-----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, GJiLVv2bK0Zc6AUK2vv7P4YrEdavsWrUqoAcZCYMr1mP0kE1t8K/N21q30IAFXKH ZqCAGvK4Mud3ulDyrcHD7A== 0000898430-01-501336.txt : 20010716 0000898430-01-501336.hdr.sgml : 20010716 ACCESSION NUMBER: 0000898430-01-501336 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20010713 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-63196 FILM NUMBER: 1680870 BUSINESS ADDRESS: STREET 1: 225 N BARRANCA AVE STREET 2: 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 S-3/A 1 ds3a.txt AMENDMENT #2 TO FORM S-3 As filed with the Securities and Exchange Commission on July 13, 2001 Registration No. 333-63196 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 -------------- Pre-Effective Amendment No. 2 to FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- SOUTHWEST WATER COMPANY (Exact name of registrant as specified in its charter) -------------- Delaware 95-1840947 (State or other jurisdiction (I.R.S Employer of incorporation or organization) Identification Number)
225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (626) 915-1551 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------- Peter J. Moerbeek Chief Financial Officer Southwest Water Company 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 (626) 915-1551 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: James W. Daniels David W. Braswell Latham & Watkins Armstrong Teasdale, LLP 650 Town Center Drive, 20th Floor One Metropolitan Square, Suite 2600 Costa Mesa, California 92626 St. Louis, MO 63102 (714) 540-1235 (314) 621-5070
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement, as determined by market conditions and other factors. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Proposed Maximum Offering Proposed Amount of Title of Amount to be Price Per Maximum Aggregate Registration Securities to be Registered Registered Unit(1)(2) Offering Price(1)(2) Fee(3)(4) - ------------------------------------------------------------------------------------------------------- Convertible Subordinate Debentures due 2021................................ $20,000,000 100% $20,000,000 $5,000 - ------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share (including the associated preferred share purchase rights).............. (5) $-0- - -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (2) Plus accrued interest, if any. (3) Calculated in accordance with Rule 457(o) under the Securities Act of 1933. Amount includes a registration fee of $4,000 previously paid. (4) The Registrant will receive no consideration upon conversion. Therefore, pursuant to Rule 457(i), no additional filing fee is required with respect to the shares of common stock registered hereby. (5) This registration statement covers an indeterminate number of shares of common stock issuable upon conversion of the Debentures. Also includes an additional indeterminate number of shares of common stock that may become issuable upon conversion of the Debentures being registered hereunder by means of an adjustment of the conversion price pursuant to the terms of the Debentures. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission (the "SEC"), acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Preliminary prospectus dated July 13, 2001, subject to completion [LOGO OF SOUTHWEST WATER COMPANY] $20,000,000 SOUTHWEST WATER COMPANY % Convertible Subordinate Debentures Due 2021 This prospectus relates to the offer and sale of the % Convertible Subordinate Debentures of Southwest Water Company due 2021 (the "Debentures"). The Debentures are sold at face value plus accrued interest, if any, to the date of sale. The Debentures are convertible at any time prior to maturity, unless previously redeemed, at a conversion price of $ per share, equivalent to a rate of shares of our common stock, par value $.01 per share, for each $1,000 principal amount, subject to adjustment under certain conditions. Interest on the Debentures is payable quarterly on January 1, April 1, July 1 and October 1, beginning October 1, 2001. The Debentures are unsecured debt of our Company and will be of equal rank with all of our other unsecured indebtedness, other than senior debt. The Debentures are subordinated to all of our existing and future senior and secured debt. At our option, beginning July 1, 2003, we may redeem the Debentures in whole or in part at a redemption price of 105% beginning July 1, 2003 and declining 1% annually to par (100% of face value) after June 30, 2008. The Debentures are redeemable at 100% of their principal amount plus accrued and unpaid interest at any time within 60 days after a request on behalf of a deceased holder, subject to an annual maximum principal amount of $25,000 per holder and $400,000 in the aggregate. However, we may redeem Debentures tendered on behalf of a deceased holder in excess of the above limitations. We will not establish a sinking fund to redeem the Debentures. See "Description of Debentures." The minimum principal amount of Debentures you may purchase is $1,000. We will issue the Debentures only in fully registered form in amounts of $1,000 or integral multiples of $1,000. There is presently no trading market for the Debentures and we cannot assure you that one will develop. Our common stock is traded on the Nasdaq National Market under the symbol "SWWC". The last reported sales price of our common stock on July 11, 2001 was $15.11 per share. Investing in our Debentures involves a high degree of risk. See "Risk Factors" beginning on page 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
- ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Price to Public Underwriting Discount (1) Proceeds to Company (2) - ------------------------------------------------------------------------------------------ Per Debenture.......... 100% 4% 96% - ------------------------------------------------------------------------------------------ Total.................. $20,000,000 $800,000 $19,200,000 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
(1) See "Underwriter" for information relating to indemnification of the underwriter. (2) Before deduction of our expenses estimated at $250,000. This offering is being underwritten by Edward D. Jones & Co., L.P. on a firm commitment basis, which means that it must purchase all of the Debentures if any are purchased. The underwriter's purchase of the Debentures is subject to a number of conditions. The underwriter reserves the right to withdraw, cancel or modify such offers and reject orders in whole or in part. We expect the Debentures to be available on or about , 2001. Edward D. Jones & Co., L.P. The date of this prospectus is July , 2001. TABLE OF CONTENTS Forward-Looking Statements............................................ 3 Prospectus Summary.................................................... 4 Risk Factors.......................................................... 6 Our Company........................................................... 12 Use of Proceeds....................................................... 14 Selected Consolidated Financial Information........................... 15 Common Stock Dividends and Price Range................................ 16 Description of Debentures............................................. 17 Description of Common Stock........................................... 26 Underwriter........................................................... 31 Legal Opinions........................................................ 31 Experts............................................................... 32 Where You Can Find More Information................................... 32 Form of Redemption Request............................................ Exhibit A
We have not authorized any dealer, salesperson or other person to give any information or to make any representations to you other than the information contained in this prospectus. You must not rely on any information or representations not contained in this prospectus. The information contained in this prospectus is current only as of the date on the cover page of the prospectus, and may change after that date. By delivering this prospectus, we do not imply that there have been no changes in the information contained in this prospectus or in our affairs since the date of the prospectus. FORWARD-LOOKING STATEMENTS In addition to historical information, we have made forward-looking statements in this prospectus and in the documents incorporated by reference in this prospectus, such as those pertaining to our capital resources and performance of our operations. "Forward-looking statements" are projections, plans, objectives or assumptions about us. Forward-looking statements involve numerous risks and uncertainties, and you should not place undue reliance on these statements because we cannot assure you that the events or circumstances reflected in these statements will actually occur. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates," "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect, imprecise or incapable of being realized. The following factors, among others set forth in our filings with the Securities and Exchange Commission or in our press releases, could cause actual results and future events to differ materially from those set forth or contemplated in our forward-looking statements: . Debt financing risks related to the Debentures; . Weather and seasonal variations; . Competition; . Failure to effectively and efficiently manage our growth; . Rate regulation and rates of return; . Certain litigation and other risks regarding water quality; . Financing capital expenditures; and . Rapidly increasing operating costs. 3 PROSPECTUS SUMMARY The following summary sets forth certain pertinent facts and does not contain all the information that may be important to you. You should read the entire prospectus, as well as the documents incorporated by reference in this prospectus, before making an investment decision. In particular, see the information presented under the captions "Our Company," "Risk Factors," "Description of Debentures," "Description of Common Stock" and "Where You Can Find More Information." All references in this prospectus to "Southwest Water Company," "the Company," "our Company," "we," "us," or "our" mean and include Southwest Water Company and its subsidiaries. Our Company Southwest Water Company provides a broad range of utility and utility management services. We own regulated water and wastewater utilities that we operate and manage and that provide approximately 42% of our gross revenue. We operate and manage water and wastewater treatment facilities owned by cities, municipal utility districts, public agencies and private entities and also provide utility submetering, installation and billing and collection services. Approximately 58% of our gross revenue is from this market segment. Our geographical coverage includes water and wastewater utility operations, as well as contract operations in California, New Mexico, Mississippi and Texas. We provide utility submetering and billing and collection services in 29 states nationwide. Our principal executive offices are located at 225 North Barranca, Suite 200, West Covina, CA 91791-1605, and our telephone number is (626) 915-1551. For selected financial information and our ratio of earnings to fixed charges, see the captions "Selected Consolidated Financial Information" and "Ratio of Earnings to Fixed Charges." The Offering Securities Offered................... $20,000,000 aggregate principal amount of % Convertible Subordinate Debentures due July 1, 2021. Issuer............................... Southwest Water Company. Maturity Date........................ July 1, 2021. Interest Payment Date................ Payable quarterly on January 1, April 1, July 1 and October 1, beginning on October 1, 2001. Holder's Conversion Privilege........ At any time, a holder may convert his or her Debentures into our common stock at an initial conversion price of $ per share, subject to adjustment under certain conditions. This equates to shares of our common stock at the initial conversion price for each $1,000 of Debentures converted. 4 Our Redemption Rights...................... We cannot redeem the Debentures before July 1, 2003. Beginning July 1, 2003, we may redeem the Debentures, in whole or in part, at any time, at redemption prices from 105% beginning July 1, 2003 and declining 1% annually to par (100% of face value) after June 30, 2008. Redemption Rights on Behalf of a Deceased Holder.................................... Upon request on behalf of a deceased holder, we will redeem up to $25,000 principal amount of Debentures held by the deceased holder. This is subject to an annual aggregate maximum for all deceased holders of $400,000. No Sinking Fund............................ We are not required to set aside funds to redeem Debentures. Priority of Payment........................ The Debentures are unsecured debt of our Company. The rights to payment of the Debenture holders are inferior to the rights of the holders of our existing and future secured debt and senior debt. The rights to payment of the Debenture holders are equal to those of all other holders of our unsecured debt. Use of Proceeds............................ We plan to use the net proceeds from the sale of our Debentures for general corporate purposes which will include reducing a portion of our unsecured, revolving lines of credit and may include the financing of certain acquisitions.
Ratio of Earnings to Fixed Charges
Quarters Ended March 31,* Year Ended December 31, ----------- ------------------------ 2001 2000 2000 1999 1998 1997 1996 ----- ----- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges........ 1.55 1.57 2.25 2.93 1.92 1.65 1.46
For purposes of computing the ratio of earnings to fixed charges, earnings means income from continuing operations before income taxes, interest expense, net of capitalized interest, and amortization and depreciation. Fixed charges means the sum of interest expense, amortization of debt costs and preferred dividends paid. - -------- * The results for the quarter ended March 31, 2001, may not be representative of the results for the 2001 fiscal year due to, among other things, seasonality. 5 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information in this prospectus and the documents incorporated by reference in this prospectus, before investing in the Debentures. You should recognize that risks in addition to those set forth may be significant presently or in the future, and the risks described may affect your investment in the Debentures to a greater or lesser extent than indicated. Risks Related to the Debentures The Debentures are unsecured debt and payment on the Debentures is subordinate to all of our current and future secured and senior debt. The Debentures are subordinated to all of our existing and future secured and senior debt including the secured and senior debt of our subsidiaries. Moreover, the Indenture governing the Debentures does not restrict the incurrence in the future of secured or senior debt by us or our subsidiaries. As a result of such subordination, if we were to become insolvent, holders of any secured or senior debt would be entitled to payment in full prior to any payments being made to the holders of the Debentures, and our other creditors may receive more, ratably, than the holders of the Debentures. In addition, an event of default under the Indenture governing the Debentures may trigger defaults under our secured or senior debt, in which case the holders of the secured or senior debt would be entitled to payment in full before any payment to the holders of the Debentures. The absence of limitations in the Indenture governing the Debentures on the issuance of secured or senior debt could increase the risk that sufficient funds will not be available to pay holders of the Debentures after payment of amounts due to the holders of secured or senior debt. Upon issuance, the Debentures will be subordinate to our outstanding secured bonds of $27,000,000 and our outstanding bank lines of credit of approximately $27,700,000. The Indenture governing the Debentures does not restrict our ability to incur additional indebtedness and we may increase our debt levels in the future. Increases in our debt in the future would also increase our debt service expense. These increases could adversely affect our ability to pay the interest on the Debentures. For further discussion of the subordination of the Debentures, see "Description of Debentures." Our outstanding indebtedness may impair our ability to make payments on the Debentures. If future debt were secured or senior debt, the holders of such debt would have priority in payment rights ahead of the holders of the Debentures. Moreover, any significant adverse developments in our business could impair our ability to make payments with respect to the Debentures. Our leveraged position poses risks to the holders of the Debentures, including the risks that: . A portion of our cash flow will be dedicated to the payment of interest on existing and future indebtedness; . Our leveraged position may impair our ability to obtain financing in the future; and . Our leveraged position may make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. We are a holding company that depends on cash flow from our subsidiaries to meet our debt service obligations. As a holding company, we conduct all of our operations exclusively through our subsidiaries and our only significant assets are our investments in these subsidiaries. This means that we are 6 dependent on dividends or other distributions of funds from our subsidiaries to meet our debt service and other obligations, including payment of interest on the Debentures. Our subsidiaries are separate legal entities and have no obligation to pay any amounts due on these Debentures or to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances by our subsidiaries to us could be subject to statutory, regulatory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. There may be no public market for the Debentures. The Debentures are a new issue of securities. At the present time, there is no established market for the Debentures, and there can be no assurance that a market will develop. The Debentures may not be widely distributed. We have been advised that the Underwriter currently intends to make a market for the Debentures. However, the Underwriter is not obligated to do so, and any market making may be discontinued at any time without notice. There can be no assurance that an active trading market for the Debentures will develop. We do not intend to list the Debentures on any established market. The market price of our shares of common stock may fluctuate. The holders of the Debentures have the right to convert their securities into shares of our common stock. This conversion right may not be of value if the market price of our common stock does not exceed the conversion price. The market price of our common stock may fluctuate depending on many factors, such as the stock market in general and our performance. We do not have direct control over all of the factors that affect our stock price. Risks Related to Our Business Our regulated and non-regulated operations are subject to weather and seasonality considerations. Our regulated water utility operations are seasonal. Therefore, the results of operations for one period do not indicate results to be expected in another period. Rainfall and weather conditions affect our utility operations, with most water consumption occurring during the third quarter of each year when weather tends to be hot and dry. Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water supply and may also result in increased water costs to us and adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit to our Company. Our contract operations business conducted by our subsidiary ECO Resources can also be seasonal in nature. For example, heavy rainfall limits ECO Resources' ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. The water, wastewater management and utility submetering businesses are highly competitive. The water and wastewater management business is highly competitive in the United States. Municipal employees perform the majority of water and wastewater utility operations. A significant portion of ECO Resources' marketing effort requires convincing elected officials and municipal authorities that outsourcing utility operations is beneficial to a city. We cannot assure you that any city will choose to outsource or will select ECO Resources as its operator at the end of the sales effort. Although industry renewal rates are high, municipalities periodically change operators or 7 terminate outsourcing at the end of a contract. ECO Resources' inability to renew its existing contracts could have a material adverse impact on us. In addition, a city or municipal utility district could cancel a long-term contract without notice. This would result in loss of revenue and operating profits and could involve us in litigation if a breach of contract occurs. ECO Resources competes with several larger companies whose size, customer base, technical expertise and capital resources may restrict ECO Resources' ability to compete successfully for certain operations and maintenance contracts. ECO Resources' recent success is a result of its ability to obtain contracts from smaller cities with populations of up to 50,000, municipal utility districts and other public agencies. We cannot assure you that ECO Resources will be able to effectively compete in this market in the future. Master Tek International's, or Master Tek's, utility submetering, installation, billing and collection business is also highly competitive. While industry contract renewal rates are high, management companies and owners of multi-family dwellings periodically change billing and collection companies. In addition, Master Tek competes with several larger competitors whose size, customer base and capital resources may restrict Master Tek's ability to compete successfully for certain contracts. This is a relatively new industry and may attract other large competitors. We may fail to effectively manage growth. During the past few years, we have expanded our business both through internal growth and through acquisitions. We are actively seeking acquisitions and joint ventures in each of our business lines. The success of our future business development and growth opportunities depends on our ability to attract and retain experienced and qualified persons to operate and manage our new business ventures. We cannot assure you that we will successfully manage our growth, and failure to do so could have a material adverse effect on our future results of operations. The rates we charge in our regulated businesses are established by governmental agencies. Our water utilities are all subject to regulation by governmental agencies in their respective jurisdictions. Rates established by these agencies are intended to permit each utility to recover its costs and earn a reasonable rate of return on common equity. Each utility may file and process general rate applications on a periodic basis. Since the established rates may be in effect for several years, where possible, the utilities attempt to anticipate cost increases and apply for rates sufficient to permit recovery of those cost increases when incurred. Suburban Water Systems, or Suburban, has been directed by the California Public Utilities Commission, or the CPUC, to file a general rate application by March 2002. Windermere Utility Company filed for a general rate increase in May 2001. New Mexico Utilities and Hornsby Bend Utility Company are not currently seeking any rate increases. To date, our utilities have been successful in obtaining rates sufficient to cover their costs and provide a sufficient rate of return. We cannot assure you that current or future rate applications will result in favorable rates or that any rate increases permitted will be granted in order to offset cost increases as they occur. Failure to achieve timely and favorable rate increases could adversely affect our profitability. Our business is subject to litigation and other risks concerning water quality. We have been named as defendants in several lawsuits alleging water contamination in the Main San Gabriel Basin. These lawsuits list hundreds of plaintiffs who receive or have received water from the Main San Gabriel Basin and list as defendants several alleged industrial polluters and all or most of the non-municipally owned water producers in the Main San Gabriel Basin. The plaintiffs allege that water consumers have suffered physical injuries or death as the result of 8 pollutants in the water delivered to them. In September 1999, the California 2nd District Court of Appeal dismissed certain of the lawsuits. The California Supreme Court has agreed to review this decision. We anticipate that the California Supreme Court will hear oral arguments during 2001. The several lawsuits not involved in the appeal are currently inactive pending the decision of the California Supreme Court. We have requested defense and indemnification from our liability insurance carriers for these lawsuits. Several of the liability insurance carriers are currently absorbing the costs of defense of the lawsuits. The basis for the dismissal by the Court of Appeal is that the CPUC has final jurisdiction over service and water quality matters. In 2000, the CPUC completed a review that included all of the larger regulated water producers in the Main San Gabriel Basin. The CPUC concluded that these water producers met all state water standards. If the California Supreme Court upholds the dismissal of the lawsuits, it is unknown whether the plaintiffs will seek recourse through new legislation or through the CPUC and what effect, if any, this may have on us. If the California Supreme Court permits these lawsuits to proceed, a number of events will occur. First, the lawsuits would be tried on their merits. If the lawsuits were decided against us, and if the results were upheld on appeal, we would then seek relief from our insurance carriers. If we were unsuccessful, we would file for a rate increase from the CPUC. If we were unable to obtain rate relief, our financial results could be adversely affected due to costs incurred, including judgments or settlements, defense costs and additional costs to improve water quality. We can give you no assurance as to the outcome of this process. Over the years, Suburban's operations have been impacted by three categories of contaminants present in quantities exceeding state and Federal water standards. In 1979, volatile organic compounds were detected; in 1997, perchlorate was detected; and in 1998, the substance N-sodimethylamine, or NDMA, was detected. These contaminants were discovered in the Main San Gabriel Basin, the primary source of groundwater for Suburban. Through various methods, including removal of wells from Suburban's distribution system and the construction of water treatment facilities, water currently delivered to Suburban's customers meets all applicable state and Federal standards. However, we cannot assure you that, in the future, Suburban will be able to reduce the amounts of any contaminants in its wells to acceptable levels, or that the costs of such removal will be fully recoverable from Suburban's customers through rate relief. Suburban has taken measures to ensure that it has an adequate supply of potable water that meets all applicable governmental standards, though the costs of such water may be higher than the water Suburban produces. That supply includes arrangements for water purchases from other water purveyors and from the Metropolitan Water District, which imports water from both the Colorado River and from the California State Water Project. The cost of purchased water could have a significant adverse effect on our results of operations if Suburban is unsuccessful in obtaining rate relief. The Environmental Protection Agency, or the EPA, has conducted numerous studies of underground water in the Main San Gabriel Basin and in 1984 designated the Main San Gabriel Basin as a Super-fund site. Several large industrial companies were named as potentially responsible parties for allegedly causing the contamination. Suburban's facilities were not named as sources of the contamination. However, certain government officials have suggested that, because of their pumping operations, the Main San Gabriel 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 potentially responsible parties. We cannot assure you, however, that Suburban will 9 not be identified as a potentially responsible party in the future. In that case, our future results of operations could be adversely affected if Suburban is required to pay clean-up costs and is not allowed to recover such costs from its customers through rate relief. 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 may use alternate sources of water, or may request rate relief from the CPUC to offset these rising costs. The potential impact of these costs and the costs associated with any other contaminant remediation on Suburban's results of operations is not fully known at this time. Such costs could be significant and could have an adverse effect on our future results of operations if Suburban is unsuccessful in obtaining rate relief. Although we believe all water currently delivered by Suburban meets all applicable governmental standards, we cannot assure you that we have identified all water quality issues that may affect us now or in the future. We also cannot assure you that governmental authorities will not seek to recover clean- up costs from Suburban in the future, or that potentially responsible parties will not seek contributions from Suburban for clean-up costs. These matters could have an adverse effect on our future results of operations if Suburban were unable to obtain rate relief. Our water utility business requires significant capital expenditures. The water utility business is capital intensive. On an annual basis, our water utilities spend significant sums for additions to or replacement of property, plant and equipment. During calendar years 2000, 1999 and 1998, our combined utilities spent $9,470,000, $8,434,000, and $11,363,000, respectively, for these purposes. Our combined budget for calendar year 2001 for these purposes is approximately $10,000,000. Our non-regulated businesses may require funds for capital projects in the future. Recently, ECO Resources has looked to expand its operations by financing or joint venturing water plants or treatment plants with customers and potential customers. Growth of Master Tek may also require capital for installation of telemetering equipment. We obtain the funds for these capital projects from operations, contributions by developers and others and advances from developers (which must be repaid). We also periodically borrow money for these purposes. We maintain bank lines of credit that we can use for these purposes, and we have substantial capacity to issue secured debt. We cannot assure you that these sources will continue to be adequate or that the cost of funds will remain at levels permitting us to remain profitable. If adequate, affordable funds are not available, certain capital projects may be deferred. Continued deferral of such projects may in turn affect our revenue and profitability. The costs of producing our products and services are rapidly increasing. The cost of water (whether produced from our own wells or purchased from outside sources), electric power and natural gas represents a substantial portion (approximately 47% in 2000) of the combined operating costs of our water utilities. Purchased water is significantly more expensive than water produced by our utilities. As a result, each utility attempts to produce as much as possible of the water it delivers and to use water purchases only to supplement its own production. Factors such as drought, water contamination and customer demand can increase water purchases 10 and the overall cost of water for our utilities. Such factors are not within our control and may decrease our profitability if we are unable to obtain rate increases from a regulatory agency. Electric power costs in California have increased dramatically in the last year and are likely to continue to increase in the near term. The cost of natural gas has increased significantly in the United States in recent years. Our response to these increases is to utilize energy efficient techniques, new and better equipment and seek rate relief from the regulating agencies. We may not, however, have the ability to completely offset the effect of these cost increases. These factors are not within our control and could decrease our profitability if costs continue to increase or if we are unable to obtain rate increases from regulatory agencies. 11 OUR COMPANY Southwest Water Company was incorporated in California in 1954 and reincorporated in Delaware in 1988. Southwest Water Company is a publicly held holding company and conducts no business operations itself. All operations are conducted through our subsidiaries which provide a broad range of services including water production and distribution, wastewater collection and treatment and utility submetering. We own regulated public water utilities. State regulatory agencies oversee the operations of our utilities as well as establish the rates that we can charge for our services. We also operate and manage water and wastewater treatment facilities which are owned by cities, public agencies, municipal utility districts and private companies under contract. These facilities are also subject to regulatory oversight; however, the pricing of our services is not subject to regulation. We serve more than one million people in 30 states nationwide. We own and operate water and wastewater utilities through four subsidiaries. Suburban, New Mexico Utilities and Hornsby Bend Utility Company are wholly owned and we also own 80% of Windermere Utility Company. Through our wholly owned subsidiary, ECO Resources, we operate and manage water and wastewater treatment facilities owned by cities, public agencies, municipal utility districts and private entities. Nationwide, we provide utility submetering and billing and collection services through our 80%-owned subsidiary, Master Tek. Suburban Water Systems Suburban is a regulated public water utility that produces and supplies water for residential, commercial, industrial and public authority use, and for private and public fire protection service under the jurisdiction of the CPUC. Suburban's service area contains a population of approximately 300,000 people within Los Angeles and Orange Counties, California. Suburban owns 14 active wells that pump water from two major groundwater basins in the Southern California coastal watershed. Suburban also purchases water from two mutual water companies that also produce their water from one of the basins. In addition, Suburban purchases water from the San Gabriel Municipal Water District and has interconnections with other water purveyors for supplemental and emergency sources of supply. During 2000, Suburban accounted for approximately 35% of our total revenue. New Mexico Utilities New Mexico Utilities is a regulated public water utility that provides water supply and sewage collection services for residential, commercial, irrigation and fire protection customers under the jurisdiction of the New Mexico Public Regulation Commission. New Mexico Utilities' service area contains a population of approximately 28,000 people within the northwest portion of the City of Albuquerque, New Mexico and the northern portion of Bernalillo County, New Mexico. New Mexico Utilities owns five wells and four reservoirs. New Mexico Utilities' wells produce water from the Rio Grande Underground Basin. During 2000, New Mexico Utilities accounted for approximately 6% of our total revenue. Windermere Utility Company and Hornsby Bend Utility Company Windermere Utility Company and Hornsby Bend Utility Company are two small public water utilities operating near Austin, Texas. Both are regulated public water utilities that provide water supply and sewage collection services for residential, commercial, irrigation and fire protection customers under the jurisdiction of the Texas Natural Resources Conservation Commission. Together, these utilities currently provide water supply and sewage collection and treatment services to approximately 4,800 customers. Their service areas are located near the city of Austin, 12 Texas and contain a population of about 17,000 people. During 2000, Windermere Utility Company and Hornsby Bend Utility Company, which were acquired in October 2000, accounted for approximately 1% of our total revenue. ECO Resources ECO Resources provides contract water and wastewater system management, operations and maintenance services in the states of Texas, Mississippi, New Mexico and California. ECO Resources' services include facility and equipment maintenance and repair, sewer pipeline cleaning, water and wastewater operations, billing and collection services and state-certified laboratory analysis. ECO Resources does not own any of the water sources, water production facilities, water distribution systems, wastewater collection systems or wastewater treatment facilities that it operates for its clients. ECO Resources has two distinct types of contractual relationships: time and material contracts (primarily with municipal utility districts in Texas) and fixed fee operations and maintenance contracts. Areas served by ECO Resources have an aggregate population of approximately 580,000 people. During 2000, ECO Resources accounted for approximately 52% of our total revenue. Master Tek International Master Tek is engaged in the utility submetering business, which involves the installation of electronic equipment in apartments, condominiums, mobile home parks and other multi-family dwellings to monitor each resident's usage of various utilities. Submetering allows water, gas and electricity usage to be measured and charged to each individual residential unit. In addition, Master Tek provides billing, collection and customer relations services for these usage charges. The billing process involves the transmission of utility usage data via radio frequency and telephone lines to Master Tek's headquarters near Denver, Colorado, where service representatives prepare bills and handle customer inquiries. Currently, Master Tek provides service to approximately 140,000 dwelling units in 29 states throughout the country. During 2000, Master Tek accounted for approximately 6% of our total revenue. 13 USE OF PROCEEDS The net proceeds from the sale of the Debentures are estimated to be approximately $18,900,000 after deducting the estimated expenses of the offering and underwriting discounts and commissions. We currently intend to use the net proceeds from the sale of the Debentures for general corporate purposes, which will include the reduction of a portion of our outstanding debt under our revolving lines of credit, and may include the financing of certain acquisitions that are expected to expand our market share in contract operations. We have unsecured lines of credit from three commercial banks with a total borrowing capacity of $30,000,000, of which $4,000,000 will expire on August 1, 2001. As of July 11, 2001, one line of credit had an outstanding balance of $11,200,000 at an interest rate of approximately 5.05%. Of this amount, $11,000,000 matures on August 1, 2002 and $200,000 matures on August 1, 2001. As of July 11, 2001, a second line of credit had an outstanding balance of $13,000,000 at an interest rate of approximately 5.33%. Of this amount, $11,000,000 matures on August 1, 2002 and $2,000,000 matures on August 1, 2001. As of July 11, 2001, a third line of credit had an outstanding balance of $3,500,000 at an interest rate of approximately 5.11% and a maturity date of April 10, 2002. We plan to reduce the outstanding line of credit balances by approximately $14,000,000 with proceeds from the sale of our Debentures. During the past few years, we have expanded our business both through internal growth and through acquisitions. We are actively seeking acquisitions and joint ventures to improve our position in both the regulated water utility and non-regulated water, wastewater and utility submetering businesses. To continue this process, we have entered into letters of intent to acquire two separate contract operations businesses to expand our market share in the southern United States. The consideration for these acquisitions will consist of approximately $3,500,000 of the proceeds from the sale of the Debentures, approximately $2,000,000 of our common stock and promissory notes to the sellers of approximately $5,400,000. We expect these acquisitions to be completed in the third quarter of 2001. However, we cannot assure you that these transactions will be successfully completed. If consummated, these acquisitions are not expected to be material in the aggregate or require pro forma disclosure in accordance with the rules and regulations of the SEC. 14 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated financial information for Southwest Water Company on an historical basis. The information was derived from our financial statements, which are incorporated by reference in this prospectus. The selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2000, and our Form 10-Q for the quarterly period ending March 31, 2001, both incorporated by reference in this prospectus.
Three Months Ended March 31, Years Ended December 31, --------------- ----------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ------- ------- -------- ------- ------- ------- ------- (in thousands, except per share data) Summary of operations Operating revenues...... $23,215 $20,557 $104,741 $80,849 $72,146 $71,005 $66,145 Operating income........ $ 1,876 $ 1,374 $ 11,637 $ 9,314 $ 8,055 $ 7,215 $ 5,734 Gain on sales of land... -- -- $ 128 $ 2,855 $ 110 -- -- Net income.............. $ 535 $ 430 $ 5,381 $ 5,819 $ 3,349 $ 2,601 $ 1,923 Net income available for common shares.......... $ 528 $ 423 $ 5,354 $ 5,792 $ 3,322 $ 2,574 $ 1,896 Common share data Earnings per common share Basic................... $.06 $.05 $.65 $.72* $.42 $.33 $.25 Diluted................. $.06 $.05 $.62 $.70* $.41 $.32 $.24 Cash dividends per common share........... $.06 $.05 $.21 $.18 $.16 $.15 $.14 Weighted average outstanding common shares Basic................... 8,567 8,079 8,273 8,010 7,883 7,778 7,673 Diluted................. 8,981 8,436 8,615 8,318 8,062 7,945 7,747
- -------- * Includes a $.20 per share gain, net of taxes, on the sale of surplus land formerly used in water utility operations. 15 COMMON STOCK DIVIDENDS AND PRICE RANGE Our common stock is traded on the Nasdaq National Market under the symbol "SWWC". The following table shows the range of market prices of our common stock for the periods indicated. The prices shown reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions. Since 1960, our practice has been to pay common stock dividends quarterly on or about the 20th day of January, April, July and October. The amount and timing of future dividends depends on our growth, results of operations, profitability and financial condition, as well as other factors deemed relevant by our board of directors. Our current quarterly dividend rate is $.056 per common share.
Market Price Range Dividends ------------- Paid High Low Per Share ------ ------ --------- 1999 First Quarter........................................ $ 8.73 $ 6.67 $.043 Second Quarter....................................... $ 9.60 $ 5.90 $.043 Third Quarter........................................ $14.37 $ 9.07 $.043 Fourth Quarter....................................... $14.90 $ 9.20 $.048 2000 First Quarter........................................ $12.70 $ 8.40 $.048 Second Quarter....................................... $11.50 $ 8.30 $.048 Third Quarter........................................ $11.20 $ 9.20 $.056 Fourth Quarter....................................... $13.40 $ 9.90 $.056 2001 First Quarter........................................ $13.75 $11.50 $.056 Second Quarter....................................... $14.94 $11.70 $.056 Third Quarter (through July 11, 2001)................ $15.41 $14.30 $.056*
- -------- * $.056 represents the dividend we expect to pay per share of common stock for the 3rd quarter of 2001. 16 DESCRIPTION OF DEBENTURES The Debentures will be unsecured general obligations of our Company. The Debentures will be issued under an Indenture, dated as of July , 2001 (the "Indenture"), between our Company and Chase Manhattan Bank and Trust Company, National Association, as Trustee, a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus is a part. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") in effect on the date of the Indenture. Potential investors are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The following statement, unless the content otherwise requires, is a summary of the substance or general effect of certain provisions of the Indenture and is qualified in its entirety by reference to the Indenture. Unless otherwise provided, terms defined in the Indenture have the same meanings when used in this prospectus. The Debentures will be limited in aggregate principal amount to $20,000,000 and will be issuable as fully registered Debentures in denominations of $1,000 or integral multiples thereof. The Debentures will have equal rank with all of our other unsecured indebtedness, other than senior debt. The Debentures will bear interest at the rate of % per annum from and after the date of their original issuance. Payments of interest will be made quarterly, each January 1, April 1, July 1 and October 1, beginning October 1, 2001. The Debentures will mature on July 1, 2021. Payment of the principal of the Debentures will be made at the office of the Paying Agent. The Debentures will be exchangeable and transferable at the office of the Registrar without charge except for any tax or other governmental charges connected therewith. We have appointed Chase Manhattan Bank and Trust Company, National Association, as Trustee, Registrar and Paying Agent for the Debentures. We have appointed Chase Mellon Shareholder Services as Conversion Agent. We furnish our stockholders our annual reports containing our audited financial statements. Upon request, we will furnish to holders of the Debentures our annual reports and our interim reports containing unaudited financial statements. Conversion Holders may, at their option, convert Debentures into our common stock at any time after the issuance and before the maturity of the Debentures. The conversion may be of the entire Debenture, or any portion of the principal of a Debenture which is $1,000 or an integral multiple thereof, into that number of fully paid and non assessable shares of our common stock obtained by dividing the principal amount of the Debenture or portion thereof to be converted by the initial conversion price of $ per share. In the event of a consolidation or merger of our Company, an adjustment will be made to the conversion price and/or in the securities, cash or other assets into which the Debentures will be convertible, if appropriate. The conversion price will be subject to proportionate adjustment if: . our common stock is reclassified or subdivided or combined by way of stock dividends, stock splits or reverse stock splits; or . we distribute to our holders of common stock any assets (other than dividends out of current or retained earnings), debt securities or rights or warrants to purchase our securities. However, no adjustment will be made unless: . the cumulative effect of all our reclassifications, subdivisions or combinations changes the conversion price by at least l%; or 17 . the cumulative effect of all such distributions of assets, debt securities, rights or warrants changes the conversion price by at least 5%. No accrued interest will be payable on a Debenture surrendered for conversion except for Debentures surrendered between a Record Date and the corresponding Interest Payment Date. No fractional shares of common stock will be issued on conversion. Instead, cash payment will be made in lieu of fractional shares based on the then Quoted Price of the Common Stock as provided in the Indenture. To convert a Debenture a holder must provide written notice to the Participant of the holder's intent to convert all or part of the holder's interest in the Debentures into shares of our common stock. The Participant shall thereupon deliver to the Depositary a written request for conversion containing the name of the holder, the holder's interest in the Debenture and the amount of the holder's interest to be converted. The Depositary will, on receipt thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to conversion requests received by it including date of receipt and the name of the Participant filing the conversion request. The Trustee will immediately send a copy of each conversion request it receives to us and the Conversion Agent. The Depositary, the Company, the Trustee and the Conversion Agent may conclusively assume, without independent investigation, that the statements contained in each conversion request are true and correct and shall have no responsibility for reviewing any documents submitted to the Participant by the holder or for determining whether the holder is in fact the Beneficial Owner of the interest in the Debenture to be redeemed. The holder shall furnish appropriate endorsements and transfer documents if required by the Registrar or the Conversion Agent and pay any transfer or similar tax required under the Indenture. If we call a Debenture for redemption, in whole or in part, the right to convert the called portion of the Debenture terminates at the close of business on the fifth business day preceding the redemption date. As soon as practicable after all of the conversion requirements have been met, we will deliver through the Conversion Agent a certificate for the number of full shares of our common stock issuable upon the conversion and a check for any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record on and after the date of conversion. Conversion price adjustments, or the failure to make such adjustments, may, in certain circumstances, result in constructive distributions that could be taxable as dividends under the Internal Revenue Code of 1986, as amended, to holders of Debentures or to holders of common stock issued upon conversion thereof. Limited Right of Redemption on Behalf of Deceased Holder Unless the Debentures have been declared due and payable prior to their maturity by reason of an Event of Default, the Representative (as defined below) of a deceased Beneficial Owner (as defined below) has the right at any time to request redemption prior to stated maturity of all or part of his interest in the Debentures. We will redeem interests in such Debentures subject to the limitations that we will not be obligated to redeem, during the period from the original issue date through and including June 30, 2002 (the "Initial Period"), and during any twelve-month period which ends on and includes each June 30 thereafter (each such twelve-month period being hereinafter referred to as a "Subsequent Period"), (i) on behalf of a deceased Beneficial Owner any interest in the Debentures which exceeds $25,000 principal amount or (ii) interests in the Debentures exceeding $400,000 in aggregate principal amount. We may, at our option, redeem interests of any deceased Beneficial Owner in the Debentures in the Initial Period or any Subsequent Period in excess of the $25,000 limitation. Any such 18 redemption, to the extent that it exceeds the $25,000 limitation for any deceased Beneficial Owner, shall not be included in the computation of the $400,000 aggregate limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. We may, at our option, redeem interests of deceased Beneficial Owners in the Debentures, in the Initial Period or any Subsequent Period, in an aggregate principal amount exceeding $400,000. Any such redemption, to the extent it exceeds the $400,000 aggregate limitation, shall not reduce the $400,000 aggregate limitation for any Subsequent Period. If we elect to redeem Debentures in excess of the $25,000 limitation or the $400,000 aggregate limitation, Debentures so redeemed shall be redeemed in the order of the receipt of Redemption Requests (as hereinafter defined) by the Trustee. A request for redemption of an interest in the Debentures may be initiated by the personal representative or other person authorized to represent the estate of the deceased Beneficial Owner or by a surviving joint tenant or tenant(s) by the entirety or by the trustee of a trust (each, a "Representative") at any time and in any principal amount. The Representative shall deliver a request to the Participant (hereinafter defined) through whom the deceased Beneficial Owner owned such interest, in form satisfactory to the Participant, together with evidence of the death of the Beneficial Owner, evidence of the authority of the Representative satisfactory to the Participant, such waivers, notices or certificates as may be required under applicable state or federal law and such other evidence of the right to such redemption as the Participant shall require. The request shall specify the principal amount of the interest in the Debentures to be redeemed. The Participant shall thereupon deliver to the Depositary a request for redemption substantially in the form attached as Exhibit A hereto (a "Redemption Request"). The Depositary will, on receipt thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to Redemption Requests received by it including date of receipt, the name of the Participant filing the Redemption Request and the status of each such Redemption Request with respect to the $25,000 limitation and the $400,000 aggregate limitation. The Trustee will immediately file each Redemption Request it receives, together with the information regarding the eligibility thereof with respect to the $25,000 limitation and the $400,000 aggregate limitation with us. The Depositary, the Issuer and the Trustee may conclusively assume, without independent investigation, that the statements contained in each Redemption Request are true and correct, and shall have no responsibility for reviewing any documents submitted to the Participant by the Representative or for determining whether the applicable decedent is in fact the Beneficial Owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the Representative is duly authorized to request redemption on behalf of the applicable Beneficial Owner. Subject to the $25,000 limitation and the $400,000 aggregate limitation, we will, after the death of any Beneficial Owner, redeem the interest of such Beneficial Owner in the Debentures within 60 days following our receipt of a Redemption Request from the Trustee. If Redemption Requests exceed the $400,000 aggregate limitation during the Initial Period or during any Subsequent Period, then such excess Redemption Requests will be applied in the order received by the Trustee to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such interests. We may, at any time, notify the Trustee that we will redeem, on a date not less than 30 or more than 60 days thereafter, all or any such lesser amount of Debentures for which Redemption Requests have been received but which are not then eligible for redemption by reason of the $25,000 limitation or the $400,000 aggregate limitation. Any Debentures so redeemed shall be redeemed in the order of receipt of Redemption Requests by the Trustee. The price paid by us for the Debentures to be redeemed pursuant to a Redemption Request is 100% of the principal amount thereof plus accrued but unpaid interest to the date of payment. Subject to arrangements with the Depositary, payment for interests in the Debentures which are to 19 be redeemed shall be made to the Depositary upon presentation of Debentures to the Trustee for redemption in the aggregate principal amount specified in the Redemption Requests submitted to the Trustee by the Depositary which are to be fulfilled in connection with such payment. The principal amount of any Debentures acquired or redeemed by us, other than by redemption at the option of any Representative of a deceased Beneficial Owner, shall not be included in the computation of either the $25,000 limitation or the $400,000 aggregate limitation for the Initial Period or for any Subsequent Period. A "Beneficial Owner" means the Person who has the right to sell, transfer or otherwise dispose of an interest in a Debenture and the right to receive the proceeds therefrom, as well as the interest and principal payable to the holder thereof. In general, a determination of beneficial ownership in the Debentures will be subject to the rules, regulations and procedures governing the Depositary and institutions that have accounts with the Depositary or a nominee thereof ("Participants"). Any interest in a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Beneficial Owner and the death of a tenant by the entirety, joint tenant or tenant in common will be deemed the death of a Beneficial Owner. The death of a person who, during his lifetime, was entitled to substantially all of the rights of a Beneficial Owner of an interest in the Debentures will be deemed the death of the Beneficial Owner, regardless of the recordation of such interest on the records of the Participant, if such rights can be established to the satisfaction of the Participant. Such interests shall be deemed to exist in typical cases of nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act, community property or other similar joint ownership arrangements, including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and any spouse, trusts and certain other arrangements where one person has substantially all of the rights of a Beneficial Owner during such person's lifetime. Any Redemption Request may be withdrawn by the person(s) presenting the same upon delivery of a written request for such withdrawal given by the Participant on behalf of such person to the Depositary and by the Depositary to the Trustee prior to payment thereof by the Company. We may, at any time, purchase any Debentures for which Redemption Requests have been received in lieu of redeeming such Debentures. Any Debentures so purchased by us shall either be re-offered for sale and sold within 180 days after the date of purchase or presented to the Trustee for redemption and cancellation. During such time or times as the Debentures are not represented by a Global Debenture and are issued in definitive form, all references herein to Participants and the Depositary, including the Depositary's governing rules, regulations and procedures, shall be deemed deleted, all determinations which under this section the Participants are required to make shall be made by the Company (including, without limitation, determining whether the applicable decedent is in fact the Beneficial Owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the Representative is duly authorized to request redemption on behalf of the applicable Beneficial Owner), all redemption requests, to be effective, shall be delivered by the Representative to the Trustee, with a copy to us, and shall be in the form of a Redemption Request (with appropriate changes to reflect the fact that such Redemption Request is being executed by a Representative) and, in addition to all documents that are otherwise required to accompany a Redemption Request, shall be accompanied by the Debenture that is the subject of such request. 20 Redemption at Our Option The Debentures will be redeemable at our option, in whole or in part, at any time and from time to time on or after July 1, 2003, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the Redemption Date:
Period Percent of Par ------ -------------- July 1, 2003--June 30, 2004.............................. 105% July 1, 2004--June 30, 2005.............................. 104% July 1, 2005--June 30, 2006.............................. 103% July 1, 2006--June 30, 2007.............................. 102% July 1, 2007--June 30, 2008.............................. 101% Thereafter............................................... 100%
We will select the principal amount, if less than all of the Debentures are to be redeemed. If we elect to redeem less than all of the then outstanding Debentures, the Trustee will select Debentures for redemption by lot. Debentures in denominations larger than $1,000 may be redeemed in integral multiples of $1,000. Either the Trustee or we will mail a notice of redemption to each holder of the Debentures to be redeemed at his registered address at least 30 days but not more than 60 days before the date selected for redemption (the "Redemption Date"). That notice will set forth the Redemption Date and Redemption Price. That notice will also set forth the date by which Debentures may be converted and the requirements to be met to effect such conversion. On and after the Redemption Date, interest will cease to accrue on Debentures or portions thereof called for redemption, unless we default in the payment of the Redemption Price. We have the option under the Indenture, in connection with any redemption at our option, to arrange for one or more purchasers to purchase the Debentures called for redemption and immediately convert such Debentures to Common Stock of the Company. In such event, the proceeds of such sale would be used to redeem the Debentures called for redemption. Any such arrangement would not relieve us from our obligation to pay the purchase price of and accrued interest on Debentures called for redemption. There will be no so-called "sinking fund" for the Debentures. This means that, except for limited amounts of Debentures which we are required to redeem at the election of Representations of deceased holders of interests in the Debentures, we will not be required to redeem or pay off any Debentures prior to their maturity date of July 1, 2021. Priority of Payment The Debentures are unsecured indebtedness of Southwest Water Company. The Indenture grants to the Trustee certain rights and remedies on behalf of the holders of the Debentures, but does not constitute a lien on any of our assets or those of our subsidiaries. The rights to payment of the holders of the Debentures will be inferior to the rights to payment of the holders of any current or future secured debt of Southwest Water Company or our subsidiaries, including secured bonds issued by our water utility subsidiaries. As of the date hereof, such outstanding secured bonds aggregate approximately $27,000,000. That amount may increase or decrease in the future as necessary to satisfy our capital requirements and those of our subsidiaries. 21 The rights to payment of the holders of the Debentures will also be inferior to the rights to payment of the holders of present or future "Designated Senior Debt." Designated Senior Debt is that debt of Southwest Water Company and our subsidiaries, other than secured debt, that we have designated as senior in right of payment to the Debentures. We currently intend to designate as Designated Senior Debt all debt now or hereafter outstanding on bank lines of credit extended to us and our subsidiaries. Such line of credit debt currently approximates $27,700,000. Such amount may increase or decrease in the future based upon our cash requirements and those of our subsidiaries. In addition, we may in the future designate other debt as Designated Senior Debt with payment rights superior to those of the holders of the Debentures. Events of Default and Remedies An event of default is: . a default for 30 days in payment of interest on the Debentures; . a default in payment of principal and premium, if any, when due; . our failure for 60 days after notice to comply with any of our other agreements in the Indenture or the Debentures; . a default by us under, and acceleration prior to maturity of, or the failure to pay at maturity, certain of our other indebtedness aggregating in excess of $2,000,000; or . certain events of bankruptcy or insolvency. If any event of default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Holders of the Debentures may not enforce the Indenture or the Debentures except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Debentures may direct the Trustee in its exercise of any trust or power conferred to it. The Trustee may withhold from holders of the Debentures notice of any continuing default or event of default (except a default or event of default in payment of principal or interest) if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the then outstanding Debentures may, on behalf of the holders of all of the Debentures, waive any past default or event of default under the Indenture and its consequences except a default in the payment of interest on, or the principal of, the Debentures, or a default or an event of default arising with respect to the conversion rights of Debenture holders. No holder of a Debenture may individually pursue a remedy under the Indenture or the holder's Debentures unless the holder gives the Trustee notice of a continuing event of default, the holders of at least 25% in principal amount of the Debentures request in writing that the Trustee pursue such remedy and offer the Trustee satisfactory indemnity against losses and expenses, the Trustee fails to comply with the request for sixty (60) days after receipt of the request and indemnity and there is no inconsistent instruction by the holders of a majority in principal amount of the Debentures during such 60-day period. No holder of a Debenture is entitled to preference or priority over other holders of Debentures. Subject to the foregoing limitations, the rights of holders to payment of the Debentures and to conversion of the Debentures are absolute and unconditional and may not be affected without their consent. We are required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and upon becoming aware of any default or event of default, a statement specifying such default or event of default. 22 None of our directors, officers, employees or stockholders, as such, shall have any liability for any of our obligations under the Debentures or the Indenture, or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of the Debentures, by accepting a Debenture, waives and releases all such liability. This waiver and release are part of the consideration for issue of the Debentures. Satisfaction and Discharge of the Indenture After all the Debentures have been called for redemption or mature in one year, we may terminate all of our obligations under the Indenture, other than our obligations to pay the principal of and interest on the Debentures and certain other obligations, at any time, by depositing with the Trustee money or non-callable U.S. Government obligations sufficient to pay all remaining indebtedness on the Debentures. Amendment, Supplement and Waiver Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented with the consent of the holders of at least a majority in principal amount of such then outstanding Debentures, and any existing default or compliance with any provision may be waived with the consent of the holders of a majority in principal amount of the then outstanding Debentures. Without the consent of any holder of the Debentures, we and the Trustee may amend or supplement the Indenture or the Debentures to: . cure any ambiguity, defect or inconsistency; . provide for uncertificated Debentures in addition to or in place of certificated Debentures; . provide for the assumption of the Company's obligations to holders of the Debentures in the case of a merger or acquisition; or . make any change that does not materially adversely affect the rights of any holder of the Debentures. Other amendments by us and the Trustee require the written consent of the holders of a majority in principal amount of the Debentures. Without the consent of each Debenture holder affected, we may not: . reduce the principal amount of Debentures whose holders must consent to an amendment of the Indenture; . reduce the rate or change the interest payment time of any Debenture; . reduce the principal of or change the maturity of any Debenture; . waive a default in the payment of the principal of or interest on any Debenture; . make any Debenture payable in money other than that stated in the Debenture; or . modify the provisions of the Indenture pertaining to the waiver of past defaults or the rights of Debenture holders to receive payments. Book-Entry-Only Issuance--The Depository Trust Company The Debentures will be represented by one Global Debenture that will be deposited with and registered in the name of The Depository Trust Company ("DTC") or its nominee. This means that we will not issue certificates to you for the Debentures. One Global Debenture will be issued to DTC, which will keep a computerized record of its Participants (for example, your broker) whose 23 clients have purchased the Debentures. Each Participant will then keep a record of its clients. Unless it is exchanged in whole or in part for a certificated security, a Global Debenture may not be transferred. However, DTC, its nominees, and their successors may transfer a Global Debenture as a whole to one another. Beneficial interests in the Global Debenture will be shown on, and transfers of the Global Debenture will be made only through, records maintained by DTC and its Participants. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the United States Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its Participants (direct Participants) deposit with DTC. DTC also records the settlement among direct Participants of securities transactions, such as transfers and pledges, in deposited securities through computerized records for direct Participants' accounts. This eliminates the need to exchange certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC's book-entry-only system is also used by other organizations such as securities brokers and dealers, banks and trust companies that work through a direct Participant. The rules that apply to DTC and its Participants are on file with the Securities and Exchange Commission. DTC is owned by a number of its direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. When you purchase Debentures through the DTC system, the purchases must be made by or through a direct Participant, who will receive credit for the Debentures on DTC's records. Since you actually own the Debentures, you are the beneficial owner and your ownership interest will only be recorded on the direct (or indirect) Participants' records. DTC has no knowledge of your individual ownership of the Debentures. DTC's records only show the identity of the direct Participants and the amount of the Debentures held by or through them. You will not receive a written confirmation of your purchase or sale or any periodic account statement directly from DTC. You will receive these from your direct (or indirect) Participant. Thus, the direct (or indirect) Participants are responsible for keeping accurate account of the holdings of their customers like you. Interest payments will be wired to DTC's nominee and we will treat DTC's nominee as the owner of the Global Debenture for all purposes. Accordingly, we will have no direct responsibility or liability to pay amounts due on the Global Debenture to you or any other beneficial owners in the Global Debenture. If we choose to redeem any Debentures, our redemption notice will be sent to DTC, which will in turn inform the direct Participants, who will then contact you as a Beneficial Owner. It is DTC's current practice, upon receipt of any payment of interest or liquidation amount, to credit direct Participants' accounts on the payment date based on their holdings of beneficial interests in the Global Debentures as shown on DTC's records. Payments by Participants to owners of beneficial interests in the Global Debentures will be based on the customary practices between the Participants and owners of beneficial interests. However, payments will be the responsibility of the Participants and not of DTC or us. 24 Debentures represented by a Global Debenture will be exchangeable for certificated securities with the same terms in authorized denominations only if: . DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered under applicable law and a successor depositary is not appointed by us within 120 days; or . We determine not to require all of the Debentures to be represented by a Global Debenture. If the book-entry-only system is discontinued, the Transfer Agent will keep the registration books for the Debentures at its corporate office. The Trustee The Trustee under the Indenture will initially be Chase Manhattan Bank and Trust Company, National Association of San Francisco, California. The Trustee will act as agent for the holders of the Debentures under certain circumstances and will initially maintain a registrar of Debenture holders as "Registrar," handle payments with respect to the Debentures as "Paying Agent" and act as agent upon any conversion of the Debentures as "Conversion Agent." The Indenture contains certain limitations on the rights of the Trustee, should it become our creditor, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign. The holders of a majority in principal amount of the then outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee. The Indenture provides that in case an event of default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in the conduct of his or her own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of the Debentures, unless they shall have offered to the Trustee security and indemnity satisfactory to it. 25 DESCRIPTION OF COMMON STOCK Authorized Shares Under our Certificate of Incorporation, we are currently authorized to issue 25,000,000 shares of common stock at a par value of $0.01 per share. As of July 11, 2001, there were 8,618,364 shares of common stock issued and outstanding. In addition, as of such date there were: (a) 790,724 shares of common stock reserved for issuance under our dividend reinvestment and employee stock purchase plan; (b) 916,667 shares of common stock reserved for issuance under our stock option plans; (c) 88,593 shares of common stock reserved for issuance upon the exercise of certain stock purchase warrants issued in connection with the purchase of a water system from the City of West Covina, California; and (d) 562,500 shares of common stock, of which 300,000 to 562,500 shares may be issued at any time during the years 2005 through 2010 upon the exercise of certain put and call stock rights issued in connection with the purchase of the remaining minority interest in Windermere Utility Company. (e) We are also authorized to issue up to 3,000 shares of Series E Convertible Preferred Stock as compensation to certain business brokers for obtaining water and sewer contracts for our 99%-owned subsidiary, Inland Pacific Water Company. Inland Pacific Water Company is primarily a marketing vehicle for contract operations in the Inland Empire area of the state of California. None of the Series E Convertible Preferred Stock has been issued, and no contracts requiring such issuance appear imminent at this time. Any such Series E Convertible Preferred Stock, if issued, would be entitled to dividends based upon an agreed formula. The Series E Convertible Preferred Stock, if issued, would vest over the terms of the long-term (10-15 years) water or sewer contracts obtained by the brokers and, to the extent vested, would be convertible into our common stock at the rate of 1,000 shares of common stock per one share of Series E Convertible Preferred Stock, subject to certain adjustments. We are currently authorized to issue 250,000 preferred shares at a par value of $.01 per share. As of July 11, 2001, there were 10,285 Series A Preferred shares outstanding. Series A Preferred stockholders are entitled to annual dividends of $2.625 per share and are entitled to five votes per share on all matters voted on by the stockholders. Common Stock During the past four years, we increased the number of shares of common stock outstanding primarily through a series of stock splits and stock dividends. Since December 31, 1997, the number of outstanding shares of our common stock has increased from 3,330,207 shares to 8,618,364 shares as of July 11, 2001. We cannot assure you that we will continue such stock splits and stock dividends in the future. Holders of our common stock are entitled to one vote for each share held on all matters voted on by stockholders, including the election of directors. Upon liquidation or dissolution, the holders of common stock will be entitled to share ratably in the assets legally available for the distribution to stockholders after payment of liabilities and subject to the prior rights of any holders of preferred stock then outstanding. Holders of our common stock do not have subscription, sinking fund, preemptive, redemption or conversion privileges. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any series of preferred stock that is issued or may be issued in the future. Under the Delaware General Corporation Law, we may pay dividends out of "surplus" (as determined in accordance with the Delaware General Corporation Law) or, if there is no surplus, 26 out of net profits for the fiscal year in which the dividends are declared and/or the preceding fiscal year (subject to certain restrictions). Subject to the preferences or other rights of any of our preferred stock that may be issued from time to time, holders of our common stock are entitled to participate ratably in dividends on the common stock as declared by the board of directors. Our dividend policy is established by our board of directors. Subject to legal and contractual restrictions, our board's decisions regarding dividends are based on all considerations that in its business judgment are relevant at the time, including past and projected earnings, cash flows, economic, business and securities market conditions and anticipated developments concerning our business and operations. Currently we pay dividends on a quarterly basis. Please see the section entitled "Common Stock Dividends and Price Range" for information about the dividends paid during the past two years. We cannot guarantee that, in the future, we will have funds available to pay dividends, or that the board of directors will declare dividends. Transfer Agent and Registrar The Transfer Agent and Registrar of our common stock is Mellon Investor Services, LLC, P.O. Box 3315, South Hackensack, New Jersey, 07606, phone number (800) 356-2017. Anti-takeover Effects of Certain Provisions Our Certificate of Incorporation and Bylaws, the Delaware General Corporation Law and our Stockholder Rights Plan, described below, contain provisions that may discourage or delay the acquisition of control of our Company by means of a tender offer, open market purchases, a proxy contest or otherwise. Purposes of Provisions of Certificate of Incorporation and Bylaws The relevant provisions of our Certificate of Incorporation and Bylaws are intended to discourage certain types of transactions that may involve an actual or threatened change of control of our Company and to encourage any person who might seek to acquire control of our Company to negotiate with our board. We believe generally that the interests of our stockholders would be served best if any change in control results from negotiations with our board of the proposed terms. However, to the extent that these provisions do discourage takeover attempts, they could make it more difficult to accomplish transactions that are opposed by the incumbent board and could deprive stockholders of opportunities to realize takeover premiums for their shares. The description below is a summary only. We encourage you to read our Certificate of Incorporation, our Bylaws and our Stockholder Rights Plan, which we have filed with the SEC. Classification of our Board We have a classified Board of Directors, comprised of seven directors, divided into three classes. The terms of the directors will expire as follows: . the term of our one Class I director will expire at the annual meeting of stockholders held in 2002; . the term of our three Class II directors will expire at the annual meeting of stockholders held in 2003; and . the term of our three Class III directors will expire at the annual meeting of stockholders held in 2004. 27 The structure of the classified board is intended to promote continuity and stability of our management and policies since a majority of the directors serving at any given time will have prior experience as our directors. The classification of directors could make it more difficult for stockholders to quickly change the composition of our board. At least two annual meetings of stockholders, instead of one, would generally be required to effect a change in the majority of our board. Number of Directors Our Certificate of Incorporation provides that the number of directors shall be no less than seven and shall not exceed nine. Our board of directors is currently comprised of seven persons. The exact number of directors is set by resolution from time to time of the majority of the directors then in office. Interim vacancies on our board, or vacancies created by an increase in the number of directors, may be filled by a majority of the directors then in office. A director appointed to fill a vacancy will hold office for the remainder of the term of the class of director in which the vacancy occurred or the new directorship was created. Stockholder Action Our Certificate of Incorporation requires all stockholder action to be taken at an annual or special meeting of stockholders and prohibits stockholder action by written consent. Our Certification of Incorporation and Bylaws also provide that special meetings of stockholders may be called only by the board pursuant to a resolution adopted by a majority of the authorized directors, or by one or more stockholders holding at least 20% of the voting power of all then outstanding shares of the Company's capital stock entitled to vote at any meeting of the stockholders. This may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of the stockholders. Requirements for Advance Notification of Stockholder Nominations and Proposals Our Bylaws establish an advance notice procedure of 90 days for nominations, other than by or at the direction of our board, of candidates for election as directors at, and for proposals to be brought before, an annual meeting of stockholders. These provisions are intended to facilitate planning for the conduct of our annual meeting of stockholders and to provide time for proposals to be fully evaluated. These provisions may have the effect of precluding a nomination or the conduct of business at a particular meeting if the advance notice and other proper procedures are not followed. These provisions may also deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or from otherwise attempting to obtain control, even if the conduct of such solicitation or such attempt might be beneficial to the stockholders. Preferred Stock and Additional Common Stock Our board's authority to issue shares of common stock and preferred stock and to fix by resolution the terms and conditions of each series of preferred stock may either impede or facilitate the completion of a merger, tender offer or other takeover attempt. For example, the issuance of new shares might impede a business combination if the terms of those shares include series voting rights that would enable the holder to block business combinations, or the issuance of new shares might facilitate a business combination if those shares have general voting rights sufficient to cause an applicable percentage vote requirement to be satisfied. Our board of directors will make any determination regarding issuance of additional shares based on its business judgment. 28 Shareholder Approval of Business Combinations Our Certificate of Incorporation contains provisions which provide that, subject to certain exceptions, we may not engage in certain "business combinations" with any "interested stockholder" or "reorganizations" unless there is an affirmative vote of at least two-thirds of the voting power of all then outstanding shares of voting stock, voting together as a single class, a majority of which must be voting stock other than that of which an interested stockholder or its affiliate is the beneficial owner. Under certain circumstances, such provisions make it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation. We anticipate that these provisions may encourage companies interested in acquiring us to negotiate in advance with our board of directors. Stockholder Rights Plan In 1998, we adopted a Stockholder Rights Plan and have issued, for each share of our common stock, one preferred share purchase right, or a Right. As long as the Rights are attached to our common stock, we will issue one Right (subject to adjustment) with each new share of common stock so that all such shares will have attached Rights. When exercisable, each Right will entitle the registered holder to purchase from us one one-hundredth of a share of Series B Junior Participating Preferred Stock, or Preferred Share, at an original price of $65.00 per one one-hundredth of a Preferred Share, subject to adjustment. The description and terms of the Rights are set forth in our Stockholder Rights Plan available from Mellon Investor Services, LLC, our Rights Agent. Until the earlier to occur of (i) ten (10) days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our common stock (an "Acquiring Person") or (ii) ten (10) business days (or such later date as may be determined by action of our board prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement or announcement of an intention to make a tender offer or exchange offer which would result in the beneficial ownership by a person or group of 15% or more of our common stock, the earlier of (i) and (ii) being called the Distribution Date, the Rights will be evidenced, with respect to any of our common stock certificates outstanding as of the adoption of the Plan, by such common stock certificate together with a summary of rights. The Plan provides that until the Distribution Date (or earlier redemption, exchange, termination, or expiration of the Rights), the Rights will be transferred with and only with our common stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new common stock certificates issued after the adoption of the Plan will contain a notation incorporating the Plan by reference. Until the Distribution Date (or earlier redemption, exchange, termination or expiration of the Rights), the surrender or transfer of any certificates for our common stock, with or without such notation or a copy of a summary of rights, will also constitute the transfer of the Rights associated with the common stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of our common stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on April 6, 2008, subject to our right to extend such date (the "Final Expiration Date"), unless earlier redeemed or exchanged by us or terminated. 29 Each Preferred Share purchasable upon exercise of the Rights will be entitled, when, as and if declared, to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate quarterly dividend of 100 times the dividend, if any, declared per share of our common stock. In the event of our liquidation, dissolution or winding up, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share (plus any accrued but unpaid dividends) and will be entitled to an aggregate payment of 100 times the payment made per share of our common stock. Each Preferred Share will have 100 votes and will vote together with our common stock. Finally, in the event of any merger, consolidation or other transaction in which our common stock is exchanged, each Preferred Share will be entitled to receive 100 times the amount received per share of our common stock. Preferred Shares will not be redeemable. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Share's dividend, liquidation and voting rights, the value of one one-hundredth of a Preferred Share purchasable upon exercise of each Right should approximate the value of one share of our common stock. The purchase price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares or convertible securities at less than the current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness, cash, securities or assets (excluding regular periodic cash dividends at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average of our net income per share for the four quarters ended immediately prior to the payment of such dividend, or dividends payable in Preferred Shares (which dividends will be subject to the adjustment described in clause (i) above) or of subscription rights or warrants (other than those referred to above). In the event that a Person becomes an Acquiring Person, or if we were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person, and our common stock was not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the Acquiring Person (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of our common stock having a market value of two times the then current purchase price of the Right. In the event that, after a person has become an Acquiring Person, we were acquired in a merger or other business combination transaction or more than 50% of our assets or earning power were sold, each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current purchase price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the then current purchase price of the Right. At any time after a Person becomes an Acquiring Person and prior to the earlier of one of the events described in the last sentence of the previous paragraph or the acquisition by such Acquiring Person of 50% or more of our outstanding common stock, the board may cause us to exchange the Rights (other than Rights owned by an Acquiring Person which will have become void), in whole or in part, for shares of our common stock at an exchange rate of one share of our common stock per Right (subject to adjustment). No adjustment in the purchase price of a Right will be required until cumulative adjustments require an adjustment of at least 1% in such purchase price. No fractional Preferred Shares or shares of our common stock will be issued (other than fractions of Preferred Shares which are integral multiples of one one-hundredth of a Preferred Share, which may, at our election, be 30 evidenced by depository receipts), and in lieu thereof, a payment in cash will be made based on the market price of the Preferred Shares or shares of our common stock on the last trading date prior to the date of exercise. The Rights may be redeemed in whole, but not in part, at a price of $.01 per Right (the "Redemption Price") by our board at any time prior to the time that an Acquiring Person has become such. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as our board, in its sole discretion, may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Until a Right is exercised, the holder thereof, as such, will have no rights as one of our stockholders beyond those as an existing stockholder, including, without limitation, the right to vote or to receive dividends. Any of the provisions of the Plan may be amended by our board for so long as the Rights are then redeemable, and after the Rights are no longer redeemable, we may amend or supplement the Plan in any manner that does not adversely affect the interests of the holders of the Rights. This summary description of the Rights does not purport to be complete, and is qualified in its entirety by reference to the Plan, which is incorporated by reference to our Report on Form 8-K filed with the SEC on April 23, 1998. UNDERWRITER Subject to the terms and conditions contained in the Underwriting Agreement, Edward D. Jones & Co., L.P. has agreed to purchase and we have agreed to sell a principal amount of $20,000,000 in Debentures. The Underwriter is obligated to purchase the entire principal amount of the Debentures offered hereby if any are purchased. The Underwriter currently intends to make a market for the Debentures. However, the Underwriter is not obligated to do so, and any market making may be discontinued at any time and without notice. We have been advised by the Underwriter that it proposes to offer the Debentures in part directly to the public at the price set forth on the cover page of this prospectus and in part to certain securities dealers who are members of the National Association of Securities Dealers, Inc. at such price less such concessions as the underwriter may determine within its discretion. After the initial public offering, the public offering price and the other selling terms may be varied from time to time by the Underwriter. The discount provided to the Underwriter is 4% of the principal amount of the Debentures, or $800,000. We have agreed to indemnify the Underwriter and its controlling persons against certain liabilities which may be incurred in connection with the offering contemplated hereby, including certain civil liabilities under the Securities Act of 1933, as amended. LEGAL OPINIONS The validity of the Debentures offered hereby, and the common stock issuable upon conversion of the Debentures, will be passed upon for us by Latham & Watkins. Certain legal matters in connection with this offering will be passed upon for the Underwriter by Armstrong Teasdale LLP. 31 EXPERTS The consolidated financial statements of Southwest Water Company as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000, which are incorporated in this prospectus by reference to the Annual Report on Form 10-K, have been incorporated by reference herein in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION Available Information We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New York, New York and Chicago, Illinois. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC- 0330. We file information electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov. You also may inspect copies of these materials and other information about us at the Nasdaq National Market, 33 Whitehall Street, New York, New York 10004. Incorporation by Reference The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we will file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings that we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, before the termination of the offering of the Debentures under this prospectus: . Report on Form 8-K dated April 23, 1998; . Annual report on Form 10-K for the fiscal year ended December 31, 2000; . Quarterly Report on Form 10-Q for the period ended March 31, 2001; and . Proxy Statement for Annual Meeting of Stockholders held on May 22, 2001. Any statement contained in a document which, or a portion of which, is incorporated by reference herein shall be deemed to be modified or superceded for purposes of this prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supercedes such statement. Any such statement so modified or superceded shall not be deemed, except as so modified or superceded, to constitute a part of this prospectus. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Southwest Water Company 225 N. Barranca Ave., Suite 200 West Covina, CA 91791-1605 Attention: Secretary Telephone Number: (626) 915-1551 e-mail address: http://www.southwestwater.com 32 This prospectus is part of a Registration Statement which we filed with the SEC. We have omitted certain parts of the Registration Statement in accordance with the rules and regulations of the SEC; therefore, this prospectus does not contain all of the information included in the Registration Statement. For further information, we refer you to the Registration Statement filed on Form S-3 (No. 333-63196) including exhibits, schedules, and the documents incorporated by reference therein. We have not authorized anyone to provide you with any information that differs from that contained in this prospectus. Accordingly, you should not rely on any information that is not contained in this prospectus. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. 33 Exhibit A FORM OF REDEMPTION REQUEST $20,000,000 SOUTHWEST WATER COMPANY % CONVERTIBLE SUBORDINATE DEBENTURES Due July 1, 2021 (The "Debentures") CUSIP NO. 845331AB3 The undersigned, (the "Participant"), does hereby certify, pursuant to the provisions of that certain Indenture of Trust dated as of July , 2001 (the "Indenture") made by Southwest Water Company (the "Company") (the "Issuer") and Chase Manhattan Bank and Trust Company, National Association, as Trustee (the "Trustee"), to The Depository Trust Company (the "Depositary"), the Company, the Issuer and the Trustee that: 1. [Name of deceased Beneficial Owner] is deceased. 2. [Name of deceased Beneficial Owner] had a $ interest in the above referenced Debenture. 3. [Name of Representative] is [Beneficial Owner's personal representative/other person authorized to represent the estate of the Beneficial Owner/surviving joint tenant/surviving tenant by the entirety/trustee of a trust] of [Name of deceased Beneficial Owner] and has delivered to the undersigned a request for redemption in form satisfactory to the undersigned, requesting that $ principal amount of said Debenture be redeemed pursuant to said Indenture. The documents accompanying such request, all of which are in proper form, are in all respects satisfactory to the undersigned and the [Name of Representative] is entitled to have the interest in the Debenture to which this Request relates redeemed. 4. The Participant holds the interest in the Debenture with respect to which this Request for Redemption is being made on behalf of [Name of deceased Beneficial Owner]. 5. The Participant hereby certifies that it will indemnify and hold harmless the Depositary, the Trustee, the Issuer and the Company (including their respective officers, directors, agents, attorneys and employees), against all damages, loss, cost, expense (including reasonable attorneys' and accountants' fees), obligations, claims or liability (collectively, the "Damages") incurred by the indemnified party or parties as a result of or in connection with the redemption of the interest in the Debenture to which this Request relates. The Participant will, at the request of the Company, forward to the Company, a copy of the documents submitted by [Name of Representative] in support of the request for redemption. IN WITNESS WHEREOF, the undersigned has executed this Redemption Request as of , 20 . [PARTICIPANT NAME] By: _________________________________ Name: _______________________________ Title: ______________________________ [LOGO OF SOUTHWEST WATER COMPANY] $20,000,000 SOUTHWEST WATER COMPANY % Convertible Subordinate Debentures Due 2021 ---------------- PROSPECTUS ---------------- Edward D. Jones & Co., L.P. July , 2001 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses payable by our Company in connection with the issuance and distribution of the Debentures being registered (all amounts are estimated except the SEC registration fee): SEC Registration Fee............................................... $ 5,000 Printing and Engraving Expenses.................................... $ 50,000 Legal Fees and Expenses............................................ $125,000 Accounting Fees and Expenses....................................... $ 45,000 Trustee Fees and Expenses.......................................... $ 20,000 Blue Sky and Legal Investment Fees and Expenses.................... $ 1,000 Miscellaneous...................................................... $ 4,000 -------- Total............................................................ $250,000 ========
Item 15. Indemnification of Directors and Officers. Statutory Provisions Section 102(b)(7) of the General Corporation Law of the State of Delaware (the "DGCL") enables a corporation in its certificate of incorporation to eliminate or limit the personal liability of members of its board of directors to the corporation or its stockholders for monetary damages for violations of a director's fiduciary duty of care. Such a provision would have no effect on the availability of equitable remedies, such as an injunction or rescission, for breach of a fiduciary duty. In addition, no such provision may eliminate or limit the liability of a director for breaching his duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law, paying an unlawful dividend or approving an illegal stock repurchase or obtaining an improper personal benefit. Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is, or was, a director, officer, employee or agent of the corporation, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with an action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. No indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Additionally, a corporation is required to indemnify its directors and officers against expenses to the extent that such directors or officers have been successful on the merits or otherwise in any action, suit or proceeding or in defense of any claim, issue or matter therein. Indemnification can be made by the corporation only upon a determination that indemnification is proper in the circumstances because the party seeking indemnification has met the applicable standard of conduct as set forth in the DGCL. The indemnification provided by the DGCL shall not be deemed exclusive of any other rights to which those seeking indemnification II-1 may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. A corporation also has the power to purchase and maintain insurance on behalf of any person, whether or not the corporation would have the power to indemnify him against such liability. The indemnification provided by the DGCL shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Our Certificate of Incorporation and Bylaws Our Certificate of Incorporation limits our directors' liability for monetary damages to us and our stockholders for breaches of fiduciary duty except under the circumstances outlined in Section 102(b)(7) of the DGCL as described above under "Statutory Provisions." Our Bylaws extend indemnification rights to the fullest extent authorized by the DGCL to directors and officers involved in any action, suit or proceeding where the basis of such involvement is such person's alleged action in an official capacity or in another capacity while serving as a director or officer of our Company. Our Bylaws also permit us to maintain insurance to protect ourselves and any of our directors, officers, employees or agents against any expense, liability or loss incurred as a result of any action, suit or proceeding whether or not we would have the power to indemnify the person under the DGCL. Our Bylaws also authorize us to enter into a contract with any of our directors, officers, employees or agents providing for indemnification rights equivalent to or, if our Board of Directors so determines, greater than, those provided for in our Bylaws. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description of Exhibit ----------- ---------------------- 1 Form of Underwriting Agreement 3* Resolution amending Registrant's Bylaws to fix number of directors 4 Indenture (including forms of Debenture and Redemption Request), dated as of July , 2001, between Registrant and Chase Manhattan Bank and Trust Company, National Association 5 Opinion of Latham and Watkins 12* Statement regarding computation of ratio of earnings to fixed charges 23.1 Consent of Latham and Watkins (included in Opinion filed as Exhibit 5) 23.2 Consent of KPMG LLP 24* Power of Attorney 25* Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, as amended, of Chase Manhattan Bank and Trust Company, National Association, as Trustee
- -------- * previously filed II-2 Item 17. Undertakings. A. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section l0 (a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. Provided, however, that paragraphs (i) and (ii) do not apply if the information required to be included in a post effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post effective amendment any of the securities being registered which remain unsold at the termination of the offering. B. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's Annual Report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. C. The undersigned Registrant hereby further undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest Annual Report to security holders that is incorporated by reference in this prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in this prospectus to provide such interim financial information. D. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A II-3 and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Registration Statement on Form S-3 and has duly caused this Pre-Effective Amendment No. 2 to the Registration Statement on Form S-3 (Registration No. 333-63196) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Covina, California on the 13th day of July 2001. Southwest Water Company /s/ Anton C. Garnier By: _________________________________ Anton C. Garnier President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Pre-Effective Amendment No. 2 to the Registration Statement on Form S-3 (Registration No. 333-63196) has been signed by the following persons in the capacities indicated on the 13th day of July 2001.
Signature Title --------- ----- /s/ Anton C. Garnier President, Chief Executive Officer and Director ______________________________________ (Chief Executive Officer) Anton C. Garnier /s/ Peter J. Moerbeek Chief Financial Officer, Secretary and Director ______________________________________ (Principal Financial Officer) Peter J. Moerbeek /s/ Thomas C. Tekulve Vice President, Finance ______________________________________ (Principal Accounting Officer) Thomas C. Tekulve * Director ______________________________________ Donovan D. Huennekens* * Director ______________________________________ Maureen A. Kindel*
* /s/ Anton C. Garnier _____________________________ (Anton C. Garnier, Attorney-in-fact)** ** By authority of the power of attorney previously filed as Exhibit 24 to the Registration Statement. II-5 EX-1 2 dex1.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 SOUTHWEST WATER COMPANY $20,000,000 ____% Convertible Subordinate Debentures due July 1, 2021 UNDERWRITING AGREEMENT ---------------------- _________, 2001 Edward D. Jones & Co., L.P. 12555 Manchester Road St. Louis, Missouri 63131 Attention: Mr. James A. Krekeler, Principal Gentlemen: The undersigned, Southwest Water Company, a Delaware corporation (the "Company"), hereby confirms its agreement with Edward D. Jones & Co., L.P. (the "Underwriter") as follows: 1. Offering. The Company proposes to issue and sell to the Underwriter an -------- aggregate principal amount of $20,000,000 of its ___% Convertible Subordinate Debentures due July 1, 2021 (the "Debentures"). The Debentures are to be issued pursuant to an indenture to be dated as of __________________, 2001 (the "Indenture) between the Company and Chase Manhattan Bank and Trust Company, National Association, as trustee (the "Trustee") and will be convertible into shares of the Company's common stock, par value $0.01 per share (the "Common Stock"). The Debentures are more particularly described in the Prospectus (as hereinafter defined) and in the form of Indenture filed as an exhibit to the Registration Statement (as hereinafter defined). No amendment to such form of Indenture will be made prior to the Closing Date, hereinafter defined, without your prior approval. 2. Reserved. -------- 3. Sale and Delivery of the Debentures. Subject to the terms and ----------------------------------- conditions and based upon the representations and warranties set forth in this Agreement, (a) the Company agrees to issue and sell $20,000,000 in aggregate principal amount of Debentures to the Underwriter and (b) the Underwriter agrees to purchase from the Company the aggregate principal amount of the Debentures at a price of 96% of the principal amount thereof. The Underwriter agrees to make a public offering of the Debentures promptly after the Registration Statement shall have become effective, at the public offering price and upon the terms and conditions set forth in the Prospectus. The Underwriter may reserve and sell such of the Debentures purchased by the Underwriter, as the Underwriter may elect, to dealers chosen by it (the "Selected Dealers") at the public offering price set forth in the Prospectus less the applicable Selected Dealers concessions as established by the Underwriter, for re-offering by Selected Dealers to the public at the public offering price. Delivery of the Debentures and payment therefor, shall be made to the Underwriter at _____ A.M., St. Louis time, on ________________, 2001, or on such later day and time (not later than seven full business days thereafter) as may be agreed upon in writing between the Underwriter and the Company, such day and time of delivery and payment being herein called the "Closing Date." On the Closing Date, the Debentures shall be delivered by the Company to the Underwriter at its office at 12555 Manchester Road, St. Louis, Missouri 63131 and/or at The Depository Trust Company in New York, New York, as designated by the Underwriter, against payment of the purchase price therefor in funds immediately available to the Company. The Company agrees to make available to the Underwriter for inspection and packaging in St. Louis, Missouri, at least one full business day prior to the Closing Date, the Debentures so to be delivered in good delivery form and in such denominations and registered in such names as the Underwriter shall have requested, all such requests to have been made in writing at least two full business days prior to the Closing Date. 4. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to the Underwriter that: (a) The Company meets the requirements for use of Form S-3 under the Securities Act of 1933, as amended (the "Act") and has prepared a registration statement on Form S-3 (Registration No. 333-63196) for the registration of the Debentures (and the shares of Common Stock issuable upon conversion of the Debentures) and one or more amendments thereto in conformity with the requirements of the Act and all applicable instructions and the published rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has filed such registration statement and amendments with the Commission. Copies of such registration statement and amendments (including all forms of preliminary prospectus) have been delivered to the Underwriter, and the Company will not, before the registration statement becomes effective, file any other amendment thereto or supplement to which you reasonably object in writing after being furnished with a copy thereof. Such registration statement, including all prospectuses included as a part thereof, all financial schedules and exhibits thereto and all documents incorporated by reference therein, as amended at the time when it becomes effective, is herein called the "Registration Statement," and the term "Prospectus" as used herein means the prospectus, including the documents incorporated by reference therein, in the form first filed by the Company pursuant to Rule 424(b) under the Act. The term "preliminary prospectus" as used herein means any preliminary prospectus included at any time as part of the Registration Statement, including the documents incorporated by reference therein. (b) The Commission has not issued any order preventing or suspending the use of any preliminary prospectus, and each preliminary prospectus, at the time of the filing thereof with the Commission, did not include any untrue statement of a material 2 fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that none of the representations and warranties in this subparagraph shall apply to statements in, or omissions from, any preliminary prospectus made in reliance upon and in conformity with the information furnished to the Company by or on behalf of the Underwriter contained in, and specifically for use in, the section entitled "Underwriter" in such preliminary prospectus. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to and including the Closing Date, the Registration Statement and Prospectus, and all amendments thereof and supplements thereto, will comply in all material respects with the provisions of the Act and the Rules and Regulations; when the Registration Statement becomes effective, and when any post-effective amendment thereto becomes effective, the Registration Statement (as amended, if the Company has filed with the Commission any post-effective amendment thereto) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and when the Registration Statement becomes effective and at all times subsequent thereto up to and including the Closing Date, the Prospectus (as amended or supplemented, if the Company has filed with the Commission any amendment thereof or supplement thereto) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that none of the representations and warranties in this subparagraph will apply to statements in, or omissions from, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Underwriter contained in, and specifically for use in, the section entitled "Underwriter" in the Registration Statement or the Prospectus or any such amendment or supplement or to that part of the Registration Statement that constitutes the Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), of the trustee referred to in the Registration Statement. (d) The documents incorporated by reference into the Prospectus pursuant to Item 12 of Form S-3 under the Act, at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder (the "Exchange Act Rules and Regulations"), and any documents deemed to be incorporated by reference in the Prospectus will, when they are filed with the Commission, comply in all material respects with the requirements of the Exchange Act and the Exchange Act Rules and Regulations, and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (e) The Company has been duly incorporated and is validly existing in good standing under the laws of Delaware, and is duly qualified as a foreign corporation for the 3 transaction of business and in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification. (f) The Company has an authorized and outstanding capitalization as set forth in the Prospectus, has authorized shares of Common Stock reserved for issuance upon conversion of the Debentures, and all of the outstanding shares of Common Stock and the shares of Common Stock to be issued upon conversion of the Debentures have been duly and validly authorized and have been, or, when issued and delivered in accordance with the Indenture, will be, duly and validly issued, fully paid and non-assessable and conform, or when issued will conform, to the description thereof contained in the Prospectus. Except as described in the Prospectus, there are no preemptive or other rights to subscribe for or purchase, or any restriction upon the voting or transfer of, any Common Stock, under the Certificate of Incorporation or By-Laws of the Company or any agreement or other outstanding instrument to which the Company is a party or by which it may be bound, other than limitations on transfers by certain stockholders such that they must conform with the applicable securities laws; the Company does not have outstanding any option, warrant, convertible security, or other right permitting or requiring it or others to purchase, or convert any obligation into, Common Stock nor has the Company agreed to issue or sell any Common Stock except as described in the Prospectus; and there are no rights in any entity or person to have the Company register under the Act any Common Stock or other securities of the Company except as described in the Prospectus. (g) The Company has full right, power and authority to enter into this Agreement and to perform all of its obligations hereunder or contemplated hereby; this Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company. (h) The Debentures have been duly authorized and, when issued and delivered against payment of the agreed consideration pursuant to this Agreement, will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms and entitled to the benefits provided by the Indenture, except insofar as enforcement may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors' rights and by equitable principles of general applicability, whether or not enforcement is sought at law or equity`; the Indenture has been duly authorized and, when executed and delivered by the Company and the Trustee, will constitute a valid and legally binding instrument of the Company enforceable in accordance with its terms except insofar as enforcement may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors' rights and by equitable principles of general applicability, whether or not enforcement is sought at law or equity; and the Debentures and the Indenture will conform to the descriptions thereof in the Prospectus and the Indenture will be substantially in the form filed as an exhibit to the Registration Statement. 4 (i) The Company has all requisite power and authority necessary to own or hold its properties and conduct its business as described in the Prospectus and owns or holds all material licenses, permits and other required authorizations from governmental authorities necessary to conduct the business operated by it. (j) The Company has good and marketable title to all property described in the Prospectus as being owned by it, in each case free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Prospectus or such as are not material to the business of the Company; and the property held under lease by the Company is held by it under valid, subsisting and enforceable leases with only such exceptions as in the aggregate are not material and do not interfere with the conduct of the business of the Company. (k) Except as set forth in the Prospectus, there are no actions, suits, proceedings, hearings, or to the best of the knowledge of the Company, any claims or investigations pending, before or by any court, governmental authority, or instrumentality (or, to the best of the knowledge of the Company, any state of facts which would give rise thereto) threatened against the Company or involving any of its properties, which the Company has reason to believe may result in any material adverse change in the business, operations, assets, financial condition or prospects of the Company, or which the Company has reason to believe may adversely affect the transactions or other acts contemplated by this Agreement or the validity or enforceability of the Debentures, the Indenture or this Agreement. (l) Except as reflected in or contemplated by the Prospectus, since the respective dates as of which information is given in the Prospectus and up to and including the Closing Date, the Company has not incurred, and will not have incurred, any liabilities or obligations, direct or contingent, which are material to the business of the Company, or entered into any transaction which is material to the business of the Company, and there has not been any change in the capital stock, short-term or long-term debt of the Company which is material to the business of the Company, or any material adverse change, or any development specifically related to the business of the Company involving, in the opinion of the Company, a prospective material adverse change, in the business, operations, assets, financial condition or prospects of the Company. (m) The issuance and sale of the Debentures, the execution and delivery of this Agreement and the Indenture by the Company, the consummation of the transactions contemplated herein and compliance with the terms of the Debentures, the Indenture and this Agreement will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of the Company pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which it is bound or to which any of its property is subject, except for conflicts, breaches, violations or defaults which would be immaterial to the business and operations of the Company and which would not affect the validity or enforceability of the Debentures, the Indenture or this Agreement or otherwise adversely affect the rights, duties or obligations of the Trustee, 5 the Underwriter or the holders of the Debentures; nor would such issuance, sale, execution, delivery, consummation or compliance conflict with or result in a breach or violation of any of the terms or provisions of or constitute a default under the Certificate of Incorporation or By-Laws of the Company or any applicable law, rule, regulation, judgment or decree or order of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties. No consent, approval, authorization or order of any court or governmental agency or body is required for the issuance and sale of the Debentures or the consummation by the Company of the transactions contemplated by this Agreement or the Indenture, except as may be required under the Act, the Trust Indenture Act, the Rules and Regulations or state securities or Blue Sky laws in connection with the purchase and distribution of the Debentures by the Underwriter. (n) The financial statements and schedules of the Company included in the Registration Statement and Prospectus fairly present, and the financial statements and schedules of the Company included in any amendment or supplement to the Registration Statement and Prospectus will fairly present, the financial condition of the Company and the results of its operations and changes in its financial position as of the dates and for the periods therein specified; and said financial statements have been and will be prepared in accordance with generally accepted accounting principles which have been consistently maintained and applied throughout the periods involved. (o) To the best of the Company's knowledge, the accountants who have certified or shall certify the financial statements filed or to be filed with the Commission as part of the Registration Statement and the Prospectus are independent accountants as required by the Act. (p) The Company is not a "holding company," as such term is defined in the Public Utility Holding Company Act of 1935. 5. Agreements of the Company. The Company agrees that: ------------------------- (a) Prior to the effective date of the Registration Statement and at any time when a prospectus relating to the Debentures is required to be delivered under the Act or the Rules and Regulations, the Company will not file or make any amendment or post-effective amendment to the Registration Statement or any amendment or supplement to the Prospectus to which the Underwriter shall reasonably object in writing within two business days after being furnished copies thereof and following reasonable telephonic notice of such amendment or supplement from the Company to the Underwriter. (b) The Company will use its commercially reasonable best efforts to cause the Registration Statement to become effective and will advise the Underwriter immediately and confirm that advice in writing (i) of the effectiveness of the Registration Statement, or any post-effective amendment thereto, (ii) of any request of the Commission to amend or supplement the Registration Statement or Prospectus, or to provide additional information, and (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of 6 the qualification of the Debentures for sale in any state or other jurisdiction, or of the initiation or threat of any proceeding for any such purpose. The Company will use its best efforts to prevent the issuance of any stop order or suspension order and to obtain the withdrawal of any such stop order or suspension order. (c) The Company will promptly deliver to the Underwriter without charge, (i) three copies of the Registration Statement, as originally filed, and of each amendment thereto, and of each post-effective amendment thereto filed at any time when a prospectus relating to the Debentures is required to be delivered under the Act, at least two of which have been signed by the proper officers and at least a majority of directors of the Company, either directly or by their attorney(s)-in-fact and include a signed copy of each consent and certificate of experts named in the Registration Statement, together with all exhibits filed therewith or incorporated by reference therein and (ii) such number of conformed copies of the Registration Statement, as originally filed, and of each amendment thereto, and of each post-effective amendment thereto filed at any time when a prospectus relating to the Debentures is required to be delivered under the Act or the Rules and Regulations (in each such case excluding exhibits), as the Underwriter may reasonably require. The Company will promptly deliver, without charge, to the Underwriter and such others whose names and addresses are designated by the Underwriter: (A) from time to time until the effective date of the Registration Statement, as many printed copies of any preliminary prospectus filed with the Commission prior to the effective date of the Registration Statement as the Underwriter may reasonably request; and (B) as soon as possible after the Registration Statement becomes effective, and from time to time thereafter, as many printed copies of the Prospectus and of any amended or supplemented Prospectus as the Underwriter may reasonably request. (d) The Company will comply to the best of its ability with the Act, the Trust Indenture Act and the Exchange Act and the Rules and Regulations so as to permit the continuance of sales of and dealings in the Debentures and Common Stock under the Act, the Trust Indenture Act and the Exchange Act, and will keep current in the filing of all reports and forms required to be filed with any regulatory authority having jurisdiction over the Company. (e) If at any time when a prospectus relating to the Debentures is required to be delivered under the Act or the Rules and Regulations, any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact, or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules and Regulations, the Company will promptly notify the Underwriter and promptly prepare and file with the Commission an amendment or supplement to the Registration Statement or an appropriate filing pursuant to Section 13 or 14 of the Exchange Act which will correct such statement or omission or an amendment which will effect such compliance, and deliver in connection therewith, such Prospectus or Prospectuses to the Underwriter in such quantity as may be necessary to permit compliance with the requirements of the Act and the Rules and Regulations. 7 (f) The Company will cooperate with the Underwriter and counsel for the Underwriter in taking such action as may be necessary to qualify the Debentures for offering and sale under the securities laws of any state or jurisdiction of the United States as the Underwriter may reasonably request and will use its best efforts to continue such qualification in effect so long as required for the distribution of the Debentures. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 120 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Section 11(a) of the Act, including, at the option of the Company, Rule 158 under the Act, which need not be certified by independent public accountants unless required by the Act or the Rules and Regulations) covering a period of at least 12 months commencing after the effective date of the Registration Statement. (h) The Company will not assert, plead (as a defense or otherwise) or in any manner whatsoever claim (and will actively resist any attempt to compel it to assert, plead or claim) in any action, suit or proceeding that the interest rate on the Debentures violates present or future usury or other laws relating to the interest payable on any indebtedness and will not otherwise avail itself (and will actively resist any attempt to compel it to avail itself) of the benefits or advantages of any such laws. (i) For a period of five years after the issuance of the Debentures, the Company will furnish as soon as practicable to the Underwriter copies of any reports filed by the Company with the Commission pursuant to Section 13 of the Exchange Act, copies of the Company's definitive proxy statements and annual reports and copies of all reports and communications which shall be sent to the holders of Common Stock. (j) The Company will apply the net proceeds from the offering of the Debentures in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 6. Expenses. The Company and the Underwriter agree as follows: -------- (a) The Company, whether or not the transactions contemplated hereunder are consummated, will pay all costs and expenses incident to the performance of its obligations hereunder, including without limitation, all costs and expenses in connection with (i) the preparation and filing of the Registration Statement, Prospectus and Indenture and any supplements or amendments thereto; (ii) the preparation, issuance and delivery of the Debentures contemplated by this Agreement; (iii) the printing and mailing in reasonable quantities of the Registration Statement, the Indenture, amendments thereto, each preliminary prospectus, the Prospectus and any amendments or supplements thereto, this Agreement and related documents delivered to the Underwriter and Selected Dealers; (iv) any taxes, including transfer taxes, on the sale of the Debentures to the Underwriter; (v) the filing fees and expenses (including legal fees and reasonable disbursements) incurred in connection with the qualification of the Debentures under the Blue Sky or securities laws of the various states, filings with the National Association of Securities Dealers, Inc. and the preparation of Preliminary and Supplemental Blue Sky Memoranda 8 for the Offering; (vi) the fees and expenses of the accountants and the counsel for the Company; (vii) the fees of the Trustee and any agent of the Trustee (including legal fees and disbursements, if any, of counsel to the Trustee); (viii) the listing of the shares of Common Stock underlying the Debentures on the Nasdaq National Market; and (ix) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. (b) The Underwriter will pay (i) the fees and disbursements of the Underwriter's counsel, except as set forth in (a) above and Section 10(b) hereof, and (ii) their own out-of-pocket expenditures. 7. Conditions of the Underwriter's Obligations. The obligations of the ------------------------------------------- Underwriter to purchase and pay for the Debentures shall be subject in its discretion to the accuracy of and compliance with the representations and the warranties of the Company herein contained as of the date hereof and the Closing Date, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective and the Indenture qualified under the Trust Indenture Act not later than ___ P.M., St. Louis time on such date as shall be consented to in writing by the Underwriter and the Company, and no stop order suspending the effectiveness of such Registration Statement shall have been issued under the Act or proceedings therefor initiated or threatened by the Commission prior to the Closing Date; and all requests for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Underwriter. (b) The Underwriter shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains an untrue statement of fact which in its judgment, is material, or omits to state a fact which, in its judgment, is material, and is required to be stated therein or necessary to make the statements therein not misleading. (c) On the Closing Date, the Underwriter shall have received an opinion, dated the Closing Date, of Latham & Watkins, counsel for the Company, substantially in the form of Exhibit A attached hereto. (d) On the Closing Date, the Underwriter shall have received from Armstrong Teasdale LLP an opinion or opinions with respect to the sufficiency of the Company proceedings and other legal matters relating to this Agreement, the Registration Statement, the Prospectus and such related matters as the Underwriter may reasonably require, and there shall have been furnished to such counsel such documents as they may request to enable them to pass upon such matters. In giving such opinion or opinions, Armstrong Teasdale LLP may rely as to matters of fact upon statements and certifications of officers of the Company and of other appropriate persons and may rely as to matters of law, other than the law of the United States and the State of Missouri, upon an opinion or opinions of local counsel, who may be counsel for the Company, provided that any such 9 opinion or opinions are delivered to the Underwriter and that said counsel shall state that they have no reason to believe that such opinions are not correct. (e) On the Closing Date, the Underwriter shall have received a certificate, dated the Closing Date, signed by the chief executive officer or president and principal financial or accounting officer of the Company, in form and substance satisfactory to the Underwriter, to the effect that (i) the representations and warranties of the Company in this Agreement are true and correct as if made on the Closing Date and the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) since the respective dates as of which information is given in the Prospectus, there has not been any material adverse change in the business, operations, assets, financial condition or prospects, of the Company, or in the business of the Company; (iii) since such dates there has not been any material transaction entered into by the Company other than transactions in the ordinary course of business; and (iv) no stop order affecting the Registration Statement is in effect or, to the best of such officers' knowledge, threatened, and covering such other matters as the Underwriter may reasonably request. (f) On the date of this Agreement, the Underwriter and the Company shall have received a letter from KPMG LLP dated such date and addressed to the Underwriter and the Company in form and substance satisfactory to the Underwriter, with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and the Prospectus. (g) At the Closing Date, the Underwriter and the Company shall have received from KPMG LLP a letter, dated the Closing Date and addressed to the Underwriter and the Company in form and substance satisfactory to the Underwriter, confirming as of the Closing Date their letter dated the date hereof and delivered to the Underwriter pursuant to Section 7(f) hereof. (h) Before _________________________________, counsel for the Underwriter, shall have been furnished with such opinions and copies of such documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Debentures as herein contemplated and related proceedings, or in order to evidence the accuracy or completeness of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Debentures as herein contemplated and all opinions and certificates mentioned above or elsewhere in this Agreement shall be satisfactory in form and substance in all material respects to the Underwriter and said counsel. (i) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material change in the capital stock, short-term debt or long-term debt of the Company or any material adverse change, or any development specifically related to the business of the Company involving a prospective material adverse change, in the business, operations, assets, financial condition or prospects of the 10 Company considered as a whole which, in the judgment of the Underwriter, makes it impractical to offer or deliver the Debentures on the terms and in the manner contemplated in the Prospectus. If any of the conditions specified in this Section 7 shall not have been fulfilled, this Agreement may be terminated by the Underwriter upon notice to the Company or such conditions may be waived, modified or the time for fulfillment thereof may be extended by the Underwriter upon notice to the Company. 8. Conditions of the Company's Obligations. The obligations of the --------------------------------------- Company to deliver the Debentures shall be subject to the following conditions: (a) The Registration Statement shall have been declared effective by the Commission. (b) No stop order suspending the effectiveness of the Registration Statement shall be in effect at the Closing Date, and no proceedings therefor shall be pending or threatened by the Commission at the Closing Date. In the event the conditions specified in this Section 8 shall not be fulfilled, this Agreement may be terminated by the Company by delivery of notice to the Underwriter. Any such notice shall be without liability of the Company to the Underwriter, except as otherwise provided in Section 10(b) thereof, and without liability of the Underwriter to the Company. 9. Indemnification. --------------- (a) The Company will indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of the Act against any losses, claims, damages or liabilities, joint or several, to which the Underwriter or such controlling person may be subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Underwriter and each controlling person for any legal or other expenses reasonably incurred by the Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission made in any of such documents in reliance upon and in conformity with information furnished to the Company by the Underwriter contained in the section of the Prospectus entitled "Underwriter" and specifically for use therein; provided, however, that the indemnification contained in this paragraph with respect to any preliminary prospectus shall not inure to the benefit of the Underwriter (or of any person controlling the Underwriter) on account of any such losses, claims, damages, liabilities or expenses arising from the sale of the Debentures by the 11 Underwriter to any person if a copy of the Prospectus (as amended or supplemented if any amendments or supplements thereto shall have been furnished to the Underwriter prior to the written confirmation of the sale involved) shall not have been given or sent to such person by or on behalf of the Underwriter with or prior to the written confirmation of the sale involved, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the Prospectus (as amended or supplemented if amended or supplemented as aforesaid). Indemnification pursuant to this Section 9 will be in addition to any liability which the Company may otherwise have. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Underwriter contained in the section of the Prospectus entitled "Underwriter" and specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. Indemnification pursuant to this Section 9 will be in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of any claim or the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under Section 9. In case any claim or action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable cost of investigation. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized by the indemnifying party, (ii) the indemnified 12 party shall have reasonably concluded that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. An indemnifying party shall not be liable for any settlement of any action or claim effected without its consent, which consent shall not be unreasonably withheld, delayed or conditioned. 10. Termination. ----------- (a) This Agreement may be terminated at any time prior to the Closing Date by the Underwriter by written notice to the Company, if in the judgment of the Underwriter it is impracticable to offer for sale or to enforce contracts made by the Underwriter for the resale of the Debentures by reason of (i) the Company sustaining a loss, whether or not insured, by reason of fire, flood, accident or other calamity, which, in the opinion of the Underwriter, substantially affects the value of the properties of the Company or which materially interferes with the operation of the business of the Company, (ii) all trading in securities on the Nasdaq National Market having been suspended or limited or minimum prices having been established on such exchange, (iii) a banking moratorium having been declared by the United States or by New York state authorities or (iv) an outbreak of major hostilities or other national or international calamity having occurred. (b) If the obligations of the parties to this Agreement shall be terminated pursuant to Section 7 or 8 hereof or this Section 10, or if the purchase provided for herein is not consummated because of any refusal, inability or failure on the part of the Company to comply with any of the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform all the obligations under this Agreement, the Company shall not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Agreement, but the Company shall remain liable to the extent provided in Sections 6(a) and 9(a) hereof, and, except where termination occurs pursuant to clause (ii), (iii) or (iv) of Section 10(a) hereof, the Company shall pay the out-of-pocket expenses incurred by the Underwriter in contemplation of the performance by it of its obligations hereunder, including the fees and disbursements of its counsel and its traveling expenses and postage, telegraph and telephone charges. 13 11. Survival of Indemnities, Representations and Warranties. The ------------------------------------------------------- respective indemnities of the Company and the Underwriter and the respective representations and warranties of the Company and the Underwriter set forth in this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Company or the Underwriter or any of their respective officers, directors, partners or any controlling person, and will survive delivery of and payment for the Debentures or termination of this Agreement pursuant to Section 10 hereof, as the case may be. 12. Parties in Interest. This Agreement shall inure to the benefit of the ------------------- Company, the Underwriter, the officers, directors and partners of such parties, each controlling person referred to in Section 9 hereof, and their respective successors. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successor" as used in this Agreement shall not include any purchaser, as such purchaser, of any Debentures from the Underwriter. This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof, and supersedes any agreement previously entered into. 13. Notices. All communication, terminations and notices hereunder shall ------- be in writing and sent to the Underwriter or the Company, as applicable. Notices shall be mailed, delivered or telegraphed and confirmed to the Underwriter at 12555 Manchester Road, St. Louis, Missouri 63131 (Attn: James A. Krekeler) (or such other place as the Underwriter may specify in writing); if sent to the Company shall be mailed, delivered or telegraphed and confirmed to the Company at 225 N. Barranca Avenue, Suite 200, West Covina, CA 91791-1605 (Attn: Thomas Tekulve) (or such other place as the Company may specify in writing). 14. Counterparts. This Agreement may be executed in any number of ------------ counterparts which, taken together, shall constitute one and the same instrument. 15. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Missouri. 14 Please sign the enclosed duplicate of this letter whereupon this letter will become a binding agreement between the parties in accordance with its terms. Very truly yours, SOUTHWEST WATER COMPANY By:_______________________________ Name:_____________________________ Title:____________________________ The foregoing Agreement is hereby confirmed and accepted, as of the date first above written, on behalf of the Underwriter EDWARD D. JONES & CO., L.P. By:_______________________________ Name:_____________________________ Title:____________________________ 15 EX-4 3 dex4.txt INDENTURE DATED AS OF JUNE __, 2001 EXHIBIT 4 SOUTHWEST WATER COMPANY AND CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION, Trustee ______________________________ INDENTURE Dated as of _____________, 2001 $20,000,000 ____% Convertible Subordinate Debentures due July 1, 2021 __________________________________________________ CROSS-REFERENCE TABLE TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE............................................................... 1 Section 1.01. Definitions........................................................................................ 1 Section 1.02. Other Definitions.................................................................................. 5 Section 1.03. Incorporation by Reference of Trust Indenture Act.................................................. 6 Section 1.04. Rules of Construction.............................................................................. 6 ARTICLE 2 THE DEBENTURES........................................................................................... 6 Section 2.01. Form and Dating.................................................................................... 6 Section 2.02. Execution and Authentication....................................................................... 7 Section 2.03. Registrar, Paying Agent and Conversion Agent....................................................... 7 Section 2.04. Paying Agent to Hold Money in Trust................................................................ 8 Section 2.05. Debentureholder Lists.............................................................................. 8 Section 2.06. Transfer and Exchange.............................................................................. 8 Section 2.07. Replacement Debentures............................................................................. 12 Section 2.08. Outstanding Debentures............................................................................. 12 Section 2.09. Treasury Debentures................................................................................ 12 Section 2.10. Temporary Debentures............................................................................... 13 Section 2.11. Cancellation....................................................................................... 13 Section 2.12. Defaulted Interest................................................................................. 13 ARTICLE 3 REDEMPTION OF DEBENTURES AT CORPORATION'S OPTION......................................................... 13 Section 3.01. Redemption Right at Corporation's Option........................................................... 13 Section 3.02. Notices to Trustee................................................................................. 13 Section 3.03. Selection of Debentures to be Redeemed............................................................. 14 Section 3.04. Notice of Redemption............................................................................... 14 Section 3.05. Effect of Notice of Redemption..................................................................... 15
i Section 3.06. Deposit of Redemption Price........................................................................ 15 Section 3.07. Debentures Redeemed in Part........................................................................ 15 Section 3.08. Conversion Arrangements on Call for Redemption..................................................... 15 ARTICLE 4 REDEMPTION OF DEBENTURES AT REPRESENTATIVE OF DECEASED DEBENTUREHOLDER'S OPTION.......................... 16 Section 4.01. Redemption Right at Representative of Deceased Debentureholder's Option............................ 16 Section 4.02. Withdrawal......................................................................................... 19 ARTICLE 5 COVENANTS................................................................................................ 19 Section 5.01. Payment of Debentures.............................................................................. 19 Section 5.02. Reporting.......................................................................................... 19 Section 5.03. Corporate Existence................................................................................ 19 Section 5.04. Compliance Certificate............................................................................. 20 ARTICLE 6 SUCCESSORS............................................................................................... 20 Section 6.01. When Corporation May Merge, etc.................................................................... 20 Section 6.02. Successor Corporation Substituted.................................................................. 20 ARTICLE 7 DEFAULTS AND REMEDIES.................................................................................... 21 Section 7.01. Events of Default.................................................................................. 21 Section 7.02. Acceleration....................................................................................... 22 Section 7.03. Other Remedies..................................................................................... 22 Section 7.04. Waiver of Past Defaults............................................................................ 23 Section 7.05. Control by Majority................................................................................ 23 Section 7.06. Limitation on Suits................................................................................ 23 Section 7.07. Rights of Holders to Receive Payment............................................................... 23 Section 7.08. Collection Suit by Trustee......................................................................... 24 Section 7.09. Trustee May File Proofs of Claim................................................................... 24
ii Section 7.10. Priorities......................................................................................... 24 Section 7.11. Undertaking for Costs.............................................................................. 25 Section 7.12. Waiver of Stay or Extension Laws................................................................... 25 Section 7.13. Restoration of Rights and Remedies................................................................. 25 ARTICLE 8 TRUSTEE................................................................................................... 25 Section 8.01. Duties of Trustee.................................................................................. 25 Section 8.02. Rights of Trustee.................................................................................. 26 Section 8.03. Individual Rights of Trustee....................................................................... 27 Section 8.04. Trustee's Disclaimer............................................................................... 27 Section 8.05. Notice of Defaults................................................................................. 27 Section 8.06. Reports by Trustee to Holders...................................................................... 28 Section 8.07. Compensation and Indemnity......................................................................... 28 Section 8.08. Replacement of Trustee............................................................................. 28 Section 8.09. Successor Trustee by Merger, etc................................................................... 29 Section 8.10. Eligibility; Disqualification...................................................................... 29 Section 8.11. Preferential Collection of Claims Against Corporation.............................................. 30 Section 8.12. Appointment of Co-Trustee.......................................................................... 30 ARTICLE 9 DISCHARGE OF INDENTURE.................................................................................... 30 Section 9.01. Termination of Corporation's Obligations........................................................... 30 Section 9.02. Application of Trust Money......................................................................... 31 Section 9.03. Repayment to Corporation........................................................................... 31 ARTICLE 10 AMENDMENTS, SUPPLEMENTS AND WAIVERS...................................................................... 31 Section 10.01. Without Consent of Holders......................................................................... 31 Section 10.02. With Consent of Holders............................................................................ 32 Section 10.03. Compliance with Trust Indenture Act................................................................ 32
iii Section 10.04. Revocation and Effect of Consents.................................................................. 32 Section 10.05. Notation on or Exchange of Debentures.............................................................. 33 Section 10.06. Trustee Protected.................................................................................. 33 ARTICLE 11 CONVERSION............................................................................................... 33 Section 11.01. Conversion Privilege; Conversion Price............................................................. 33 Section 11.02. Conversion Procedure............................................................................... 33 Section 11.03. Fractional Shares.................................................................................. 34 Section 11.04. Taxes on Conversion................................................................................ 34 Section 11.05. Corporation to Provide Stock....................................................................... 35 Section 11.06. Adjustment for Change in Capital Stock............................................................. 35 Section 11.07. Adjustment for Rights Issue........................................................................ 36 Section 11.08. Adjustment for Other Distributions................................................................. 36 Section 11.09. Current Market Price............................................................................... 37 Section 11.10. When Adjustment May Be Deferred.................................................................... 37 Section 11.11. When No Adjustment Required........................................................................ 37 Section 11.12. Notice of Adjustment............................................................................... 38 Section 11.13. Voluntary Reduction................................................................................ 38 Section 11.14. Notice of Certain Transactions..................................................................... 38 Section 11.15. Reorganization of Corporation...................................................................... 39 Section 11.16. Corporation Determination Final.................................................................... 39 Section 11.17. Trustee's Disclaimer............................................................................... 39 ARTICLE 12 SUBORDINATION............................................................................................ 40 Section 12.01. Agreement to Subordinate........................................................................... 40 Section 12.02. Liquidation, Dissolution, Bankruptcy............................................................... 40 Section 12.03. Default on Designated Senior Debt.................................................................. 40
iv Section 12.04. When Distribution Must Be Paid Over................................................................ 41 Section 12.05. Subrogation........................................................................................ 41 Section 12.06. Relative Rights; Subordination Not to Prevent Events of Default or Limit Right to Accelerate....... 41 Section 12.07. Subordination May Not Be Impaired by Corporation................................................... 42 Section 12.08. Rights of Trustee.................................................................................. 42 Section 12.09. Distributions and Notices to, and Notices and Consents by, Representatives of Holders of Senior Debt........................................................................................................... 42 Section 12.10. Trustee Entitled to Rely........................................................................... 42 Section 12.11. Trustee to Effectuate Subordination................................................................ 43 Section 12.12. Trustee Not Fiduciary for Holders of Senior Debt................................................... 43 Section 12.13. Reliance by Holder of Senior Debt on Subordination Provisions; No Waiver........................... 43 ARTICLE 13 MISCELLANEOUS............................................................................................ 44 Section 13.01. Trust Indenture Act Controls....................................................................... 44 Section 13.02. Notices............................................................................................ 44 Section 13.03. Communication by Holders with Other Holders........................................................ 45 Section 13.04. Certificate and Opinion as to Conditions Precedent................................................. 45 Section 13.05. Statements Required in Certificate or Opinion...................................................... 45 Section 13.06. Rules by Trustee and Agents........................................................................ 45 Section 13.07. Legal Holidays..................................................................................... 45 Section 13.08. No Recourse Against Others......................................................................... 46 Section 13.09. Duplicate Originals................................................................................ 46 Section 13.10. Governing Law...................................................................................... 46 Section 13.11. Table of Contents, Headings, etc................................................................... 46 Section 13.12. No Adverse Interpretation of Other Agreements...................................................... 46
v Section 13.13. Successors......................................................................................... 46 Section 13.14. Severability....................................................................................... 46
vi INDENTURE dated as of _______________, 2001, between SOUTHWEST WATER COMPANY, a Delaware corporation ("Corporation"), and CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION, a national banking association, as trustee ("Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Corporation's _____% Convertible Subordinate Debentures due July 1, 2021 ("Debentures"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions. "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation. "Agent" means any Registrar, Paying Agent, Conversion Agent or co-registrar or agent for service of notices and demands. See Section 2.03. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Debenture, the rules and procedures of the Depositary that apply to such transfer or exchange. "Board of Directors" means the Board of Directors of the Corporation or any authorized committee of the Board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Corporation to have been duly adopted by the Board of Directors and to be in full force and effect. "Business Days" means those days on which banks in the city in which the Trustee is located are open for business. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of corporate stock. "Common Stock" means the common stock, par value $0.01 per share, of the Corporation as the same exists at the date of this Indenture or as such stock shall be constituted from time to time. "Corporate Trust Office" means the office of the Trustee located in San Francisco, California, at which at any time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 101 California Street, Suite 3800, San Francisco, California 94111. "Corporation" means the party named as such above until a Successor replaces it pursuant to the applicable provisions of the Indenture and thereafter means the successor. "Custodian" means the Trustee, as custodian with respect to the Debentures in global form, or any successor entity thereto. "Debenture" means the Debentures described above issued under this Indenture. "Debt" means, with respect to any Person, without duplication, (1) all indebtedness of such Person for borrowed money; (2) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (3) all obligations of such Person in respect of letters of credit, bankers' acceptances or other similar instruments, excluding obligations in respect of trade letters of credit or bankers' acceptances issued in respect of trade payables; (4) all obligations of such Person to pay the deferred and unpaid purchase price of property or services which are recorded as liabilities under GAAP, excluding trade payables arising in the ordinary course of business; (5) all Capital Lease Obligations of such Person as lessee under such leases; (6) all Debt of other Persons Guaranteed by such Person to the extent so Guaranteed ; (7) all Debt of other Persons secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; and (8) all Hedging Obligations of such Person. The amount of Debt of any Person will be deemed to be: (A) with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation; (B) with respect to Debt secured by a Lien on an asset of such Person but not otherwise the obligation, contingent or otherwise, of such Person, the lesser of (x) the fair market value of such asset on the date the Lien attached and (y) the amount of such Debt; (C) with respect to any Debt issued with original issue discount, the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt; (D) with respect to any Hedging Obligation, the net amount payable if such Hedging Obligation terminated at that time due to default by such Person; and 2 (E) otherwise, the outstanding principal amount thereof. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Definitive Debenture" means a certificated Debenture registered in the name of the Debentureholder thereof and issued in accordance with Section 2.06 hereof, substantially in the form of Exhibit A hereto except that such Debenture --------- shall not bear the Global Debenture Legend and shall not have the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto. "Depositary" means, with respect to the Debenture issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Debenture, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Designated Senior Debt" means all Obligations with respect to Debt pursuant to lines of credit of the Corporation or any subsidiary of the Corporation with any bank, as outstanding from time to time and such other Senior Debt as is specifically designated as "Designated Senior Debt" in an Officers' Certificate received by the Trustee. "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "Global Debenture" means a global debenture substantially in the form of Exhibit A hereto bearing the Global Debenture Legend and deposited with or on - --------- behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Debentures issued in accordance with ARTICLE 2 hereof. "Global Debenture Legend" means the legend set forth in Section 2.06(f), which is required to be placed on all Global Debentures issued under this Indenture. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Debt. "Hedging Obligation" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, (ii) foreign exchange contracts or currency swap agreements and (iii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency values. "Holder" or "Debentureholder" means a person in whose name a Debenture is registered. 3 "Indenture" means this Indenture as amended from time to time. "Issue Date" of a Debenture means the date on which the Debenture was originally issued or deemed issued as set forth on the face of the Debenture. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset given to secure Debt, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction with respect to any such lien, pledge, charge or security interest). "Obligations" means, with respect to any Debt, all obligations (whether in existence on the Issue Date or arising afterwards, absolute or contingent, direct or indirect) for or in respect of principal (when due, upon acceleration, upon redemption, upon mandatory repayment or repurchase pursuant to a mandatory offer to purchase, or otherwise), premium, interest, penalties, fees, indemnification, reimbursement and other amounts payable and liabilities with respect to such Debt, including all interest accrued or accruing after the commencement of any bankruptcy, insolvency or reorganization or similar case or proceeding at the contract rate (including, without limitation, any contract rate applicable upon default) specified in the relevant documentation, whether or not the claim for such interest is allowed as a claim in such case or proceeding. "Officers" means the Chairman of the Board, any Vice Chairman, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Secretary or any Assistant Secretary of the Corporation. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the Chairman of the Board, a Vice Chairman, President, or a Vice President of the Corporation. See Sections 13.04 and 13.05. "Opinion of Counsel" means a written opinion from legal counsel who may be an employee of or counsel to the Corporation or the Trustee and who is acceptable to the Trustee. See Sections 13.04 and 13.05. "Participant" means, with respect to the Depositary, a Person who has an account with the Depositary. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal" of the Debenture means the principal of the Debenture plus the premium, if any, on the Debenture. "Qualified Institution" means a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company located in the United States. 4 "Quoted Price" means the last transaction price of the Common Stock as reported on a national securities exchange or a national interdealer automated securities quotation system. "Redemption Date" when used with respect to any Debenture to be redeemed means the date fixed for such redemption pursuant to this Indenture. "Redemption Price" when used with respect to any Debenture to be redeemed means the price at which it is to be redeemed pursuant to this Indenture and the Debenture. "SEC" means the Securities and Exchange Commission. "Senior Debt" of the Corporation means all Obligations with respect to Debt of the Corporation, whether outstanding on the Issue Date or thereafter created (and all renewals, extensions or refundings thereof), except for Debt which, in the instrument creating or evidencing the same, is expressly stated to be not senior in right of payment to the Debentures; provided that Senior Debt does not include (i) any obligation to the Corporation or any Subsidiary, (ii) trade payables or (iii) any Debt incurred in violation of the Indenture. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) as in effect on the date shown above except as provided in Section 10.03. "Trustee" means the party named as such above until a successor replaces it pursuant to the applicable provisions of the Indenture and thereafter means the successor. "Trust Officer" means the Chairman of the Board, the president or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "United States" means the United States of America. Section 1.02. Other Definitions. Term Defined in "Bankruptcy Law" Section 7.01 "Conversion Agent" Section 2.03 "Conversion Date" Section 11.02 "Conversion Price" Section 11.01 "Custodian" Section 7.01 "Event of Default" Section 7.01 "Legal Holiday" Section 13.07 "Paying Agent" Section 2.03 "Registrar" Section 2.03 "Successor" Section 6.01 "U.S. Government Obligations" Section 9.01 5 Section 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" mean the Debentures. "indenture securityholder" means a Debentureholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Corporation. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "Section" shall refer to a Section of this Indenture. ARTICLE 2 THE DEBENTURES Section 2.01. Form and Dating. Global Debentures. Debentures issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Debenture Legend --------- thereon and the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto). Debentures issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Debenture --------- Legend thereon and without the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto). Each Global Debenture shall represent such of the 6 outstanding Debentures as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Debentures from time to time endorsed thereon and that the aggregate principal amount of outstanding Debentures represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Debenture to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Debentures represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. The terms and provisions contained in the Debentures shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Corporation and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.02. Execution and Authentication. Two Officers shall sign the Debentures for the Corporation by manual or facsimile signature. The Corporation's seal shall be reproduced on the Debentures. If an Officer whose signature is on a Debenture no longer holds that office at the time the Debenture is authenticated, the Debenture shall nevertheless be valid. A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The Trustee shall authenticate Debentures for original issue up to the aggregate principal amount of $20,000,000 upon a written order of the Corporation signed by two Officers. The aggregate principal amount of Debentures outstanding at any time may not exceed that amount except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Corporation to authenticate Debentures. An authenticating agent may authenticate Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Corporation or an Affiliate. Section 2.03. Registrar, Paying Agent and Conversion Agent. The Corporation shall maintain an office or agency where Debentures may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Debentures may be presented for payment ("Paying Agent"), an office or agency where Debentures may be presented for conversion ("Conversion Agent") and an office or agency where notices and demands to or upon the Corporation in respect of the Debentures and this Indenture may be served. The Registrar shall keep a register of the Debentures and of their transfer and exchange. The Corporation may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The Corporation may act as Registrar, Paying 7 Agent or Conversion Agent. The term "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. The Corporation shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Corporation fails to maintain a Registrar, Paying Agent, Conversion Agent or agent for service of notices and demands or fails to give the foregoing notice, the Trustee shall act as such. The Corporation or any of its subsidiaries may act as Paying Agent, Conversion Agent, Registrar or Co-Registrar. The Corporation initially appoints Chase Manhattan Bank and Trust Company, National Association of San Francisco, California as Registrar, Paying Agent and agent for service of notices and demands and ChaseMellon Shareholder Services as Conversion Agent. The Corporation initially appoints The Depository Trust Company to act as Depositary with respect to the Global Debenture. The Corporation initially appoints the Trustee to act as Custodian with respect to the Global Debenture. Section 2.04. Paying Agent to Hold Money in Trust. The Corporation shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Debentureholders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Debentures, and will notify the Trustee of any Default by the Corporation in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Corporation at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent shall have no further liability for the money. If the Corporation acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent. Section 2.05. Debentureholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Debentureholders. If the Trustee is not the Registrar, the Corporation shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list of the names and addresses of Debentureholders in such form and as of such date as the Trustee may reasonably require. Section 2.06. Transfer and Exchange. (a) A Global Debenture may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Debentures will be exchanged by the Corporation for Definitive Debentures if (i) the Corporation delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary 8 is not appointed by the Corporation within 120 days after the date of such notice from the Depositary or (ii) the Corporation in its sole discretion determines that Global Debentures (in whole but not in part) should be exchanged for Definitive Debentures and delivers a written notice to such effect to the Trustee. Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Debentures shall be issued in such names as the Depositary shall instruct the Trustee. Global Debentures also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Debenture authenticated and delivered in exchange for, or in lieu of, a Global Debenture or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Debenture. A Global Debenture may not be exchanged for another Debenture other than as provided in this Section 2.06(a), however, beneficial interests in a Global Debenture may be transferred and exchanged as provided in Section 2.06(b) or (c) hereof. (b) Transfer and Exchange of Beneficial Interests in Global Debentures. The transfer and exchange of beneficial interests in Global Debentures shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Transfers of beneficial interests in Global Debentures also shall require compliance with subparagraph (i) or subparagraph (ii) below, as applicable: (i) Transfer of Beneficial Interests in the Same Global Debenture. Beneficial interests in any Global Debenture may be transferred to Persons who take delivery thereof in the form of a beneficial interest in a Global Debenture. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Debentures. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Debenture in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Debenture in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Debenture shall be registered to effect the transfer or exchange referred to in (1) above. Upon receipt of an opinion of counsel to the Corporation certifying that all of the requirements for transfer or exchange of beneficial interests in Global Debentures contained in this Indenture and the Debentures or otherwise applicable under the Securities Act of 1933, as amended, have been satisfied, the Trustee shall adjust the principal amount of the relevant Global Debenture(s) pursuant to Section 2.06(g) hereof. (c) Transfer or Exchange of Beneficial Interests in Global Debentures for Definitive Debentures. If any holder of a beneficial interest in a Global Debenture proposes to exchange 9 such beneficial interest for a Definitive Debenture or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Debenture, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Debenture to be reduced accordingly pursuant to Section 2.06(g) hereof, and the Corporation shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Debenture in the appropriate principal amount. Any Definitive Debenture issued in exchange for a beneficial interest pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant. (d) Transfer and Exchange of Definitive Debentures for Beneficial Interests in Global Debentures. A Holder of a Definitive Debenture may exchange such Debenture for a beneficial interest in a Global Debenture or transfer such Definitive Debentures to a Person who takes delivery thereof in the form of a beneficial interest in a Global Debenture at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Definitive Debenture and increase or cause to be increased the aggregate principal amount of Global Debentures. (e) Transfer and Exchange of Definitive Debentures for Definitive Debentures. Upon request by a Holder of Definitive Debentures and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Debentures. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Debentures duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required by the Registrar. A Holder of Definitive Debentures may transfer such Debentures to a Person who takes delivery thereof in the form of a Definitive Debenture. (f) Global Debenture Legend. Each Global Debenture shall bear a legend in substantially the following form: "THIS GLOBAL DEBENTURE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS DEBENTURE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06 OF THE INDENTURE, (II) THIS GLOBAL DEBENTURE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL DEBENTURE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL DEBENTURE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF SOUTHWEST WATER COMPANY." 10 (g) Cancellation and/or Adjustment of Global Debentures. At such time as all beneficial interests in a Global Debenture have been exchanged for Definitive Debentures or a Global Debenture has been redeemed, repurchased or canceled in whole and not in part, such Global Debenture shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Debenture is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Debenture or for Definitive Debentures, the principal amount of Debentures represented by such Global Debenture shall be reduced accordingly and an endorsement shall be made on such Global Debenture by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Debenture, such other Global Debenture shall be increased accordingly and an endorsement shall be made on such Global Debenture by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (h) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Corporation shall execute and the Trustee shall authenticate Global Debentures and Definitive Debentures upon the Corporation's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Debenture or to a Holder of a Definitive Debenture for any registration of transfer or exchange, but the Corporation may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.07, 10.05 and 11.02 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Debenture selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part. (iv) All Global Debentures and Definitive Debentures issued upon any registration of transfer or exchange of Global Debentures or Definitive Debentures shall be the valid obligations of the Corporation, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Debentures or Definitive Debentures surrendered upon such registration of transfer or exchange. (v) The Corporation shall not be required (A) to issue, to register the transfer of or to exchange any Debentures during a period beginning at the opening of business 15 days before the day of any selection of Debentures for redemption under Section 3.03 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Debenture so selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part or (C) to register the transfer of or to exchange a Debenture between a record date and the next succeeding interest payment date. 11 (vi) Prior to due presentment for the registration of a transfer of any Debenture, the Trustee, any Agent and the Corporation may deem and treat the Person in whose name any Debenture is registered as the absolute owner of such Debenture for the purpose of receiving payment of principal of and interest on such Debentures and for all other purposes, and none of the Trustee, any Agent or the Corporation shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Debentures and Definitive Debentures in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. Section 2.07. Replacement Debentures. If the Holder of a Debenture claims that the Debenture has been lost, destroyed or wrongfully taken, the Corporation shall issue and the Trustee shall authenticate a replacement Debenture if the Trustee's requirements are met. If required by the Trustee or the Corporation, an indemnity bond must be obtained and be sufficient in the judgment of both to protect the Corporation, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Debenture is replaced. The Trustee or the Corporation may charge for its expenses in replacing a Debenture. Every replacement debenture is an obligation of the Corporation. Section 2.08. Outstanding Debentures. The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Debenture is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If Debentures are considered paid under Section 5.01, they cease to be outstanding and interest on them ceases to accrue. A Debenture does not cease to be outstanding because the Corporation or an Affiliate holds the Debenture. Section 2.09. Treasury Debentures. In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by the Corporation or an Affiliate shall be disregarded, except for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent. Only Debentures which the Trustee knows are so owned shall be disregarded. 12 Section 2.10. Temporary Debentures. Until Definitive Debentures are ready for delivery, the Corporation may prepare and the Trustee shall authenticate temporary Debentures. Temporary Debentures shall be substantially in the form of Definitive Debentures but may have variations that the Corporation considers appropriate for temporary Debentures. Without unreasonable delay, the Corporation shall prepare and the Trustee shall authenticate Definitive Debentures in exchange for temporary Debentures. Section 2.11. Cancellation. The Corporation at any time may deliver Debentures to the Trustee for cancellation. The Registrar, the Paying Agent and the Conversion Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, exchange, payment or conversion. The Trustee shall cancel all Debentures surrendered for registration of transfer, exchange, payments, replacement, conversion or cancellation and shall dispose of cancelled Debentures as the Corporation directs. The Corporation may not issue new Debentures to replace Debentures that it has paid or delivered to the Trustee for cancellation or that any Debentureholder has converted pursuant to ARTICLE 11. Section 2.12. Defaulted Interest. If the Corporation defaults in a payment of interest on the Debentures, it shall pay the defaulted interest in any lawful manner. It may pay the defaulted interest, plus any interest payable on the defaulted interest, to the persons who are Debentureholders on a subsequent special record date. The Corporation shall fix the special record date and payment date in a manner satisfactory to the Trustee. At least 15 days before the special record date, the Corporation shall mail to Debentureholders a notice that states the special record date, the payment date and the amount of interest to be paid. ARTICLE 3 REDEMPTION OF DEBENTURES AT CORPORATION'S OPTION Section 3.01. Redemption Right at Corporation's Option. The Corporation has the right to redeem the Debentures at its sole option, in whole or in part, at any time and from time to time on or after July 1, 2003, at the Redemption Prices specified in paragraph 5 of the Debenture, subject to the terms and conditions set forth in this ARTICLE 3, and subject to the Corporation first obtaining the approval of any holders of any Designated Senior Debt, if required. The election of the Corporation to redeem any Debenture shall be evidenced by a Board Resolution. Section 3.02. Notices to Trustee. If the Corporation wishes to redeem Debentures pursuant to paragraph 5 of the Debenture, it shall notify the Trustee of the Redemption Date and the principal amount of Debentures to be redeemed. The Corporation shall give the notice provided for in this Section 13 not less than 45 nor more than 60 days prior to the Redemption Date (unless a shorter notice period is satisfactory to the Trustee). Section 3.03. Selection of Debentures to be Redeemed. If less than all the Debentures are to be redeemed, the Trustee shall select the Debentures to be redeemed by lot. The Trustee shall make the selection not more than 60 days and not less than 30 days before the Redemption Date from Debentures then outstanding that have not been previously called for redemption. The Trustee may select for redemption portions of the principal of Debentures that have denominations larger than $1,000. Debentures and portions of Debentures that the Trustee selects shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. The Trustee shall notify the Corporation promptly of Debentures or portions of Debentures to be called for redemption. Section 3.04. Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Corporation shall mail notice of redemption to each Holder whose Debentures are to be redeemed and to the Nasdaq National Market, and shall provide prompt publicity of the redemption as required by the Nasdaq National Market Rules. The notice shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the Conversion Price; (4) the name and address of the Paying Agent and Conversion Agent; (5) that Debentures called for redemption may be converted at any time prior to the close of business on the fifth Business Day preceding the Redemption Date; (6) that Holders who wish to convert Debentures must satisfy the requirements of paragraph 9 of the Debentures; (7) that Definitive Debentures called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (8) that interest on Debentures called for redemption ceases to accrue on and after the Redemption Date (unless the Corporation shall default in the payment of the Redemption Price); (9) if less than all of the Debentures outstanding are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the Debentures to be redeemed; 14 (10) if any Debenture is being redeemed in part, the portion of the principal amount of such Debenture to be redeemed and that, after the redemption date, upon surrender of a Definitive Debenture, a new Definitive Debenture or Definitive Debentures in principal amount equal to the unredeemed portion will be issued; and (11) the paragraph of the Debentures pursuant to which the Debentures are being redeemed. At the Corporation's request, the Trustee shall give notice of redemption in the Corporation's name and at its expense. Section 3.05. Effect of Notice of Redemption. Once notice of redemption is mailed, Debentures called for redemption become due and payable on the Redemption Date at the Redemption Price. Section 3.06. Deposit of Redemption Price. On or before the Redemption Date, the Corporation shall deposit with the Paying Agent cash sufficient to pay the Redemption Price and accrued interest on all Debentures to be redeemed. The Paying Agent shall return to the Corporation any money not required due to the conversion of Debentures called for redemption. Section 3.07. Debentures Redeemed in Part. Upon surrender of a Definitive Debenture that is redeemed in part, the Corporation shall issue and the Trustee shall authenticate for the Holder a new Definitive Debenture equal in principal amount to the unredeemed portion of the Definitive Debenture surrendered. Section 3.08. Conversion Arrangements on Call for Redemption. Notwithstanding anything to the contrary contained in this Indenture, in connection with any redemption of Debentures pursuant to this ARTICLE 3, the Corporation, by an agreement with one or more investment bankers or other purchasers, may arrange for such purchasers to purchase all Debentures called for redemption (the "Called Debentures") which are either (i) surrendered for redemption or (ii) not duly surrendered for redemption or conversion prior to the close of business on the Redemption Date, and to convert the same into shares of Common Stock, by the purchasers' depositing with the Trustee (acting as Paying Agent with respect to the deposit of such amount and as Conversion Agent with respect to the conversion of such Called Debentures), in trust for the Holders of the Called Debentures, on or prior to the Redemption Date in the manner agreed to by the Corporation and such purchasers, an amount sufficient to pay the Redemption Price payable by the Corporation on redemption of such Called Debentures. In connection with any such arrangement for purchase and conversion, the Trustee as Paying Agent shall pay on or after the Redemption Date such amounts so deposited by the purchasers in exchange for Called Debentures surrendered for redemption prior to the close of business on the Redemption Date and for all Called Debentures surrendered after such Redemption Date. Notwithstanding anything to the contrary contained in this ARTICLE 3, the obligation of the Corporation to pay the Redemption Price of such Called Debentures shall be satisfied and 15 discharged to the extent such amount is so paid by such purchasers; provided, however, that nothing in this Section 3.08 shall in any way relieve the Corporation of the obligation to pay such Redemption Price on all Called Debentures to the extent such amount is not so paid by said purchasers. For all purposes of this Indenture, any Called Debentures surrendered by the Holders for redemption, and any Called Debentures not duly surrendered for redemption or conversion prior to the close of business on the Redemption Date, shall be deemed acquired by such purchasers from such Holders and surrendered by such purchasers for conversion and shall in all respects be deemed to have been converted, all as of immediately prior to the close of business on the Redemption Date, subject to the deposit by the purchasers of the above amount as aforesaid. Nothing in this Section 3.08 shall in any way limit the right of any Holder of a Debenture to convert his Debenture pursuant to the terms of this Indenture any time prior to the close of business on the fifth Business Day prior to the Redemption Date. ARTICLE 4 REDEMPTION OF DEBENTURES AT REPRESENTATIVE OF DECEASED DEBENTUREHOLDER'S OPTION Section 4.01. Redemption Right at Representative of Deceased Debentureholder's Option. The personal representative, or surviving joint tenant(s), tenant by the entirety or tenant in common of a deceased Beneficial Owner (as hereinafter defined) (the "Representative") has the right to request redemption prior to stated maturity of all or part of his interest in the Debentures, and the Corporation will redeem the same subject to the limitations that the Corporation will not be obligated to redeem, during the period beginning with the original issuance of the Debentures and ending June 30, 2002 (the "Initial Period") and during any twelve month period ending June 30 thereafter (each such twelve month period being hereinafter referred to as a "Subsequent Period"), (i) on behalf of a deceased Beneficial Owner, any interest in the Debentures which exceeds $25,000 in principal amount or (ii) interests in the Debentures exceeding $400,000 in aggregate principal amount. The Corporation may, at its option, redeem interests of any deceased Beneficial Owner in the Debentures in the Initial Period or any Subsequent Period in excess of the $25,000 limitation. Any such redemption, to the extent that it exceeds the $25,000 limitation for any deceased Debenture Holder, shall not be included in the computation of the $400,000 aggregate limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. The Corporation may, at its option, redeem interests of deceased Beneficial Owners in the Debentures, in the Initial Period or any Subsequent Period, in an aggregate principal amount exceeding $320,000. Any such redemption, to the extent it exceeds the $400,000 aggregate limitation, shall not reduce the $400,000 aggregate limitation for any Subsequent Period. On any determination by the Corporation to redeem Debentures in excess of the $25,000 limitation or the $400,000 aggregate limitation, Debentures so redeemed shall be redeemed in the order of the receipt of Redemption Requests (as hereinafter defined) by the Trustee. A request for redemption of an interest in the Debentures may be initiated by the Representative. The Representative shall deliver a request to the Participant (hereinafter defined) through whom the deceased Beneficial Owner owned such interest, in form satisfactory 16 to the Participant, together with evidence of the death of the Beneficial Owner, evidence of the authority of the Representative satisfactory to the Participant, such waivers, notices or certificates as may be required under applicable state or federal law and such other evidence of the right to such redemption as the Participant shall require. The request shall specify the principal amount of the interest in the Debentures to be redeemed. The Participant shall thereupon deliver to the Depositary a request for redemption substantially in the form of Exhibit B hereto (a "Redemption Request"). The Depositary will, on receipt - --------- thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to Redemption Requests received by it including date of receipt, the name of the Participant filing the Redemption Request and the status of such Redemption Request with respect to the $25,000 limitation and the $400,000 aggregate limitation. The Trustee will immediately send a copy of each Redemption Request it receives, together with the information regarding the eligibility thereof with respect to the $25,000 limitation and the $400,000 aggregate limitation, to the Corporation. The Depositary, the Corporation and the Trustee may conclusively assume, without independent investigation, that the statements contained in each Redemption Request are true and correct and shall have no responsibility for reviewing any documents submitted to the Participant by the Representative or for determining whether the applicable decedent is in fact the Beneficial Owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the Representative is duly authorized to request redemption on behalf of the applicable Beneficial Owner. Subject to the $25,000 limitation and the $400,000 aggregate limitation, the Corporation will, upon the death of any Beneficial Owner, redeem the interest of such Beneficial Owner in the Debentures within 60 days following receipt by the Corporation of a Redemption Request from the Trustee. If Redemption Requests exceed the aggregate principal amount of interests in Debentures required to be redeemed during the Initial Period or any Subsequent Period, then such excess Redemption Requests will be applied in the order received by the Trustee to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such interests. The Corporation may, at any time, notify the Trustee in writing that it will redeem, on a date not less than 30 nor more than 60 days thereafter, all or any such lesser amount of Debentures for which Redemption Requests have been received but which are not then eligible for redemption by reason of the $25,000 limitation or the $320,000 aggregate limitation. Any Debentures so redeemed shall be redeemed in the order of receipt of Redemption Requests by the Trustee. The price to be paid by the Corporation for the Debentures to be redeemed pursuant to a Redemption Request is 100% of the principal amount thereof plus accrued but unpaid interest to the date of payment. No premium will be paid on any Debenture redeemed pursuant to this Section. Subject to arrangements with the Depositary, payment for interests in the Debentures which are to be redeemed shall be made to the Depositary upon presentation of Debentures to the Trustee for redemption in the aggregate principal amount specified in the Redemption Requests submitted to the Trustee by the Depositary which are to be fulfilled in connection with such payment. The principal amount of any Debentures acquired or redeemed by the Corporation other than by redemption at the option of any Representative of a deceased Beneficial Owner pursuant to this Section shall not be included in the computation of either the $25,000 limitation or the $400,000 aggregate limitation for the Initial Period or for any Subsequent Period. 17 For purposes of this Section, a "Beneficial Owner" means the Person who has the right to sell, transfer or otherwise dispose of an interest in a Debenture and the right to receive the proceeds therefrom, as well as the interest and principal payable to the holder thereof. In general, a determination of beneficial ownership in the Debentures will be subject to the rules, regulations and procedures governing the Depositary and institutions that have accounts with the Depositary or a nominee thereof ("Participants"). For purposes of this Section 4.01, an interest in a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Beneficial Owner and the death of a tenant by the entirety, joint tenant or tenant in common will be deemed the death of a Beneficial Owner. The death of a person, who, during his lifetime, was entitled to substantially all of the rights of a Beneficial Owner of an interest in the Debentures will be deemed the death of the Beneficial Owner, regardless of the recordation of such interest on the records of the Participant, if such rights can be established to the satisfaction of the Participant. Such interests shall be deemed to exist in typical cases of nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, community property or similar joint ownership arrangements, including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and any spouse, and trust and certain other arrangements where one person has substantially all of the rights of a Beneficial Owner during such person's lifetime. The Corporation may, at its option, purchase any Debentures for which Redemption Requests have been received in lieu of redeeming such Debentures. Any Debentures so purchased by the Corporation shall either be offered for sale and sold within 180 days after the date of purchase or presented to the Trustee for redemption and cancellation. In the case of any Debenture or portion thereof which is presented for redemption pursuant to this ARTICLE 4 and which has not been redeemed at the time the Corporation gives notice of its election to redeem Debentures pursuant to ARTICLE 3, such Debenture or portion thereof shall first be subject to redemption pursuant to ARTICLE 3 and if any such Debenture or portion thereof is not redeemed pursuant to ARTICLE 3 it shall remain subject to redemption pursuant to ARTICLE 4. Nothing herein shall prohibit the Corporation from redeeming, in acceptance of tenders made pursuant hereto, Debentures in excess of the principal amount that the Corporation is obligated to redeem, nor from purchasing any Debentures in the open market. However, the Corporation may not use any Debentures purchased in the open market as a credit against its prepayment obligation hereunder. During such time or times as the Debentures are not represented by a Global Debenture and are issued in definitive form, all references in this Section to Participants and the Depositary, including the Depositary's governing rules, regulations and procedures shall be deemed deleted, all determinations which under this section the Participants are required to make shall be made by the Corporation (including, without limitation, determining whether the applicable decedent is in fact the Beneficial Owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the Representative is duly authorized to request redemption on behalf of the applicable Beneficial Owner), all redemption requests, to be effective, shall be delivered by 18 the Representative to the Trustee, with a copy to the Corporation, and shall be in the form of a Redemption Request (with appropriate changes to reflect the fact that such Redemption Request is being executed by a Representative) and, in addition to all documents that are otherwise required to accompany a Redemption Request, shall be accompanied by the Debenture that is the subject of such request. Section 4.02. Withdrawal. Any Redemption Request may be withdrawn by the person(s) presenting the same upon delivery of a written request for such withdrawal given by the Participant on behalf of such person to the Depositary and by the Depositary to the Trustee prior to payment thereof by the Corporation. ARTICLE 5 COVENANTS Section 5.01. Payment of Debentures. The Corporation shall pay the principal of and interest on the Debentures on the dates and in the manner provided in the Debentures. Principal and interest shall be considered paid on the date due if the Trustee or any Paying Agent holds on that date money sufficient to pay all principal and interest then due, provided that, if Debentures are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture. To the extent lawful, the Corporation shall pay interest on (i) overdue principal at the rate borne by the Debentures and (ii) overdue installments of interest at the same rate. Section 5.02. Reporting. The Corporation shall file with the Trustee within 15 days after it files them with the SEC copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Corporation is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Corporation also shall comply with the other provisions of TIA (S)314(a). The Corporation shall furnish to Holders of Debentures, upon request, annual financial statements and quarterly reports containing unaudited financial statements. Section 5.03. Corporate Existence. Subject to ARTICLE 6, the Corporation will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) and franchises of the Corporation; provided, however, that the Corporation shall not be required to preserve any such right or franchise, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Corporation taken as a whole and that the loss thereof is not, and will not be, adverse in any material respect to the Holders. 19 Section 5.04. Compliance Certificate. The Corporation shall deliver to the Trustee within 30 days after the end of each fiscal year of the Corporation an Officers' Certificate stating whether or not the signers know of any Default that occurred during the fiscal year. If they do, the certificate shall describe the Default and its status. ARTICLE 6 SUCCESSORS Section 6.01. When Corporation May Merge, etc. The Corporation shall not consolidate or merge into, or sell or transfer or lease all or substantially all of its assets to, any Person unless: (1) the Person is a corporation organized and existing under the Laws of the United States, or any State thereof or the District of Columbia; (2) the Person assumes by supplemental indenture all the obligations of the Corporation under the Debentures and this Indenture except that it need not assume the obligations of the Corporation as to conversion of the Debentures if pursuant to Section 11.15, the Corporation or another Person obligates itself by supplemental indenture to deliver securities, cash or other assets upon conversion of the Debentures; (3) immediately after the transaction no Default exists; and (4) the Corporation has delivered to the Trustee an Officer's Certificate and Opinion of Counsel each stating that the transaction and supplemental indenture comply with this ARTICLE and Section 11.15. The surviving, transferee or lessee corporation shall be the successor Corporation (a "Successor") and deemed to and be substituted for the Corporation under the Indenture and the predecessor Corporation in the case of a transfer or lease shall be released from all obligations and covenants under the Indenture and Debentures. Section 6.02. Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Corporation in accordance with Section 6.01, the successor corporation formed by such consolidation or into or with which the Corporation is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Corporation under this Indenture with the same effect as if such successor person has been named as the Corporation herein; provided, however, that the predecessor Corporation in the case of a sale, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of and interest on the Debentures. 20 ARTICLE 7 DEFAULTS AND REMEDIES Section 7.01. Events of Default. An "Event of Default" occurs if: (1) the Corporation defaults in the payment of interest on any Debenture when the same becomes due and payable and the Default continues for a period of 30 days; (2) the Corporation defaults in the payment of the principal of any Debenture when the same becomes due and payable at maturity, upon redemption or otherwise; (3) the Corporation fails to comply with any of its other agreements in the Debentures or this Indenture and the Default continues for the period and after the notice specified below; (4) the Corporation defaults in the payment of any indebtedness having an outstanding principal balance of $2,000,000 or more, whether such indebtedness now exists or shall hereafter be created, and any period of grace with respect thereto shall have expired, which default shall result in such indebtedness being declared due and payable prior to the date on which it would otherwise become due and payable, and such default in payment is not cured, or such acceleration shall not be rescinded, annulled or obviated through payment, within thirty days after written notice to the Corporation from the Trustee or to the Corporation and to the Trustee from the Holders of not less than 25% in principal amount of the Debentures then outstanding under the Indenture, provided that no default shall occur hereunder if there shall have been delivered to the Trustee an Officers' Certificate stating that the Corporation is contesting in good faith the existence of such default in payment or event of default; (5) the Corporation pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law, and the order or decree remains unstayed and in effect for 60 days, that: (A) is for relief against the Corporation in an involuntary case, (B) appoints a Custodian of the Corporation or for all or substantially all of its property, or 21 (C) orders the liquidation of the Corporation. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A Default under clause (3) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the Debentures then outstanding notify the Corporation of the Default and the Corporation does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." The Trustee shall, if requested to do so by the holders of 25% in principal amount of the Debentures, notify the Corporation of the Default pursuant to this Section. Subject to the provisions of Sections 8.01 and 8.02, the Trustee shall not be charged with knowledge of any Event of Default unless written notice thereof shall have been given to a Trust Officer of the Trustee at the Corporate Trust Office by the Corporation, the Paying Agent, the Holder of a Debenture or an agent of such Holder. Section 7.02. Acceleration. If an Event of Default occurs and is continuing, the Trustee, by notice to the Corporation, or the Holders of at least 25% in principal amount of the Debentures then outstanding, by notice to the Corporation and the Trustee, may declare the principal of, and accrued interest on, all the Debentures to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. The Holders of a majority in principal amount of the Debentures then outstanding, by notice to the Trustee, may rescind an acceleration of all the Debentures and its consequences if (i) all existing Events of Default have been cured or waived except nonpayment of the principal and interest that has become due solely because of the acceleration and (ii) if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 7.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Debentureholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in such Event of Default. All remedies are cumulative to the extent permitted by law. 22 Section 7.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Debentures, by notice to the Trustee, may waive an existing Default and its consequences, except a Default in the payment of the principal of or interest on any Debenture, a Default under ARTICLE 11 hereof, an uncured failure to make any redemption payment or an uncured default with respect to a provision which cannot be modified under the terms of this Indenture without the consent of each Holder affected. Section 7.05. Control by Majority. The Holders of a majority in principal amount of the Debentures then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Debentureholders, or would involve the Trustee in personal liability; provided, that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 7.06. Limitation on Suits. A Debentureholder may pursue a remedy with respect to this Indenture or the Debentures only if: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the Debentures then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the Debentures then outstanding do not give the Trustee a direction inconsistent with the request. A Debentureholder may not use this Indenture to prejudice the rights of another Debentureholder or to obtain a preference or priority over another Debentureholder. Section 7.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to receive payment of principal and interest on the Debenture, on or after the respective due dates expressed in the Debenture, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. 23 Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to bring suit for the enforcement of the right to convert the Debenture shall not be impaired or affected without the consent of the Holder. Section 7.08. Collection Suit by Trustee. If an Event of Default in payment of interest or principal specified in Section 7.01(1) or 7.01(2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Corporation for the whole amount of unpaid principal and accrued interest remaining unpaid. Section 7.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Debentureholders allowed in any judicial proceedings relative to the Corporation, its creditors or its property, and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceeding is hereby authorized by each Debentureholder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Debentureholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses and disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 8.07. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Debentureholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Debentureholder thereof, or to authorize the Trustee to vote in respect of the claim of any Debentureholder in any such proceeding. Section 7.10. Priorities. If the Trustee collects any money pursuant to this ARTICLE, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 8.07; ----- Second: to holders of Senior Debt to the extent required by ARTICLE 12; ------ Third: to Debentureholders for amounts due and unpaid on the Debentures ----- for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for principal and interest, respectively; and Fourth: to the Corporation. ------ The Trustee may fix a record date and payment date for any payment to Debentureholders pursuant to this ARTICLE. 24 Section 7.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 7.07 or a suit by Holders of more than 10% in principal amount of the Debentures. Section 7.12. Waiver of Stay or Extension Laws. The Corporation covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of the Indenture; and the Corporation (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 7.13. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Corporation, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE 8 TRUSTEE Section 8.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are expressly and specifically set forth in this Indenture and no implied covenants or duties shall be read into this Indenture against the Trustee. No permissive power, right or remedy conferred upon the Trustee hereunder shall be construed to impose a duty to exercise such power, right or remedy. 25 (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as otherwise agreed with the Corporation. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 8.02. Rights of Trustee. Except as otherwise provided in Section 8.01: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through attorneys, consultants and agents and shall not be responsible for the misconduct or negligence of any such attorneys, consultants and agents appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. 26 (e) The Trustee shall not be bound to recognize any person as an owner of any Debenture or take any action at the request of any such person unless such Debenture shall be deposited with the Trustee or satisfactory evidence of ownership of such Debenture shall be furnished to the Trustee. (f) At all reasonable times the Trustee and its duly authorized agents, accountants, attorneys and experts shall have the right to inspect fully all books, papers and records of the Corporation relating to the Debentures and to take such photocopies and memoranda therefrom and in regard thereto as may be desired. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights and powers. (h) Whether or not herein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this ARTICLE 8 and shall apply to the Trustee in all of its capacities provided for in this Indenture including its capacity as any Agent, as the case may be. The immunities and exceptions from liability of the Trustee shall extend to its officers, directors, employees and agents. Section 8.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with the Corporation or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 8.10 and 8.11. Section 8.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity, priority or adequacy of this Indenture or the Debentures, it shall not be accountable for the Corporation's use of the proceeds from the Debentures, and it shall not be responsible for any statement in any official statement, offering memorandum, other disclosure material prepared or distributed with respect to the Debentures or in the Debentures other than its authentication. Section 8.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Debentureholders a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of the principal of or interest on any Debenture, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Debentureholders. The Trustee shall not be required to take notice of any default or other fact or event hereunder unless and until the Trustee shall be specifically notified in writing of such default, fact or event. 27 Section 8.06. Reports by Trustee to Holders. Within 60 days after each December 31 beginning with the December 31 following the date of this Indenture, the Trustee shall mail to each Debentureholder a brief report dated as of such reporting date that complies with TIA (S)313(a). The Trustee also shall comply with TIA (S)313(b)(2). A copy of each report at the time of its mailing to Debentureholders shall be filed with the SEC and each stock exchange, if any, on which the Debentures are listed. The Corporation shall notify the Trustee when the Debentures are listed on any Stock exchange. Section 8.07. Compensation and Indemnity. The Corporation shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Corporation shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and out-of-pocket expenses of the Trustee's agents and counsel. The Corporation shall indemnify the Trustee against any loss or liability incurred by it. The Trustee shall notify the Corporation promptly of any claim for which it may seek indemnity. The Corporation shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Corporation shall pay the reasonable fees and expenses of such counsel. The Corporation need not pay for any settlement made without its consent. This indemnity clause shall survive the payment of the Debentures. The Trustee may engage legal counsel who may be counsel to the Corporation and shall not be liable for any act or omission taken or suffered in good faith reliance on the opinion of such counsel selected with due care. The Corporation need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Corporation's payment obligations in this Section, the Trustee shall have a lien prior to the Debentures on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Debentures. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 7.01(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 8.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. 28 The Trustee may resign by so notifying the Corporation. The Holders of a majority in principal amount of the Debentures may remove the Trustee by so notifying the Trustee and the Corporation. The Corporation may remove the Trustee if: (1) the Trustee fails to comply with Section 8.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or public officer takes charge of the Trustee or its property; or (4) the Trustee become incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Corporation shall promptly appoint a successor Trustee. Within one year after the successor Trustee assumes office, the Holders of a majority in principal amount of the Debentures may appoint a successor Trustee to replace the successor Trustee appointed by the Corporation. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Corporation or the Holders of at least 10% in principal amount of the Debentures then outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 8.10, any Debentureholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Corporation. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Debentureholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 8.07. Section 8.09. Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. Section 8.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA (S) 310(a)(l). The Trustee shall always have a combined capital and surplus and undivided profits of at least $15,000,000 as set forth in its most recent published annual report of condition. The Trustee is subject to TIA (S) 310(b), including the optional provision permitted by the second sentence of TIA (S) 310(b)(9). 29 Section 8.11. Preferential Collection of Claims Against Corporation. The Trustee is subject to TIA (S)311(a), excluding any creditor relationship listed in TIA (S)311(b). A Trustee who has resigned or been removed is subject to TIA (S)311(a) to the extent indicated therein. Section 8.12. Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as a trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture, and in particular in case of the enforcement on an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or Co-Trustee. The Trustee may appoint an additional individual or institution as a separate or Co-Trustee, in which event each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture, to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or Co-Trustee but only to the extent necessary to enable such separate or Co-Trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or Co-Trustee shall run to and be enforceable by either of them. Should any deed, conveyance or instrument in writing from the Corporation be required by the separate or Co-Trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to it such properties, rights, powers, trusts, duties and obligations, including particularly the right to be paid its fees and expenses for services rendered, any and all such deeds, conveyances and instruments in writing shall, on request, be executed, acknowledged and delivered by the Corporation. In case any separate or Co- Trustee, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers trusts, duties and obligations of such separate or Co-Trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new Co- Trustee successor to such separate or Co-Trustee. ARTICLE 9 DISCHARGE OF INDENTURE Section 9.01. Termination of Corporation's Obligations. The Corporation may at any time terminate all of its obligations under this Indenture if the Corporation irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay principal and interest on the Debentures at maturity or on redemption, as the case may be. The Corporation may make the deposit only during the one-year period prior to maturity or concurrently with or after the notice to the Trustee provided for in 30 Section 3.02. However, the Corporation's obligations in Sections 2.03, 2.04, 2.05, 2.06, 5.01, 8.07, 8.08, 9.03 and in ARTICLE 11, shall survive until the Debentures are no longer outstanding. Thereafter, the Corporation's obligations in Sections 8.07 and 9.03 shall survive. After a deposit made pursuant to this Section 9.01, the Trustee upon request shall acknowledge in writing the discharge of the Corporation's obligations under this Indenture except for those surviving obligations specified above. In order to have money available on a payment date to pay principal or interest on the Debentures, the U.S. Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money. The U.S. Government Obligations shall not be callable at the issuer's option. "U.S. Government Obligations" means direct obligations of the United States for the payment of which the full faith and credit of the United States is pledged. Section 9.02. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 9.01. It shall apply the deposited money and the money from the U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Debentures. Section 9.03. Repayment to Corporation. The Trustee and the Paying Agent shall promptly pay to the Corporation upon request any excess money or securities held by them at any time. The obligation of the Trustee and the Paying Agent to pay such excess money or securities to the Corporation shall survive the payment, conversion and/or cancellation of all of the Debentures until all such excess funds or securities have been so paid. The Trustee and the Paying Agent shall pay to the Corporation upon request any money held by them for the payment of principal or interest that remains unclaimed for two years. After payment to the Corporation, Debentureholders entitled to the money must look solely to the Corporation for payment as general creditors unless an applicable abandoned property law designates another person. ARTICLE 10 AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 10.01. Without Consent of Holders. The Corporation and the Trustee may amend or supplement this Indenture or the Debentures without notice to or consent of any Debentureholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Sections 6.01 and 11.15; 31 (3) to provide for uncertificated Debentures in addition to or in place of certificated Debentures; or (4) to make any change that does not materially adversely affect the rights of any Debentureholder hereunder. Section 10.02. With Consent of Holders. The Corporation and the Trustee may amend or supplement this Indenture or the Debentures with the written consent of the Holders of at least a majority in principal amount of the Debentures then outstanding. Without the consent of each Debentureholder affected, however, an amendment under this Section may not: (1) reduce the amount of Debentures whose Holders must consent to an amendment or waiver; (2) reduce the rate of or change the time for payment of interest on any Debenture; (3) reduce the principal of or change the maturity of any Debenture; (4) waive a Default in the payment of the principal of or interest on any Debenture; (5) make any Debenture payable in money other than that stated in the Debenture; or (6) modify the provisions of Sections 7.04, 7.07 and 10.02 (second sentence). To secure a consent of the Debentureholders under this Section, it shall not be necessary for the Debentureholders to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or supplement under this Section becomes effective, the Corporation shall mail to Debentureholders a notice briefly describing the amendment. Section 10.03. Compliance with Trust Indenture Act. Every amendment to or supplement of this Indenture or the Debentures shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 10.04. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Debenture is a continuing consent by the Holder and every subsequent Holder of a Debenture or portion of a Debenture that evidences the same debt as the consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, any such Holder or subsequent Holder may revoke the consent as to his Debenture or portion of a Debenture if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. 32 After an amendment or waiver becomes effective it shall bind every Debentureholder, unless it is of the type described in any of clauses (1) through (6) of Section 10.02. In such case, the amendment or waiver shall bind each Debentureholder who has consented to it and every subsequent Holder who holds a Debenture that evidences the same debt as the consenting Debentureholder's Debenture. Section 10.05. Notation on or Exchange of Debentures. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Debenture thereafter authenticated. The Corporation in exchange for all Debentures may issue and the Trustee shall authenticate new Debentures that reflect the amendment, supplement or waiver. Section 10.06. Trustee Protected. The Trustee shall sign all supplemental Indentures, except that the Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE 11 CONVERSION Section 11.01. Conversion Privilege; Conversion Price. A Holder of a Debenture, at his sole option, may convert such Debenture into Common Stock at any time prior to the close of business on June 25, 2021. If a Debenture is called for redemption by the Corporation, the Holder thereof may convert such Debenture into Common Stock at any time prior to the close of business on the fifth Business Day preceding the Redemption Date. The number of shares of Common Stock issuable upon conversion of a Debenture is determined by dividing the principal amount to be converted by the Conversion Price in effect on the Conversion Date. The initial Conversion Price is stated in paragraph 9 of the Debenture. The Conversion Price is subject to adjustment as described in this ARTICLE 11. A Holder may convert a portion of a Debenture only if the portion to be converted is $1,000 or an integral multiple thereof. Provisions in this Indenture which apply to the conversion of all of a Debenture also apply to a portion of such Debenture. Section 11.02. Conversion Procedure. To convert a Debenture: (1) the Holder must provide written notice to the Participant of such Holder's intent to convert all or part of such Holder's interest in the Debenture into shares of Common Stock of the Corporation which notice shall specify the principal amount of the interest in the Debenture to be converted; 33 (2) the Participant shall thereupon deliver to the Depositary a written request for conversion containing the name of the Holder, the Holder's interest in the Debenture and the amount of such Holder's interest to be converted. The Depositary will, on receipt thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to conversion requests received by it including date of receipt and the name of the Participant filing the conversion request. The Trustee will immediately send a copy of each conversion request it receives to the Corporation and the Conversion Agent. The Depositary, the Corporation, the Trustee and the Conversion Agent may conclusively assume, without independent investigation, that the statements contained in each conversion request are true and correct and shall have no responsibility for reviewing any documents submitted to the Participant by the Holder or for determining whether the Holder is in fact the Beneficial Owner of the interest in the Debenture to be redeemed; (3) The Holder shall furnish appropriate endorsements and transfer documents if required by the Registrar or the Conversion Agent; and (4) The Holder shall pay any transfer or similar tax required by Section 11.04. The date on which all of such requirements are met is the Conversion Date. As soon as practicable thereafter, the Corporation shall deliver through the Conversion Agent a certificate for the number of full shares of Common Stock issuable upon the conversion and a check for any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record of the Corporation on and after the Conversion Date. No payment or adjustment will be made for accrued interest on a converted Debenture. If a Holder converts more than one Debenture at the same time, the number of full shares issuable upon the conversion shall be based on the total principal amount of the Debentures converted. Section 11.03. Fractional Shares. The Corporation will not issue a fractional share of Common Stock upon conversion of a Debenture. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined by multiplying the current market price of a full share by the fraction and rounding the result to the nearest cent. The current market price of a share of Common Stock is the Quoted Price of the Common Stock on the last trading day prior to the Conversion Date. In the absence of such a quotation, the Corporation shall determine the current market price on the basis of such quotations as it considers appropriate. Section 11.04. Taxes on Conversion. If a Holder of a Debenture converts it, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the shares are issued in a name other than the Holder's name. 34 Section 11.05. Corporation to Provide Stock. The Corporation shall at all times reserve and have available, free from pre-emptive rights out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Debentures. All shares of Common Stock which may be issued upon conversion of the Debentures shall be fully paid and nonassessable Before taking any action that would cause an adjustment reducing the Conversion Price below the then par value (if any) of the shares of Common Stock issuable upon conversion of the Debentures, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of such Common Stock at such Conversion Price. The Corporation will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Debentures and will endeavor to list such shares on each national securities exchange, if any, on which its Common Stock is then listed. Section 11.06. Adjustment for Change in Capital Stock. If the Corporation: (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (2) subdivides its outstanding shares of Common Stock into a greater number of shares; (3) combines its outstanding shares of Common Stock into a smaller number of shares; (4) makes a distribution on its Common Stock in shares of its Capital Stock other than Common Stock; or (5) issues by reclassification of its Common Stock any shares of its Capital Stock, then the conversion privilege and the Conversion Price in effect immediately prior to such action shall be adjusted so that the Holder of a Debenture thereafter converted may receive the number of shares of Capital Stock of the Corporation which he would have owned immediately following such action if he had Converted the Debenture immediately prior to such action. Subject to Section 11.10, the adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. 35 If after an adjustment a Holder of a Debenture, upon conversion of such Debenture, may receive shares of two or more classes of Capital Stock of the Corporation, the Board of Directors shall determine the allocation of the adjusted Conversion Price between the classes of Capital Stock. After such allocation, the conversion privilege and the Conversion Price with respect to each class of Capital Stock shall thereafter be subject to adjustment on terms comparable to those with respect to Common Stock in this ARTICLE. Section 11.07. Adjustment for Rights Issue. If the Corporation distributes any rights or warrants to all holders of its Common Stock entitling them for a period expiring within 60 days after the record date mentioned below to purchase shares of Common Stock at a price per share less than the current market price per share on that record date, the Conversion Price shall be adjusted in accordance with the formula: 0 + (N x P) ------- C' = C x ( M ) ----------- 0 + N where: C' = the adjusted Conversion Price. C = the current Conversion Price. 0 = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the current market price per share of Common Stock on the record date. Subject to Section 11.10, the adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights or warrants. If at the end of the period during which such warrants or rights are exercisable, not all warrants or rights shall have been exercised, the conversion price shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued. Section 11.08. Adjustment for Other Distributions. If the Corporation distributes to all holders of its Common Stock any of its assets or debt securities or any rights or warrants to purchase securities of the Corporation, the Conversion Price shall be adjusted in accordance with the formula: C' = C x (M - F) --------- M 36 where: C' = the adjusted Conversion Price. C = the current Conversion Price. M = the current market price per share of Common Stock on the record date mentioned below. F = the fair market value on the record date of the assets, securities, rights or warrants applicable to one share of Common Stock. The Corporation shall determine the fair market value. Subject to Section 11.10, the adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. This Section does not apply to cash dividends or cash distributions paid out of consolidated current or retained earnings as shown on the books of the Corporation. Also, this Section does not apply to rights or warrants referred to in Section 11.07. Section 11.09. Current Market Price. For purposes of Sections 11.07 and 11.08, the current market price per share of Common Stock on any date is the average of the Quoted Prices of the Common Stock for 30 consecutive trading days commencing 45 trading days before the date in question. In the absence of one or more such quotations, the Board of Directors shall determine the current market price on the basis of such quotations as it considers appropriate. Section 11.10. When Adjustment May Be Deferred. No adjustment in the Conversion Price need be made pursuant to Section 11.06 unless the adjustment would require an increase or decrease of at least 1% in the Conversion Price. No adjustment in the Conversion Price need be made pursuant to Section 11.07 or 11.08 unless the adjustment would require an increase or decrease of at least 5% in the Conversion Price. Any adjustments that are not made pursuant to Section 11.06 shall be carried forward and taken into account in the calculation of any subsequent adjustment pursuant to Section 11.06. Any adjustments that are not made pursuant to either Section 11.07 or 11.08 shall be carried forward and taken into account in the calculation of any subsequent adjustment pursuant to Sections 11.07 or 11.08. All calculations under this ARTICLE shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Section 11.11. When No Adjustment Required. No adjustment need be made for a transaction referred to in Sections 11.06, 11.07 or 11.08 if Debentureholders are to participate in the transaction on a basis and with notice that the 37 Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction. No adjustment need be made for rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value or no par value of the Common Stock. To the extent the Debentures become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. Section 11.12. Notice of Adjustment. Whenever the Conversion Price is adjusted, the Corporation shall promptly mail to Debentureholders a notice of the adjustment. The Corporation shall file with the Trustee a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct. Section 11.13. Voluntary Reduction. The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 days and if the reduction is irrevocable during the period. Whenever the Conversion Price is reduced, the Corporation shall mail to Debentureholders a notice of the reduction. The Corporation shall mail the notice at least 15 days before the date the reduced Conversion Price takes effect. The notice shall state the reduced Conversion Price and the period it will be in effect. A reduction of the Conversion Price does not change or adjust the Conversion Price otherwise in effect for purposes of Sections 11.06 through 11.08. Section 11.14. Notice of Certain Transactions. If: (1) the Corporation takes any action that would require an adjustment in the Conversion Price pursuant to Section 11.06, 11.07 or 11.08 and if the Corporation does not allow Debentureholders to participate pursuant to Section 11.11; (2) the Corporation takes any action that would require a supplemental indenture pursuant to Section 11.15; or (3) there is a liquidation or dissolution of the Corporation, 38 the Corporation shall cause to be filed with the Trustee and the Conversion Agent and shall mail to Debentureholders a notice stating the proposed record date (or other applicable determination date) for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable in connection with such transaction. The Corporation shall mail the notice at least 20 days before the record date. Failure to mail the notice or any defect in it shall not affect the validity of the transaction. Section 11.15. Reorganization of Corporation. If the Corporation is a party to a transaction subject to Section 6.01 or a merger which reclassifies or changes its outstanding Common Stock, the person obligated to deliver securities, cash or other assets upon conversion of Debentures shall enter into a supplemental indenture. If the issuer of securities deliverable upon conversion of Debentures is an Affiliate of the surviving, transferee or lessee corporation, that issuer shall join in the supplemental indenture. The supplemental indenture shall provide that the Holder of a Debenture may convert it into the kind and amount of securities, cash or other assets which he would have owned immediately after the consolidation, merger, transfer or lease if he had converted the Debenture immediately before the effective date of the transaction. The supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this ARTICLE. The successor Corporation shall mail to Debentureholders a notice briefly describing the supplemental indenture. If this Section applies, Section 11.06 does not apply. Section 11.16. Corporation Determination Final. Any determination that the Corporation or the Board of Directors must make pursuant to Sections 11.03, 11.06, 11.07, 11.08, 11.09, 11.10 or 11.11 is conclusive. Section 11.17. Trustee's Disclaimer. The Trustee has no duty to determine when an adjustment under this ARTICLE should be made, how it should be made or what it should be. The Trustee has no duty to determine whether any provisions of a supplemental indenture under Section 11.15 are correct. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Debentures. The Trustee shall not be responsible for the Corporation's failure to comply with this ARTICLE. Each Conversion Agent other than the Corporation shall have the same protection under this Section as the Trustee. 39 ARTICLE 12 SUBORDINATION Section 12.01. Agreement to Subordinate. The Debt evidenced by the Debentures is subordinated in right of payment, to the extent and in the manner provided in the Indenture, to the prior payment of all Senior Debt. The subordination provisions are for the benefit of and enforceable by the holders of Senior Debt. Section 12.02. Liquidation, Dissolution, Bankruptcy. Upon any payment or distribution of the assets of the Corporation to creditors upon a total or partial liquidation or a total or partial dissolution of the Corporation or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Corporation or its property: (1) holders of Senior Debt are entitled to receive payment in full in cash of all Obligations in respect of Senior Debt, including all interest accrued or accruing on Senior Debt after the commencement of any bankruptcy, insolvency or reorganization or similar case or proceeding at the contract rate (including, without limitation, any contract rate applicable upon default) specified in the relevant documentation, whether or not the claim for the interest is allowed as a claim in the case or proceeding with respect to the Senior Debt (only such payment constituting "payment in full") before Holders will be entitled to receive any payment of principal of or interest on the Debentures; and (2) until the Senior Debt is paid in full and payment has been made to the Trustee for amounts due under Section 8.07, any distribution to which Holders would be entitled but for these subordination provisions shall instead be made to holders of Senior Debt and the Trustee as their interests may appear. In the event that payment of principal or interest on the Debentures is prohibited by this Section, the holders of Senior Debt shall provide written notice to the Trustee of such prohibition, unless the Trustee already has actual notice of the bankruptcy, reorganization, insolvency, receivership, or similar proceeding. Section 12.03. Default on Designated Senior Debt. (a) The Corporation shall not pay the principal of or interest on the Debentures or make any deposit pursuant to the provisions of ARTICLE 9 and shall not, pursuant to the provisions of ARTICLE 3 or otherwise, repurchase, redeem or otherwise retire any Debentures (collectively, "pay the Debentures") if at the time any Designated Senior Debt has not been paid when due, whether at maturity, upon redemption or mandatory repurchase, acceleration, or otherwise, and the default has not been cured or waived. In the event that payment of principal or interest on the Debentures is prohibited by this Section, the holders of the Senior Debt shall provide written notice to the Trustee of such prohibition, unless the Trustee already has actual notice of the nonpayment. (b) During the continuance of any other default with respect to any Designated Senior Debt, the Corporation may not pay the Debentures for a period (a "Payment Blockage Period"): (1) commencing upon the receipt by the Corporation and the Trustee of written notice of default from any holder of any Designated Senior Debt specifying an election to effect a Payment Blockage Period (a "Blockage Notice") and (2) ending one hundred eighty (180) days thereafter (or earlier if the Payment Blockage Period is terminated (i) by written notice to the Trustee and the Corporation from the 40 Person that gave the Blockage Notice, (ii) by repayment in full of such Senior Debt or (iii) because the default giving rise to the Blockage Notice is no longer continuing). Subject to the preceding paragraph, unless the holders of such Senior Debt have accelerated the maturity of such Senior Debt, the Corporation may resume payments on the Debentures after the Payment Blockage Period. (c) Not more than one Blockage Notice may be given by any holder of Designated Senior Debt in any consecutive 360-day period, irrespective of the number of defaults with respect to Designated Senior Debt during such period. No default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt whose holders initiated the Payment Blockage Period may be made the basis of the commencement of a subsequent Payment Blockage Period by the holders of such Designated Senior Debt, whether or not within a period of 360 consecutive days, unless the default has been cured or waived for a period of not less than 90 consecutive days. Section 12.04. When Distribution Must Be Paid Over. In the event that the Corporation shall make any payment to the Trustee on account of the principal or interest on the Debentures at a time when such payment is prohibited by Section 12.02 or Section 12.03, and the Trustee has been notified by any holder of the Senior Debt in writing of such prohibition, or the Trustee has actual notice of the event giving rise to such prohibition, then the Trustee shall hold such payment in trust for the benefit of the holders of the Senior Debt, until the Trustee receives written instructions from the holders of the Senior Debt who sent the related Blockage Notice, specifying to whom and in what amounts such funds shall be paid. Upon receipt of such written instructions, the Trustee shall forthwith pay over and deliver such amounts to such parties as so instructed. If a payment or other distribution is made to Holders that because of these subordination provisions should not have been made to them, the Holders that receive the distribution shall hold it in trust for holders of Senior Debt and pay it over to them as their interests may appear. Section 12.05. Subrogation A distribution made under these subordination provisions to holders of Senior Debt which otherwise would have been made to Holders is not, as between the Corporation and Holders, a payment by the Corporation on Senior Debt. After all Senior Debt is paid in full and until the Debentures are paid in full, Holders will be subrogated to the rights of holders of Senior Debt to receive payments in respect of Senior Debt, which, to the extent received by Holders, do not constitute, as between the Corporation and the Holders, payments by the Corporation on the Debentures. Section 12.06. Relative Rights; Subordination Not to Prevent Events of Default or Limit Right to Accelerate. These subordination provisions define the relative rights of Holders and holders of Senior Debt and do not impair, as between the Corporation and Holders, the obligation of the Corporation, which is absolute and unconditional, to pay principal of and interest on the Debentures in accordance with their terms. The failure to make a payment pursuant to the Debentures by reason of these subordination provisions does not prevent the occurrence of a 41 Default, nor do these subordination provisions have any effect on the right of the Holders or the Trustee to accelerate the maturity of the Debentures upon an Event of Default or prevent the Trustee or any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Debt to receive distributions otherwise payable to Holders. Section 12.07. Subordination May Not Be Impaired by Corporation. No right of any holder of Senior Debt to enforce the subordination of the Debentures will be impaired by any act or failure to act by the Corporation or by its failure to comply with the Indenture. Section 12.08. Rights of Trustee. (a) The Trustee may continue to make payments on the Debentures and will not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, the Trustee receives written notice satisfactory to it from the Corporation or a holder of Senior Debt that payments may not be made under this Article. (b) The Trustee in its individual or any other capacity may hold Senior Debt with the same rights, including rights under this Article, it would have if it were not Trustee. Nothing in this Article applies to claims of, or payments to, the Trustee under or pursuant to Section 8.07. Section 12.09. Distributions and Notices to, and Notices and Consents by, Representatives of Holders of Senior Debt. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their representative (if any). If there is a representative acting for the holders of any Senior Debt pursuant to the agreements governing such Senior Debt, notices or consents under the Indenture from holders of such Senior Debt may be given only by their representative. Section 12.10. Trustee Entitled to Rely. For the purpose of ascertaining the outstanding amount of Senior Debt, the holders thereof, and all other information relevant to making any payment or distribution to holders of Senior Debt pursuant to this Article, the Trustee and the Holders are entitled to rely upon an order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 12.02 are pending, a certificate of the liquidating trustee or other Person making a payment or distribution to the Trustee or to the Holders, or information provided by the holders of Senior Debt. The Trustee may defer any payment or distribution pending receipt of evidence or instructions satisfactory to it or a judicial determination regarding the rights of parties to receive the payment or distribution. 42 Section 12.11. Trustee to Effectuate Subordination. Each Holder by accepting a Debenture authorizes and directs the Trustee on behalf of the Holder to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Holders and the holders of Senior Debt as provided in this Article and appoints the Trustee as attorney- in-fact for any and all such purposes, including for the purpose of filing a claim in any proceedings of the nature referred to in Section 12.02. Section 12.12. Trustee Not Fiduciary for Holders of Senior Debt. The Trustee will not be deemed to owe any fiduciary duty to the holders of Senior Debt and will not be liable to any such holders if it mistakenly pays over or distributes to Holders, or to the Corporation or any other Person, any money or assets to which holders of Senior Debt are entitled by virtue of this Article. Section 12.13. Reliance by Holder of Senior Debt on Subordination Provisions; No Waiver. (a) Each Holder by accepting a Debenture acknowledges and agrees that these subordination provisions are, and are intended to be, an inducement and a consideration to each holder of Senior Debt, whether created or acquired before or after the issuance of the Debentures, to acquire or to hold such Senior Debt, and each holder of Senior Debt will be deemed conclusively to have relied on these subordination provisions in acquiring and holding such Senior Debt. (b) The holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring any liability or responsibility to the Holders, and without impairing the rights of holders of Senior Debt under these subordination provisions, do any of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding or secured; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (3) release any Person liable in any manner for the payment of Senior Debt; or (4) exercise or refrain from exercising any rights against the Corporation and any other Person. 43 ARTICLE 13 MISCELLANEOUS Section 13.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Section 13.02. Notices. Any notice or communication by the Corporation or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Corporation: --------------------- Southwest Water Company 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 Attn: Vice President Finance and Treasurer if to the Trustee: ----------------- Chase Manhattan Bank and Trust Company, National Association 101 California Street, Suite 3800 San Francisco, CA 94111 Attn: Hank Helley The Corporation or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Debentureholder shall be mailed by first- class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Debentureholder or any defect in it shall not affect its sufficiency with respect to other Debentureholders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Corporation mails a notice or communication to Debentureholders, it shall mail a copy to the Trustee and each Agent at the same time. All notices or communications shall be in writing, except as set forth below. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. 44 Section 13.03. Communication by Holders with Other Holders. Debentureholders may communicate pursuant to TIA (S)312(b) with other Debentureholders with respect to their rights under this Indenture or the Debentures. The Corporation, the Trustee, the Registrar and anyone else shall have the protection of TIA (S)312(c). Section 13.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Corporation to the Trustee to take any action under this Indenture, the Corporation shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 13.05. Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such Officer's Certificate or Opinion of Counsel has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officer's Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 13.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of Debentureholders. The Registrar, Paying Agent or Conversion Agent may make reasonable rules and set reasonable requirements for its functions. Section 13.07. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking institutions in the relevant jurisdiction are not required to be open. If a payment date is a Legal Holiday at a place 45 of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 13.08. No Recourse Against Others. No liability under the Debentures or Indenture shall inure to any director, officer, employee or stockholders as such, of the Corporation and each Debentureholder, by accepting the Debenture, waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. Section 13.09. Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. Section 13.10. Governing Law. The laws of the State of California shall govern this Indenture and the Debentures. Section 13.11. Table of Contents, Headings, etc. The Table of Contents, cross-reference sheet and headings of the ARTICLES and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 13.12. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Corporation or a subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.13. Successors. All agreements of the Corporation in this Indenture and the Debentures shall bind its Successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.14. Severability. In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 46 SIGNATURES CHASE MANHATTAN BANK AND TRUST SOUTHWEST WATER COMPANY, COMPANY, NATIONAL ASSOCIATION, as a Delaware corporation Trustee By By ______________________________ ______________________________ Title: Title: ___________________________ ___________________________ By By ______________________________ ______________________________ Title: Title: ___________________________ ___________________________ The "Trustee" The "Corporation" 47 EXHIBIT A --------- (Face of global debenture) THIS GLOBAL DEBENTURE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS DEBENTURE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06 OF THE INDENTURE, (II) THIS GLOBAL DEBENTURE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL DEBENTURE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL DEBENTURE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF SOUTHWEST WATER COMPANY. SOUTHWEST WATER COMPANY ___% Convertible Subordinate Debenture due July 1, 2021 No. ______________________ $ _______________ Southwest Water Company, a corporation organized under the laws of Delaware, for value received, hereby promises to pay to ______________________, or registered assigns, the principal sum of _______________________________ DOLLARS, on July 1, 2021 and to pay interest on said principal sum at the rate of ___% per annum calculated on the basis of a 360-day year of twelve 30-day months. Interest Payment Dates: January 1, April 1, July 1 and October 1 Record Dates: December 20, March 20, June 20 and September 20 IN WITNESS WHEREOF, Southwest Water Company has caused this Instrument to be signed in its name by the signature (or a facsimile thereof) of its President or a President, and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by the facsimile signature of its Secretary or an Assistant Secretary. Dated: Authenticated: A-1 (Back of global debenture) SOUTHWEST WATER COMPANY ____% Convertible Subordinate Debenture due July 1, 2021 1. Interest. Southwest Water Company, a corporation organized under the laws of Delaware ("Corporation"), promises to pay interest on the principal amount of this Debenture at the rate per annum shown above. The Corporation will pay interest quarterly on January 1, April 1, July 1 and October 1 of each year, commencing October 1, 2001. Interest on the Debentures will accrue from the most recent date to which interest has been paid, or, if no interest has been paid previously, from _______________; provided that, if there is no existing default in the payment of interest, and if this Debenture is authenticated between a record date referred to on the face hereof and the next succeeding interest date, interest shall accrue from the next interest payment date. 2. Method of Payment. The Corporation will pay interest on the Debentures (except defaulted interest) to the persons who are registered holders of Debentures at the close of business on the record date next preceding the interest payment date. The Corporation will pay interest to such holders on the next interest payment date even though Debentures are cancelled after the record date but on or before the interest payment date. Holders must surrender Debentures to a Paying Agent to collect principal payments. The Corporation will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Corporation may pay principal and interest by check payable in such money. The Corporation may mail an interest check to a holder's registered address. 3. Paying Agent, Registrar, Conversion Agent. Initially, Chase Manhattan Bank and Trust Company, National Association, will act as Paying Agent and Registrar. Initially, ChaseMellon Shareholder Services will act as Conversion Agent. The Corporation may change any Paying Agent, Registrar or Conversion Agent without notice. The Corporation may act in any such capacity. 4. Indenture. The Corporation issued the Debentures under an Indenture dated as of ________, 2001 ("Indenture"), between the corporation and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-7bbbb) as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Debentureholders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The Debentures are unsecured general obligations of the Corporation limited to $20,000,000 in aggregate principal amount. A-2 5. Redemption at Corporation's Option. The Corporation may, at its option, at any time on or after July 1, 2003, redeem all the Debentures or some of them from time to time after issuance at the following redemption prices (expressed in percentages of principal amount of the Debentures) plus unpaid accrued interest to the redemption date. If redeemed during the 12-month period beginning July 1: Year Redemption Price Year Redemption Price ---- ---------------- ---- ---------------- 2003 105% 2006 102% 2004 104% 2007 101% 2005 103% Thereafter 100% 6. Notice of Redemption. Notice of redemption at the Corporation's option will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of Debentures to be redeemed at his registered address as set forth in the Debenture register. Debentures in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. On and after the redemption date (if there is no default in the payment of the redemption price by the Corporation), interest ceases to accrue on Debentures or portions thereof called for redemption. 7. Redemption at Representative of Deceased Holder's Option. The personal representative, or surviving joint tenant(s), tenant by the entirety or tenant in common of a deceased Beneficial Owner (as hereinafter defined) (the "Representative") has the right to request redemption prior to stated maturity of all or part of his interest in the Debentures, and the Corporation will redeem the same subject to the limitations that the Corporation will not be obligated to redeem, during the period beginning with the original issuance of the Debentures and ending June 30, 2002, (the "Initial Period") and during any twelve month period ending June 30, thereafter (each such twelve month period being hereinafter referred to as a "Subsequent Period"), (i) on behalf of a deceased Beneficial Owner any interest in the Debentures which exceeds $25,000 principal amount or (ii) interests in the Debentures exceeding $400,000 in aggregate principal amount. A-3 The Corporation may, at its option, redeem interests of any deceased Beneficial Owner in the Debentures in the Initial Period or any Subsequent Period in excess of the $25,000 limitation. Any such redemption, to the extent that it exceeds the $25,000 limitation for any deceased Debenture Holder, shall not be included in the computation of the $400,000 aggregate limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. The Corporation may, at its option, redeem interests of deceased Beneficial Owners in the Debentures, in the Initial Period or any Subsequent Period, in an aggregate principal amount exceeding $400,000. Any such redemption, to the extent it exceeds the $400,000 aggregate limitation, shall not reduce the $400,000 aggregate limitation for any Subsequent Period. On any determination by the Corporation to redeem Debentures in excess of the $25,000 limitation or the $400,000 aggregate limitation, Debentures so redeemed shall be redeemed in the order of the receipt of Redemption Requests (as hereinafter defined) by the Trustee. 8. Representative's Request for Redemption. A request for redemption of an interest in the Debentures may be initiated by the Representative. The Representative shall deliver a request to the Participant (hereinafter defined) through whom the deceased Beneficial Owner owned such interest, in form satisfactory to the Participant, together with evidence of the death of the Beneficial Owner, evidence of the authority of the Representative satisfactory to the Participant, such waivers, notices or certificates as may be required under applicable state or federal law and such other evidence of the right to such redemption as the Participant shall require. The request shall specify the principal amount of the interest in the Debentures to be redeemed. The Participant shall thereupon deliver to the Depositary a request for redemption substantially in the form of Exhibit A hereto (a --------- "Redemption Request"). The Depositary will, on receipt thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to Redemption Requests received by it including date of receipt, the name of the Participant filing the Redemption Request and the status of such Redemption Request with respect to the $25,000 limitation and the $400,000 aggregate limitation. The Trustee will immediately file each Redemption Request it receives, together with the information regarding the eligibility thereof with respect to the $25,000 limitation and the $400,000 aggregate limitation, with the Company. The Depositary, the Company and the Trustee may conclusively assume, without independent investigation, that the statements contained in each Redemption Request are true and correct and shall have no responsibility for reviewing any documents submitted to the Participant by the Representative or for determining whether the applicable decedent is in fact the Beneficial Owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the Representative is duly authorized to request redemption on behalf of the applicable Beneficial Owner. Subject to the $25,000 limitation and the $400,000 aggregate limitation, the Corporation will, upon the death of any Beneficial Owner, redeem the interest of such Beneficial Owner in the Debentures within 60 days following receipt by the Corporation of a redemption request from the Trustee. If Redemption Requests exceed the aggregate principal amount of interests in Debentures required to be redeemed during the Initial Period or any Subsequent Period, then such excess Redemption Requests will be applied in the order received by the Trustee to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such interests. The Corporation may, at any time, notify the Trustee that it will redeem, A-4 on a date not less than 30 nor more than 60 days thereafter, all or any such lesser amount of Debentures for which Redemption Requests have been received but which are not then eligible for redemption by reason of the $25,000 limitation or the $400,000 aggregate limitation. Any Debentures so redeemed shall be redeemed in the order of receipt of Redemption Requests by the Trustee. The price to be paid by the Corporation for the Debentures to be redeemed pursuant to a Redemption Request is 100% of the principal amount thereof plus accrued but unpaid interest to the date of payment. No premium will be paid on any Debenture redeemed pursuant to this provision. Subject to arrangements with the Depositary, payment for interests in the Debentures which are to be redeemed shall be made to the Depositary upon presentation of Debentures to the Trustee for redemption in the aggregate principal amount specified in the Redemption Requests submitted to the Trustee by the Depositary which are to be fulfilled in connection with such payment. The principal amount of any Debentures acquired or redeemed by the Corporation other than by redemption at the option of any Representative of a deceased Beneficial Owner pursuant to this Section shall not be included in the computation of either the $25,000 limitation or the $400,000 aggregate limitation for the Initial Period or for any Subsequent Period. For purposes of this Section 8 and Section 7 above, a "Beneficial Owner" means the Person who has the right to sell, transfer or otherwise dispose of an interest in a Debenture and the right to receive the proceeds therefrom, as well as the interest and principal payable to the holder thereof. In general, a determination of beneficial ownership in the Debentures will be subject to the rules, regulations and procedures governing the Depositary and institutions that have accounts with the Depositary or a nominee thereof ("Participants"). In the case of any Debenture which is presented for redemption in part only, upon such redemption the Corporation shall execute and the Trustee shall authenticate and deliver to or on the order of the holder of such Debenture, without service charge, a new Debenture or Debentures, of any authorized denomination or denominations as requested by such holder, in aggregate principal amount equal to the unredeemed portion of the principal of the Debenture so presented. In the case of any Debenture or portion thereof which is presented for redemption pursuant to this paragraph and which has not been redeemed at the time the Corporation gives notice of its election to redeem Debentures pursuant to paragraph 5, such Debenture or portion thereof shall first be subject to redemption pursuant to paragraph 5 and if any such Debenture or portion thereof is not redeemed pursuant to paragraph 5 it shall remain subject to redemption pursuant to this paragraph. For purposes of this Section 8 and Section 7 above, an interest in a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Beneficial Owner and the death of a tenant by the entirety, joint tenant or tenant in common will be deemed the death of a Beneficial Owner. The death of a person, who, during his lifetime, was entitled to substantially all of the rights of a Beneficial Owner of an interest in the Debentures will be deemed the death of the Beneficial Owner, regardless of the recordation of such interest on the records of the Participant, if such rights can be established to the satisfaction of the Participant. Such interests shall be deemed to exist in typical cases of A-5 nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, community property or similar joint ownership arrangements, including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and any spouse, and trust and certain other arrangements where one person has substantially all of the rights of a Beneficial Owner during such person's lifetime. The Corporation may, at its option, purchase any Debentures for which Redemption Requests have been received in lieu of redeeming such Debentures. Any Debentures so purchased by the Corporation shall either be offered for sale and sold within 180 days after the date of purchase or presented to the Trustee for redemption and cancellation. Any Redemption Request may be withdrawn by the person(s) presenting the same upon delivery of a written request for such withdrawal given by the Participant on behalf of such person to the Depositary and by the Depositary to the Trustee prior to payment thereof by the Corporation. 9. Conversion. A Holder of a Debenture may convert it into Common Stock of the Corporation at any time before the close of business on June 25, 2021. If the Debenture is called for redemption, the holder may convert the Debenture at any time before the close of business on the fifth Business Day preceding the redemption date. The initial conversion price is $_____ per share, subject to adjustments due to certain events set forth in the Indenture. The number of shares of Common Stock issuable upon conversion of a Debenture is determined by dividing the principal amount to be converted by the conversion price in effect on the conversion date. On conversion, no payment or adjustment for interest will be made. The Corporation will issue a check in lieu of the issuance of a fraction of a share. To convert a Debenture: (1) the Holder must provide written notice to the Participant of such Holder's intent to convert all or part of such Holder's interest in the Debenture into shares of Common Stock of the Corporation which notice shall specify the principal amount of the interest in the Debenture to be converted; (2) the Participant shall thereupon deliver to the Depositary a written request for conversion containing the name of the Holder, the Holder's interest in the Debenture and the amount of such Holder's interest to converted. The Depositary will, on receipt thereof, forward the same to the Trustee. The Trustee shall maintain records with respect to conversion requests received by it including date of receipt and the name of the Participant filing the conversion request. The Trustee will immediately file each conversion request it receives with the Company and the Conversion Agent. The Depositary, the Company, the Trustee and the Conversion Agent may conclusively assume, without independent investigation, that the statements contained in each conversion request are true and correct and shall have no responsibility for reviewing any documents submitted to the Participant by the Holder or for determining whether the Holder is in fact the Beneficial Owner of the interest in the Debenture to be redeemed; A-6 (3) The Holder shall furnish appropriate endorsements and transfer documents if required by the Registrar or the Conversion Agent; and (4) The Holder shall pay any transfer or similar tax required by the Indenture. The date on which all of such requirements are met is the Conversion Date. As soon as practicable thereafter, the Corporation shall deliver through the Conversion Agent a certificate for the number of full shares of Common Stock issuable upon the conversion and a check for any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record of the Corporation on and after the Conversion Date. No payment or adjustment will be made for accrued interest on a converted Debenture. If a Holder converts more than one Debenture at the same time, the number of full shares issuable upon the conversion shall be based on the total principal amount of the Debentures converted. If the last day on which a Debenture may be converted is a Legal Holiday in a place where a Conversion Agent is located, the Debenture may be surrendered to that Conversion Agent on the next succeeding day that is not a Legal Holiday. A holder may convert a portion of a Debenture if the portion is $1,000 or an integral multiple thereof. The conversion price will be adjusted for dividends or distributions on Common Stock payable in the Corporation's stock; subdivisions, combinations and certain reclassifications of Common Stock; distribution to all holders of Common Stock of certain rights to purchase Common Stock at less than the then current market value; distribution to such holders of assets or debt securities of the Corporation or certain rights to purchase securities of the Corporation (excluding cash dividends or distribution from current or retained earnings). However, no adjustment need be made if holders may participate in the transaction or in certain other cases set forth in the Indenture. The Corporation may, from time to time, voluntarily reduce the conversion price for a period of time. If the Corporation is a party to a consolidation or merger or a transfer or lease of all or substantially all of its assets, the right to convert a Debenture into Common Stock may be changed into a right to convert the Debenture into securities, cash or other assets of the Corporation or another corporation. 10. Denominations, Transfer, Exchange. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Debentures may be registered and Debentures may be exchanged as provided in the Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption. Also, it need not A-7 exchange or register the transfer of any Debentures for a period of 15 days before a selection of Debentures to be redeemed. 11. Persons Deemed Owners. The registered holder of a Debenture may be treated as its owner for all purposes. 12. Amendments, Supplements and Waivers. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented, and any existing default may be waived, with the consent of holders of a majority in principal amount of the Debentures then outstanding. Without the consent of any Debentureholder, the Indenture or the Debentures may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for assumption of Corporation obligations to Debentureholders or to make any change that does not materially adversely affect the rights of any Debentureholder. 13. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Debentures; default in payment of principal on the Debentures; failure by the Corporation for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Debentures; default in the payment of indebtedness having an outstanding principal balance of $2,000,000 or more under certain circumstances; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Debentures may declare all the Debentures to be due and payable immediately. Debentureholders may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, holders of a majority in principal amount of the Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Debentureholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Corporation must furnish an annual compliance certificate to the Trustee. 14. Trustee Dealings with Corporation. Chase Manhattan Bank And Trust Company, National Association, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Corporation or its Affiliates, and may otherwise deal with the Corporation or its Affiliates, as if it were not Trustee. 15. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation shall not have any liability for any Obligations of the Corporation under the Debentures or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Debentureholder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. A-8 16. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Debentureholder or an assignee, such as TEN COM ( = tenants in common), TEN ENT ( = tenants by the entireties), JT TEN ( = joint tenants with right of survivorship and not as tenants in common), CUST ( = Custodian), and U/G/M/A ( = Uniform Gifts to Minors Act). _________________________________ The Corporation will furnish to any Debentureholder upon written request without charge a copy of the Indenture, which has in it the text of this Debenture in larger type. Requests may be made to: Southwest Water Company, 225 N. Barranca Ave., Suite 2200, West Covina, CA 91791-1605, Attention: Secretary. A-9 ASSIGNMENT FORM I/We assign and transfer this Debenture to [___________________________] (Insert assignee's social security or tax identification number, and supply signature guarantee) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type name, address and zip code of assignee) and irrevocably appoint _____________________________________________ agent to transfer this Debenture on the books of the Corporation. The agent may substitute another to act for him. Date:________________ Signature_______________________________ (Sign exactly as your name appears on the other side of this Debenture ) CONVERSION NOTICE I/We convert $______________ in principal amount of the Debenture(s) into Common Stock of the Corporation at the current conversion price. I/We request that the stock certificate be prepared in the same manner as is this Debenture or, alternatively, in the name of the person specified below: [___________________] (Insert other person's social Security or tax identification number, and supply signature guarantee) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type name, address and zip code of other person) Date:________________ Signature_______________________________ (Sign exactly as your name appears on the other side of this Debenture) Signature Guarantee if required: A-10 EXHIBIT B --------- FORM OF REDEMPTION REQUEST $20,000,000 SOUTHWEST WATER COMPANY % CONVERTIBLE SUBORDINATE DEBENTURES Due July 1, 2021 (The "Debentures") CUSIP NO. 845331AB3 The undersigned, (the "Participant"), does hereby certify, pursuant to the provisions of that certain Indenture of Trust dated as of June , 2001 (the "Indenture") made by Southwest Water Company (the "Company") (the "Issuer") and Chase Manhattan Bank and Trust Company, National Association, as Trustee (the "Trustee"), to the Depository Trust Company (the "Depositary"), the Company, the Issuer and the Trustee that: 1. [Name of deceased Beneficial Owner] is deceased. 2. [Name of deceased Beneficial Owner] had a $ interest in the above referenced Debenture. 3. [Name of Representative] is [Beneficial Owner's personal representative/other person authorized to represent the estate of the Beneficial Owner/surviving joint tenant/surviving tenant by the entirety/trustee of a trust] of [Name of deceased Beneficial Owner] and has delivered to the undersigned a request for redemption in form satisfactory to the undersigned, requesting that $ principal amount of said Debenture be redeemed pursuant to said Indenture. The documents accompanying such request, all of which are in proper form, are in all respects satisfactory to the undersigned and the [Name of Representative] is entitled to have the interest in the Debenture to which this Request relates redeemed. 4. The Participant holds the interest in the Debenture with respect to which this Request for Redemption is being made on behalf of [Name of deceased Beneficial Owner]. 5. The Participant hereby certifies that it will indemnify and hold harmless the Depositary, the Trustee, the Issuer and the Company (including their respective officers, directors, agents, attorneys and employees), against all damages, loss, cost, expense (including reasonable attorneys' and accountants' fees), obligations, claims or liability (collectively, the "Damages") incurred by the indemnified party or parties as a result of or in connection with the redemption of the interest in the Debenture to which this Request relates. The Participant will, at the request of the company, forward to the Company, a copy of the documents submitted by [Name of Representative] in support of the request for redemption. A-11 IN WITNESS WHEREOF, the undersigned has executed this Redemption Request as of _____________, 20___. [PARTICIPANT NAME] By:_________________________________ Name:_______________________________ Title:______________________________ A-12 EX-5 4 dex5.txt OPINION OF LATHAM AND WATKINS EXHIBIT 5 [L&W ISSUING OFFICE LETTERHEAD] July 13, 2001 Southwest Water Company 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 Re: Registration Statement No. 333-63196; $20,000,000 Aggregate Offering Price of Convertible Subordinate Debentures of Southwest Water Company Ladies and Gentlemen: In connection with the registration of $20,000,000 aggregate principal amount of Convertible Subordinate Debentures due July 1, 2021 (the "Securities"), by Southwest Water Company, a Delaware corporation (the "Company"), under the Securities Act of 1933, as amended (the "Securities Act"), on Form S-3 filed with the Securities and Exchange Commission (the "Commission"), on June 15, 2001 (File No. 333-63196), as amended by Amendment No. 1, filed with the Commission on July 6, 2001 and Amendment No. 2, expected to be filed with the Commission on July 13, 2001 (collectively, the "Registration Statement"), you have requested our opinion with respect to the matters set forth below. You have provided us with the prospectus (the "Prospectus") which is part of the Registration Statement. The Securities will be issued pursuant to an indenture between the Company and Chase Manhattan Bank and Trust Company, National Association as trustee (the "Trustee") in the form attached as Exhibit 4 to the Registration Statement, (the "Indenture"). The Securities will be convertible into shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"). In our capacity as your counsel in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization and issuance of the Securities, and for the purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and instruments, as we have deemed necessary or appropriate for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the federal laws of the United States, the internal laws of the State of California and the General Corporation Law of the State of Delaware, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or, in the case of Southwest Water Company July 13, 2001 Page 2 Delaware any other laws, or as to any matters of municipal law or the laws of any local agencies within any state. Subject to the foregoing and the other matters set forth herein, it is our opinion that as of the date hereof: (1) When (i) the Indenture has been duly executed and delivered by the Company and the Trustee, and (ii) the Securities have been duly issued in accordance with the Indenture (including, without limitation, the adoption by the Board of Directors of the Company of a resolution duly authorizing the issuance and delivery of the Securities), duly authenticated by the Trustee and duly executed and delivered on behalf of the Company against payment therefor in accordance with the terms and provisions of the Indenture and as contemplated by the Registration Statement and the Prospectus, and (iii) the Registration Statement and any required post-effective amendments thereto have all become effective under the Securities Act, and (iv) assuming that the terms of the Securities as executed and delivered are as described in the Registration Statement and the Prospectus, and (v) assuming that the Securities as executed and delivered do not violate any law applicable to the Company or result in a default under or breach of any agreement or instrument binding upon the Company, and (vi) assuming that the Securities as executed and delivered comply with all requirements and restrictions, if any, applicable to the Company, whether imposed by any court or governmental or regulatory body having jurisdiction over the Company, the Securities will constitute legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms. (2) When the Registration Statement and any required post-effective amendments thereto have become effective under the Securities Act, and assuming that (i) the terms of such shares as executed and delivered are as described in the Registration Statement and the Prospectus, (ii) at the time of issuance of such shares, the Company has a sufficient number of authorized but unissued shares under its Restated Certificate of Incorporation, as amended, (iii) such shares as executed and delivered do not violate any law applicable to the Company or result in a default under or breach of any agreement or instrument binding upon the Company, and (iv) such shares as executed and delivered comply with all requirements and restrictions, if any, applicable to the Company, whether imposed by any court or governmental or regulatory body having jurisdiction over the Company, the shares of Common Stock, when issued upon conversion of the Securities in accordance with the terms of the Indenture, will be validly issued, fully paid and nonassessable. The opinions rendered in paragraph 1 relating to the enforceability of the Securities are subject to the following exceptions, limitations and qualifications: (i) such opinions are subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors; (ii) enforceability of the Securities is subject to the effect of general principles of equity, including without limitation concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific Southwest Water Company July 13, 2001 Page 3 performance or injunctive relief regardless of whether considered in a proceeding in equity or at law, (iii) certain rights, remedies and waivers contained in the Indenture may be limited or rendered ineffective by applicable California law or judicial decisions governing such provisions, but such laws or judicial decisions do not render the Indenture invalid or unenforceable as a whole, (iv) we express no opinion concerning the enforceability of the waiver of rights or defenses contained in Section 7.12 of the Indenture, and (v) we express no opinion with respect to whether acceleration of Securities may affect the collectibility of that portion of the stated principal amount thereof which might be determined to constitute unearned interest thereon. To the extent that the obligations of the Company under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee has complied with any applicable requirements to file returns and pay taxes under the Franchise Tax Law of the State of California; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture, when duly authorized, executed and delivered by the Trustee will constitute the legally valid, binding and enforceable obligation of the Trustee enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as a trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the Indenture. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading "Legal Opinions" in the Prospectus included therein. This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without our prior written consent. Very truly yours, /s/ LATHAM & WATKINS EX-23.2 5 dex232.txt CONSENT OF KPMG LLP Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors Southwest Water Company We consent to the use of our reports incorporated herein by reference and to the reference to our firm under the heading "Experts" in the Registration Statement. KPMG LLP Los Angeles, California July 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----