 2022, at 9.09% interest rate, with semi-annual interest payments 8,000 8,000 Suburban First Mortgage Bond, Series C, due 2006, at 7.61% interest rate, with semi-annual interest payments 8,000 8,000 NMUI First Mortgage Bond, Series A, due 2002, at 8.86% interest rate, with semi-annual interest payments 2,000 2,000 NMUI First Mortgage Bond, Series B, due 2006, at 7.64% interest rate, with semi-annual interest payments 4,000 4,000 - ------------------------------------------------------------------------------------------------------------------ Long-term debt before current maturities 28,900 29,800 Less current maturities (900) (900) - ------------------------------------------------------------------------------------------------------------------ Long-term debt $ 28,000 $ 28,900 ==================================================================================================================
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments of $900,000. The bond is nonrefundable and may not be redeemed prior to October 2, 2000. After October 1, 2000, the bond may be redeemed at the option of the Company at a price of par plus a call premium. Suburban's First Mortgage Bonds, Series B and C, and NMUI's First Mortgage Bonds, Series A and B, do not require annual sinking fund payments. These bonds are nonrefundable and may be redeemed at any time by the Company at a price of par plus a call premium. Additional mortgage bonds may be issued subject to the provisions of the existing indentures. Substantially all of the Company's utility plant is pledged as collateral for these bonds (Note 3). Each indenture limits the amount of cash and property dividends that Suburban and NMUI may pay to the Company. Suburban and NMUI pay regular quarterly dividends to the Company. In addition, in 1999, Suburban paid a specially authorized dividend of $3,000,000 to the Company. As of December 31, 1999, and 1998, both Suburban and NMUI were in compliance with dividend limitations mandated in the indentures. At December 31, 1999 and 1998, the combined indenture limits for dividends totaled $17,687,000 and $15,605,000, respectively. Aggregate annual maturity and sinking fund requirements of all long-term debt are $900,000 for the two years ending December 31, 2001, and for the two years ended December 31, 2004. Annual maturity and sinking fund requirements are $2,900,000 for the year ended December 31, 2002, and include NMUI's Series A Bonds, which mature in 2002. 30 NOTE 7. INCOME TAXES The components of the current and deferred income tax provisions are as follows:
- -------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Current tax expense: Federal $ 2,156 $ 1,683 $ 978 State 497 306 372 - -------------------------------------------------------------------------------------------------------------------------- 2,653 1,989 1,350 - -------------------------------------------------------------------------------------------------------------------------- Deferred income taxes (benefits): Section 1031 like-kind property exchange gain (Note 1) 1,241 0 0 Depreciation 570 568 640 Contributions in aid of construction and advances for construction 216 227 242 Production cost balancing accounts 163 (39) 342 Investment tax credits 25 25 26 Pension expense (352) (193) 0 Reserves (168) (243) (440) Gains on condemnation of land (72) (50) (51) Deferred debt expenses (6) (7) (7) Other, net 99 12 (20) - -------------------------------------------------------------------------------------------------------------------------- 1,716 300 732 - -------------------------------------------------------------------------------------------------------------------------- Change in regulatory assets and regulatory liabilities, net (442) (49) (183) Investment tax credit amortization (49) (49) (49) - -------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 3,878 $ 2,191 $ 1,850 ==========================================================================================================================
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
- -------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Provision computed at statutory rates 34% 34% 34% State income taxes, net of federal tax benefit 4% 1% 2% Goodwill amortization and other non-deductible expense 1% 2% 3% Compensation expense on stock options exercised deductible for tax purposes (2%) 0% 0% Investment tax credits (1%) (1%) (1%) Depreciation 1% 1% 1% Other, net 3% 3% 3% - -------------------------------------------------------------------------------------------------------------------------- 40% 40% 42% ==========================================================================================================================
31 Net deferred income taxes consist of the following at December 31, 1999 and 1998:
- -------------------------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Deferred income tax assets: Contributions in aid of construction and advances for construction $ 3,113 $ 3,329 Reserves 1,362 1,194 Investment tax credits 506 531 Production cost balancing accounts (441) (278) Other 63 162 - -------------------------------------------------------------------------------------------------------------------------- Total deferred Income tax assets 4,603 4,938 - -------------------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Depreciation 9,033 8,463 Section 1031 like-kind property exchange gain 1,241 0 Gains on condemnation of land 684 756 Deferred debt expenses 99 105 Pension (395) (96) Other 87 140 - -------------------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 10,749 9,368 - -------------------------------------------------------------------------------------------------------------------------- Net deferred income tax liabilities $ 6,146 $ 4,430 ==========================================================================================================================
Management regularly reviews the recoverability of deferred income tax assets and has determined that no valuation allowances were necessary at December 31, 1999 or 1998. NOTE 8. EARNINGS PER SHARE The Company records earnings per share ("EPS") by computing basic EPS and diluted EPS. Basic EPS measures the performance of the Company over the reporting period by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS measures the performance of the Company over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if the shares had been issued. Stock options give rise to potentially dilutive common shares. 32 The following table is a reconciliation of the numerators and denominators used in both basic and diluted EPS calculations:
Dividends on Effect of Preferred Dilutive Net Income Shares Basic EPS Options Diluted EPS - ---------------------------------------------------------------------------------------------------------------------------- (in thousands except per share amounts) 1999 ---- Income (numerator) $ 5,819 $ (27) $ 5,792 $ 0 $ 5,792 Shares (denominator) 6,404 251 6,655 Per share amount before land sale $ 0.65 $ 0.62 ========= =========== Land sale, net of taxes $ 0.25 $ 0.25 ========= =========== Per share amount $ 0.90 $ 0.87 ========= =========== 1998 ---- Income (numerator) $ 3,349 $ (27) $ 3,322 $ 0 $ 3,322 Shares (denominator) 6,304 149 6,453 Per share amount $ 0.53 $ 0.51 ========= =========== 1997 ---- Income (numerator) $ 2,601 $ (27) $ 2,574 $ 0 $ 2,574 Shares (denominator) 6,217 133 6,350 Per share amount $ 0.41 $ 0.41 ========= =========== - ----------------------------------------------------------------------------------------------------------------------------
NOTE 9. STOCKHOLDERS' EQUITY The Company is currently authorized to issue 25,000,000 common shares and 250,000 preferred shares at a par value of $.01 per share. At December 31, 1999, there were 6,447,030 common shares and 10,341 preferred shares outstanding, and at December 31, 1998, there were 4,220,743 common shares and 10,341 preferred shares outstanding. Series A-preferred stockholders are entitled to annual dividends of $2.625 per share. Series A-preferred shares may be called by the Company for a price of $52 per share and have preference in liquidation of $50 per share. In August 1999, the Company declared a 3-for-2 stock split (or 2,141,958 shares), paid in the form of a stock dividend to stockholders of record on October 1, 1999. In September 1998, the Company declared a 5-for-4 stock split (or 842,474 shares), paid in the form of a stock dividend to stockholders of record on October 1, 1998. In December 1997, the Company declared a stock dividend of five percent (or 158,581 shares) to stockholders of record on January 2, 1998, and at December 31, 1997, retained earnings were charged approximately $2,735,000, which represents the market value of the shares issued using the closing price of the Company's common stock on January 2, 1998. A corresponding entry of approximately $2,733,000 was recorded to paid-in-capital. The weighted-average number of outstanding common shares and dividends per common share reflect the stock splits and stock dividends. The Company has a dividend reinvestment and stock purchase plan ("DRIP") that allows common stockholders the option of receiving their dividends either in cash or in common stock at a five percent discount from the market value. The DRIP permits optional cash purchases of stock at current market values up to a maximum of $3,000 per quarter. As of December 31, 1999, there were 744,187 shares (adjusted for stock splits and stock dividends) authorized for issuance under the DRIP and 213,645 shares were available for issuance. 33 NOTE 10. STOCK COMPENSATION PLANS At December 31, 1999, the Company had three stock-based compensation plans: the Stock Option Plan, the Director Stock Option Plan, and the Employee Stock Purchase Plan. The Company accounts for these plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. If compensation expense for the Company's three stock-based compensation plans had been determined using the alternative method described under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been as follows:
- -------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------- (in thousands except per share data) Net income available for common shares As reported $ 5,792 $ 3,322 $ 2,574 Pro forma $ 5,612 $ 3,208 $ 2,511 - -------------------------------------------------------------------------------------------------- Basic earnings per common share As reported $ 0.90 $ 0.53 $ 0.41 Pro forma $ 0.88 $ 0.51 $ 0.40 - -------------------------------------------------------------------------------------------------- Diluted earnings per common share As reported $ 0.87 $ 0.51 $ 0.41 Pro forma $ 0.84 $ 0.50 $ 0.39 ==================================================================================================
In the table below, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Dividend yield 1.8% 2.3% 2.6% Expected volatility 42.1% 32.4% 33.1% Risk free interest rate 5.0% 5.5% 6.0% Expected life in years 7 6 6 =================================================================================================
STOCK OPTION PLAN ("SOP"): In 1988, the stockholders approved the SOP and reserved 150,000 shares for issuance under the SOP and in 1993, approved an amendment to the SOP which increased the shares reserved for issuance to 250,000. The amendment also eliminated any future grants of restricted stock as well as amending certain provisions for the restricted stock already issued. In 1997, the stockholders approved another amendment to the SOP, which provided for an increase of 200,000 shares reserved for issuance and also extended the future grant date to February 17, 2007. As of December 31, 1999, there were 1,013,905 shares (adjusted for the stock splits and stock dividends) authorized for issuance under the SOP and 170,642 shares were available for issuance. Under the SOP, the Company may grant non-qualified stock options to officers and employees at an exercise price not less than the fair value of the stock on the last trading date preceding the date of grant. Prior to the approval of the Director Option Plan discussed below, the Company also granted non-qualified options to certain non-employee directors of the Company. Options vest equally over a period of five years and expire 10 years and one day from the date of grant. Restricted stock was issued under the SOP prior to 1993 and was held in escrow until the restrictions lapsed. The Company released 13,291 shares of restricted stock from escrow in 1999. All restricted stock has been issued. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions described above. 34 A summary of the status of the SOP and changes during the years ended as of December 31, 1999, 1998 and 1997 is presented below.
- -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price ==================================================================================================================== Outstanding at beginning of year 524,163 $ 6.32 425,911 $ 5.69 410,036 $ 5.31 Granted 203,850 10.14 134,059 8.42 75,989 6.87 Exercised (65,280) 6.16 (35,807) 6.60 (40,363) 4.80 Forfeited (18,775) 7.38 0 0.00 (19,751) 4.29 -------- -------- -------- Outstanding at end of year 643,958 7.52 524,163 6.32 425,911 5.69 ======== ======== ======== Options exercisable at year-end 263,037 $ 5.73 252,090 $ 5.69 231,178 $ 5.95 ======== ======== ======== Weighted average fair value $ 4.47 $ 2.64 $ 2.45 ======== ======== ======== ====================================================================================================================
The following table summarizes information about fixed stock options outstanding at December 31, 1999:
- -------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------------- Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Life Average Exercisable Average Exercise Prices at 12/31/99 in Years Exercise Price at 12/31/99 Exercise Price - -------------------------------------------------------------------------------------------------------------------- $ 3 to $ 6 156,387 5.0 $ 4.23 118,829 $ 4.18 $ 6 to $ 8 171,411 4.1 $ 6.77 121,148 $ 6.71 $ 8 to $12 316,160 8.6 $ 9.56 23,060 $ 8.53 ------- ------- $ 3 to $12 643,958 6.3 $ 7.52 263,037 $ 5.73 ====================================================================================================================
Director Option Plan ("Dop"): In 1996 the stockholders approved the DOP for non- employee directors and reserved 50,000 shares for issuance under the DOP. As of December 31, 1999, there were 118,125 shares (adjusted for the stock splits and stock dividends) authorized for issuance under the DOP and 72,066 shares were available for issuance. The DOP provides for an automatic grant of options to purchase 1,000 of the Company's common stock to eligible non-employee directors of the Company on the date of the Company's Annual Meeting of Stockholders through 2006. All unexercised awarded options are adjusted for stock splits and stock dividends. New directors are granted an initial option to purchase 1,000 shares of the Company's common stock upon appointment to the Board of Directors. The DOP options become exercisable in equal installments over two years and expire 10 years and one day after the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the assumptions described above. 35 A summary of the status of the DOP and changes during the years ended as of December 31, 1999,
- ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price ============================================================================================================= Outstanding at beginning of year 33,068 $ 7.51 16,534 $ 6.41 0 $ 0 Granted 14,172 10.00 16,534 8.60 16,534 6.41 Exercised (5,043) 7.01 0 0 0 0 Forfeited (1,181) 8.40 0 0 0 0 ------- ------- ------- Outstanding at end of year 41,016 8.17 33,068 7.51 16,534 6.41 ======= ======= ======= Options exercisable at year-end 19,758 $ 7.17 0 $ 0 0 $ 0 ======= ======= ======= Weighted average fair value of options granted during the year $ 4.25 $ 2.64 $ 2.41 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN ("ESPP"): The Company has a stockholder-approved ESPP that allows eligible employees to purchase common stock through payroll deductions up to 10 percent of their salary (not to exceed $25,000 per year). The purchase price of the stock is 90 percent of the lower of the share price as calculated at the beginning and end of each three-month offering period. Under the ESPP, the Company issued 9,005 shares, 9,714 shares and 9,867 shares to employees in 1999, 1998 and 1997, respectively. At December 31, 1999, 620,155 shares (after adjustment for stock splits and stock dividends) were reserved for issuance under the ESPP and 522,002 shares were available for issuance. Using the alternative method described under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes option-pricing model with the assumptions shown in the table on page 34. The weighted average value of those purchase rights granted in 1999, 1998 and 1997 was $1.569, $0.979, and $0.773, respectively, which resulted in compensation expense of $13,905, $9,637 and $9,096, and is included in the pro forma net income available for common share amounts shown in the table on page 34. NOTE 11. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS DEFINED BENEFIT PLAN: The Company has a non-contributory defined benefit pension plan ("the Pension Plan") under which employees of the parent company, Suburban and NMUI who have one or more years of service and have attained the age of 21 years are qualified to participate. Each year, the Company funds the minimum required statutory amount and in 1999 and 1998, no contributions were required. In 1997, the Company contributed $560,000 to the Pension Plan. Benefits to employees are based upon their years of service and their average compensation for the five highest consecutive years of the last ten years before retirement. Benefits are reduced if a participant retires before a certain age. Approximately 82 percent of Pension Plan assets are invested in retirement money market funds, in addition to a group retirement policy consisting of a guaranteed insurance contract. The remaining 18 percent of Pension Plan assets are invested primarily in the Company's common stock. The Pension Plan owns 158,917 shares of the Company's common stock, which had a market value of approximately $2,384,000 and $1,642,000 at December 31, 1999 and 1998, respectively. The Pension Plan received dividends on these shares of approximately $35,000 and $32,000 in 1999 and 1998, respectively. The Company adopted SFAS No. 132, "Employer's Disclosures about Pension and Other Post- retirement Benefits", which was effective for financial statements issued after December 15, 1997. On August 5, 1999, the Company's Board of Directors adopted a resolution to terminate the Pension Plan, freeze the assets of the Pension Plan and cease all benefit accruals as of December 30, 1999. In connection with the termination of the Pension Plan, the Company enhanced its current defined 36 contribution plan covering employees of the parent company, Suburban and NMUI. Upon plan termination and favorable determination from the Internal Revenue Service, the net assets of the Pension Plan will be distributed as permitted by ERISA and its related regulations. In accordance with generally accepted accounting principles, the Company will recognize any termination gain or loss when final settlement of the Pension Plan has taken place, all assets have been distributed and the Company no longer has primary responsibility for the pension benefit obligation. The Company does not expect the termination to adversely affect its financial position or results of operations. The Company may be required to pay certain excise taxes on any amounts currently held by the Pension Plan and not ultimately distributed to the vested participants; however, the Company does not expect this amount to be material. The following tables provide the actuarial assumptions used in determining the Pension Plan Valuation, the reconciliation of the Projected Benefit Obligation and the reconciliation of Pension Plan assets:
Weighted-Average Assumptions 1999 1998 - ------------------------------------------------------------------------------ Discount rate 6.5% 6.5% Expected return on plan assets 8.0% 8.0% Rate of compensation increase 3.0% 3.0% ============================================================================== Pension Benefits - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ (in thousands) Change in benefit obligation Benefit obligation at beginning of year $ 10,265 $ 8,422 Amendments 1,898 Service cost 536 440 Interest cost 667 632 Actuarial gain (loss) 0 1,058 Plan curtailment (1,586) 0 Benefits paid (285) (287) ------------------------------ Benefit obligation at end of year $ 11,496 $ 10,265 ------------------------------ Change in plan assets Fair value of plan assets at beginning of year $ 13,032 $ 11,414 Actual return on plan assets 1,405 1,905 Employer contribution 0 0 Benefits paid (285) (287) ------------------------------ Fair value of plan assets at end of year $ 14,152 $ 13,032 ------------------------------ Funded status 2,656 2,766 Unrecognized net actuarial gain (2,082) (1,747) Unrecognized prior service cost 0 (143) Unrecognized net asset (372) (496) ------------------------------ Prepaid benefit cost $ 202 $ 380 ============================== Components of net periodic benefits Service cost $ 536 $ 440 Interest cost 667 632 Expected return on plan assets (1,043) (915) Amortization of prior service costs (10) (10) Recognized actuarial gain (27) (39) Recognized net initial asset (125) (124) ------------------------------ Net periodic benefit cost $ (2) $ (16) ------------------------------
37 DEFINED CONTRIBUTION PLANS: The Company has established a 401(k) profit sharing plan (the "ECO Plan") covering employees of its contract operations business. The ECO Plan provides for monthly enrollment by employees after completion of three months of service. Participants may elect to contribute up to 15 percent of their salary to the ECO Plan. The Company matches a participant's contribution for an amount up to 50 percent of the first four percent of the participant's salary. Company contributions vest immediately. Company contributions to the ECO Plan were $181,000, $152,000 and $133,000 in 1999, 1998 and 1997, respectively. The assets of the ECO Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds, and money market investments. The Company also established a 401(k) plan ("Utility Plan") covering employees of the parent company, Suburban and NMUI. Prior to December 30, 1999, the Utility Plan provided for monthly enrollment by employees after completion of three months of service. Participants may elect to contribute up to 15 percent of their salary to the Utility Plan. Prior to December 30, 1999 the Utility Plan did not provide for Company contributions. The assets of the Utility Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds, and money market investments. Subsequent to December 30, 1999, the Company amended the plan because the Company's defined benefit plan was terminated. Under the amendment, the Company matches 100 percent of the first two percent and 50 percent of the next four percent of the employees' contributions up to a maximum Company match of four percent. In addition, the Company contributes $250 semi-annually to each eligible employee. Employees become eligible for participation on the first of the month following their date of hire. The Company contributions vest depending upon an employee's length of service. NOTE 12. SEGMENT INFORMATION Under FASB No. 131, Southwest Water Company has two reportable segments: non- regulated and regulated operations. The non-regulated contract operations segment operates and manages water and wastewater treatment facilities owned by cities, municipalities and private entities. Revenue is derived through municipal utility district contracts and operations and maintenance contracts. The regulated utility segment provides water and wastewater services through regulated utility operations, and derives revenue from the sales of water and wastewater services to the consumer. Southwest Water Company's reportable segments are strategic business units that offer different services. They are managed separately since each business requires different operating and marketing strategies. The contract operations segment, while subject to certain environmental standards, is not regulated in its pricing, marketing or rates of return. The utility operations are governed by the regulatory bodies of the respective states and by the federal government. The service areas in which the utilities operate constitute monopolies with allowable rates of return determined by state regulatory agencies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. 38 The following table presents information about each reported segment profit or loss and segment assets. These items are the measures reported to the chief operating decision-maker for purposes of making decisions about allocating resources to the segment and assessing its performance.
- ---------------------------------------------------------------------------------------------------------------------------- Non- Total Regulated Regulated Total Segment Consolidated Segment Segment Information Other Information - ---------------------------------------------------------------------------------------------------------------------------- (in thousands) As of December 31, 1999 - ----------------------- Revenues from external customers $ 42,649 $ 38,200 $ 80,849 $ 0 $ 80,849 Interest income 46 8 54 12 66 Interest expense 30 2,756 2,786 139 2,925 Depreciation and amortization 717 3,674 4,391 57 4,448 Segment operating profit 1,528 11,648 13,176 (3,862) 9,314 Income tax provision (benefit) 370 3,776 4,146 (268) 3,878 Gain on sales of land 0 2,855 2,855 0 2,855 All other 28 96 124 263 387 Other significant non-cash items: Non-cash contributions in aid of construction 0 2,618 2,618 0 2,618 Segment assets 12,450 123,310 135,760 7,190 142,950 Expenditures for segment assets 925 8,434 9,359 150 9,509 As of December 31, 1998 - ----------------------- Revenues from external customers $ 36,844 $ 35,302 $ 72,146 $ 0 $ 72,146 Interest income 66 8 74 17 91 Interest expense 14 2,742 2,756 228 2,984 Depreciation and amortization 736 3,477 4,213 52 4,265 Segment operating profit 848 10,493 11,341 (3,286) 8,055 Income tax provision (benefit) 192 2,588 2,780 (589) 2,191 Gain on sales of land 0 110 110 0 110 All other 15 (11) 4 264 268 Other significant non-cash items: Non-cash contributions in aid of construction 0 1,775 1,775 0 1,775 Segment assets 10,157 115,515 125,672 4,255 129,927 Expenditures for segment assets 430 11,363 11,793 128 11,921 As of December 31, 1997 - ----------------------- Revenues from external customers $ 34,985 $ 36,020 $ 71,005 $ 0 $ 71,005 Interest income 67 2 69 25 94 Interest expense 7 2,833 2,840 327 3,167 Depreciation and amortization 808 3,311 4,119 43 4,162 Segment operating profit (loss) 147 10,407 10,554 (3,339) 7,215 Income tax provision (benefit) (39) 2,344 2,305 (455) 1,850 All other 0 19 19 290 309 Other significant non-cash items: Non-cash contributions in aid of construction 0 5,818 5,818 0 5,818 Segment assets 9,765 109,167 118,932 4,168 123,100 Expenditures for segment assets 404 14,365 14,769 433 15,202 - ----------------------------------------------------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES The Company leases certain equipment and office facilities under operating leases that expire through 2004. Aggregate rental expense under all operating leases approximated $2,240,000 in 1999, $2,384,000 in 1998 and $2,225,000 in 1997. At December 31, 1999, the future minimum rental commitments under existing non-cancelable operating leases are as follows: 2000-$2,264,000, 2001- $1,905,000, 2002-$1,207,000, 2003-$663,000, 2004-$437,000 and $91,000 thereafter. 39 NOTE 14. SELECTED UNAUDITED QUARTERLY FINANCIAL INFORMATION The fluctuations in operating revenues and operating income between quarters reflect the seasonal nature of contract and utility operations. Earnings per basic and diluted common share reflect a 3-for 2 stock split in the form of a stock dividend on October 1, 1999 and a 5-for-4 stock split in the form of a stock dividend on October 1, 1998, as well as a stock dividend of five percent on January 2, 1998. Selected unaudited quarterly financial information of the Company is presented in the table below.
1999 Quarters Ended March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------------------- (in thousands except per share amounts) Operating revenues $ 16,649 $ 19,454 $ 22,911 $ 21,835 Operating income 1,179 3,750 3,239 1,146 Net income before land sale 354 1,165 1,659 993 Land sale, net of taxes - - 1,648 - Net income 354 1,165 3,307 993 Net income available for common shares 347 1,158 3,300 987 Basic earnings before land sale 0.05 0.18 0.26 0.15 Land sale, net of taxes - - 0.25 - Basic earnings per common share 0.05 0.18 0.51 0.15 Diluted before land sale 0.05 0.18 0.24 0.00 Land sale, net of taxes - - 0.25 - Diluted 0.05 0.18 0.49 0.15 1998 Quarters Ended March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------------------------- Operating revenues $ 15,946 $ 18,332 $ 19,960 $ 17,908 Operating income 1,022 2,184 3,088 1,761 Net income 182 926 1,448 793 Net income available for common shares 175 919 1,441 787 Basic earnings per common share 0.03 0.15 0.23 0.12 Diluted earnings per common share 0.03 0.14 0.22 0.12
NOTE 15. NEW BUSINESS In January 2000, the Company announced the formation of IPWC and IPDC, two joint ventures designed to develop water and wastewater-related opportunities in Southern California's San Bernardino and Riverside counties. IPWC will market and sell a wide range of services that include financing, design and construction of water and wastewater facilities, water rights development and full contract operation, maintenance and management of water and wastewater systems. On February 25, 2000, Suburban purchased the City of West Covina's water distribution system and facilities with Suburban assuming ownership and operation of the water system on that date. The transaction added approximately 7,000 connections to Suburban's customer base, an increase of approximately 11 percent. 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information relating to the directors of the Company is set forth in the Company's definitive Proxy Statement, to be filed with the Securities and Exchange Commission ("Commission") dated on or about April 7, 2000, under the caption "Governance of the Company," and is hereby incorporated by reference. In addition, information appearing under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the Securities Exchange Act of 1934, as Amended" is in the Company's definitive Proxy Statement, dated on or about April 7, 2000, and is also hereby incorporated by reference. Item 11. EXECUTIVE COMPENSATION Information related to executive compensation is contained in the Company's definitive Proxy Statement, to be filed with the Commission dated on or about April 7, 2000, under the captions "Executive Compensation," and "Compensation of Directors Fees and Benefit Plans," and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership of certain beneficial owners and management of the Company's voting securities is set forth in the Company's definitive Proxy Statement, to be filed with the Commission dated on or about April 7, 2000, under the caption "Beneficial Ownership of the Company's Securities," and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is set forth under the captions "Item I - Election of Directors," "Executive Severance Compensation Agreements," and "Certain Transactions" in the Company's definitive Proxy Statement, to be filed with the Commission dated on or about April 7, 2000, and is hereby incorporated by reference. 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) The financial statements listed below are filed as part of this report: Independent Auditors' Report Consolidated Statements of Income - Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Changes in Common Stockholders' Equity - Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (a)(2) The supplementary financial statement schedule required to be filed with this report is as follows:
Page ---- Schedule II - Valuation and Qualifying Accounts ....................................... 43 Schedules not listed above are omitted because of the absence of conditions under which they are required, or because the information required by such omitted schedules is included in the consolidated financial statements or notes to consolidated financial statements thereto. (a)(3) Exhibit Index.......................................................................... 44
(b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended December 31, 1999. 42 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999, 1998 AND 1997
Balance at Provision Beginning Charged to Recoveries / Accounts Balance at of Year Income Other Written Off End of Year ---------------------------------------------------------------- (in thousands) 1999 Allowance for Doubtful Accounts $ 895 $ 367 $ 0 $ (60) $ 1,202 ---------------------------------------------------------------- 1998 Allowance for Doubtful Accounts $ 711 $ 319 $ 0 $ (135) $ 895 ---------------------------------------------------------------- 1997 Allowance for Doubtful Accounts $ 512 $ 247 $ 0 $ (48) $ 711
43 SOUTHWEST WATER COMPANY AND SUBSIDIARIES EXHIBIT INDEX Exhibit No. and Applicable Section of Item 601 of Regulation S-K: - ----------------------------------------------------------------- 2 Agreement and Plan of Merger of Registrant dated May 25, 1988 (incorporated by reference to Exhibit 2 to Registrant's Form 10-K Report for the year ended December 31, 1988). 3.1 Registrant's Restated Certificate of Incorporation dated April 4, 1988 (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988). 3.1B Certificate of Amendment of Article Four of Articles of Incorporation dated March 30, 1995 (incorporated by reference to Exhibit 3.1B to Registrant's Form 10-Q Report for the quarter ended March 31, 1995). 3.1C Certificate of Amendment of Restated Certificate of Incorporation dated June 4, 1998 (incorporated by reference to Appendix A of Registrant's 1998 Proxy Statement filed with the Commission on April 20, 1998). 3.1D Certificate of Correction of Amendment of Restated Certificate of Incorporation dated September 14, 1998, filed herewith. 3.1E Certificate of Designation of Series E Convertible Preferred Stock Of Southwest Water Company dated January 12, 2000, filed herewith. 3.2 Registrant's Bylaws as amended April 4, 1988 (incorporated by reference to Exhibit 3.2 to Registrant's Form 8-B Report filed with the Commission on July 5, 1988). 3.2A Amendment to Registrant's Bylaws dated March 15, 1991 (incorporated by reference to Exhibit 3.2A to Registrant's Form 10-K Report for the year ended December 31, 1990). 3.2B Amendment to Registrant's Bylaws dated June 27, 1995 (incorporated by reference to Exhibit 3.2B to Registrant's Form 10-K Report for the year ended December 31, 1995). 3.2C Amendment to Registrant's Bylaws dated December 12, 1996 (incorporated by reference to Exhibit 3.2C to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.1 Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank Trust National Association, formerly First Trust of California, N.A. dated October 1, 1986 (incorporated by reference to Exhibit 4.3 to Registrant's Form 10-K Report for the year ended December 31, 1986). 4.1A First Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank Trust National Association, formerly First Trust of California, N.A. dated February 7, 1990 (incorporated by reference to Exhibit 4.2A to Registrant's Form 10-K Report for the year ended December 31, 1989). 4.1B Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank Trust National Association, formerly First Trust of California, N.A. dated January 24, 1992 (incorporated by reference to Exhibit 4.2B to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.1C Third Amendment and Supplement to Indenture of Mortgage dated October 9, 1996, between Suburban Water Systems and U.S. Bank Trust National Association, formerly First Trust of California, N.A. (incorporated by reference to Exhibit 4.2C to Registrant's Form 10-K Report for the year ended December 31, 1996). 44 4.2 Bond Purchase Agreement dated October 1, 1986, for Suburban Water Systems (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1986). 4.2A Bond Purchase Agreement dated February 20, 1992, for Suburban Water Systems (incorporated by reference to Exhibit 4.3A to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.2B Bond Purchase Agreement dated October 21, 1996, for Suburban Water Systems (incorporated by reference to Exhibit 4.3B to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.3 Indenture of Mortgage dated February 14, 1992, between New Mexico Utilities, Inc., and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.3A First Supplement to Indenture of Mortgage dated May 15, 1992, between New Mexico Utilities, Inc. and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4A to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.3B Second Amendment and Supplement to Indenture of Mortgage dated October 21, 1996, between New Mexico Utilities, Inc. and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4B to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.4 Bond Purchase Agreement dated March 12, 1992, for New Mexico Utilities, Inc. (incorporated by reference to Exhibit 4.5 to Registrant's Form 10-K Report for the year ended December 31, 1991). 4.4A Bond Purchase Agreement dated November 8, 1996, for New Mexico Utilities, Inc. (incorporated by reference to Exhibit 4.5A to Registrant's Form 10-K Report for the year ended December 31, 1996). 4.5 Article Four of the Restated Certificate of Incorporation of the Registrant as to the rights, preferences, privileges and restrictions of all classes of stock (incorporated by reference to Exhibit 3.1 to Registrant's form 8-B Report filed with the Commission on July 5, 1988). 4.5A Registration Statement for the Second Amendment to the Amended and Restated Southwest Water Company Stock Option and Restricted Stock Plan (incorporated by reference to Registrant's Form S-8 Registration Statement filed with the Commission October 29, 1997). 4.7 Stockholder's Rights Plan dated April 6, 1998 (incorporated by reference to the Registrant's Form 8-K Report filed with the Commission April 23, 1998). 10.1 Fourteenth Amendment to the Utility Employees' Retirement Plan dated December 12, 1996 (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K Report for the year ended December 31, 1996). 10.1A Fifteenth Amendment to the Utility Employees' Retirement Plan dated December 31, 1997 (incorporated by reference to Exhibit 10.1A to the Registrant's Form 10-K Report for the year ended December 31, 1998). 10.1B Resolution adopted August 5, 1999 by the Board of Directors regarding Cessation of Benefit Accruals and Termination of the Retirement Plan, Effective December 30, 1999, filed herewith. 10.1C Sixteenth Amendment to the Utility Employees' Retirement Plan dated December 30, 1999, filed herewith. 45 10.2 Amended and Restated Employee Stock Purchase Plan dated May 28, 1998 (incorporated by reference to Appendix B to Registrant's 1998 Proxy Statement filed with the Commission on April 20, 1998). 10.3 Dividend Reinvestment and Stock Purchase Plan Dated December 1, 1992 (incorporated by reference to Registrant's Form S-3 Registration Statement filed with the Commission on December 1, 1992). 10.4 Amended and Restated Stock Option and Restricted Stock Option and Restricted Stock Plan dated November 11, 1991, and First Amendment to the Amended and Restated Stock Option and Restricted Stock Plan dated March 21, 1993 (incorporated by reference to Registrant's Form S-8 Registration Statement filed with the Commission on December 21, 1993). 10.5 Stock Purchase Agreement and First Amendment to Stock Purchase Agreement dated August 13, 1993, between ECO Resources, Inc., and Robert E. Hebert (incorporated by reference to Exhibit 10.11 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.6 Utility Employees' 401(k) Plan dated January 7, 1994 (incorporated by reference to Exhibit 10.13 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.6A First Amendment to Utility Employees' 401(k) Plan (incorporated by reference to Exhibit 10.8A to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.8 Comprehensive Amendment to the Profit Sharing 401(k) Plan for the Southwest Water Company's Related Companies dated March 10, 1994 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K Report for the year ended December 31, 1993). 10.8A First Amendment to the Profit Sharing 401(k) Plan for the Southwest Water Company's Related Companies (incorporated by reference to Exhibit 10.9A to Registrant's Form 10-K Report for the year ended December 31, 1994). 10.9 Form of Severance Compensation Agreement between Registrant and certain executive officers approved by the Compensation Committee of the Board of Directors on February 21, 1995, (incorporated by reference to Exhibit 10.11 to Registrant's Form 10-K Report for the year ended December 31, 1995). 10.9A Form of Severance Compensation Agreement between Registrant and certain executive officers approved by the Compensation Committee of the Board of Directors on August 5, 1998, (incorporated by reference to Exhibit 10.9A to Registrant's Form 10-K Report for the year ended December 31, 1998). 10.10 Equity Investment Agreement dated May 23, 1996, between the Registrant and RTNT, Inc., covering Windermere Utility Company, together with two First Refusal Agreements and Call Purchase Agreements between the Registrant and RTNT, Inc. (incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K Report for the year ended December 31, 1996). 10.10A First Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 22, 1998 (incorporated by reference to Exhibit 10.10A to Registrant's Form 10-K Report for the year ended December 31, 1998). 10.10B Second Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement between the Registrant and RTNT, Inc. dated January 15, 1999, (incorporated by reference to Exhibit 10.10B to Registrant's Form 10-K Report for the year ended December 31, 1998). 10.10C First Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 22, 1998 (incorporated by 46 reference to Exhibit 10.10C to Registrant's Form 10-K Report for the year ended December 31, 1998). 10.10D Second Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement between the Registrant and RTNT, Inc. dated January 15, 1999 (incorporated by reference to Exhibit 10.10D to Registrant's Form 10-Q Report for the year ended December 31, 1998). 10.10E Third Amendment of SWWC Right of First Refusal Agreement and SWWC Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 27, 1999 (incorporated by reference to Exhibit 10.10E to Registrant's Form 10-Q Report for the quarter ended June 30, 1999). 10.10F Third Amendment of RTNT Right of First Refusal Agreement and RTNT Call Purchase Agreement between the Registrant and RTNT, Inc. dated May 27, 1999 (incorporated by reference to Exhibit 10.10F to Registrant's Form 10-Q Report for the quarter ended June 30, 1999). 10.11 Credit Agreement between Registrant and Bank of America, N.A. dated July 30, 1999, filed herewith. 10.12 Credit Agreement between Suburban Water Systems, Inc. and Bank of America N.A., dated July 30, 1999, filed herewith. 10.13 Amended and Restated Credit Agreement between Registrant and Mellon Bank, N.A. dated December 23, 1997 (incorporated by reference to Exhibit 10.13 to Registrant's Form 10-K Report for the year ended December 31, 1997). 10.13A First Amendment to the Amended and Restated Credit Agreement between Registrant and Mellon Bank, N.A. dated September 1, 1998 (incorporated by reference to Exhibit 10.13A to Registrant's Form 10-K for the year ended December 31, 1998). 10.13B Second Amendment to the Amended and Restated Credit Agreement between Registrant and Mellon Bank, N.A. dated September 29, 1999, filed herewith. 10.14 Credit Agreement between Suburban Water Systems and Mellon Bank, N.A. dated December 23, 1997 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K Report for the year ended December 31, 1997). 10.14A First Amendment to the Credit Agreement between Suburban Water Systems and Mellon Bank, N.A. dated September 1, 1998 (incorporated by reference to Exhibit 10.14A to Registrant's Form 10-K for the year ended December 31, 1998). 10.14B Second Amendment to Credit Agreement between Suburban Water Systems and Mellon Bank, N.A. dated September 29, 1999, filed herewith. 10.15 Business Loan Agreement dated December 10, 1997 between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N.A. (incorporated by reference to Exhibit 10.15 to Registrant's Form 10-K Report for the year ended December 31, 1998). 10.15A Modification Agreement between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N. A, dated April 10, 1999 (incorporated by reference to Exhibit 10.15A to Registrant's Form 10-Q Report for the quarter ended September 30, 1999). 10.16 Agreement Between Suburban Water Systems and The City of West Covina, California for the Acquisition of the City's Water Utility System dated February 1, 2000, filed herewith. 47 10.17 IPWC Stockholders Agreement Between Southwest Water Company, Inland Pacific Partners and Inland Pacific Water Company effective January 1, 2000, filed herewith. 10.18 Limited Liability Company Agreement of Inland Pacific Development Company, LLC effective January 1, 2000, filed herewith. 21.1 Listing of Registrant's subsidiaries. 23.1 Consent of KPMG LLP. 27 Financial Data Schedule. 48 SOUTHWEST WATER COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SOUTHWEST WATER COMPANY By: /s/ Anton C. Garnier -------------------- ANTON C. GARNIER President and Chief Executive Officer (Principal Executive Officer) March 14, 2000 By: /s/ Peter J. Moerbeek --------------------- PETER J. MOERBEEK Chief Financial Officer (Principal Financial Officer) March 14, 2000 By: /s/ Thomas C. Tekulve --------------------- THOMAS C. TEKULVE Vice President Finance (Principal Accounting Officer) March 14, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ H. Frederick Christie /s/ Richard Kelton - ------------------------- ------------------ H. FREDERICK CHRISTIE RICHARD KELTON Director Director March 14, 2000 March 14, 2000 /s/ Anton C. Garnier /s/ Maureen A. Kindel - ---------------------- --------------------- ANTON C. GARNIER MAUREEN A. KINDEL Director Director March 14, 2000 March 14, 2000 /s/ Monroe Harris /s/ Richard G. Newman - ---------------------- --------------------- MONROE HARRIS RICHARD G. NEWMAN Director Director March 14, 2000 March 14, 2000 /s/Donovan D. Huennekens - ------------------------ DONOVAN D. HUENNEKENS Director March 14, 2000 49 EX-3.1D 2 CERTIFICATE OF CORRECTION EXHIBIT 3.1D CERTIFICATE OF CORRECTION OF SOUTHWEST WATER COMPANY It is hereby certified that: FIRST: On February 2, 1988, Southwest Water Company, a Delaware corporation (the "Corporation"), filed a Certificate of Incorporation with the Delaware Secretary of State (the "Certificate of Incorporation"). On April 6, 1988, the Corporation filed a Restated Certificate of Incorporation and a Certificate of Amendment of Articles of Incorporation was filed on May 1, 1995. On June 10, 1998, the Corporation filed a Certificate of Amendment of Restated Certificate of Incorporation (the "Certificate of Amendment") SECOND: Article FOURTH and Article SIXTH, Paragraph B of the Certificate of Amendment included typographical errors. Article FOURTH of the Certificate of Amendment erroneously restated Article FOURTH in its entirety and should have only restated Article FOURTH, Paragraph A in its entirety. THIRD: The undersigned executes, acknowledges and presents for filing this Certificate of Correction in accordance with Section 103(f) of the General Corporation Law of the State of Delaware for the purpose of correctly providing that only Article FOURTH, Paragraph A is restated and for the purpose of restating Article FOURTH, Paragraph A of the Certificate of Amendment as follows: "FOURTH: A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is twenty-five million two hundred fifty thousand (25,250,000), consisting of the following: (1) two hundred fifty thousand (250,000) shares of Preferred stock, with a par value of $.01 per share (the "Preferred Stock"); and (2) twenty-five million (25,000,000) shares of Common stock, with a par value of $.01 per share (the "Common Stock")." FOURTH: The undersigned further executes, acknowledges and presents for filing this Certificate of Correction in accordance with Section 103(f) of the General Corporation Law of the State of Delaware for the purpose of correctly restating Article SIXTH, Paragraph B of the Certificate of Amendment as follows: "SIXTH: B. The number of Directors shall be not less than seven nor more than nine, and the exact number of Directors shall be fixed from time to time exclusively by the Board of Directors acting pursuant to a resolution adopted by affirmative vote of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time of any such resolution). The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be determined by the Board of Directors and shall consist of as nearly equal a number of directors as practicable. The term of the Class I directors initially shall expire at the first annual meeting of stockholders ensuing after the 1998 Annual Meeting of Stockholders; the term of Class II directors initially shall expire at the second Annual Meeting of Stockholders ensuing after the 1998 Annual Meeting of Stockholders; and the term of Class III directors initially shall expire at the third Annual Meeting of Stockholders ensuing after the 1998 Annual Meeting of Stockholders. In the case of each class, the directors shall serve until their respective successors are duly elected and qualified. At each Annual Meeting of Stockholders, directors of the respective class whose term expires shall be elected, and the directors chosen to succeed those whose terms shall have expired shall be elected to hold office for a term to expire at the third ensuing Annual Meeting of Stockholders after their election, and until their respective successors are elected and qualified. Any vacancy in the office of a director shall be filled by the vote of the majority of the remaining directors, regardless of any quorum requirements set forth in the Bylaws of the corporation. Any director appointed to fill a vacancy in the office of director shall serve until the next Annual Meeting of Stockholders at which directors of the class for which such director shall have been chosen are to be elected, and until his or her successor is elected and qualified. Newly created directorships shall be filled by the Board of Directors." 2 IN WITNESS WHEREOF, this Corporation has caused this Certificate of Correction to be signed by Anton C. Garnier, its President, and Peter J. Moerbeek, its Secretary, this 14th day of September, 1998. SOUTHWEST WATER COMPANY, a Delaware corporation By: /s/ANTON C. GARNIER ---------------------------------------- Anton C. Garnier, President By: /s/PETER J. MOERBEEK ----------------------------------------- Peter J. Moerbeek, Secretary 3 EX-3.1E 3 CERTIFICATE OF DESIGNATION EXHIBIT 3.1E CERTIFICATE OF DESIGNATION OF SERIES E CONVERTIBLE PREFERRED STOCK OF SOUTHWEST WATER COMPANY PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Southwest Water Company, a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article Fourth of its Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation at a telephonic meeting called and held on January 12, 2000 adopted the following resolution, which resolution remains in full force and effect on the date hereof; RESOLVED, that there is hereby established a series of authorized preferred stock having a par value of $.01 per share, which series shall be designated as "Series E Convertible Preferred Stock" (the "Series E Preferred Stock"), shall consist of Three Thousand (3,000) shares and shall have voting rights, preferences, privileges and restrictions thereof as follows: (1) Designation and Number of Shares. Three Thousand (3,000) shares -------------------------------- of Preferred Stock shall be designated and known as the "Series E Convertible Preferred Stock," par value $.01 per share (the "Series E Preferred Stock"). (2) Issue Value. Each share of Series E Preferred Stock shall be ----------- issued at a price (the "Issue Value") established from time to time by the Board of Directors. (3) Dividends. --------- (a) Right to Dividends. The holders of the then outstanding ------------------ Series E Preferred Stock shall be entitled to receive dividends, when, as and if declared by the Board. Dividends on the Series E shall not be cumulative and shall not accrue and the Corporation shall not be obligated to pay dividends unless and until declared by the Board, whether or not the earnings of the Corporation in that or any previous fiscal year are sufficient to pay dividends in whole or in part. (b) Rank. Each share of the Series E Preferred Stock shall rank ---- on a parity with each other share of the Series E Preferred Stock but shall be subordinate with respect to dividends to the rank of (i) the Series A Preferred Stock, (ii) the Series D Preferred Stock and (iii) any other class or series of stock ranking senior to the Series E Preferred Stock as to dividends. Unless full dividends on all outstanding shares of Series A Preferred Stock, Series D Preferred Stock and any other class or series of stock ranking senior to the Series E Preferred Stock as to dividends which have previously become due and payable, have been paid or are contemporaneously declared and paid (or declared and a sum sufficient for the payment thereof is set apart for such payment), the Corporation shall not declare or pay any dividend on the Series E Preferred Stock. Unless full dividends on all outstanding shares of Series E Preferred Stock which have previously become due and payable, have been paid or are contemporaneously declared and paid (or declared and a sum sufficient for the payment thereof is set apart for such payment), the Corporation shall not declare or pay any dividend on (A) the Common Stock or (B) on any other class or series of stock ranking junior to the Series E Preferred Stock as to dividends. (c) Upon Conversion. Upon conversion of any shares of Series E --------------- Preferred Stock, dividends declared by the Board but not paid shall be paid to the holders of record of such shares. (4) Voting Rights. The holders of the Series E Preferred Stock shall ------------- not be entitled to vote on any matter. (5) Conversion Rights. ----------------- (a) Optional Conversion. The holder of any shares of Series E ------------------- Preferred Stock (on which any vesting or other restrictions imposed by the Board have lapsed) shall have the right, at such holder's option, at any time or from time to time, to convert any or all of such holder's shares of Series E Preferred Stock into such number of fully paid and nonassessable shares of Common Stock (the "Conversion Shares") at a conversion rate of one thousand (1,000) shares of Common Stock for each one (1) share of Series E Preferred Stock converted (the "Conversion Rate"). Should the Corporation at any time subdivide ("Split") or combine ("Reverse Split") its outstanding shares of Common Stock into a greater or smaller number of shares, respectively, the Conversion Rate in effect immediately prior to such Split or Reverse Split shall be proportionately adjusted. (b) Mandatory Conversion. Each and every share of Series E -------------------- Preferred Stock shall automatically be converted into shares of Common Stock at the then applicable Conversion Rate if (i) the Board of Directors of the Corporation directs that the shares be converted or (ii) the Corporation completes a Change of Control Event. (c) Delivery of Stock Certificates; Conversion Date. The holder ----------------------------------------------- of any shares of Series E Preferred Stock may exercise the optional conversion right pursuant to Section 5(a) above by delivering to the Corporation or its duly authorized transfer agent during regular business hours at the office of the Corporation the certificate or certificates for the shares to be converted, duly endorsed or assigned either in blank or to the 2 Corporation (if required by it), accompanied by written notice stating that such holder elects to convert such shares and shall provide a certificate to the Corporation or its duly authorized transfer agent as to the date of such conversion. Upon the occurrence of a mandatory conversion pursuant to Section 5(b) above, the Corporation shall deliver notice to each holder of Series E Preferred Stock and each holder of shares of Series E Preferred Stock shall deliver to the Corporation at the office of the Corporation the certificate or certificates for all shares of Series E Preferred Stock then held by such holder, duly endorsed or assigned either in blank or to the Corporation (if requested by it). Conversion shall be deemed to have been effected (1) in the case of an optional conversion, on the date when the aforesaid delivery of stock certificates is made if such day is a Business Day and otherwise on the Business Day following the date of the aforesaid delivery, or (2) in the case of an automatic conversion pursuant to Section 5(b)(i), upon the effective date established by the Board of Directors, or (3) in the case of an automatic conversion pursuant to Section 5(b)(ii), upon the effective date of the Change of Control Event; and in each case such date is referred to herein as the "Conversion Date." As promptly as practicable thereafter, the Corporation, through its transfer agent, shall issue and deliver to or upon the written order of such holder, to the place designated by such holder, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock, as provided in Section 5(e) below. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become the stockholder of record in respect of such Common Stock on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become the stockholder of record in respect of such Common Stock on the next succeeding date on which the transfer books are open; provided that notwithstanding the date the stockholder is deemed to become a stockholder of record, the Conversion Rate shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a stock certificate representing shares of Series E Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the stock certificate so surrendered for conversion, at the expense of the Corporation, a new stock certificate covering the number of shares of Series E Preferred Stock representing the unconverted portion of the certificate so surrendered. Immediately following such conversion, the rights of the holders of converted Series E Preferred Stock (other than the right to receive dividends declared by the Board but not paid to the date of such conversion) shall cease and the persons entitled to receive the Common Stock upon the conversion of Series E Preferred Stock shall be treated for all purposes (other than the right to receive dividends declared by the Board but not paid on the Common Stock to the date of such conversion) as having become the owners of such Common Stock. (d) Taxes. Any transfer taxes applicable to the above described ----- transactions shall be paid by such transferee. The Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of Common Stock or the reissuance of the Preferred Stock in a name other than that in which the shares of Series E Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person requesting such 3 issuance has paid to the Corporation the amount of any such tax or has established to the satisfaction of the Corporation that such tax has been paid. (e) No Fractional Shares of Common Stock. No fractional shares ------------------------------------ of Common Stock shall be issued upon conversion of shares of Series E Preferred Stock and, in lieu thereof, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the then current Market Price (as defined in Section 5(f) below) of a share of Common Stock multiplied by such fractional interest. The holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests. In determining the number of shares of Common Stock and the payment, if any, in lieu of fractional shares that a holder of Series E Preferred Stock shall receive, the total number of shares of Series E Preferred Stock surrendered for conversion by such holder shall be aggregated. (f) Market Price. "Market Price" shall mean the last reported ------------ sale price of the applicable security as reported by the National Association of Securities Dealers, Inc. Automatic Quotations System, National Market System, or, if the applicable security is listed or admitted for trading on a securities exchange, the last reported sales price of the applicable security on the principal exchange on which the applicable security is listed or admitted for trading (which shall be for consolidated trading if applicable to such exchange), or if neither so reported or listed or admitted for trading, the last reported bid price of the applicable security in the over-the-counter market. In the event that the Market Price cannot be determined as aforesaid, the Board of Directors of the Corporation shall determine the Market Price on the basis of such quotations as it in good faith considers appropriate. (g) Change of Control Event. A "Change of Control Event" shall ----------------------- mean (i) the acquisition by any Person or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership, direct or indirect, of securities of the Corporation representing fifty percent (50%) or more of the combined voting power of the Corporation's then outstanding equity securities or (ii) the acquisition of the Corporation, or all or substantially all of its assets, by, or the combination of the Corporation or all or substantially all of its assets, with, another Person, unless the acquiring or surviving Person shall be a corporation, limited liability company, partnership or other entity more than 50% of the combined voting power of which entity's then outstanding equity securities, after such acquisition or combination, are owned, immediately after such acquisition or combination, by the owners of more than 50% of the voting securities of the Corporation immediately prior to such acquisition or combination. When used herein the term "Person" shall mean and include an individual, a corporation, a limited liability company, an association, a partnership, a trust or estate, a government or any department or agency thereof. (h) Changes in Common Stock. If any capital reorganization or ----------------------- reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale, transfer or other disposition of all or substantially all of its assets to another corporation for cash or stock of such other corporation, shall be effected, then, as a condition of such reorganization, reclassification, 4 consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Series E Preferred Stock shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the shares of the Common Stock of the Corporation immediately theretofore issuable upon conversion of the Series E Preferred Stock, such shares of stock, securities or properties as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore issuable upon conversion of the Series E Preferred Stock (on which any vesting or other restrictions imposed by the Board have lapsed) had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provisions shall be made with respect to the shares of stock, securities or properties deliverable upon such conversion to give each holder of Series E Preferred Stock rights and interests as nearly equivalent to those granted herein as may be practicable. The Corporation shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Series E Preferred Stock at the last addresses of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or properties as, in accordance with the foregoing provisions, such holders may be entitled to acquire. The above provisions of this subparagraph shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (i) Stock to be Reserved. The Corporation will at all times -------------------- reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon the conversion of Series E Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding Series E Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from preemptive or similar rights on the part of the holders of any shares of capital stock or securities of the Corporation, and free from all liens and charges with respect to the issue thereof. The Corporation will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation by the Corporation of any applicable law or regulation or agreement, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. (j) Registration and Listing of Common Stock. If any shares of ---------------------------------------- Common Stock required to be reserved for purposes of conversion of Series E Preferred Stock hereunder require registration with or approval of any governmental authority under any Federal or state law (other than the Securities Act of 1933, as amended (the "Securities Act")) before such shares may be issued upon conversion, the Corporation will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. Shares of Common Stock issuable upon conversion of the Series E Preferred Stock shall be registered by the 5 Corporation under the Securities Act or similar statute then in force if required before such shares may be issued upon conversion. If and so long as the Common Stock is listed on any national securities exchange, the Corporation will, at its expense, obtain promptly and maintain the approval for listing on each such exchange upon official notice of issuance, of shares of Common Stock issuable upon conversion of the then outstanding Series E Preferred Stock and maintain the listing of such shares after their issuance; and the Corporation will also list on such national securities exchange, will register under the Exchange Act and will maintain such listing of, any other securities that at any time are issuable upon conversion of the Series E Preferred Stock, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Corporation. (6) Fractional Shares. Shares of Series E Preferred Stock may be ----------------- issued in fractions of shares; provided, however, that the fractions of Series E Preferred Stock must be capable of conversion into a whole number of shares of Common Stock at the Conversion Rate (e.g. shares of Series E Preferred Stock may be divided into whole tenths, fifths, quarters or halves of shares but not thirds of shares). (7) Vesting and Other Restrictions. The Board of Directors may, at ------------------------------ its discretion, but subject to any contractual rights or limitations relating to the Series E Preferred Stock, establish vesting criteria, restrictions on transferability and/or other restrictions (including, without limitation, conditions which may cause shares of Series E Preferred Stock, or any right or preference pertaining to such shares, to lapse or be terminated) on the rights and preferences of the Series E Preferred Stock and may as a condition to receipt of Series E Preferred Stock require persons to sign a stockholders or other agreement acknowledging and agreeing to be bound by such criteria and restrictions. (8) Exclusion of Other Rights. Except as may otherwise be required by ------------------------- law, the shares of Series E Preferred Stock shall not have any preferences or other rights other than those specifically set forth in this resolution and in the Certificate of Incorporation. The shares of Series E Preferred Stock shall have no preemptive or subscription rights. IN WITNESS WHEREOF, Southwest Water Company has caused these presents to be signed in its name and on its behalf by its President on January 12, 2000. SOUTHWEST WATER COMPANY By /s/ ANTON C. GARNIER ----------------------- Name: Anton C. Garnier Title: President 6 EX-10.1B 4 RESOLUTION ADOPTED AUGUST 5, 1999 EXHIBIT 10.1B EXHIBIT "C" RESOLUTIONS ADOPTED AT A MEETING OF THE BOARD OF DIRECTORS OF SOUTHWEST WATER COMPANY HELD ON AUGUST 5, 1999 Cessation of Benefit Accruals and Termination of the Retirement Plan - -------------------------------------------------------------------- WHEREAS, The Utility Employees' Retirement Plan (the "Plan") and the trust agreement pursuant thereto (the "Trust Agreement") were established effective as of December 31, 1957 for the benefit of the employees of this corporation and certain affiliated companies; WHEREAS, the Plan and the trust established pursuant thereto are intended to constitute a qualified defined benefit pension plan and a tax-exempt trust under the provisions of Sections 401 and 501 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, under the terms of the Plan, this corporation retains the right to amend or terminate the Plan; WHEREAS, this corporation now finds it desirable and in the best interests of Southwest Water Company to cease all benefit accruals under the Plan and to terminate the Plan, effective as of December 30, 1999; WHEREAS, pursuant to the requirements of Section 204(h) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), notice of the cessation of benefit accruals under the Plan must be provided to each Plan participant, each Plan beneficiary who is an alternate payee under a qualified domestic relations order and each employee organization representing any Plan participant, following the adoption of the amendment to the Plan ceasing benefit accruals and not less than 15 days before the effective date of such amendment to the Plan; and WHEREAS, pursuant to the requirement of Section 4041(a)(2) of ERISA, notice of intent to terminate the Plan must be provided to each Plan participant, each Plan beneficiary of a deceased Plan participant, each Plan beneficiary who is an alternate payee under a qualified domestic relations order, and each employee organization representing any Plan participant, not less than 60 days before the proposed effective date of the Plan termination. NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended to cease all future benefit accruals under the Plan, effective as of December 30, 1999, subject to any amendment to the Plan that is adopted and effective on or prior to December 30, 1999. RESOLVED FURTHER, that the Plan is hereby terminated effective as of December 30, 1999. RESOLVED FURTHER, that the officers of this corporation be, and each hereby is, authorized and directed to prepare and distribute a notice of the cessation of benefit accruals, in accordance with the provisions of Section 204(h) of ERISA, to each Plan participant, each Plan beneficiary who is an alternate payee under a qualified domestic relations order and each employee organization representing any Plan participant, not less than 15 days before December 30, 1999. RESOLVED FURTHER, that the officers of this corporation be, and each hereby is, authorized and directed to prepare and distribute a notice of intent to terminate the Plan, in accordance with the provisions of ERISA Section 4041(a)(2), to each Plan participant, each Plan beneficiary of a deceased Plan participant, each Plan beneficiary who is an alternate payee under a qualified domestic relations order, and each employee organization representing any Plan participant, not less than 60 days before December 30, 1999. RESOLVED FURTHER, that said officers be, and each hereby is, authorized and directed to provide the trustees of the trust established pursuant to the Plan with a certified copy of these resolutions. Further Actions - --------------- RESOLVED FURTHER, that said officers be, and each hereby is, authorized and directed to prepare and execute any further documents and to take any further actions as may be necessary to accomplish the purposes of the foregoing resolutions. EX-10.1C 5 SIXTEENTH AMEND. TO THE UTILITY EMPL. RETIREMENT EXHIBIT 10.1C SIXTEENTH AMENDMENT TO THE UTILITY EMPLOYEES' RETIREMENT PLAN The Utility Employees' Retirement Plan (the "Plan") was established on December 30, 1957, effective as of December 31, 1957, by Suburban Water Systems, a California corporation, as a mandatory contributory money purchase plan and trust for the exclusive benefit of participating employees of Suburban Water Systems. It was amended on November 12, 1958, December 21, 1959, April 20, 1960, April 26, 1968 and October 10, 1968. The Sixth Amendment to the Plan, effective December 31, 1972, restated the Plan and converted it into a non- contributory defined benefit pension plan. The Plan has since been amended on December 22, 1976, June 10, 1978, June 25, 1979, twice on March 26, 1986, by a "model amendment" adopted on October 20, 1989, and on December 11, 1990, December 12, 1996, October 30, 1997 and August 5, 1999. The Plan is maintained by Southwest Water Company, Suburban Water Systems, New Mexico Utilities, Inc. and East Pasadena Water Company for the benefit of their eligible employees. The Plan will be terminated effective as of December 30, 1999, and benefit accruals under the Plan will cease as of December 30, 1999. In order to amend the Plan to comply with changes to the Internal Revenue Code made by the Uniformed Services Employment and Reemployment Rights Act of 1992, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Internal Revenue Service Restructuring and Reform Act of 1998, and make certain other changes to the Plan, prior to the termination of the Plan, this Sixteenth Amendment to the Plan has been adopted by the Board of Directors of Southwest Water Company, effective as of December 30, 1999, except as otherwise provided herein. 1. Section 1.3 of the Plan is hereby amended to read in its entirety as follows: Section 1.3 - Actuarial Equivalent ----------- -------------------- (a) "Actuarial Equivalent" shall mean the equivalent of a given Benefit or a given amount payable in another manner or by other means, determined by or under the direction of the Administrator in accordance with the actuarial assumptions prescribed in this Section and actuarial principles and methods which are found to be appropriate by the Enrolled Actuary, acting independently of the Administrator or the Companies and in the exercise of his sole professional judgment (and which principles, methods and assumptions may differ from those used for the purposes of Section 3.1). Such principles, methods and assumptions, however, shall be reasonable in the aggregate and shall constitute the Enrolled Actuary's best estimate of anticipated experience under the Plan. On such basis, the "Actuarial Equivalent" of a Benefit payable as a monthly payment to an annuitant on the first day of each calendar month and ending on the calendar month in which the death of such annuitant occurs, shall mean such Benefit, multiplied by the actuarial equivalency factor determined as follows: (i) in the case of a distribution, other than a lump sum distribution under Section 4.7, 4.8, 4.9 or 4.13, the actuarial equivalency factor determined by a an interest assumption of 7 1/2%, and - b the UP-84 Mortality Table (with no setback for - Participants and a three year setback for Spouses and/or Beneficiaries), and (ii) in the case of a lump sum distribution under Section 4.7, 4.8, 4.9 or 4.13, the actuarial equivalency factor determined by a an interest assumption equal to the Applicable - Interest Rate (as defined in subsection (c)) with respect to such distribution, and b the Applicable Mortality Table (as defined in - subsection (c)) with respect to such distribution. (b) Notwithstanding subsection (a), for the purposes of any determination under Section 4.12, the "Actuarial Equivalent" of a given amount, and the adjustments in the limitation under Section 4.12(a)(i), shall be determined as is prescribed in regulations promulgated by the Secretary under Code Section 415(b), as follows: (i) for purposes of determining, with respect to any Benefit, the "Actuarial Equivalent" of a straight life annuity in an annual amount determined under Section 4.12(a), in accordance with the provisions of Code Section 415(b)(2)(B), such "Actuarial Equivalent" shall be the amount determined using the lesser of the actuarial equivalency factor determined under subsection (a), and the actuarial equivalency factor determined by a an interest assumption of 5%; provided, - however, that, in the case of a lump sum distribution under Sections 4.7, 4.8, 4.9 or 4.13, the Applicable Interest Rate (as defined in subsection (c)) with respect to such distribution shall be substituted for 5%, and b the Applicable Mortality Table (as defined in - subsection (c)) with respect to such distribution, (ii) for purposes of determining any limitation under Section 4.12(a)(i), in accordance with the provisions of Code Section 415(b)(2)(C), in the case of Benefit payments beginning prior to the applicable Social Security Retirement Age, the limitation applicable to distributions commencing on or after age 62 shall be the limitation applicable to distributions commencing at Social Security Retirement Age, reduced to the age at which the distribution commences using factors that are consistent with the factors used to reduce old-age insurance benefits under the Social Security Act, which factors are presently a 5/9 of 1% for each of the first 36 months by - which the distribution commences before the month in which the Participant or Former Participant attains Social Security Retirement Age, and b 5/12 of 1% for each additional month (up to 24 - months) by which such distribution commences before the month in which the Participant or Former Participant attains Social Security Retirement Age, (iii) for purposes of determining any limitation under Section 4.12(a)(i), in accordance with the provisions of Code Section 415(b)(2)(C), in the case of Benefit payments beginning prior to age 62, the limitation applicable to distributions commencing prior to age 62 shall be the actuarial equivalent of the limitation applicable to distributions commencing at age 62, determined using the lesser of the actuarial equivalency factor determined by the early reduction factors under Section 4.5(b)(i) (to the extent applicable), and the actuarial equivalency factor determined by a an interest assumption of 5%, and - b the Applicable Mortality Table (as defined in - subsection (c)) with respect to such distribution, and (iv) for purposes of determining any limitation under Section 4.12(a)(i), in accordance with the provisions of Code Section 415(b)(2)(D), in the case of Benefit payments beginning after the applicable Social Security Retirement Age, the limitation applicable to distributions commencing after the applicable Social Security Retirement Age shall be the actuarial equivalent of the limitation based on the applicable Social Security Retirement Age, determined using the actuarial equivalency factor determined by a an interest assumption of 5%, and - b the Applicable Mortality Table (as defined in - subsection (c)) with respect to such distribution. (c) For purposes of this Section, (i) the "Applicable Interest Rate" with respect to any distribution shall mean the "applicable interest rate", within the meaning of Code Section 417(e)(3)(A)(ii)(II) and Temp. Reg. Section 1.417(e)-1T(d)(3), for the Lookback Month for such distribution, (ii) the "Applicable Mortality Table" with respect to any distribution shall mean the "applicable mortality table", within the meaning of Code Section 417(e)(3)(A)(ii)(I) and Temp. Reg. Section 1.417(e)-1T(d)(2), for the Lookback Month for such distribution, and (iii) the "Lookback Month" with respect to any distribution shall mean the October next preceding the first day of the Plan Year in which the Annuity Starting Date of the distribution occurs. 2. Section 1.5 of the Plan is hereby amended to read in its entirety as follows: Section 1.5 - Annuity Starting Date ----------- --------------------- "Annuity Starting Date" shall mean the first day of the first period for which a Benefit is payable as an annuity to a Participant or Former Participant, or the date with respect to which a Benefit is payable as a lump sum distribution to a Participant or Former Participant, as the case may be, by reason of his Separation from the Service or the termination of the Plan. 3. Section 1.7 of the Plan is hereby amended to read in its entirety as follows: Section 1.7 - Benefit ----------- ------- "Benefit" shall mean a monthly or lump sum payment payable at the times and over the applicable periods specified in Article IV. 4. Effective as of December 30, 1997, Section 1.12 of the Plan is hereby amended to read in its entirety as follows: Section 1.12 - Compensation ------------ ------------ "Compensation" of a Participant for any Plan Year, expressed as a monthly rate, shall mean his fixed, basic monthly rate of pay from the Companies as of July 1 of such Plan Year if he was then an Employee, or (if not) as of the date during such Plan Year nearest to July 1 on which nearest date he was an Employee, but shall exclude all payments from overtime hours, bonuses, incentive pay, special allowances, workers' compensation, retainers, insurance or pension benefits and any other special payments, but in no event shall such monthly rate exceed one twelfth of $160,000 (adjusted for increases in the cost of living described in Code Section 401(a)(17)). 5. Section 1.18 of the Plan is hereby amended to read in its entirety as follows: Section 1.18 - Election Period ------------ --------------- "Election Period" means, in the case of an election under Section 4.7(f) to waive the Joint and Survivor Annuity, the period beginning ninety days before the Participant's or Former Participant's Annuity Starting Date and ending on the later of (a) the Participant's or Former Participant's Annuity Starting Date, (b) the ninetieth day after the latest mailing or personal delivery to him of the explanation described in Section 4.7(d)(i), or (c) the sixtieth day after the mailing or personal delivery to him of the information he has requested under Section 4.7(d)(ii). 6. Effective as of December 30, 1997, Section 1.24 of the Plan is hereby amended to read in its entirety as follows: Section 1.24 - Highly Compensated Employee ------------ --------------------------- For any Plan Year, a "Highly Compensated Employee" shall mean any Employee who (a) in the previous Plan Year, or the current Plan Year, was a 5% owner of the Company (within the meaning of Code Section 414(q)(2)), or (b) in the previous Plan Year, had Statutory Compensation in excess of $80,000 (adjusted as described in Code Section 414(q)(1)(B)) and was in the group consisting of the top 20% of Employees (excluding for such purpose such Employees described in Code Section 414(q)(5) as are excluded under the Rules of the Plan) when ranked by Statutory Compensation for the previous Plan Year. For each Plan Year, the "top-paid group election" shall be applied for purposes of the determination under this section. 7. Section 4.3(a) of the Plan is hereby amended as follows: a. Except as otherwise provided below, for each Participant who is an Employee as of December 30, 1999, Section 4.3(a)(i)a 1 of the Plan - - is hereby amended to read as follows: "1 the factor 0.0215." - b. Notwithstanding the foregoing, and except as otherwise provided in paragraph c. below, for all Participants who are Employees as of December 30, 1999 and who are Highly Compensated Employees for the Plan Year ended as of December 30, 1999, the factor set forth in Section 4.3(a)(i)a 1 of - - the Plan for such Participants is hereby amended to be the greatest factor (rounded down to the nearest 0.0001), that is not less than 0.0150 and not greater than 0.0215, for which the Plan satisfies the requirements of the Code and ERISA (including, without limitation, the requirements of Sections 401(a)(4) and 410(b) of the Code and the Treasury Regulations thereunder). Such factor shall be applied uniformly to all such Participants. c. In the case of a Participant is an Employee as of December 30, 1999 and whose Compensation for any Plan Year ended on or before December 30, 1994 exceeded $150,000, the amount determined under Section 4.3(a)(i) of the Plan for such Participant shall not exceed the greater of the following amounts: i. the sum of: A. the amount determined under Section 4.3(a)(i) of the Plan (determined without regard to the amendment under paragraph a. or b. above (as applicable) to the factor set forth in Section 4.3(a)(i)a 1 of the Plan), based on such Participant's - - Credited Service as of December 30, 1994, and such Participant's Final Average Compensation as of December 30, 1994, and B. the amount determined under Section 4.3(a)(i) of the Plan (determined after taking into account the amendment under paragraph a. or b. (as applicable) to the factor set forth in Section 4.3(a)(i)a 1 of the Plan), based on such Participant's - - Credited Service accrued after December 30, 1994 and such Participant's Final Average Compensation as of December 30, 1999 (determined assuming that such Participant's Compensation for any Plan Year ended on or before December 30, 1994 was not in excess of $150,000), and ii. the amount determined under Section 4.3(a)(i) of the Plan (determined taking into account the amendment under paragraph a. or b. above (as applicable) to the factor set forth in Section 4.3(a)(i)a 1 of the Plan), based on such Participant's Credited - - Service as of December 30, 1999, and such Participant's Final Average Compensation as of December 30, 1999 (determined assuming that such Participant's Compensation for any Plan Year ended on or before December 30, 1994 was not in excess of $150,000). d. In no event shall a Participant's or Former Participant's "accrued benefit," within the meaning of Section 411(a)(7) of the Code and the Treasury Regulations thereunder, be reduced or eliminated, to the extent accrued as of December 30, 1999. The Plan was previously amended to cease all benefit accruals under the Plan as of December 30, 1999. 8. Subsection 4.4(b) of the Plan is hereby amended to read in its entirety as follows: (b) A Former Participant with a Vested Retirement Benefit may on or after attainment of his fifty-fifth birthday and upon not less than two months prior written notice to the Administrator elect Early Retirement in accordance with this Section. 9. Subsection 4.6(e) of the Plan is hereby amended to read in its entirety as follows: (e) The Vested Retirement Benefit of a Participant who dies prior to his Early or Normal Retirement (and prior to receiving a lump sum distribution under Section 4.8(a)(v) or an immediate annuity distribution under Section 4.8(e)), or of a Former Participant who dies prior to his Annuity Starting Date (whichever is applicable) shall be forfeited as provided in Section 2.5, but a Survivor Annuity shall be payable under Section 4.9 or 4.10 with regard to such a Participant or Former Participant. 10. Section 4.7(a) of the Plan is hereby amended to read in its entirety as follows: (a) Notwithstanding anything in the Plan to the contrary, the Benefit, if any, of a married Participant or of a married Former Participant not referred to in subsection (l), commencing on his Early or Normal Retirement Date (or, in the case of a Participant or Former Participant eligible to elect a lump sum distribution under Section 4.8(a)(v), commencing on the Annuity Starting Date of such distribution) shall be a Joint and Survivor Annuity, as described in subsection (b), if (i) he was legally married to his Spouse on his Annuity Starting Date, (ii) he notified the Administrator, in writing, prior to his Annuity Starting Date that he was married, (iii) the then Actuarial Equivalent of such Benefit as determined under Section 1.2(a)(ii) is more than $5,000, and (iv) he has not otherwise elected under subsection (f). 11. Subsection 4.7(d) of the Plan is hereby amended to read in its entirety as follows: (d) At least nine months prior to his qualifying for Early Retirement (or, if later, upon his becoming a Participant), and again not more than 90 days before (and not less than 30 days before) the Annuity Starting Date, each Participant or Former Participant (including a Former Participant referred to in subsection (m)) who may be affected by this Section shall be furnished, by mail or personal delivery (and consistent with such regulations as the Secretary may prescribe), with (i) a written explanation of the terms and conditions of the Joint and Survivor Annuity, including a the right of the Participant or Former Participant - to make, and the effect of, an election under subsection (f) to waive the Joint and Survivor Annuity, b the relative financial effect on his Benefit of - an election under subsection (f), c the right of the Participant's or Former - Participant's Spouse under subsection (g), d the right of the Participant or Former Participant - under subsection (h) to revoke an election made under subsection (f) and the effect thereof, and (ii) a statement that the Administrator will furnish the Participant or Former Participant, upon his first written request within 60 days after the mailing or personal delivery to him of the notice required under this subsection, a detailed statement as to the financial effect upon his Benefit of making an election under subsection (f). 12. Subsection 4.7(f) of the Plan is hereby amended to read in its entirety as follows: (f) A Participant or Former Participant referred to in subsection (a) may elect in writing, at any time during his Election Period, not to receive a Joint and Survivor Annuity (in which case, he shall receive his Normal Retirement Benefit, Optional Retirement Benefit or other Benefit as provided in the Plan). Notwithstanding the requirement under subsection (d) that the written explanation described in paragraph (d)(i) be provided not less than 30 days before the Annuity Starting Date, a Participant or a Former Participant, after having received the written explanation of the Joint and Survivor Annuity described in paragraph (d)(i), may make an election under this subsection, with Spousal Consent thereto, less than 30 days after the written explanation was provided to the Participant or Former Participant, provided, that (i) the Administrator shall provide information to the Participant or Former Participant clearly indicating that the Participant or Former Participant has the right during the Election Period to consider whether to waive the Joint and Survivor Annuity and consent to a distribution other than the Joint and Survivor Annuity and that such period shall be at least 30 days in duration, (ii) the Participant or the Former Participant shall be permitted to revoke the distribution election under this subsection at least until the Annuity Starting Date or, if later, at any time prior to the expiration of the seven-day period that begins the day after the written explanation of the Joint and Survivor Annuity is provided to the Participant or Former Participant, (iii) the Annuity Starting Date is after the date that the written explanation of the Joint and Survivor Annuity is provided to the Participant or Former Participant, and (iv) the distribution in accordance with the election under this subsection does not commence before the expiration of the seven- day period that begins the day after the explanation of the Joint and Survivor Annuity is provided to the Participant or Former Participant. 13. Section 4.8 of the Plan is hereby amended to read as follows: Section 4.8 - Optional Retirement Benefit ----------- --------------------------- (a) In lieu of his Vested, Early or Normal Retirement Benefit, a Participant or Former Participant may elect, with Spousal Consent, to receive an Optional Retirement Benefit. A Participant or Former Participant must make such an election in writing in accordance with the Rules of the Plan and deliver it to the Administrator prior to his Early or Normal Retirement Date (or, in the case of a lump sum distribution under paragraph (v), the Annuity Starting Date of such distribution), as the case may be. Subject to Section 4.15, the Optional Retirement Benefit of a Participant or Former Participant shall be one of (i) a monthly Benefit, reduced as provided in subsection (b), payable during each month of the period of his Early or Normal Retirement with the provision that if he dies after his Annuity Starting Date, and if his properly designated Contingent Annuitant survives him, such Contingent Annuitant shall receive a monthly payment beginning on the first day of the calendar month next following the Participant's death and ending with the calendar month in which the Contingent Annuitant's death occurs, in the same amount (or in one-half, two-thirds or three-quarters of that amount as the Participant may elect); provided, however, that this election shall not take effect if the Contingent Annuitant does not survive until the Participant's Annuity Starting Date, (ii) a monthly Benefit, reduced as provided in subsection (b), payable during each month of the period of his Early or Normal Retirement with the provision that if he dies after his Annuity Starting Date and before receiving thirty-six, sixty or one hundred-twenty monthly payments, as the Participant may elect, his Beneficiaries as designated for this purpose under Section 4.14 will receive the remainder of such monthly payments, (iii) solely with respect to a Participant or Former Participant who elects to retire on his Early Retirement Date, monthly payments increased before the then anticipated commencement date of his old age benefits under the federal Social Security Act and decreased or, if necessary, eliminated after such date in order to provide monthly payments to the Participant which, when added to his then anticipated old age benefits under said Act would provide monthly payments for his life which are as nearly uniform as possible, (iv) solely with respect to a Participant or Former Participant who has an Account, the amount of his Account in cash in a lump sum Benefit and the remainder of his Benefit, as actuarially determined under Section 1.3, in accordance with Sections 4.3, 4.5, 4.6, 4.7 or this Section as applicable, or (v) a lump sum Benefit pursuant to the termination of the Plan, determined as provided in subsection (b), payable as of an Annuity Starting Date after the termination of the Plan as follows: a in the case of a Participant who is an Employee - on his Annuity Starting Date (other than a Participant who is employed by East Pasadena Water Company), such lump sum distribution shall be made in the form of an elective transfer of such Participant's lump sum Benefit from the Plan to The 401(k) Retirement and Savings Plan for Southwest Water Company (the "Southwest Savings Plan") in accordance with subsection (f), or b in the case of any other Participant or Former - Participant, in the form of a lump sum distribution to such Participant or Former Participant; provided, however, that any lump sum distribution under paragraph (v) shall be made in accordance with the Code and ERISA. (b) A Participant's or Former Participant's Optional Retirement Benefit (other than a lump sum distribution under paragraph (a)(v)) shall be the Actuarial Equivalent of his Vested, Early or Normal Retirement Benefit, said Equivalent being computed as of his Early or Normal Retirement Date, whichever is applicable. A Participant's or a Former Partnership's Optional Retirement Benefit distributed in the form of a lump sum distribution under paragraph (a)(v) shall be the Actuarial Equivalent of his Normal Retirement Benefit, such Actuarial Equivalent being computed as of the Annuity Starting Date of such distribution. (c) Notwithstanding any other provision of this Section, no Optional Retirement Benefit shall be provided under which any Beneficiary or Contingent Annuitant (other than the Participant's or Former Participant's spouse or incompetent child) can receive a Benefit having an Actuarial Equivalent on the date such Benefits commence greater than the then present Actuarial Equivalent of the Participant's Benefit under said election. (d) Notwithstanding subsection (a) and Section 4.7(g), if a Participant or Former Participant elects to receive any one of the Optional Retirement Benefits specified in paragraph (a)(i) and his Contingent Annuitant is his Spouse, Spousal Consent shall not be required. (e) Notwithstanding anything in this Section to the contrary, a Participant or Former Participant who is eligible to elect a lump sum distribution under paragraph (a)(v) may elect to receive, in lieu thereof, the Actuarial Equivalent of his Vested, Early or Normal Retirement Benefit (whichever is greatest) in the form of a monthly payment on the first day of each calendar month commencing on or after the Annuity Starting Date on which such lump sum distribution is otherwise payable and ending on the calendar month in which his death occurs, or, if required under Section 4.7, in the form of a Joint and Survivor Annuity. (f) If a Participant elects to receive lump sum distribution under subparagraph 4.8(a)(v)a, such lump sum distribution shall be made in - the form of an elective transfer of such Participant's lump sum Benefit from the Plan to the Southwest Savings Plan in accordance with Treasury Regulation Section 1.411(d)-4 Q/A-3(b). Such Participant's lump sum Benefit as of his Annuity Starting Date shall be transferred in a transfer of assets and liabilities from the Plan to the Southwest Savings Plan satisfying the requirements of Code Sections 401(a)(12) and 414(l), Treasury Regulation Section 1.414(l)-1 and ERISA Section 208. Upon such transfer, the Trustees shall transfer from the Trust an amount, in cash, equal to the amount of such Participant's lump sum Benefit as of the Annuity Starting Date to the trust established pursuant to the Southwest Savings Plan. Such lump sum distribution shall be conditioned upon the voluntary, fully informed election by the Participant of the transfer of such Participant's lump sum Benefit to the Southwest Savings Plan. Such lump sum distribution shall only be made if such Participant has elected not to receive a life annuity or a Joint and Survivor Annuity in accordance with subsection 4.7(e) and has elected such lump sum distribution with Spousal Consent. Such lump sum distribution shall be credited to an account under the Southwest Savings Plan and such Participant shall be fully vested in the amount credited to such account. The amount credited to such account shall be distributable under the terms of the Southwest Savings Plan. 14. Section 4.13(a) of the Plan is hereby amended to read in its entirety as follows: (a) Notwithstanding any other provision of the Plan to the contrary, upon a Participant's Separation from the Service, or following the termination of the Plan, the Administrator shall cause payment to him or on his account the Actuarial Equivalent in cash of his Vested, Normal or Early Retirement Benefit if it is not more than $5,000 (and at no time exceeded such amount at the time of a prior distribution under Section 4.15(a)). 15. Effective as of December 30, 1995, Article IV of the Plan is hereby amended by adding Section 4.18 as follows at the end thereof: Section 4.18 - Limitation on Distributions other than Life Annuities ------------ ----------------------------------------------------- (a) Notwithstanding any other provision of the Plan, no payment described in subsection (b) shall be made to any Participant, Former Participant, Beneficiary or Contingent Annuitant during a period in which the Plan has a "liquidity shortfall" (as defined in Code Section 401(a)(32)(C)). (b) The payments described in this subsection shall include (i) any payment, in excess of the monthly amount paid under a single life annuity (plus any Social Security supplements described in the last sentence of Code Section 411(a)(9)), to a Participant, Former Participant, Beneficiary or Contingent Annuitant whose "annuity starting date" (as defined in Code Section 417(f)(2)) occurs during the period referred to in subparagraph (a), (ii) any payment for the purchase of an irrevocable commitment from an insurer to pay Benefits, and (iii) any other payment specified by the Secretary by regulations under Code Section 401(a)(32). 16. Section 7.1 of the Plan is hereby amended by adding the following new subsection (e) to the end thereof to read as follows: (e) In the event of the termination of the Plan, the Benefit of a Participant, Former Participant, Beneficiary and Contingent Annuitant who is a "missing participant" (as defined in ERISA Section 4050(b)(1)) shall be distributed by transferring the "designated benefit" (as defined in ERISA Section 4050(b)(2)) of such Participant, Former Participant, Beneficiary or Contingent Annuitant to the Pension Benefit Guaranty Corporation, or by purchasing irrevocable commitments from an insurer with respect to such "designated benefit" in accordance with ERISA Section 4041(b)(3)(A)(i). Any such transfer and purchase of an irrevocable commitment shall be in accordance with regulations promulgated by the Pension Benefit Guaranty Corporation. The Administrator shall provide to the Pension Benefit Guaranty Corporation such information and certifications regarding the "designated benefits" or irrevocable commitments with respect to such Participants, Former Participants, Beneficiaries and Contingent Annuitants as are required under ERISA Section 4050 and the regulations thereunder. This subsection shall be effective with respect to distributions that occur in Plan Years commencing after final regulations implementing ERISA Section 4050 are promulgated by the Pension Benefit Guaranty Corporation. 17. Section 7.12 of the Plan is hereby amended to read in its entirety as follows: Section 7.12 - Use of Funds ------------ ------------ Except as provided in Section 7.03 of the Trust Agreement, under no circumstances shall any contribution by a Company under the Plan or any part of any fund created thereby, be recoverable by such Company from the Trust or from any Participant or Former Participant, Beneficiary, Contingent Annuitant, or other person, or be used for or diverted to for purposes other than for the exclusive benefit of Participants, Former Participants and their Beneficiaries and Contingent Annuitants, except that the portion of the funds not required for the satisfaction of all liabilities to Participants, Former Participants and their Beneficiaries and Contingent Annuitants shall, upon termination of the Plan, be transferred to the Southwest Savings Plan in accordance with the Code and ERISA (prior to any reversion to any Company, and in such amount as is determined by the Board) and revert to the applicable Company (to the extent not so transferred). 18. Effective as of October 13, 1996, Article VII of the Plan is hereby amended by adding the following new Section 7.20 to the end thereof to read as follows: Section 7.20 - Qualified Military Service ------------ -------------------------- Notwithstanding any provision of the Plan to the contrary, benefits and service credits with respect to qualified military service shall be provided in accordance with Code Section 414(u). Executed at West Covina, California as of December 30, 1999. SOUTHWEST WATER COMPANY By /s/ PETER J. MOERBEEK ------------------------ Title Chief Financial Officer and Secretary ------------------------------------------- EX-10.11 6 CREDIT AGREEMENT - BANK OF AMERICA, N.A. EXHIBIT 10.11 CREDIT AGREEMENT between SOUTHWEST WATER COMPANY and BANK OF AMERICA, N.A. July 30, 1999 TABLE OF CONTENTS -----------------
PAGE(S) ARTICLE I............................................................... 1 SECTION 1.01. Defined Terms............................................ 1 SECTION 1.02. Other Definitional Provisions............................ 5 ARTICLE II.............................................................. 5 SECTION 2.01. The Revolving Loans...................................... 6 (a) The Revolving Commitment................................... 6 (b) Making the Revolving Loans................................. 6 (c) Reduction of the Revolving Commitment...................... 6 (d) Revolving Note............................................. 6 SECTION 2.02. Mandatory Repayment...................................... 6 SECTION 2.03. Interest Computation and Payment......................... 7 ARTICLE III............................................................. 7 SECTION 3.01. Use of Proceeds.......................................... 7 SECTION 3.02. [Intentionally Omitted].................................. 7 SECTION 3.03. Payments................................................. 7 SECTION 3.04. Payment on Non-Business Days............................. 7 SECTION 3.05. Reduced Return........................................... 7 SECTION 3.06. Indemnities.............................................. 8 SECTION 3.07. Funding Sources.......................................... 8 ARTICLE IV.............................................................. 8 SECTION 4.01. Conditions Precedent to Initial Loan..................... 8 SECTION 4.02. Conditions Precedent to Each Borrowing................... 9 ARTICLE V............................................................... 10 SECTION 5.01. Representations and Warranties........................... 10 (a) Organization............................................... 10 (b) Authorization; No Conflict................................. 10 (c) Governmental Consents...................................... 10 (d) Validity................................................... 11 (e) Financial Condition........................................ 11 (f) Litigation................................................. 11 (g) Employee Benefit Plans..................................... 11 (h) Disclosure................................................. 11 (i) Environmental Matters...................................... 11 (j) Employee Matters........................................... 12 (k) Solvency................................................... 12 (l) Title to Properties........................................ 12 (m) Tax Returns................................................ 12 (n) Compliance with Other Agreements and Applicable Laws....... 13 ARTICLE VI.............................................................. 13 SECTION 6.01. Affirmative Covenants.................................... 13 (a) Financial Information...................................... 13 (b) Notices and Information.................................... 14 (c) Corporate Existence, Etc................................... 15 (d) Payment of Taxes and Claims................................ 15
i (e) Maintenance of Properties; Insurance....................... 16 (f) Inspection................................................. 16 (g) Compliance with Laws Etc................................... 16 (h) Hazardous Waste Studies.................................... 16 (i) Year 2000 Compliance....................................... 16 SECTION 6.02. Negative Covenants....................................... 17 (a) Leverage Ratio............................................. 17 (b) Consolidated Tangible Net Worth............................ 17 (c) Consolidated Net Profit.................................... 17 (d) EBITDA Coverage Ratio...................................... 17 (e) Liens Etc.................................................. 17 (f) Debt....................................................... 18 (g) Consolidation, Merger or Dissolution....................... 18 (h) Loans, Investments, Secondary Liabilities.................. 18 (i) Asset Sales................................................ 19 (j) Hostile Tender Offers...................................... 19 (k) Distributions.............................................. 20 (l) Transactions with Affiliates............................... 20 (m) Books and Records.......................................... 20 (n) Restructure................................................ 20 ARTICLE VII............................................................. 20 SECTION 7.01. Events of Default........................................ 20 ARTICLE VIII............................................................ 23 SECTION 8.01. Amendments, Etc.......................................... 23 SECTION 8.02. Notices, Etc............................................. 23 SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts.. 23 SECTION 8.04. No Waiver; Remedies...................................... 24 SECTION 8.05. Costs and Expenses....................................... 24 SECTION 8.06. Participations........................................... 24 SECTION 8.07. Effectiveness: Binding Effect............................ 24 SECTION 8.08. Governing Law............................................ 24 SECTION 8.09. Arbitration.............................................. 24 (a) Arbitration................................................ 24 (b) Governing Rules............................................ 25 (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. 25 (d) Arbitrator Qualification and Powers; Awards................ 25 (e) Judicial Review............................................ 26 (f) Real Property Collateral, Judicial Reference............... 26 (g) Miscellaneous.............................................. 26 SECTION 8.10. Waiver of Notices........................................ 26 SECTION 8.11. Entire Agreement......................................... 27 SECTION 8.12. Separability of Provisions............................... 27 SECTION 8.13. Execution in Counterparts................................ 27
ii 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 CREDIT AGREEMENT This Credit Agreement dated as of July 30, 1999 is entered into between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower") and -------- BANK OF AMERICA, N.A. (the "Bank"). ---- RECITALS -------- WHEREAS, the Borrower has requested that the Bank extend certain credit facilities to the Borrower in the place of Wells Fargo Bank, National Association; and WHEREAS, the Bank is willing to extend such credit facilities to the Borrower on the terms and conditions set forth below. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the ------------- following terms have the following meanings: "Agreement": This Credit Agreement, as amended, supplemented or --------- modified from time to time. "Bank": As set forth in the introductory paragraph of this Agreement. ---- "Borrower": As set forth in the introductory paragraph of this -------- Agreement. "Borrowing": As defined in Section 2.01. --------- "Business Day": Has the meaning set forth in the Revolving Note. ------------ "Capital Leases": As applied to any Person, any lease of any property -------------- (whether real, personal or mixed) by that Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "Change of Control": Shall be deemed to have occurred at such times ----------------- as: (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Act of 1934), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than thirty percent (30%) of the total voting power of all classes of stock then outstanding of Borrower normally entitled to vote in the election of directors; or (b) the Borrower shall fail to own directly one hundred percent (100%) of the issued and outstanding common stock of Suburban, NMUI or ECO or shall lose voting control of Suburban's, NMUI's or ECO's issued and outstanding common stock. A change of control shall not include a transfer of NMUI's operating assets through a condemnation or sale in lieu of condemnation. 1 "Commitment": The Bank's obligation to make Loans to the Borrower ---------- pursuant to Article II in the amount or amounts referred to therein. "Consolidated EBITDA" means, for any period of Borrower and its ------------------- Subsidiaries on a consolidated basis, Consolidated Net Profit for such period, plus interest expense (net of capitalized interest expense) and provision for income taxes for such period, plus depreciation and amortization for such period. "Consolidated Liabilities": At any date of determination, the total ------------------------ liabilities of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP (including, without limitation, (1) any balance sheet liability with respect to a Pension Plan recognized pursuant to Financial Accounting Standards Board Statements 87 or 88 and (2) any withdrawal liability under Section 4201 of ERISA with respect to a withdrawal from a Multiemployer Plan, as such liability may be set forth in a notice of withdrawal liability under Section 4219 (and as adjusted from time to time subsequent to the date of such notice) less (1) deferred taxes, (2) contributions in aid of ---- construction ("CIAC"), (3) unamortized investment tax credits, (4) deferred revenue on CIAC, and (5) deposits for CIAC for capital improvement projects. "Consolidated Net Profit" means, in respect of any period of the ----------------------- Borrower and its Subsidiaries, the consolidated net profit after taxes of the Borrower and its Subsidiaries as such would appear on the consolidated statement of earnings of Borrower and its Subsidiaries prepared in accordance with GAAP, consistently applied, minus nonrecurring or extraordinary income. ----- "Consolidated Tangible Net Worth": At any date of determination, the ------------------------------- sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of the Borrower and its consolidated Subsidiaries minus (i) treasury stock, (ii) intangible assets (including, without limitation, - ----- franchises, patents, patent applications, trademarks, brand names, goodwill, purchased contracts, water rights and deferred charges (including unamortized debt discount and expense and organization costs) and research and development expenses) and (iii) receivables, advances, loans and all other amounts due from employees, officers, shareholders and/or affiliates (excluding Borrower's wholly-owned Subsidiaries), on a consolidated basis determined in conformity with GAAP. "Debt": As applied to any Person, (i) all indebtedness for borrowed ---- money, (ii) that portion of obligations with respect to Capital Leases which is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services which purchase price is (y) due more than six months from the date of incurrence of the obligation in respect thereof, or (z) evidenced by a note or similar written instrument; (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that person; (vi) reimbursement obligations under letters of credit; and (vii) other contingent liabilities. "Distribution": With respect to any Person shall mean that such ------------ Person has paid any dividend or returned any capital to, its stockholders or equity holders as such or authorized or made any other distribution, payment or delivery of property or cash to its stockholders or 2 equity holders as such, or redeemed, retired, purchased, or otherwise acquired, directly or indirectly, for consideration, any shares of any class of its capital stock or equity interests (or any options, warrants or rights issued by such Person with respect to its capital stock or equity interests), or set aside any funds for any of the foregoing purposes, or shall have permitted any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock or any equity interests of such Person (or any options, warrants or rights issued by such Person with respect to its capital stock or equity interests). Without limiting the foregoing, "Distributions" with respect to any Person shall also include all payments made or required to be made by such Person with respect to any stock appreciation rights plans, equity incentive or the setting aside of any funds for the foregoing purposes. "Dollars and $": Dollars in lawful currency of the United States of ------------- America. "EBITDA Coverage Ratio" means, for any period of Borrower and its --------------------- Subsidiaries on a consolidated basis, Consolidated EBITDA divided by the sum of the total interest expense plus current portion of long-term Debt plus current ---- ---- portion of advances for construction plus Distributions. ---- "ECO": ECO Resources, Inc., a Texas corporation. --- "Employee Benefit Plan": Any Pension Plan, any employee welfare --------------------- benefit plan, or any other employee benefit plan which is described in Section 3(3) of ERISA and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "ERISA": The Employee Retirement Income Security Act of 1974, as ----- amended to the date hereof and from time to time hereafter. "ERISA Affiliate": As applied to any Person, any trade or business --------------- (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b) and (c) of the Internal Revenue Code. "GAAP": Generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession or any public commission having regulatory responsibility over the Borrower or any Subsidiary. "Internal Revenue Code": The Internal Revenue Code of 1986, as --------------------- amended to the date hereof and from time to time hereafter and any successor statute. "Lien": Any lien, mortgage, deed of trust, pledge, security interest, ---- charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Loans": Loans made to the Borrower pursuant to Section 2.01. ----- 3 "Loan Documents": This Agreement, the Revolving Note and each -------------- agreement, document, instrument and guarantee required by the Bank in connection with this Agreement and/or the credit extended hereunder. "Maturity Date": July 31, 2001. ------------- "Mellon": means Mellon Bank, N.A. ------ "Multiemployer Plan": A "multiemployer plan" as defined in Section ------------------ 4001(a)(3) of ERISA which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "NAIC" means National Association of Insurance Companies. ---- "NMUI": New Mexico Utilities, Inc., a New Mexico corporation. ---- "Pension Plan": Any employee plan which is subject to Section 412 of ------------ the Internal Revenue Code and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower, other than a Multiemployer Plan. "Person": An individual, partnership, corporation, limited liability ------ company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Potential Event of Default": A condition or event which, after -------------------------- notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Regulations G, T, U and X": Regulations G, T, U and X, respectively, ------------------------- promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time, and any successors thereto. "Revolving Commitment": The amount of $4,000,000 as such amount may -------------------- be reduced pursuant to Section 2.01(c). "Revolving Loans": As defined in Section 2.01(a). --------------- "Revolving Note": As defined in Section 2.01(d). -------------- "S.E.C.": The United States Securities and Exchange Commission and ------ any successor institution or body which performs the functions or substantially all of the functions thereof. "Solvent": When used with respect to any Person that as of the date ------- as to which the Person's solvency is to be measured: (i) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities) as they become absolute and matured; 4 (ii) it has sufficient capital to conduct its business; and (iii) it is able to meet its debts as they mature. "Subsidiary": A corporation of which shares of stock having ordinary ---------- voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, directly, or indirectly through one or more intermediaries, or both, by the Borrower. "Suburban": Suburban Water Systems, a California corporation. -------- "Suburban Loan Documents" means that Credit Agreement dated as of the ----------------------- date hereof between the Bank and Suburban, and each agreement, document, instrument and guarantee required by the Bank in connection with such Credit Agreement and/or the credit extended thereunder. "Termination Event": (i) a "Reportable Event" described in Section ----------------- ---------------- 4043 of ERISA and the regulations issued thereunder (other than a "Reportable Event" not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations) with respect to any Pension Plan, or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as -------------------- defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Pension Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v) any other event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan under Section 4042 of ERISA, or (vi) the imposition of a lien with respect to any Pension Plan pursuant to Section 412(n) of the Internal Revenue Code. SECTION 1.02. Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the defined meanings when used in the Revolving Note or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Revolving Note, and any certificate or other document made or delivered pursuant hereto, accounting terms not defined in subsection 1.01, and accounting terms partly defined in subsection 1.01 to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (d) So long as the Borrower does not have any Subsidiaries, references to a Subsidiary or Subsidiaries in this Agreement shall be deemed to be deleted. ARTICLE II 5 THE CREDIT SECTION 2.01. The Revolving Loans. ------------------- (a) The Revolving Commitment. The Bank agrees, on the terms and ------------------------ conditions hereinafter set forth, to make loans ("Revolving Loans") to the --------------- Borrower from time to time during the period from the date hereof to and including the Maturity Date in an aggregate amount not to exceed the Revolving Commitment, as such amount may be reduced pursuant to Section 2.01(c). Within the limits of the Revolving Commitment and prior to the Maturity Date, the Borrower may borrow, repay, and reborrow subject to the terms of this Agreement. (b) Making the Revolving Loans. The Borrower may borrow under the -------------------------- Revolving Commitment on any Business Day, provided that the Borrower shall give the Bank notice pursuant to the terms of the Note specifying (i) the amount of the proposed Borrowing and (ii) the requested date of the Borrowing. Upon satisfaction of the applicable conditions set forth in Article IV, the proceeds of all such Loans will then be made available to the Borrower by the Bank by crediting the account of the Borrower on the books of the Bank, or as otherwise directed by the Borrower. (c) Reduction of the Revolving Commitment. The Borrower shall have ------------------------------------- the right, upon at least two Business Days' notice to the Bank, to terminate in whole or reduce in part the unused portion of the Revolving Commitment, without premium or penalty, provided that each partial reduction shall be in the aggregate amount of $100,000 or an integral multiple thereof and that such reduction shall not reduce the Revolving Commitment to an amount less than the amount outstanding hereunder on the effective date of the reduction. Such notice shall be irrevocable and such reduction shall not be reinstated. (d) Revolving Note. The Loans made by the Bank pursuant hereto shall -------------- be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to - --------- -------------- the order of the Bank and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of all Revolving Loans made by the Bank, with interest thereon as prescribed in Section 2.03. The Bank is hereby authorized to record in its books and records and on any schedule annexed to the Revolving Note, the date and amount of each Revolving Loan made by the Bank, the date and amount of each payment of principal thereof, and the applicable interest rate, and any such recordation shall constitute prima facie evidence of the accuracy ----- ----- of the information so recorded; provided that failure by the Bank to effect such recordation shall not affect the Borrower's obligations hereunder. Prior to the transfer of a Revolving Note, the Bank shall record such information on any schedule annexed to and forming a part of such Revolving Note. SECTION 2.02. Mandatory Repayment.. The aggregate principal amount ------------------- of the Revolving Loans outstanding on the Maturity Date, together with accrued interest thereon, shall be due and payable in full on the Maturity Date. If at any time the aggregate outstanding Borrowings exceed the Revolving Commitment then in effect, the Borrower shall immediately repay the excess to the Bank without penalty or premium. SECTION 2.03. Interest Computation and Payment. The outstanding -------------------------------- principal balance of the Revolving Loans shall bear interest at the rates of interest set forth in the Revolving Note. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Revolving Note. 6 ARTICLE III GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the initial Loan --------------- hereunder shall be used to pay off obligations owing to Wells Fargo Bank, National Association under that certain Amended and Restated Credit Agreement dated December 23, 1997, as amended. The proceeds of subsequent Loans hereunder shall be used by the Borrower (i) for general corporate purposes, working capital and acquisitions of the Borrower and its wholly-owned Subsidiaries, and (ii) to finance capital additions to the water utility and other operations of the Borrower and its wholly-owned Subsidiaries. SECTION 3.02. [Intentionally Omitted] SECTION 3.03. Payments. Borrower authorizes Bank to collect all -------- principal, interest and fees due under this Agreement and the Revolving Note by charging Borrower's demand deposit account number 14599-07501 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 3.04. Payment on Non-Business Days. Whenever any payment to ---------------------------- be made hereunder or under the Revolving Note shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. SECTION 3.05. Reduced Return. If the Bank shall have determined that -------------- any applicable law, regulation, rule or regulatory requirement generally applicable to banks located in California and (collectively in this Section 3.05 "Requirement") regarding capital adequacy, or any change therein, or any change ----------- in the interpretation or administration thereof by any United States federal or state governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its Commitment and obligations hereunder to a level below that which would have been achieved but for such Requirement, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material (which amount shall be determined by the Bank's reasonable allocation of the aggregate of such reductions resulting from such events), then from time to time, within five (5) Business Days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. The Bank does not presently have knowledge of any new Requirement or any pending change in any existing Requirement which would result in such additional amounts being owed. SECTION 3.06. Indemnities. Whether or not the transactions ----------- contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay and hold the Bank, and the shareholders, officers, directors, employees and agents of the Bank ("Indemnified Persons"), harmless from and against any and ------------------- all claims, liabilities, losses, damages, costs and 7 expenses (whether or not any of the foregoing Indemnified Persons is a party to any litigation), including, without limitation, reasonable attorneys' fees and costs (including, without limitation, the reasonable estimate of the allocated cost of in-house legal counsel and staff) and costs of investigation, document production, attendance at a deposition, or other discovery, prior to the assumption of defense by the Borrower, with respect to or arising out of any proposed acquisition by the Borrower or any of its Subsidiaries of any Person or any securities (including a self-tender), this Agreement or any use of proceeds hereunder, or any claim, demand, action or cause of action being asserted against the Borrower or any of its Subsidiaries (collectively, the "Indemnified ----------- Liabilities"), provided that the Borrower shall have no obligation hereunder - ----------- with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of any such Indemnified Persons. If any claim is made, or any action, suit or proceeding is brought, against any Indemnified Person pursuant to this Section, the Indemnified Person shall notify the Borrower within thirty (30) days of the Bank being notified in writing of any such claim or the commencement of such action, suit or proceeding, and the Borrower will assume the defense of such action, suit or proceeding, employing counsel selected by Borrower's insurance carrier, or selected by the Borrower and reasonably satisfactory to the Indemnified Person, and pay the fees and expenses of such counsel. This covenant shall survive termination of this Agreement and payment of the outstanding Revolving Note for a period of six (6) years. SECTION 3.07. Funding Sources. Nothing in this Agreement shall be --------------- deemed to obligate the Bank to obtain the funds for any Loan in any particular place or manner or to constitute a representation by the Bank that it has obtained or will obtain the funds for any Loan in any particular place or manner. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Conditions Precedent to Initial Loan. The obligation ------------------------------------ of the Bank to make its initial Loan is subject to the conditions precedent that: (a) The Bank shall have received on or before the day of the initial Borrowing the following, each dated prior to or as of such day, in form and substance satisfactory to the Bank: (i) The Revolving Note issued by the Borrower to the order of the Bank; (ii) Copies of the Articles, Certificate of Incorporation, partnership agreement or other organizational document of the Borrower, certified as of a recent date by the Secretary of State of its state of formation or incorporation; (iii) Copies of the Bylaws, if any, of the Borrower, certified by the Secretary or an Assistant Secretary of the Borrower; (iv) Copies of resolutions of the Board of Directors or other authorizing documents of the Borrower, in form and substance satisfactory to the Bank, approving the Loan Documents and the Borrowings hereunder; (v) An incumbency certificate executed by the Secretary or an Assistant Secretary of the Borrower or equivalent document, certifying the names and signatures of the 8 officers of the Borrower or other Persons authorized to sign the Loan Documents and the other documents to be delivered hereunder; (vi) Executed copies of all Loan Documents; (vii) Opinion from Borrower's counsel substantially in the form of Exhibit B hereto; --------- (b) The Bank shall have completed its due diligence review of the Borrower, and the scope and results thereof shall be satisfactory to Bank in its discretion; (c) All information previously furnished by Borrower to Bank shall be true and correct in all material respects; (d) All fees required to be paid at closing shall have been paid; (e) All corporate and legal proceedings and all instruments and documents in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in content, form and substance to the Bank and its counsel, and the Bank and such counsel shall have received any and all further information and documents which the Bank or such counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities; and (f) Nothing shall have occurred and the Bank shall not have become aware of any fact or condition not previously known, which the Bank shall determine has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Bank, or on the ability of the Borrower to perform its obligations to the Bank or which has, or could reasonably be expected to have, a materially adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole. SECTION 4.02. Conditions Precedent to Each Borrowing. The obligation -------------------------------------- of the Bank to make a Loan on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing (a) the following statements shall be true and the Bank shall have received the notice required by Section 2.01(b), which notice shall be deemed to be a certification by the Borrower that: (i) The representations and warranties contained in Section 5.01 are correct on and as of the date of such Borrowing as though made on and as of such date, (ii) No event has occurred and is continuing, or would result from such Borrowing, which constitutes an Event of Default or Potential Event of Default; and (iii) Nothing shall have occurred and the Bank shall not have become aware of any fact or condition not previously known, which the Bank shall determine has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Bank, or on the ability of the Borrower to perform 9 its obligations to the Bank or which has, or could reasonably be expected to have, a material adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole; and (iv) All Loan Documents are in full force and effect, and (b) the Bank shall have received such other approvals, opinions or documents as the Bank may reasonably request. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties. The Borrower ------------------------------ represents and warrants as follows: (a) Organization. The Borrower and each of its Subsidiaries is ------------ duly organized, validly existing and in good standing under the laws of the state of its incorporation. The Borrower and each of its Subsidiaries is also duly authorized, qualified and licensed in all applicable jurisdictions, and under all applicable laws, regulations, ordinances or orders of public authorities, to carry on its business in the locations and in the manner presently conducted. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance by the Borrower of the Loan Documents, and the making of Borrowings hereunder, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Borrower's charter, by-laws or other organizational document or (ii) any law or regulation (including, without limitation, Regulations G, T, U and X and regulations of public utility commissions or similar regulatory authorities) binding on or affecting the Borrower or its properties, and will not constitute an event of default under any material agreement to which Borrower is a party or by which its assets or properties may be bound. (c) Governmental Consents. No authorization or approval or other --------------------- action by, and no notice to or filing with, any governmental authority or regulatory body (except routine reports required pursuant to the Securities Exchange Act of 1934, as amended (if such act is applicable to the Borrower), which reports will be made in the ordinary course of business) is required for the due execution, delivery and performance by the Borrower of the Loan Documents. (d) Validity. The Loan Documents are the binding obligations of -------- the Borrower or other executing Person, if any, enforceable in accordance with their respective terms; except in each case as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors' rights. (e) Financial Condition. The balance sheets of the Borrower and ------------------- its consolidated Subsidiaries as at March 31, 1999,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal three months then ended, copies of which have been furnished to the 10 Bank, fairly present the financial condition of the Borrower and its consolidated Subsidiaries as at such dates and the results of the operations of the Borrower and its consolidated Subsidiaries for the period ended on such date, all in accordance with GAAP, consistently applied, and since March 31, 1999 there has been no material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (f) Litigation. Except as set forth in the Form 10-Q dated March 31, ---------- 1999, and on Schedule 5.01(f) hereto, there is no known pending or threatened ---------------- action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may materially adversely affect the consolidated financial condition or operations of the Borrower or which may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. (g) Employee Benefit Plans. The Borrower and each of its ERISA ---------------------- Affiliates is in compliance in all material respects with any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans. No Termination Event has occurred with respect to any Pension Plan. The excess of the actuarial present value of all benefit liabilities under all Pension Plans (excluding in such computation Pension Plans with assets greater than benefit liabilities) over the fair market value of the assets allocable to such benefit liabilities are not greater than five percent (5%) of Consolidated Tangible Net Worth. For purposes of the preceding sentence, the term "benefit liabilities" shall have the meaning specified in Section 4001 of ERISA. (h) Disclosure. No representation or warranty of the Borrower ---------- contained in this Agreement or any other document, certificate or written statement furnished to the Bank by or on behalf of the Borrower for use in connection with the transactions contemplated by this Agreement contains any known untrue statement of a material fact or omits to state a known material fact (known to the Borrower in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than matters of a general economic nature) which materially adversely affects the business, operations, property, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Bank for use in connection with the transactions contemplated hereby. (i) Environmental Matters. Except as set forth in Schedule 5.01(i) --------------------- ---------------- hereto, neither the Borrower nor any Subsidiary, nor any of their respective officers, employees, representatives or agents, nor, to the best of their knowledge, any other person, has treated, stored, processed, discharged, spilled, or otherwise disposed of any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at any real property or any other facility owned, leased or used by the Borrower or any Subsidiary, in violation of any applicable statutes, regulations, ordinances or directives of any governmental authority or court, which violations may result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500,000 for all such violations; and the unresolved violations set forth in said Schedule 5.01(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500,000 for all such 11 unresolved violations. Except as set forth in said Schedule, no employee or other person has made a claim or demand against the Borrower or any Subsidiary based on alleged damage to health caused by any such hazardous or toxic substance or by any waste or by-product thereof; and the unsatisfied claims or demands against the Borrower or any Subsidiary set forth in said Schedule 5.01(i) will not result in uninsured liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 in excess of reserves on the books of the Borrower for all such unsatisfied claims or demands. Except as set forth in said Schedule 5.01(i), neither the Borrower nor any Subsidiary has been charged by any governmental authority with improperly using, handling, storing, discharging or disposing of any such hazardous or toxic substance or waste or by-product thereof or with causing or permitting any pollution of any body of water; and the outstanding related charges set forth in said Schedule 5.01(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500,000 for all such outstanding charges. (j) Employee Matters. There is no known strike or work stoppage in ---------------- existence or threatened involving the Borrower or its Subsidiaries that may materially adversely affect the consolidated financial condition or operations of the Borrower or that may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. (k) Solvency. Borrower and each of its Subsidiaries is Solvent. -------- (l) Title to Properties. Borrower and each of its Subsidiaries has ------------------- good and marketable title to or interests in all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Bank and such others as are permitted under Section 6.02(e) hereof. (m) Tax Returns. Borrower and each of its Subsidiaries has filed, or ----------- caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Bank). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower and each of its Subsidiaries has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower or its Subsidiaries and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. (n) Compliance with Other Agreements and Applicable Laws. Neither ---------------------------------------------------- Borrower nor any of its Subsidiaries is in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment (including, but not limited to any such agreement involving the debts or investments of Borrower or liens upon its assets) to which it is a party or by which it or any of its assets are bound and Borrower and each of its Subsidiaries is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 12 ARTICLE VI COVENANTS SECTION 6.01. Affirmative Covenants. So long as any Revolving Note --------------------- shall remain unpaid or the Bank shall have any Commitment hereunder, the Borrower will, unless the Bank shall otherwise consent in writing: (a) Financial Information. Furnish to the Bank: --------------------- (i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, (1) a copy of the Borrower's annual report to shareholders containing the audited consolidated balance sheets of itself and its consolidated Subsidiaries as at the end of each fiscal year and the related consolidated statements of income and changes in common stockholders' equity (or comparable statement) employed in the business and changes in financial position and cash flow for such year, in each case prepared in accordance with GAAP, setting forth in each case in comparative form the figures for the previous year, accompanied by an unqualified report and opinion thereon of independent certified public accountants acceptable to the Bank and, if prepared, such accountants' letter to management, and (2) a copy of the Borrower prepared consolidating financial statements prepared in connection with each of the statements provided in subpart (1) above; and (ii) as soon as available, but in any event within forty-five (45) days after the end of each fiscal quarter, the Borrower's unaudited consolidated and consolidating balance sheets of itself and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income and changes in common stockholders' equity (or comparable statement) and changes in financial position and cash flow for such period and year to date, setting forth in each case in comparative form the figures as at the end of the previous fiscal year as to the balance sheet and the figures for the previous corresponding period as to the other statements, certified by a duly authorized officer of the Borrower as being fairly stated in all material respects subject to year end adjustments; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail acceptable to the Bank and in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by such accountants and disclosed therein and except for the exclusion of certain information and footnote disclosures omitted pursuant to the rules and regulations of the S.E.C.); and (iii) as soon as available, copies of all reports which the Borrower sends to any of its security holders, and copies of all reports and registration statements which the Borrower or any Subsidiary files with the S.E.C. or any national securities exchange; and (iv) (a) together with each delivery of financial statements of Borrower and its Subsidiaries pursuant to subdivision (i) above, a certificate, executed by the Borrower's chairman of the board (if an officer) or its president or one of its 13 vice presidents or by its chief financial officer stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Borrower and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Borrower has taken, is taking and proposes to take with respect thereto; and (b) together with each delivery of financial statements of Borrower and its Subsidiaries pursuant to subdivision (i) and (ii) above, a certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 6.02 hereof. (b) Notices and Information. Deliver to the Bank: ----------------------- (i) promptly upon any officer of the Borrower obtaining knowledge (a) of any condition or event which constitutes an Event of Default or Potential Event of Default, (b) that any Person has given any notice to the Borrower or any Subsidiary of the Borrower or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.01(e), (c) of the institution of any litigation involving an alleged liability (including possible forfeiture of property) of the Borrower or any of its Subsidiaries equal to or greater than $500,000 which is not, except for deductibles and self insurance reserves, fully covered by insurance maintained by Borrower or any adverse determination in any litigation involving a potential liability of the Borrower or any of its Subsidiaries equal to or greater than $500,000 which is not, except for deductibles and self insurance reserves, fully covered by insurance maintained by Borrower or (d) of a material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, an officers' certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action the Borrower has taken, is taking and proposes to take with respect thereto; (ii) promptly upon becoming aware of the occurrence of any (a) Termination Event, or (b) non-exempt "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code or a transaction prohibited by Section 406 of ERISA, in connection with any Employee Benefit Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Borrower has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation with respect thereto; (iii) with reasonable promptness copies of (a) all notices received by the Borrower or any of its ERISA Affiliates of the Pension Benefit Guaranty 14 Corporation's intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan and (b) all notices received by the Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA; (iv) promptly, and in any event within 30 days after receipt thereof, a copy of any notice, summons, citation, directive, letter or other form of communication from any governmental authority or court in any way concerning any action or omission on the part of the Borrower or any of its Subsidiaries in connection with any substance defined as toxic or hazardous by any applicable federal, state or local law, rule, regulation, order or directive or any waste or byproduct thereof, or concerning the filing of a lien upon, against or in connection with the Borrower, its Subsidiaries, or any of their leased or owned real or personal property, in connection with a Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained pursuant to (S) 9507 of the Internal Revenue Code; and (v) promptly, and in any event within 30 days after request, such other information and data with respect to the Borrower or any of its Subsidiaries as from time to time may be reasonably requested by the Bank and is reasonably available to Borrower. (c) Corporate Existence, Etc. At all times preserve and keep in full ------------------------- force and effect its and its Subsidiaries' corporate existence and rights, licenses and franchises material to its business and those of each of its Subsidiaries; provided, however, that the corporate existence of any such -------- ------- Subsidiary (except Suburban) may be terminated if such termination is in the best interest of the Borrower and is not materially disadvantageous to the holder of any Revolving Note. (d) Payment of Taxes and Claims. Pay, and cause each of its --------------------------- Subsidiaries to pay, all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. (e) Maintenance of Properties; Insurance. Maintain or cause to be ------------------------------------ maintained in good repair, working order and condition all material properties used or useful in the business of the Borrower and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. 15 The Borrower will comply with any other insurance requirement set forth in any other Loan Document. (f) Inspection. Permit any authorized representatives designated by ---------- the Bank to visit and inspect any of the properties of the Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested. (g) Compliance with Laws Etc. Exercise, and cause each of its ------------------------- Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including, without limitation, all rules and regulations of public utility commissions or similar regulatory authorities, and all environmental laws, rules, regulations and orders, noncompliance with which would materially adversely affect the business, properties, assets, operations or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (h) Hazardous Waste Studies. Promptly, and in any event within thirty ----------------------- (30) days after submission, provide the Bank with copies of all such investigations, studies, samplings and testings as may be requested by any governmental or regulatory authority relative to any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at or affecting any real property or any facility owned, leased or used by the Borrower or any Subsidiary. The foregoing shall not include sampling and testing of water, waste water and effluent conducted by the Subsidiaries of Borrower on periodic bases as a normal part of their water delivery and wastewater treatment businesses. (i) Year 2000 Compliance. Perform all acts reasonably necessary to --------------------- ensure that Borrower and any business in which Borrower holds a substantial interest, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, ------------------- hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. SECTION 6.02. Negative Covenants. So long as any Revolving Note ------------------ shall remain unpaid or the Bank shall have any Commitment hereunder, the Borrower will not, without the written consent of the Bank: (a) Leverage Ratio. At any time, permit the ratio of Consolidated -------------- Liabilities to Consolidated Tangible Net Worth to be more than 2.30:1.00. (b) Consolidated Tangible Net Worth. At any time, permit Consolidated ------------------------------- Tangible Net Worth to be less than $28,500,000. 16 (c) Consolidated Net Profit. At the end of any fiscal quarter of the ----------------------- Borrower, permit Consolidated Net Profit, determined on a four quarter rolling basis, to be less than $1.00. (d) EBITDA Coverage Ratio. At the end of any fiscal quarter of --------------------- Borrower, permit the EBITDA Coverage Ratio, determined on a four quarter rolling basis, to be less than 1.25:1.0. (e) Liens Etc. Create or suffer to exist, or permit any of its --------- Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure any Debt of any Person other than (i) Liens in favor of the Bank; (ii) Liens reflected on the financial statements referred to in Section 5.01(e) hereof and other Liens existing on the date hereof and set forth in Schedule -------- 6.02(e) hereto; (iii) purchase money Liens upon or in any equipment acquired or - ------- held by the Borrower or any Subsidiary in the ordinary course of business up to a maximum of $500,000 to secure the purchase price of such equipment or to secure indebtedness incurred solely for the purpose of financing the acquisition of such equipment: (iv) Liens existing on property acquired by the Borrower or any Subsidiary, and all refundings and extensions of any such Liens, and (v) Liens, deposits and/or pledges made to secure the performance of operating leases; provided that the principal amount of Debt secured by any such Lien permitted hereunder shall not exceed an amount equal to (x) one hundred percent (100%) of the cost of the real property subject to such lien or security interest or (y) one hundred percent (100%) of the cost of the personal property subject to such lien or security interest, and further provided that none of such liens or security interests shall extend to other assets of the Borrower or its Subsidiaries. The Bank acknowledges that (A) Suburban has an existing first mortgage indenture encumbering substantially all of its assets to secure three series (A, B and C) of first mortgage bonds and (B) NMUI has an existing first mortgage indenture encumbering substantially all of its assets to secure its Series A and Series B first mortgage bonds. (f) Debt. Create, incur, assume or permit to exist, or permit any ---- Subsidiary to create, incur, assume or permit to exist, any indebtedness or liabilities resulting from borrowings, loans or advances, whether matured or unmatured, liquidated or unliquidated, joint or several, secured or unsecured, except for (i) Debt incurred pursuant to this Agreement and the other Loan Documents, (ii) Debt incurred pursuant to the Suburban Loan Documents; (iii) Debts, revolving lines of credit and lease obligations of Borrower existing as of, and disclosed to Bank prior to, the date of this Agreement (including $4,000,000 of unsecured debt of the Borrower to Mellon, $4,000,000 of unsecured debt of Suburban to Mellon, and $4,000,000 of unsecured debt of NMUI to First Security Bank), (iv) secured indebtedness for purchase money financing of equipment which is permitted under Section 6.02(e)(iii) not to exceed an aggregate of $500,000, (v) unsecured funded bank debt not to exceed an aggregate of $20,000,000 at any time (including, without limitation, unsecured funded bank debt incurred pursuant to the Loan Documents and the Suburban Loan Documents and unsecured funded bank debt to Mellon as described in clause (iii) above) and (vi) intercompany Debt between Borrower and its wholly-owned Subsidiaries or between such wholly-owned Subsidiaries. (g) Consolidation, Merger or Dissolution. (i) Consolidate with or ------------------------------------ merge into any other Person, unless Borrower is the surviving entity and no event has occurred and is continuing, or would result from such consolidation or merger, which constitutes an Event of Default or Potential Event of Default, (ii) wind up, liquidate or dissolve or (iii) agree to do any of the foregoing. 17 (h) Loans, Investments, Secondary Liabilities. Make or permit to ----------------------------------------- remain outstanding, or permit any Subsidiary to make or permit to remain outstanding, any loan or advance to, or guarantee, induce or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person, except that the Borrower and its Subsidiaries may: (i) own, purchase or acquire certificates of deposit issued by a bank, commercial paper rated Moody's P-1, municipal bonds rated Moody's AA or better, direct obligations of the United States of America or its agencies, and obligations guaranteed by the United States of America; (ii) continue to own the existing capital stock of the Borrower's Subsidiaries and make new purchases of the capital stock of other entities as long as such new investments do not exceed in the aggregate Five Million Dollars ($5,000,000) outstanding at any one time, without the Bank's prior written approval; (iii) endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (iv) allow the Borrower's wholly-owned Subsidiaries to make or permit to remain outstanding advances from the Borrower's wholly-owned Subsidiaries to the Borrower; (v) make or permit to remain outstanding loans or advances to the Borrower's wholly-owned Subsidiaries or enter into or permit to remain outstanding guarantees in connection with the obligations of the Borrower's wholly-owned Subsidiaries; provided, however, that any -------- ------- outstanding loans or advances by Borrower to its wholly-owned Subsidiaries shall be evidenced by negotiable promissory notes, in form and substance satisfactory to Bank, and which notes shall provide for the assignment thereof to the Bank as collateral security for the repayment of the Loans and any other obligations of the Borrower hereunder upon the demand of the Bank; (vi) make or permit to remain outstanding loans and advances to any of its officers, shareholders or affiliates or enter into or permit to remain outstanding guarantees in connection with the obligations of its officers, shareholders or affiliates, in an aggregate amount for all such loans, advances and guarantees not exceeding $100,000 in addition to the loans outstanding and reflected on the Borrower's financial statements dated March 31, 1999; (vii) guaranty the indebtedness of Suburban under the Suburban Loan Documents; (viii) guaranty the indebtedness of Suburban under that certain Credit Agreement between Suburban and Mellon dated as of the date hereof in a maximum amount at any one time not to exceed $4,000,000 for principal, plus all interest thereon and costs and expenses pertaining to the enforcement of the guaranty and/or the collection of such indebtedness; and 18 (ix) guaranty the unsecured bank indebtedness of NMUI in a maximum amount at any one time not to exceed $4,000,000 for principal, plus all interest thereon and all costs and expenses pertaining to the enforcement of the guaranty and/or the collection of such indebtedness. (i) Asset Sales. Convey, sell, lease, transfer or otherwise dispose ----------- of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its or its Subsidiary's business, property or fixed assets outside the ordinary course of business, whether now owned or hereafter acquired, except that the Borrower and its Subsidiaries may convey, sell, lease, transfer or otherwise dispose of business, property or fixed assets for consideration which in the aggregate does not exceed $500,000 per year. The foregoing covenant shall not extend to any property taken by eminent domain by any governmental authority or other person or entity having the power of eminent domain or to any sale in lieu of condemnation to a governmental authority or other person or entity having the power of eminent domain made after threat of condemnation by such governmental authority or other person or entity, or to the pending sale by Suburban of that certain parcel of real estate commonly known as 16340 East Maplegrove Street, La Puente, California, which property was the site of the former headquarters facility of Borrower and Suburban. (j) Hostile Tender Offers. Make any offer to purchase or acquire, or --------------------- consummate a purchase or acquisition of, five percent (5%) or more of the capital stock of any publicly held corporation or other publicly held business entity, unless the board of directors of such corporation or business entity has notified the Borrower that it invites or does not oppose such offer or purchase. (k) Distributions. Upon the occurrence and during the continuance of ------------- an Event of Default or Potential Event of Default, authorize, declare or pay, or permit any of its Subsidiaries to authorize, declare or pay, any Distributions. (l) Transactions with Affiliates. Neither Borrower nor any of its ---------------------------- Subsidiaries shall enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's or its Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or its Subsidiary than Borrower or its Subsidiary would obtain in a comparable arm's length transaction with an unaffiliated person. (m) Books and Records. Borrower will, and will cause each of its ----------------- Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of applicable law shall be made of all dealings and transactions in relation to its business and activities. (n) Restructure. Make any change in Borrower's financial restructure, ----------- the principal nature of Borrower's business operations (taken as a whole), or the date of its fiscal year. ARTICLE VII EVENTS OF DEFAULT 19 SECTION 7.01. Events of Default. If any of the following events ----------------- ("Events of Default") shall occur and be continuing: - -------------------- (a) Borrower shall fail to pay within three (3) days of the date when due, any principal, interest, fees or other amounts payable under any of the Loan Documents; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with the Loan Documents shall prove to have been incorrect in any material respect when made; or (c) Borrower shall fail to perform or observe any term, any affirmative or negative covenant, including, but not limited to, those covenants set forth in Sections 6.01 and 6.02 hereof, or any other agreement contained in this Agreement on its part to be performed or observed (other than those referred to in subsections (a) and (b) above); and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence; or (d) The Borrower or any of its Subsidiaries shall default in the performance of or compliance with any term contained in any Loan Document other than this Agreement and such default shall not have been remedied or waived within any applicable grace period in such Loan Document or in (c) above; or (e) an Event of Default shall occur under the Suburban Loan Documents; or (f) (i) The Borrower or any of its Subsidiaries shall (A) fail to pay any principal of, or premium or interest on, any Debt (including, without limitation, Debt owing to Mellon), the aggregate outstanding principal amount of which is at least $100,000 (excluding Debt evidenced by the Revolving Note), when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt, or (B) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt or material to the performance, business, property, assets, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, when required to be performed or observed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument; or (g) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days (Bank may, in its discretion, cease making Revolving Loans during the pendency of such action or 20 proceeding); or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof (Bank may, in its discretion, cease making Revolving Loans during the pendency of such action or proceeding); or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (i), (ii) and (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance or reserves) equal to or greater than $250,000 and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (i) (i) The Borrower or any of its ERISA Affiliates fails to make full payment when due of all material amounts which, under the provisions of any Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of its ERISA Affiliates is required to pay as contributions thereto and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (ii) any material accumulated funding deficiency occurs or exists, whether or not waived, with respect-to any Pension Plan and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (iii) the excess of the actuarial present value of all benefit liabilities under all Pension Plans over the fair market value of the assets of such Pension Plans (excluding in such computation Pension Plans with assets greater than benefit liabilities) allocable to such benefit liabilities are greater than five percent (5%) of Consolidated Tangible Net Worth and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (iv) the Borrower or any of its ERISA Affiliates enters into any transaction which has as its principal purpose the evasion of liability under Subtitle D of Title IV of ERISA: (v) (A) Any Pension Plan maintained by the Borrower or any of its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA in a distress termination, or (B) a trustee shall be appointed by an appropriate United States district court in accordance with Section 4042 of ERISA to administer any Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan in accordance with Section 4042 of ERISA, or (D) the Borrower or any of its ERISA Affiliates shall withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date of the event listed in subclauses (A)-(D) above or any subsequent date, either the Borrower or its ERISA Affiliates has any material liability (such liability to include, without limitation, any liability to the Pension Benefit Guaranty Corporation, or any successor thereto, or to any other party under Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or otherwise associated with the events listed in subclauses (A)-(D) above; 21 (vi) As used in this subsection 7.01(h) the term "accumulated funding deficiency" has the meaning specified in Section 412 of the Internal Revenue Code, and the term "benefit liabilities" has the meaning specified in Section 4001 of ERISA; (j) There shall be instituted against the Borrower or any Subsidiary, or against any guarantor, any proceeding for which forfeiture of any property with a value of $250,000 or more is a potential penalty and such proceeding remains undismissed, undischarged or unbonded for a period of thirty (30) days from the date the Borrower knows of such proceeding; (k) A Change of Control shall have occurred; or (l) The mortgage bonds of Suburban or NMUI shall fail to maintain a NAIC rating of 1 or 2. Then, (i) upon the occurrence of any Event of Default described in clause 7.01(g) above, the Commitment shall immediately terminate and all Loans hereunder with accrued interest thereon, and all other amounts owing under the Loan Documents shall automatically become due and payable, and (ii) upon the occurrence of any other Event of Default, the Bank may, by notice to the Borrower, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate; and, by notice to the Borrower, declare the Loans hereunder, with accrued interest thereon, and all other amounts owing under the Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including, without limitation, the right to resort to any or all security for any credit accommodation from the Bank subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank in connection with each of the Loan Documents may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Notwithstanding any other provision of this Agreement, including Section 8.02, notices to the Borrower under this Section shall be communicated in writing (including telex or facsimile transmissions). ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any --------------- provision of the Loan Documents nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.02. Notices, Etc. Except as otherwise set forth in this ------------ Agreement, all notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed certified mail, return receipt requested or sent by facsimile 22 or delivered, if to the Borrower, at its address set forth on the signature page hereof; and if to the Bank, at its address set forth on the signature page hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective upon personal delivery or upon receipt when sent by facsimile, or on the date of receipt or refusal indicated on the return receipt if sent by certified mail, except that notices and communications to the Bank pursuant to Article II or VII shall not be effective until received by the Bank. SECTION 8.03. Right of Setoff: Security Interest in Deposit ---------------------------------------------- Accounts. Upon and only after the occurrence of any Event of Default not cured - -------- within any applicable grace period, the Bank is hereby authorized by the Borrower, at any time and from time to time, without notice, (a) to set off against, and to appropriate and apply to the payment of, the obligations and liabilities of the Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by the Bank to the Borrower (whether payable in Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as the Bank in its sole discretion may elect. The Borrower hereby grants to the Bank a security interest in all deposits and accounts maintained with the Bank and with any other financial institution. The Bank is authorized to debit any account maintained with it by the Borrower for any amount of principal, interest or fees which are then due and owing to the Bank. SECTION 8.04. No Waiver; Remedies. No failure on the part of either ------------------- party hereto to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.05. Costs and Expenses. Borrower shall pay to Bank ------------------ immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and each other of the Loan Documents, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents (including, without limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings) or the restructuring of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including, without limitation, any action for declaratory relief. SECTION 8.06. Participations. The Bank may sell, assign, transfer, -------------- negotiate or grant participations to other financial institutions in all or part of the obligations of the Borrower outstanding under the Loan Documents, provided that any such sale, assignment, transfer, negotiation or participation shall be in compliance with the applicable federal and state securities laws; and provided further that any assignee or transferee agrees to be bound by the terms and conditions of this Agreement. The Bank may, in connection with any actual or 23 proposed assignment or participation, disclose to the actual or proposed assignee or participant, any information relating to the Borrower or any of its Subsidiaries. SECTION 8.07. Effectiveness: Binding Effect. This Agreement shall ----------------------------- become effective when it shall have been executed by the Borrower and the Bank and thereafter shall be binding upon and inure to the benefit of the Borrower, the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. SECTION 8.08. Governing Law. The validity, interpretation and ------------- enforcement of this Agreement and the other Loan Documents and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). SECTION 8.09. Arbitration. ----------- (a) Arbitration. Upon the demand of any party, any Dispute shall be ----------- resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by --------------- the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in the County of Los Angeles, California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No ---------------------------------------------------------- provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction 24 before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be -------------------------------------------- active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, --------------- in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (A) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (B) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (C) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (1) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (2) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding -------------------------------------------- anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be 25 entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the ------------- arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. SECTION 8.10. Waiver of Notices. Borrower hereby expressly waives ----------------- demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments, included in or evidencing any of the obligations, and any and all other demands and notices of any kind or nature whatsoever with respect to the obligations and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Bank may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. SECTION 8.11. Entire Agreement. This Agreement with Exhibits and ---------------- Schedules and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 8.12. Separability of Provisions. In case any one or more of -------------------------- the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 8.13. Execution in Counterparts. This Agreement may be ------------------------- executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BANK OF AMERICA, N.A. SOUTHWEST WATER COMPANY By: /s/ PAUL F. SUTHERLEN By: /s/ THOMAS C. TEKULVE ------------------------------- ------------------------------------ Name: Paul F. Sutherlen Name: Thomas C. Tekulve Title: Vice President Title: Vice President - Finance By: /s/ STEPHEN J. MUZI ------------------------------------ Name: Stephen J. Muzi Title: Corporate Controller Address: Address: Los Angeles Regional Commercial 225 North Barranca Avenue, Suite 200 Banking Office West Covina, California 91791-1605 525 South Flower Street Attention: Thomas C. Tekulve Mezzanine Level Vice President - Finance Los Angeles, California 90071 Facsimile: (626) 915-1558 Attention: Paul F. Sutherlen Title: Vice President Facsimile (213) 345-6983 27 SCHEDULE 5.01(f) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Borrower for quarter ended March 31, 1999, and Form 10-K of Borrower for year ended December 31, 1998. 28 SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Borrower for quarter ended March 31, 1999, and Form 10-K of Borrower for year ended December 31, 1998. 29 SCHEDULE 6.02(e) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Borrower for the fiscal year ended December 31, 1998. 30 EXHIBIT A REVOLVING NOTE $4,000,000 Los Angeles, California July 30, 1999 FOR VALUE RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A. ("Bank") at its office at 525 South Flower Street, Mezzanine Level, Los Angeles, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Million Dollars ($4,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) either (i) at a fluctuating rate per annum equal to the Reference Rate minus one quarter (0.25) of a percentage point in effect from time to time, or (ii) at an optional rate per annum determined by Bank to be one and one-quarter (1.25%) percentage points above Bank's IBOR in effect on the first day of the applicable IBOR Rate Term. When interest is determined in relation to the Reference Rate, each change in the rate of interest hereunder shall become effective on the opening of business on the day specified in the public announcement of a change in Bank's Reference Rate. With respect to each IBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable IBOR Rate Term thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. A. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each: 1. "Business Day" means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation, or for amounts bearing interest at an offshore rate, a Business Day is any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation on which Bank is open for business in California and dealing in offshore dollars. 2. "IBOR Rate Portion" means a portion of the principal amount outstanding under this Note which is bearing interest at a rate related to IBOR. No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars ($250,000). 3. "IBOR Rate Term" means a period commencing on a Business Day and continuing for no shorter than one (1) month and no longer than six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank's IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled Maturity Date hereof. The last day of the interest period will be determined by Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would end on a day which is not a Business Day, then such IBOR Rate Term shall be extended to the next succeeding Business Day. i 4. "IBOR Rate" means the interest rate determined by the following formula, rounded upward, if necessary, to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by Bank as of the first day of the interest period.) IBOR Rate = IBOR Base Rate -------------------------------------------- (1.00 - Reserve Percentage) (a) "IBOR Base Rate" means the interest rate at which Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (b) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. 5. "Reference Rate" means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by Bank based on various factors, including Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. Bank may price loans to its customers at, above or below the Reference Rate. B. INTEREST: 1. Payment of Interest. Interest accrued on this Note shall be payable ------------------- on the first day of each month, commencing September 1, 1999. 2. Selection of Interest Rate Options. At any time any portion of this ---------------------------------- Note bears interest determined in relation to Bank's IBOR, it may be continued by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Reference Rate or in relation to Bank's IBOR for a new IBOR Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Reference Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank's IBOR for a IBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the IBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the IBOR option is selected, the length of the applicable IBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each IBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate Term. For each IBOR option requested hereunder, Bank will quote the applicable IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first day of the IBOR Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re- determination by Bank of the applicable IBOR Rate; provided however, that if Borrower fails ii to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a IBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any IBOR Rate Term, Borrower shall be deemed to have made a Reference Rate interest selection for such advance or the principal amount to which such IBOR Rate Term applied. 3. Additional IBOR Provisions. -------------------------- (a) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank's IBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, than (i) no new IBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank's IBOR, subsequent to the end of the IBOR Rate Term applicable thereto, shall bear interest determined in relation to the Reference Rate. (b) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (i) to make IBOR options available hereunder, or (ii) to maintain interest rates based on Bank's IBOR, then in the former event, any obligation of Bank to make available such unlawful IBOR options shall immediately be cancelled, and in the latter event, any such unlawful IBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Reference Rate; provided however, that if any such Change in Law shall permit any IBOR-based interest rates to remain in effect until the expiration of the IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates shall continue in effect until the expiration of such IBOR Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any IBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (c) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (i) subject Bank to any tax, duty or other charge with respect to any IBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (ii) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of advances or loans by, or any other acquisition of funds by any office of Bank; or (iii) impose on Bank any other condition; iii and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any IBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such IBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any IBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. 4. Default Interest. During the continuance of an Event of Default, the ---------------- outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) equal to two percent (2%) above the rate of interest from time to time applicable to this Note. C. BORROWING AND REPAYMENT: 1. Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and re-borrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on the "Maturity Date" (as defined in the Credit Agreement). 2. Advances. Advances hereunder, to the total amount of the principal -------- sum stated above, may be made by the holder at the oral or written request of (a) Anton C. Garnier, Peter J. Moerbeek, Thomas C. Tekulve , Stephen J. Muzi or Leslie Ward-Cline, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. 3. Application of Payments. Each payment made on this Note shall be ----------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof. Unless instructed otherwise by Borrower, all payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Reference Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank's IBOR, with such payments applied to the oldest IBOR Rate Term first. 4. Prepayment. ---------- iv (a) Reference Rate. Borrower may prepay principal on any portion of this -------------- Note which bears interest determined in relation to the Reference Rate at any time, in any amount and without penalty. (b) IBOR. Each prepayment of an IBOR Rate Portion, whether voluntary, by ---- reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). Bank will have no obligation to accept an election of an IBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not available in the offshore dollar inter-bank market; or (ii) the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion. Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Reference Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). D. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of July 30, 1999, as amended from time to time, including, without limitation, those terms relating to arbitration of Disputes (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. E. MISCELLANEOUS: v 1. Remedies. Upon the occurrence of any Event of Default, the holder of -------- this Note, at the holder's option, without notice upon the occurrence of an Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with notice upon the occurrence of any other Event of Default, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower. 2. Obligations Joint and Several. Should more than one person or entity ----------------------------- sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 3. Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California. iv 4. Defined Terms. All capitalized terms not herein defined shall have ------------- the meanings given to them in the Credit Agreement. "Borrower" SOUTHWEST WATER COMPANY, a Delaware corporation By: /s/THOMAS C. TEKULVE ------------------------------------------ Thomas C. Tekulve Vice President - Finance By: /s/STEPHEN J. MUZI ------------------------------------------ Stephen J. Muzi Corporate Controller vii EX-10.12 7 CREDIT AGREEMENT - SUBURBAN & B OF A EXHIBIT 10.12 CREDIT AGREEMENT between SUBURBAN WATER SYSTEMS and BANK OF AMERICA, N.A. July 30, 1999 TABLE OF CONTENTS -----------------
PAGE(S) ARTICLE I............................................................ 1 SECTION 1.01. Defined Terms.......................................... 1 SECTION 1.02. Other Definitional Provisions.......................... 5 ARTICLE II........................................................... 6 SECTION 2.01. The Revolving Loans.................................... 6 (a) The Revolving Commitment.................................. 6 (b) Making the Revolving Loans................................ 6 (c) Reduction of the Revolving Commitment..................... 6 (d) Revolving Note............................................ 6 SECTION 2.02. Mandatory Repayment.................................... 7 SECTION 2.03. Interest Computation and Payment....................... 7 ARTICLE III.......................................................... 7 SECTION 3.01. Use of Proceeds........................................ 7 SECTION 3.02. [Deliberately Omitted]................................. 7 SECTION 3.03. Payments............................................... 7 SECTION 3.04. Payment on Non-Business Days........................... 7 SECTION 3.05. Reduced Return......................................... 7 SECTION 3.06. Indemnities............................................ 8 SECTION 3.07. Funding Sources........................................ 8 ARTICLE IV........................................................... 8 SECTION 4.01. Conditions Precedent to Initial Loan................... 8 SECTION 4.02. Conditions Precedent to Each Borrowing.................10 ARTICLE V............................................................10 SECTION 5.01. Representations and Warranties.........................10 (a) Organization..............................................10 (b) Authorization; No Conflict................................10 (c) Governmental Consents.....................................11 (d) Validity..................................................11 (e) Financial Condition.......................................11 (f) Litigation................................................11 (g) Employee Benefit Plans....................................11 (h) Disclosure................................................11 (i) Environmental Matters.....................................12 (j) Employee Matters..........................................12 (k) Solvency..................................................12 (l) Title to Properties.......................................12 (m) Tax Returns...............................................13 (n) Compliance with Other Agreements and Applicable Laws......13 ARTICLE VI...........................................................13 SECTION 6.01. Affirmative Covenants.................................13 (a) Financial Information.....................................13 (b) Notices and Information...................................15 (c) Corporate Existence, Etc..................................16 (d) Payment of Taxes and Claims...............................16
i (e) Maintenance of Properties; Insurance...........................16 (f) Inspection.....................................................17 (g) Compliance with Laws Etc.......................................17 (h) Hazardous Waste Studies........................................17 (i) Year 2000 Compliance...........................................17 SECTION 6.02. Negative Covenants.........................................17 (a) Leverage Ratio.................................................17 (b) Consolidated Tangible Net Worth of Borrower....................17 (c) Consolidated Tangible Net Worth of Southwest...................18 (d) Consolidated Net Profit of Borrower............................18 (e) Consolidated Net Profit of Southwest...........................18 (f) EBITDA Coverage Ratio of Southwest.............................18 (g) Funded Debt of Borrower........................................18 (h) Liens Etc......................................................18 (i) Debt...........................................................18 (j) Consolidation, Merger or Dissolution...........................19 (k) Loans, Investments, Secondary Liabilities......................19 (l) Asset Sales....................................................19 (m) Hostile Tender Offers..........................................20 (n) Distributions..................................................20 (o) Transactions with Affiliates...................................20 (p) Books and Records..............................................20 (q) Restructure....................................................20 ARTICLE VII...............................................................20 SECTION 7.01. Events of Default..........................................20 ARTICLE VIII..............................................................23 SECTION 8.01. Amendments, Etc............................................23 SECTION 8.02. Notices, Etc...............................................23 SECTION 8.03. Right of Setoff: Security Interest in Deposit Accounts.....23 SECTION 8.04. No Waiver; Remedies........................................24 SECTION 8.05. Costs and Expenses.........................................24 SECTION 8.06. Participations.............................................24 SECTION 8.07. Effectiveness: Binding Effect..............................24 SECTION 8.08. Governing Law..............................................24 SECTION 8.09. Arbitration................................................24 SECTION 8.10. Waiver of Notices..........................................26 SECTION 8.11. Entire Agreement...........................................26 SECTION 8.12. Separability of Provisions.................................27 SECTION 8.13. Execution in Counterparts..................................27
Schedules - --------- 5.01(f) - Litigation 5.01(i) - Environmental Matters 6.02(h) - Liens ii Exhibits - -------- A - Form of Note B - Form of Legal Opinion C - Form of Continuing Guaranty iii CREDIT AGREEMENT This Credit Agreement dated as of July 30, 1999 is entered into between SUBURBAN WATER SYSTEMS, a California corporation (the "Borrower") and --------- BANK OF AMERICA, N.A. (the "Bank"). ----- RECITALS -------- WHEREAS, the Borrower has requested that the Bank extend certain credit facilities to the Borrower in the place of Wells Fargo Bank, National Association; and WHEREAS, the Bank is willing to extend such credit facilities to the Borrower on the terms and conditions set forth below. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the ------------- following terms have the following meanings: "Agreement": This Credit Agreement, as amended, supplemented or ---------- modified from time to time. "Bank": As set forth in the introductory paragraph of this Agreement. ----- "Bondable Capacity": has the meaning as set forth in Section 4.02(A) ------------------ of that certain Indenture of Mortgage and Deed of Trust dated October 1, 1986, executed by Suburban Water Systems to First Trust of California, National Association, as Trustee, as amended by First Supplemental Indenture of Mortgage dated February 7, 1990, Second Amendment and Supplement to Indenture of Mortgage dated January 24, 1992 and Third Amendment and Supplement to Indenture of Mortgage dated October 9, 1996. "Borrower": As set forth in the introductory paragraph of this --------- Agreement. "Borrowing": As defined in Section 2.01. ---------- "Business Day": Has the meaning set forth in the Revolving Note. ------------- "Capital Leases": As applied to any Person, any lease of any property --------------- (whether real, personal or mixed) by that Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person. "Change of Control": Shall be deemed to have occurred at such times ------------------ as: (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Act of 1934), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than thirty percent (30%) of the total voting power of all classes of stock then outstanding of Borrower normally entitled to vote in the election of directors; or (b) Southwest shall fail to own directly one hundred percent (100%) of the issued -1- and outstanding common stock of the Borrower, NMUI or ECO or shall lose voting control of the Borrower's, NMUI's or ECO's issued and outstanding common stock. A change of control shall not include a transfer of NMUI's operating assets through a condemnation or sale in lieu of condemnation. "Commitment": The Bank's obligation to make Loans to the Borrower ----------- pursuant to Article II in the amount or amounts referred to therein. "Consolidated EBITDA of Southwest" means, for any period of Southwest --------------------------------- and its Subsidiaries on a consolidated basis, Consolidated Net Profit of Southwest for such period, plus interest expense (net of capitalized interest expense) and provision for income taxes for such period, plus depreciation and amortization for such period. "Consolidated Liabilities of Southwest": At any date of ------------------------------------- determination, the total liabilities of Southwest and its Subsidiaries on a consolidated basis determined in accordance with GAAP (including, without limitation, (1) any balance sheet liability with respect to a Pension Plan recognized pursuant to Financial Accounting Standards Board Statements 87 or 88 and (2) any withdrawal liability under Section 4201 of ERISA with respect to a withdrawal from a Multiemployer Plan, as such liability may be set forth in a notice of withdrawal liability under Section 4219 (and as adjusted from time to time subsequent to the date of such notice) less (1) deferred taxes, (2) ---- contributions in aid of construction ("CIAC"), (3) unamortized investment tax credits, (4) deferred revenue on CIAC, and (5) deposits for CIAC for capital improvement projects. "Consolidated Net Profit of Southwest" means, in respect of any period ------------------------------------- of Southwest and its Subsidiaries, the consolidated net profit after taxes of Southwest and its Subsidiaries as such would appear on the consolidated statement of earnings of Southwest and its Subsidiaries prepared in accordance with GAAP, consistently applied, minus nonrecurring or extraordinary income. ----- "Consolidated Tangible Net Worth of Borrower": At any date of -------------------------------------------- determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of the Borrower and its consolidated Subsidiaries minus (i) treasury stock, (ii) intangible assets ----- (including, without limitation, franchises, patents, patent applications, trademarks, brand names, goodwill, purchased contracts, water rights and deferred charges (including unamortized debt discount and expense and organization costs) and research and development expenses) and (iii) receivables, advances, loans and all other amounts due from employees, officers, shareholders and/or affiliates (excluding Southwest), on a consolidated basis determined in conformity with GAAP. "Consolidated Tangible Net Worth of Southwest": At any date of --------------------------------------------- determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Southwest and its consolidated Subsidiaries minus (i) treasury stock, (ii) intangible assets ----- (including, without limitation, franchises, patents, patent applications, trademarks, brand names, goodwill, purchased contracts, water rights and deferred charges (including unamortized debt discount and expense and organization costs) and research and development expenses) and (iii) receivables, advances, loans and all other amounts due from employees, officers, shareholders and/or affiliates (excluding Southwest's wholly-owned Subsidiaries), on a consolidated basis determined in conformity with GAAP. "Debt": As applied to any Person, (i) all indebtedness for borrowed ----- money, (ii) that portion of obligations with respect to Capital Leases which is properly classified as a -2- liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services which purchase price is (y) due more than six months from the date of incurrence of the obligation in respect thereof, or (z) evidenced by a note or similar written instrument; (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that person; (vi) reimbursement obligations under letters of credit; and (vi) other contingent liabilities. "Distribution": With respect to any Person shall mean that such ------------- Person has paid any dividend or returned any capital to, its stockholders or equity holders as such or authorized or made any other distribution, payment or delivery of property or cash to its stockholders or equity holders as such, or redeemed, retired, purchased, or otherwise acquired, directly or indirectly, for consideration, any shares of any class of its capital stock or equity interests (or any options, warrants or rights issued by such Person with respect to its capital stock or equity interests), or set aside any funds for any of the foregoing purposes, or shall have permitted any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock or any equity interests of such Person (or any options, warrants or rights issued by such Person with respect to its capital stock or equity interests). Without limiting the foregoing, "Distributions" with respect to any Person shall also include all payments made or required to be made by such Person with respect to any stock appreciation rights plans, equity incentive or the setting aside of any funds for the foregoing purposes. "Dollars and $": Dollars in lawful currency of the United States of -------------- America. "EBITDA Coverage Ratio of Southwest" means, for any period of ---------------------------------- Southwest and its Subsidiaries on a consolidated basis, Consolidated EBITDA divided by the sum of the total interest expense plus current portion of long- ---- term Debt plus current portion of advances for construction plus Distributions. ---- ---- "ECO": ECO Resources, Inc., a Texas corporation. ---- "Employee Benefit Plan": Any Pension Plan, any employee welfare ---------------------- benefit plan, or any other employee benefit plan which is described in Section 3(3) of ERISA and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "ERISA": The Employee Retirement Income Security Act of 1974, as ------ amended to the date hereof and from time to time hereafter. "ERISA Affiliate": As applied to any Person, any trade or business ---------------- (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b) and (c) of the Internal Revenue Code. "Funded Debt of Borrower" means, without duplication, all with respect ------------------------ to Borrower and its Subsidiaries on a consolidated basis, all Debt for borrowed money, including without limitation: (i) Debt evidenced by Borrower's mortgage bonds; (ii) unsecured Debt; (iii) all amounts owing under the Loan Documents; and (iv) all amounts owing to Wells Fargo (including, without limitation, unsecured Debt to Wells Fargo as permitted hereunder). -3- "GAAP": Generally accepted accounting principles set forth in the ----- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession or any public commission having regulatory responsibility over the Borrower or any Subsidiary. "Internal Revenue Code": The Internal Revenue Code of 1986, as ---------------------- amended to the date hereof and from time to time hereafter and any successor statute. "Lien": Any lien, mortgage, deed of trust, pledge, security interest, ----- charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Loans": Loans made to the Borrower pursuant to Section 2.01. ------ "Loan Documents": This Agreement, the Revolving Note and each --------------- agreement, document, instrument and guarantee required by the Bank in connection with this Agreement and/or the credit extended hereunder. "Maturity Date": July 31, 2001. -------------- "Mellon": means Mellon Bank, N.A. ------- "Multiemployer Plan": A "multiemployer plan" as defined in Section ------------------- 4001(a)(3) of ERISA which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower. "NAIC" means National Association of Insurance Companies. ----- "NMUI": New Mexico Utilities, Inc., a New Mexico corporation. ----- "Pension Plan": Any employee plan which is subject to Section 412 of ------------- the Internal Revenue Code and which is maintained for employees of the Borrower or any ERISA Affiliate of the Borrower, other than a Multiemployer Plan. "Person": An individual, partnership, corporation, limited liability ------- company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Potential Event of Default": A condition or event which, after --------------------------- notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Regulations G, T, U and X": Regulations G, T, U and X, respectively, -------------------------- promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time, and any successors thereto. "Revolving Commitment": The amount of $4,000,000 as such amount may --------------------- be reduced pursuant to Section 2.01(c). "Revolving Loans": As defined in Section 2.01(a). ---------------- -4- "Revolving Note": As defined in Section 2.01(d). --------------- "S.E.C.": The United States Securities and Exchange Commission and ------- any successor institution or body which performs the functions or substantially all of the functions thereof. "Solvent": When used with respect to any Person that as of the date -------- as to which the Person's solvency is to be measured: (i) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities) as they become absolute and matured; (ii) it has sufficient capital to conduct its business; and (iii) it is able to meet its debts as they mature. "Southwest": Southwest Water Company, a Delaware corporation and the ---------- parent company of the Borrower. "Southwest Loan Documents" means that Credit Agreement dated as of the ------------------------- date hereof between the Bank and Southwest, and each agreement, document, instrument and guarantee required by the Bank in connection with such Credit Agreement and/or the credit extended thereunder. "Subsidiary": A corporation of which shares of stock having ordinary ----------- voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, directly, or indirectly through one or more intermediaries, or both, by the Borrower. "Termination Event": (i) a "Reportable Event" described in Section ------------------ ----------------- 4043 of ERISA and the regulations issued thereunder (other than a "Reportable Event" not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations) with respect to any Pension Plan, or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a "substantial employer" as --------------------- defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Pension Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v) any other event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan under Section 4042 of ERISA, or (vi) the imposition of a lien with respect to any Pension Plan pursuant to Section 412(n) of the Internal Revenue Code. SECTION 1.02. Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the defined meanings when used in the Revolving Note or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Revolving Note, and any certificate or other document made or delivered pursuant hereto, accounting terms not defined in subsection 1.01, -5- and accounting terms partly defined in subsection 1.01 to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. (d) So long as the Borrower does not have any Subsidiaries, references to a Subsidiary or Subsidiaries in this Agreement shall be deemed to be deleted. ARTICLE II. THE CREDIT SECTION 2.01. The Revolving Loans. ------------------- (a) The Revolving Commitment. The Bank agrees, on the terms and ------------------------ conditions hereinafter set forth, to make loans ("Revolving Loans") to the ---------------- Borrower from time to time during the period from the date hereof to and including the Maturity Date in an aggregate amount not to exceed the Revolving Commitment, as such amount may be reduced pursuant to Section 2.01(c). Within the limits of the Revolving Commitment and prior to the Maturity Date, the Borrower may borrow, repay, and reborrow subject to the terms of this Agreement. (b) Making the Revolving Loans. The Borrower may borrow under the -------------------------- Revolving Commitment on any Business Day, provided that the Borrower shall give the Bank notice pursuant to the terms of the Note specifying (i) the amount of the proposed Borrowing and (ii) the requested date of the Borrowing. Upon satisfaction of the applicable conditions set forth in Article IV, the proceeds of all such Loans will then be made available to the Borrower by the Bank by crediting the account of the Borrower on the books of the Bank, or as otherwise directed by the Borrower. (c) Reduction of the Revolving Commitment. The Borrower shall have ------------------------------------- the right, upon at least two Business Days' notice to the Bank, to terminate in whole or reduce in part the unused portion of the Revolving Commitment, without premium or penalty, provided that each partial reduction shall be in the aggregate amount of $100,000 or an integral multiple thereof and that such reduction shall not reduce the Revolving Commitment to an amount less than the amount outstanding hereunder on the effective date of the reduction. Such notice shall be irrevocable and such reduction shall not be reinstated. (d) Revolving Note. The Loans made by the Bank pursuant hereto shall -------------- be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to - --------- --------------- the order of the Bank and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of all Revolving Loans made by the Bank, with interest thereon as prescribed in Section 2.03. The Bank is hereby authorized to record in its books and records and on any schedule annexed to the Revolving Note, the date and amount of each Revolving Loan made by the Bank, and the date and amount of each payment of principal thereof, and the applicable interest rate, and any such recordation shall constitute prima facie evidence of the ----- ----- accuracy of the information so recorded; provided that failure by the Bank to effect such recordation shall not affect the Borrower's obligations hereunder. Prior to the transfer of a Revolving Note, the Bank shall record such information on any schedule annexed to and forming a part of such Revolving Note. -6- SECTION 2.02. Mandatory Repayment. The aggregate principal amount ------------------- of the Revolving Loans outstanding on the Maturity Date, together with accrued interest thereon, shall be due and payable in full on the Maturity Date. If at any time the aggregate outstanding Borrowings exceed the Revolving Commitment then in effect, the Borrower shall immediately repay the excess to the Bank without penalty or premium. SECTION 2.03. Interest Computation and Payment. The outstanding -------------------------------- principal balance of the Revolving Loans shall bear interest at the rates of interest set forth in the Revolving Note. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Revolving Note. ARTICLE III. GENERAL PROVISIONS CONCERNING THE LOANS SECTION 3.01. Use of Proceeds. The proceeds of the initial Loan --------------- hereunder shall be used to pay off obligations owing to Wells Fargo Bank, National Association under that certain Amended and Restated Credit Agreement dated December 23, 1997, as amended. The proceeds of subsequent Loans hereunder shall be used by the Borrower (i) for general corporate purposes, working capital and acquisitions of the Borrower and its wholly-owned Subsidiaries, and (ii) to finance capital additions to the water utility and other operations of the Borrower and its wholly-owned Subsidiaries. SECTION 3.02. [Deliberately Omitted] SECTION 3.03. Payments. Borrower authorizes Bank to collect all -------- principal, interest and fees due under this Agreement and the Revolving Note by charging Borrower's demand deposit account number 14595-07503 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 3.04. Payment on Non-Business Days. Whenever any payment to ---------------------------- be made hereunder or under the Revolving Note shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. SECTION 3.05. Reduced Return. If the Bank shall have determined that -------------- any applicable law, regulation, rule or regulatory requirement generally applicable to banks located in California and (collectively in this Section 3.05 "Requirement") regarding capital adequacy, or any change therein, or any change ------------ in the interpretation or administration thereof by any United States federal or state governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its Commitment and obligations hereunder to a level below that which would have been achieved but for such Requirement, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material (which amount shall be determined by the Bank's reasonable allocation of the aggregate of such reductions resulting from such events), then from time to time, within five (5) Business Days after demand by the Bank, the Borrower -7- shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. The Bank does not presently have knowledge of any new Requirement or any pending change in any existing Requirement which would result in such additional amounts being owed. SECTION 3.06. Indemnities. Whether or not the transactions ----------- contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay and hold the Bank, and the shareholders, officers, directors, employees and agents of the Bank ("Indemnified Persons"), harmless from and against any and -------------------- all claims, liabilities, losses, damages, costs and expenses (whether or not any of the foregoing Indemnified Persons is a party to any litigation), including, without limitation, reasonable attorneys' fees and costs (including, without limitation, the reasonable estimate of the allocated cost of in-house legal counsel and staff) and costs of investigation, document production, attendance at a deposition, or other discovery, prior to the assumption of defense by the Borrower, with respect to or arising out of any proposed acquisition by the Borrower or any of its Subsidiaries of any Person or any securities (including a self-tender), this Agreement or any use of proceeds hereunder, or any claim, demand, action or cause of action being asserted against the Borrower or any of its Subsidiaries (collectively, the "Indemnified Liabilities"), provided that ------------------------ the Borrower shall have no obligation hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of any such Indemnified Persons. If any claim is made, or any action, suit or proceeding is brought, against any Indemnified Person pursuant to this Section, the Indemnified Person shall notify the Borrower within thirty (30) days of the Bank being notified in writing of any such claim or the commencement of such action, suit or proceeding, and the Borrower will assume the defense of such action, suit or proceeding, employing counsel selected by Borrower's insurance carrier, or selected by the Borrower and reasonably satisfactory to the Indemnified Person, and pay the fees and expenses of such counsel. This covenant shall survive termination of this Agreement and payment of the outstanding Revolving Note for a period of six (6) years. SECTION 3.07. Funding Sources. Nothing in this Agreement shall be --------------- deemed to obligate the Bank to obtain the funds for any Loan in any particular place or manner or to constitute a representation by the Bank that it has obtained or will obtain the funds for any Loan in any particular place or manner. ARTICLE IV. CONDITIONS OF LENDING SECTION 4.01. Conditions Precedent to Initial Loan. The obligation ------------------------------------ of the Bank to make its initial Loan is subject to the conditions precedent that: (a) The Bank shall have received on or before the day of the initial Borrowing the following, each dated prior to or as of such day, in form and substance satisfactory to the Bank: (i) The Revolving Note issued by the Borrower to the order of the Bank; (ii) Copies of the Articles, Certificate of Incorporation, partnership agreement or other organizational document of the Borrower, certified as of a recent date by the Secretary of State of its state of formation or incorporation; (iii) Copies of the Bylaws, if any, of the Borrower, certified by the Secretary or an Assistant Secretary of the Borrower; -8- (iv) Copies of resolutions of the Board of Directors or other authorizing documents of the Borrower, in form and substance satisfactory to the Bank, approving the Loan Documents and the Borrowings hereunder; (v) An incumbency certificate executed by the Secretary or an Assistant Secretary of the Borrower or equivalent document, certifying the names and signatures of the officers of the Borrower or other Persons authorized to sign the Loan Documents and the other documents to be delivered hereunder; (vi) a guaranty executed by Southwest in the form attached hereto as Exhibit C; --------- (vii) Executed copies of all Loan Documents; (viii) Opinion from Borrower's counsel substantially in the form of Exhibit B hereto; --------- (b) The Bank shall have completed its due diligence review of the Borrower, and the scope and results thereof shall be satisfactory to Bank in its discretion; (c) All information previously furnished by Borrower to Bank shall be true and correct in all material respects; (d) All fees required to be paid at closing shall have been paid; (e) All corporate and legal proceedings and all instruments and documents in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in content, form and substance to the Bank and its counsel, and the Bank and such counsel shall have received any and all further information and documents which the Bank or such counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities; and (f) Nothing shall have occurred and the Bank shall not have become aware of any fact or condition not previously known, which the Bank shall determine has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Bank, or on the ability of the Borrower to perform its obligations to the Bank or which has, or could reasonably be expected to have, a materially adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole. SECTION 4.02. Conditions Precedent to Each Borrowing. The obligation -------------------------------------- of the Bank to make a Loan on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that on the date of such Borrowing (a) the following statements shall be true and the Bank shall have received the notice required by Section 2.01(b), which notice shall be deemed to be a certification by the Borrower that: (i) The representations and warranties contained in Section 5.01 are correct on and as of the date of such Borrowing as though made on and as of such date; -9- (ii) No event has occurred and is continuing, or would result from such Borrowing, which constitutes an Event of Default or Potential Event of Default; (iii) Southwest and its Subsidiaries are in compliance with all financial covenants under the Southwest Loan Documents; (iv) Nothing shall have occurred and the Bank shall not have become aware of any fact or condition not previously known, which the Bank shall determine has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Bank, or on the ability of the Borrower to perform its obligations to the Bank or which has, or could reasonably be expected to have, a material adverse effect on the performance, business, property, assets, condition (financial or otherwise) or prospects of Borrower and its Subsidiaries taken as a whole; and (iv) All Loan Documents are in full force and effect, and (b) the Bank shall have received such other approvals, opinions or documents as the Bank may reasonably request. ARTICLE V. REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties. The Borrower ------------------------------ represents and warrants as follows: (a) Organization. The Borrower and each of its Subsidiaries is duly ------------ organized, validly existing and in good standing under the laws of the state of its incorporation. The Borrower and each of its Subsidiaries is also duly authorized, qualified and licensed in all applicable jurisdictions, and under all applicable laws, regulations, ordinances or orders of public authorities, to carry on its business in the locations and in the manner presently conducted. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance by the Borrower of the Loan Documents, and the making of Borrowings hereunder, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Borrower's charter, by-laws or other organizational document or (ii) any law or regulation (including, without limitation, Regulations G, T, U and X and regulations of public utility commissions or similar regulatory authorities) binding on or affecting the Borrower or its properties, and will not constitute an event of default under any material agreement to which Borrower is a party or by which its assets or properties may be bound. (c) Governmental Consents. No authorization or approval or other --------------------- action by, and no notice to or filing with, any governmental authority or regulatory body (except routine reports required pursuant to the Securities Exchange Act of 1934, as amended (if such act is applicable to the Borrower), which reports will be made in the ordinary course of business) is required for the due execution, delivery and performance by the Borrower of the Loan Documents. -10- (d) Validity. The Loan Documents are the binding obligations of the -------- Borrower or other executing Person, if any, enforceable in accordance with their respective terms; except in each case as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors' rights. (e) Financial Condition. The balance sheets of the Borrower and its ------------------- consolidated Subsidiaries as at March 31, 1999,and the related consolidated statements of income and changes in common stockholders' equity of the Borrower and its consolidated Subsidiaries for the fiscal three (3) months then ended, copies of which have been furnished to the Bank, fairly present the financial condition of the Borrower and its consolidated Subsidiaries as at such date and the results of the operations of the Borrower and its consolidated Subsidiaries for the period ended on such date, all in accordance with GAAP, consistently applied, and since March 31, 1999 there has been no material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (f) Litigation. Except as set forth in the Form 10-Q of Southwest ---------- dated March 31, 1999, and on Schedule 5.01(f) hereto, there is no known pending ---------------- or threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may materially adversely affect the consolidated financial condition or operations of the Borrower or which may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. (g) Employee Benefit Plans. The Borrower and each of its ERISA ---------------------- Affiliates is in compliance in all material respects with any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans. No Termination Event has occurred with respect to any Pension Plan. The excess of the actuarial present value of all benefit liabilities under all Pension Plans (excluding in such computation Pension Plans with assets greater than benefit liabilities) over the fair market value of the assets allocable to such benefit liabilities are not greater than five percent (5%) of Consolidated Tangible Net Worth. For purposes of the preceding sentence, the term "benefit liabilities" shall have the meaning specified in Section 4001 of ERISA. (h) Disclosure. No representation or warranty of the Borrower ---------- contained in this Agreement or any other document, certificate or written statement furnished to the Bank by or on behalf of the Borrower for use in connection with the transactions contemplated by this Agreement contains any known untrue statement of a material fact or omits to state a known material fact (known to the Borrower in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Borrower (other than matters of a general economic nature) which materially adversely affects the business, operations, property, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Bank for use in connection with the transactions contemplated hereby. (i) Environmental Matters. Except as set forth in Schedule 5.01(i) --------------------- ---------------- hereto, neither the Borrower nor any Subsidiary, nor any of their respective officers, employees, representatives or agents, nor, to the best of their knowledge, any other person, has treated, stored, processed, discharged, spilled, or otherwise disposed of any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or -11- directive, or any waste or by-product thereof, at any real property or any other facility owned, leased or used by the Borrower or any Subsidiary, in violation of any applicable statutes, regulations, ordinances or directives of any governmental authority or court, which violations may result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500,000 for all such violations; and the unresolved violations set forth in said Schedule 5.01(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500, 000 for all such unresolved violations. Except as set forth in said Schedule, no employee or other person has made a claim or demand against the Borrower or any Subsidiary based on alleged damage to health caused by any such hazardous or toxic substance or by any waste or by-product thereof; and the unsatisfied claims or demands against the Borrower or any Subsidiary set forth in said Schedule 5.01(i) will not result in uninsured liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $250,000 in excess of reserves on the books of the Borrower for all such unsatisfied claims or demands. Except as set forth in said Schedule 5.01(i), neither the Borrower nor any Subsidiary has been charged by any governmental authority with improperly using, handling, storing, discharging or disposing of any such hazardous or toxic substance or waste or by-product thereof or with causing or permitting any pollution of any body of water; and the outstanding related charges set forth in said Schedule 5.01(i) will not result in liability to the Borrower or any Subsidiary or any of their respective officers, employees, representatives, agents or shareholders in an amount exceeding $500,000 for all such outstanding charges. (j) Employee Matters. There is no known strike or work stoppage in ---------------- existence or threatened involving the Borrower or its Subsidiaries that may materially adversely affect the consolidated financial condition or operations of the Borrower or that may have a material adverse effect on the Borrower's ability to perform its obligations under the Loan Documents, having regard for its other financial obligations. (k) Solvency. Borrower and each of its Subsidiaries is Solvent. -------- (l) Title to Properties. Borrower and each of its Subsidiaries has ------------------- good and marketable title to or interests in all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Bank and such others as are permitted under Section 6.02(h) hereof. (m) Tax Returns. Borrower and each of its Subsidiaries has filed, or ----------- caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Bank). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower and each of its Subsidiaries has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower or its Subsidiaries and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. (n) Compliance with Other Agreements and Applicable Laws. Neither ---------------------------------------------------- Borrower nor any of its Subsidiaries is in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment (including, but not limited to any such agreement involving the debts or -12- investments of Borrower or liens upon its assets) to which it is a party or by which it or any of its assets are bound and Borrower and each of its Subsidiaries is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. ARTICLE VI. COVENANTS SECTION 6.01. Affirmative Covenants. So long as any Revolving Note --------------------- shall remain unpaid or the Bank shall have any Commitment hereunder, the Borrower will, unless the Bank shall otherwise consent in writing: (a) Financial Information. Furnish to the Bank: --------------------- (i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the Borrower's audited consolidated balance sheets of itself and its consolidated Subsidiaries as at the end of each fiscal year and the related consolidated statements of income and changes in common stockholders' equity (or comparable statement) employed in the business and changes in financial position and cash flow for such year, in each case prepared in accordance with GAAP, setting forth in each case in comparative form the figures for the previous year, accompanied by an unqualified report and opinion thereon of independent certified public accountants acceptable to the Bank and, if prepared, such accountants' letter to management; and (ii) as soon as available, but in any event within forty-five (45) days after the end of each fiscal quarter, the Borrower's unaudited consolidated and consolidating balance sheets of itself and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income and changes in common stockholders' equity (or comparable statement) and changes in financial position and cash flow for such period and year to date, setting forth in each case in comparative form the figures as at the end of the previous fiscal year as to the balance sheet and the figures for the previous corresponding period as to the other statements, certified by a duly authorized officer of the Borrower as being fairly stated in all material respects subject to year end adjustments; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail acceptable to the Bank and in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by such accountants and disclosed therein and except for the exclusion of information and footnote disclosures omitted pursuant to the rules and regulations of the S.E.C.); and (iii) as soon as available, but in any event within 120 days after the end of each fiscal year of Southwest, (1) a copy of Southwest's annual report to shareholders containing the consolidated balance sheets of itself and its consolidated Subsidiaries as at the end of each fiscal year and the related consolidated statements of income and changes in common stockholders' equity (or comparable statement) employed in the business and changes in financial position and cash flow for such year, setting forth in each case in comparative -13- form the figures for the previous year, accompanied by an unqualified report and opinion thereon of independent certified public accountants acceptable to the Bank and, if prepared, such accountants' letter to management, and (2) a copy of Southwest's prepared consolidating financial statements prepared in connection with each of the statements provided in subpart (1) above; and (iv) as soon as available, but in any event within forty-five (45) days after the end of each fiscal quarter, Southwest's unaudited consolidated and consolidating balance sheets of itself and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income and changes in common stockholders' equity (or comparable statement) and changes in financial position and cash flow for such period and year to date, setting forth in each case in comparative form the figures as at the end of the previous fiscal year as to the balance sheet and the figures for the previous corresponding period as to the other statements, certified by a duly authorized officer of Southwest as being fairly stated in all material respects subject to year end adjustments; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail acceptable to the Bank and in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by such accountants and disclosed therein and except for the exclusion of information and footnote disclosures omitted pursuant to the rules and regulations of the S.E.C.); and (v) as soon as available, copies of all reports which Southwest sends to any of its security holders, and copies of all reports and registration statements which Southwest or any of its Subsidiaries files with the S.E.C. or any national securities exchange; and (vi) (a) together with each delivery of financial statements of Borrower, Southwest and their respective Subsidiaries pursuant to subdivision (i) or subdivision (iii) above, a certificate, executed by the Borrower's chairman of the board (if an officer) or its president or one of its vice presidents or by its chief financial officer stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Borrower and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Borrower has taken, is taking and proposes to take with respect thereto; and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii), and (iv) above, a certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 6.02 hereof. (b) Notices and Information. Deliver to the Bank: ----------------------- (i) promptly upon any officer of the Borrower obtaining knowledge (a) of any condition or event which constitutes an Event of Default or Potential Event of -14- Default, (b) that any Person has given any notice to the Borrower or any Subsidiary of the Borrower or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.01(e), (c) of the institution of any litigation involving an alleged liability (including possible forfeiture of property) of the Borrower or any of its Subsidiaries equal to or greater than $500,000 which is not, except for deductibles and self insurance reserves, fully covered by insurance maintained by Borrower or any adverse determination in any litigation involving a potential liability of the Borrower or any of its Subsidiaries equal to or greater than $500,000 which is not, except for deductibles and self insurance reserves, fully covered by insurance maintained by Borrower or (d) of a material adverse change in the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole, an officers' certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action the Borrower has taken, is taking and proposes to take with respect thereto; (ii) promptly upon becoming aware of the occurrence of any (a) Termination Event, or (b) non-exempt "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code or a transaction prohibited by Section 406 of ERISA, in connection with any Employee Benefit Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Borrower has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation with respect thereto; (iii) with reasonable promptness copies of (a) all notices received by the Borrower or any of its ERISA Affiliates of the Pension Benefit Guaranty Corporation's intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan and (b) all notices received by the Borrower or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA; (iv) promptly, and in any event within 30 days after receipt thereof, a copy of any notice, summons, citation, directive, letter or other form of communication from any governmental authority or court in any way concerning any action or omission on the part of the Borrower or any of its Subsidiaries in connection with any substance defined as toxic or hazardous by any applicable federal, state or local law, rule, regulation, order or directive or any waste or byproduct thereof, or concerning the filing of a lien upon, against or in connection with the Borrower, its Subsidiaries, or any of their leased or owned real or personal property, in connection with a Hazardous Substance Superfund or a Post-Closure Liability Fund as maintained pursuant to (S) 9507 of the Internal Revenue Code; and (v) promptly, and in any event within 30 days after request, such other information and data with respect to the Borrower or any of its Subsidiaries as from time to time may be reasonably requested by the Bank and is reasonably available to Borrower. -15- (c) Corporate Existence, Etc. At all times preserve and keep in full ------------------------- force and effect its and its Subsidiaries' corporate existence and rights, licenses and franchises material to its business and those of each of its Subsidiaries; provided, however, that the corporate existence of any such -------- ------- Subsidiary may be terminated if such termination is in the best interest of the Borrower and is not materially disadvantageous to the holder of any Revolving Note. (d) Payment of Taxes and Claims. Pay, and cause each of its --------------------------- Subsidiaries to pay, all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. (e) Maintenance of Properties; Insurance. Maintain or cause to be ------------------------------------ maintained in good repair, working order and condition all material properties used or useful in the business of the Borrower and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. The Borrower will comply with any other insurance requirement set forth in any other Loan Document. (f) Inspection. Permit any authorized representatives designated by ---------- the Bank to visit and inspect any of the properties of the Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested. (g) Compliance with Laws Etc. Exercise, and cause each of its ------------------------- Subsidiaries to exercise, all due diligence in order to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including, without limitation, all rules and regulations of public utility commissions or similar regulatory authorities, and all environmental laws, rules, regulations and orders, noncompliance with which would materially adversely affect the business, properties, assets, operations or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole. (h) Hazardous Waste Studies. Promptly, and in any event within thirty ----------------------- (30) days after submission, provide the Bank with copies of all such investigations, studies, samplings and testings as may be requested by any governmental or regulatory authority relative to any substance defined as hazardous or toxic by any applicable federal, state or local law, rule, regulation, order or directive, or any waste or by-product thereof, at or affecting any real property or any facility owned, leased or used by the Borrower or any Subsidiary. The foregoing shall not include sampling and testing of water, waste water and effluent conducted by -16- the Subsidiaries of Borrower on periodic bases as a normal part of their water delivery and wastewater treatment businesses. (i) Year 2000 Compliance. Perform all acts reasonably necessary to -------------------- ensure that Borrower and any business in which Borrower holds a substantial interest, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, ------------------- hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. SECTION 6.02. Negative Covenants. So long as any Revolving Note ------------------ shall remain unpaid or the Bank shall have any Commitment hereunder, neither Borrower nor Southwest will, without the written consent of the Bank: (a) Leverage Ratio. At any time, permit the ratio of Consolidated -------------- Liabilities of Southwest to Consolidated Tangible Net Worth of Southwest to be more than 2.30:1:00 (b) Consolidated Tangible Net Worth of Borrower. At any time, permit ------------------------------------------- Consolidated Tangible Net Worth of Borrower to be less than $24,500,000. (c) Consolidated Tangible Net Worth of Southwest. At any time, permit -------------------------------------------- Consolidated Tangible Net Worth of Southwest to be less than $28,500,000. (d) Consolidated Net Profit of Borrower. At the end of any fiscal ----------------------------------- quarter of the Borrower, permit Consolidated Net Profit of Borrower, determined on a four quarter rolling basis, to be less than $1.00. (e) Consolidated Net Profit of Southwest of Southwest. At the end of ------------------------------------------------- any fiscal quarter of the Borrower, permit Consolidated Net Profit of Southwest, determined on a four quarter rolling basis, to be less than $1.00. (f) EBITDA Coverage Ratio of Southwest. At the end of any fiscal ---------------------------------- quarter of Borrower, permit the EBITDA Coverage Ratio of Southwest, determined on a four quarter rolling basis, to be less than 1.25:1.0. (g) Funded Debt of Borrower. At any time, permit Funded Debt of ----------------------- Borrower to exceed Bondable Capacity. (h) Liens Etc. Create or suffer to exist, or permit any of its --------- Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure any Debt of any Person other than (i) Liens in favor of the Bank; (ii) Liens reflected on the financial statements referred to in Section 5.01(e) hereof and other Liens existing on the date hereof and set forth in Schedule -------- 6.02(h) hereto; (iii) purchase money Liens upon or in any equipment acquired or - ------- held by the Borrower or any Subsidiary in the ordinary course of business up to a maximum of $500,000 to secure the purchase price of such equipment or to secure indebtedness incurred solely for the purpose of -17- financing the acquisition of such equipment: (iv) Liens existing on property acquired by the Borrower or any Subsidiary, and all refundings and extensions of any such Liens, and (v) Liens, deposits and/or pledges made to secure the performance of operating leases; provided that the principal amount of Debt secured by any such Lien permitted hereunder shall not exceed an amount equal to (x) one hundred percent (100%) of the cost of the real property subject to such lien or security interest or (y) one hundred percent (100%) of the cost of the personal property subject to such lien or security interest, and further provided that none of such liens or security interests shall extend to other assets of the Borrower or its Subsidiaries. The Bank acknowledges that the Borrower has an existing first mortgage indenture encumbering substantially all of its assets to secure three series (A, B and C) of first mortgage bonds. (i) Debt. Create, incur, assume or permit to exist, or permit any ---- Subsidiary to create, incur, assume or permit to exist, any indebtedness or liabilities resulting from borrowings, loans or advances, whether matured or unmatured, liquidated or unliquidated, joint or several, secured or unsecured, except for (i) Debt incurred pursuant to this Agreement and the other Loan Documents, (ii) Debts, revolving lines of credit and lease obligations of Borrower existing as of, and disclosed to Bank prior to the date of this Agreement (including $4,000,000 of unsecured debt of the Borrower to Mellon), (iii) secured indebtedness for purchase money financing of equipment which is permitted under Section 6.02(h)(iii) not to exceed an aggregate of $500,000, and (iv) unsecured funded bank debt not to exceed an aggregate of $8,000,000 at any time (including, without limitation, unsecured funded bank debt incurred pursuant to the Loan Documents and unsecured funded bank debt to Mellon as described in clause (ii) above). (j) Consolidation, Merger or Dissolution. (i) Consolidate with or ------------------------------------ merge into any other Person, (ii) wind up, liquidate or dissolve or (iii) agree to do any of the foregoing. (k) Loans, Investments, Secondary Liabilities. Make or permit to ----------------------------------------- remain outstanding, or permit any Subsidiary to make or permit to remain outstanding, any loan or advance to, or guarantee, induce or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person, except that the Borrower and its Subsidiaries may: (i) own, purchase or acquire certificates of deposit issued by a bank, commercial paper rated Moody's P-1, municipal bonds rated Moody's AA or better, direct obligations of the United States of America or its agencies, and obligations guaranteed by the United States of America; (ii) continue to own the existing capital stock of the Borrower's Subsidiaries; (iii) endorse negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (iv) make or permit to remain outstanding loans or advances to Southwest; provided, however, that any such outstanding loans or -------- ------- advances by Borrower to Southwest shall be evidenced by negotiable promissory notes, in form and substance satisfactory to Bank, and which notes shall provide for the assignment thereof to the Bank as collateral security for the repayment of the Loans and any other obligations of the Borrower hereunder upon the demand of the Bank; and -18- (v) make or permit to remain outstanding loans and advances to any of its officers, shareholders or affiliates or enter into or permit to remain outstanding guarantees in connection with the obligations of its officers, shareholders or affiliates, in an aggregate amount for all such loans, advances and guarantees not exceeding $100,000 in addition to the loans outstanding and reflected on the Borrower's financial statement dated March 31, 1999. (l) Asset Sales. Convey, sell, lease, transfer or otherwise dispose ----------- of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its or its Subsidiary's business, property or fixed assets outside the ordinary course of business, whether now owned or hereafter acquired, except that Borrower and its Subsidiaries may convey, sell, lease, transfer or otherwise dispose of business, property or fixed assets for consideration which in the aggregate does not exceed $500,000 per year. The foregoing covenant shall not extend to any property taken by eminent domain by any governmental authority or other person or entity having the power of eminent domain or to any sale in lieu of condemnation to a governmental authority or other person or entity having the power of eminent domain made after threat of condemnation by such governmental authority or other person or entity, or to the pending sale by Borrower of that certain parcel of real estate commonly known as 16340 East Maplegrove Street, La Puente, California, which property was the site of the former headquarters facility of Borrower and Southwest. (m) Hostile Tender Offers. Make any offer to purchase or acquire, or --------------------- consummate a purchase or acquisition of, five percent (5%) or more of the capital stock of any publicly held corporation or other publicly held business entity, unless the board of directors of such corporation or business entity has notified the Borrower that it invites or does not oppose such offer or purchase. (n) Distributions. Upon the occurrence and during the continuance of ------------- an Event of Default or Potential Event of Default, authorize, declare or pay, or permit any of its Subsidiaries to authorize, declare or pay, any Distributions. (o) Transactions with Affiliates. Neither Borrower nor any of its ---------------------------- Subsidiaries shall enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's or its Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or its Subsidiary than Borrower or its Subsidiary would obtain in a comparable arm's length transaction with an unaffiliated person. (p) Books and Records. Borrower will, and will cause each of its ----------------- Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of applicable law shall be made of all dealings and transactions in relation to its business and activities. (q) Restructure. Make any change in Borrower's financial restructure, ----------- the principal nature of Borrower's business operations (taken as a whole), or the date of its fiscal year. ARTICLE VII. EVENTS OF DEFAULT -19- SECTION 7.01. Events of Default. If any of the following events ----------------- ("Events of Default") shall occur and be continuing: ----------------- (a) Borrower shall fail to pay within three (3) days of the date when due, any principal, interest, fees or other amounts payable under any of the Loan Documents; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with the Loan Documents shall prove to have been incorrect in any material respect when made; or (c) Borrower shall fail to perform or observe any term, any affirmative or negative covenant, including, but not limited to, those covenants set forth in Sections 6.01 and 6.02 hereof, or any other agreement contained in this Agreement on its part to be performed or observed (other than those referred to in subsections (a) and (b) above); and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence; or (d) The Borrower or any of its Subsidiaries shall default in the performance of or compliance with any term contained in any Loan Document other than this Agreement and such default shall not have been remedied or waived within any applicable grace period in such Loan Document or in (c) above; or (e) an Event of Default shall occur under the Southwest Loan Documents; or (f) (i) The Borrower or any of its Subsidiaries shall (A) fail to pay any principal of, or premium or interest on, any Debt (including, without limitation, Debt owing to Mellon), the aggregate outstanding principal amount of which is at least $100,000 (excluding Debt evidenced by the Revolving Note), when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt, or (B) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt or material to the performance, business, property, assets, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, when required to be performed or observed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument; or (g) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days (Bank may, in its discretion, cease making Revolving Loans during the pendency of such action or proceeding); or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, -20- distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof (Bank may, in its discretion, cease making Revolving Loans during the pendency of such action or proceeding); or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (i), (ii) and (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance or reserves) equal to or greater than $250,000 and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (i) (i) The Borrower or any of its ERISA Affiliates fails to make full payment when due of all material amounts which, under the provisions of any Pension Plan or Section 412 of the Internal Revenue Code, the Borrower or any of its ERISA Affiliates is required to pay as contributions thereto and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (ii) any material accumulated funding deficiency occurs or exists, whether or not waived, with respect-to any Pension Plan and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (iii) the excess of the actuarial present value of all benefit liabilities under all Pension Plans over the fair market value of the assets of such Pension Plans (excluding in such computation Pension Plans with assets greater than benefit liabilities) allocable to such benefit liabilities are greater than five percent (5%) of Consolidated Tangible Net Worth and such development is not remedied or reversed within fifteen (15) days after the Borrower knows of such development; (iv) the Borrower or any of its ERISA Affiliates enters into any transaction which has as its principal purpose the evasion of liability under Subtitle D of Title IV of ERISA: (v) (A) Any Pension Plan maintained by the Borrower or any of its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA in a distress termination, or (B) a trustee shall be appointed by an appropriate United States district court in accordance with Section 4042 of ERISA to administer any Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan in accordance with Section 4042 of ERISA, or (D) the Borrower or any of its ERISA Affiliates shall withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date of the event listed in subclauses (A)-(D) above or any subsequent date, either the Borrower or its ERISA Affiliates has any material liability (such liability to include, without limitation, any liability to the Pension Benefit Guaranty Corporation, or any successor thereto, or to any other party under Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or otherwise associated with the events listed in subclauses (A)-(D) above; (vi) As used in this subsection 7.01(h) the term "accumulated funding deficiency" has the meaning specified in Section 412 of the Internal Revenue Code, and the term "benefit liabilities" has the meaning specified in Section 4001 of ERISA; -21- (j) There shall be instituted against the Borrower or any Subsidiary, or against any guarantor, any proceeding for which forfeiture of any property with a value of $250,000 or more is a potential penalty and such proceeding remains undismissed, undischarged or unbonded for a period of thirty (30) days from the date the Borrower knows of such proceeding; (k) A Change of Control shall have occurred; or (l) The mortgage bonds of the Borrower shall fail to maintain a NAIC rating of 1 or 2. Then, (i) upon the occurrence of any Event of Default described in clause 7.01(g) above, the Commitment shall immediately terminate and all Loans hereunder with accrued interest thereon, and all other amounts owing under the Loan Documents shall automatically become due and payable, and (ii) upon the occurrence of any other Event of Default, the Bank may, by notice to the Borrower, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate; and, by notice to the Borrower, declare the Loans hereunder, with accrued interest thereon, and all other amounts owing under the Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including, without limitation, the right to resort to any or all security for any credit accommodation from the Bank subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank in connection with each of the Loan Documents may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Notwithstanding any other provision of this Agreement, including Section 8.02, notices to the Borrower under this Section shall be communicated in writing (including telex or facsimile transmissions). ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any --------------- provision of the Loan Documents nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.02. Notices, Etc. Except as otherwise set forth in this ------------ Agreement, all notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed certified mail, return receipt requested or sent by facsimile or delivered, if to the Borrower, at its address set forth on the signature page hereof; and if to the Bank, at its address set forth on the signature page hereof; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective upon personal delivery or upon receipt when sent by facsimile, or on the date of receipt or refusal indicated on the return receipt if sent by certified mail, except that notices and communications to the Bank pursuant to Article II or VII shall not be effective until received by the Bank. -22- SECTION 8.03. Right of Setoff: Security Interest in Deposit ---------------------------------------------- Accounts. Upon and only after the occurrence of any Event of Default not cured - -------- within any applicable grace period, the Bank is hereby authorized by the Borrower, at any time and from time to time, without notice, (a) to set off against, and to appropriate and apply to the payment of, the obligations and liabilities of the Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by the Bank to the Borrower (whether payable in Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as the Bank in its sole discretion may elect. The Borrower hereby grants to the Bank a security interest in all deposits and accounts maintained with the Bank and with any other financial institution. The Bank is authorized to debit any account maintained with it by the Borrower for any amount of principal, interest or fees which are then due and owing to the Bank. SECTION 8.04. No Waiver; Remedies. No failure on the part of either ------------------- party hereto to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.05. Costs and Expenses. Borrower shall pay to Bank ------------------ immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and each other of the Loan Documents, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents (including, without limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings) or the restructuring of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including, without limitation, any action for declaratory relief. SECTION 8.06. Participations. The Bank may sell, assign, transfer, -------------- negotiate or grant participations to other financial institutions in all or part of the obligations of the Borrower outstanding under the Loan Documents, provided that any such sale, assignment, transfer, negotiation or participation shall be in compliance with the applicable federal and state securities laws; and provided further that any assignee or transferee agrees to be bound by the terms and conditions of this Agreement. The Bank may, in connection with any actual or proposed assignment or participation, disclose to the actual or proposed assignee or participant, any information relating to the Borrower or any of its Subsidiaries. SECTION 8.07. Effectiveness: Binding Effect. This Agreement shall ----------------------------- become effective when it shall have been executed by the Borrower and the Bank and thereafter shall be binding upon and inure to the benefit of the Borrower, the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. SECTION 8.08. Governing Law. The validity, interpretation and ------------- enforcement of this Agreement and the other Loan Documents and any dispute arising out of the relationship -23- between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). SECTION 8.09. Arbitration. ----------- (a) Arbitration. Upon the demand of any party, any Dispute shall be ----------- resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by --------------- the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in the County of Los Angeles, California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No ---------------------------------------------------------- provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be -------------------------------------------- active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in -24- controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, --------------- in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (A) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (B) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (C) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (1) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (2) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding -------------------------------------------- anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the ------------- arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. SECTION 8.10. Waiver of Notices. Borrower hereby expressly waives ----------------- demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments, included in or evidencing any of the obligations, and any and all other demands -25- and notices of any kind or nature whatsoever with respect to the obligations and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Bank may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. SECTION 8.11. Entire Agreement. This Agreement with Exhibits and ---------------- Schedules and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 8.12. Separability of Provisions. In case any one or more of -------------------------- the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 8.13. Execution in Counterparts. This Agreement may be ------------------------- executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BANK OF AMERICA SUBURBAN WATER SYSTEMS NATIONAL TRUST AND SAVINGS ASSOCIATION By:/s/ PAUL F. SUTHERLEN By: /s/ DANIEL N. EVANS ---------------------- ------------------- Name: Name: Daniel N. Evans Title: Vice President Title: Vice President - Finance Chief Financial Officer By: /s/ STEPHEN J. MUZI ------------------- Name: Stephen J. Muzi Title: Treasurer Address: Address: Los Angeles Regional Commercial 1211 E. Center Court Drive Commercial Banking Office Covina, California 91724-3603 525 South Flower Street Attention: Daniel N. Evans Mezzanine Level Vice President of Finance Los Angeles, CA 90071 Chief Financial Officer Attention: Paul F. Sutherlen Title: Vice President Facsimile: (626) 915-1558 Facsimile: (213) 345-6983 -26- SCHEDULE 5.01(f) - LITIGATION ----------------------------- None other than as reported on Form 10-Q of Southwest for quarter ended March 31, 1999, and Form 10-K of Southwest for year ended December 31, 1998. -27- SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS ---------------------------------------- See Form 10-Q of Southwest for quarter ended March 31, 1999, and Form 10-K of Southwest for year ended December 31, 1998. -28- SCHEDULE 6.02(h) - LIENS ------------------------ None except as disclosed in the audited consolidated financial statements of Southwest for the fiscal year ended December 31, 1998. -29- EXHIBIT A REVOLVING NOTE $4,000,000 Los Angeles, California July 30, 1999 FOR VALUE RECEIVED, the undersigned SUBURBAN WATER SYSTEMS, a California corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A. ("Bank") at its office at 525 South Flower Street, Mezzanine Level, Los Angeles, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Million Dollars ($4,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) either (i) at a fluctuating rate per annum equal to the Reference Rate minus one quarter (0.25) of a percentage point in effect from time to time, or (ii) at an optional rate per annum determined by Bank to be one and one-quarter (1.25%) percentage points above Bank's IBOR in effect on the first day of the applicable IBOR Rate Term. When interest is determined in relation to the Reference Rate, each change in the rate of interest hereunder shall become effective on the opening of business on the day specified in the public announcement of a change in Bank's Reference Rate. With respect to each IBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable IBOR Rate Term thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. A. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each: 1. "Business Day" means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation, or for amounts bearing interest at an offshore rate, a Business Day is any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation on which Bank is open for business in California and dealing in offshore dollars. 2. "IBOR Rate Portion" means a portion of the principal amount outstanding under this Note which is bearing interest at a rate related to IBOR. No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars ($250,000). 3. "IBOR Rate Term" means a period commencing on a Business Day and continuing for no shorter than one (1) month and no longer than six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank's IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled Maturity Date hereof. The last day of the interest period will be determined by Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would end on a day which is not a Business Day, then such IBOR Rate Term shall be extended to the next succeeding Business Day. -1- 4. "IBOR Rate" means the interest rate determined by the following formula, rounded upward, if necessary, to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by Bank as of the first day of the interest period.) IBOR Rate = IBOR Base Rate -------------------------------------------- (1.00 - Reserve Percentage) (a) "IBOR Base Rate" means the interest rate at which Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (b) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. 5. "Reference Rate" means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by Bank based on various factors, including Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. Bank may price loans to its customers at, above or below the Reference Rate. B. INTEREST: 1. Payment of Interest. Interest accrued on this Note shall be payable ------------------- on the first day of each month, commencing September 1, 1999. 2. Selection of Interest Rate Options. At any time any portion of this ---------------------------------- Note bears interest determined in relation to Bank's IBOR, it may be continued by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Reference Rate or in relation to Bank's IBOR for a new IBOR Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Reference Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank's IBOR for a IBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the IBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the IBOR option is selected, the length of the applicable IBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each IBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate Term. For each IBOR option requested hereunder, Bank will quote the applicable IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first day of the IBOR Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re- determination by Bank of the applicable IBOR Rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is -2- given, then the quoted rate shall expire and Bank shall have no obligation to permit a IBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any IBOR Rate Term, Borrower shall be deemed to have made a Reference Rate interest selection for such advance or the principal amount to which such IBOR Rate Term applied. 3. Additional IBOR Provisions. -------------------------- (a) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank's IBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, than (i) no new IBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank's IBOR, subsequent to the end of the IBOR Rate Term applicable thereto, shall bear interest determined in relation to the Reference Rate. (b) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (i) to make IBOR options available hereunder, or (ii) to maintain interest rates based on Bank's IBOR, then in the former event, any obligation of Bank to make available such unlawful IBOR options shall immediately be cancelled, and in the latter event, any such unlawful IBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Reference Rate; provided however, that if any such Change in Law shall permit any IBOR-based interest rates to remain in effect until the expiration of the IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates shall continue in effect until the expiration of such IBOR Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any IBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (c) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (i) subject Bank to any tax, duty or other charge with respect to any IBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (ii) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of advances or loans by, or any other acquisition of funds by any office of Bank; or (iii) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any IBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon -3- demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such IBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any IBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. 4. Default Interest. During the continuance of an Event of Default, the ---------------- outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) equal to two percent (2%) above the rate of interest from time to time applicable to this Note. C. BORROWING AND REPAYMENT: 1. Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and re-borrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on the "Maturity Date" (as defined in the Credit Agreement). 2. Advances. Advances hereunder, to the total amount of the principal -------- sum stated above, may be made by the holder at the oral or written request of (a) Anton C. Garnier, Peter J. Moerbeek, Thomas C. Tekulve, Michael O. Quinn, Daniel N. Evans or Stephen J. Muzi, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. 3. Application of Payments. Each payment made on this Note shall be ----------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof. Unless instructed otherwise by Borrower, all payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Reference Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank's IBOR, with such payments applied to the oldest IBOR Rate Term first. 4. Prepayment. ---------- (a) Reference Rate. Borrower may prepay principal on any portion of this -------------- Note which bears interest determined in relation to the Reference Rate at any time, in any amount and without penalty. -4- (b) IBOR. Each prepayment of an IBOR Rate Portion, whether voluntary, by ---- reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). Bank will have no obligation to accept an election of an IBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not available in the offshore dollar inter-bank market; or (ii) the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion. Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Reference Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). D. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of July 30, 1999, as amended from time to time, including, without limitation, those terms relating to arbitration of Disputes (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. E. MISCELLANEOUS: 1. Remedies. Upon the occurrence of any Event of Default, the holder of -------- this Note, at the holder's option, without notice upon the occurrence of an Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with notice upon the occurrence of any other Event of Default, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of -5- which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower. 2. Obligations Joint and Several. Should more than one person or entity ----------------------------- sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 3. Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California. 4. Defined Terms. All capitalized terms not herein defined shall have ------------- the meanings given to them in the Credit Agreement. "Borrower" SUBURBAN WATER SYSTEMS, a California corporation By:/s/DANIEL N. EVANS ------------------- Daniel N. Evans Vice President - Finance Chief Financial Officer By:/s/STEPHEN J. MUZI ------------------- Stephen J. Muzi Treasurer -6- EX-10.13B 8 2ND AMEND. CREDIT AGREEMENT - MELLON BANK N.A. EXHIBIT 10.13B -------------- EXHIBIT A --------- SOUTHWEST WATER COMPANY SECOND AMENDED AND RESTATED PROMISSORY NOTE $4,000,000.00 September 29, 1999 West Covina, California FOR VALUE RECEIVED, SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (the "Bank") -------- ---- on the Maturity Date (as defined in the Credit Agreement referred to below) the principal amount of Four Million Dollars ($4,000,000.00), or, if less, the aggregate amount of Revolving Loans (as defined in the Credit Agreement referred to below) made by the Bank to the Borrower pursuant to the Credit Agreement referred to below outstanding on the Maturity Date. The Borrower also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement. All unpaid amounts of principal and interest shall be due and payable in full on the Maturity Date. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of the Bank located at Three Mellon Bank Center, 23rd Floor/Loan Administration, Pittsburgh, Pennsylvania 15259 or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Until notified of the transfer of this Note, the Borrower shall be entitled to deem the Bank or such person who has been so identified by the transferor in writing to the Borrower as the holder of this Note, as the owner and holder of this Note. Each of the Bank and any subsequent holder of this Note agrees that before disposing of this Note or any part hereof, it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid on the schedule attached hereto, if any; provided, however, that the failure to make notation of any -------- ------- payment made on this Note shall not limit or otherwise affect the obligation of the Borrower hereunder with respect to payments of principal or interest on this Note. This Note is referred to in, and is entitled to the benefits of, the Amended and Restated Credit Agreement dated as of December 23, 1997, as amended from time to time (the "Credit Agreement") between the Borrower and the Bank. ---------------- The Credit Agreement, among other things, (i) provides for the making of advances (the "Loans") by the Bank to the Borrower from time to time in an ----- aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Loan being evidenced by this Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. The Borrower promises to pay all costs and expenses, including reasonable attorneys' fees, incurred in the collection and enforcement of this Note. The Borrower hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. This Note amends and restates in its entirety that certain Amended and Restated Promissory Note dated as of September 1, 1998 in the amount of Two Million Dollars ($2,000,000) made by Borrower payable to the order of Bank pursuant to the Credit Agreement. IN WITNESS WHEREOF, the Borrower has caused this Notice to be executed and delivered by its duly authorized officers, as of the date and the place first above-written. SOUTHWEST WATER COMPANY By: /s/ THOMAS C. TEKULVE ------------------------------------- Name: Thomas C. Tekulve Title: Vice President - Finance By: /s/ STEPHEN J. MUZI ------------------------------------- Name: Stephen J. Muzi Title: Corporate Controller Exhibit A-2 TRANSACTIONS ON NOTE
Amount of Amount of Interest Paid Principal Notation Loan Made Principal Paid Interest Paid Through Balance Made By - --------- -------------- ------------- ------- ------- -------
Exhibit A-3 EX-10.14B 9 2ND AMEND. CREDIT AGREE. SUBURBAN-MELLON BANK EXHIBIT 10.14B EXHIBIT A --------- SUBURBAN WATER SYSTEMS SECOND AMENDED AND RESTATED PROMISSORY NOTE $4,000,000.00 September 29, 1999 Covina, California FOR VALUE RECEIVED, SUBURBAN WATER SYSTEMS, a California corporation (the "Borrower"), promises to pay to the order of MELLON BANK, N.A. (the "Bank") -------- ---- on the Maturity Date (as defined in the Credit Agreement referred to below) the principal amount of Four Million Dollars ($4,000,000.00), or, if less, the aggregate amount of Revolving Loans (as defined in the Credit Agreement referred to below) made by the Bank to the Borrower pursuant to the Credit Agreement referred to below outstanding on the Maturity Date. The Borrower also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement. All unpaid amounts of principal and interest shall be due and payable in full on the Maturity Date. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of the Bank located at Three Mellon Bank Center, 23rd Floor/Loan Administration, Pittsburgh, Pennsylvania 15259 or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Until notified of the transfer of this Note, the Borrower shall be entitled to deem the Bank or such person who has been so identified by the transferor in writing to the Borrower as the holder of this Note, as the owner and holder of this Note. Each of the Bank and any subsequent holder of this Note agrees that before disposing of this Note or any part hereof, it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid on the schedule attached hereto, if any; provided, however, that the failure to make notation of any -------- ------- payment made on this Note shall not limit or otherwise affect the obligation of the Borrower hereunder with respect to payments of principal or interest on this Note. This Note is referred to in, and is entitled to the benefits of, the Credit Agreement dated as of December 23, 1997, as amended from time to time (the "Credit Agreement") between the Borrower and the Bank. The Credit ---------------- Agreement, among other things, (i) provides for the making of advances (the "Loans") by the Bank to the Borrower from time to time in an aggregate amount - ------ not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Loan being evidenced by this Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. The Borrower promises to pay all costs and expenses, including reasonable attorneys' fees, incurred in the collection and enforcement of this Note. The Borrower hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waives diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. This Note amends and restates in its entirety that certain Amended and Restated Promissory Note dated as of September 1, 1998 in the amount of Four Million Dollars ($4,000,000) made by Borrower payable to the order of Bank pursuant to the Credit Agreement. IN WITNESS WHEREOF, the Borrower has caused this Notice to be executed and delivered by its duly authorized officers, as of the date and the place first above-written. SUBURBAN WATER SYSTEMS By: /s/ DANIEL N. EVANS ------------------------------------- Name: Daniel N. Evans Title: Vice President - Finance Chief Financial Officer By: /s/ STEPHEN J. MUZI ------------------------------------- Name: Stephen J. Muzi Title: Treasurer Exhibit A-2 TRANSACTIONS ON NOTE
Amount of Amount of Interest Paid Principal Notation Loan Made Principal Paid Interest Paid Through Balance Made By - --------- -------------- ------------- ------- ------- -------
Exhibit A-3 EX-10.16 10 AGREE.BETWEEN SUBURBAN & CITY OF WEST COVINA AGREEMENT BETWEEN SUBURBAN WATER SYSTEMS AND THE CITY OF WEST COVINA, CALIFORNIA FOR THE ACQUISITION OF THE CITY'S WATER UTILITY SYSTEM TABLE OF CONTENTS
Page ---- ARTICLE 1. Definitions and Statement of Purpose............................... 2 1.1 Statement of Purpose............................................... 2 1.2 Definitions........................................................ 2 ARTICLE 2. PROCEDURES FOR PURCHASE............................................ 4 2.1 Closing............................................................ 4 2.2 Closing Conveyances................................................ 4 2.3 Escrow and Escrow Agent............................................ 4 2.4 Closing Costs...................................................... 5 2.5 Certain Assets..................................................... 5 2.6 Plant 118.......................................................... 8 2.7 Hassen Facilities.................................................. 8 ARTICLE 3. Purchase Price, ALLOCATION OF REVENUES and costs................... 9 3.1 Purchase of Water System........................................... 9 3.2 Purchase Price..................................................... 9 3.3 Allocation of Costs................................................ 9 3.4 Allocation of Revenues............................................. 10 3.5 Adjustments Outside of Escrow...................................... 10 3.6 Possession......................................................... 10 3.7 Claims............................................................. 11 ARTICLE 4. Water rates and Service Provisions................................. 11 4.1 City Rates......................................................... 11 4.2 Water Rates and Billing By Company................................. 11 4.3 Fire Hydrant Services.............................................. 12 4.4 Connections or Main Extensions Subsequent to Closing............... 12 4.5 Capital Additions.................................................. 12 4.6 Water Supply From Company Subsequent to Closing.................... 13 4.7 Reclaimed Water.................................................... 13 ARTICLE 5. Conditions to Obligations.......................................... 13 5.1 Statutory Prerequisites............................................ 13 5.2 Defeasance of Water Revenue Bonds.................................. 14 5.3 Approval of Property, Books and Records............................ 15 5.4 Consents........................................................... 15 5.5 Easements.......................................................... 15 5.6 Franchises to Operate.............................................. 16 5.7 Other Approvals.................................................... 16 5.8 Title Approval and Commitment...................................... 16 5.9 Absence of Certain Events.......................................... 17
i Page ---- 5.10 Lender Matters..................................................... 17 5.11 Accuracy of Representations and Warranties......................... 18 ARTICLE 6. Representations and Warranties of the City......................... 19 6.1 Political Existence................................................ 19 6.2 Authorization...................................................... 19 6.3 No Breach.......................................................... 19 6.4 Financial Statements............................................... 20 6.5 Title to Assets.................................................... 20 6.6 Warranty to Preserve and Maintain.................................. 20 6.7 Contractual Freeze................................................. 21 6.8 Insurance.......................................................... 21 6.9 Pending Litigation................................................. 21 6.10 Transfer of Operational Authority.................................. 21 6.11 Compliance with Applicable Laws.................................... 21 6.12 Opinion of City Attorney........................................... 22 6.13 Indemnification.................................................... 23 6.14 Notice by City..................................................... 23 ARTICLE 7. Representations and Warranties of the Company...................... 24 7.1 Existence and Power................................................ 24 7.2 Authorization of Agreement......................................... 24 7.3 Agreement to Create No Default..................................... 24 7.4 Pending Litigation................................................. 24 7.5 Opinion of Company Attorney........................................ 25 ARTICLE 8. Covenants of the Company........................................... 25 8.1 Local Telephone Lines.............................................. 25 8.2 Indemnification.................................................... 25 8.3 Holding Costs to Customers......................................... 26 8.4 Property Taxes..................................................... 26 ARTICLE 9. Covenants of the city.............................................. 26 9.1 Performance........................................................ 26 9.2 Books and Records.................................................. 26 9.3 Conduct of Business................................................ 27 9.4 Taxes and Fees..................................................... 27 9.5 Accounts Payable................................................... 27 9.6 Utilities.......................................................... 27 ARTICLE 10. Miscellaneous...................................................... 27 10.1 Company's and City's Liability for Fees............................ 27 10.2 Survival of Representations and Warranties......................... 28 10.3 Bulk Sales......................................................... 28 10.4 Notices............................................................ 28 10.5 Section Headings................................................... 29
ii Page ---- 10.6 Governing Law...................................................... 29 10.7 Entire Agreement and Amendment..................................... 29 10.8 Expense of Litigation.............................................. 29 10.9 Counterparts....................................................... 30 10.10 Effectiveness...................................................... 30 10.11 Interest........................................................... 30 10.12 Severability....................................................... 30 10.13 City Employees..................................................... 30 10.14 Exclusive Negotiating Agreement and LOI............................ 30 10.15 Indemnities........................................................ 31 10.16 Escrow Agent Not to be Concerned................................... 31 10.17 Brokers............................................................ 31 10.18 Arm's Length Transaction........................................... 31 10.19 Further Instruments................................................ 31 10.20 Exhibits To Be Added............................................... 32
iii EXHIBIT 10.16 AGREEMENT BETWEEN SUBURBAN WATER SYSTEMS AND THE CITY OF WEST COVINA, CALIFORNIA FOR THE ACQUISITION OF THE CITY'S WATER UTILITY SYSTEM - -------------------------------------------------------------------------------- THIS AGREEMENT (the "Agreement") is made and entered into this 1st day of February, 2000, by and between SUBURBAN WATER SYSTEMS, a California corporation (the "Company") and THE CITY OF WEST COVINA, CALIFORNIA, a municipal corporation (the "City"), with respect to the following: RECITALS -------- A. The City is a municipal corporation operating a municipal water utility system pursuant to California Public Utilities Code (S) 10001, et seq., as amended (the "Code"), as modified, with respect to the City, by the special legislation contained in Code (S) 10061.3. B. The Company is a California corporation and a public utility water corporation regulated by the California Public Utilities Commission ("CPUC") providing retail water service to customers in portions of Los Angeles and Orange Counties, California. C. The Company is willing and able to deliver retail water service to the City's current and future water customers. D. The parties have entered into a letter of intent dated August 3, 1999, as amended on September 9, 1999 (collectively, the "LOI"), setting out the principal terms upon which the Company shall acquire the water utility system of the City. E. As required by the special legislation covering the sale, on December 7, 1999, a majority of those customers of the City's water system located within the City and casting ballots voted in favor of the sale based upon the terms and conditions set forth in the LOI. On such date, the City Council certified such vote and approved the sale. F. The City has determined to sell and the Company wishes to purchase the entire City water system. The City and the Company enter into this Agreement to carry out such purchase and sale. AGREEMENT --------- NOW, THEREFORE, for good and valuable consideration described herein, the receipt and adequacy of which are hereby acknowledged, the City and the Company agree as follows: ARTICLE 1. DEFINITIONS AND STATEMENT OF PURPOSE 1.1 Statement of Purpose. The City is entering into this Agreement for -------------------- the benefit of the Customers, as defined below, by divesting itself of the Water System, as defined below, and its operation in order to stabilize rates and assure water availability, quality and delivery to Customers. 1.2 Definitions. The following definitions shall apply to the following ----------- terms as used herein: (a) "Capital Additions" -- water system additions, improvements and replacements which are or upon completion will become a part of the Water System, whether built by the City or dedicated by a developer. (b) "City's Water Rates" or "Rates" -- the rates in effect on February 1, 2000 for water service provided by the Water System as approved by the City Council and attached hereto as Exhibit A. --------- (c) "Closing" -- the consummation of the sale of the Water System, as defined below, pursuant to Section 2.1. (d) "Closing Date" -- the date upon which the Closing occurs pursuant to Section 2.1. (e) "Customer Service Connection" -- the point of connection of the customer's piping with the meter and service pipe of the Water System, but not including the meter (meter box and meter keystop service). (f) "Customer Service Deposits" -- funds, if any, collected by the City as security for the payment of bills for water service. (g) "Customers" -- all persons, firms, associations, corporations and governmental authorities supplied or entitled to be supplied with water service for compensation through the Water System on the Date of this Agreement, and those added prior to and after the Closing. (h) "Date of this Agreement" -- the Date of this Agreement identified in the first paragraph hereof. (i) "LOI" -- has the meaning set forth in Recital D. (j) "Purchase Price" -- the purchase price payable by the Company for the Water System at the Closing pursuant to Section 3.2 below. (k) "Reclaimed Water" -- non-potable water which cannot be used for human consumption but which is of sufficient quality to be used for irrigation purposes. 2 (l) "Water Revenue Bonds" -- all outstanding bonds or certificates of participation issued by the City (i) payable from revenues arising from the operation of the Water System, (ii) constituting a lien or encumbrance on such revenues or on the property of the Water System, and/or (iii) which have terms limiting the ability of the City to sell or convey the Water System or either the Walnut Portion or West Covina Portion thereof. Water Revenue Bonds do not include the City's participation agreement with Walnut Valley Water District and Valencia Heights Water Company, which participation agreement shall be treated pursuant to Section 2.5 of this Agreement. (m) "Water System" -- all water mains and related appurtenances, pumping stations, reservoirs, service lines, meters, hydrants, equipment, real property, easements, and permits and all other assets of whatsoever kind, regardless of whether located within or outside the City's municipal limits, which are, or in the future would be, part of the transmission, storage and distribution system utilized to provide water service to the Customers generally as set out on the City's June 30, 1998 balance sheet attached hereto as Exhibit ------- B (the "Balance Sheet"). The term "Water System" excludes (a) Customer Service - - Connections which are and shall remain the property of Customers, (b) cash and accounts receivable and Customer Service Deposits (which shall remain the property of the City or the Customers, as applicable), (c) liabilities incurred prior to the Closing Date, contingent or otherwise, which shall remain the responsibility of the City except as expressly provided herein to the contrary, (d) vehicles and tools used in the operation of the Water System (which shall remain the property of the City) and (e) the City's inventory of pipe, meters, meter boxes, fire hydrants and other parts used by the City in the operation of the Water System (which inventory shall remain the property of the City). The Water System shall include, and there shall be transferred to the Company on the Closing Date, copies of books and records relating to the Water System as reasonably requested by the Company and all capital stock (i.e., water rights) of Covina Irrigating Company owned by the City and the City's connection, through the Upper District, to the Metropolitan Water District. The Water System also includes, without limitation, each asset which, pursuant to Section 2.5 below, is to be transferred to the Company. The Water System consists of two components for purposes of this sale. One component consists of those portions of the Water System located outside of the geographical boundaries of the City and includes approximately 2,800 Customer Service Connections (the "Walnut Portion") as set out on the system map attached hereto as Exhibit C. The other component consists of those portions of --------- the Water System located inside of the geographical boundaries of the City and includes approximately 4,200 Customer Service Connections (the "West Covina portion") as set out on the system map attached hereto as Exhibit D. As part of --------- this sale, the Company is purchasing all Water System assets of both the Walnut --- ---- Portion and the West Covina Portion, except as specified to the contrary in this subsection (m) and in Section 2.5 below. Other terms used in this Agreement and defined at various places in this Agreement shall have the meanings given to such terms in the definitions thereof. 3 ARTICLE 2. PROCEDURES FOR PURCHASE 2.1 Closing. The City agrees to sell and transfer to the Company, and the ------- Company agrees to purchase and pay for, the Water System. Except as otherwise expressly set forth herein, the Water System shall be free and clear of all liens, claims and encumbrances. The sale of the Water System shall occur on or before February 25, 2000. If, however, the parties are unable to close on such date, the parties shall use all reasonable efforts to close as soon thereafter as possible. 2.2 Closing Conveyances. The Closing shall be held on the Closing Date at ------------------- a mutually acceptable location in Los Angeles County or Orange County. At the Closing, the City shall deliver to the Company such deeds, bills of sale, assignments, easements, and other instruments of transfer or conveyance (including those provided for in Section 2.5) as may be necessary to vest in the Company all of the City's title to the Water System. All such transfer documents shall be prepared by the attorneys for the Company and shall be in form and substance satisfactory to the City and the Company. The City shall draft the necessary documentation for the defeasance of the Water Revenue Bonds, and all transfer documents relating to real property and interests therein or releasing or reconveying the lien securing the Water Revenue Bonds shall be satisfactory to the Company and Chicago Title Company ("Chicago" or "Escrow Agent"). At the Closing, the Company shall also deliver to Escrow Agent the relevant Purchase Price and the reimbursement due to the City pursuant to Section 5.1 below (if not previously delivered to the City) in immediately available funds and each party shall deliver to Escrow Agent all other documents to be delivered by either party to the other pursuant to this Agreement. Promptly following such deliveries, the Escrow Agent shall record or file all documents to be recorded or filed, shall issue the policy of title insurance provided for in Section 5.8, shall, except as set forth in Section 5.2, deliver the Purchase Price to the City and shall deliver to the parties all other documents to be delivered to the parties pursuant to this Agreement. All documents to be delivered and the Purchase Price shall be deemed delivered concurrently. 2.3 Escrow and Escrow Agent. The Closing of the transaction provided for ----------------------- herein shall be effected through a sale escrow (the "Escrow") to be established at Chicago as "Escrow Agent," 16969 Von Karman Avenue, Irvine, California 92614. The provisions of this Agreement shall also constitute escrow instructions to Escrow Agent. In addition, the parties agree to promptly execute and deliver to Escrow Agent such supplemental instructions and such Escrow Agent's general terms and conditions as shall not be inconsistent with the terms and provisions of this Agreement and as shall be requested by Escrow Agent. Escrow shall be opened by delivery of fully executed counterparts of this Agreement to Escrow Agent within three (3) business days after the execution and delivery of this Agreement by the parties. All deliveries required to be made pursuant to this Agreement shall be made through the Escrow and all deliveries shall be made at the Closing. 2.4 Closing Costs. Except as expressly provided to the contrary herein, ------------- the City shall pay all costs incurred to satisfy all conditions for which the City is responsible. The Company shall pay all Escrow Agent's fees and costs, the title insurance premium, any and all additional 4 premiums or costs required for ALTA coverage and for any title endorsements requested by the Company, for all recording and filing fees, for all costs incurred to satisfy all conditions for which the Company is responsible and those costs to be paid by the Company pursuant to Section 5.1. Any additional closing costs shall be paid by the party which causes such costs to be incurred or in accordance with Southern California escrow practice if one party is not clearly responsible for a particular cost. The Company shall deposit at Closing, in addition to the Purchase Price, the Company's share of closing costs pursuant to this Section and not paid outside of Escrow. The City's share of such closing costs, to the extent not paid outside of Escrow, shall be deducted by Escrow Agent from the Purchase Price prior to delivery of the Purchase Price to the City. The Company agrees that all title and escrow work with respect to the Water System being performed by Chicago at the request of the Company shall be paid for by the Company. 2.5 Certain Assets. For the purposes of the sale of the Water System it -------------- is agreed that: (a) Grand Avenue Pipeline. The City is a party to a certain Grand --------------------- Avenue Pipeline Participation Agreement dated November 14, 1988 (the "Participation Agreement"), pursuant to which a certain pipeline (the "Grand Avenue Line") was constructed by a non-profit corporation formed by one of the parties to the Participation Agreement. The City and the Company agree that the City's interest under the Participation Agreement (the "Interest") is an asset of the Water System. In connection with the Interest, the parties shall proceed as follows: (i) Each of Walnut Valley Water District ("Walnut Valley") and Valencia Heights Water Company ("Valencia"), the other parties to the Participation Agreement, had a right of first refusal to purchase a portion of the Interest. Valencia has, by letter to the City dated September 30, 1999, declined to purchase its portion of the Interest upon a sale thereof by the City. The City has, by letter dated January 7, 2000 and in form and substance satisfactory to the Company, notified Walnut Valley in writing that: (A) The City proposes to sell the Interest to the Company as a part of the Water System on the terms and conditions set forth in this Agreement; (B) The portion of the Purchase Price allocated to the Interest is $2,946,143; (C) Valencia has declined to exercise its right of first refusal and that Walnut Valley has indicated its intention to acquire the entire Interest; (D) Subject to Walnut Valley confirming its exercise of its right of first refusal, payment for the Interest will be in cash in the amount of $2,946,143 payable into the Escrow on the Closing Date against delivery of a mutually approved assignment and assumption agreement with Walnut Valley. The form and substance of the notice was approved in advance by the Company. Walnut Valley has exercised its right of first refusal by letter dated January 24, 2000. A copy of such letter shall be furnished to the Company. 5 (ii) Assuming that Walnut Valley timely and properly confirms the exercise of its right of first refusal by deposit of such funds into Escrow, then: (A) Concurrently with the Closing, the City shall sell and assign the interest to Walnut Valley for $2,946,143; and (B) The Purchase Price paid by the Company shall be reduced by $2,946,143 (to $8,553,857). (iii) If Walnut Valley declines to confirm its exercise of the right of first refusal and fails to complete the purchase of the Interest at the time and in the manner set forth in the City's notice, then: (A) At the Closing, the City shall assign to the Company all right, title and interest of the City in the Interest and the Company shall assume all obligations of the City pursuant to the Participation Agreement accruing subsequent to the Closing Date. The Company shall not assume any obligation with respect to any bonds or other financing issued by the City with respect to the facilities which are the subject of the Participation Agreement. The assignment and assumption agreement shall be in form and substance reasonably satisfactory to the City and the Company. (B) The Company shall cooperate with the City as reasonably requested by the City in effecting such transfer, but such cooperation covenant shall not require the Company to bear any costs which are the responsibility of the City or to assume any obligations in addition to those to be assumed by the Company pursuant to this Agreement. (C) There shall be no reduction in the Purchase Price provided for in Sections 2.5 and 3.1. (D) The Company agrees that any issues between the City and Walnut Valley as to bond payments relating to the Grand Avenue Line are between the City and Walnut Valley only, are outside the scope of this Agreement and are not to involve the Company. (iv) The City is a party to a reimbursement agreement associated with the Participation Agreement pursuant to which the City pays to Walnut Valley the sum of approximately $23,000 per year (the "District Payment"). Responsibility for the District Payment shall be assumed by the Company as a part of the purchase of the Water System if but only if the Company acquires the City's Interest. (b) Galster Pump Station. Included within the Water System is a -------------------- pumping station (the "Galster Facility") located within Galster Park, a public park owned and operated by the City. As a part of the sale of the Water System, the City shall: (i) Convey the Galster Facility (without the real property) to the Company by means of a bill of sale; 6 (ii) Grant to the Company an exclusive easement to use, maintain and operate the Galster Facility in its present location; (iii) Grant to the Company a non-exclusive easement to operate, maintain, repair, replace, etc. any service line located within Galster Park and running to or from the Galster Facility; and (iv) Confirm the Company's rights as a franchisee to use the public right of way in Galster Way. Such bill of sale and easement agreements shall be prepared by the Company at its cost and shall be subject to the approval of the City, not to be unreasonably withheld or delayed. The area encompassed by the easement described in clause (ii) shall be sufficient in size to encompass the Galster Facility and building enclosure, to permit repair and replacement thereof and to permit vehicular access from the adjacent public street. The easement provided for in clause (iii) shall be sufficient to reasonably accommodate all permitted activities with respect to such service line. The Company shall prepare all legal descriptions and depictions required with respect to such easements, at the expense of the Company. (c) Fire Hydrants. Without limiting the generality of the ------------- definition thereof, the Water System shall include all fire hydrants owned and served by the City as of the Closing Date. All such fire hydrants (and the pipelines serving such hydrants) shall be transferred to the Company by means of a bill of sale. To the extent that any such hydrant is not located in a public right-of-way, the City shall, (i) to the extent such hydrant is located in an area covered by a single purpose easement, assign such easement to the Company and (ii) to the extent such hydrant is located in a general utility easement area, grant to the Company an easement to maintain such hydrant and pipeline in such easement area. All such instruments shall be prepared by the Company at its expense and shall be subject to the approval of the City, not to be unreasonably withheld or delayed. (d) Sites For Future Improvements. The Water System shall also ----------------------------- include all, if any, sites acquired and owned by the City for future use of the Water System. Title to all such sites shall be transferred to the Company by quitclaim deed on the Closing Date. (e) Intertie. The City is a party to a certain Agreement For An -------- Emergency Intertie dated March 16, 1976 with Walnut Valley, as amended in 1978 the "Intertie." The Intertie is a part of the Water System and shall be assigned to the Company at the Closing. The Company shall also assume all obligations of the City under the Intertie accruing from and after the Closing Date. The form and substance of such assignment and assumption shall be subject to the reasonable approval of each of the City and the Company. Such assignment and assumption agreement shall be prepared by the attorneys for the Company, at its expense. The City shall have no responsibility to obtain any consent or approval of Walnut Valley to such assignment and assumption. Any such consent or approval shall be the sole responsibility of the Company, and failure to obtain such consent shall not relieve the Company of its obligations hereunder. 7 2.6 Plant 118. The City and the Company jointly developed a certain --------- pumping station commonly known as "Plant 118." The Company owns the real property on which Plant 118 is located. Each of the Company and the City own one-half (1/2) of the building located thereon and each owns the pumping equipment located in its one-half of the building. The City's one-half of the building and pumping equipment is included in the Water System, and on the Closing Date the City shall transfer to the Company, by bill of sale, the City's one-half of the building and pumping equipment. 2.7 Hassen Facilities. Included within the Water System are certain ----------------- facilities developed by Hassen Development and consisting of two water reservoirs, a service line to the reservoirs and a branch or loop line (the "Hassen Facilities"). The City has accepted the reservoirs, the service line and the branch line but has not accepted the developer's irrevocable offer of dedication of the large open space area in which the Hassen Facilities are located. The City and Company agree that: (a) On the Closing Date, the City shall transfer title to the reservoirs, service line and branch line to the Company by means of a bill of sale. (b) The City shall, prior to the Closing Date, accept or otherwise obtain sufficient rights in and to the open space area to enable the City, on the Closing Date, to grant or assign to the Company (i) an exclusive easement as to the portion of such open space area on which the reservoirs are located and (ii) a non-exclusive easement as to the areas in which the service line and branch line are located. (c) On the Closing Date, the City shall execute, acknowledge and deliver to the Company the easements described in subsection (b) above. (d) Within two (2) years after the Closing Date, the City shall (i) accept or otherwise acquire legal title to the entire open space area, (ii) at the Company's expense, prepare and process a parcel map to constitute the area containing the reservoirs as a separate legal parcel and (iii) transfer such legal parcel to the Company by grant deed. The bill of sale, easements and grant deed shall be prepared by the Company at its expense and shall be subject to the approval of the City, not to be unreasonably withheld or delayed. The parcel map shall be prepared and processed by the City, but the size and configuration of the reservoir parcel shall be subject to the approval of the Company, not to be unreasonably withheld or delayed. The Company shall also reimburse the City for all reasonable fees and costs incurred to prepare and process the parcel map, with such reimbursement to be made periodically not more frequently than monthly within ten (10) days after delivery to the Company of documentary evidence as to the costs and fees incurred reasonably satisfactory to the Company. 8 ARTICLE 3. PURCHASE PRICE, ALLOCATION OF REVENUES AND COSTS 3.1 Purchase of Water System. The City hereby agrees to sell to the ------------------------ Company for the Purchase Price and, except as otherwise expressly set forth herein, free and clear of all liens, claims and encumbrances, and the Company hereby agrees to purchase from the City, the Water System, which includes, among other things, all real property described on Exhibit E, all easements described --------- on Exhibit F, all tangible personal property (including but not limited to --------- mains, hydrants, all other operating facilities and distribution system) described on Exhibit G, all intangible property (leases, permits, licenses, --------- etc.) described on Exhibit H and those assets provided for in Section 2.5 to be --------- transferred to the Company. Title to and possession of the Water System shall be delivered to the Company on the Closing Date. 3.2 Purchase Price. The Purchase Price shall be Eleven Million Five -------------- Hundred Thousand Dollars ($11,500,000.00), payable as provided in Sections 2.2 and 5.2 and subject to adjustment as provided in Section 2.5. There shall be no adjustments to the Purchase Price for Capital Additions to the Water System prior to the Closing or for accumulated depreciation prior to Closing. There shall be no adjustment to the purchase price on account of the prorations, adjustments and allocations provided for in Sections 3.3 and 3.4, all of which shall be handled outside of Escrow. 3.3 Allocation of Costs. As of the Closing Date, the parties shall cause ------------------- Southern California Edison Company and Southern California Gas Company to read all meters serving the Water System and, in each case, to render final bills to the City and to switch the billings for such services to the Company at the Closing Date. The parties shall give the same notice to all water suppliers to the City. The City shall be responsible for all utilities usage by the Water System through the Closing Date and for the cost of all water purchased by the City through the Closing Date. The City shall also be responsible for all costs of operating the Water System, including employee compensation and related costs, through the Closing Date. The Company shall be responsible for all utilities costs with respect to the Water System subsequent to the Closing Date and shall supply, at its expense, all water necessary to operate the Water System subsequent to the Closing Date. As to all other costs of operating the Water System, including but not limited to the Company's employee compensation and related costs, the Company shall be responsible for all such costs incurred subsequent to the Closing Date. All billings to the City's Customers for the period which includes the Closing Date shall be pursuant to the City's normal billing cycle. 3.4 Allocation of Revenues. Consistent with the last sentence of Section ---------------------- 3.3, all billings to the City's Customers for the period which includes the Closing Date shall be by the Company but pursuant to the City's normal billing cycle. All revenue on such billings (i.e., those which include the Closing Date) shall be allocated and paid, upon collection by the Company, between the City and the Company based upon the number of days prior to and including the 9 Closing Date (to the City) and the number of days thereafter (to the Company). Bad debts shall be allocated and charged to the City and the Company in the same manner, when such debts are determined to be uncollectible. The City and the Company contemplate that the Company will bill Customers for all water service rendered by the Water System for the billing period which includes the Closing Date. In the event, however, that the Company is unable to implement such billings immediately following the Closing Date, the City shall, upon request by the Company, perform such billings for the Company for up to three (3) two (2) month billing cycles subsequent to the Closing Date. Such bills shall be prepared based upon information supplied by the Company, and the Company shall reimburse the City for all costs incurred by the City to prepare and deliver such bills. Such costs shall include the allocated compensation costs of the City's employees who prepare such bills, the postage costs incurred to deliver such bills to such Customers and the direct and indirect overhead of the City in performing such service for the Company. 3.5 Adjustments Outside of Escrow. The prorations and adjustments ----------------------------- provided for in Sections 3.3 and 3.4 shall be made by the City and the Company outside of the Escrow. The only proration to be made in Escrow shall be real property taxes and assessments, if any, with respect to the Water System. Such proration shall be made by Escrow Agent based upon the latest available information provided by the City and the Company. Any proration in favor of the City shall be deposited by the Company in Escrow at the Closing in addition to the Purchase Price for the Water System. Any proration in favor of the Company shall reduce the Purchase Price payable by the Company for the Water System. To the extent that any adjustment, allocation or proration provided for in this Section cannot be effected at or prior to the Closing Date, the parties shall make such adjustment, allocation or proration as promptly as practicable thereafter. 3.6 Possession. Possession of the entire Water System shall be delivered ---------- to the Company on the Closing Date. Such delivery of possession shall include delivery of all keys to all facilities comprising a part of the Water System. 3.7 Claims. Any liability claims against or involving the Water System ------ and arising out of occurrences on or prior to the Closing Date shall be the responsibility of the City. All liability claims arising out of occurrences thereafter shall be the responsibility of the Company. Each party shall hold the other harmless under Sections 6.13 and 8.2 from and against all claims for which the indemnifying party is responsible. ARTICLE 4. WATER RATES AND SERVICE PROVISIONS 4.1 City Rates. ---------- (a) Except as provided in subsection (b) below, the City shall, between the Date of this Agreement and the Closing Date, maintain in effect the City's Rates (as set forth on Exhibit A) without change. --------- 10 (b) Notwithstanding subsection (a) above, the City shall, effective as of the Closing Date, (i) decrease the commodity portion of the City's Rates applicable to Customers located within the boundaries of the City by 15.0% and (ii) decrease the commodity portion of the City's rates applicable to all other Customers by 0.2%. The City shall make no other changes to the City's Rates. 4.2 Water Rates and Billing By Company. ---------------------------------- (a) From and after the Closing Date, the Company shall: (i) As to those Customers located within the boundaries of the City, maintain in effect the City's Rates (after the reduction effected pursuant to Section 4.1(b), for a period of four (4) years subsequent to the Closing Date without increase in such Rates but with the addition of the 1.4% CPUC surcharge described in clause (ii) below. (ii) As to those Customers located outside of the boundaries of the City, maintain in effect the City's Rates (after the reduction effected pursuant to Section 4.1(b), for a period of four (4) years subsequent to the Closing Date without increase in such Rates. However, subsequent to the Closing Date the charges to such Customers may be increased by a CPUC surcharge (currently approximately 1.4% of Customer bills) designed to cover certain operating expenses of the CPUC. (iii) Advise the CPUC by advice letter of the additional geographical area to be served. Moreover, and subject to CPUC approval, the Company shall include the entire Purchase Price in the Company's rate base. The Company and the City recognize that, pursuant to an order of the CPUC issued on October 21, 1999 (the "Order"), the Company's advice letter to the CPUC must justify the reasonableness of the reduced City's Rates and that such reduced City's Rates require the approval of the CPUC. The Company shall obtain such CPUC approval and shall use its best efforts to obtain such approval before the Closing Date. (iv) As to all Customers of the Water System, provide service of a quality and level at least equal to that provided by the City prior to the Closing. The quality of the water provided shall meet all federal and state requirements, and all water service shall be in accordance with the rules and regulations of the CPUC. (v) The Company shall not file for rate increases for the West Covina Portion or the Walnut Portion to be effective earlier then four (4) years after the Closing Date. If the CPUC requires the Company to increase the rates provided for in Section 4.1(b) above effective prior to the end of such four (4) year period, from the date of the increase to the end of the four (4) year period the Company shall take such action as shall be legally permitted and which shall provide to the City's Customers (both within and outside of the City's boundaries) the same economic benefit as if the CPUC had not required such increase(s). (b) The City is not liable for, nor does it guarantee payment of, any amounts charged by the Company to Customers, except to the extent that the City is provided water service by the Company for its own use or on its own behalf. The Company shall not be 11 precluded from adjusting customer billing periods from the bi-monthly billing period used by the City to the monthly billing used by the Company. (c) The provisions of subsections (a) and (b) above shall be subject to all CPUC policies and practices as to water service provided by CPUC regulated water purveyors. 4.3 Fire Hydrant Services. Subject to Section 4.6, from and after the --------------------- Closing Date, the Company, without additional charge, shall provide water for fire protection in the Water System. The Company will maintain all fire hydrants and install others as reasonably required by fire agencies. 4.4 Connections or Main Extensions Subsequent to Closing. After the ---------------------------------------------------- Closing, all applicable rules and orders of the CPUC and other agencies having jurisdiction of the Water System or the Company shall govern present and future Customer connections and main extensions to the Water System. 4.5 Capital Additions. Pending the Closing, the City is authorized to ----------------- continue to completion all additions, betterments and improvements commenced by the City prior to the Date of this Agreement. Such pending work (i.e., Capital Additions currently in process at the Date of this Agreement) is set forth on Exhibit I and is approved by the Company. The City further agrees that between - --------- the Date of this Agreement and the Closing Date it will consult with the Company and obtain the written approval of the Company prior to commencing any additional betterments or improvements. Subsequent to the Date of this Agreement, the City will not approve any main extensions without the prior written approval of the Company. All main extensions to which the City has title as of the close of sale of the Water System shall be transferred to the Company as a part of the Water System. All main extensions to which the City receives title after the close of sale of the Water System shall be transferred to the Company upon receipt of title thereto by the City. 4.6 Water Supply From Company Subsequent to Closing. After the Closing, ----------------------------------------------- water service shall be provided by the Company in the Water System, also subject to the approval of the CPUC and all applicable rules and orders of the CPUC and other agencies having jurisdiction thereof. Water provided by the Company shall be available at the pressure which is normally available but not less than that which may be required by State and Federal regulatory agencies. The Company EXPRESSLY does not guarantee a supply of water for fire protection to ANY of its Customers (whether within the Walnut Portion or the West Covina Portion), and makes no warranty or guarantee whatsoever in this Agreement with respect to the quantity or quality of water for fire protection available in the Water System. 4.7 Reclaimed Water. The City and the Company acknowledge that BKK, the --------------- City and certain other Customers located within the area served by the Water System desire to obtain Reclaimed Water for irrigation purposes. In the event that the City and/or such Customers desire to obtain or construct a delivery system for such Reclaimed Water within the area served by the Water System, the City shall in writing offer to the Company the opportunity to participate in such delivery system on an equitable basis, including the rate for reclaimed water delivered, to be determined at the time of planning for such delivery system. The Company may participate, on 12 the basis offered and at the same rate(s) set forth in the proposal delivered to the Company, by accepting such offer by written notice to the City within thirty (30) days after receipt of such offer, and if the Company so elects to participate, the customers for such delivery system shall become Customers of the Water System as to such Reclaimed Water. If the Company declines to participate or does not accept the City's offer within such thirty (30) day period, the City and/or such Customers shall be free to install such delivery system and obtain Reclaimed Water therefrom without objection or challenge by the Company. If the Company declines to participate or fails to timely accept such offer, the Company waives all rights which it may have to object to or challenge such Reclaimed Water delivery system. If the Company declines to participate or fails to timely accept such offer, the City shall not offer the opportunity to participate to third parties on terms more favorable to such third parties than those offered to the Company. ARTICLE 5. CONDITIONS TO OBLIGATIONS The obligation of the parties to close the purchase and sale transaction shall be contingent on satisfaction of each of the following conditions. 5.1 Statutory Prerequisites. The City has obtained special legislation, ----------------------- codified as Section 10061.3 of the Code (the "Special Statute"), permitting the sale to the Company of the entire Water System without compliance with Section 10061 et seq. of the Code and subject to (i) approval of such sale by a majority of the City Council and (ii) approval of such sale by a majority of those West Covina Portion Customers returning ballots based upon a mail ballot sent to all West Covina Portion Customers along with information as to the sale as specified in the Special Statute. In connection with the sale of the Water System: (A) The City prepared a ballot and information notice which met the requirements of the Special Statute, mailed or caused to be mailed such ballot and notice to all West Covina Customers and held a City Council meeting to tabulate the ballots returned as required by the Special Statute. The tabulation indicated approval of the sale by more than the required majority of West Covina Customers returning ballots. (B) The ballot and information notice were approved by the Company. The Company shall reimburse to the City all out-of-pocket costs incurred by the City in complying with clause (A) above. Such costs shall include the fees and costs of a consultant retained by the City to prepare, distribute, collect and tabulate the ballot and notice, mailing and printing costs and the costs and fees of the City's legal counsel with respect to such ballot and notice process. Payment of such costs shall be made, if not made prior thereto, on the Closing Date as provided for in Section 2.2. (C) By executing and delivering this Agreement, the City represents and warrants that the City Council has approved the sale of the Water System to the Company upon the terms and at the Purchase Price set forth herein. There shall not have been any amendment to, modification of, rescission of or repeal of such approval prior to the Closing Date unless the 13 Company fails to obtain the CPUC approval described in Section 4.2 prior to Closing or otherwise fails to perform hereunder in some material respect. (D) At the Closing, the City shall deliver a certificate executed by the Public Services Director and the City Clerk of the City certifying: (1) That each of the factual statements set forth in clauses (A) and (B) above is accurate and each action described in such clauses (A) and (B) has in fact been taken. (2) The number of ballots received by the City from the West Covina Portion Customers, the number of ballots voted in favor of the within sale and the number of ballots voted against the within sale. (3) The resolutions adopted by the City Council with respect to clauses (A), (B) and (D) (2) above and attaching copies of such resolutions to such certificate. The certificate shall be prepared by the attorneys for the Company and shall be subject to the approval of the City and the Company, in each case not to be unreasonably withheld or delayed. 5.2 Defeasance of Water Revenue Bonds. The City shall defease, or pay and --------------------------------- satisfy all Water Revenue Bonds as set forth in this Section. The City will make available to the Company for inspection and copying prior to the Closing Date documentary evidence that all steps necessary to defease such Water Revenue Bonds have been taken as of or prior to the Closing Date. The City shall also provide to the Company on the Closing Date a written agreement to indemnify and hold the Company harmless from any claims, loss or damage, including expenses and reasonable attorneys' fees, sustained as a result of failure to effectively retire all Water Revenue Bonds. The indemnity agreement to be delivered at the Closing shall be in the form attached hereto as Schedule 1. It is expressly ---------- agreed that the Water Revenue Bonds are to be defeased prior to or concurrently with the Closing, that the Water Revenue Bonds are not to constitute a lien, claim or encumbrance on the Water System acquired by the Company, or any portion thereof, and that the Water Revenue Bonds and any obligations or liabilities relating thereto are not assumed by the Company in any respect. 5.3 Approval of Property, Books and Records. --------------------------------------- (a) The City shall allow the Company to inspect all books, records, contracts and property of the City constituting or relating to the Water System, which said inspection may be undertaken by the Company at a time convenient to the Company and the City prior to the Closing Date. The City further agrees to permit the Company and its representatives full access to the City's property and records constituting or relating to the Water System at any time prior to the Closing Date during normal business hours and to supply all information concerning the Water System and its affairs as the Company may reasonably request. (b) The Company shall, in its sole but reasonable discretion before the Closing Date, approve the financial condition of the Water System and the physical condition of the assets comprising the Water System. 14 (c) The City and the Company acknowledge that the City has used Bookman-Edmonston Engineering as the City's outside civil engineering firm. The City hereby consents to retention by the Company of such firm in connection with the Water System, or any portion thereof, after the Closing and, to the extent of the City's ability to do so, waives any actual or apparent conflict of interest which such firm might otherwise have due to its prior retention by the City. 5.4 Consents. All necessary consents, if any, for the assignment or -------- transfer of all contracts, leases, licenses, easements and permits which form a part of or relate to the Water System shall be obtained by the City and shall be in form and substance reasonably satisfactory to the Company, unless the Company agrees to specifically waive such requirement with respect to one or more of the contracts, licenses, leases, easements or permits. 5.5 Easements. The City shall provide to the Company easements which are --------- in form and substance reasonably satisfactory to the Company for all water mains, reservoir access, facilities and appurtenances which are a part of the Water System and which are not located on public rights-of-way or in easements assigned to the Company. The Company will assist the City in its attempt to acquire such easements to the extent that such easements do not exist at the Date of this Agreement, and the obligations of the Company hereunder shall be contingent upon its ability to acquire transferable property rights for all of the City's watermains, reservoir access, facilities and appurtenances not located on public rights of way. Prior to the Closing, the City shall also amend the existing water franchise agreement previously granted by the City to the Company to include the use of the streets and other public places of the City incident thereto as reasonably necessary for the Company to operate the West Covina Portion of the Water System and without change in the terms, conditions and franchise fee rate thereof. The covenants of the City contained in this Section shall include those easements and other rights to be granted or assigned pursuant to Section 2.5 above. 5.6 Franchises to Operate. At or before the Closing Date, the Company --------------------- shall either (a) receive a water franchise agreement from the City of Walnut sufficient for the Company to operate the Walnut Portion without fee or charge to the Company by the City of Walnut or (b) receive a letter from the City Manager of the City of Walnut providing, in substance, that no such franchise agreement is required for the Company to operate the Walnut Portion of the Water System. 5.7 Other Approvals. The Company and the City shall receive all consents, --------------- approvals and authorizations of all governmental bodies, authorities and agencies, if any, having jurisdiction over the transaction provided for in this Agreement, free of conditions or restrictions which would impair the ability of either party to consummate the transaction contemplated by this Agreement in accordance with its terms. 5.8 Title Approval and Commitment. Approval by the Company of the title to ----------------------------- the real property and real property interests (and all operating facilities therein or thereon) included in the Water System and the written commitment of Chicago to issue, upon the closing, a policy of CLTA Owner's title insurance in favor of the Company, insuring title to such real property and real property interests (and all operating facilities therein or thereon) in the Company with a 15 liability amount equal to the Purchase Price, plus costs of defense as permitted by such policy, subject only to such matters as are approved by the Company. Promptly upon the execution of this Agreement, the Company (with the City's consent, which hereby is given) shall cause Chicago to issue and deliver to the Company a preliminary title report (the "PTR") with respect to all real property and real property interests included in the Water System, together with legible copies of all exceptions described therein. The PTR and exceptions shall be subject to the approval of the Company, which approval shall not be unreasonably withheld and shall be deemed given unless the Company shall disapprove the PTR and exceptions by written notice to the City and Escrow Agent within thirty (30) days after receipt by the Company of the entire PTR and exceptions. Such notice shall specify with particularity the item or items disapproved. For the purposes of this provision, the Company shall not be entitled to disapprove (a) the standard printed exceptions to the PTR form, (b) real property taxes a lien not delinquent, (c) the lien of the Water Revenue bonds (which shall be released or reconveyed at or prior to Closing) and (d) any lien, claim or encumbrance created or suffered by the Company. If the Company timely and properly disapproves the PTR and exceptions, the City shall, within fifteen (15) days after receipt of such notice, notify the Company and Escrow Agent in writing whether the City elects to remove or cure the item(s) disapproved. If the City so elects to remove or cure such disapproved item(s), it shall proceed to do so and shall complete such removal and cure to the reasonable satisfaction of the Company and Chicago at least ten (10) days prior to the Closing. If the City elects not to remove or cure such item(s) or makes no written election within such time period, the Company shall have thirty (30) days from receipt of the City's election or the expiration of the fifteen (15) day period, as applicable, to either (i) elect to accept title with such disapproved item(s) or (ii) elect to terminate this Agreement. Promptly following approval by the Company of title to the real property and real property interests included in the Water System, the Company (with City's consent, hereby given) shall cause Chicago to issue and deliver to the Company the written commitment provided for in this Section subject only to the exceptions approved (or disapproved but accepted) by the Company. Upon the closing, the Company (with the City's consent) at the expense of the Company, shall cause Chicago to issue to the Company a policy of title insurance in accordance with the commitment. 5.9 Absence of Certain Events. There shall not have occurred any damage to ------------------------- or destruction of any material portion of the Water System between the Date of this Agreement and the Closing Date. For this purpose, a "material portion" shall mean a portion or portions of the Water System with an aggregate repair or replacement cost of $100,000 or more. However, in the event of the occurrence of damage to or destruction of a material portion of the Water System, the Company may, by written notice to the City and Escrow Agent given within thirty (30) days after receipt by the Company of written notice of such occurrence, elect to waive the satisfaction of this condition and proceed to close the purchase. In such event the City shall, at the election of the Company, either (a) repair or replace the damaged or destroyed property(ies) prior to the Closing (if such repair or replacement can be accomplished prior to the Closing), (b) assign to the Company at the Closing all rights of the City to the proceeds of all insurance maintained by the City with respect to such damaged or destroyed property or (c) transfer the damaged property to the Company in its then condition, with a reduction in the Purchase Price equal to the mutually agreed cost of repair or replacement. 16 5.10 Lender Matters. The Company shall have obtained (a) financing in an -------------- amount equal to the Purchase Price from a lender selected by the Company and upon terms and provisions satisfactory to the Company and such lender and (b) all consents to the purchase by the Company of the Water System and/or such new financing required by all existing credit agreements to which the Company and/or the Company's parent are parties and which require such consent prior to such purchase and/or new financing. 5.11 Accuracy of Representations and Warranties. ------------------------------------------ (a) All representations and warranties of the City and all representations and warranties of the Company shall be accurate as of the Date of this Agreement and the Closing Date and all covenants of the City and the Company to be performed by the Closing Date shall have been performed by the Closing Date or waived. (b) The Company shall be responsible to satisfy those conditions set forth in Sections 5.3, 5.6, 5.7 (to the extent of approvals, consents and authorizations required due to the Company's operations), 5.8, 5.10 and 5.11(a) (to the extent of representations, warranties and covenants of the Company). The City shall be responsible to satisfy those conditions set forth in Sections 5.1, 5.2, 5.4, 5.5, 5.7 (to the extent of approvals, consents and authorizations required due to the City's operations) and 5.11(a) (to the extent of representations, warranties and covenants of the City). (c) Each party shall use its respective best efforts to satisfy each condition for which such party is responsible. Nothing herein, however, shall require either party to pay any expense or to assume any obligation in addition to those expenses and obligations which such party agrees to pay or assume pursuant to the provisions of this Agreement. Moreover, nothing in this section or this Agreement shall be deemed or construed to limit any approval right or other right given to either party with respect to satisfaction of any condition, except that any approval required shall not be unreasonably withheld. Each party agrees to cooperate as reasonably requested by the other in connection with the satisfaction of the conditions set forth in each of such Sections. (d) The conditions set forth in Sections 5.2, 5.3, 5.5, 5.6, 5.8, 5.9 and 5.10 have been included for the benefit of the Company. The conditions set forth in Sections 5.1, 5.4, 5.7 and 5.11 (for the City as to the representations, warranties and covenants of the Company and for the Company as to the representations, warranties and covenants of the City) have been included for the benefit of both the City and the Company. As to those conditions which are solely for the benefit of the Company, only the Company can waive the satisfaction thereof. As to those conditions which are for the benefit of both the City and the Company, any waiver thereof, to be effective, must, except as to Section 5.11, be by both parties. As to any waiver of Section 5.11, each party may waive only the accuracy of a representation and warranty of the other party or the breach of a covenant by the other party. Any waiver of a condition pursuant to this Article must be in a written notice to the other party and to Escrow Agent. (e) In the event of failure of any of the conditions set forth in Sections 5.1 through 5.11, a party for whose benefit such condition is included shall have the right to terminate 17 this Agreement. Such termination shall be effected by written notice from the terminating party to the other party and to Escrow Agent given promptly following the failure of such condition and, in any event, prior to the Closing Date. In the event that this Agreement is terminated pursuant to this subsection (e), this Agreement shall terminate on the third (3rd) business day following the date of such termination notice (unless such failed condition is satisfied within such period). Upon such termination, Escrow Agent shall promptly return to each party all funds and instruments deposited by such party; the Company shall bear the escrow cancellation fee; each party shall bear all fees and costs incurred by it in the negotiation and preparation of this Agreement and in performing its respective obligations hereunder through the date of termination; the Company shall return to the City all information and documents provided by the City with respect to the Water System; and except as provided herein, neither party shall have any further rights or obligations pursuant to this Agreement. Pending any such termination, each party shall diligently pursue its obligations hereunder. ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE CITY The City represents and warrants to the Company as follows: 6.1 Political Existence. The City is a duly constituted, validly existing ------------------- municipal corporation, in good standing, and authorized to do business under the laws of the State of California. The City has all necessary power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 6.2 Authorization. The execution and delivery of this Agreement, and all ------------- other instruments and documents contemplated hereunder, and the performance by the City of its obligations and duties hereunder and thereunder have been duly authorized by the City Council of the City. Those persons executing and delivering this Agreement and such other instruments on behalf of the City are duly authorized to so execute and deliver on behalf of the City. 6.3 No Breach. --------- (a) The execution, delivery and performance of this Agreement do not and will not constitute a breach or violation of or a default under any ordinances or the governing code of the City or any other agreement, contract, mortgage or other instrument to which the City or its properties are bound, nor will such execution, delivery and performance result in the creation of any lien, charge or encumbrance upon any property or assets of the City, nor will such actions violate any statute, ordinance, regulation, judgment, order or ruling to which the City or its properties are subject, except for such exceptions as are specifically stated in the opinion of the City Attorney and as are reasonably approved by the Company. (b) Without limiting the generality of the foregoing, the City specifically represents and warrants that (i) the City has full power and authority to sell to the Company reservoir R-2 in the Walnut Portion ("R-2"), (ii) no consent to or approval of such sale is required from the United States government or any agency thereof and (iii) the City is entitled to retain all 18 amounts paid by the Company to the City for R-2. The City agrees specifically that it shall indemnify, defend and hold the Company harmless from any and all claims by the United States (or any agency thereof) to any portion of the Purchase Price and any and all claims to the effect that the United States (or any agency thereof) has any interest in R-2 or any claim or lien thereon. (c) The City represents and warrants that it does not collect and therefore does not have any customer deposits to transfer to the Company. (d) The City shall not, prior to the Closing Date, reduce the City's Rates for water service, except as provided in Section 4.1 above. 6.4 Financial Statements. The Balance Sheet accurately and completely sets -------------------- forth the assets of and the liabilities of the Water System as of the date of the Balance Sheet. There have been no material adverse changes in the financial condition or business of the Water System since the date of the Balance Sheet. All assets set forth in Exhibits E, F, G and H are used and useful in the ---------------------- operation of the Water System. Exhibits E, F, G and H were compiled jointly by ---------------------- the City and the Company, and the City does not warrant the accuracy or completeness of such Exhibits. However, employees of the City familiar with the Water System have reviewed (without independent investigation) such Exhibits and, on the basis of their knowledge, the City is not aware of any omissions from or inaccuracies in such Exhibits. If, however, it is determined after the Closing that any asset of the Water System was not included in the appropriate Exhibit and was not transferred to the Company, the City shall promptly transfer the same to the Company without additional charge by means of an appropriate conveyance (grant deed, bill of sale or assignment) in form and substance reasonably satisfactory to the City and the Company. 6.5 Title to Assets. The City has good and merchantable title to all --------------- assets comprising the Water System, subject only to the lien of the Water Revenue Bonds and those related to the Grand Avenue Line. The City will convey title to all real property and real property interests included in the Water System free and clear of all liens, claims and encumbrances, by deed, except in the case of easements, the conveyance of which may be by grant in a form satisfactory as to form and content to the Company and Chicago. As to all other assets, conveyance shall be made by instruments appropriate thereto and reasonably satisfactory to the Company as to form and content. Neither any review by the Company of the City's books and records pertaining to or the assets comprising the Water System nor any title insurance obtained by the Company with respect to the assets comprising the Water System shall relieve the City from liability for the inaccuracy of the representation contained in this Section. 6.6 Warranty to Preserve and Maintain. The City shall, between the Date of --------------------------------- this Agreement and the Closing Date, operate, maintain and preserve the Water System in a careful and proper manner, and deliver the same to the Company in as good condition as it now is, reasonable wear and tear expected. Between the Date of this Agreement and the Closing Date, the City shall operate the Water System in the same manner as operated on the Date of this Agreement. As set out in Section 5.9, all risk of loss or damage prior to the Closing to the Water System or any part thereof by fire, tornado, windstorm, explosion or any other casualty whatsoever shall be assumed by the City. 19 6.7 Contractual Freeze. The City shall not enter into any contractual ------------------ agreements prior to the Closing which relate to the Water System or the provision of water service thereby without the Company's written consent except in connection with normal and usual commitments in the ordinary course of business for the purchase of materials, services and supplies, which such commitments shall be terminable upon not more than thirty (30) days written notice unless otherwise approved by the Company. 6.8 Insurance. The City shall continue to maintain its current insurance --------- or self-insurance coverage on the Water System through and including the Closing Date, after which time all insurance coverage with respect to the Water System shall be the obligation of the Company. 6.9 Pending Litigation. To the best of the City's knowledge without ------------------ independent investigation, there are no actions, suits or proceedings pending or threatened against the City, its properties, or the assets constituting the Water System, at law or in equity, before or by any federal, state, county, municipal or other government court, department, commission, board, bureau, agency or instrumentality in which an adverse judgment, assessment or liability would have a material adverse effect on the City's title to any of the assets comprising the Water System, the rights of the City or the Company to own and operate the Water System, or the ability of the City to execute and deliver this Agreement or to perform its obligations under this Agreement or the other agreements contemplated hereunder. 6.10 Transfer of Operational Authority. The City shall use its best --------------------------------- efforts to transfer to the Company all licenses, permits, and other authorizations, if any, necessary to operate the Water System in the manner and method in which operated prior to the Closing Date. 6.11 Compliance with Applicable Laws. To the best knowledge of the City, ------------------------------- without independent investigation, and except as disclosed in written materials (the "Materials") supplied by Rutan & Tucker, legal counsel to the City, to Latham & Watkins, legal counsel to the Company, the Water System, and all facilities and other components thereof, comply with all applicable federal and state statutes, laws and other requirements, including but not limited to all statutes, laws, regulations, rulings and other governmental pronouncements and requirements dealing with or regulating (a) the quality of water delivered by the Water System, (b) the operation, maintenance and repair of the Water System and the various facilities and other assets comprising the Water System, (c) provision of water service to the City's Customers and the charges therefor and (d) the presence, use, discharge, storage or release of all materials (whether solid, liquid or gaseous) determined by any governmental authority to be hazardous or dangerous to persons or property. For the purposes of the Materials, responsibility for any fines or penalties resulting from any action or inaction by the City with respect to the Water System shall remain with the City, all testing required subsequent to the Closing Date shall be the responsibility of the Company and responsibility for any other matters shall be as agreed by the City and the Company, applying the other provisions of this Agreement. 20 6.12 Opinion of City Attorney. The City shall deliver to the Company at ------------------------ the Closing an opinion of the City Attorney for the City, dated the Closing Date and in form and substance reasonably satisfactory to the Company, to the effect that: (a) The City is a duly constituted, validly existing municipal corporation, in good standing, and authorized to do business under the laws of the State of California. The City has all necessary power and authority to execute and deliver this Agreement and all other agreements provided for herein and to perform its obligations hereunder and thereunder. (b) All consents, approvals and authorizations of all governmental bodies, authorities, agencies and citizens which are required for the execution and delivery by the City of this Agreement and all other agreements provided for herein and for the City's performance of its obligations pursuant to this Agreement and all other agreements provided for herein have been received, free from any conditions and restrictions. All statutory prerequisites to the sale of the Water System to the Company on the terms described herein have been fully complied with. Without limiting the generality of the foregoing, all requirements of the Code and the Special Statute applicable to the sale of the Water System provided for herein have been complied with. (c) The execution and delivery of this Agreement and all agreements contemplated hereunder by the City and the consummation of the transactions contemplated hereby and thereby are within the corporate power of the City, have been duly authorized by all necessary action on behalf of the City, and this Agreement has been duly executed by the City, and constitutes the valid and binding obligation of the City enforceable in accordance with its terms. Those persons executing and delivering this Agreement on behalf of the City are duly authorized to so execute and deliver on behalf of the City. (d) The deeds, easements, bills of sale and all other instruments of conveyance delivered by the City to the Company at the Closing are legally valid and enforceable by the Company in accordance with their respective terms and conditions and are effective to convey to the Company all of the City's right, title and interest in the Water System, free and clear of all liens, claims and encumbrances. (e) The execution, delivery and performance of this Agreement and all other agreements provided for herein by the City do not and will not constitute a breach or violation of or a default under any ordinances or the governing code of the City or, to the best of her knowledge, any other agreement, contract, mortgage or other instrument to which the City or its properties are bound nor, to the best of her knowledge, will such execution, delivery and performance by the City result in the creation of any lien, charge or encumbrance upon any property or assets of the City, nor will such actions violate any statue, ordinance, regulation, judgment, order or ruling to which the City or its properties are subject. (f) To the best of her knowledge, but without independent investigation, there are no actions, suits or proceedings pending or threatened against the City, its properties, or the assets constituting the Water System, at law or in equity, before or by any federal, state, county, municipal or other governmental court, department, commission, board, bureau, agency or instrumentality in which an adverse judgment, assessment or liability would have a material 21 adverse effect on the City's title to any of the assets comprising the Water System, the rights of the City or the Company to own and operate the Water System, or the ability of the City to execute and deliver this Agreement or the other agreements provided for herein or to perform its obligations under this Agreement and the other agreements contemplated hereunder. 6.13 Indemnification. The City shall indemnify, defend and hold harmless --------------- the Company from and against any and all claims, causes of action (whether administrative or judicial), liabilities, losses, damages, fines, penalties, costs and expenses of any kind or nature whether current, deferred or contingent (including, but not limited to, court costs and reasonable attorneys' fees) which arise out of or are in connection with: (a) The City's breach, nonperformance, or nonfulfillment of any representation, warranty, covenant, or obligation of the City under this Agreement, including but not limited to those in Sections 3.3, 3.4, 3.5, 3.6 and 3.7; (b) The failure of the City to comply with any statutes, regulations, codes or ordinances (including, but not limited to, any and all environmental or public health laws) applicable to the Water System and the operation thereof through the Closing Date, including items disclosed in the Materials subject to the second paragraph of Section 6.11; (c) Any actions, transactions, failure to act, and any negligence or willful misconduct by the City, its employees, agents and independent contractors in the ownership, use, maintenance or operation of the Water System prior to the Closing; (d) The employment by the City of those city employees engaged in the management, operation, maintenance and repair of the Water System through the Closing Date, including but not limited to all claims by such employees resulting from transfer to another position as of the Closing Date; and (e) Any placement, discharge, release or maintenance by the City of hazardous material or hazardous waste in the City's operation of the Water System. 6.14 Notice by City. In the event that, during the period from the Date of -------------- this Agreement through the Closing Date, (a) there occurs any casualty to the Water System or any facility or other significant asset thereof, or (b) the City receives notice or knowledge of any lawsuit, claim, legal notice, notice of violation or any other event which will or may result in the inaccuracy of any representation or warranty by the City or the breach of any covenant by the City contained herein, then, in any such event, the City shall promptly notify the Company in writing of the occurrence and nature of such event or occurrence. The City shall include with such notice a copy of any summons, complaint, notice, claim or other writing received by the City and constituting, or received by the City in connection with, such event or occurrence. Following the delivery of any such notice, the City shall cooperate with the Company as reasonably requested in connection with the review or examination of such event or occurrence and the determination of whether such event or occurrence renders inaccurate any representation or warranty by the City. 22 ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the City as follows: 7.1 Existence and Power. The Company is a California Corporation duly ------------------- organized and validly existing under the laws of the State of California, has full power and authority to own and use its properties and to transact the business in which it is engaged and, subject to the grant of the water franchise agreements described herein and receipt of all requisite approvals as described herein, it will have the authority to purchase, own and operate the Water System. 7.2 Authorization of Agreement. The Board of Directors of the Company has -------------------------- duly authorized the execution and delivery of this Agreement and the performance by the Company of its obligations pursuant to this Agreement, all as provided herein, and no other approvals or authorizations other than those specified herein are necessary or required for the execution and delivery of this Agreement by the Company or the performance by the Company of its obligations hereunder. Those persons executing and delivering this Agreement on behalf of the Company are duly authorized to so execute and deliver on behalf of the Company. 7.3 Agreement to Create No Default. Subject to Section 5.10, the execution ------------------------------ and delivery of this Agreement by the Company and the performance by the Company of its obligations herein contained do not, and will not as of the Closing Date, result in any breach of any of the terms, conditions or provisions of or constitute a default under any indenture, agreement or other instrument to which the Company is a party or by which it may be bound or affected. 7.4 Pending Litigation. To the best of the Company's knowledge without ------------------ independent investigation, there are no actions, suits or proceedings pending or threatened against the Company or its properties, in law or in equity, before or by any federal, state, county, municipal or other government court, department, commission, board, bureau, agency or instrumentality in which an adverse judgment, assessment or liability would have a material adverse effect on the rights of the Company to own and to operate the Water System or the ability of the Company to execute and deliver this Agreement and perform its obligations under this Agreement. 7.5 Opinion of Company Attorney. The Company shall deliver to the City at --------------------------- the Closing an opinion of Latham & Watkins, counsel to the Company, dated the Closing Date and in form and substance reasonably satisfactory to the City, to the effect that: (a) The Company is a California corporation duly incorporated and validly existing under the laws of the State of California. Subject to the grant of the water franchise agreements and other approvals, consents and authorizations provided for herein, the Company has the authority to purchase, own and operate the Water System. (b) The Board of Directors of the Company has duly authorized the execution and delivery of this Agreement by the Company and the performance by the Company of its 23 obligations pursuant to this Agreement. No other corporate authorization is required for the execution and delivery by the Company of this Agreement or the performance by the Company of its obligations under this Agreement. Those persons who have executed and delivered this Agreement on behalf of the Company have been duly authorized to so execute and deliver on behalf of the Company. (c) To the knowledge of such counsel, and subject to the satisfaction of the condition set forth in Section 5.10, the execution and delivery of this Agreement by the Company and the performance by the Company of its obligations herein will not result in the breach of or in a default under any Material Agreement, as defined in such opinion, to which the Company or its properties are bound. ARTICLE 8. COVENANTS OF THE COMPANY The Company covenants with the City as follows: 8.1 Local Telephone Lines. The Company shall maintain at all times after --------------------- the Closing Date local telephone lines which will enable the City's Customers to contact the Company by telephone without charge. 8.2 Indemnification. The Company shall indemnify, defend and hold harmless --------------- the City from and against any and all claims, causes of action (whether administrative or judicial), liabilities, losses, damages, fines, penalties, costs or expenses of any kind or nature (including, but not limited to, court costs and reasonable attorney's fees) which arise out of or are in connection with: (a) The Company's breach, nonperformance, or nonfulfillment of any representation, warranty, covenant, or obligation of the Company under this Agreement, including but not limited to those in Sections 3.3, 3.4, 3.5 and 3.7; (b) The failure by the Company to comply with applicable statutes, regulations, codes or ordinances (including, but not limited to, any and all environmental or public health laws) in the operation of the Water System subsequent to the Closing; (c) Any actions, transactions, failure to act, and any negligence or willful misconduct by its employees, agents and independent contractors in the ownership, use, maintenance or operation of the Water System subsequent to the Closing Date; and (d) Any placement, discharge, release or maintenance by the Company of hazardous materials or hazardous waste in the Company's operation of the Water System. For this purpose, the Company specifically acknowledges that the Company has elected not to perform a Phase I Environmental Assessment with respect to the Water System or any portion thereof. 24 8.3 Holding Costs to Customers. For a period of four (4) years subsequent -------------------------- to the Closing Date, the Company shall provide water service to the Customers at costs to the Customers not in excess of the reduced rates provided for in Section 4.1. 8.4 Property Taxes. The Company shall pay all real and personal property -------------- taxes and assessments assessed against the Water System from and after the Closing Date. ARTICLE 9. COVENANTS OF THE CITY The City covenants with the Company as follows: 9.1 Performance. The City shall perform its obligations under all ----------- contracts, leases, licenses, easements and permits which form a part of the Water System without default until the Closing Date. 9.2 Books and Records. The City shall deliver to the Company on the ----------------- Closing Date copies of all books and records of the City, held or controlled by the City or its agents relating to the Water System, including but not limited to customer lists, billing/collection history, technical information, distribution system maps, continuing property records, hydrant records, valve records, customer service records, monthly reports submitted to state agencies, maintenance records on tanks, mains and services, and all other records and documents relating to the Water System. 9.3 Conduct of Business. Until the Closing Date, the City shall not, ------------------- without the written consent of the Company, dispose of or encumber any of the assets comprising the Water System except (a) for transactions in the ordinary course of business and (b) as provided in Section 2.5(a). Pending the Closing, the City shall operate and maintain the Water System in the ordinary course of business, consistent with good past business practices. 9.4 Taxes and Fees. The City agrees not to impose after the Closing Date -------------- any taxes, franchise fees, license fees, or other similar charges or assessments on the Company relating to the operation of the Water System and the use of the public rights-of-way within the City for the operation of such system other than lawful fees for street excavation or encroachment permits, building permits, and real and personal property taxes and assessments and the extension of the Company's franchise agreement to cover the West Covina Portion of the Water System. 9.5 Accounts Payable. The City shall pay and satisfy in full all accounts ---------------- payable relating to the Water System which are accrued or accruable as of the Closing Date if they represent services or goods received by the City prior to the Closing Date. The City agrees to indemnify and hold the Company harmless for all accounts payable relating to the Water System which are accrued or accruable as of the Closing Date. 9.6 Utilities. The City shall pay all utility charges for which the City --------- is responsible pursuant to Section 3.3 as soon as practicable after the Closing, but in no event later than sixty 25 (60) days after the Closing. The City agrees to indemnify and hold the Company harmless from all liability with respect to all utility charges and accounts payable for which the City is responsible pursuant to Sections 3.3, 9.5 and this Section 9.6. ARTICLE 10. MISCELLANEOUS 10.1 Company's and City's Liability for Fees. The Company and the City --------------------------------------- will each be responsible for all fees and charges of their respective accountants, technical consultants (except as provided in clause (B) of Section 5.1), appraisers, attorneys, and other advisors employed with respect to the transactions provided for herein, whether or not the transactions provided for herein take place. 10.2 Survival of Representations and Warranties. All agreements, ------------------------------------------ representations, and warranties contained in this Agreement shall, to the extent applicable, apply as of the Closing Date and shall survive the Closing, notwithstanding any investigation or other due diligence performed by either party hereto. 10.3 Bulk Sales. It is the opinion of both parties that the Bulk Sales Law ---------- of the State of California does not apply to this transaction. Should any claim or legal proceeding be made or commenced by a creditor of the City based on the applicability of said Bulk Sales Law to this transaction, the City shall indemnify and hold harmless the Company from and against any and all claims of such creditors under the Bulk Sales Law. 10.4 Notices. All notices, requests, demands, approvals, consents, ------- waivers, or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid, addressed to the mailing addresses set forth below (or to such other addresses as the parties hereto may from time to time designate in writing in a notice given in the same manner): Suburban Water Systems: 1211 E. Center Court Drive Covina, CA 91724-3603 Attn: President Fax: (818) 331-6363 with a copy to: Latham & Watkins 650 Town Center Drive, Suite 2000 Costa Mesa, CA 92626 Attn: James W. Daniels, Esq. Fax: (714) 755-8290 26 City of West Covina: 1444 W. Garvey Avenue South P.O. Box 1440 West Covina, CA 91793 Attn: Mr. Jeff Collier Fax: (626) 813-8667 with a copy to: Rutan & Tucker 611 Anton Boulevard, Suite 1400 Costa Mesa, CA 92626 Attn: Elizabeth Martyn, Esq. Fax: (714) 546-9035 Notices which are personally delivered shall be effective upon delivery. Notices sent by registered or certified mail as provided herein and properly addressed and sent postage prepaid shall be effective on the date of delivery or refusal indicated on the return receipt. Each party may also send notices by facsimile transmission. Any notices sent by facsimile transmission shall be effective upon acknowledgment of receipt of a legible copy thereof. Each party may change its address for notices by written notice given in the manner provided in this Section. 10.5 Section Headings. All article and section headings herein are ---------------- inserted for convenience of reference only and shall not control, affect or modify the meaning or construction of any of the terms or provisions hereof. 10.6 Governing Law. This Agreement shall be governed by, enforced under, ------------- and interpreted in accordance with, the laws of the State of California. 10.7 Entire Agreement and Amendment. This Agreement and the Exhibits and ------------------------------ Schedule hereto set forth the entire understanding reached between the parties hereto with respect to the transactions contemplated hereby. Any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. This Agreement may not be amended except by a written instrument executed by the parties hereto. All Exhibits and the Schedule are incorporated into and made a part of this Agreement by this reference. 10.8 Expense of Litigation. If either party incurs any expense, including --------------------- reasonable attorneys' fees, in connection with any action or proceeding, including any arbitration proceeding, instituted by either party by reason of any default or alleged default of the other party hereunder, to seek damages, to prevent a breach or continued breach of this Agreement, to determine the rights and obligations of the parties hereunder or in which this Agreement is asserted as a defense, the party prevailing in such action or proceeding shall be entitled to recover its reasonable expenses from the other party, including expenses of investigation and enforcement. 27 10.9 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which together shall be deemed a single instrument. It shall not be necessary for both parties to execute the same counterpart(s) of this Agreement for this Agreement to become effective. 10.10 Effectiveness. This Agreement shall become effective upon the last ------------- execution and delivery of this Agreement by the City and the Company. 10.11 Interest. Any amount due from either party to the other party -------- hereunder which is not paid when due shall bear interest at the rate of seven percent (7%) per annum from the date due until payment in full. 10.12 Severability. In the event that any portion of this Agreement is ------------ determined to be illegal, void or unenforceable in total or as applied to any particular circumstance(s) by a court of competent jurisdiction or in any arbitration proceeding, such provision shall be enforced as to any other circumstance where not so illegal, void or unenforceable and such determination shall not affect the validity or enforceability of any other provision of this Agreement. 10.13 City Employees. The Company shall not be required to hire any City -------------- employees engaged in the operation of the Water System. The City shall indemnify, defend and hold the Company harmless from and against any and all claims and actions brought by City employees arising out of or resulting from or alleged to arise out of or result from the sale of the Water System to the Company. 10.14 Exclusive Negotiating Agreement and LOI. The City and the Company --------------------------------------- have previously executed and delivered a certain Exclusive Negotiating Agreement dated as of August 3, 1998 (as amended, the "Exclusive Agreement") and the LOI. Upon execution and delivery of this Agreement, this Agreement shall supersede, in their entireties, the Exclusive Agreement and the LOI, and such Exclusive Agreement and LOI shall each terminate. 10.15 Indemnities. The obligations of the indemnifying party under each ----------- and every indemnification and hold harmless provision contained in this Agreement shall survive the Closing or any termination of this Agreement to and until the last to occur of (a) the last date permitted by law for the bringing of any claim or action with respect to which indemnification may be claimed by the indemnified party against the indemnifying party under such provision or (b) the date on which any claim or action for which indemnification may be claimed under such provision is fully and finally resolved and, if applicable, any compromise thereof or judgment or award thereon is paid in full by the indemnifying party and the indemnified party is reimbursed by the indemnifying party for any amounts paid by the indemnified party in compromise thereof or upon a judgment or award thereon and in defense of such action or claim, including reasonable attorneys' fees incurred. Payment shall not be a condition precedent to recovery upon any indemnification provision contained in this Agreement. 10.16 Escrow Agent Not to be Concerned. The provisions of Sections 1.1, -------------------------------- 3.3, 3.4, 3.6, 3.7, 4.1 through 4.7, 6.13, 8.1, 8.2, 9.4, 9.5, 9.6, 10.3, 10.13, 10.14 and 10.18 are strictly 28 between the City and the Company, and Escrow Agent need not be concerned with such provisions. 10.17 Brokers. Each of the City and the Company shall be responsible for ------- any fee or commission payable to any broker, finder or agent retained by it in connection with the transaction provided for in this Agreement. Each of the City and the Company shall indemnify, defend and hold the other harmless from and against all claims for a fee or commission with respect to the transaction described in this Section made by any broker, finder or agent claiming through the indemnifying party. Payment shall not be a condition precedent to recovery upon the foregoing indemnification provision. Each indemnifying party shall defend the indemnified party against all claims for which indemnification is available pursuant to this Section with legal counsel appointed by the liability carrier for the indemnifying party or otherwise reasonably satisfactory to the indemnified party. 10.18 Arm's Length Transaction. The purchase and sale provided for in this ------------------------ Agreement is the result of a negotiated and arm's length sale of the Water System. In connection with the negotiation and execution of this Agreement, each party has been represented and advised by such attorneys, accountants and other professional advisors as such party desired, all of whom were selected and retained by the retaining party. 10.19 Further Instruments. Each of the parties shall, upon the request of ------------------- the other party, promptly execute (and acknowledge if required) and deliver such other and further instruments as shall reasonably be required to carry out the purpose and intent of this Agreement. Such instruments shall be prepared by the party requesting the same at its cost and expense. Nothing in this Section shall be deemed or construed to require any party to assume or discharge any obligation in addition to or other than those which such party expressly agrees to assume or discharge pursuant to this Agreement. 10.20 Exhibits To Be Added. To the extent that any Exhibits described -------------------- herein are not completed and included with this Agreement at execution, such Exhibits shall be supplied during the escrow and shall be subject to the approval of both parties. 29 IN WITNESS WHEREOF, the parties have executed this Agreement for the Acquisition of the City's Water Utility System as of the date first written above. SUBURBAN WATER SYSTEMS, a California corporation By:/s/ MICHAEL O. QUINN -------------------- Title: President --------- By:/s/ DANIEL N. EVANS ------------------- Title: V.P. Finance and CFO --------------------- "Company" CITY OF WEST COVINA, a Municipal corporation ATTEST: By:/s/ JANET BERRY By: /s/ KATHRYN HOWARD --------------------- --------------------------- City Clerk Mayor "City" APPROVED AS TO FORM: By:/s/ ELIZABETH MARBYN --------------------- City Attorney 30 PENDING CAPITAL ADDITIONS TO WATER SYSTEM ----------------------------------------- None. EXHIBIT I Exhibits to Acquisition Agreement --------------------------------- Exhibit Content Responsibility - --------- ------- -------------- A Current City Water Rates City B June 30, 1998 Water System Balance Sheet City C System Map - Walnut Portion City D System Map - West Covina Portion City E Real Property Company F Easements Company G Tangible Personal Property City H Intangible Personal Property City I Pending Capital Additions to Water System City Sched. 1 Indemnity re Water Revenue Bonds Done iv AGREEMENT TO INDEMNIFY (the "Agreement") ---------------------------------------- WHEREAS, Suburban Water Systems (the "Company") and the City of West Covina, California (the "City") have entered into that certain agreement (the "Contract"), dated February 1, 2000, for the sale of certain water utility assets (the "Assets"); and WHEREAS, the City has in the past caused to be issued certain water revenue bonds (the "Bonds"), at __%, due September 1, 2010, which constitute a lien or encumbrance on some or all of the Assets subject to the Contract, and the full redemption and payoff of which is required to release the lien or encumbrance on the Assets; and WHEREAS, the City has represented in the Contract that prior to, or concurrently with, but no later than the Closing Date pursuant to the Contract, it will establish an escrow for the payment and redemption of the Bonds in full, pay all charges to the Bond trustee(s), provide and send out all required notices, complete all required paperwork, fully satisfy and defease all claims of the holders of the Bonds (the "Bondholders"), act in a manner such that all Bondholders have no further claim in equity or law with respect to the Bonds and the Bond issuance and satisfaction, and otherwise act to successfully fulfill all legal obligations it has with respect to the Bonds; The Company and the City hereby agree as follows: 1. Intent of the Agreement. It is the intent of the parties to this ------------------------ Agreement that the Company, its parent company, subsidiaries, officers, directors, employees, shareholders, agents, affiliates, representatives, and successors in interest (collectively, "Indemnitees"), shall not bear any costs --- whatsoever, direct or indirect, under any conditions, resulting from any claims --- --- by any person or party, arising from or under the obligations City has incurred --- by issuing the Bonds. In the event of any dispute over the terms and meaning of this Agreement, such disputed terms or meaning shall be construed in a manner that strictly fulfills the intent of the Agreement. 2. Persons to be Indemnified. City agrees to and shall indemnify -------------------------- Indemnitees pursuant to this Agreement. 3. Promise to Defend Against Third Party Claims. City shall -------------------------------------------- indemnify, defend, and hold harmless Indemnitees against any and all liabilities, demands, claims, costs, losses, damages, recoveries, settlements, and expenses (including, but not limited to, interest, penalties, attorneys' fees, accounting fees, expert witness fees, costs, and expenses) incurred by Indemnitees ("Losses"), known or unknown, contingent or otherwise, directly or indirectly arising from or related to (i) any suits, actions, and claims arising from the Bond issuance and retirement; (ii) the contracts and agreements relating to the Bond issuance and retirement, and any related agreements; and (iii) the contracts and agreements made pursuant to the Contract and this Agreement. 4. No time Limitations on Survival of Representations, Warranties, --------------------------------------------------------------- and Agreements. All representations, warranties, and agreements in this - -------------- Agreement and those made in the Contract which reasonably relate to the terms, spirit, and intent of this Agreement, shall survive indefinitely until, by their respective terms, they are no longer operative or are otherwise limited by any applicable statute of limitations. All statements in any certificate, schedule, or exhibit delivered by the City under this Agreement or in the Contract which reasonably relate to the terms, spirit, and intent of this Agreement, or in connection with the transactions contemplated by this Agreement, shall constitute representations and warranties by the City under this Agreement. 5. Failure to Defend; Settlement. In the event the City fails to ----------------------------- defend Indemnitees against any claim(s) according to the intent and terms of this Agreement and the Contract, and if Indemnitees choose to, in good faith and upon reasonable terms, settle any claim(s) brought or asserted against them, or any of them, then such settlement(s) shall be conclusive against the City as indemnifiable Losses. 6. Counsel Representation, Review, and Participation. The City and ------------------------------------------------- the Company agree that each has been represented by legal counsel, and that this Agreement is the result of a negotiated compromise between them. The City and the Company and their respective counsel have participated fully in the review and revision of this Agreement. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party or the Indemnitees shall not apply in interpreting this Agreement or those terms in the Contract which reasonably relate to the terms, spirit, and intent of this Agreement. 7. Severability. If a court or an arbitrator of competent ------------ jurisdiction holds any provision of this Agreement to be illegal, unenforceable, or invalid in whole or in part for any reason, the validity and enforceability of the remaining provisions, or portions of them, will not be affected, unless the essential purpose of the intent of the Agreement, as stated in paragraph 1 above, would be defeated by the loss of the illegal, unenforceable, or invalid provision. 8. Incorporation of Contract by Reference. All the provisions of the --------------------------------------- Contract not inconsistent with the intent and terms of this Agreement are incorporated herein by reference. 2 IN WITNESS WHEREOF, the parties have executed this Agreement to Indemnify as of the date first written above. SUBURBAN WATER SYSTEMS, a California corporation By_______________________________ Title:___________________________ By_______________________________ Title:___________________________ "Company" CITY OF WEST COVINA, a Municipal corporation ATTEST: By____________________________ By_______________________________ City Clerk Mayor "City" APPROVED AS TO FORM: By____________________________ for the City Attorney 3 EX-10.17 11 IPWC STOCKHOLDERS AGREEMENT EXHIBIT 10.17 IPWC STOCKHOLDERS AGREEMENT THIS IPWC STOCKHOLDERS AGREEMENT (this "Agreement") is made as of January 1, 2000 among Southwest Water Company, a Delaware corporation ("SWC"), Inland Pacific Partners, LLC, a Delaware limited liability company ("Inland"), and Inland Pacific Water Company, a California corporation ("IPWC"). SWC and Inland are collectively referred to herein as the "Stockholders." W I T N E S S E T H: WHEREAS, pursuant to the terms of that certain Agreement Regarding Formation of Companies, dated September 22, 1999, by and between SWC and Inland, IPWC has issued 99% of its common stock to SWC and 1% of its common stock to Inland, and; WHEREAS, the Stockholders desire to more particularly set forth in writing their agreements with respect to (i) certain matters relating to the corporate governance of IPWC, (ii) specific restrictions on the transfer of their interests in IPWC and (iii) terms under which the parties would be willing to sell their stock interests in IPWC to one another; NOW, THEREFORE, in consideration of the premises and undertakings hereinafter set forth, the parties hereto agree as follows: ARTICLE I. DEFINITIONS AND INTERPRETATION Section 1.1. Definitions. As used in this Agreement: ----------- ----------- "Affiliate" of a Holder means (a) a Person directly or indirectly --------- (through one or more intermediaries) controlling, controlled by or under common control with that Holder; (b) an officer, director, partner, shareholder or member of that Holder; (c) a member of the immediate family of an officer, director, partner, shareholder, or member of that Holder; (d) a Person directly or indirectly controlled by or under common control with any member of Inland; or (e) any of the individuals designated by Inland that are listed on Schedule 2.4. For these purposes "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Annual Election" means the annual election of Directors held in --------------- accordance with the By-laws, including any such election by stockholders' consent. "Board" means the Board of Directors of IPWC. ----- "By-laws" mean the By-laws of IPWC. ------- "Certificate of Incorporation" means the Articles of Incorporation of ---------------------------- IPWC in the form filed with the California Secretary of State on July 9, 1999. "Common Stock" means the common stock of IPWC. ------------ "Director" means a director of IPWC. -------- "Disposition" has the meaning given to such term in Section 3.1. ----------- ----------- "Effective Date" means January 1, 2000. -------------- "Holder" means a record and beneficial owner of any Shares. ------ "Initial Inland Directors" mean Robb Quincey ("Quincey") and William ------------------------ McIntyre. "Initial SWC Directors" mean Anton C. Garnier, Maurice Gallarda, and --------------------- Steve Richardson. "Inland Director" means the Initial Inland Directors and each Person --------------- nominated by the Inland Holders pursuant to Section 2.4 and elected as a ----------- Director. "Inland Holder" means Inland (so long as it is a Holder) and each ------------- Permitted Transferee of Inland who becomes a Holder by acquiring any Inland Shares. "Inland Shares" means the shares of IPWC Common Stock owned of record ------------- and beneficially by the Inland Holders. "IPDC" means Inland Pacific Development Company, a Delaware limited ---- liability company. "Permitted Transferee" means, in the case of any SWC Holder, (i) a -------------------- successor to a SWC Holder by Reorganization or operation of law pursuant to a statutory merger, consolidation, dissolution or liquidation (ii) a purchaser of all or substantially all of a SWC Holder's assets, or (iii) a Person owning, directly or indirectly, a majority of the Voting Securities or other comparable equity interests of a SWC Holder, a Person under common control with such Person or a Person of which SWC Holder owns, directly or indirectly, a majority of the outstanding Voting Securities or other comparable equity interests; and in the case of any Inland Holder, a Person to whom SWC has given its written consent to become a transferee of all or any part of the Inland Shares which consent shall not be unreasonably withheld if such transfer is to an Affiliate of Inland; provided, however, that in each case the Permitted Transferee has become a party to and has agreed to be bound by this Agreement as to all Shares then being transferred to it. "Permitted Transferee" includes successive transferees in transactions described in the preceding sentence. "Person" means an individual, partnership, corporation, limited ------ liability company, unincorporated organization or association, trust, government or department, unit or political subdivision of a government, or other such entity. 2 "Reorganization" means any merger or consolidation of IPWC or SWC with -------------- or into any other Person, any recapitalization or reclassification of capital stock or other equity interests of IPWC or SWC or any sale of all or substantially all of the assets of IPWC or SWC in any one or a series of related transactions. "Shares" means the shares of IPWC Common Stock owned by the ------ Stockholders on the date hereof and any shares of Common Stock acquired by any Holder in any capacity after the date hereof and prior to the termination of this Agreement. "Shares" shall include Shares acquired upon the exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities, or by means of purchase, dividend, distribution, gift, bequest, inheritance or as a successor in interest in any capacity or otherwise. In the event of a stock dividend or distribution, or any change in the Common Stock by reason of any stock dividend, split-up, recapitalization, reclassification, combination, exchange of shares or the like, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed, reclassified or exchanged and appropriate adjustments shall be made to the terms and provisions of this Agreement. "Shares" shall also include voting trust certificates issued in respect of any Shares. "SWC Director" means any Person nominated by the SWC Holders and ------------ elected as a Director. "SWC Holder" means SWC (so long as it is a Holder) and each Permitted ---------- Transferee of SWC who becomes a Holder by acquiring any SWC Shares. "SWC Shares" means the Shares of IPWC Common Stock owned of record and ---------- beneficially by the SWC Holders. "Voting Securities" means shares of capital stock or equity interests ----------------- the holders of which are at the time entitled to elect a majority of the issuer's board of directors or other comparable body. Additional terms are defined where used in this Agreement. Section 1.2. Interpretation. Each definition in this Agreement ----------- -------------- includes the singular and the plural, and references to the neuter gender include the masculine and feminine whenever appropriate. References to any statute mean such statute as amended at the time and include any successor legislation. References to a business day mean any day other than a Saturday, Sunday or legal holiday where IPWC's principal office is located. The words "herein," "hereof" and "hereunder" refer to this Agreement as a whole. The headings of the Articles and Sections are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. Unless the context otherwise requires, references to Articles, Sections and Subsections mean the Articles, Sections and Subsections of this Agreement. 3 Section 1.3. Changes in IPWC Common Stock. If during the term of this ----------- ---------------------------- Agreement the outstanding shares of IPWC Common Stock shall be changed into a different number of shares or a different class or classes of shares by reason of any split-up, combination, reclassification or other recapitalization, or if a stock dividend shall be declared on shares of IPWC Common Stock with a record date during such term, the terms of this Agreement (including its definitions) shall be appropriately modified to give effect to such occurrence. ARTICLE II. VOTING OF SHARES AND GOVERNANCE Section 2.1. Composition of Board. From and after the date hereof: ----------- -------------------- (a) The number of Directors comprising the whole Board shall initially be five (5), subject to increase as provided in Section 2.1(b). On the -------------- date hereof, SWC shall appoint the three (3) Initial SWC Directors and Inland shall appoint the two (2) Initial Inland Directors. (b) From time to time, upon the unanimous written consent of the SWC Directors and Inland Directors, the number of Directors comprising the Board may be increased to any odd number larger than five (5) and the Board shall be constituted so that the number of SWC Directors is at least one (1) larger than the number of Inland Directors. (c) Each of the SWC Holders and Inland Holders agree to vote its Shares (or sign written consents in lieu thereof) at each Annual Election, and at all other times when required to fill a vacancy on the Board, however arising, and to take all such other action as may be reasonably necessary (including, without limitation, causing one or more of the Directors nominated by it to be removed or resign promptly after any change in ownership of Shares), so that the Board shall be constituted as provided in Section 2.1(a) or (b), as -------------- --- applicable, and to the extent herein provided shall consist of the appropriate number of Directors in accordance with this Section 2.1, and of SWC Directors ------------ and Inland Directors nominated in accordance with Sections 2.3 and 2.4. -------------------- Section 2.2. Election of Initial Board. ----------- -------------------------- (a) Subject to Section 2.1(a), each of SWC and Inland hereby -------------- authorize, consent to and approve the election of each of the Initial Directors as Directors to serve until their respective successors have been duly elected pursuant to this Agreement, the Articles of Incorporation, the By-laws and applicable law. (b) Each of SWC and Inland shall take reasonable efforts to ensure that their Initial Directors authorize, consent to and approve the election of Anton C. Garnier as "Chairman" and Quincey as "Vice Chairman" of the IPWC Board. Section 2.3. Changes in SWC Directors. ----------- ------------------------- (a) The SWC Holders may designate the individual to fill any vacancy on the Board resulting from the death, resignation or removal of any SWC Director by giving written notice to IPWC (which shall promptly forward a copy of such notice to each Director and 4 Holder). Within not more than 10 days after the notice described in the preceding sentence is so forwarded, the Holders will use their best efforts to cause the election to the Board of the nominee named in such notice. (b) The SWC Holders may nominate the individual to succeed any SWC Director who will not stand for re-election, and may change any such nomination, at any Annual Election by giving written notice to IPWC of its nominees as SWC Directors not less than 45 days (or, in the case of unforeseen circumstances, such shorter period as may be permitted by law) prior to the date fixed for any Annual Election. If the notice specified in the preceding sentence is not given within the time required, the incumbent SWC Directors shall be deemed to be the nominees for election as SWC Directors at such Annual Election. Section 2.4. Changes in Inland Directors. ----------- ---------------------------- (a) The Inland Holders may designate the individual, subject to SWC's reasonable approval, to fill any vacancy on the Board resulting from the death, resignation or removal of any Inland Director by giving written notice to IPWC (which shall promptly forward a copy of such notice to each Director and Holder). Within not more than 10 days after the notice described in the preceding sentence is so forwarded, the Holders will use their best efforts to cause the election to the Board of the nominee named in such notice. (b) The Inland Holders may nominate the individual, subject to SWC's reasonable approval, to succeed any Inland Director who will not stand for re- election, and may change any such nomination, at any Annual Election by giving written notice to IPWC of its nominee as Inland Director not less than 45 days (or, in the case of unforeseen circumstances, such shorter period as may be permitted by law) prior to the date fixed for any Annual Election. If the Notice specified in the preceding sentence is not given within the time required, the incumbent Inland Directors shall be deemed to be the nominees for election as Inland Directors at such Annual Election. All of the individual listed on Schedule 2.4 attached hereto are approved by SWC to serve as Inland Directors as designated by Inland. Section 2.5. Removal of Directors. A SWC Director may not be removed ----------- -------------------- from the Board except by delivery to IPWC and all Holders of a written notice of such removal signed by the SWC Holders. An Inland Director may not be removed from the Board except by delivery to IPWC and all Holders of a written notice of such removal signed by the Inland Holders. Within not more than 10 days after such notice is given, each of the Holders shall execute and deliver to IPWC its written consent to the removal specified in such notice or, if requested by whichever of the SWC Holders or the Inland Holders shall have given such notice in accordance with this Section 2.5, shall vote its Shares in favor of such removal. Section 2.6. IPWC Officers. The IPWC Board shall, at a minimum, ----------- ------------- appoint a president, vice president, secretary, and treasurer of IPWC. Unless terminated for cause, Quincey shall be the Vice President, Director of Business Development of IPWC, or other title as an officer of IPWC as reasonably approved by SWC, for a period consistent with the terms of that certain Quincey Employment Agreement between Quincey and IPDC dated January 1, 2000, but not in excess of 5 years unless approved by the IPWC Board of Directors; provided, however, 5 that if the Cooperative Services Agreement has been terminated, Quincey may be terminated as Vice President in SWC's sole discretion. Section 2.7. Agent for Affiliated Holders. If a portion or all of the ----------- ---------------------------- Shares held by Inland shall be transferred to one or more Permitted Transferees, resulting in the Shares which were theretofore held by such Holder being held by more than one Holder, then the Inland Holders shall: (i) pre-approve an attorney in fact to act as agent and proxy for all purposes of this Agreement (including without limitation the voting of Shares, the nomination of Directors, the giving of consents, the approval of amendments, the receipt of notices, etc.) for all of the Inland Holders, as the case may be, and (ii) specify in writing to the other parties that it (or such other Holder) is to act as such agent and proxy, and thereafter the other parties shall be entitled to look solely to, and to deal solely with, the person so specified for all purposes of this Agreement as if such Holder held all the Shares held by the party providing such notice and its Permitted Transferees. Section 2.8. Related Party Transactions. Any contract or transaction ------------ -------------------------- between IPWC and one or more of its Directors or officers or between IPWC and any other Person in which one or more of its Directors or officers are shareholders, partners, members, directors, or officers, or have a material financial interest, shall be void unless: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors, and the Board of Directors in good faith authorizes the contract or transaction by the affirmative vote of a majority of the Directors and (2) the contract or transaction is at arms' length and fair as to IPWC as of the time it is authorized, approved or ratified by the Board of Directors. Interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors at which the contract or transaction is authorized and in determining whether the action received the requisite approval. Section 2.9. Conflicts of Interest. SWC and Inland acknowledge that ----------- --------------------- Quincey, and/or an entity wholly owned by Quincey, is a member of Inland and that Quincey will be performing services for IPWC, IPDC and Inland. SWC further acknowledges that the Quincey Employment Agreement shall permit Quincey to devote sufficient time to the business of IPDC and Inland in order to effectively and efficiently manage IPDC and Inland. It is the intention of the parties that Quincey, in his capacity as a member and the President of Inland, will attempt to negotiate agreements for IPWC to lease, manage or operate municipal water and wastewater systems. In return, Inland will receive certain fees from IPWC and preferred stock from SWC. ARTICLE III. RESTRICTIONS ON TRANSFERS OF SHARES Section 3.1. No Dispositions. No Holder shall (a) sell, assign, ----------- --------------- transfer by operation of law or otherwise, pledge, hypothecate, grant any security interest or other lien in or otherwise dispose of any of its Shares, or make or permit any indirect transfer of such Shares through an issuance of such Holder's capital stock or other equity interests resulting in a direct or indirect change in the beneficial ownership of a majority of its Voting Securities or other equity interests (a "Disposition"), or (b) agree or otherwise become obligated to take any action referred to in clause (a) of this Section 3.1; provided, however, that such restrictions shall not apply to (i) a - ----------- Disposition of Shares to a Permitted Transferee of the SWC Holders, (ii) a change of control of 6 SWC, (iii) the hypothecation or pledge of the SWC Shares to a bank or other financial institution or under any indenture, or (iv) the granting of a security interest in or other lien on the SWC Shares to a bank or other financial institution or under any indenture. In the event that the Inland Holders transfer their shares in violation of this Section 3.1, other than if approved ----------- by SWC, such transfer shall result in the termination of all of the rights of the Inland Holders under Article II of this Agreement. Such termination will be effective sixty (60) days after written notice of termination is delivered to Inland unless the Inland Holder rescinds the purported transfer. Section 3.2. Legend on Share Certificates. ----------- ---------------------------- (a) All certificates for Shares which are subject to the terms and provisions of this Agreement shall bear the following legend: The shares represented by this certificate (the "Shares") have not been registered under the Securities Act of 1933, as amended, and no sale, transfer or other disposition may be made of the Shares unless they have been so registered or Inland Pacific Water Company (the "Company") has been furnished with a legal opinion from a nationally recognized law firm satisfactory to it that such registration is not required. The Shares are also subject to certain restrictions on transfer and requirements as to voting contained in the IPWC Stockholders Agreement dated as of January 1, 2000 among the Company, the registered holder of the Shares and certain other stockholders, a copy of which is on file with the Secretary of the Company. (b) Upon the termination of this Agreement pursuant to Section 5.7, ----------- each Holder shall be entitled to receive, in exchange for any certificate for IPWC Common Stock bearing the legend set forth in subsection (a) of this Section ------- 3.2, a certificate bearing a legend containing only the first sentence of such - --- legend, unless IPWC shall have determined (based upon the advice of legal counsel) that such legend is then no longer required. Section 3.3. Put-Call Rights. ----------- --------------- (a) At any time, or from time to time, any Inland Holder may require the SWC Holders to purchase from it all of the Shares held by such Holder (the "Put Right"), and upon termination of this Agreement under Section 5.7 hereof, ----------- the SWC Holders may deliver notice to the Inland Holders requiring that the Inland Holders sell all of their Shares to SWC (the "Call Right"). (b) Should a Put or Call Right be exercised for Shares pursuant to this Section 3.3, the purchase price (the "Purchase Price") to be paid by the ----------- SWC Holders to the Inland Holders for such Shares shall be determined as follows: 7 (1) The parties shall first negotiate in good faith for a price that a willing buyer would pay and a willing seller would accept for the Shares for which the Put or Call Right is being exercised. (2) If the parties do not agree on a Purchase Price within 15 business days after the delivery of the Put Notice or Call Notice, as applicable, the dispute shall be submitted to an arbitrator selected in accordance with Section 5.4(b) of this Agreement. Each party shall submit a -------------- proposed Purchase Price and a brief in support of its proposed Purchase Price and the arbitrator shall select one party's proposed Purchase Price as the price to be paid by the SWC Holders to the Inland Holders for such Shares. Each party shall be responsible for its own costs and fees in connection with such arbitration. (c) The Inland Holders may exercise such Put Right by delivering to the SWC Holders a written notice (a "Put Notice") stating that such Put Right is being exercised and specifying the number of Shares held by the Inland Holders for which the Put Right is being exercised. The SWC Holders shall be obligated to purchase the Shares specified in the Put Notice on the later of sixty (60) days after receipt of the Put Notice or ten (10) business days after the Purchase Price is determined in accordance with Section 3.3 (b) (the "Put Date"). (d) The SWC Holders may, from and after the Termination Notice Date, exercise such Call Right by delivering to the Inland Holders a written notice (a "Call Notice") stating that such Call Right is being exercised and specifying the number of Shares held by the Inland Holders for which the Call Right is being exercised. The Inland Holders shall be obligated to sell the Shares specified in the Call Notice on the later of thirty (30) days after receipt of the Call Notice or ten (10) business days after the Purchase Price is determined in accordance with Section 3.3 (b) (the "Call Date"). (e) On a Put Date or a Call Date, the SWC Holders shall be obligated to pay to the Holder an amount equal to the applicable Purchase Price upon surrender of the certificates representing such Shares. Section 3.4. First Right of Refusal. In the event hat the SWC Holders ----------- ---------------------- desire to make a disposition of the SWC Shares to a Person other than to a Permitted Transferee, SWC, on behalf of the SWC Holders, shall give Inland, on behalf of the Inland Holders, a first right of refusal to acquire the SWC Shares by giving Inland written notice of the identity of the proposed transferee, the proposed purchase price and the proposed payment terms and shall offer to sell such SWC Shares on the same terms. Inland shall have seven (7) days to notify SWC in writing if the Inland Holders will purchase the SWC Shares proposed to be transferred by the SWC Holders on the terms set forth in such notice from SWC. Failure of Inland to provide written notice by 5:00 p.m. Pacific Time on the seventh day shall be deemed to be a rejection of the SWC Holders' offer to sell the SWC Shares to the Inland Holders, and the first right of refusal shall be extinguished with respect to such SWC Shares and the SWC Holders may proceed with its sale of the SWC Shares to the proposed transferee in accordance with the terms as noticed; provided, however, that any material changes to the terms as noticed will trigger a new first right of refusal with respect to such new terms. If Inland provides timely written notice accepting the offer to 8 sell, the SWC Holders shall sell such SWC Shares to the Inland Holders on the same terms as noticed instead of to the proposed transferee. ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1. Representations and Warranties. Each Holder hereby ----------- ------------------------------ acknowledges, represents, warrants and/or agrees as follows: (a) The issuance of the Shares has not been nor will it be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, and that the Shares are being issued pursuant to exemptions from registration under the Securities Act for issuance of securities not involving a public offering; (b) The Holder is acquiring Shares solely for its own account for investment and not with a view to resale or distribution and has no present intention of transferring the Shares to any other person or entity, and the Holder was not formed for the specific purpose of acquiring or holding the Shares; (c) The Holder is a sophisticated investor and has such knowledge and experience in financial, tax, business matters, securities and investments including, without limitation, experience in investments by actual participation, so as to evaluate the merits and risks of investing in and holding the Shares and to make an informed investment decision with respect thereto, and has made such investigation into IPWC as is necessary to make an informed investment decision; (d) The Holder has not received any advertisement or general solicitation with respect to the issuance of the Shares; (e) Neither the Securities and Exchange Commission (the "SEC") nor any state securities commission has approved the Shares or passed upon or endorsed the merits of the Shares; (f) The Holder is aware that an investment in the Shares involves a number of very significant risks and, in particular, acknowledges that IPWC is in the development stage, has no products or services, and has not commenced significant operations; (g) The Holder must bear the economic risk of the investment indefinitely because none of the Shares have been registered under applicable securities laws and therefore, none of the Shares may be sold, hypothecated or otherwise disposed of unless subsequently registered under the Securities Act and applicable state securities laws or an exemption from registration is available; (h) The Holder will not sell or transfer any of the Shares without (i) registration under applicable securities laws or a valid exemption therefrom and (ii) complying with the requirements of this Agreement; 9 (i) The legends set forth in Section 3.2 shall be placed on the certificates representing the Shares and notations thereof will be made in IPWC's books and stock transfer records; (j) The information contained herein is accurate and may be relied upon by IPWC in determining the availability of an exemption from registration under federal and state securities laws; and (k) The execution, delivery and performance of this Agreement by the Holder have been duly authorized and this Agreement is a valid and legally binding agreement of the Holder. ARTICLE V. GENERAL PROVISIONS Section 5.1. Notices. All notices, requests or demands required or ----------- ------- permitted by this Agreement: (i) shall be in writing; (ii) shall be deemed to have been given, forwarded, made or delivered: (x) if delivered in person or by overnight courier service, when received, (y) if transmitted by telefax, when so transmitted if evidence of completed transmission is received, and (z) if sent by prepaid registered or certified mail, return receipt requested, and properly addressed on the earlier of the date of receipt or refusal or the seventh day after it is mailed; and (iii) shall be addressed: If to IPWC, addressed to: Inland Pacific Water Company 225 North Barranca Ave., Suite 200 West Covina, California 91791-1605 Attention: President Telecopier: (626) 915-1558 If to SWC, addressed to: Southwest Water Company 225 North Barranca Ave., Suite 200 West Covina, California 91791-1605 Attention: Tom Tekulve Telecopier: (626) 915-1558 with a copy to: Latham & Watkins 650 Town Center Drive Costa Mesa, California 92626-1925 Attention: James W. Daniels, Esq. Telecopier: (714) 755-8290 10 If to Inland, addressed to: The Quincey Companies 8300 Utica Avenue, Third Floor Rancho Cucamonga, California 91730 Attention: Mr. Robb Quincey Telecopier: (909) 635-2048 with copies to: Lewis Investment Company, LLC 1156 North Mountain Avenue P.O. Box 670 Upland, California 91785-0670 Attention: Mr. Richard A. Lewis Telecopier: (909) 949-6700 Mr. Bill McIntyre Mr. Steven Reenders c/o Canyon Water Company 300 E. Rowland Covina, California 91723 Telecopier: (626) 966-1274 Mr. Michael J. Bidart 600 S. Indian Hill Boulevard Claremont, California 91711 Telecopier: (909) 625-6915 or to such other place and with such other copies as any party may designate as to itself by written notice to the others. Section 5.2. Holder List. IPWC shall maintain a list (the "Holder ----------- ----------- ------ List") of the name and address of each Holder and the number of Shares held by - ----- it. The initial Holder List is attached hereto as Exhibit A. Each Holder shall give prompt notice to IPWC of any change in the information pertaining to it in the Holder List, but in the absence of such notice IPWC and each other Holder may treat the information reflected in the current Holder List as correct. IPWC shall furnish a copy of the Holder List to any Holder upon request. Section 5.3. Amendments, Waivers and Consents. This Agreement may be ----------- -------------------------------- amended only by a document executed (which may be in counterparts) by IPWC and all of the Holders. Any Holder may waive the benefit of any provision of this Agreement, either in a specific instance or generally, by delivering to IPWC and each other Holder a consent to such waiver. All consents required or permitted by this Agreement shall be in writing and signed by the party to be charged therewith. For purposes of this Agreement, the written consent of any of the 11 SWC appointees to the IPWC Board of Directors shall constitute the consent of SWC where required herein. Section 5.4. Equitable Remedies; Submission to Arbitration. ----------- --------------------------------------------- (a) Each Holder, by becoming a party to this Agreement, acknowledges and agrees that its breach or nonperformance of any provision of this Agreement in accordance with the specific terms hereof would result in irreparable harm to IPWC and to each other Holder for which money damages would not provide an adequate remedy. Accordingly, each Holder (i) agrees that IPWC and each other Holder shall be entitled to specific performance or injunctive or other equitable relief against such Holder in the event of its breach or other non- performance of any of the provisions of this Agreement; and (ii) waives any requirement for the securing or posting of any bond in connection with such remedy. (b) EXCEPT AS OTHERWISE PROVIDED IN SECTION 5.4(a), EACH HOLDER -------------- IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED HEREBY SHALL BE RESOLVED BY ARBITRATION IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, UNDER THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION. EACH HOLDER HEREBY WAIVES ALL RIGHTS (IF ANY) SUCH HOLDER MAY HAVE TO A TRIAL BY JURY. (c) The arbitrator shall be selected by the Holders who are involved in the dispute, shall have expertise and experience in the resolution of disputes similar to the dispute to be resolved and shall not be an Affiliate of any Holder. If such Holders are unable to agree on the selection of an arbitrator, each such Holder shall select one arbitrator and such arbitrators shall select an arbitrator meeting the criteria set forth in the immediately preceding sentence to resolve such dispute, subject to the provisions of Section ------- 3.3(b). The fees and expenses of any arbitrator selected by any Holder shall be - ------ paid by such Holder; the fees and expenses of any other arbitrators shall be shared equally by the Holders who are involved in the dispute. All other expenses of such arbitration shall be paid by the Holder incurring the same. Section 5.5. Successors and Assigns. This Agreement shall inure to ----------- ---------------------- the benefit of and be binding upon the permitted successors and assigns of IPWC and each Holder; provided, however, that IPWC may not assign this Agreement -------- ------- except by operation of law or to a purchaser of all or substantially all of its business and assets; and provided further, that no Holder may assign this -------- ------- Agreement except in connection with a transfer of Shares by such transferring Holder to another Person which thereupon becomes a Holder with respect to such Shares, all in accordance with Section 3.1 and Section 5.6. ----------- ----------- Section 5.6. Counterparts; Additional Parties. This Agreement may be ----------- -------------------------------- executed in counterparts, all of which together shall constitute a single agreement. Prior to any Disposition of Shares to a Permitted Transferee, the Holder effecting such Disposition shall cause such Permitted Transferee to execute and deliver to IPWC and all of the Holders a supplemental agreement to this Agreement, in form and substance reasonably satisfactory to IPWC and such other Holders, whereby such Permitted Transferee shall agree to become a party to and be bound 12 by all of the terms and conditions of this Agreement applicable to a Holder of Shares and confirm that all of the Shares to be acquired by such Permitted Transferee shall continue to be subject to this Agreement. As promptly as practicable, IPWC shall cause a fully executed counterpart of this Agreement or any supplemental agreement referred to in this Section 5.6 to be delivered to ----------- each Holder. Section 5.7. Term; Termination. ----------- ----------------- (a) Each party to this Agreement shall remain bound by this Agreement for so long as such party is a Holder of Shares. This Agreement shall remain in effect for the maximum duration permitted by law and for so long as there is more than one Holder, unless terminated in accordance with this Section 5.7. ----------- (b) This Agreement may only be terminated with the written consent of all the parties hereto or by the following special termination right afforded SWC and Inland (or SWC's Permitted Transferees). From and after the expiration of six (6) months following the Effective Date, either SWC or Inland can deliver written notice to the other (the "Termination Notice") electing to terminate such party's obligation hereunder and under Section 8.2 of the Cooperative Services Agreement. Upon delivery of the Termination Notice (the "Termination Notice Date"), the provisions of Section 3.3 shall apply. Such termination ----------- shall not be effective until 270 days following the Termination Notice Date (the "Termination Date"), and until such Termination Date, all of the terms of Article II shall continue to apply. (c) The termination of this Agreement or any provision hereof shall not affect any action taken or agreement entered into prior to such termination or any liability under any obligation previously incurred under this Agreement, all of which shall survive such termination. Section 5.8. Insurance. IPWC shall at all times during the term of ----------- --------- this Agreement maintain (i) a commercial general liability policy in the minimum amount of Five Million Dollars ($5,000,000) per occurrence for claims incurred, (ii) workers' compensation insurance and (iii) directors and officers liability insurance. SWC, Inland and such other parties as SWC shall from time to time designate shall be named as an additional insured on all policies of insurance. The insurance provided for in clause (i) shall be on an occurrence rather than a claims made basis. Section 5.9. Ethics Policy. Inland and each of its members agree to ----------- ------------- be bound by the spirit of SWC's ethics policy, a copy of which appears as Exhibit B, and as may be amended from time to time. Section 5.10. Partial Invalidity. Each provision of this Agreement ------------ ------------------ shall be interpreted so as to render it valid and enforceable under applicable law. A finding that any such provision is invalid or unenforceable in any jurisdiction or in any particular circumstance shall not affect its validity or enforceability under the laws of any other jurisdiction or in any other circumstances. 13 Section 5.11. Governing Law. This Agreement shall be governed by and ------------ ------------- construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. For Southwest Water Company For Inland Pacific Water Company /s/ANTON C. GARNIER /s/MAURICE GALLARDA - ------------------------ ----------------------------- Anton C. Garnier Maurice Gallarda President President For Inland Pacific Partners, LLP /s/RICHARD A. LEWIS - ------------------- By: Richard A. Lewis Its: Manager /s/MICHAEL J. BIDART - -------------------- By: Michael J. Bidart Its: Manager /s/WILLIAM MCINTYRE - ------------------- By: William McIntyre Its: Manager /s/ROBB QUINCEY - --------------- By: Robb Quincey Its: Manager 14 EXHIBIT A HOLDER LIST ----------- Name of Holder Number of Shares -------------- ---------------- Southwest Water Company 990 Inland Pacific Partners, LLC 10 EXHIBIT B ETHICS POLICY ------------- SCHEDULE 2.4 INLAND REPRESENTATIVES ---------------------- Michael J. Bidart William McIntyre Steve Reenders Robb Quincey Richard A. Lewis Robert E. Lewis Roger G. Lewis Randall W. Lewis John M. Goodman 17 EX-10.18 12 LIMITED LIABILITY COMPANY AGREEMENT LIABILITY COMPANY AGREEMENT OF INLAND PACIFIC DEVELOPMENT COMPANY, LLC A DELAWARE LIMITED LIABILITY COMPANY TABLE OF CONTENTS -----------------
Page ---- Article 1 DEFINITIONS............................................................................................ 1 1.1 "Accountant"........................................................................................ 1 1.2 "Act"............................................................................................... 1 1.3 "Affiliate"......................................................................................... 1 1.4 "Agreement"......................................................................................... 2 1.5 "Bankruptcy"........................................................................................ 2 1.6 "Base Rate"......................................................................................... 2 1.7 "Capital Account"................................................................................... 2 1.8 "Capital Contribution".............................................................................. 2 1.9 "Certificate of Formation".......................................................................... 2 1.10 "Code".............................................................................................. 2 1.11 "Company"........................................................................................... 2 1.12 "Company Budget".................................................................................... 2 1.13 "Distributable Cash" and "Start-Up Distributable Cash".............................................. 2 1.14 "Distribution"...................................................................................... 2 1.15 "Economic Interest"................................................................................. 2 1.16 "Fair Market Value"................................................................................. 3 1.17 "Fiscal Year"....................................................................................... 3 1.18 "Formation Date".................................................................................... 3 1.19 "Former Member"..................................................................................... 3 1.20 "Former Member's Interest".......................................................................... 3 1.21 "IPWC".............................................................................................. 3 1.22 "IPWC Contract"..................................................................................... 3 1.23 "IPWC Development Fees"............................................................................. 3 1.24 "Laws".............................................................................................. 3 1.25 "Management Committee".............................................................................. 3 1.26 "Member"............................................................................................ 3 1.27 "Membership Interest"............................................................................... 4 1.28 "Membership Termination Event"...................................................................... 4 1.29 "Percentage Interest"............................................................................... 4 1.30 "Person"............................................................................................ 4 1.31 "Preferred Return".................................................................................. 4 1.32 "Preferred Return Account".......................................................................... 4 1.33 "President"......................................................................................... 4 1.34 "Project"........................................................................................... 5 1.35 "Project Budget and Plan"........................................................................... 5 1.36 "Related IPWC Agreements"........................................................................... 5 1.37 "Start-Up Capital".................................................................................. 5 1.38 "Start-Up Distributable Cash"....................................................................... 5 1.39 "Start-Up Period"................................................................................... 5 1.40 "Start-Up Percentages".............................................................................. 5 1.41 "Tax Credits"....................................................................................... 5 1.42 "Tax Matters Member"................................................................................ 5 1.43 "Tax Supplement".................................................................................... 5 1.44 "Transfer".......................................................................................... 6 1.45 "Treasury Regulations".............................................................................. 6
Page(s) ------- Article 2 ORGANIZATIONAL MATTERS................................................................................... 6 2.1 Name.................................................................................................. 6 2.2 Term.................................................................................................. 6 2.3 Office and Agent...................................................................................... 7 2.4 Purpose of Company.................................................................................... 7 2.5 Intent................................................................................................ 7 2.6 Absence of Other Restrictions......................................................................... 7 Article 3 CAPITAL CONTRIBUTIONS.................................................................................... 7 3.1 Initial Capital Contributions......................................................................... 7 3.2 Project Capital Contributions......................................................................... 9 3.3 Call Notice/Bank Accounts............................................................................. 10 3.4 Capital Accounts...................................................................................... 10 3.5 Preferred Return...................................................................................... 10 3.6 Contribution Accounts and Preferred Return Accounts................................................... 10 3.7 Capital Matters....................................................................................... 11 3.8 IPWC Development Fees................................................................................. 11 3.9 Failure to Contribute Capital......................................................................... 11 Article 4 MEMBERS.................................................................................................. 12 4.1 Limited Liability..................................................................................... 12 4.2 Admission of Additional Members....................................................................... 12 4.3 Withdrawal............................................................................................ 12 4.4 Lack of Member Authority.............................................................................. 13 Article 5 MANAGEMENT AND CONTROL OF THE COMPANY.................................................................... 13 5.1 Management of the Company by Management Committee..................................................... 13 5.2 President of Company.................................................................................. 15 5.3 Performance of Duties; Liability of Members and Officers.............................................. 16 5.4 Major Decisions....................................................................................... 17 5.5 Competing Activities.................................................................................. 18 5.6 Contracts with Affiliates............................................................................. 19 5.7 Company Opportunities................................................................................. 19 5.8 Expenses.............................................................................................. 19 Article 6 PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS........................................................... 20 6.1 Allocation of Income and Losses....................................................................... 20 6.2 Definition of "Distributable Cash".................................................................... 20 6.3 Timing of Distributions............................................................................... 20 6.4 Order of Distribution................................................................................. 20 6.5 Start-Up Period Distributions......................................................................... 21 6.6 Form of Distribution.................................................................................. 21 Article 7 TRANSFER OF INTERESTS.................................................................................... 21 7.1 Transfer of Interests................................................................................. 21 7.2 Permitted Transfers................................................................................... 21 7.3 Substitution of Members............................................................................... 22 7.4 Further Restrictions on Transfer of Interests......................................................... 22
Page(s) ------- 7.5 Election to Dissolve.................................................................................. 22 Article 8 CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS............................................................ 22 8.1 Dissolution of Company................................................................................ 22 8.2 Admission or Conversion............................................................................... 23 8.3 Optional Buy-Out...................................................................................... 23 Article 9 ACCOUNTING, RECORDS, REPORTING BY MEMBERS................................................................ 25 9.1 Books and Records/Financial Reports................................................................... 25 9.2 Bank Accounts; Invested Funds......................................................................... 25 9.3 Accounting Matters.................................................................................... 25 Article 10 DISSOLUTION AND WINDING UP.............................................................................. 26 10.1 Dissolution........................................................................................... 26 10.2 Date of Dissolution................................................................................... 26 10.3 Winding Up............................................................................................ 26 10.4 Distributions in Kind................................................................................. 26 10.5 Order of Payment of Proceeds Upon Dissolution......................................................... 27 10.6 Limitations on Payments Made in Dissolution........................................................... 27 10.7 Certificate of Cancellation........................................................................... 27 10.8 Compensation for Services............................................................................. 27 Article 11 INDEMNIFICATION......................................................................................... 27 11.1 Indemnification....................................................................................... 27 11.2 Contract Right; Expenses.............................................................................. 28 11.3 Insurance............................................................................................. 28 Article 12 BUY/SELL................................................................................................ 28 12.1 Put/Call Offering Notice.............................................................................. 28 12.2 Exercise of Put/Call.................................................................................. 29 12.3 Notice................................................................................................ 29 12.4 Designee.............................................................................................. 30 12.5 Closing............................................................................................... 30 12.6 Company Accountant.................................................................................... 31 12.7 Timing of Put/Call and Default Buy-Out................................................................ 31 Article 13 MISCELLANEOUS........................................................................................... 31 13.1 Amendments............................................................................................ 31 13.2 Offset Privilege...................................................................................... 31 13.3 Arbitration........................................................................................... 31 13.4 Notices............................................................................................... 33 13.5 Attorney's Fees....................................................................................... 33 13.6 Jurisdiction.......................................................................................... 33 13.7 Complete Agreement.................................................................................... 33 13.8 Binding Effect........................................................................................ 33 13.9 Section Headings...................................................................................... 34 13.10 Interpretation........................................................................................ 34 13.11 Severability.......................................................................................... 34
Page(s) ------- 13.12 Multiple Counterparts................................................................................. 34 13.13 Securities Representations and Warranties............................................................. 34 Article 14 DEFAULT REMEDIES........................................................................................ 34 14.1 Events of Default..................................................................................... 34 14.2 Remedies.............................................................................................. 35 14.3 Cumulative Remedies................................................................................... 36 14.4 Litigation Without Termination........................................................................ 36 14.5 No Waiver............................................................................................. 36
iv LIABILITY COMPANY AGREEMENT OF INLAND PACIFIC DEVELOPMENT COMPANY, LLC A DELAWARE LIMITED LIABILITY COMPANY This Limited Liability Company Agreement ("Agreement") is dated as of January 1, 2000 (the "Effective Date"), and is made by and between Inland Pacific Partners, LLC, a Delaware limited liability company ("Inland") and Southwest Water Company, a Delaware corporation ("SWC") (collectively, the "Members" and individually, a "Member") with reference to the following facts: A. The parties desire to form Inland Pacific Development, LLC (the "Company") as a limited liability company under the laws of the State of Delaware. B. In furtherance thereof, the parties filed a Certificate of Formation on November 13, 1999 (the "Formation Date") with the Secretary of State for the State of Delaware and desire to adopt a limited liability company agreement to govern their respective rights and obligations as Members of the Company from and after the Formation Date (as defined in Section 1.18). NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt of which is acknowledged, the Members agree that the following shall be the Limited Liability Company Agreement of the Company. ARTICLE 1 DEFINITIONS When used in this Agreement, the following terms have the following meanings: 1.1 "Accountant" shall mean the Company's independent certified public ---------- accounting firm, which initially shall be Ernst & Young Kenneth Leventhal, but may be replaced by the Management Committee from time to time. 1.2 "Act" means the Limited Liability Company Act of the State of --- Delaware, as amended from time to time (or any corresponding provisions of any succeeding law). 1.3 "Affiliate" of a Member means (a) a Person directly or indirectly --------- (through one or more intermediaries) controlling, controlled by or under common control with that Member; (b) an officer, director, partner, shareholder, member or immediate family member of that Member; (c) a member of the immediate family of an officer, director, partner, shareholder, or member of that Member, or (d) a Person directly or indirectly controlled by or under common control with any member of Inland. For these purposes "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. 1.4 "Agreement" means this Limited Liability Company Agreement of Inland --------- Pacific Development Company, LLC, as originally executed and as amended from time to time. 1.5 "Bankruptcy" of a Member means the occurrence of any event of ---------- bankruptcy specified in Section 18-304(a) and (b) of the Act. 1.6 "Base Rate" means the commercial loan rate of interest announced --------- publicly from time to time by Bank of America in San Francisco, California, as such bank's "reference rate" or "prime rate" from time to time in effect. 1.7 "Capital Account" shall mean with respect to each Member, the --------------- "Adjusted Capital Account" which the Company establishes and maintains for that Member pursuant to Article 1 of the Tax Supplement. 1.8 "Capital Contribution" of a Member, at any particular time, means the -------------------- amount of money or the value of property which that Member has contributed to the capital of the Company. The value of any Capital Contribution of property (other than money) shall be its Fair Market Value as determined by the Management Committee using such reasonable methods of valuation as it may adopt. 1.9 "Certificate of Formation" means the Certificate of Formation of the ------------------------ Company as filed under the Act with the Delaware Secretary of State on November 13, 1999. 1.10 "Code" means the Internal Revenue Code of 1986, as amended from time ---- to time (or any corresponding provisions of any succeeding law). 1.11 "Company" means Inland Pacific Development Company, LLC, a Delaware ------- limited liability company. 1.12 "Company Budget" means the annual budget of the projected costs (i) to -------------- fund the day to day administration and operation of the Company, including, without limitation, the Quincey Employment Agreement, and (ii) to assist in the business development of Inland Pacific Water Company. All costs identified in the Company Budget are referred to herein as "Operating Costs". 1.13 "Distributable Cash" and "Start-Up Distributable Cash" have the ------------------ --------------------------- meanings specified in Section 6.2. 1.14 "Distribution" means the transfer of money or property by the Company ------------ to one or more Members without separate consideration. 1.15 "Economic Interest" means a share, expressed as a percentage, of one ----------------- or more of the Company's Net Income, Net Losses, Distributable Cash or other Page 2 Distributions, but does not include any other rights of a Member, including, without limitation, the right to vote or participate in the management of the Company or the right to information concerning the business and affairs of the Company. 1.16 "Fair Market Value" shall mean the value of the Company's assets if ----------------- sold for all cash in an arms-length negotiated sale as determined by the Members (or the appraised value if the Members are unable to agree on that value), or as determined by the Management Committee where stated herein. 1.17 "Fiscal Year" means the Company's fiscal year, which shall be the ----------- calendar year. 1.18 "Formation Date" means the date the Certificate of Formation is filed -------------- with the Delaware Secretary of State. 1.19 "Former Member" has the meaning specified in Section 8.2. ------------- 1.20 "Former Member's Interest" has the meaning specified in Section 8.2. ------------------------ 1.21 "IPWC" means Inland Pacific Water Company, a California corporation. ---- 1.22 "IPWC Contract" means a municipal water or wastewater contract ------------- entered into by IPWC. 1.23 "IPWC Development Fees" has the meaning set forth in Section 3.8. --------------------- 1.24 "Laws" means all federal, state and local laws, statutes, moratoria, ---- initiatives, referenda, ordinances, rules, regulations, standards, orders, judicial decisions, common law and other governmental, quasi- governmental and utility company requirements (including those relating to the environment, health and safety, or handicapped persons). 1.25 "Management Committee" means the committee appointed by the Members to -------------------- manage the overall business and affairs of the Company and to make all policy decisions of the Company. Initially, the Management Committee shall be comprised of those individuals named in Schedule 1.25 hereto. The initial appointees (and all subsequent appointees) to the Management Committee are referred to in this Agreement collectively as the "Managers." As used herein, the terms "approval by the Managers" or "approval by the Management Committee" means approval by a majority in number of the Managers, except where this Agreement expressly requires the unanimous approval of the Managers. 1.26 "Member" means each Person who is an initial signatory to this ------ Agreement and any Person who is subsequently admitted as a Member in accordance with Sections 7.3 or 8.2(a) of this Agreement. A Person who holds a mere Economic Interest but who has not been admitted as a Member is referred to herein as an "Interest Holder". Except where "unanimous approval" is Page 3 expressly required, "approval by the Members" or "approval of a majority-in-interest of the Members" as used herein means approval by Members that own, individually or collectively, a majority of the Percentage Interests owned by all Members then authorized to vote. 1.27 "Membership Interest" means a Member's total interest as a Member of ------------------- the Company, including that Member's Economic Interest, its right to inspect the books and records of the Company and its right, to the extent specifically provided in this Agreement, to participate in the business, affairs and management of the Company and to vote or grant consent with respect to matters coming before the Company. 1.28 "Membership Termination Event" with respect to any Member means one or ---------------------------- more of the following: the death, insanity, permanent disability, withdrawal, resignation, expulsion, Bankruptcy, dissolution, Transfer, or occurrence of any other event which terminates the continued membership of that Member in the Company, including the occurrence of any of the events set forth in Section 18-304 of the Act, excepting a Transfer of a Member's Membership Interest which is made in accordance with the provisions of Section 7.2 shall not constitute a Membership Termination Event. 1.29 "Percentage Interest" means the percentage of a Member's Membership ------------------- Interest in Company set forth opposite the name of that Member in Schedule 1.29, as such percentage may be adjusted from time to time pursuant to the provisions of this Agreement, or, as to an Interest Holder who owns a mere Economic Interest in Company, the percentage of that Person's Economic Interest. The Percentage Interest of the Members for all matters of Net Income and Net Loss related to the Start-Up Capital, Operating Costs, and IPWC Development Fees during the Start-Up Period shall be SWC -55%, Inland - 45% (the "Start-Up Percentages")); thereafter such Percentage Interests for all matters under this Agreement shall adjust to and remain SWC - 25%; Inland - 75%, unless further adjusted by reason of Transfer or dilution pursuant to the terms of this Agreement. 1.30 "Person" means any entity, corporation, company, association, joint ------ venture, joint stock company, partnership, trust, limited liability company, limited liability partnership, real estate investment trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator. 1.31 "Preferred Return" shall have the meaning specified in Section 3.5 ---------------- hereof. 1.32 "Preferred Return Account" shall have the meaning given such term in ------------------------ Section 3.6(b) hereof. 1.33 "President" means the individual employed by the Company to supervise --------- the day to day operations of the Company and to carry out the policy decisions of Page 4 the Management Committee. The initial President of the Company shall be Robb Quincey ("Quincey") in accordance with the terms of that certain Employment Agreement attached hereto as Appendix B (the "Quincey Employment Agreement"). 1.34 "Project" means a specific water or wastewater related opportunity or ------- other opportunity for investment by Company in utility (sewer, water, gas, electric, phone, CATV, solid waste, water treatment, etc.) and natural resource management projects, including, without limitation, the acquisition, lease and/or sale of water rights, water rights transfers, the acquisition and/or operation of utility companies, including water or wastewater companies, the financing, construction, and/or operation of water and wastewater infrastructure and other utilities, groundwater retention, recharge and management, NPDES projects, wetlands management, air quality projects, and/or operating as a utility purveyor. 1.35 "Project Budget and Plan" means, for each Project, a plan for the ----------------------- acquisition, development, management, operation, marketing and/or disposition of the Project and a proforma budget which identifies projected capital requirements, costs, and revenues for the Project. 1.36 "Related IPWC Agreements" means the Certificate of Formation, the ----------------------- Cooperative Services Agreement dated December 31, 1999, the IPWC Stockholders Agreement dated December 31, 1999, and the Agreement for Services dated December 31, 1999. 1.37 "Start-Up Capital" means all Capital Contributions made by Inland and ---------------- SWC during the Start-Up Period to pay the Operating Costs. 1.38 "Start-Up Distributable Cash" has the meaning specified in Section --------------------------- 6.2. 1.39 "Start-Up Period" means the period commencing upon the Formation ---------------- Date and ending two(2) years after the Effective Date. 1.40 "Start-Up Percentages" means SWC - 55%, Inland - 45% as further --------------------- described in Sections 1.29, 3.1(b), 3.8, Appendix A, and Schedule 1.29. 1.41 "Tax Credits" means all credits against income or franchise taxes and ----------- credits allowable to Members under state, federal, or other tax statutes. 1.42 "Tax Matters Member" means the Member appointed pursuant to the ------------------ provisions of Section 5.5 of the Tax Supplement to serve as the "Tax Matters Member" of the Company for purposes of Sections 6221-6233 of the Code. Initially, the Tax Matters Partner shall be the Member named on Schedule 1.41 hereto. 1.43 "Tax Supplement" means Appendix A attached hereto. -------------- Page 5 1.44 "Transfer" means, with respect to a Membership Interest or any -------- interest therein, including the Economic Interest, the sale, assignment, transfer, disposition, pledge, hypothecation or encumbrance, whether direct or indirect, voluntary, involuntary or by operation of law, and whether or not for value, of (a) all or any part of that Membership Interest or interest therein or (b) a controlling interest in any Person which directly or indirectly through one or more intermediaries holds that Membership Interest or interest therein, provided a Transfer of a controlling interest in SWC shall not constitute a Transfer for purposes of this Agreement. Further, the addition or substitution of any member of Inland where such new member acquires more than a twenty-five percent (25%) interest in Inland shall constitute a Transfer. A Transfer referred to in clause (b) above, except to an "Affiliate," is referred to in this Agreement as a "Change in Control". 1.45 "Treasury Regulations" means the regulations of the United States -------------------- Treasury Department pertaining to income tax. References in this Agreement to "Articles," "Sections," "Appendices" and "Schedules," shall be to the Articles, Sections, Appendices and Schedules of this Agreement, unless otherwise specifically provided; all Appendices and Schedules to this Agreement are incorporated herein by reference; any of the terms defined in this Agreement may, unless the context otherwise requires, be used in the singular or the plural and in any gender depending on the reference; the words "herein", "hereof" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and except as otherwise specified in this Agreement, all references in this Agreement (a) to any Person shall be deemed to include such Person's permitted heirs, personal representatives, successors and assigns; and (b) to any agreement, any document or any other written instrument shall be a reference to such agreement, document, or instrument together with all exhibits, schedules, attachments and appendices thereto, and in each case as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof; and (c) to any Law(s) shall be deemed references to such Law(s) as the same may be supplemented, amended, consolidated, superseded or modified from time to time. ARTICLE 2 ORGANIZATIONAL MATTERS 2.1 Name. The name of the Company shall be "Inland Pacific Development ---- Company, LLC." The business of the Company may be conducted under that name or, upon compliance with applicable law, under any other name approved by the Members. 2.2 Term. The term of the Company's existence shall commence upon the ---- Formation Date, and shall continue until such time as it is terminated pursuant to Article 10. Page 6 2.3 Office and Agent. The principal office of the Company shall be at 1156 ---------------- N. Mountain Avenue, Upland, California 91786, or at such other place as a majority of the Managers may determine from time to time. The Company may also have such offices within and without the State of California as a majority of the Managers may from time to time determine. The name and business address of the Company's agent for service of process in the State of Delaware is Corporation Service Company, or as may otherwise be determined by approval of the Managers from time to time. 2.4 Purpose of Company. Subject to any express limitation set forth in ------------------ this Agreement, the Company may engage in any lawful activity in furtherance of, or related to any Projects (as defined in Section 1.34) with an emphasis on the Inland Empire region of Southern California. 2.5 Intent. It is the intent of the Members that the Company shall always ------ be operated in a manner consistent with its treatment as a "partnership" for Federal and state income tax purposes. It also is the intent of the Members that the Company not be operated or treated as a "partnership" for purposes of Section 303 of the United States Bankruptcy Code. No Member, Manager, President, or other officer of Company shall take any action inconsistent with that express intent. 2.6 Absence of Other Restrictions. The Members acknowledge that as of the ----------------------------- date of this Agreement, the only restrictions on SWC and its Affiliates and Inland and its Affiliates regarding the conducting of their respective businesses are set forth in Section 5.5 hereof and in that certain Cooperative Services Agreement between SWC and Inland dated December 31, 1999, and that no other restrictions on their activities have been created hereby or shall be deemed to exist, as a matter of fiduciary duty, corporate opportunity or otherwise. ARTICLE 3 CAPITAL CONTRIBUTIONS 3.1 Initial Capital Contributions. ----------------------------- (a) Pre-Formation Capital. Pursuant to the terms of Section 5.3 of --------------------- that certain Agreement Regarding Formation of Companies between Inland and SWC dated September 22, 1999 (the "Formation Agreement"), Inland and SWC shall pay all of the "Consultant Fees" and related Operating Costs between August 1, 1999 and the Effective Date in accordance with the following percentages: Inland 45% SWC 55% As of the Effective Date, SWC has paid $110,000 and Inland has paid $90,000 toward such Consultant Fees and Operating Costs and SWC and Page 7 Inland shall each be credited with Start-Up Capital Contributions in those respective amounts. (b) Start-Up Capital Contributions. In addition to the Pre-Formation ------------------------------ Treasury Department pertaining to Section 3.1(a), SWC and Inland agree to contribute, as required by the Management Committee, all capital required to fund the Company Budget during the Start-Up Period in accordance with the following percentages to a maximum, in the aggregate, of Five Hundred Thirty-five Thousand Dollars ($535,000.00) per year; provided the Company Budget may be increased in the aggregate a maximum of five percent (5%) over the previous Company Budget approved by the Management Committee in any twelve-month period by majority approval of the Management Committee and any further increase in the Company Budget shall be a Major Decision and require the unanimous vote of the SWC Manager and Inland Senior Manager. SWC 55% Inland 45% (c) Termination of Cooperative Services Agreement. In the event that --------------------------------------------- Treasury Department pertaining to terminate the Cooperative Services Agreement, then SWC shall, within thirty (30) days following the delivery or receipt of such notice of termination, elect, by written notice to Inland (the "Election Notice"), to either withdraw as a Member of Company, whereupon the terms of Article 8 herein shall apply, or remain as a Member of Company notwithstanding such termination of the Cooperative Services Agreement. In the event SWC fails to deliver that Election Notice to Inland, SWC shall conclusively be deemed to have elected to withdraw. Upon the election by SWC (or deemed election) to withdraw as a Member, and notwithstanding anything to the contrary in this Article 3, SWC shall cease to have any further obligation to pay for any Operating Costs of Company except SWC shall pay Company a percentage of the lump sum amount of Two Hundred Seventeen Thousand Five Hundred Dollars ($217,500) (the "Termination Payment") ($217,500 equals nine (9) months of a total one-time annual severance payment of Two Hundred Ninety Thousand Dollars ($290,000) which would be payable to Quincey in twenty-four (24) semi-monthly installments under the Quincey Employment Agreement assuming such Agreement was terminated without cause at the same time as termination of the Cooperative Services Agreement) as follows: (i) During any portion of the nine (9) month period following the delivery or receipt of the notice terminating the Cooperative Services Agreement which is within the two (2) year Start-Up Period, SWC shall pay fifty-five percent (55%) of the Termination Payment, and Page 8 (ii) During any portion of such nine (9) month period following the Start-Up Period, SWC shall pay twenty-five percent (25%) of the Termination Payment. For example, if a notice terminating the Cooperative Services Agreement is delivered by SWC to Inland eighteen (18) months after the Effective Date, and SWC elected to withdraw as a Member of the Company, then SWC would cease to have any further obligation to make any further Capital Contributions to Company except, SWC would be required to pay Company its Termination Payment equal to Ninety-seven Thousand Eight Hundred Sixty-nine Dollars ($97,869) calculated as follows: (i) Six (6) months at $13,291 ($217,500 / 9 x 55%) (ii) Three (3) months at $6,041 ($217,500 / 9 x 25%) Such Termination Payment would be due and payable in full fifteen (15) days after SWC's election to withdraw (or deemed election to withdraw). If SWC elects not to withdraw as a Member of Company upon the termination of the Cooperative Services Agreement, then SWC shall continue to make all Capital Contributions as required in Sections 3.1(b) and 3.2 at the percentages set forth in those Sections. Company shall not be required to terminate or amend the Quincey Employment Agreement by reason of the termination of the Cooperative Services Agreement; rather SWC and Inland have agreed herein to calculate the Termination Payment payable by SWC as if the Quincey Employment Agreement was terminated concurrent with termination of the Cooperative Services Agreement. The Termination Payment shall be paid by SWC whether or not the Quincey Employment Agreement is terminated if SWC elects to withdraw as a Member of Company upon termination of the Cooperative Services Agreement. 3.2 Project Capital Contributions. In addition to the Start-Up Capital ----------------------------- Contributions set forth in Section 3.1, the Members shall contribute from time to time, in accordance with their Percentage Interests, cash in amounts as required by the Management Committee to fund all Project Budgets, to fund the Company Budget after the Start-Up Period, and otherwise pay the costs of the Company (a "Project Capital Contribution"). As of the Formation Date, such Percentage Interests, for all matters under this Agreement, excepting (i) Start-Up Capital Contributions under Section 3.1(b), and (ii) Net Loss, Net Income, and Distributions related to such Start-Up Capital Contributions as set forth in the Tax Supplement (Sections 2.2 and 2.3) and Section 6.5 of this Agreement, are: SWC- 25%, Inland - 75% (which Percentages are subject to adjustment by reason of Transfer or dilution pursuant to the terms of this Page 9 Agreement). Upon the Formation Date, SWC and Inland shall contribute the following initial Project Capital Contributions to the Company to fund future Projects: SWC $10,000 Inland $30,000 3.3 Call Notice/Bank Accounts. Notice requesting a Capital Contribution ------------------------- (a "Call Notice") shall, upon unanimous approval of the Management Committee in accordance with Section 5.4, be sent to each Member by the President and within thirty (30) days after the mailing of such notice, each Member shall contribute its respective Percentage Interest) of such Capital, in cash or by certified check, to the Company. During the Start-Up Period, Company shall maintain separate bank accounts for deposit of Start-Up Capital Contributions and Project Capital Contributions, respectively. Upon distribution of the Start-Up Distributable Cash (as defined in Section 6.2) pursuant to Section 6.5, the Start-Up Capital Contribution account shall be closed by Company. All requests for Capital Contributions are "Major Decisions" which require unanimous written approval of the Management Committee in accordance with Section 5.4. 3.4 Capital Accounts. The Company shall establish and maintain an ---------------- individual Capital Account for each Member as set forth in the Tax Supplement. 3.5 Preferred Return. Each Member shall earn a preferred return on its ---------------- Capital Contributions, except for the Start-Up Capital, in an amount calculated like interest and accrued on the balance outstanding from time to time in each Members' Contribution Account (as defined in Section 3.6(a) below) at Bank of America's Base Rate, compounded monthly, and determined on a cumulative basis. 3.6 Contribution Accounts and Preferred Return Accounts. --------------------------------------------------- (a) Contribution Account. The Company shall maintain for accounting -------------------- purposes the following memorandum account ("Contribution Account") for each Member. The initial balance of such account shall be the Member's Initial Capital Contributions set forth in Section 3.1. The balance of such account shall be increased by, and as of the date of, each additional Capital Contribution made by such Member. The balance of the Contribution Account of each Member shall be decreased by any Distributions to such Member under Sections 6.4(b) and 10.5. (b) Preferred Return Account. The Company shall maintain for ------------------------ accounting purposes the following memorandum account ("Preferred Return Account") for each Member. The initial balance of such account shall be zero; and the balance of such account shall be increased by the accrued Preferred Return of each Member. Such return shall commence as of the funding of a Members' Capital Contributions Page 10 pursuant hereto (excepting any Start-Up Capital shall not earn a Preferred Return), shall be cumulative, and shall compound monthly (as of the last date of each calendar month). Further, the balance of the Preferred Return Account of each Member (as the same may be increased by such compounding) shall be decreased by any Distributions to such Member under Sections 6.4(a) and 10.5, but only to the extent any Distribution relates to Distribution of the Preferred Return. 3.7 Capital Matters. Except as otherwise expressly provided in this --------------- Agreement or as otherwise agreed in writing by the Members, (i) no Member shall be entitled to receive interest on such Members' Capital Contributions, (ii) no Member shall be required or obligated to contribute additional Capital to the Company, (iii) no Capital Contributions of any Member may be withdrawn by such Member, (iv) no Member shall have the right to demand or receive property other than cash in return for such Members' Capital Contributions, and (v) except as provided in Section 6.4(b), no Member shall have the right to the return of all or any portion of its Capital Contributions before the dissolution and termination of the Company and then only to the extent of the cash and other property, if any, distributable to the Members upon Company liquidation. 3.8 IPWC Development Fees. IPWC will pay Company an annual fee (a "IPWC --------------------- Development Fee") in accordance with the Cooperative Services Agreement during each year of an IPWC Contract. Company shall use all IPWC Development Fees to first pay all Operating Costs identified in the Company Budget. All such IPWC Development Fees paid during the Start-Up Period shall be allocated to the Adjusted Capital Accounts of the Members for purposes of Net Income, Net Loss, and Distributions in accordance with the Start-Up Percentages. All IPWC Development Fees paid after the Start-Up Period shall be allocated in accordance with the Member's Percentage Interests at that time. 3.9 Failure to Contribute Capital. If a Member fails to timely contribute ----------------------------- (the "Non-Contributing Member") all or any portion of the cash amounts required of it by a Call Notice delivered pursuant to Section 3.3 (the "Default Amount"), then the other Member (the "Contributing Member") (provided such other Member has contributed all of the capital required of such Member pursuant to Section 3.3 with respect to that particular Call Notice) shall have the right, but not the obligation, at its sole discretion, to either (a) loan to the Non-Contributing Member all or any portion of the Default Amount within thirty (30) days following such default (a "Member Loan") with a proportional amount of the Non-Contributing Member's Membership Interest as security for such Member Loan and an assignment of any Distributions otherwise payable to the Non-Contributing Member under Sections 6.4 and 6.5 until the Member Loan is repaid in full; the Member Loan shall earn Interest equal to the lesser of four hundred (400) basis points over the Base Rate, or the maximum rate permitted by law (the "Default Rate"); the Non-Contributing Member hereby Page 11 irrevocably appoints the Contributing Member as its attorney-in-fact with full power and authority to prepare, execute, acknowledge, deliver, file and/or record, as appropriate, any documents, instruments and agreements reasonably necessary to memorialize the Member Loan, including, without limitation, any note evidencing the Member Loan, or (b) contribute all or any portion of the Default Amount to the Company as an additional Capital contribution whereupon the Percentage Interests of the Non-Contributing Member shall be decreased at a dilution ratio of 1.25:1 (the "Dilution Ratio") determined by dividing the Default Amount paid by Contributing Member by the total amount of all Capital Contributions of all Members (including the Default Amount paid by Contributing Member) and multiplying the quotient by the Dilution Ratio; the resulting percentage is the amount by which the Percentage Interest of the Non- Contributing Member is decreased, and the Percentage Interest of the Contributing Member, increased; the Non-Contributing Member shall have no right to cure this default after the Default Amount is contributed by the Contributing Member. In addition to the remedies provided in this Section 3.9, the Contributing Member shall also have the right to exercise all other rights and remedies at law or in equity. ARTICLE 4 MEMBERS 4.1 Limited Liability. Except as required under the Act or as expressly ----------------- set forth in this Agreement, no Member or Manager shall be personally liable for any debt, obligation or liability of the Company, whether that liability or obligation arises in contract, tort or otherwise, except intentional misconduct, fraud, or gross negligence. 4.2 Admission of Additional Members. Subject to compliance with applicable ------------------------------- law, additional Members may be admitted to the Company from time to time upon the unanimous vote of all Members and upon such terms and conditions as the Members may determine unanimously, and any such additional Members shall be granted Membership Interests and may participate in the management, Net Income, Net Losses, Tax Credits and Distributions of the Company on such terms as the Members unanimously approve. 4.3 Withdrawal. From and after the date which is six (6) months after the ---------- Effective Date, any Member may withdraw or resign from the Company at any time and for any reason upon two hundred seventy (270) days prior written notice to the other Members. Any such withdrawal or resignation shall constitute a Membership Termination Event and shall be subject to the provisions of Article 8. Any Member who effects a voluntary withdrawal or resignation other than as permitted in the preceding sentence, or as set forth in Section 3.1(c), shall cease to be a Member, and shall forfeit its rights to receive any further Distributions, including any Distributions under Article 6 and Article 10 herein, and forfeit its right to receive the fair value of its Membership Interest as of the date of such withdrawal as otherwise provided in Section 18-604 of the Act, and the Percentage Interests of the remaining Page 12 Member(s) shall be increased, pro rata, based upon the relative Percentage Interest(s) of such remaining Members, by the total amount of the Membership Interest forfeited by the withdrawing Member. 4.4 Lack of Member Authority. Unless otherwise expressly stated in this ------------------------ Agreement, no Member, except the Management Committee, has the power to act for or on behalf of the Company, to do any act that would be binding on the Company or to make any expenditures or incur any obligations on behalf of the Company. The Management Committee may delegate certain powers to act on behalf of the Company to officers, agents and other Persons. ARTICLE 5 MANAGEMENT AND CONTROL OF THE COMPANY 5.1 Management of the Company by Management Committee. Except as otherwise ------------------------------------------------- expressly provided herein, the business and affairs of the Company shall be managed and controlled exclusively by the Management Committee. (a) Management and Management Committee. ----------------------------------- (i) The Management Committee shall consist of three (3) individuals, each of whom shall be an Affiliate of a Member or a senior employee of a Member. SWC shall appoint one Person to serve on the Management Committee (the "SWC Manager") and Inland shall appoint two Persons (collectively, the "Inland Managers", and individually, each, an "Inland Manager"); Robb Quincey may be an Inland Manager notwithstanding his employment by Company. The members of the Committee are referred to herein as the "Managers". Each Manager shall serve on the Management Committee until replaced by the Member appointing such Manager or removed pursuant to Section 8.2(b). The Management Committee initially shall consist of the following persons: Anthony Garnier (SWC Manager), Bill McIntyre (Inland Senior Manager), and Robb Quincey (Inland Manager). Each Member shall also designate an alternate Person(s) to act for it if its appointed Manager is unavailable. Any written act, approval, consent, or vote of a Manager or alternate(s) so designated shall be deemed to be the act, approval, consent, or vote of the Member which designated such Manager and alternate(s) and neither the Company, Manager, nor any Member shall be required to inquire into the authority of such Manager or alternate(s) as to such written act, approval, consent, or vote on behalf of the Member which designated such Manager and alternate(s). Any such Manager or alternate(s) may be replaced by a successor Manager or alternate(s) by written notice delivered to the Management Committee and to the other Member. Any such notice from Inland shall identify whether the successor Manager Page 13 is serving in the capacity of "Senior Manager" or "Manager" for purposes of Section 5.4. Until such further written notice, the designated Managers and alternates of the Members shall be as set forth in Schedule 1.25 attached hereto. In the event SWC acquires more than a fifty percent (50%) Membership Interest in Company under this Agreement after the Start-Up Period, then SWC shall have the right to appoint a second Manager and Inland shall have the right to appoint only one Manager. (ii) All powers of the Company shall be exercised by or under the authority of the Management Committee. Decisions of the Management Committee within its scope of authority shall be binding upon the Company and each Member, in its capacity as a Member of Company. Except as otherwise expressly provided in this Agreement, no action may be taken by any Member to bind the Company without the approval of the Management Committee. (iii) Meetings of the Management Committee shall be held at the principal place of business of the Company or at any other place that a majority of the Managers determine. In the alternative, meetings may be held by conference telephone, provided that each Manager can hear the others and it has been confirmed so, and it has been confirmed that there are no unauthorized people on the telephone. The presence of the SWC Manager and either of the Inland Managers in person or via telephone conference shall constitute a quorum for the transaction of business. Meetings shall be held once each month, or otherwise in accordance with a schedule established by the Management Committee. In addition, any Manager or Member may convene a meeting of the Management Committee at the Company's principal place of business upon at least three (3) business days' prior written notice to all Members and Managers. The Management Committee also may make decisions, without holding a meeting, by unanimous written consent of all of the Managers. Minutes of each meeting and a record of each decision shall be kept by the President (defined herein) and shall be given to the Members promptly after the meeting. (iv) Decisions of the Management Committee shall require the approval of a majority of the Managers, except that "Major Decisions" (as defined in Section 5.4) shall require the written consent of the SWC Manager and the Senior Inland Manager. (b) Agency Authority. Subject to Section 5.4 below, Inland, any two ----------------- (2) Managers, or, subject to Section 5.2(c), President, acting alone, is/are Page 14 authorized to endorse all checks, drafts and other evidences of indebtedness made payable to the order of the Company and to execute, on behalf of the Company, all agreements, contracts, commitments, checks, instruments and other documents approved by the Management Committee. The Management Committee shall have the right to delegate in writing any or all of their authority, rights and/or obligations, whether arising hereunder, under the Act or otherwise, to any one or more officers, agents or other duly authorized Persons. Any note, mortgage, deed of trust, evidence of indebtedness, contract, certificate, statement, conveyance or other instrument or obligation in writing, and any assignment or endorsement thereof, executed or entered into between the Company and any other Person, when signed by Inland, any two (2) Managers, or by President is not invalidated as to the Company by any lack of authority of such Persons in the absence of actual knowledge on the part of the other Person that such Persons had no authority to execute the same on behalf of the Company. (c) Meetings of Members; Written Consent. Annual Meetings of the --------------------------------------- Members shall be held at such time and place within or without the State of California as the Members shall determine. No regular meetings of Members are required, but if such meetings are held, they shall be noticed, held and conducted pursuant to the Act. Members may participate in any meeting through the use of conference telephones or similar communications equipment as long as all Members participating can hear one another. A Member so participating is deemed to be present in person at the meeting. Any action which may be taken by the Members at a meeting may also be taken without a meeting, if a consent in writing setting forth the action so taken is signed by Members having not less than the minimum votes that would be necessary to authorize that action at a meeting of the Members duly called and noticed. 5.2 President of Company. -------------------- (a) Appointment of President. The Management Committee shall appoint ------------------------ an individual to supervise the day-to-day operations of the Company and such person shall be designated as "President." Such appointment, if the appointee is other than one of the individuals listed in Schedule 1.25, shall be a "Major Decision" pursuant to Section 5.4. The President shall be subject to the general supervision and control of the Management Committee and shall carry out the policy decisions made by the Managers. At all meetings of the Management Committee and meetings of the Members, the President shall be present and shall report to the Management Committee and Members on the operation of the Company including all Projects, or any other matters as any Manager or Member may request. Robb Quincey shall be employed by Company pursuant to the terms of the Quincey Page 15 Employment Agreement as the initial President of the Company and shall continue to serve as the President until terminated by the vote of the SWC Manager and Inland Senior Manager (other than Quincey) in accordance with the Quincey Employment Agreement. (b) Project Plan and Budgets. The President shall prepare a ------------------------ Project Plan and Budget for each Project, and submit the Project Plan and Budget to the Management Committee for approval by the SWC Manager and Inland Senior Manager. The President shall also prepare and submit annual, operating budgets (a "Company Budget") to the Company and Management Committee for its approval. The initial Company Budget approved by the Management Committee is attached hereto as Schedule 5.2(b). All subsequent Company Budgets and any amendments thereto shall require the majority approval of the Management Committee, except any aggregate ------ increase in the Company Budget in excess of five percent (5%) over the previous Company Budget approved by the Management Committee in any twelve-month period shall be a Major Decision requiring the unanimous consent of the SWC Manager and Inland Senior Manager. (c) Signing Authority of President. Subject to prior approval by the ------------------------------ Management Committee and Section 5.4 below, the President shall have the full power to execute, for and on behalf of the Company, any and all documents and instruments which may be necessary to carry on the business of the Company, including, without limitation, any and all deeds, contracts, leases, mortgages, deeds of trust, promissory notes, guarantees, security agreements, and financing statements pertaining to the Company's assets or obligations. 5.3 Performance of Duties; Liability of Members and Officers. No Member, -------------------------------------------------------- Manager, or President shall be liable to the Company or to any other Member for any losses or damages suffered by them, as a result of actions taken within the scope of authority conferred upon them by this Agreement, or by the Management Committee and in the ordinary course of business of the Company, except as the result of fraud, deceit, gross negligence, reckless or intentional misconduct or a knowing violation of law or this Agreement by that Member, Manager or President or as a result of acts from which that Member, Manager, or President derives an improper personal benefit either directly or indirectly. The Managers and President shall perform their duties in good faith, in a manner they reasonably believe to be in the best interests of the Company and the Members. In performing their duties, the Managers and President shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, of the following persons or groups unless they have knowledge concerning the matter in question that would cause such reliance to be unwarranted and provided that the Managers and President act in good faith and after reasonable inquiry when the need therefor is indicated by the circumstances: Page 16 (a) one or more agents of the Company whom the Managers or President, as the case may be, reasonably believe to be reliable and competent in the matters presented; or (b) any attorney, independent accountant or other Person as to matters which the Managers or President, as the case may be, reasonably believe to be within such Person's professional or expert competence. 5.4 Major Decisions. Neither President, nor any Member or Manager, may, --------------- without the unanimous written consent of the SWC Manager and Inland Senior Manager, take any of the following actions (in each case the taking of which shall be referred to as a "Major Decision"): (a) Spend or commit to be spent any of the Company's capital or funds for a Project until the Project Plan and Project Budget for the Project is approved by unanimous consent of the SWC Manager and Inland Senior Manager; (b) Incur any expenses or liabilities in excess of $25,000 not identified in a Company Budget or Project Budget previously approved by unanimous consent of SWC Manager and Inland Senior Manager; (c) Sell or encumber any property or assets of the Company not identified for sale or encumbrance in an approved Project Plan; (d) Contract on behalf of, or otherwise bind, the Company in furtherance of a Project until the Project Plan and Project Budget is approved by unanimous consent of the SWC Manager and Inland Senior Manager including, making any binding commitments on behalf of the Company to representatives of any City, County, or other governmental agency; (e) Issue any public announcement or press release relating to the Company, or any Project; (f) Do any act in contravention of this Agreement; (g) Possess, assign, or use funds or other property of the Company for other than a Company purpose; (h) Make, execute, or deliver on behalf of the Company an assignment for the benefit of creditors, or cause the Company to be subject to the authority of any trustee, custodian, or receiver or to be subject to any proceeding for bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, or liquidation or similar proceedings; (i) Employ or contract with any Affiliate of a Member or any other person or entity in which any Member or Affiliate of a Member has a direct or indirect financial interest where such contract provides for the payment Page 17 for materials or services at a rate which exceeds the rate that would be charged by a third party contractor in a competitive arms-length transaction and/or includes any profit-mark-up; (j) Except where any of such matters is only civil in nature and does not involve amounts in excess of $25,000, (i) confess a judgment against the Company, (ii) settle or adjust any claims against the Company; or (iii) defend, or discontinue the defense of, or prosecute, or discontinue the prosecution of, any legal action or proceedings against, or on behalf or in the name of, the Company; (k) Do any act which would make it impossible to carry on the business of the Company; (l) Take any action or make any decision not reasonably contemplated in this Agreement; (m) Make any in-kind distributions as provided for in Section 10.4; (n) Call for any Capital Contributions; (o) Effectuate any change in number of the Managers; (p) Sell or otherwise issue any additional Membership Interests in the Company except as permitted in Section 7.2; (q) Make any amendment to this Agreement; or (r) Increase the Company Budget in excess of five percent (5%) over the previous Company Budget approved by the Management Committee in any twelve-month period. 5.5 Competing Activities. Each Member and Manager shall be obligated to -------------------- present any investment opportunity to the Company if the opportunity concerns a Project within the Inland Empire region of Southern California (Riverside/San Bernardino Counties and incorporated cities therein other than the City of Barstow). Each such Project shall be presented to the Company for consideration by the Management Committee. The election to proceed with a Project shall be a Major Decision. If the SWC Manager does not approve of a Project and/or related Project Budget and Plan then Inland may proceed with the Project independent of the Company for its own account or recommend such opportunity to Persons other than the Company or the other Members. Likewise, if Inland's Senior Manager does not approve of a Project and/or related Project Budget and Plan then SWC may proceed with the Project independent of the Company for its own account or recommend such opportunity to Persons other than the Company or the other Members. Without limiting the foregoing, any water rights acquired by Company which Company elects to lease, sell, or transfer shall first be offered for lease or sale, at the election of Company, to IPWC at a market rate. In the event IPWC elects not to lease or purchase such water rights, the rights shall next Page 18 be offered for lease or sale by Company to SWC; if SWC elects not to lease or purchase such water rights, the rights may then be offered to unaffiliated third parties at a price equal to or greater than the price offered to IPWC and SWC. Notwithstanding any of the foregoing restrictions in this Section 5.5, any opportunity by a Member or Manager outside the scope of this covenant does not need to be presented by a Member or Manager to the Company; provided Quincey may not proceed with any opportunity independent of the Company if such conduct would violate any of Quincey's obligations under the Quincey Employment Agreement. 5.6 Contracts with Affiliates. If the Company uses the personnel or ------------------------- resources of an Affiliate of a Member or Manager, or otherwise contracts directly or indirectly with an Affiliate of a Member or Manager for services or materials, the payment or compensation therefor shall be at competitive arm's-length rates, and such services and materials shall be comparable in quality, type, size, and specifications as would be obtained in a competitive arm's-length transaction with third-party contractors. All contracts or agreements with Affiliates of Managers or Members shall be subject to the prior written approval of the Managers appointed by the non-affiliated Members in their reasonable discretion. The non-affiliated Managers acting alone shall have the right on behalf of the Company to send any appropriate notice of default or termination, to institute legal proceedings and/or to take such other action as may be necessary or appropriate to enforce the rights and protect the interests of the Company pursuant to any agreement now or hereafter entered into between the Company and an Affiliate of a Member or Manager with respect to any other rights or remedies of the Company running against or in connection with any Affiliate of a Member or Manager. Non- affiliated Members shall mean those Members without a direct or indirect interest in the contracts or agreements with the Affiliate, financial or otherwise. 5.7 Company Opportunities. Except as provided in Section 5.5 above, and --------------------- except as otherwise provided in any contract to which Company is a party, no Member shall be obligated to present any prospective project, business venture, investment opportunity or economic advantage to the Company or to any other Members or Managers, even if the opportunity is one of the character that, if presented to the Company or the other Members or Managers, could be taken by the Company or the other Members or Managers, and each Member or Manager shall have the right to hold any such prospective project, business venture, investment opportunity or economic advantage for its own account or to recommend the same to Persons other than the Company or the other Members or Managers. 5.8 Expenses. Subject to Sections 5.4 and 5.6 above, the Company shall -------- reimburse the Members and Managers, for all reasonable out-of-pocket costs and expenses incurred by them (or by their Affiliates with approval of the Management Committee) in connection with the business and affairs of the Company; provided all organizational expenses (including, without limitation, Page 19 legal and accounting fees and costs) incurred by each Member to form the Company shall not be reimbursed by Company. ARTICLE 6 PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS 6.1 Allocation of Income and Losses. The agreement of the Members ------------------------------- concerning the maintenance of Capital Accounts, the allocation of income and loss, deficit restoration, and other related matters is set forth in Appendix A, attached hereto and made a part hereof. 6.2 Definition of "Distributable Cash". The term "Distributable Cash" --------------------------------- means all cash of the Company on hand and in banks, saving and loan associations and cash equivalents, on the date of any proposed distribution pursuant to this Agreement, after payment or provision for payment of Company obligations (actual and anticipated), including, without limitation, provision for working capital needs and reserves, interest carry, warranties and contingent liabilities of the Company as reasonably determined by President and approved by the Management Committee. The term "Start-Up Distributable Cash" as used herein means Distributable Cash generated from any IPWC Development Fees paid to Company by IPWC during the Start-Up Period (as prorated through the expiration of the Start-Up Period) or from any Start-Up Capital Contributions. The President shall prepare and deliver to the Management Committee a quarterly report summarizing the sources and uses of such reserve funds. Notwithstanding anything provided in Section 6.4 to the contrary, no Distributions shall be made to the Members until the Company's outstanding debts, if any, to the Members have been fully repaid. 6.3 Timing of Distributions. Subject to the provisions of this Article 6 ----------------------- and Article 10 (Dissolution and Winding Up), payments and distributions to the Members of Distributable Cash shall be made at such times as approved by the Management Committee, but in no event no less frequently than annually. 6.4 Order of Distribution. Except as provided in Section during the Start- --------------------- Up Period, and Sections 3.9 and 10.5, Distributable Cash shall be distributed in the following order of priority (taking into account, as applicable, the Members then existing Preferred Return Account and Contribution Account balances); (a) First: To the Members, pro rata in accordance with the ratios of ----- their respective accrued and unpaid Preferred Returns until each Member's respective Preferred Return Account is zero. (b) Second. To the Members pro rata in accordance with the ratios of ------ their respective Capital Contributions which have not yet been repaid until each Member's respective Contribution Account is zero. (c) Third. To the Members in proportion to the positive balance, if ----- any, in each such Member's Capital Account. Page 20 (d) Remainder. Subject to a Member's repayment of any such Member's --------- outstanding Member Loan pursuant to Section 3.9, all Distributable Cash in excess thereof shall be distributed to the Members pro rata in accordance with their respective Percentage Interest. 6.5 Start-Up Period Distributions. All Start-Up Distributable Cash Fees shall, ----------------------------- be distributed 55% to SWC and 45% to Inland and Section 6.4 above shall not apply to such distributions of Start-Up Distributable Cash. Upon expiration of the Start-Up Period, Company shall make a special distribution to Inland and SWC of all remaining Start-Up Distributable Cash of Company as of such expiration date in accordance with the Start-Up Percentages (SWC - 55%, Inland - 45%). Thereafter, all Distributable Cash distributed after the Start-Up Period under Section 6.4(d) shall be distributed in accordance with the then Percentage Interests of the Members (SWC - 25%, Inland - 75%), as such percentages may be adjusted upon Transfer or dilution. 6.6 Form of Distribution. No Member has any right to demand and receive any -------------------- Distribution from the Company in any form other than money. No Member may be compelled to accept from the Company a Distribution of any asset in kind in lieu of a proportionate Distribution of money being made to other Members. ARTICLE 7 TRANSFER OF INTERESTS 7.1 Transfer of Interests. Except as permitted by Sections 7.2 and 8.3, no --------------------- Member shall be entitled to Transfer all or any part of its Membership Interest except with the prior written consent of the other Member(s), which consent may be given or withheld, conditioned or delayed as the other Member(s) may determine in its sole and absolute discretion. Any attempted Transfer without such prior written consent shall constitute a Membership Termination Event (as of the date of such attempted Transfer) and shall be null and void ab initio, and the transferee shall not become a Member. A -- ------ Member who elects to Transfer its Membership Interest is referred to herein as a "Transferring Member"; the remaining Member(s) is referred to as the "Remaining Member." 7.2 Permitted Transfers. Subject to the provisions of Section 7.3, the ------------------- restrictions upon Transfer specified in Section 7.1 shall not apply to any Transfer of all or any part of a Transferring Member's Membership Interest to an Affiliate of such Transferring Member (an "Affiliate Transferee") nor shall it include a Change in Control, merger or sale of all assets of SWC. The Remaining Member shall receive a minimum of sixty (60) days prior written notice from Transferring Member of the proposed transfer to an Affiliate (a "Transfer Notice"). Any Affiliate Transferee permitted under the preceding sentence shall, subject to Section 7.3(b) and (c), hold the Membership Interest or part thereof transferred by the Transferring Member subject to all the provisions of this Agreement. Except for any Transfer to an Affiliate Transferee permitted Page 21 under the initial sentence of this Section 7.2, no Member shall Transfer all or any part of its Membership Interest until such Transferring Member first offers that Membership Interest for sale to the other Remaining Member by written notice (the "Withdrawal Offer") whereupon the terms of Section 8.3 shall apply. For purposes of this Section 7.2, the Member seeking to transfer its interest shall be deemed to be the "Withdrawing Member" as used in Section 8.3. 7.3 Substitution of Members. Notwithstanding anything in this Agreement to the ----------------------- contrary, any transferee of the whole or any part of a Membership Interest shall hold only the Economic Interest of the Transferring Member as an Interest Holder and shall not become a substituted Member in the place of a Transferring Member unless and until all of the following conditions are satisfied: (a) The Remaining Member(s) unanimously consents to the admission of the transferee as a Member; (b) The Transferring Member and the transferee execute and acknowledge such other instrument or instruments as the Management Committee may deem necessary or desirable to effectuate the admission, including the written acceptance and adoption by the transferee of all of the terms and conditions of this Agreement as the same may have been amended; and (c) At the election of the other Members, the transferee pays to the Company a transfer fee which is sufficient, in the reasonable discretion of the other Members, to cover all expenses incurred by the Company in connection with the Transfer and substitution. 7.4 Further Restrictions on Transfer of Interests. In addition to other --------------------------------------------- restrictions set forth in this Agreement, no Member shall Transfer all or any part of such Member's Membership Interest: (i) without compliance with all federal and state securities laws, (ii) if the Transfer would cause the tax termination of the Company under Code Section 708, (iii) or if the Transfer would otherwise result in adverse tax consequences to the Company and/or the non-transferring Members. 7.5 Election to Dissolve. The Remaining Member(s) may vote to dissolve the -------------------- Company in accordance with Section 10.1 in the event of a Transfer. ARTICLE 8 CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS 8.1 Dissolution of Company. The occurrence of a Membership Termination Event as ---------------------- to any Member other than the last and only remaining Member shall not dissolve the Company unless the Remaining Member(s) votes to dissolve in accordance with Section 10.1. Upon the occurrence of a Membership Termination Event as to the last and only remaining Member, the Company Page 22 shall dissolve unless the personal representative or other successor-in- interest of the last and only remaining Member consents in writing within ninety (90) days of that Membership Termination Event to the continuation of the Company and to the admission of such personal representative or other successor-in-interest, or its designee or nominee, as a Member. 8.2 Admission or Conversion. Upon the occurrence of a Membership Termination ----------------------- Event with respect to a Member under circumstances where the Company does not dissolve, the Remaining Member(s) shall determine which one of the following shall occur and give written notice thereof, within sixty (60) days after the Membership Termination Event, to the Member who suffered the Membership Termination Event (the "Former Member"): (a) the Former Member's personal representative or other successor-in- interest shall be admitted as a Member of the Company in the place and stead of the Former Member to the extent of the Former Member's Membership Interest (the "Former Member's Interest"); or (b) the Former Member's Interest shall be converted to a bare Economic Interest, with no voting rights and no rights to appoint a Manager (except the right to participate in decisions regarding confessions, judgments and suits against Members), and the Former Member's representative or other successor-in-interest shall become the Interest Holder of that Economic Interest. The Former Member's Interest shall also be converted if the Remaining Member(s) fails to approve a substitution under Section 8.2(a) within the aforementioned 60-day period. Additionally, the Former Member shall not be subject to additional Capital Contributions, following the expiration of the 270- day period set forth in Section 4.3. 8.3 Optional Buy-Out. ---------------- (a) The Member causing the Membership Termination Event (the "Withdrawing Member") shall be deemed to offer for sale (the "Withdrawal Offer") to the other Member (the "Remaining Member") the Membership Interest of the Withdrawing Member (the "Withdrawal Interest"). (b) The Withdrawal Offer shall be and remain irrevocable for a period (the "Withdrawal Offer Period") ending at 11:59 p.m. local time at the Company's principal office on the sixtieth (60th) day following the date of the Membership Termination Event provided that the sixty (60) day period shall be extended during a period of automatic stay pursuant to bankruptcy. At any time during the Withdrawal Offer Period, the Remaining Member may accept the Withdrawal Offer by notifying the Withdrawing Member (the "Withdrawal Notice") of its acceptance. (c) If the Remaining Member accepts the Withdrawal Offer (the "Purchasing Member"), the Withdrawal Notice shall fix a closing date Page 23 (the "Withdrawal Closing Date") for the purchase that shall not be earlier than ten (10) or later than sixty (60) days after determination of the Withdrawal Purchase Price (as defined in (d) below). (d) The Purchasing Member shall purchase the Withdrawal Interest for a price (the "Withdrawal Purchase Price") equal to the amount the Withdrawing Member would be entitled to receive pursuant to Section 6.4 (taking into account Section 10.5) if the Company sold all of the Company assets to a third party at their Fair Market Value as of the date of the Withdrawal Notice. If the Withdrawing Member and Purchasing Member are unable to reach agreement on the Withdrawal Purchase Price within thirty (30) days after expiration of the Withdrawal Offer Period, then the Fair Market Value shall be determined within thirty (30) days by an independent M.A.I. appraiser or other qualified appraiser; each Member shall select an appraiser from a list of five (5) appraisers to be prepared by the Company's Accountant; if the Members each select a different appraiser, the Company Accountant shall select one of the remaining three (3) appraisers to conduct the appraisal; if the Members select the same appraiser, then that appraiser shall complete the appraisal. The Fair Market Value shall be determined by Appraiser as of the date of the Withdrawal Notice. Upon completion of the appraisal, the Company's Accountant (defined in Section 1.1) shall, within 30 days, determine the Withdrawal Purchase Price based upon the Fair Market Value. The Purchasing Member shall approve or disapprove of the Withdrawal Purchase Price on or before the Withdrawal Closing Date. If approved, the Withdrawal Purchase Price shall be paid in cash on the Withdrawal Closing Date. Company shall pay the cost of the appraisal. The determination of the Appraiser and Accountant shall, for purposes of this Agreement, be binding and conclusive on the parties. (e) If the Remaining Member fails to accept the Withdrawal Offer, or if the Purchasing Member disapproves of the Withdrawal Purchase Price, or if not all of the Withdrawal Interest is purchased by the Purchasing Member, then the Withdrawing Member or the Withdrawing Member's successor, as the case may be, shall continue to be a Former Member pursuant to Section 8.2 as to that portion of the Withdrawal Interest retained by the Withdrawing Member, and Withdrawing Member may sell or otherwise Transfer all or any part of its Membership Interest to any Person, including any other Member, provided such Membership Interest shall be converted to a mere Economic Interest pursuant to Section 7.3. (f) If the Purchasing Member fails to complete its purchase on the Withdrawal Closing Date (a "Defaulting Purchaser"), then the Withdrawing Member may either sell or Transfer its Membership Interest in accordance with (e) above, or elect to dissolve the Company in accordance with Article 10. Page 24 ARTICLE 9 ACCOUNTING, RECORDS, REPORTING BY MEMBERS 9.1 Books and Records/Financial Reports. The books and records of the Company ----------------------------------- shall be kept, and the financial position and the results of its operations recorded by the President (or by Inland, if no President has been appointed or if otherwise elected by Inland), in accordance with the accounting method of the Company approved by the Management Committee. The books and records of the Company shall reflect all the Company transactions and shall be appropriate and adequate for the Company's business. Each Member and its duly authorized representative shall have complete access to all such books and records at any time. The President (or Inland if no President has been appointed or if otherwise elected by Inland) shall cause the Company to deliver to each Member the following: (a) Quarterly Tax Information: Within forty-five (45) days following the -------------------------- end of each calendar quarter, a statement of pre-tax net income (loss) of the Company for the then most recently completed calendar quarter and the current balance of each Member's Capital Account; and (b) Annual Tax Information. Within ninety (90) days following the end of ---------------------- each calendar year, a final financial statement of the Company for the previous calendar year prepared in accordance with generally accepted accounting principles, consistently applied. Management Committee may elect to cause the Accountant to audit the Financial Statements of the Company at the Company's expense. Further, any Member may elect to cause the Accountant to audit such statements at such Member's expense; provided, however, that under all circumstances, the statements of the Company shall only be audited once a year. The year end financial statements of the Company shall include a balance sheet, an income statement, statement of cash flow, statement of sources and uses of funds and such other information and reports as the Management Committee may reasonably request. 9.2 Bank Accounts; Invested Funds. All funds of the Company shall be deposited ----------------------------- in such account or accounts of the Company as approved by the Management Committee and shall not be commingled with the funds of any other Person. All withdrawals therefrom shall be made upon checks signed by such Persons and in such manner as the Management Committee may approve. Temporary surplus funds of the Company may be invested in commercial paper, time deposits, short-term government obligations or other investments approved by the Management Committee. 9.3 Accounting Matters. All decisions as to accounting matters shall be ------------------ approved by the Management Committee. Page 25 ARTICLE 10 DISSOLUTION AND WINDING UP 10.1 Dissolution. The Company shall be dissolved, its assets disposed of and ----------- its affairs wound up upon the first to occur of the following: (a) the unanimous vote of the Members or unanimous vote of the Remaining Member(s) after (i) receipt of a Transfer Notice or Withdrawal Offer, or (ii) a Membership Termination Event; (b) the occurrence of a Membership Termination Event as to the last and only remaining Member if that Member's personal representative or other successor-in-interest fails to consent to the continuation of the Company in accordance with Section 8.1 within ninety (90) days after the occurrence of that event; (c) the Company's Bankruptcy; (d) the occurrence of an event which makes it unlawful for the business of the Company to be continued; and (e) the expiration of twenty-five (25) years from the Formation Date. 10.2 Date of Dissolution. Dissolution of the Company shall be effective on the ------------------- day on which the event occurs giving rise to the dissolution, but the Company shall not terminate until the assets of the Company have been liquidated and distributed as provided herein. Notwithstanding the dissolution of the Company, prior to the termination of the Company the business of the Company and the rights and obligations of the Members, as such, shall continue to be governed by this Agreement. 10.3 Winding Up. Upon the occurrence of any event specified in Section 10.1, the ---------- Company shall continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors. The President, or any other person designated by the Management Committee, shall be responsible for overseeing the winding up and liquidation of the Company, shall take full account of the liabilities and assets of the Company, shall cause its assets either to be sold or distributed, as they may determine, and shall cause the proceeds therefrom, to the extent sufficient, to be applied and distributed as provided in Section 10.5. The President shall give written notice of the commencement of winding up by mail to all known creditors and claimants whose addresses appear on the records of the Company. 10.4 Distributions in Kind. Any non-cash assets distributed to any Members shall --------------------- require the approval of the SWC Manager and Inland Senior Manager in accordance with Section 5.4. Following such approval, any non-cash asset distributed to one or more Members shall first be valued at its Fair Market Value to determine the Net Income or Net Loss that would have resulted if Page 26 that asset had been sold for that value, the Net Income or Net Loss shall then be allocated pursuant to the Tax Supplement, and the Members' Capital Accounts shall be adjusted to reflect those allocations. The amount distributed and charged to the Capital Account of each Member receiving an interest in the distributed asset shall be the Fair Market Value of the interest (net of any liability secured by the asset that the Member assumes or takes subject to). The Fair Market Value of that asset shall be determined by an independent M.A.I. appraiser or other qualified appraiser selected by the Members in accordance with the selection process set forth in Section 8.3(d). 10.5 Order of Payment of Proceeds Upon Dissolution. --------------------------------------------- (a) Liquidating Distributions. After determining that all known debts and ------------------------- liabilities of the Company, including, without limitation, debts and liabilities to Members who are creditors of the Company, have been paid or adequately provided for, the remaining assets shall promptly be distributed to the Members in accordance with Section 6.4, after taking into account income and loss allocations for the Company's taxable year during which the liquidation occurs. (b) No Liability. No Member shall have any liability to the Company, ------------ any other Member, or any creditor of the Company on account of any deficit balance in its Capital Account. 10.6 Limitations on Payments Made in Dissolution. Except as otherwise ------------------------------------------- specifically provided in this Agreement, each Member shall be entitled to look only to the assets of the Company for the return of that Member's positive Capital Account balance and shall have no recourse for its Capital Contributions and/or share of Net Income (upon dissolution or otherwise) against any other Member. 10.7 Certificate of Cancellation. Upon completion of the winding up of the --------------------------- Company's affairs, the Members shall cause a Certificate of Cancellation to be filed with the Delaware Secretary of State. 10.8 Compensation for Services. The Persons winding up the affairs of the ------------------------- Company shall be entitled to reasonable compensation from the Company for their services. ARTICLE 11 INDEMNIFICATION 11.1 Indemnification. The Company shall indemnify and hold harmless each of the --------------- Members, and each of their respective Managers, officers, directors, shareholders, partners, members, trustees, beneficiaries, employees, agents, heirs, assigns, successors-in-interest and Affiliates, together with all officers, employees, or agents of the Company, including President (collectively, "Indemnified Persons") from and against any and all losses, damages, liabilities and expenses, (including costs and reasonable attorneys' fees), Page 27 judgments, fines, settlements and other amounts (collectively "Liabilities") reasonably incurred by any such Indemnified Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil, criminal, administrative or investigative and whether threatened, pending or completed (collectively a "Proceeding"), in which any such Indemnified Person may be involved or with which any such Indemnified Person may be threatened, with respect to or arising out of any act performed by the Indemnified Person or any omission or failure to act if the performance of the act or the omission or failure was done in good faith and within the scope of the authority conferred upon the Indemnified Person by this Agreement or by the Act, except for acts of willful misconduct, gross negligence or reckless disregard of duty, or acts which constitute a material breach of this Agreement, or acts from which such Indemnified Person derived an improper personal benefit. The Company's indemnification obligations hereunder shall apply not only with respect to any Proceeding brought by the Company or a Member but also with respect to any Proceeding brought by a third party. 11.2 Contract Right; Expenses. The right to indemnification conferred in this ------------------------ Article 11 shall be a contract right and shall include the right to require the Company to advance the expenses incurred by the Indemnified Person in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Act so requires, the payment of such -------- ------- expenses in advance of the final disposition of a Proceeding shall be made only upon receipt by the Company of an undertaking, by or on behalf of the indemnified Person, to repay all amounts so advanced if it shall ultimately be determined that such Person is not entitled to be indemnified under this Article 11 or otherwise. 11.3 Insurance. The Company may purchase and maintain insurance on behalf of any --------- Person who is or was an agent of the Company against any liability asserted against that Person and incurred by that Person in any such capacity or arising out of that Person's status as an agent, whether or not the Company would have the power to indemnify that Person against liability under the provisions of Section 11.1 or under applicable law. IPDC shall procure commercial general liability insurance in the minimum amount of Five Million Dollars ($5,000,000.00) per occurrence, workers' compensation insurance, and officers and directors coverage and Inland and SWC shall be named as additional insured parties. ARTICLE 12 BUY/SELL 12.1 Put/Call Offering Notice. At any time after the second anniversary of the ------------------------ Effective Date, a Member (the "Initiating Member"), may give written notice (the "Offering Notice") to the other Member (the "Responding Member") of its intent to implement the provisions of this Article 12 and to purchase all, but not less than all, of the Responding Member's Membership Interest. In such event, the provisions set forth in this Article 12 shall apply. The Initiating Page 28 Member shall specify in its Offering Notice the price ("Company Price") the Initiating Member would be willing in its sole discretion to pay for all of the assets of the Company free of any monetary liens or encumbrances as of the date the Offering Notice is given ("Date of Value"). 12.2 Exercise of Put/Call. Upon receipt of the Offering Notice, the Responding -------------------- Member shall then be obligated to either (subject to any required lender approval): (i) sell to the Initiating Member its Membership Interest at a price (the "Sales Price") equal to the amount the Responding Member would have been entitled to receive pursuant to Section 6.4, (taking into account the terms of Section 10.5) (as determined by the Company's Accountant at the expense of the Initiating Member), if the Company had sold the Company assets in a hypothetical sale to a third party for the Company Price on the Date of Value and liquidated the Company in accordance with Section 10.5 with the proceeds remaining after the application of Paragraph 10.5 distributed in accordance with Paragraph 6.4 of this Agreement; or (ii) to purchase the Membership Interest of the Initiating Member at a price (the "Purchase Price") equal to the amount the Initiating Member would have been entitled to receive pursuant to Section 6.4, (taking into account the terms of Section 10.5) (as determined by the Accountant at the expense of Initiating Member), if the Company had sold the Company assets in a hypothetical sale to a third party for the Company Price on the Date of Value and liquidated the Company in accordance with Section 10.5 with the proceeds remaining after the application of Section 10.5 distributed in accordance with Section 6.4 of this Agreement. (a) If the Responding Member elects to purchase under (ii) above, then the Responding Member shall purchase the Initiating Member's entire Membership Interest and shall pay the Purchase Price as determined in (ii) above, and shall deposit, within ten (10) days after the election to purchase is made, ten percent (10%) of the Purchase Price into escrow at Chicago Title Company, 560 East Hospitality Lane, San Bernardino, CA 92608, or such other Title Company approved by both Members ("Escrow Holder") (b) If the Responding Member elects to sell under (i) above, the Initiating Member shall purchase all of the Responding Member's Membership Interests at the Sales Price determined in (i) above, and shall deposit ten percent (10%) of the Sales Price into escrow within ten (10) days after such election. 12.3 Notice. The Responding Member shall notify the Initiating Member of its ------ election under (i) and (ii) above within sixty (60) days after the Date of Value (the "Election Notice"). In the event the Responding Member fails to give the Election Notice within the required time period, the Initiating Member shall be obligated to purchase the Responding Member's Membership Interest according to the terms of Section 12.2(b). For purposes of this Article 12 the term "Purchasing Member" shall mean the Member who is obligated to Page 29 purchase the other Member's Membership Interest (whether such Member is the Initiating Member or the Responding Member) and the term "Non-Purchasing Member" shall mean the Member who is obligated to sell its Membership Interest to the Purchasing Member. 12.4 Designee. In the event that any Member purchases another Member's -------- Membership Interest pursuant to this Article 12, such Purchasing Member shall be entitled to designate any third party to be the Transferee of such Membership Interest and such Transferee shall be a Member without further consent of the other Members. 12.5 Closing. ------- (a) The Members shall meet and exchange documents and pay any amounts due, and otherwise do all things reasonably necessary to conclude the transaction set forth herein at the closing of such purchase (the "Closing"). The Closing shall occur at Escrow Holder on the date that is sixty (60) days after the date of the Election Notice unless that day is a Saturday, Sunday, or national or state holiday and, in that event, on the next business day. At the Closing, the Non-Purchasing Member shall deliver to the Purchasing Member a duly executed assignment of its Membership Interest and shall also, upon the reasonable request of the Purchasing Member, concurrently therewith (or at any time and from time to time thereafter) execute and deliver such other documents and records as the Purchasing Member reasonably determines is necessary or desirable to conclude the Closing and to transfer the Non-Purchasing Member's Membership Interest. The Purchasing Member shall deliver the Purchase Price or Sales Price, as applicable, to the Non-Purchasing Member for the full amount of consideration for such Membership Interest in accordance with Section 12.5(b) below, and each Member shall deliver any documents reasonably necessary to conclude the Closing. The Non-Purchasing Member shall Transfer its Membership Interest free of all liens or encumbrances. (b) The Purchase Price or Sales Price shall be paid in all cash, by certified or bank cashier's checks, made payable to the Non-Purchasing Member, or by a wire transfer of immediately available funds. (c) If the Purchasing Member fails to close as aforesaid, in addition to any other remedies available at law or in equity, the Non-Purchasing Member shall have the right, exercisable by written notice to the Purchasing Member given within thirty (30) days of the date set for the Closing, to purchase under this Section 12 the Membership Interest of that defaulting Member. If the Non-Purchasing Member exercises such option, the Company Price used for the purposes of this Section 12.5(b) shall be ninety percent (90%) of the Company Price. Page 30 12.6 Company Accountant. The Company's Accountant shall determine the ------------------ proper application of Section 6.4 (taking into account the terms of Section 10.5) to arrive at the Purchase Price or Sales Price as applicable. Each of the Members shall cooperate fully with the Accountant to assist in such determination. The Accountant shall make its determination of the Purchase Price or Sales Price within ten (10) days after submission to the Accountant and the results thereof shall be binding on the Members. The Initiating Member shall bear the costs and fees of the Company's Accountant in making its determinations under this Article 12.. 12.7 Timing of Put/Call and Default Buy-Out. If any Member shall have given -------------------------------------- the other Member notice of the first Member's exercise of its rights under Section 12.1, then the other Member shall have the right to give a subsequent notice under Section 12.1, until that first transaction is completed or terminates. Article 13 MISCELLANEOUS 13.1 Amendments. All amendments to this Agreement must be in writing and ---------- executed by all of the Members. 13.2 Offset Privilege. Any monetary obligation owing from the Company to ---------------- any Member may be offset by the Company against any monetary obligation then owing from that Member to the Company. 13.3 Arbitration. Notwithstanding anything to the contrary set forth in ----------- this Agreement, in the event of any dispute between the Members with respect to this Agreement, then the Members shall promptly and in good faith attempt to resolve such dispute by mutual agreement. In the event the Members are unable to resolve such dispute by mutual agreement, the matter shall be settled exclusively by a binding arbitration ("Arbitration"), conducted by a single arbitrator (the "Arbitrator") chosen by the parties to the litigation as described below. Any party may initiate the Arbitration by written notice to the other and to the Arbitration Tribunal. The date on which the notice is given is called the "Arbitration Initiation Date". The fees and expenses of the Arbitration Tribunal and the Arbitrator shall be shared equally by the parties and advanced by them from time to time as required; provided, however, that at the conclusion of the Arbitration, the Arbitrator may award costs and expenses (including the costs of the Arbitration previously advanced and the fees and expenses of attorneys, accountants and other experts) to the prevailing party. Except as expressly modified herein, the Arbitration shall be conducted in accordance with the provisions of Section 1280 et seq. of the California Code of Civil Procedure or their successor sections ("CCP"), and shall constitute the exclusive remedy for the determination of any Claim, including whether the Claim is subject to arbitration; provided the following time periods in the CCP shall be shortened as follows: Sections 1284, 1288.4, 1290.2 and 1290.6 - halved, Section 1288 - 4 years to 30 days, and 100 days to 15 days; Section 1288.2 - 100 days to 30 days. The Arbitration Page 31 shall be conducted under the procedures of the Arbitration Tribunal, except as modified herein. The Arbitration Tribunal shall be the Los Angeles Office of JAMS/ENDISPUTE ("JAMS"), unless the parties to the dispute cannot agree on a JAMS arbitrator, in which case the Arbitration Tribunal shall be the Los Angeles Office of the American Arbitration Association ("AAA"). The Arbitrator shall be a retired judge or other arbitrator employed by JAMS selected by mutual agreement of the parties to the dispute, and if they cannot so agree within thirty (30) days after the Arbitration Initiation Date, then the Arbitrator shall be selected from the Large and Complex Case Project ("LCCP") panel of the AAA, by mutual agreement of the parties to the dispute. If the parties to the dispute cannot agree on the Arbitrator within sixty (60) days after the Arbitration Initiation Date, the Arbitrator shall be selected by the AAA, from its LCCP panel, through such procedures as the AAA regularly follows. In all events, the Arbitrator must have had not less than fifteen (15) years experience as a practitioner or arbitrator of complex business transactions. If, for any reason, the AAA does not so act, any party to the dispute may apply to the Superior Court in and for Los Angeles County, California, for the appointment of a single arbitrator. No pre-arbitration discovery shall be permitted, except that the Arbitrator shall have the power in his or her discretion, upon either party's motion but not on his or her own initiative, to order the parties to engage in pre-arbitration mediation for a period not exceeding thirty (30) days before a mediator mutually acceptable to the parties. The Arbitrator shall try any and all issues of law or fact and be prepared to make the award within ninety (90) days after the close of evidence in the Arbitration. When prepared to make the award, the Arbitrator shall first so inform the parties, who shall have ten (10) days to attempt to resolve the matter by a binding agreement between them. If the parties do not resolve the matter, the Arbitrator shall make the award on the eleventh day following his notice of being prepared to make the award. The Arbitrator's award shall dispose of all of the claims that are the subject of the Arbitration and shall follow California law, unless the Claim concerns the Act, in which event Delaware law shall be applied, and the award shall include written statements of fact and conclusions of law. The Arbitrator shall be empowered to (i) enter equitable as well as legal relief, (ii) provide all temporary and/or provisional remedies, and (iii) enter binding equitable orders. The award rendered by the Arbitrator shall be final and not subject to judicial review, and judgment thereon may be entered in any court of competent jurisdiction. The prevailing party, as determined by the Arbitrator, shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including, without limitation, actual attorneys' fees and expenses, and the other costs of such arbitration. The Arbitrator shall award to the prevailing party: (i) the reasonable attorneys' fees which the prevailing party has paid or is obligated to pay; and (ii) the reasonable costs and expenses which the prevailing party has paid or is obligated to pay. The "prevailing party," for purposes of this Agreement, shall be the party who, in light of the issues litigated and the Arbitrator's decision on these issues, was more successful in the action. The Page 32 party who is more successful need not be determined to be the party who receives the judgment in the action. 13.4 Notices. Any notice to be given to the Company or any Member in ------- connection with this Agreement must be in writing and will be deemed to have been given and received when delivered to the address specified by the party to receive the notice by courier or other means of personal service, when received if sent by facsimile, or three (3) days after deposit of the notice by first class mail, postage prepaid, or certified mail, return receipt requested. Any such notice must be given to the Company at its principal place of business, and to any Member at the address specified in Appendix C. Any party may, at any time by giving five (5) days' prior written notice to the other parties, designate any other address as the new address to which notice must be given. 13.5 Attorney's Fees. In the event that any dispute between the Company --------------- and/or the Members should result in litigation or arbitration, the prevailing party in that dispute shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorneys' fees and expenses, subject, however to the provisions of Section 13.3. 13.6 Jurisdiction. Subject to Section 13.3, each Member consents to the ------------ exclusive jurisdiction of the state and federal courts sitting in Orange, Los Angeles, or San Bernardino, California in any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. Each Member further agrees that personal jurisdiction over it may be effected by service of process by registered or certified mail addressed as provided in Section 13.4 and that when so made shall be as if served upon it personally. 13.7 Complete Agreement. This Agreement and the Related IPWC Agreements ------------------ constitute the complete and exclusive statement of agreement among the Members with respect to their respective subject matters and supersede all prior written and oral agreements or statements by and among the Members including that certain Agreement Regarding Formation of Companies between SWC and Inland dated September 22, 1999 (the "Formation Agreement"). The Formation Agreement is merged herein and is of no further force or effect. No representation, statement, condition or warranty not contained in this Agreement or the Certificate of Formation shall be binding on the Members or have any force or effect whatsoever. To the extent that any provision of the Certificate of Formation conflicts with any provision of this Agreement, the Certificate of Formation shall control. 13.8 Binding Effect. Subject to the provisions of this Agreement relating -------------- to Transfers, this Agreement shall be binding upon and inure to the benefit of the Members and their respective successors and assigns. Page 33 13.9 Section Headings. All Section headings are inserted only for ---------------- convenience of reference and are not to be considered in the interpretation or construction of any provision of this Agreement. 13.10 Interpretation. The Members acknowledge and agree that each has been -------------- given the opportunity to review this Agreement with legal counsel independently, and/or has the requisite experience and sophistication to understand, interpret, and agree to the particular language of the provisions hereof. The Members have equal bargaining power, and intend the plain meaning of the provisions herein. All words in this Agreement (including any Exhibit attached to and made a part of this Agreement), other than those specifically defined, shall have the meanings assigned to them in American English dictionaries of common usage; there are no secret meanings or code words. The term "including", whenever used in this Agreement, shall be deemed to be followed by the words "without limitation." Words used in the singular number shall include the plural, and vice versa, and any gender shall be deemed to include each other gender. Any captions and headings in this Agreement are for convenience of reference only, and they shall not be deemed to define or limit the provisions of this Agreement. In the event of an ambiguity in or dispute regarding the interpretation of same, the interpretation of this Agreement shall not be resolved by any rule of interpretation providing for interpretation against the Member who causes the uncertainty to exist or against the draftsman. This Agreement shall be interpreted in accordance with the Act, if applicable, and otherwise in accordance with the internal laws of the State of California without regard to any choice of law provisions of California law. 13.11 Severability. If any provision of this Agreement or the application of ------------ that provision to any person or circumstance shall be held invalid, the remainder of this Agreement or the application of that provision to persons or circumstances other than those to which it is held invalid shall not be affected. 13.12 Multiple Counterparts. This Agreement may be executed in two or more --------------------- counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 13.13 Securities Representations and Warranties. Concurrently with the ----------------------------------------- formation of the Company, each Member makes the securities representations and warranties set forth on Appendix D attached hereto. All representations and warranties contained in Appendix D shall survive the execution of this Agreement, the formation of the Company, and the liquidation of the Company. ARTICLE 14 DEFAULT REMEDIES 14.1 Events of Default. The occurrence of any of the following events (or any other events set forth herein which are deemed to cause a Member to be in default of this Agreement) by or with respect to a Member or the Manager Page 39 appointed by a Member (the "Defaulting Member") shall be defaults under this Agreement, and if not cured within the applicable notice and cure period provided below, if any, to such default shall constitute an "Event of Default" hereunder: (a) Failure to Perform. Except as provided in Section 14.1(b) below, ------------------ the failure of a Member or Manager appointed by a Member (or any Affiliate thereof) to comply with or perform any of its (or such Affiliate's) material obligations under this Agreement and a continuation of such failure or breach for more than thirty (30) days after notice to the Defaulting Member that such Member or Manager (or such Affiliate) has failed to perform any such obligations under this Agreement; provided, however, if such failure is of a nature that can be cured but cannot reasonably be cured within such thirty (30) day period, such period shall be extended for up to an additional one hundred twenty (120) days so long as the Defaulting Member (or such Affiliate) in good faith commences all reasonable curative efforts within such thirty (30) day period and diligently and expeditiously continues its curative efforts to completion. "Material" shall mean having a significant financial impact on the Company through operations or otherwise. (b) Failure to Make Capital Contribution. The failure of a Member to ------------------------------------ pay a Capital Contribution within thirty (30) days after receipt of a Call Notice pursuant to Section 3.3. (c) Defaults of Individuals. If a Member or its officers, directors, ----------------------- shareholders, members, or senior employees thereof shall be convicted of a criminal felony or convicted of an act of fraud or other abuse subject to material civil penalty, in each case which causes the Company to suffer material and adverse effects to its business reputation or purpose. 14.2 Remedies. Upon the occurrence of any Event of Default, the Company -------- and the other Member (who is not the Defaulting Member) shall have the following rights and remedies except where such rights and remedies are expressly limited by the terms and conditions of this Agreement: (a) Dissolution. The non-Defaulting Member may elect to dissolve the ----------- Company in accordance with Article 10. (b) Optional Buy-Out. The non-Defaulting Member may elect to buy-out ---------------- the Defaulting Member's Membership Interest in accordance with Section 8.3. (c) Other Rights and Remedies. All other rights and remedies ------------------------- available to the Members and the Company at law or in equity, unless expressly limited in this Agreement. Page 35 14.3 Cumulative Remedies. Except as otherwise stated expressly in this ------------------- Agreement, no remedy conferred upon the Company or any Member in this Agreement is intended to be exclusive of any other remedy herein or by law provided or permitted, but rather each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in equity or by statute. 14.4 Litigation Without Termination. Subject to the arbitration provisions ------------------------------ set forth above in Section 13.3, any Member shall be entitled to maintain, on its own behalf or on behalf of the Company, any action or proceeding against any other Member or the Company (including, without limitation, any action for damages, specific performance or declaratory relief) for or by reason of breach by such party of this Agreement, notwithstanding the fact that any or all of the parties to such proceeding may then be Members in the Company, and without dissolving the Company. 14.5 No Waiver. No waiver by a Member or the Company of any breach of or --------- default under this Agreement shall be deemed to be a waiver of any other breach or default of any kind or nature, and no acceptance of payment or performance by a Member or the Company after any such breach or default shall be deemed to be a waiver of any breach or default of this Agreement, whether or not such Member or the Company knows of such breach or default at the time it accepts such payment or performance. No failure or delay on the part of a Member or the Company to act at any time such other may continue to be so in default, and no such failure or delay shall operate as a waiver of any default. / / / / / / / / / / / / / / / / / / / / / / / / Page 36 IN WITNESS WHEREOF, all of the Members of Inland Pacific Development Company, LLC have executed this Agreement, effective as of the Effective Date. INLAND PACIFIC DEVELOPMENT COMPANY, LLC, a Delaware limited liability company By: INLAND PACIFIC PARTNERS, LLC, a Delaware limited liability company Its Member By: /s/ RICHARD A. LEWIS -------------------------- Richard A. Lewis, Manager By: /s/ WILLIAM MCINTYRE -------------------------- William McIntyre, Manager By: /s/ MICHAEL J. BIDART --------------------------- Michael J. Bidart, Manager By: /s/ ROBB QUINCEY --------------------------- Robb Quincey, Manager By: SOUTHWEST WATER COMPANY, a California corporation, Its Member By: /s/ ANTON C. GAR ----------------- Name: Anton C. President List of Appendices/Schedules - ---------------------------- Appendix A - Tax and Related Matters Appendix B - Quincey Employment Agreement Appendix C - Member Notice Addresses Appendix D - Investment Representations Schedule 1.25 - Management Committee Schedule 1.29 - Percentage Interests Schedule 1.41 - Tax Matters Member Schedule 5.2(b) - Initial Company Budget Page 37 APPENDIX A TAX AND RELATED MATTERS ("Tax Supplement") Article 1 CAPITAL ACCOUNTS 1.1 Book Capital Accounts. A capital account (the "Book Capital Account") --------------------- for each Member shall be maintained at all times during the Term in accordance with this Section 1.1 and the capital accounting rules set forth in Section 1.704-1(b)(2)(iv) of the Treasury Regulations, as the same may be amended from time to time ("Regulations") (excluding however, Section 1.704-1(b)(2)(iv)(f) of the Regulations [permitting an optional revaluation of Company property in certain circumstances] except with respect to Company property as to which an election to revalue the same shall have been made pursuant to subsection (d) below) except as otherwise specifically provided herein. The Company shall make all adjustments required by said Section 1.704-1(b)(2)(iv). In the event that at any time during the term of the Company it shall be determined that the Book Capital Accounts shall not have been maintained as required by this Section 1.1, then said accounts shall be retroactively adjusted so that the same shall conform to this Section 1.1. The Company shall make all adjustments required by said Section 1.704-1(b)(2)(iv). In the event that the Company acquires an interest in another limited liability company or partnership by way of contribution or owns an interest in any other limited liability company or partnership at the time of a revaluation of Company property, the allocation of the Company's distributive share of the income, gain, loss or deduction of any such subsidiary limited liability company or partnership shall, to the extent possible, be made for purposes of this Company as if the subsidiary limited liability company or partnership's assets were owned directly by the Company and the property of the subsidiary limited liability company or partnership was revalued. In addition, the provisions of Section 1.704-2(k) shall be applied in connection with Nonrecourse Deductions and Member Risk Nonrecourse Deductions when the Company is a partner in another partnership or a member in another limited liability company. (a) Maintenance of Book Capital Accounts. Each Member's Capital ------------------------------------ Account shall be maintained on the Company's books and records in accordance with the following provisions: (i) To each Member's Book Capital Account there shall be added (a) such Member's Capital Contributions, (b) such Member's allocable share of Net Income and any items in the nature of income or gain that are specially allocated to such Member pursuant to Section 2.4 of this Tax Supplement or other provisions of this Agreement, and (c) the amount of any A-1 Company liabilities assumed by such Member or which are secured by any property distributed to such Member. (ii) From each Member's Book Capital Account there shall be subtracted (a) the amount of (1) cash and (2) the Fair Market Value of any Company property (other than cash) distributed to such Member (other than any payment of principal and/or interest to such Member pursuant to the terms of a Member Loan made by the Member to the Company) pursuant to any provision of this Agreement, (b) such Member's allocable share of Net Losses and any other items in the nature of expenses or losses that are specially allocated to such Member pursuant to Section 2.4 of this Tax Supplement, or other provisions of this Agreement, and (c) liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company. (iii) In determining the amount of any liability for purposes of subsections (i) and (ii) above, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. (b) Book Basis. As used herein, "Book Basis" of an item of Company ---------- property means the adjusted basis of such item as reflected in the books of the Company, determined and maintained in accordance with the capital accounting rules contained in Section 1.704- 1(b)(2)(iv) of the Regulations (excluding, however, Section 1.704-1(b)(2)(iv)(f) thereof [permitting an optional revaluation of Company property in certain circumstances] except with respect to Company property as to which an election to revalue the same shall have been made pursuant to subsection (d) below). (c) Initial Book Capital Accounts. The initial Book Capital Account ----------------------------- balances of the Members as of the date hereof shall, based upon the Capital Contributions made by the Members under Sections 3.1(a) and 3.2, be as follows: SWC $120,000 Inland $120,000 (d) Optional Revaluations of Company Property. The Management ----------------------------------------- Committee may cause the Company to make the election to revalue Company property permitted under Section 1.704-1(b)(2)(iv)(f) of the Regulations. Should such election be made, the Book Capital Account of each Member shall be adjusted in accordance with Section 1.704-1(b)(2)(iv)(g) of the Regulations. A-2 (e) Book Items. Consistent with the provisions of Section 1.704- ---------- 1(b)(2)(iv)(g)(3) of the Regulations, "Book Depreciation" (which means the depreciation, depletion or amortization [as the case may be], deduction or allowance that shall be allowable to the Company with respect to an item of Company property, determined in the manner hereinafter set forth) for each item of Company property shall be the amount that bears the same relationship to the "Adjusted Book Basis" (which means with respect to an item of Company property, the Book Basis of such item as the same may be adjusted from time to time by Book Depreciation allowed with respect to such item of Company property) of such item of Company property as the depreciation, depletion or amortization, as the case may be, allowable for federal income tax purposes with respect to such item of Company property for such year bears to the "adjusted basis" (within the meaning of Section 1011(a) of the Code of such item of Company property). If an item of Company property shall have an "adjusted basis" (as defined in the preceding sentence) equal to zero, Book Depreciation shall be determined under a reasonable method, which method shall be selected by the Management Committee. Also consistent with the provisions of Section 1.704-1(b)(2)(iv)(g)(1) of the Regulations, Book Gain or Book Loss (which means the gain or loss with respect to an item of Company property with a Book Basis on the Company's books that differs from the adjusted tax basis of such property) shall be allocated to the Members' Book Capital Accounts in lieu of gain or loss with respect to such property as determined for federal income tax purposes. (f) Book Adjustments on Distributions. With respect to all --------------------------------- distributions of Company property to Members, the Company shall comply with the provisions contained in Section 1.704- 1(b)(2)(iv)(e) of the Regulations (relating to adjustments to the Members' Book Capital Accounts in connection with such distributions) and all allocations and adjustments made in connection therewith shall be in accordance with Article 2 of this Tax Supplement. ARTICLE 2 ALLOCATION OF PROFITS AND LOSSES For purposes of maintaining Book Capital Accounts and in determining the rights of the Members among themselves, the Company's items of income, gain, loss and deduction for any taxable year (or portion thereof) shall be allocated to the Members as provided hereinbelow. 2.1 Preliminary Definitions. When used herein, the following terms shall ----------------------- have the respective meanings assigned to them in this Article 2: A-3 (a) Adjusted Capital Account. "Adjusted Capital Account" shall mean the ------------------------ Book Capital Account maintained for each Member as of the end of each taxable year of the Company (a) increased by any amounts which such Member is deemed obligated to restore under Regulation Section 1.704- 2(g)(1) and Section 1.704-2(i)(5), and (b) decreased by such Member's share of the items described in Regulations Sections 1.704- 1(b)(2)(ii)(d)(4), (5) and (6). (b) Economic Risk of Loss. "Economic Risk of Loss" shall have the meaning ---------------------- set forth in Regulation Section 1.704-2(b)(4). (c) Minimum Gain Attributable to Member Risk Non-recourse Debt. "Minimum ---------------------------------------------------------- Gain Attributable to Member Risk Non-recourse Debt" shall mean the amount determined in accordance with the principles of Regulation Section 1.704-2(i). (d) Net Income/Net Loss. "Net Income" or "Net Loss", as the case may be, ------------------- shall mean, for any taxable period, the difference between the Company's items of income and gain and the Company's items of loss and deduction for such taxable period. The determination of Net Income or Net Loss shall be made generally in accordance with Section 703(a) of the Code; however, (i) all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code will be included in the determination; (ii) any income and gain that is exempt from tax, and all expenditures described in Section 705(a)(2)(B) of the Code (or treated as expenditures so described pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) shall be included in such determination; (iii) Book Gain, Book Loss and Book Depreciation will be included in such determination in lieu of tax gain or loss or depreciation; and (iv) the items allocated under Section 2.4 of this Tax Supplement shall be excluded from such determination. (e) Nonrecourse Deductions. "Nonrecourse Deductions" shall have the ----------------------- meaning set forth in Regulation Section 1.704-2(b)(1). (f) Nonrecourse Liability. "Nonrecourse Liability" shall have the meaning ---------------------- set forth in Regulation Section 1.704-2(b)(3). (g) Member Risk Nonrecourse Debt. "Member Risk Nonrecourse Debt" shall have the meaning set forth in Regulation Section 1.704-2(b)(4) for "partner nonrecourse debt." (h) Member's Share of Minimum Gain. "Member's Share of Minimum Gain" shall -------------------------------- be calculated as set forth in Regulation Section 1.704-2(g)(1). A-4 (i) Member's Share of Minimum Gain Attributable to Member Risk Nonrecourse ---------------------------------------------------------------------- Debt. "Member's Share of Minimum Gain Attributable to Member Risk ---- Nonrecourse Debt" shall be calculated as set forth in Regulation Section 1.704-2(i)(5). (j) Company Minimum Gain. "Company Minimum Gain" shall mean that amount --------------------- determined in accordance with the principles of Regulation Section 1.704-2(d). (k) Member Risk Nonrecourse Deductions. "Member Risk Nonrecourse ---------------------------------- Deductions" shall mean any and all items of loss, deduction or expenditure described in Section 705(a)(2)(B) of the Code (or treated as an expenditure so described pursuant to Regulation Section 1.704- 1(b)(2)(iv)(i)) that, in accordance with the principles of Regulation Section 1.704-2(i), are attributable to Member Risk Nonrecourse Debt. 2.2 Net Loss. After giving effect to the allocations set forth in Section 2.4 -------- of this Tax Supplement hereof, and the special allocations for Start-Up Losses and Start-Up Income (as defined below), all items of income, gain, loss and deduction taken into account in computing Net Loss for a particular taxable period shall be allocated in the same manner as such Net Loss is allocated hereunder, to wit: (a) First. To the Members to offset any Net Income allocated pursuant to ----- Sections 2.3(c) and (b) of this Tax Supplement, in that order, pro rata among the Members in proportion to their respective shares of the Net Income being offset. To the extent any allocation of Net Income is offset pursuant to this Section 2.2 of this Tax Supplement, such Net Income shall be disregarded in making subsequent allocations pursuant to Section 2.3 of this Tax Supplement. (b) Second. To the Members in proportion to their respective Percentage ------ Interests; provided, notwithstanding subsection (a) above, net losses attributable to the expenditure of the Start-Up Capital Contributions during the Start-Up Period (the "Start-Up Losses") shall be allocated 55% to SWC and 45% to Inland, in accordance with Section 6.5 of the Agreement, after first offsetting any Start-Up Income allocated pursuant to Section 2.3 of this Tax Supplement. 2.3 Net Income. After giving effect to the allocations set forth in Section 2.4 ---------- of this Tax Supplement, and the special allocation of Start-Up Losses and Start-Up Income as defined herein, all items of income, gain, loss and deduction taken into account in computing Net Income shall be allocated in the same manner as such Net Income is allocated hereunder, to wit: A-5 (a) First. To the Members to offset any Net Loss allocated pursuant to ----- Section 2.2(b) of this Tax Supplement pro rata among the Members in proportion to their respective amount of Net Loss being offset. (b) Second. To the Members, pro rata, in the same proportion and to the ------ extent of each such Member's accrued Preferred Return during the term of the Company. (c) Third. To the Members in accordance with their Percentage Interests; ----- provided, notwithstanding subsections (a) and (b) above, net income attributable to the IPWC Contracts and IPWC Development Fees earned during the Start-Up Period shall be allocated 55% to SWC and 45% to Inland, in accordance with Section 6.5 of the Agreement, after first offsetting any Start-Up Losses allocated pursuant to Section 2.2 of this Tax Supplement. 2.4 Overriding Allocation Provisions. Notwithstanding any other provision of -------------------------------- this Article 2, the following allocations shall be made: (a) Qualified Income Offset. Except as provided in Section 2.4(b) of this ----------------------- Tax Supplement, in the event any Member unexpectedly receives any adjustments, allocations or distributions described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704- 1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account deficit created by such adjustments, allocations or distributions as quickly as possible; provided, however, that an allocation pursuant to this Section 2.4(a) shall be made only if and to the extent that such Member would have an Adjusted Capital Account deficit after all other allocations provided for in this Article 2 have been tentatively made as if this Section 2.4(a) were not in this Tax Supplement. (b) Minimum Gain Chargeback. Notwithstanding the other provisions of this ----------------------- Article 2, except as provided otherwise in Regulation Section 1.704- 2(f) if there is a net decrease in Company Minimum Gain for any Company taxable period, each Member shall be allocated items of Company income and gain for such period (and, if necessary, subsequent periods) in an amount equal to such Member's share of the net decrease in Company Minimum Gain for such taxable period. (c) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period ----------------------- shall be allocated in accordance with the Members' respective Percentage Interests in effect during such taxable period. A-6 (d) Code Section 754 Adjustments. To the extent an adjustment to the ---------------------------- adjusted tax basis of any Company asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704- 1(b)(2)(iv)(m), to be taken into account in determining Book Capital Accounts, the amount of such adjustment to the Book Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Book Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. (e) Member Risk Nonrecourse Deductions. Member Risk Nonrecourse Deductions ---------------------------------- for any taxable period shall be allocated to the Member that bears the Economic Risk of Loss for such Member Risk Nonrecourse Debt. If more than one Member bears such Economic Risk of Loss, such Member Risk Nonrecourse Deductions shall be allocated between or among such Members in accordance with the ratios in which such Members share such Economic Risk of Loss. (f) Member Risk Minimum Gain Chargeback. Notwithstanding the other ----------------------------------- provisions of this Article 2, except as provided otherwise in Regulation Section 1.704-2(i) if there is a net decrease in Minimum Gain Attributable to Member Risk Nonrecourse Debt for any Company taxable period, each Member with a Member's Share of Minimum Gain Attributable to Member Risk Nonrecourse Debt at the beginning of such taxable period shall be allocated items of Company income and gain for such period (and, if necessary, subsequent periods) in an amount equal to such Member's share of the net decrease in the Minimum Gain Attributable to Member Risk Nonrecourse Debt. The items to be so allocated shall be determined in a manner consistent with the principles of Regulation Section 1.704-2(f)(5). (g) Curative Allocations. The allocations set forth in Sections 2.4(a) -------------------- through (f) of this Tax Supplement (the "Regulatory Allocations") are intended to comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2(i). The Regulatory Allocations may not be consistent with the manner in which the Members intend to distribute the cash of the Company or allocate Company income or loss. Accordingly, the Management Committee is hereby authorized and directed to cause the allocation of Net Income, Net Loss and other items of income, gains, loss and deductions to the Members so as to prevent the Regulatory Allocations from distorting the manner in which Company distributions will be divided among the Members. In general, the Members anticipate that this will be accomplished by specially allocating other Net Profits, Net Losses and other items of income, gain, loss and deduction to the Members so that, to the extent A-7 possible, the net amount of such allocations of other Net Income, Net Loss, and other items and the Regulatory Allocations to the Members shall be equal to the net amount that would have been allocated among the Members if the Regulatory Allocations had not occurred. (h) Liquidation Allocations. It is intended that the amount to be ----------------------- distributed to a Member pursuant to Section 10.3 of the Agreement shall equal the amount such Member would receive if liquidation proceeds were instead distributed in accordance with Section 6.4 of the Agreement. This intended distribution amount for a member is referred to as such Member's "Targeted Distribution Amount". Notwithstanding anything to the contrary in this Tax Supplement, if upon a termination and liquidation of the Company, any Member's ending Book Capital Account balance immediately prior to the distributions to be made pursuant to Section 10.3 of the Agreement is less than the "Targeted Distribution Amount," then such Member shall be specially allocated items of gross income or gain for Book Capital Account purposes for such year (or for prior years to the extent amended tax returns can be filed for the Company), and items of loss or deduction for Book Capital Account purposes for such year (or for prior years to the extent amended tax returns can be filed for the Company), shall be allocated away from such Member to the other Members, until such Member's actual Book Capital Account balance equals the Targeted Distribution Amount for such Member. The special allocation provisions provided by this Section 2.4(h) shall be applied in such a manner so as to cause the difference between any Member's Targeted Distribution Amount and the balance in its Book Capital Account (determined after this allocation, but immediately prior to the distributions pursuant to Section 10.3 of the Agreement) to be the smallest dollar amount possible. 2.5 Allocation of Nonrecourse Liabilities. Nonrecourse Liabilities of the ------------------------------------- Company in excess of the sum of the amount of Company Minimum Gain and any tax gain allocable to the Members under Section 704(c) of the Code shall be allocated in accordance with their respective Percentage Interests. 2.6 Protective Allocations. In the event that any amount claimed by the Company ---------------------- to constitute a deductible expense in any taxable year is recharacterized for federal income tax purposes as a distribution made to a Member in its capacity as a member of the Company and not a Section 707(c) Payment or a payment to a Member not acting in his capacity as a member under Code Section 707(a), then, in the taxable year of such recharacterization, the Member who is deemed to have received such distribution shall first be allocated an amount of Company gross income equal to such payment, its Capital Account shall be reduced to reflect the distribution, and for purposes of this Article 2 (other than the allocations in Section 2.4 of this Tax A-8 Supplement) Net Income and Net Loss shall be determined after making the allocation required by this Section 2.6. ARTICLE 3 DETERMINATIONS OF FAIR MARKET VALUE FOR BOOK AND TAX PURPOSES The determination of the Fair Market Value of Company property for book and tax purposes shall be made by the Company Accountant and approved by the Management Committee. ARTICLE 4 DEFICIT FUNDING OBLIGATION No Member shall be obligated to eliminate any deficit balance in its final Book Capital Account on the liquidation of the Company. ARTICLE 5 MISCELLANEOUS 5.1 Allocations to Periods. For purposes of determining the income, gain, loss ---------------------- and deductions allocable to any period, such items shall be determined on the interim closing the books method. 5.2 Definitions. Terms utilized herein but not defined herein shall have the ----------- same meanings specified therefor in the Agreement. 5.3 Federal Income Tax Allocations. The following provisions are applicable for ------------------------------ federal and state income tax purposes: (a) Tax Allocations Follow Book Allocations. Except as otherwise provided --------------------------------------- herein, and to the extent permitted by Section 1.704-1(b)(4)(i) of the Regulations, for federal and state income tax purposes each Company item of income, gain, loss and deduction shall be allocated to the Members in the same manner as its corresponding item of "book" income, gain, loss or deduction has been allocated under Article 2 of this Tax Supplement. (b) Section 704(c) Allocations. Notwithstanding any provisions hereof to -------------------------- the contrary, income, gain, loss and deductions with respect to Section 704(c) Property shall, solely for tax purposes, be allocated between the Members so as to take account of any variation between the adjusted tax basis of such property to the Company for federal income tax purposes and its initial Book Basis. As used herein, "Section 704(c) Property" means (1) each item of Company property which is contributed to the Company and to which Section 704(c) of the Code or Section 1.704-1(b)(2)(iv)(d) of the Regulations applies, and (2) each item of Company property which, as contemplated by Section 1.704- A-9 1(b)(4)(i) and other analogous provisions of the Regulations, is governed by the principles of Section 704(c) of the Code (or principles analogous to the principles contained in Section 704(c) of the Code) by virtue of (a) an increase or decrease in the Book Capital Accounts of the Members to reflect a revaluation of Company property on the company's books as provided by Section 1.704-1(b)(2)(iv)(f) of the Regulations, (b) the fact that it constitutes a receivable, account payable, or other accrued but unpaid item which, under principles analogous to those applying to an item of Company property having an adjusted tax basis that differs from its Book Basis, is treated as an item of property described in Section 1.704- 1(b)(2)(iv)(g)(2) of the Regulations, (c) the constructive liquidation and reconstitution of the Company under Section 708(b)(1)(B) of the Code (see, e.g., Section 1.704-1(b)(2)(iv)(1) of the Regulations) as ---- the same may from time to time be construed, to the extent that, and for so long as, such item of Company property continues to be governed by the principles of Section 704(c) of the Code (or principles analogous to the principles contained in Section 704(c) of the Code). Similar principles should be followed in allocating tax items for state income tax purposes. (c) Ordinary Income Recapture. If, in the event of a gain on any sale, ------------------------- exchange or other disposition of Company property, all or a portion of such gain is characterized as ordinary income ("Recapture") by virtue of the recapture rules of Section 1250, Section 1245 or otherwise, then the Recapture shall be allocated to the Members as follows (i.e., the portion of the gain allocated to a Member which constitutes Recapture shall be determined as follows): to the extent possible, there shall be allocated to each Member that portion of such Recapture which is equal to the fraction, the numerator of which is the depreciation deductions (or other items of deduction that generated such Recapture) allowable with respect to the Company property being sold theretofore allocated to such Member or its predecessor in interest for federal income tax purposes, and the denominator of which is the total depreciation deductions (or other items of deduction that generated such Recapture) allowable with respect to the Company property being sold theretofore allocated to any Member or its predecessor in interest for federal income tax purposes (including, in the case of property which is contributed to the Company, depreciation deductions taken or claimed by the contributing Member prior to such contribution); provided, however, that under no circumstances shall there be allocated to any Member, Recapture in excess of the gain allocated to such Member (and such excess shall be allocated instead to the other Members). 5.4 Tax Elections. All elections required or permitted to be made by the ------------- Company under the Code and state revenue laws shall be made jointly by the Members. A-10 5.5 Tax Matters Member. ------------------ (a) Identity, Etc.. Inland is designated the tax matters member ("TMM") -------------- for the Company as defined in Section 6231(a)(7) of the Code. The Manager may resign as TMM for one (1) or more specified Company taxable years upon thirty (30) days prior notice to the Members. In the event of any change in TMM, the Member serving as TMM for a given taxable year shall continue as TMM with respect to all matters concerning such year. The TMM and the Members shall use their reasonable efforts to comply with the responsibilities outlined in this Section 5.5 and in Sections 6222 through 6232 of the Code and in doing so shall incur no liability to any Members. Notwithstanding TMM's obligation to use its reasonable efforts in the fulfillment of its responsibilities, TMM shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Members agree on a method for sharing such expenses. (b) Inconsistent Treatment. If any Member intends to file a notice of ---------------------- inconsistent treatment under Section 6222(b) of the Code, then such Member shall give reasonable notice under the circumstances to the Members of such intent and the manner in which the Member's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the Company. (c) Extension of Limitations. The TMM shall not enter into any extension ------------------------ of the period of limitations for making assessments on behalf of Members without first obtaining the written consent of the Members, which consent may not be unreasonably withheld. (d) Administrative Adjustment. No Member shall file, pursuant to Section -------------------------- 6227 of the Code, a request for an administrative adjustment of items for any Company taxable year without first notifying the Management Committee. If the Management Committee agrees with the requested adjustment, then the TMM shall file the request for administrative adjustment on behalf of the Company. If unanimous consent is not obtained within thirty (30) days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Member, including the TMM, may file a request for administrative adjustment on its own behalf. (e) Judicial Proceedings. Any Member intending to file a petition under -------------------- Section 6226, 6228, or other section of the Code with respect to any item or other matters involving the Company shall notify the Members of such intention and the nature of the contemplated proceeding. In the case in which the TMM is the Member intending to file such petition on behalf of the Company, such notice shall be given within a A-11 reasonable period of time to allow the Members to participate in the choosing of the forum in which such petition will be filed. If any Member intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this Section, then such Member shall notify the Members of such intended action. (f) Settlements. The TMM shall not bind the Members to a settlement ----------- agreement without obtaining the written concurrence of the Members. For purposes of this paragraph, the term "settlement agreement" shall include a settlement agreement at either the administrative or judicial level. Any Member who enters into a settlement agreement with respect to any partnership items, as defined by Section 6231(a)(3) of the Code, shall notify the Members of such settlement agreement and its terms within ninety (90) days from the date of settlement. (g) Survival. The provisions of this Section 5.5 shall survive the -------- termination of the Company or the termination of any Member's interest in the Company and shall remain binding on the Members for a period of time necessary to resolve with the Internal Revenue Service of the United States of America or the Department of Treasury any and all matters regarding the federal income taxation of the Company. A-12 APPENDIX B QUINCEY EMPLOYMENT AGREEMENT ---------------------------- B-1 APPENDIX C ---------- MEMBER NOTICE ADDRESSES ----------------------- Inland: Mr. Robb Quincey Inland Pacific Partners, LLC 8300 Utica Avenue, Third Floor Rancho Cucamonga, CA 91730 Fax No.: 909/635-2048 SWC: Mr. Tony Garnier Southwest Water Company 225 Barranca Avenue, Suite 200 West Covina, CA 91791-1605 Fax No.: 626/915-1558 APPENDIX D ---------- INVESTMENT REPRESENTATIONS -------------------------- Each Member acknowledges and agrees as follows with respect to investment representations: (a) Each Member understands: (i) That the Membership Interests in the Company evidenced by this Agreement have not been registered under the Securities Act of 1933, 15 U.S.C. (SS) 15b et seq., the -- --- California Corporate Securities Law of 1968 or any other state securities laws (collectively, the "Securities Acts") because the Company is issuing Membership Interests in the Company in reliance upon the exemptions from the registration requirements of the Securities Acts providing for issuance of securities not involving a public offering. (ii) That the Company has relied upon the representation made by each Member that such Member's Membership Interest in the Company is to be held by such Member for investment; and (iii) That exemption from registration under the Securities Acts would not be available if any Membership Interest in the Company was acquired by a Member with a view to distribution. Each Member agrees that the Company is under no obligation to register the Membership Interests in the Company or to assist the Members in complying with any exemption from registration under the Securities Acts if the Member should at a later date desire to dispose of such Member's Membership Interest in the Company. (b) Each Member hereby represents to the Company that such Member is acquiring such Member's Membership Interest in the Company for such Member's own account, for investment and not with a view to the resale or distribution. (c) Each Member recognizes that no public market exists with respect to the Membership Interests and no representation has been made that such a public market will exist at a future date. (d) Each Member hereby represents that such Member has not received any advertisement or general solicitation with respect to the sale of the Membership Interests. D-1 (e) Each Member acknowledges that such Member has a preexisting personal or business relationship with the Company or its officers, directors, or principal Membership Interest holders, or, by reason of such Member's business or financial experience or the business or financial experience of such Member's financial advisors (who are not affiliated with the Company), could be reasonably assumed to have the capacity to protect such Member's own interest in connection with the purchase of the Membership Interests. Each Member further acknowledges that such Member is familiar with the financial condition and prospects of the Company's business, and has discussed with the other Members the current activities of the Company. Each Member believes that the Membership Interests are securities of a kind such Member wishes to purchase and hold for investment, and that the nature and amount of the Membership Interests are consistent with such Member's investment program. (f) Before acquiring any Membership Interest in the Company, each Member has investigated the Company and its business and the Company has made available to each Member all information necessary for the Member to make an informed decision to acquire a Membership Interest in the Company. Each Member considers itself to be a person or entity possessing experience and sophistication as an investor adequate for the evaluation of the merits and risks of the Member's investment in the Company. (g) Each Member understands the meaning and consequences of the representations and warranties made by such Member set forth in this Appendix and that the Company has relied upon such representations and warranties. Each Member hereby indemnifies, defends, protects and holds wholly free and harmless the Company and the other Members from and against any and all claims, losses, damages, expenses or liabilities arising out of the breach and/or inaccuracy of any such representation and warranty. The indemnification contained in this paragraph shall survive the execution of this Agreement, the formation of the Company, and the liquidation of the Company. D-2 SCHEDULE 1.25 ------------- Initial Management Committee ---------------------------- Inland Representatives - ---------------------- Bill McIntyre (Senior Manager) Robb Quincey Inland Alternates - ----------------- Richard A. Lewis (Senior Manager) Steve Reenders Michael J. Bidart John M. Goodman SWC Representatives - ------------------- Anthony Garnier SWC Alternate(s) - ---------------- Maurice Gallarda SCHEDULE 1.29 ------------- Percentage Interests -------------------- Inland 75% SWC 25% Start-Up Percentages -------------------- Inland 45% SWC 55% SCHEDULE 1.41 ------------- Tax Matters Member ------------------ Inland Pacific Partners, LLC SCHEDULE 5.2(a) --------------- Initial Company Budget ---------------------- EX-21.1 13 LISTING OF REGISTRANT'S SUBSIDIARIES EXHIBIT 21.1 SOUTHWEST WATER COMPANY SUBSIDIARIES OF THE REGISTRANT As of March 13, 2000
Jurisdiction of Incorporation Name of Subsidiary Tax payer EIN Parent - ------------------------------------------------------------------------------------------------------------- Suburban Water Systems 95-1371870 California Southwest Water Company Water Suppliers Mobile Communication Service 95-2394217 California Suburban Water Systems New Mexico Utilities 85-0205040 New Mexico Southwest Water Company ECO Resources, Inc. 74-1800544 Texas Southwest Water Company Southwest Environmental Labs 76-0155825 Texas ECO Resources, Inc. Wastewater Rehabilitation, Inc. 74-2894610 Texas Southwest Water Company SW Utility Company 76-0332193 Texas Southwest Water Company Southwest Resource Management 95-4169558 Delaware Southwest Water Company SOCI, Inc. (1) 95-4107357 Delaware Southwest Water Company SW Operating Services Co. (1) 95-4107349 Delaware Southwest Water Company Inland Pacific Water Company Pending Delaware Southwest Water Company
All above listed subsidiaries have been included in the Registrant's consolidated financial statements. (1) Inactive EX-23.1 14 CONSENT OF KPMG LLP Exhibit 23.1 KPMG LLP (Company Letterhead) 725 South Figueroa Street Los Angeles, CA 90017 To the Board of Directors and Stockholders Southwest Water Company We consent to incorporation by reference in the registration statement (No. 33-21154) on Form S-3 and the registration statements (Nos. 33-28918, 33-28919, 33-73174, 333-18513 and 333-38935) on Form S-8 of Southwest Water Company of our report dated January 27, 2000, relating to the consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Southwest Water Company. /s/ KPMG LLP Los Angeles, California March 10, 2000 EX-27 15 FINANCIAL DATA SCHEDULE
5 1 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 4,146,000 0 11,667,000 1,202,000 0 18,311,000 158,278,000 44,581,000 142,950,000 16,606,000 28,000,000 0 517,000 64,000 39,896,000 142,950,000 0 80,849,000 0 71,535,000 (387,000) 367,000 2,925,000 9,697,000 3,878,000 5,819,000 0 0 0 5,792,000 0.90 0.87
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