**Exhibit 10.6**

 

AMENDED ANDRESTATED CREDIT AGREEMENTbetweenSOUTHWEST WATER COMPANYandUNION BANK OF CALIFORNIA, N.A.July 7, 2004

 

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TABLE OFCONTENTS

 
| ARTICLE I DEFINITIONS                                |                                               |                                   |
|-----------------------------------------------------------|----------------------------------------------------|----------------------------------------|
| SECTION 1.01.                                        | Defined Terms                                      |                                   |
| SECTION 1.02.                                        | Other Definitional Provisions                      |                                   |
|                                                      |                                               |                                   |
| ARTICLE II THE CREDIT                                |                                               |
| SECTION 2.01.                                        | The Revolving Loans                                |                                   |
|                                                      | (a)                                                | The Revolving Commitment               |   |
|                                                      | (b)                                                | Making the Revolving Loans             |   |
|                                                      | (c)                                                | Reduction of the Revolving  Commitment |   |
|                                                      | (d)                                                | Revolving  Note                        |   |
|                                                      | (e)                                                | Standby Letters of Credit.             |   |
| SECTION 2.02.                                        | The Term Loan                                      |                                   |
|                                                      | (a)                                                | Term  Loan Advance                     |   |
|                                                      | (b)                                                | Term Note                              |   |
| SECTION 2.03.                                        | Mandatory Repayment                                |                                   |
| SECTION 2.04.                                        | Interest Computation and Payment; Fee  Computation |                                   |
| SECTION 2.05.                                        | Unused commitment fee                              |                                   |
| SECTION 2.06.                                        | Annual Credit Facility Fee                         |                                   |
| SECTION 2.07.                                        | Front End Fee                                      |                                   |
|                                                      |                                               |
| ARTICLE III  GENERAL PROVISIONS CONCERNING THE LOANS |                                               |
| SECTION 3.01.                                        | Use of Proceeds                                    |                                   |
| SECTION 3.02.                                        | Payment on Non-Business Days                       |                                   |
| SECTION 3.03.                                        | Reduced Return                                     |                                   |
| SECTION 3.04.                                        | Indemnities                                        |                                   |
| SECTION 3.05.                                        | Funding Sources                                    |                                   |
|                                                      |                                               |                                   |
| ARTICLE IV  CONDITIONS OF LENDING                    |                                               |
| SECTION 4.01.                                        | Conditions Precedent to Initial Revolving Loan     |                                   |
| SECTION 4.02.                                        | Conditions Precedent to the Term Advance           |                                   |
| SECTION 4.03.                                        | Conditions Precedent to Each Revolving  Loan       |                                   |
|                                                      |                                               |
| ARTICLE V  REPRESENTATIONS AND WARRANTIES            |                                               |
| SECTION 5.01.                                        | Representations and Warranties                     |                                   |
|                                                      | (a)                                                | Organization                           |   |
|                                                      | (b)                                                | Authorization;  No Conflict            |   |
|                                                      | (c)                                                | Governmental Consents                  |   |
|                                                      | (d)                                                | Validity                               |   |
|                                                      | (e)                                                | Financial Condition                    |   |
|                                                      | (f)                                                | Litigation                             |   |
|                                                      | (g)                                                | Employee Benefit Plans                 |   |
|                                                      | (h)                                                | Disclosure                             |   |
|                                                      | (i)                                                | Environmental Matters                  |   |
|                                                      | (j)                                                | Employee  Matters                      |   |
|                                                           |                                                    |                                        |  |  |

 

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|                                | (k)                                                          | Solvency                                                 |   |
|-------------------------------------|--------------------------------------------------------------|----------------------------------------------------------|--------|
|                                | (l)                                                          | Title  to Properties                                     |   |
|                                | (m)                                                          | Tax Returns                                              |   |
|                                | (n)                                                          | Compliance with  Other Agreements and Applicable Laws    |   |
|                                | (o)                                                          | No Default                                               |   |
|                                | (p)                                                          | Regulation U;  Investment Company Act                    |   |
|                                | (q)                                                          | Intangible Assets                                        |   |
|                                |                                                         |
| ARTICLE VI COVENANTS           |                                                         |
| SECTION 6.01.                  | Affirmative Covenants                                        |                                                     |
|                                | (a)                                                          | Financial Information                                    |   |
|                                | (b)                                                          | Notices and Information                                  |   |
|                                | (c)                                                          | Corporate Existence, Etc.                                |   |
|                                | (d)                                                          | Payment of Taxes and Claims                              |   |
|                                | (e)                                                          | Maintenance of Properties;  Insurance                    |   |
|                                | (f)                                                          | Inspection                                               |   |
|                                | (g)                                                          | Compliance with Laws Etc.                                |   |
|                                | (h)                                                          | Hazardous Waste Studies                                  |   |
|                                | (i)                                                          | Equity Offering                                          |   |
| SECTION 6.02.                  | Negative Covenants                                           |                                                     |
|                                | (a)                                                          | Consolidated Tangible  Net Worth                         |   |
|                                | (b)                                                          | Consolidated Net Profit                                  |   |
|                                | (c)                                                          | EBITDA Coverage Ratio                                    |   |
|                                | (d)                                                          | Liens Etc.                                               |   |
|                                | (e)                                                          | Debt                                                     |   |
|                                | (f)                                                          | Consolidation,  Merger or Dissolution                    |   |
|                                | (g)                                                          | Loans, Investments,  Acquisitions, Secondary Liabilities |   |
|                                | (h)                                                          | Asset  Sales                                             |   |
|                                | (i)                                                          | Hostile Tender Offers                                    |   |
|                                | (j)                                                          | Distributions                                            |   |
|                                | (k)                                                          | Transactions with  Affiliates                            |   |
|                                | (l)                                                          | Books  and Records                                       |   |
|                                | (m)                                                          | Restructure                                              |   |
|                                |                                                         |
| ARTICLE VII EVENTS  OF DEFAULT |                                                         |
| SECTION 7.01.                  | Events of Default                                            |                                                     |
|                                |                                                         |
| ARTICLE VIII  MISCELLANEOUS    |                                                         |
| SECTION 8.01.                  | Amendments, Etc.                                             |                                                     |
| SECTION 8.02.                  | Notices, Etc.                                                |                                                     |
| SECTION 8.03.                  | Right of Setoff:  Security Interest in Deposit Accounts |                                                     |
| SECTION 8.04.                  | No Waiver; Remedies                                          |                                                     |
| SECTION 8.05.                  | Costs and Expenses                                           |                                                     |
| SECTION 8.06.                  | Participations                                               |                                                     |
| SECTION 8.07.                  | Effectiveness: Binding Effect                                |                                                     |
| SECTION 8.08.                  | Governing Law                                                |                                                     |
| SECTION 8.09.                  | Dispute Resolution                                           |                                                     |
|                                     |                                                              |                                                          |        |  |

 

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| SECTION 8.10. | Waiver of Notices          |   |
|--------------------|----------------------------|--------|
| SECTION 8.11. | Entire Agreement           |   |
| SECTION 8.12. | Severability of Provisions |   |
| SECTION 8.13. | Execution in Counterparts  |   |
| SECTION 8.14. | Further Assurances         |   |

 

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| Schedules                               |
|-----------------------------------------|
|                                    |
| 5.01(a) -  Subsidiaries            |
|                                    |
| 5.01(f) - Litigation                    |
| 5.01(i) -  Environmental Matters   |
| 6.02(d) -  Liens                   |
| 6.02(e) –  Other secured debt |
|                                    |
| Exhibits                                |
|                                    |
| A - Form of Revolving Note              |
| B - Form of Term Note                   |
| C - Form of Pledge Agreement            |
| D - Form of  Legal Opinion              |

 

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AMENDED ANDRESTATED CREDIT AGREEMENT

 

This Amended and RestatedCredit Agreement dated as of July 7, 2004 is entered into betweenSOUTHWEST WATER COMPANY, a Delaware corporation (the “Borrower”), and UNIONBANK OF CALIFORNIA, N.A., a national banking association (the “Bank”), withreference to the following facts:

 

RECITALS

 

A.                                   The Borrower and the Bank are parties tothe Credit Agreement dated as of June 6, 2003, as amended (collectively,the “Old Credit Agreement”).

 

B.                                     The Borrower and the Bank wish to amend,restate, replace and supercede the Old Credit Agreement on the terms andconditions set forth herein.

 

NOW THEREFORE, inconsideration of the premises and of the mutual covenants and agreementscontained herein, the parties hereto agree as follows:

 

ARTICLE IDEFINITIONS

 

SECTION 1.01.                 Defined Terms .  As used in this Agreement, the followingterms have the following meanings:

 

“Acquisition”: Anytransaction, or any series of related transactions, by which the Borrowerand/or any of its Subsidiaries directly or indirectly (a) acquires theongoing business or all or substantially all of the assets of any firm,partnership, joint venture, limited liability company, corporation or divisionthereof, (b) acquires in one transaction or as the most recenttransaction in a series of transactions control of securities of a Personengaged in an ongoing business representing more than 50% of the ordinaryvoting power for the election of directors or other governing position if thebusiness affairs of such Person are managed by a board of directors or othergoverning body or (c) acquires control of more than 50% of the ownershipinterest in any partnership, joint venture, limited liability company, businesstrust or other Person that is not managed by a board of directors or othergoverning body.

 

“Agreement”:  This Amended and Restated Credit Agreement,as amended, supplemented or modified from time to time.

 

“Aqua”: Aqua Services LP,a Texas limited partnership.

 

“Bank”:  As set forth in the introductory paragraphof this Agreement.

 

“Bank of America”:  Bank of America, N.A., a national bankingassociation.

 

“BofA LoanDocuments”:  That certain Amended andRestated Credit Agreement dated as of July 7, 2004, between Bank ofAmerica and Borrower, and each agreement, document, instrument and guaranteerequired by Bank of America in connection with such

 

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Amended and RestatedCredit Agreement and/or the credit extended thereunder, in each case asamended, supplemented or modified from time to time.

 

“Borrower”:  As set forth in the introductory paragraphof this Agreement.

 

“Business Day”:  Has the meaning set forth in the RevolvingNote.

 

“Capistrano Letter ofCredit”: The standby letter of credit issued by Bank of America, N.A., for theaccount of the Borrower in the face amount of $3,430,000 for the benefit ofCapistrano Valley Water District.

 

“Capital Leases”:  As applied to any Person, any lease of anyproperty (whether real, personal or mixed) by that Person as lessee whichwould, in accordance with GAAP, be required to be accounted for as a capitallease on the balance sheet of that Person.

 

“CDC”: CDC Maintenance,Inc., a Texas corporation.

 

“Change of Control”:  Shall be deemed to have occurred at suchtimes as:  (a) a “person” or“group” (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Act of 1934), becomes the“beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Actof 1934), directly or indirectly, of more than thirty percent (30%) of thetotal voting power of all classes of stock then outstanding of the Borrowernormally entitled to vote in the election of directors; or (b) theBorrower shall fail to own directly one hundred percent (100%) of theissued and outstanding common stock or other equity interest of Aqua, Suburban,SWUC, NMUI, ECO, MTI or, following the Tecon Acquisition, Tecon, or shall losevoting control of Aqua’s, Suburban’s, SWUC’s, NMUI’s, ECO’s, MTI’s or,following the Tecon Acquisition, Tecon’s issued and outstanding common stock orother equity interest; or (c) the Borrower shall fail to own directly50.1% of the issued and outstanding common stock or other equity interest ofMetro or OpTech or shall lose voting control of 50.1% of the issued andoutstanding common stock or other equity interest of Metro or OpTech; or(d) the Borrower shall fail to own directly 67% of the issued andoutstanding common stock of WRI or shall lose voting control of 67% of theissued and outstanding common stock of WRI; or (e) ECO shall fail to owndirectly one hundred percent (100%) of the issued and outstanding commonstock of CDC or shall lose voting control of CDC’s issued and outstandingcommon stock; or (f) SWUC shall fail to own directly one hundredpercent (100%) of the issued and outstanding common stock of Hornsby or shalllose voting control of Hornsby’s issued and outstanding common stock; or (g)SWUC shall fail to own directly 80% of the issued and outstanding common stockof Windermere or shall lose voting control of 80% of the issued and outstandingcommon stock of Windermere.  A change ofcontrol shall not include a transfer of NMUI’s operating assets through acondemnation or sale in lieu of condemnation.

 

“Closing Date”:  The Business Day on which the conditions setforth in Section 4.01 are satisfied or waived.

 

“Collateral Agent”:  The Bank acting in its capacity ascollateral agent under the Pledge Agreement and its successors in suchcapacity.

 

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“Commitment”:  The Bank’s obligation to make RevolvingLoans and the Term Loan to the Borrower pursuant to Article II in theamounts referred to therein.

 

“ConsolidatedEBITDA”:  For any period of the Borrowerand its Subsidiaries on a consolidated basis, Consolidated Net Profit for suchperiod, plus interest expense (net of capitalized interest expense) andprovision for income taxes for such period, plus depreciation and amortizationfor such period, plus the non-cash expense of the Borrowerand its Subsidiaries recognized during such period for any stock options grantedby the Borrower and its Subsidiaries permitted hereunder.

 

“Consolidated NetProfit”:  In respect of any period ofthe Borrower and its Subsidiaries, the consolidated net profit after taxes ofthe Borrower and its Subsidiaries as such would appear on the consolidatedstatement of earnings of the Borrower and its Subsidiaries prepared inaccordance with GAAP, consistently applied, minus nonrecurring or extraordinaryincome.

 

“Consolidated TangibleNet Worth”:  At any date ofdetermination, the sum of the capital stock and additional paid-in capital plusretained earnings (or minus accumulated deficit) of the Borrower and itsconsolidated Subsidiaries plus the outstanding principal amount of theConvertible Debentures minus (i) treasury stock, (ii) intangibleassets (including, without limitation, franchises, patents, patentapplications, trademarks, brand names, goodwill, purchased contracts, deferredcharges (including unamortized debt discount and expense and organizationcosts) and research and development expenses, provided, howeverthat water rights shall not be considered an intangible asset) and(iii) receivables, advances, loans and all other amounts due fromemployees, officers, shareholders and/or affiliates (excluding thoseSubsidiaries of which the Borrower owns at least 80% of the outstandingequity), on a consolidated basis determined in conformity with GAAP.

 

“ConvertibleDebentures”:  The Borrower’s 6.85%Convertible Subordinate Debentures due 2021.

 

“Debt”:  As applied to any Person, (i) allindebtedness for borrowed money, (ii) that portion of obligations withrespect to Capital Leases which is properly classified as a liability on abalance sheet in conformity with GAAP, (iii) notespayable and drafts accepted representing extensions of credit whether or notrepresenting obligations for borrowed money, (iv) any obligation owed forall or any part of the deferred purchase price of property or services whichpurchase price is (y) due more than six months from the date of incurrenceof the obligation in respect thereof, or (z) evidenced by a note orsimilar written instrument; (v) all indebtedness secured by any Lien onany property or asset owned or held by that Person regardless of whether theindebtedness secured thereby shall have been assumed by that Person or isnon-recourse to the credit of that person; (vi) reimbursement obligationsunder letters of credit; and (vii) other contingent liabilities.

 

“Default Rate”:  As defined in the Revolving Note.

 

“Distribution”:  With respect to any Person shall mean thatsuch Person has paid any dividend or returned any capital to its stockholdersor equity holders as such or authorized or

 

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made any otherdistribution, payment or delivery of property or cash to its stockholders orequity holders as such, or redeemed, retired, purchased, or otherwise acquired,directly or indirectly, for consideration, any shares of any class of itscapital stock or equity interests (or any options, warrants or rights issued bysuch Person with respect to its capital stock or equity interests), or setaside any funds for any of the foregoing purposes, or shall have permitted anyof its Subsidiaries to purchase or otherwise acquire for a consideration anyshares of any class of the capital stock or any equity interests of such Person(or any options, warrants or rights issued by such Person with respect to itscapital stock or equity interests). Without limiting the foregoing,“Distributions” with respect to any Person shall also include all payments madeor required to be made by such Person with respect to any stock appreciationrights plans, equity incentive or the setting aside of any funds for theforegoing purposes.

 

“Dividend ReinvestmentPlan”:  Borrower’s Dividend Reinvestmentand Stock Purchase Plan dated September 26, 2001.

 

“Dollars and $”:  Dollars in lawful currency of the UnitedStates of America.

 

“EBITDA Coverage Ratio”:For any period of the Borrower and its Subsidiaries on a consolidated basis,Consolidated EBITDA divided by the sum of the total interest expense pluscurrent portion of long-term Debt****plus current portion of advances forconstruction plus cash Distributions.

 

“ECO”:  ECO Resources, Inc., a Texas corporation.

 

“Employee BenefitPlan”:  Any Pension Plan, any employeewelfare benefit plan, or any other employee benefit plan which is described inSection 3(3) of ERISA and which is maintainedfor employees of the Borrower or any ERISA Affiliate of the Borrower.

 

“Employee Stock PurchasePlan”:  Borrower’s Amended and RestatedEmployee Stock Purchase Plan dated May 28, 1998.

 

“ERISA”:  The Employee Retirement Income Security Actof 1974, as amended to the date hereof and from time to time hereafter.

 

“ERISA Affiliate”:  As applied to any Person, any trade orbusiness (whether or not incorporated) which is a member of a group of whichthat Person is a member and which is under common control within the meaning ofSection 414(b) and (c) of theInternal Revenue Code.

 

“Event of Default”: Asdefined in Section 7.01.

 

“GAAP”:  Generally accepted accounting principles setforth in the opinions and pronouncements of the Accounting Principles Board ofthe American Institute of Certified Public Accountants and statements andpronouncements of the Financial Accounting Standards Board or in such otherstatements by such other entity as may be approved by a significant segment ofthe accounting profession or any public commission having regulatoryresponsibility over the Borrower or any Subsidiary.

 

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“Hornsby”:  Hornsby Bend Utility Company, a Texascorporation.

 

“IntercreditorAgreement”:  That certain IntercreditorAgreement to be entered into by and among the Bank, Bank of America and theCollateral Agent, as amended, supplemented or modified from time to time.

 

“Internal RevenueCode”:  The Internal Revenue Code of1986, as amended to the date hereof and from time to time hereafter and anysuccessor statute.

 

“Lien”:  Any lien, mortgage, deed of trust, pledge, securityinterest, charge or encumbrance of any kind (including any conditional sale orother title retention agreement, any lease in the nature thereof, and anyagreement to give any security interest).

 

“Loan Documents”:  This Agreement, the Revolving Note, the TermNote, the Pledge Agreement, the Intercreditor Agreement, each alternativedispute resolution agreement entered into by Borrower and Bank in connectionwith this Agreement, and each other agreement, document, instrument andguarantee required by the Bank in connection with this Agreement and/or thecredit extended hereunder.

 

“Loans”:  Collectively, the Revolving Loans and theTerm Loan.

 

“Maturity Date”:  September 30, 2006.

 

“Metro”: Metro-H20Utilities, Limited., a Texas limited partnership.

 

“MTI”:  Master Tek International, Inc., a Coloradocorporation.

 

“MultiemployerPlan”:  A “multiemployer plan” asdefined in Section 4001(a)(3) of ERISA which ismaintained for employees of the Borrower or any ERISA Affiliate of theBorrower.

 

“Net Cash Proceeds” meansthe cash proceeds received by the Borrower or any of its Subsidiaries from theissuance of any capital stock or Debt securities of the Borrower or any of itsSubsidiaries after the date hereof net of (i) underwriting discounts andcommissions, professional fees and disbursements in each case not paid to anaffiliate of the Borrower or a Subsidiary of the Borrower and (ii) that portionof the cash proceeds of any new Debt securities issued by a Subsidiary of theBorrower which are used to refinance existing Debt of such Subsidiary (otherthan any such proceeds received by the Borrower in connection with theEmployee Stock Purchase Plan or the Dividend Reinvestment Plan).

 

“NMUI”: New MexicoUtilities, Inc., a New Mexico corporation.

 

“OpTech”: OperationsTechnologies, Inc., a Georgia corporation.

 

“Pension Plan”: anyemployee plan which is subject to Section 412 of the Internal Revenue Codeand which is maintained for employees of the Borrower or any ERISA Affiliate ofthe Borrower, other than a Multiemployer Plan.

 

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“PermittedAcquisition”:  An Acquisition by theBorrower or any of its Subsidiaries of all or substantially all of the assetsof, or 80% or more of the capital stock or other equity interests of, a Person(the “Acquired Person”) engaged in the same line of business as the Borrower orsuch Subsidiary, provided that (a) if such Acquisition is of all ofthe capital stock or other equity interests of the Acquired Person, suchAcquired Person is merged with and into the Borrower or such Subsidiarysubstantially simultaneously with the Borrower’s or such Subsidiary’sacquisition of such capital stock or other equity interests or becomes awholly-owned Subsidiary, (b) no Potential Event of Default or Event ofDefault shall have occurred or be continuing or would result after givingeffect to such Permitted Acquisition, and (c) the Acquisition shall havebeen consummated in compliance with all applicable laws.

 

“Person”:  An individual, partnership, corporation,limited liability company, business trust, joint stock company, trust,unincorporated association, joint venture, governmental authority or otherentity of whatever nature.

 

“Pledge Agreement” Thatcertain Pledge and Collateral Agency Agreement to be entered into by and amongthe Borrower, the Bank, Bank of America and the Collateral Agent, as amended,supplemented or modified from time to time.

 

“Potential Event ofDefault”:  A condition or event which,after notice or lapse of time or both, would constitute an Event of Default ifthat condition or event were not cured or removed within any applicable graceor cure period.

 

“ReferenceRate”:  The variable per annum rate of interestmost recently announced by the Bank at its corporate headquarters as the “UnionBank of California, N.A. Reference Rate,” with the understanding that the“Union Bank of California, N.A. Reference Rate” is one of the Bank’s indexrates and merely serves as a basis upon which effective rates of interest arecalculated for loans making reference thereto and may not be the lowest or bestrate at which the Bank calculates interest or extends credit.  Any change in the Reference Rate announcedby the Bank shall take effect at the opening of business on the day specifiedin the announcement of such change.

 

“Regulations T, U andX”:  Regulations T, U and X,respectively, promulgated by the Board of Governors of the Federal ReserveSystem, as amended from time to time, and any successors thereto.

 

“Revolving Commitment”: Theamount of $20,000,000, as such amount may be reduced pursuant toSection 2.01(c).

 

“Revolving Loans”:  As defined in Section 2.01(a).

 

“Revolving Note”:  As defined in Section 2.01(d).

 

“S.E.C.”:  The United States Securities and ExchangeCommission and any successor institution or body which performs the functionsor substantially all of the functions thereof.

 

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“Solvent”:  When used with respect to any Person, thatas of the date as to which the Person’s solvency is to be measured:

 

(i)                  the fair saleable value of its assets isin excess of the total amount of its liabilities (including contingentliabilities) as they become absolute and matured;

 

(ii)               it has sufficient capital to conduct itsbusiness; and

 

(iii)            itis able to meet its debts as they mature.

 

“Subsidiary”:  Any corporation, limited liability companyor partnership (whether or not, in any case, characterized as such or as a“joint venture”): (i) in the case of a corporation or limited liabilitycompany, of which a majority of the securities having ordinary voting power forthe election of directors or other governing body (other than securities havingsuch power only by reason of the happening of a contingency) are at the timeowned directly, or indirectly through one or more intermediaries, or both,by the Borrower, or (ii) in the case of a partnership or limited liabilitycompany, of which a majority of the partnership or limited liability company orother ownership interest are at the time owned directly, or indirectly throughone or more intermediaries, or both, by the Borrower.

 

“Suburban”:  Suburban Water Systems, a Californiacorporation.

 

“SWUC”: SW UtilityCompany, a Texas corporation.

 

“Tecon”: Collectively,Tecon Water Companies, Inc., a Texas corporation, and Tenkiller UtilityCompany, an Oklahoma corporation.

 

“Tecon Acquisition”: Theacquisition by the Borrower of all of the issued and outstanding capital stockof Tecon.

 

“Term Loan”: as definedin Section 2.02.

 

“Termination Event”:  (i) a “Reportable Event” described inSection 4043 of ERISA and the regulations issued thereunder (other than a“Reportable Event” not subject to the provision for 30-day notice to thePension Benefit Guaranty Corporation under such regulations) with respect toany Pension Plan, or (ii) the withdrawal of the Borrower or any of itsERISA Affiliates from a Pension Plan during a plan year in which it was a“substantial employer” as defined in Section 4001(a)(2) of ERISA, or(iii) the filing of a notice of intent to terminate a Pension Plan or thetreatment of a Pension Plan amendment as a termination under Section 4041of ERISA, or (iv) the institution of proceedings to terminate a PensionPlan by the Pension Benefit Guaranty Corporation under Section 4042 ofERISA, or (v) any other event or condition which might constitute grounds underERISA for the termination of, or the appointment of a trustee to administer,any Pension Plan under Section 4042 of ERISA, or (vi) the imposition of alien with respect to any Pension Plan pursuant to Section 412(n) of theInternal Revenue Code.

 

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“Unfunded TermCommitment”: $15,000,000; provided that the Unfunded Term Commitmentwill be reduced to $0 upon the earlier of (a) December 31, 2004 and(b) such time as the Bank makes the Term Loan.

 

“Windermere”: WindermereUtility Co., Inc., a Texas corporation.

 

“WRI”: WastewaterRehabilitation, Inc., a Texas corporation.

 

SECTION 1.02.                 Other Definitional Provisions.

 

(a)                                  All terms defined in this Agreement shallhave the defined meanings when used in the Revolving Note or any certificate orother document made or delivered pursuant hereto.

 

(b)                                 As used herein and in the Revolving Note,and any certificate or other document made or delivered pursuant hereto,accounting terms not defined in Section 1.01, and accounting terms partlydefined in Section 1.01 to the extent notdefined, shall have the respective meanings given to them under GAAP.

 

(c)                                  The words “hereof”, “herein” and “hereunder”and words of similar import when used in this Agreement shall refer to thisAgreement as a whole and not to any particular provision of this Agreement, andsection, subsection, schedule and exhibit references are to this Agreementunless otherwise specified.

 

(d)                                 So long as the Borrower does not have anySubsidiaries, references to a Subsidiary or Subsidiaries in this Agreementshall be deemed to be deleted.

 

ARTICLE IITHE CREDIT

 

SECTION 2.01.                 The Revolving Loans.

 

(a)                                  The Revolving Commitment.  The Bank agrees, on the terms and conditionshereinafter set forth, to make loans (“Revolving Loans”) to the Borrower fromtime to time during the period from the date hereof to and including theMaturity Date in an aggregate amount not to exceed the Revolving Commitment, assuch amount may be reduced pursuant to Section 2.01(c).  Within the limits of the RevolvingCommitment and prior to the Maturity Date, the Borrower may borrow, repay, andreborrow subject to the terms of this Agreement and the Revolving Note.

 

(b)                                 Making the Revolving Loans .  The Borrower may borrow under the RevolvingCommitment on any Business Day, provided that the Borrower shall give the Banknotice pursuant to the terms of the Revolving Note specifying (i) theamount of the proposed Revolving Loan and (ii) the requested date of theRevolving Loan.  Upon satisfaction ofthe applicable conditions set forth in Article IV, the proceeds of allsuch Revolving Loans will then be made available to the Borrower by the Bank bycrediting the account of the Borrower on the books of the Bank, or as otherwisedirected by the Borrower.

 

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(c)                                  Reduction of the Revolving Commitment.  The Borrower shall have the right, upon atleast two Business Days’ notice to the Bank, to terminate in whole or reduce inpart the unused portion of the Revolving Commitment, without premium orpenalty, provided that each partial reduction shall be in the aggregate amountof $100,000 or an integral multiple thereof and that such reduction shall notreduce the Revolving Commitment to an amount less than the amount outstandinghereunder on the effective date of the reduction.  Such notice shall be irrevocable and such reduction shall not bereinstated.

 

(d)                                 Revolving Note.  TheRevolving Loans made by the Bank pursuant hereto shall be evidenced by apromissory note of the Borrower, substantially in the form of Exhibit A,with any appropriate insertions (as amended from time to time, the “RevolvingNote”), payable to the order of the Bank and representing the obligation of theBorrower to pay the aggregate unpaid principal amount of all Revolving Loansmade by the Bank, with interest thereon as prescribed in Section 2.04. TheBank is hereby authorized to record in its books and records and on anyschedule annexed to the Revolving Note, the date and amount of eachRevolving Loan made by the Bank, the date and amount of each payment ofprincipal thereof, and the applicable interest rate, and any such recordationshall constitute prima facie evidence of the accuracy of the information sorecorded; provided that failure by the Bank to effect such recordation shallnot affect the Borrower’s obligations hereunder.  Prior to the transfer of the Revolving Note, the Bank shallrecord such information on any schedule annexed to and forming a part ofthe Revolving Note.

 

(e)                                  Standby Letters of Credit.  The Revolving Commitment may be used forfinancing standby letters of credit with a maximum maturity of 365 days but notto extend more than 365 days beyond the Maturity Date. The standby letters ofcredit may include a provision providing that the maturity date will beautomatically extended each year for an additional year unless the Bank giveswritten notice to the contrary. The amount of standby letters of creditoutstanding at any one time (including amounts drawn on letters of creditand not yet reimbursed) may not exceed Three Million Dollars****($3,000,000).Each standby letter of credit must be requested by the Borrower at leastthree (3) Business Days prior to the proposed date of issuance of suchstandby letter of credit, and any such request may be submitted by telecopy,rapidfax or other telecommunication method (otherthan telephonicor oral advice).  The Borrower agrees:

 

(i)                                     to pay the Bank an amount equal to anypayment made by the Bank with respect to each letter of credit withinone (1) Business Day after demand made by the Bank therefor, together withinterest on such amount from the date of any payment made by the Bank at the rateapplicable to advances bearing interest with reference to the Reference Ratefor the period commencing on the date of any such payment and continuingthrough the first Business Day following such demand and thereafter at theDefault Rate.  The Borrower also agreesthat any sum drawn under a letter of credit may, without further action of theBank, upon the Borrower’s failure to make the payment referred to in thepreceding sentence, be added to the principal amount outstanding under the

 

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Revolving Commitment. The amount will bear interestand be due as described elsewhere in this Agreement.

 

(ii)                                  if there is an Event of Default underthis Agreement, to immediately prepay and make the Bank whole for any outstandingletters of credit.

 

(iii)                               the issuance of any letter of credit andany amendment to a letter of credit is subject to the Bank’s written approvaland must be in form and content satisfactory to the Bank and in favor of abeneficiary acceptable to the Bank.

 

(iv)                              to sign the Bank’s form application andagreement for standby letters of credit with respect to each letter of credit,which must be submitted to the Bank concurrently with the Borrower’s requestfor any standby letter of credit.

 

(v)                                 to pay any issuance and/or other feesthat the Bank notifies the Borrower will be charged for issuing and processingletters of credit for the Borrower.

 

(vi)                              to allow the Bank to automatically chargeits checking account for applicable fees, discounts, and other charges.

 

(vii)                           to pay the Bank a non-refundable feeequal to 1.25% per annum of the outstanding undrawn amount of each standbyletter of credit, provided that the minimum amount per annum of such feewith respect to each standby letter of credit shall be $500.  This fee shall be calculated in advance asof the first day of each calendar quarter on the basis of such amount in effecton the day the fee is calculated, and is payable on the 14th dayafter each such date of calculation. If there is a default under thisAgreement, at the Bank’s option, the amount of the fee shall be increased to3.25% per annum, effective starting on the day the Bank provides notice of theincrease to the Borrower.

 

SECTION 2.02.                 The Term Loan.

 

(a)                                  Term Loan Advance. At the request of the Borrower, the Bank will make a singlenon-revolving advance in an amount up to $15,000,000 on or beforeDecember 31, 2004 (the “Term Loan”). The Term Loan must be drawn in a single advance.  Any amounts not drawn during the initialTerm Loan advance may not be borrowed, and any amounts repaid may not bereborrowed.

 

(b)                                 Term Note.  The TermLoan made by the Bank pursuant hereto shall be evidenced by a promissory noteof the Borrower, substantially in the form of Exhibit B, with any appropriateinsertions (as amended from time to time, the “Term Note”), payable to theorder of the Bank and representing the obligation of the Borrower to pay theaggregate unpaid principal amount of the Term Loan made by the Bank, withinterest thereon as prescribed in Section 2.04.

 

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SECTION 2.03.                 MandatoryRepayment.  The aggregate principalamount of the Revolving Loans outstanding on the Maturity Date, together withaccrued interest thereon, shall be due and payable in full on the MaturityDate.  On or before September 30,2005, the Borrower shall make a payment that will reduce the outstandingprincipal balance of the Term Loan to no more than $10,000,000; provided,however, if the outstanding principal balance of the Term Loan onSeptember 30, 2005 is equal to or less than $10,000,000, whether as aresult of a payment or payments pursuant to Section 6.01(i) or otherwise,then no principal payment on the Term Loan shall be required.  The remaining principal balance of the TermLoan, together with accrued and unpaid interest thereon, shall be due andpayable in full on September 30, 2006. If at any time the aggregate outstanding Revolving Loans exceed theRevolving Commitment then in effect, the Borrower shall immediately repay theexcess to the Bank without penalty or premium.

 

SECTION 2.04.                 InterestComputation and Payment; Fee Computation. The outstanding principal balance of the Revolving Loans shall bearinterest as set forth in the Revolving Note. The outstanding principal balanceof the Term Loan shall bear interest as set forth in the Term Note.   Interest on all Loans shall be computed onthe basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and place set forth in theRevolving Note and the Term Note.  Allfees under this Agreement shall be computed on the basis of a 360-day year,actual days elapsed.

 

SECTION 2.05.                 Unused commitmentfee.  The Borrower agrees to pay a feecalculated at 0.25% per year times the sum of (a) any difference between(i) the Revolving Commitment and (ii) the amount of Revolving Loansit actually borrows, determined by the weighted average credit outstandingduring the specified period and (b) the Unfunded Term Commitment. Thecalculation of credit outstanding shall include the Revolving Loans and theundrawn amount of outstanding letters of credit. This fee shall be calculatedin arrears as of the end of each calendar quarter, and is payable on the 15thday of the calendar month beginning immediately after each calendar quarterend.  Each such fee shall be fullyearned when paid and shall be non-refundable.

 

SECTION 2.06.                 Annual CreditFacility Fee.  The Borrower agrees topay, on the Closing Date and on each September 30 (commencing with September 30,2005), an annual credit facility fee in the amount of$                   .  Each such fee shall be fully earned whenpaid and shall be non-refundable.

 

SECTION 2.07.                 Front EndFee.  The Borrower agrees to pay, on theClosing Date a front end fee in the amount of$                        .  The Bank acknowledges and agrees that itreceived $                in connection with its issuance of a commitment letter to the Borrower and willcredit such amount toward payment of the front end fee on the Closing Date. Thefront end fee shall be fully earned when paid and shall be non-refundable.

 

ARTICLE IIIGENERAL PROVISIONS CONCERNING THE LOANS

 

SECTION 3.01.                 Use ofProceeds.  The proceeds of RevolvingLoans hereunder shall be used by the Borrower (i) for general corporatepurposes, working capital and

 

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acquisitions permitted hereunder of the Borrower and those Subsidiariesof the Borrower as to which the Borrower owns at least 80% of the outstandingequity, and (ii) to finance capital additionsto the water utility and other operations of the Borrower and thoseSubsidiaries of the Borrower as to which the Borrower owns at least 80% of theoutstanding equity. The Proceeds of the Term Loan shall be used for the TeconAcquisition.

 

SECTION 3.02.                 Payment onNon-Business Days.  Whenever any paymentto be made hereunder or under the Revolving Note shall be stated to be due on aday which is not a Business Day, such payment may be made on the nextsucceeding Business Day, and with respect to payments of principal, interestthereon shall be payable at the then applicable rate during such extension.

 

SECTION 3.03.                 ReducedReturn.  If the Bank shall havedetermined that any applicable law, regulation, rule or regulatory requirementgenerally applicable to banks located in California and (collectively in thisSection 3.03, “Requirement”) regarding capital adequacy, or any changetherein, or any change in the interpretation or administration thereof by anyUnited States federal or state governmental authority, central bank orcomparable agency charged with the interpretation or administration thereof, orcompliance by the Bank with any request or directive regarding capital adequacy(whether or not having the force of law) of any such authority, central bank orcomparable agency, has or would have the effect of reducing the rate of returnon the Bank’s capital as a consequence of its Commitment and obligationshereunder to a level below that which would have been achieved but for suchRequirement, change or compliance (taking into consideration the Bank’spolicies with respect to capital adequacy) by an amount deemed by the Bank tobe material (which amount shall be determined by the Bank’s reasonableallocation of the aggregate of such reductions resulting from such events),then from time to time, within five (5) Business Days after demand by the Bank,the Borrower shall pay to the Bank such additional amount or amounts as willcompensate the Bank for such reduction. The Bank does not presently have knowledge of any new Requirement or anypending change in any existing Requirement which would result in suchadditional amounts being owed.

 

SECTION 3.04.                 Indemnities.  The Borrower agrees to indemnify, pay andhold the Bank, and the shareholders, officers, directors, employees and agentsof the Bank (“Indemnified Persons”), harmless from and against any and allclaims, liabilities, losses, damages, costs and expenses (whether or not any ofthe foregoing Indemnified Persons is a party to any litigation), including,without limitation, reasonable attorneys’ fees and costs (including, withoutlimitation, the reasonable estimate of the allocated cost of in-house legalcounsel and staff) and costs of investigation, document production, attendanceat a deposition, or other discovery, prior to the assumption of defense by theBorrower, with respect to or arising out of any proposed acquisition by theBorrower or any of its Subsidiaries of any Person or any securities (includinga self-tender), this Agreement or any use of proceeds hereunder, or any claim,demand, action or cause of action being asserted against the Borrower or any ofits Subsidiaries (collectively, the “Indemnified Liabilities”), provided thatthe Borrower shall have no obligation hereunder with respect to IndemnifiedLiabilities arising from the gross negligence or willful misconduct of any suchIndemnified Persons. If any claim is made, or any action, suit or proceeding isbrought, against any Indemnified Person with respect to IndemnifiedLiabilities, the Indemnified Person shall notify the Borrower within thirty (30) days of the Bank being notified in writing of anysuch claim or the commencement of such action, suit or proceeding, and theBorrower will

 

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assume the defense of such action, suit or proceeding, employingcounsel selected by Borrower’s insurance carrier, or selected by the Borrowerand reasonably satisfactory to the Indemnified Person, and pay the fees andexpenses of such counsel. This covenant shall survive termination of thisAgreement and payment of the amounts outstanding under the Revolving Note for aperiod of six (6) years.

 

SECTION 3.05.                 FundingSources.  Nothing in this Agreementshall be deemed to obligate the Bank to obtain the funds for any Revolving Loanin any particular place or manner or to constitute a representation by the Bankthat it has obtained or will obtain the funds for any Revolving Loan in anyparticular place or manner.

 

ARTICLE IVCONDITIONS OF LENDING

 

SECTION 4.01.                 ConditionsPrecedent to Initial Revolving Loan. The obligation of the Bank to make its initial Revolving Loan is subjectto the conditions precedent that:

 

(a)                                  The Bank shall have received on or beforethe day of the initial Revolving  Loanthe following, each dated prior to or as of such day, in form and substancesatisfactory to the Bank:

 

(i)                                     The Revolving Note issued by the Borrowerto the order of the Bank;

 

(ii)                                  Copies of the Certificate ofIncorporation of the Borrower, certified as of a recent date by the Secretaryof State of Delaware;

 

(iii)                               Copies of the Bylaws, if any, of theBorrower, certified by the Secretary or an Assistant Secretary of the Borrower;

 

(iv)                              Copies of resolutions of the Board of Directorsor other authorizing documents of the Borrower, in form and substancesatisfactory to the Bank, approving the Loan Documents and the Loans hereunder;

 

(v)                                 An incumbency certificate executed by theSecretary or an Assistant Secretary of the Borrower or equivalent document,certifying the names and signatures of the officers of the Borrower or otherPersons authorized to sign the Loan Documents and the other documents to bedelivered hereunder;

 

(vi)                              Executed copies of all other LoanDocuments;

 

(vii)                           Opinion from Latham & Watkins LLP, onbehalf of the Borrower, substantially in the form of Exhibit D hereto; and

 

(viii)                        Executed copies of the amended BofA LoanDocuments.

 

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(b)                                 The Bank shall have completed its duediligence review of the Borrower, and the scope and results thereof shall besatisfactory to the Bank in its discretion;

 

(c)                                  All information previously furnished bythe Borrower to the Bank shall be true and correct in all material respects;

 

(d)                                 All fees and expenses required to be paidon the Closing Date shall have been paid or arrangements satisfactory to theBank shall have been made with respect to the payment thereof;

 

(e)                                  The Borrower shall be in compliance withthe Loan Documents, and after giving effect to the initial Revolving Loan, noPotential Event of Default or Event of Default shall have occurred and becontinuing;

 

(f)                                    The representations and warranties of theBorrower contained in Article V shall be true and correct in all respects;

 

(g)                                 The Bank shall have received evidence ofthe insurance policies required by Section 6.01(e);

 

(h)                                 All corporate and legal proceedings andall instruments and documents in connection with the transactions contemplatedby this Agreement shall be reasonably satisfactory in content, form andsubstance to the Bank and its counsel, and the Bank and such counsel shall havereceived any and all further information and documents which the Bank or suchcounsel may reasonably have requested in connection therewith, such documentswhere appropriate to be certified by proper corporate or governmentalauthorities;

 

(i)                                     Nothing shall have occurred and the Bankshall not have become aware of any fact or condition not previously known,which the Bank shall determine has, or could reasonably be expected to have, amaterial adverse effect on the rights or remedies of the Bank, or on theability of the Borrower to perform its obligations to the Bank or which has, orcould reasonably be expected to have, a materially adverse effect on theperformance, business, property, assets, condition (financial or otherwise) orprospects of the Borrower and its Subsidiaries taken as a whole;

 

SECTION 4.02.                 ConditionsPrecedent to the Term Advance. The obligation of the Bank to make the Term Loanis subject to the satisfaction on or before December 31, 2004 of each ofthe following conditions:

 

(a)                                  All of the conditions set forth inSection 4.01 shall have been satisfied.

 

(b)                                 The Bank shall have received on or beforethe day of the Term Loan the following, each dated prior to or as of such day,in form and substance satisfactory to the Bank:

 

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(i)                                     The Term Note issued by the Borrower tothe order of the Bank;

 

(ii)                                  A copy of the executed purchase and saledocuments relating to the Tecon Acquisition;

 

(iii)                               The Pledge Agreement set forth as ExhibitC, duly executed by the Borrower, together with delivery to the CollateralAgent of the stock certificates evidencing the shares of Tecon’s capital stockpledged thereunder, duly endorsed in blank;

 

(iv)                              The Intercreditor Agreement, dulyexecuted by the Bank, Bank of America, and the Collateral Agent, and dulyacknowledged by the Borrower; and

 

(v)                                 An executed opinion from Akin, Gump,Strauss, Hauer & Feld, LLP, on behalf of the Borrower, in form andsubstance reasonably satisfactory to the Collateral Agent, to counsel to theBank, and to counsel to Bank of America.

 

SECTION 4.03.                 ConditionsPrecedent to Each Revolving Loan.  Theobligation of the Bank to make a Revolving Loan on the occasion of eachRevolving Loan (including the initial Revolving Loan) shall be subject to thefurther conditions precedent that on the date of such Revolving Loan(a) the following statements shall be true and the Bank shall havereceived the notice required by Section 2.01(b), which notice shall bedeemed to be a certification by the Borrower that:

 

(i)                                     The representations and warrantiescontained in Section 5.01 are correct in all material respects on and asof the date of such Revolving Loan as though made on and as of such date,

 

(ii)                                  No event has occurred and is continuing,or would result from such Revolving Loan, which constitutes an Event of Defaultor Potential Event of Default; and

 

(iii)                               Nothing shall have occurred and the Bankshall not have become aware of any fact or condition not previously known,which the Bank shall determine has, or could reasonably be expected to have, amaterial adverse effect on the rights or remedies of the Bank, or on the abilityof the Borrower to perform its obligations to the Bank or which has, or couldreasonably be expected to have, a material adverse effect on the performance,business, property, assets, condition (financial or otherwise) or prospects ofthe Borrower and its Subsidiaries taken as a whole; and

 

(iv)                              All Loan Documents are in full force andeffect,

 

and (b) the Bankshall have received such other approvals, opinions or documents as the Bank mayreasonably request.

 

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ARTICLE VREPRESENTATIONS AND WARRANTIES

 

SECTION 5.01.                 Representationsand Warranties.  The Borrower representsand warrants as follows:

 

(a)                                  Organization.  TheBorrower and each of its Subsidiaries is duly organized, validly existing andin good standing under the laws of the state of its organization. The Borrowerand each of its Subsidiaries is also duly authorized, qualified and licensed inall applicable jurisdictions, and under all applicable laws, regulations,ordinances or orders of public authorities, to carry on its business in thelocations and in the manner presently conducted, except to the extent that thefailure to be so authorized, qualified or licensed would not have a materialadverse effect on the Borrower’s business, and the Borrower and each of itsSubsidiaries has all requisite power and authority to conduct its business andto own and lease its properties. Schedule 5.01(a) attached hereto correctly sets forth thenames, form of legal entity, number of shares of capital stock or membership orother equity interests, as applicable, issued and outstanding, number of sharesof capital stock or membership or other equity interests, as applicable, ownedby the Borrower or any of its Subsidiaries (specifying such owner) and jurisdictionsof organization of all Subsidiaries of the Borrower.  Except as set forth on Schedule 5.01(a), there are nooutstanding options, warrants or other rights to purchase any capital stock,membership interests or units of other equity interest of any Subsidiary otherthan in favor of the Borrower, and all shares, membership interests or otherequity interests issued by the Subsidiaries are****free and clear of all liens,except for liens permitted under Section 6.02(d).

 

(b)                                 Authorization; No Conflict.  The execution, delivery and performance by the Borrower of theLoan Documents, and the borrowing of Revolving Loans hereunder, are within theBorrower’s corporate powers, have been duly authorized by all necessarycorporate action, do not contravene (i) the Borrower’s charter, by-laws orother organizational document or (ii) any law or regulation (including,without limitation, Regulations T, U and X and regulations of public utilitycommissions or similar regulatory authorities) binding on or affecting the Borroweror its properties, and will not constitute an event of default under anymaterial agreement to which the Borrower is a party or by which its assets orproperties may be bound.

 

(c)                                  Governmental Consents.  No authorization or approval or other action by, and nonotice to or filing with, any governmental authority or regulatory body (exceptroutine reports required pursuant to the Securities Exchange Act of 1934, asamended (if such act is applicable to the Borrower), which reports will be madein the ordinary course of business) is required for the due execution, deliveryand performance by the Borrower of the Loan Documents.

 

(d)                                 Validity.  The LoanDocuments are the binding obligations of the Borrower or other executingPerson, if any, enforceable in accordance with their respective terms; exceptin each case as such enforceability may be limited by

 

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bankruptcy, insolvency, reorganization, liquidation, moratorium orother similar laws of general application and equitable principles relating toor affecting creditors’ rights.

 

(e)                                  Financial Condition.  The balance sheets of the Borrower and its consolidatedSubsidiaries as at December 31, 2003, and the related consolidatedstatements of income and changes in common stockholders’ equity of the Borrowerand its consolidated Subsidiaries for the fiscal twelve months then ended,copies of which have been furnished to the Bank, fairly present in all materialrespects the financial condition of the Borrower and its consolidatedSubsidiaries as at such dates and the results of the operations of the Borrowerand its consolidated Subsidiaries for the period ended on such date, all inaccordance with GAAP, consistently applied, and since December 31, 2003 therehas been no material adverse change in the business, operations, properties,assets or condition (financial or otherwise) of the Borrower and itsSubsidiaries, taken as a whole.

 

(f)                                    Litigation.  Exceptas set forth in the Form 10-K dated December 31, 2003, and onSchedule 5.01(f) hereto, there is no known pending or threatened action orproceeding affecting the Borrower or any of its Subsidiaries before any court,governmental agency or arbitrator, which may materially adversely affect theconsolidated financial condition or operations of the Borrower or which mayhave a material adverse effect on the Borrower’s ability to perform itsobligations under the Loan Documents, having regard for its other financialobligations.

 

(g)                                 Employee Benefit Plans.  The Borrower and each of its ERISA Affiliates is in compliance inall material respects with any applicable provisions of ERISA and theregulations and published interpretations thereunder with respect to allEmployee Benefit Plans.  No TerminationEvent has occurred with respect to any Pension Plan.  The excess of the actuarial present value of all benefitliabilities under all Pension Plans (excluding in such computation PensionPlans with assets greater than benefit liabilities) over the fair market valueof the assets allocable to such benefit liabilities are not greater than fivepercent (5%) of Consolidated Tangible Net Worth.  For purposes of the preceding sentence, the term “benefitliabilities” shall have the meaning specified in Section 4001 of ERISA.

 

(h)                                 Disclosure.  Norepresentation or warranty of the Borrower contained in this Agreement or anyother document, certificate or written statement furnished to the Bank by or onbehalf of the Borrower for use in connection with the transactions contemplatedby this Agreement contains any known untrue statement of a material fact oromits to state a known material fact (known to the Borrower in the case of anydocument not furnished by it) necessary in order to make the statementscontained herein or therein not misleading when taken as a whole. There is nofact known to the Borrower (other than matters of a general economic nature)which materially adversely affects the business, operations, property, assetsor condition (financial or otherwise) of the Borrower and its Subsidiaries,taken as a whole, which has not been disclosed herein or in such otherdocuments, certificates and statements furnished to the Bank for use inconnection with the transactions contemplated hereby.

 

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(i)                                     Environmental Matters.  Except as set forth inSchedule 5.01(i) hereto, neither the Borrower nor any Subsidiary, norany of their respective officers, employees, representatives or agents, nor, tothe best of their knowledge, any other person, has treated, stored, processed,discharged, spilled, or otherwise disposed of any substance defined ashazardous or toxic by any applicable federal, state or local law, rule,regulation, order or directive, or any waste or by-product thereof, at any realproperty or any other facility owned, leased or used by the Borrower or anySubsidiary, in violation of any applicable statutes, regulations, ordinances ordirectives of any governmental authority or court, which violations may resultin liability to the Borrower or any Subsidiary or any of their respectiveofficers, employees, representatives, agents or shareholders in an amountexceeding $500,000 for all such violations; and the unresolved violations setforth in said Schedule 5.01(i) will not resultin liability to the Borrower or any Subsidiary or any of their respectiveofficers, employees, representatives, agents or shareholders in an amountexceeding $500,000 for all such unresolved violations. Except as set forth insaid Schedule, no employee or other person has made a claim or demand againstthe Borrower or any Subsidiary based on alleged damage to health caused by anysuch hazardous or toxic substance or by any waste or by-product thereof; andthe unsatisfied claims or demands against the Borrower or any Subsidiary setforth in said Schedule 5.01(i) will notresult in uninsured liability to the Borrower or any Subsidiary or any of theirrespective officers, employees, representatives, agents or shareholders in anamount exceeding $250,000 in excess of reserves on the books of the Borrowerfor all such unsatisfied claims or demands. Except as set forth in saidSchedule 5.01(i), neither the Borrower nor any Subsidiary has been chargedby any governmental authority with improperly using, handling, storing,discharging or disposing of any such hazardous or toxic substance or waste orby-product thereof or with causing or permitting any pollution of any body ofwater; and the outstanding related charges set forth in saidSchedule 5.01(i) will not result in liability to the Borrower or anySubsidiary or any of their respective officers, employees, representatives,agents or shareholders in an amount exceeding $500,000 for all such outstandingcharges.

 

(j)                                     Employee Matters. There is no known strike or work stoppage in existence or threatenedinvolving the Borrower or its Subsidiaries that may materially adversely affectthe consolidated financial condition or operations of the Borrower or that mayhave a material adverse effect on the Borrower’s ability to perform itsobligations under the Loan Documents, having regard for its other financialobligations.

 

(k)                                  Solvency.  TheBorrower and each of its Subsidiaries is Solvent.

 

(l)                                     Title to Properties.  The Borrower and each of its Subsidiaries has good and marketabletitle to or interests in all of its properties and assets subject to no liens,mortgages, pledges, security interests, encumbrances or charges of any kind,except those granted to the Bank and such others as are permitted under Section 6.02(d) hereof.

 

(m)                               Tax Returns.  TheBorrower and each of its Subsidiaries has filed, or caused to be filed, in atimely manner all tax returns, reports and declarations which are required tobe filed by it (without requests for extension (other than automatic

 

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extensions provided by law) except as previously disclosed in writingto the Bank).  All information in suchtax returns, reports and declarations is complete and accurate in all materialrespects.  The Borrower and each of itsSubsidiaries has paid or caused to be paid all taxes due and payable or claimeddue and payable in any assessment received by it, except taxes the validity ofwhich are being contested in good faith by appropriate proceedings diligentlypursued and available to the Borrower or its Subsidiaries and with respect towhich adequate reserves have been set aside on its books.  Adequate provision has been made for thepayment of all accrued and unpaid Federal, State, county, local, foreign andother taxes whether or not yet due and payable and whether or not disputed.

 

(n)                                 Compliance with Other Agreements and ApplicableLaws.  Neither the Borrower nor any ofits Subsidiaries is in default in any material respect under, or in violation inany material respect of any of the terms of, any agreement, contract,instrument, lease or other commitment (including, but not limited to any suchagreement involving the debts or investments of the Borrower or liens upon itsassets) to which it is a party or by which it or any of its assets are boundand the Borrower and each of its Subsidiaries is in compliance in all materialrespects with all applicable provisions of laws, rules, regulations, licenses,permits, approvals and orders of any foreign, Federal, State or localgovernmental authority.

 

(o)                                 No Default.  No eventhas occurred and is continuing that is a Potential Event of Default or an Eventof Default.

 

(p)                                 Regulation U; Investment Company Act.  No part of the proceeds of any RevolvingLoan hereunder will be used to purchase or carry, or to extend credit to othersfor the purpose of purchasing or carrying, any “margin stock” (as defined inRegulation U) in violation of Regulation U. The Borrower is not required to be registered as an “investment company”under the Investment Company Act of 1940.

 

(q)                                 Intangible Assets. The Borrower owns, or possesses the right to use to the extentnecessary in its business, all trademarks, trade names, copyrights, patents,patent rights, computer software, licenses and other intangible assets that areused in the conduct of its business as now operated, and no such intangibleasset, to the Borrower’s actual knowledge, conflicts with the valid trademark,trade name, copyright, patent, patent right or intangible asset of any otherPerson.

 

ARTICLE VICOVENANTS

 

SECTION 6.01.                 AffirmativeCovenants.  So long as any Loan shallremain unpaid or the Bank shall have any Commitment hereunder, the Borrowerwill, unless the Bank shall otherwise consent in writing:

 

(a)                                  Financial Information.  Furnish to the Bank:

 

(i)                                     as soon as available, but in any eventwithin 120 days after the end of each fiscal year of the Borrower, (1) acopy of the Borrower’s annual report to shareholders containing the auditedconsolidated balance sheets of itself

 

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and its consolidated Subsidiaries as at the end ofeach fiscal year and the related consolidated statements of income and changesin common stockholders’ equity (or comparable statement) employed in thebusiness and changes in financial position and cash flow for such year, in eachcase prepared in accordance with GAAP, setting forth in each case incomparative form the figures for the previous year, accompanied by anunqualified report and opinion thereon of independent certified publicaccountants acceptable to the Bank and, if prepared, such accountants’ letterto management, and (2) a copy of the Borrower-prepared consolidatingbalance sheets and statements of income prepared in connection with each of thestatements provided in subpart (1) above; and

 

(ii)                                  as soon as available, but in any eventwithin forty-five (45) days after the end of eachfiscal quarter otherthan the fourth fiscal quarter of any fiscalyear, the Borrower’s unaudited consolidated and consolidating balance sheets ofitself and its consolidated Subsidiaries as at the end of such period and therelated unaudited consolidated and consolidating statements of income and therelated unaudited consolidated statement of changes in common stockholders’equity (or comparable statement) and changes in financial position and cashflow for such period and year to date, setting forth in each case incomparative form the figures as at the end of the previous fiscal year as to thebalance sheet and the figures for the previous corresponding period as to theother statements, certified by a duly authorized officer of the Borrower asbeing fairly stated in all material respects subject to year end adjustments;all such financial statements to be complete and correct in all materialrespects and to be prepared in reasonable detail acceptable to the Bank and inaccordance with GAAP applied consistently throughout the periods reflectedtherein (except as approved by such accountants and disclosed therein andexcept for the exclusion of certain information and footnote disclosuresomitted pursuant to the rules and regulations of the S.E.C.); and

 

(iii)                               as soon as available, copies of allreports which the Borrower sends to any of its security holders, and copies ofall reports and registration statements which the Borrower or any Subsidiaryfiles with the S.E.C. or any national securities exchange; and

 

(iv)                              (a) together with each delivery offinancial statements of the Borrower and its Subsidiaries pursuant tosubdivision (i) above, a certificate, executed by the Borrower’s chairmanof the board (if an officer) or its president or one of its vicepresidents or by its chief financial officer stating that the signers havereviewed the terms of this Agreement and have made, or caused to be made undertheir supervision, a review in reasonable detail of the transactions andcondition of the Borrower and its Subsidiaries during the accounting periodcovered by such financial statements and that such review has not disclosed theexistence during or at the end of such accounting period, and that the signersdo not have knowledge of the existence as at the date of such certificate, ofany condition or event that constitutes an Event of Default or Potential Eventof Default, or, if any such condition or event existed or exists, specifyingthe nature

 

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and period of existence thereof and what action theBorrower has taken, is taking and proposes to take with respect thereto; and(b) together with each delivery of financial statements of the Borrowerand its Subsidiaries pursuant to subdivision (i) and(ii) above, a certificate demonstrating in reasonable detail complianceduring and at the end of the applicable accounting periods with therestrictions contained in Section 6.02 hereof.

 

(b)                                 Notices and Information.  Deliver to the Bank:

 

(i)                                     promptly upon any officer of the Borrowerobtaining knowledge (a) of any condition or event which constitutes an Eventof Default or Potential Event of Default, (b) that any Person has givenany notice to the Borrower or any Subsidiary of the Borrower or taken any otheraction with respect to a claimed default or event or condition of the typereferred to in Section 7.01(e) or Section 7.01(f), (c) ofthe institution of any litigation involving an alleged liability (includingpossible forfeiture of property) of the Borrower or any of its Subsidiariesequal to or greater than $500,000 which is not, except for deductibles and selfinsurance reserves, fully covered by insurance maintained by the Borrower orany adverse determination in any litigation involving a potential liability ofthe Borrower or any of its Subsidiaries equal to or greater than $500,000 whichis not, except for deductibles and self insurance reserves, fully covered byinsurance maintained by the Borrower or (d) of a material adverse changein the business, operations, properties, assets or condition (financial orotherwise) of the Borrower and its Subsidiaries, taken as a whole, an officers’certificate specifying the nature and period of existence of any such conditionor event, or specifying the notice given or action taken by such holder orPerson and the nature of such claimed default, Event of Default, PotentialEvent of Default, event or condition, and what action the Borrower has taken,is taking and proposes to take with respect thereto;

 

(ii)                                  promptly upon becoming aware of theoccurrence of any (a) Termination Event, or (b) non-exempt“prohibited transaction”, as such term is defined in Section 4975 of theInternal Revenue Code or a transaction prohibited by Section 406 of ERISA,in connection with any Employee Benefit Plan or any trust created thereunder, awritten notice specifying the nature thereof, what action the Borrower hastaken, is taking or proposes to take with respect thereto, and, when known, anyaction taken or threatened by the Internal Revenue Service, the Department ofLabor, or the Pension Benefit Guaranty Corporation with respect thereto;

 

(iii)                               with reasonable promptness copies of(a) all notices received by the Borrower or any of its ERISA Affiliates ofthe Pension Benefit Guaranty Corporation’s intent to terminate any Pension Planor to have a trustee appointed to administer any Pension Plan and (b) allnotices received by the Borrower or any of its ERISA Affiliates from aMultiemployer Plan sponsor concerning the imposition or amount of withdrawalliability pursuant to Section 4202 of ERISA;

 

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(iv)                              promptly, and in any event within 10 daysafter the effective date thereof, a copy of all amendments to any of the loandocuments governing any of the debt permitted bySection 6.02(e)(iv) (including, without limitation, the BofA LoanDocuments);

 

(v)                                 promptly, and in any event within 30 daysafter receipt thereof, a copy of any notice, summons, citation, directive,letter or other form of communication from any governmental authority or courtin any way concerning any action or omission on the part of the Borrower or anyof its Subsidiaries in connection with any substance defined as toxic orhazardous by any applicable federal, state or local law, rule, regulation,order or directive or any waste or byproduct thereof, or concerning the filingof a lien upon, against or in connection with the Borrower, its Subsidiaries,or any of their leased or owned real or personal property, in connection with aHazardous Substance Superfund or a Post-Closure Liability Fund as maintainedpursuant to § 9507 of the Internal Revenue Code; and

 

(vi)                              promptly, and in any event within 30 daysafter request, such other information and data with respect to the Borrower orany of its Subsidiaries as from time to time may be reasonably requested by theBank and is reasonably available to the Borrower.

 

(c)                                  CorporateExistence, Etc.  At all timespreserve and keep in full force and effect its and its Subsidiaries’ corporateexistence and rights, licenses and franchises material to its business andthose of each of its Subsidiaries; provided, however, that thecorporate existence of any such Subsidiary may be terminated if suchtermination is in the best interest of the Borrower and does not result in aChange of Control.

 

(d)                                 Payment of Taxes and Claims.  Pay, and cause each of its Subsidiaries topay, all taxes, assessments and other governmental charges imposed upon it orany of its properties or assets or in respect of any of its franchises,business, income or property before any penalty which would exceed the PenaltyCap (as defined below) or interest accrues thereon, and all claims (including,without limitation, claims for labor, services, materials and supplies) forsums which have become due and payable and which by law have or may become alien upon any of its properties or assets, prior to the time when any penaltyor fine shall be incurred with respect thereto; provided that no such charge orclaim need be paid if being contested in good faith by appropriate proceedingspromptly instituted and diligently conducted and if such reserve or otherappropriate provision, if any, as shall be required in conformity with GAAPshall have been made therefor.  As usedherein, the term “Penalty Cap” means an amount equal to $10,000 in theaggregate for the Borrower and its Subsidiaries for each calendar year.

 

(e)                                  Maintenance of Properties; Insurance.  Maintain or cause to be maintained in goodrepair, working order and condition (ordinary wear and tear excepted) allmaterial properties used or useful in the business of the Borrower and itsSubsidiaries and from time to time will make or cause to be made allappropriate repairs, renewals and

 

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replacements thereof. The Borrower will maintain or cause to bemaintained, with financially sound and reputable insurers, insurance withrespect to its properties and business and the properties and business of itsSubsidiaries against loss or damage of the kinds customarily insured against bycorporations of established reputation engaged in the same or similarbusinesses and similarly situated, of such types and in such amounts as arecustomarily carried under similar circumstances by such othercorporations.  The Borrower will complywith any other insurance requirement set forth in any other Loan Document.

 

(f)                                    Inspection.  Permitany authorized representatives designated by the Bank to visit and inspect anyof the properties of the Borrower or any of its Subsidiaries, including its andtheir financial and accounting records, and to make copies and take extractstherefrom, and to discuss its and their affairs, finances and accounts with itsand their officers and independent public accountants, all at such reasonabletimes during normal business hours and as often as may be reasonably requested.

 

(g)                                 Compliance with Laws Etc.  Exercise, and cause each of its Subsidiariesto exercise, all due diligence in order to comply with the requirements of allapplicable laws, rules, regulations and orders of any governmental authority,including, without limitation, all rules and regulations of public utilitycommissions or similar regulatory authorities, and all environmental laws,rules, regulations and orders, noncompliance with which would materiallyadversely affect the business, properties, assets, operations or condition(financial or otherwise) of the Borrower and its Subsidiaries, taken as awhole.

 

(h)                                 Hazardous Waste Studies.  Promptly, and in any event within thirty (30) days after submission, provide the Bank with copiesof all such investigations, studies, samplings and testings as may be requestedby any governmental or regulatory authority relative to any substance definedas hazardous or toxic by any applicable federal, state or local law, rule,regulation, order or directive, or any waste or by-product thereof, at oraffecting any real property or any facility owned, leased or used by theBorrower or any Subsidiary.  Theforegoing shall not include sampling and testing of water, waste water andeffluent conducted by the Subsidiaries of the Borrower on periodic bases as anormal part of their water delivery and wastewater treatment businesses.

 

(i)                                     SecuritiesOfferings.  While the Term Loan isoutstanding, the Borrower shall use 50% of any Net Cash Proceeds to repay theTerm Loan and 50% of any Net Cash Proceeds to repay the Additional RevolvingLoans (as defined in the BofA Loan Documents) made to the Borrower by Bank ofAmerica under the BofA Loan Documents.

 

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SECTION 6.02.                 NegativeCovenants.  So long as any RevolvingLoan shall remain unpaid or the Bank shall have any Commitment hereunder, theBorrower will not, without the written consent of the Bank:

 

(a)                                  Consolidated Tangible Net Worth.  At any time, permit Consolidated TangibleNet Worth to be less than the sum of (i) $70,000,000 plus(ii) fifty percent (50%) of the cash proceeds received by the Borrower orany of its Subsidiaries from the issuance of any capital stock of the Borroweror any of its Subsidiaries after the date hereof (net of underwriting discountsand commissions, professional fees and disbursements in each case not paid toan affiliate of the Borrower or a Subsidiary of the Borrower) otherthanany such proceeds received by the Borrower in connection with the EmployeeStock Purchase Plan or the Dividend Reinvestment Plan.

 

(b)                                 Consolidated Net Profit.  At the end of any fiscal quarter of theBorrower, permit Consolidated Net Profit, determined on a four quarter rollingbasis, to be less than $1.00.

 

(c)                                  EBITDA Coverage Ratio.  At the end of any fiscal quarter of the Borrower, permit theEBITDA Coverage Ratio, determined on a four quarter rolling basis, to be lessthan 1.50:1.00.

 

(d)                                 Liens Etc.  Create orsuffer to exist, or permit any of its Subsidiaries to create or suffer toexist, any Lien upon or with respect to any of its properties, whether nowowned or hereafter acquired, or assign, or permit any of its Subsidiaries toassign, any right to receive income, in each case to secure any Debt of anyPerson other than (i) Liens in favor of the Bank; (ii) Liens on thecapital stock of Tecon in favor of Bank of America, N.A, under the BofA LoanDocuments; (iii) following the closing of the Tecon Acquisition, Liens onthe assets of Tecon in existence on the closing date of the Tecon Acquisitionwhich secure the bond indebtedness of Tecon referred to in, and permittedunder, clause (ii) of Section 6.02(e) below; (iv) Liens existing on thedate hereof and set forth in Schedule 6.02(d) hereto;(v) purchase money Liens upon or in any equipment acquired or held by theBorrower or any Subsidiary in the ordinary course of business with respect toprincipal indebtedness up to a maximum of $2,000,000 to secure the purchaseprice of such equipment or to secure indebtedness incurred solely for thepurpose of financing the acquisition of such equipment; (vi) Liensexisting on property acquired by the Borrower or any Subsidiary, and allrefundings and extensions of any such Liens; (vii) Liens, deposits and/orpledges made to secure the performance of operating leases; provided that theprincipal amount of Debt secured by any such Lien permitted hereunder shall notexceed an amount equal to (x) one hundred percent (100%) of the cost of the real property subject to suchlien or security interest or (y) one hundred percent (100%) of thecost of the personal property subject to such lien or security interest, andfurther provided that none of such liens or security interests shallextend to other assets of the Borrower or its Subsidiaries; (viii) Liens fortaxes, assessments or other governmental charges which are not delinquent; and(ix) materialmen’s, mechanics’ or other similar liens arising in the ordinarycourse of business the underlying claim with respect to which is not delinquentor is being contested in good faith.

 

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(e)                                  Debt.  Create,incur, assume or permit to exist, or permit any Subsidiary to create, incur,assume or permit to exist, any indebtedness or liabilities resulting fromborrowings, loans or advances, whether matured or unmatured, liquidated orunliquidated, joint or several, secured or unsecured, except for (i) Debtincurred pursuant to the Convertible Debentures in a principal amount not toexceed $18,000,000 outstanding at any time, (ii) following the closing ofthe Tecon Acquisition, the secured bond indebtedness of Tecon which as of theclosing of the Tecon Acquisition shall be in an aggregate outstanding principalbalance not exceeding $14,674,649.36 and which when repaid may not bereborrowed, (iii) secured indebtedness for purchase money financing ofequipment which is permitted under Section 6.02(d)(iv) in a principalamount not to exceed an aggregate of $2,000,000 outstanding at any time, (iv) othersecured Debt identified on Schedule 6.02(e) not to exceed theapplicable amount indicated on such schedule, (v) the Term Loan,(vi) the Additional Revolving Loan (as defined in the BofA LoanDocuments), (vii) unsecured senior funded bank debt in a principal amount notto exceed $40,000,000 outstanding at any time in the aggregate for the Borrowerand its Subsidiaries (including, without limitation, unsecured senior fundedbank debt incurred pursuant to the Loan Documents and the BofA Loan Documents,and excluding the undrawn face amount of the Capistrano Letter of Credit); providedthat the only unsecured senior funded debt of the Subsidiaries which may beoutstanding shall be (i) unsecured bank indebtedness of NMUI in anaggregate principal amount not to exceed at any one time $4,000,000 and(ii) other unsecured senior funded debt in a principal amount not toexceed $500,000 outstanding at any time in the aggregate for all Subsidiaries,****and(vi) intercompany Debt between the Borrower and its majority-owned Subsidiaries.

 

(f)                                    Consolidation,Merger or Dissolution. (i) Consolidate with or merge into any other Person, or permit anySubsidiary to consolidate with or merge into any other Person, unless theBorrower or the applicable Subsidiary is the surviving entity and no event hasoccurred and is continuing, or would result from such consolidation or merger,which constitutes an Event of Default or Potential Event of Default, (ii) wind up, liquidate or dissolve (provided,however, that the corporate existence of any Subsidiary may beterminated if such termination is in the best interest of the Borrower and doesnot result in a Change of Control) or (iii) agree to do any of theforegoing or permit any Subsidiary to agree to do any of the foregoing.

 

(g)                                 Loans,Investments, Acquisitions, Secondary Liabilities.  Make or permit to remain outstanding, or permit any Subsidiary tomake or permit to remain outstanding, any loan or advance to, or guarantee,induce or otherwise become contingently liable, directly or indirectly, inconnection with the obligations, stock or dividends of, or own, purchase oracquire any stock, obligations or securities of or any other interest in, ormake any capital contribution to, any other Person, or make any Acquisition orenter into any agreement to make any Acquisition, except that the Borrower andits Subsidiaries may:

 

(i)                                     own, purchase or acquire certificates ofdeposit issued by a bank, commercial paper rated Moody’s P-1, municipal bondsrated Moody’s AA or better, direct obligations of the United States of Americaor its agencies,

 

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obligations guaranteed by the United States ofAmerica, and “money market preferred stock” issued by a corporationincorporated under the laws of the United States of America or any statethereof given on the date of such investment a credit rating of at leastMoody’s Aa (and having an investment period not exceeding 50 days);

 

(ii)                                  make Permitted Acquisitions (includingthe Tecon Acquisition), provided that the aggregate consideration paidor payable by the Borrower and its Subsidiaries in connection with allPermitted Acquisitions consummated in any fiscal year of the Borrower shall notexceed $5,000,000 (excluding the cost of the Tecon Acquisition), providedfurther that such limit on consideration shall be increased to$10,000,000 (excluding the cost of the Tecon Acquisition) with respect to eachfiscal year of the Borrower if all Permitted Acquisitions are made by theBorrower in such fiscal year and all purchase price payments to be made by theBorrower in connection with such Permitted Acquisitions are payable only instock of the Borrower;

 

(iii)                               continue to own the existing capitalstock of the Borrower’s Subsidiaries;

 

(iv)                              endorse negotiable instruments fordeposit or collection or similar transactions in the ordinary course ofbusiness;

 

(v)                                 allow the Borrower’s Subsidiaries to makeor permit to remain outstanding advances from the Borrower’s Subsidiaries tothe Borrower;

 

(vi)                              make or permit to remain outstandingloans or advances to those Subsidiaries of the Borrower as to which theBorrower owns at least 80% of the outstanding equity;

 

(vii)                           with respect to the Borrower only, enterinto or permit to remain outstanding (a) a guaranty of the unsecured bankindebtedness of NMUI in an amount  notto exceed at any one time $4,000,000 for principal, plus all interestthereon and all costs and expenses pertaining to the enforcement of theguaranty and/or the collection of such indebtedness, (b) a guaranty of thesenior secured bank indebtedness provided by Bank of the West to Windermere inan amount not to exceed at any one time $10,000,000 for principal, plusall interest thereon and all costs and expenses pertaining to the enforcementof the guaranty and/or the collection of such indebtedness, (c) guarantiesof the obligations of ECO under that certain Service Contract for the Design,Construction, Financing and Operation of the San Juan Basin Desalter Projectdated as of September 3, 2002 between the Capistrano Valley Water Districtand ECO and associated project agreements;****and

 

(viii)                        make or permit to remain outstandingloans and advances to any of its officers, shareholders or affiliates or enterinto or permit to remain outstanding guarantees in connection with theobligations of its officers,

 

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shareholders or affiliates, in an aggregate amount forall such loans, advances and guarantees not exceeding $100,000 in addition tothe loans outstanding and reflected on the Borrower’s financial statementsdated March 31, 2004.

 

 

(h)                                 Asset Sales.  Convey,sell, lease, transfer or otherwise dispose of, or permit any Subsidiary toconvey, sell, lease, transfer or otherwise dispose of, in one transactionor a series of transactions, all or any part of its or its Subsidiary’sbusiness, property or fixed assets outside the ordinary course of business,whether now owned or hereafter acquired, except that the Borrower and itsSubsidiaries may convey, sell, lease, transfer or otherwise dispose ofbusiness, property or fixed assets for consideration which in the aggregatedoes not exceed $1,000,000 per year. The foregoing covenant shall not extend to any property taken by eminentdomain by any governmental authority or other person or entity having the powerof eminent domain or to any sale in lieu of condemnation to a governmentalauthority or other person or entity having the power of eminent domain madeafter threat of condemnation by such governmental authority or other person orentity.

 

(i)                                     Hostile Tender Offers.  Make any offer to purchase or acquire, or consummate a purchaseor acquisition of, five percent (5%) or more of the capital stock of anypublicly held corporation or other publicly held business entity, unless theboard of directors of such corporation or business entity has notified theBorrower that it invites or does not oppose such offer or purchase.

 

(j)                                     Distributions.  Uponthe occurrence and during the continuance of an Event of Default, authorize, declareor pay, or permit any of its Subsidiaries to authorize, declare or pay, anyDistributions otherthan Distributions to the Borrower made by aSubsidiary of the Borrower.

 

(k)                                  Transactions with Affiliates.  Neither the Borrower nor any of itsSubsidiaries shall enter into any transaction for the purchase, sale orexchange of property or the rendering of any service to or by any affiliate,except in the ordinary course of and pursuant to the reasonable requirements ofthe Borrower’s or its Subsidiary’s business and upon fair and reasonable termsno less favorable to the Borrower or its Subsidiary than the Borrower or itsSubsidiary would obtain in a comparable arm’s length transaction with anunaffiliated person.

 

(l)                                     Books and Records. The Borrower will, and will cause each of its Subsidiaries to, keepproper books of record and account in which full, true and correct entries inconformity with GAAP and all requirements of applicable law shall be made ofall dealings and transactions in relation to its business and activities.

 

(m)                               Restructure.  Makeany change in the principal nature of the Borrower’s and its Subsidiaries’business operations (taken as a whole) or the date of its fiscal year.

 

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ARTICLE VIIEVENTS OF DEFAULT

 

SECTION 7.01.                 Eventsof Default.  If any of the followingevents (“Events of Default”) shall occur and be continuing:

 

(a)                                  The Borrower shall fail to pay withinthree (3) days of the date when due, any principal, interest, fees or otheramounts payable under any of the Loan Documents; or

 

(b)                                 Any representation or warranty made bythe Borrower herein or by the Borrower (or any of its officers)  in connection with the Loan Documents shallprove to have been incorrect in any material respect when made; or

 

(c)                                  The Borrower shall fail to perform orobserve any term, any affirmative or negative covenant, including, but notlimited to, those covenants set forth in Sections 6.01 and 6.02 hereof, or anyother agreement contained in this Agreement on its part to be performed orobserved (other than those referred to in subsections (a) and(b) above); and with respect to any such default which by its nature canbe cured, such default shall continue for a period of twenty (20) days from itsoccurrence; or

 

(d)                                 The Borrower or any of its Subsidiariesshall default in the performance of or compliance with any term contained inany Loan Document other than this Agreement and such default shall not havebeen remedied or waived within any applicable grace period in such LoanDocument or in (c) above; or

 

(e)                                  The Borrower shall default in theperformance of or compliance with any term contained in any BofA Loan Document,and such default shall continue after the applicable grace period, if any,specified in the applicable BofA Loan Document; or

 

(f)                                    to the extent not already addressed inthis Section 7.01, the Borrower or any of its Subsidiaries shall(a) fail to pay any principal of, or premium or interest on, any Debt theaggregate outstanding principal amount of which is at least $500,000 (excludingDebt evidenced by the Revolving Note or the Term Note), when due (whether byscheduled maturity, required prepayment, acceleration, demand or otherwise) andsuch failure shall continue after the applicable grace period, if any,specified in the agreement or instrument relating to such Debt, or(b) fail to perform or observe any term, covenant or condition on its partto be performed or observed under any agreement or instrument relating to anysuch Debt or material to the performance, business, property, assets, condition(financial or otherwise) or prospects of the Borrower and its Subsidiariestaken as a whole, when required to be performed or observed, and such failureshall continue after the applicable grace period, if any, specified in suchagreement or instrument; or

 

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(g)                                 (i) The Borrower or any of itsSubsidiaries shall commence any case, proceeding or other action (a) underany existing or future law of any jurisdiction, domestic or foreign, relatingto bankruptcy, insolvency, reorganization or relief of debtors, seeking to havean order for relief entered with respect to it, or seeking to adjudicate it abankrupt or insolvent, or seeking reorganization, arrangement, adjustment,winding-up, liquidation, dissolution, composition or other relief with respectto it or its debts, or (b) seeking appointment of a receiver, trustee,custodian or other similar official for it or for all or any substantial partof its assets, or the Borrower or any of its Subsidiaries shall make a generalassignment for the benefit of its creditors; or (ii) there shall becommenced against the Borrower or any of its Subsidiaries any case, proceedingor other action of a nature referred to in clause (i) above which(a) results in the entry of an order for relief or any such adjudicationor appointment or (b) remains undismissed, undischarged or unbonded for aperiod of sixty (60) days the (the Bank may, in its discretion, cease makingRevolving Loans during the pendency of such action or proceeding); or(iii) there shall be commenced against the Borrower or any of itsSubsidiaries any case, proceeding or other action seeking issuance of a warrantof attachment, execution, distraint or similar process against all or anysubstantial part of its assets which results in the entry of an order for anysuch relief which shall not have been vacated, discharged, or stayed or bondedpending appeal within sixty (60) days from the entry thereof (the Bank may, inits discretion, cease making Revolving Loans during the pendency of such actionor proceeding); or (iv) the Borrower or any of its Subsidiaries shall takeany action in furtherance of, or indicating its consent to, approval of, oracquiescence in, any of the acts set forth in clauses (i), (ii) and(iii) above; or (v) the Borrower or any of its Subsidiaries shallgenerally not, or shall be unable to, or shall admit in writing its inabilityto, pay its debts as they become due; or

 

(h)                                 One or more judgments or decreesshall be entered against the Borrower or any of its Subsidiaries involving inthe aggregate a liability (not paid or fully covered by insurance orreserves)  equal to or greater than $500,000and all such judgments or decrees shall not have been vacated, discharged, orstayed or bonded pending appeal within thirty (30) days from the entry thereof;or

 

(i)                                     The Borrower or any of its ERISAAffiliates fails to make full payment when due of all material amounts which,under the provisions of any Pension Plan or Section 412 of the InternalRevenue Code, the Borrower or any of its ERISA Affiliates is required to pay ascontributions thereto and such development is not remedied or reversed withinfifteen (15) days after the Borrower knows of such development;

 

(i)                                     any material accumulated fundingdeficiency occurs or exists, whether or not waived, with respect to any PensionPlan and such development is not remedied or reversed within fifteen (15) daysafter the Borrower knows of such development;

 

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(ii)                                  the excess of the actuarial present valueof all benefit liabilities under all Pension Plans over the fair market valueof the assets of such Pension Plans (excluding in such computation PensionPlans with assets greater than benefit liabilities)  allocable to such benefit liabilities are greater than fivepercent (5%) of Consolidated Tangible Net Worth and such development is notremedied or reversed within fifteen (15) days after the Borrower knows of such development;

 

(iii)                               the Borrower or any of its ERISAAffiliates enters into any transaction which has as its principal purpose theevasion of liability under Subtitle D of Title IV of ERISA;

 

(iv)                              (a) Any Pension Plan maintained bythe Borrower or any of its ERISA Affiliates shall be terminated within themeaning of Title IV of ERISA in a distress termination, or (b) a trusteeshall be appointed by an appropriate United States district court in accordancewith Section 4042 of ERISA to administer any Pension Plan, or (c) thePension Benefit Guaranty Corporation (or any successor thereto) shall instituteproceedings to terminate any Pension Plan or to appoint a trustee to administerany Pension Plan in accordance with Section 4042of ERISA, or (d) the Borrower or any of its ERISA Affiliates shallwithdraw (under Section 4063 of ERISA) from a Pension Plan, if as of thedate of the event listed in subclauses (A)-(d) above or any subsequentdate, either the Borrower or its ERISA Affiliates has any material liability(such liability to include, without limitation, any liability to the PensionBenefit Guaranty Corporation, or any successor thereto, or to any other partyunder Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resultingfrom or otherwise associated with the events listed in subclauses(A)-(d) above;

 

(v)                                 As used in thisSubsection 7.01(i) the term “accumulated funding deficiency” has themeaning specified in Section 412 of the Internal Revenue Code, and theterm “benefit liabilities” has the meaning specified in Section 4001 of ERISA;

 

(j)                                     There shall be instituted against theBorrower or any Subsidiary, or against any guarantor, any proceeding for whichforfeiture of any property with a value of $500,000 or more is a potentialpenalty and such proceeding remains undismissed, undischarged or unbonded for aperiod of thirty (30) days from the date the Borrower knows of such proceeding;or

 

(k)                                  A Change of Control shall have occurred.

 

Then, (i) upon theoccurrence and during the continuation of any Event of Default described inclause 7.01(g) above, the Commitment shall immediately terminate and allRevolving Loans hereunder with accrued interest thereon, and all other amountsowing under the Loan Documents shall automatically become due and payable, and(ii) upon the occurrence of any other Event of Default, the Bank may, bynotice to the Borrower, declare the Commitment to be terminated forthwith,whereupon the Commitment shall immediately terminate; and, by notice

 

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to the Borrower, declarethe Revolving Loans hereunder, with accrued interest thereon, and all otheramounts owing under the Loan Documents to be due and payable forthwith,whereupon the same shall immediately become due and payable.  The Bank shall have all rights, powers andremedies available under each of the Loan Documents, or accorded by law,including, without limitation, the right to resort to any or all security forany credit accommodation from the Bank subject hereto and to exercise any orall of the rights of a beneficiary or secured party pursuant to applicablelaw.  All rights, powers and remedies ofthe Bank in connection with each of the Loan Documents may be exercised at anytime by the Bank and from time to time after the occurrence of an Event ofDefault, are cumulative and not exclusive, and shall be in addition to anyother rights, powers or remedies provided by law or equity.  Except as expressly provided above in thisSection, presentment, demand, protest and all other notices of any kind arehereby expressly waived. Notwithstanding any other provision of this Agreement,including Section 8.02, notices to the Borrower under thisSection shall be communicated in writing (including telex or facsimiletransmissions).

 

ARTICLE VIIIMISCELLANEOUS

 

SECTION 8.01.                 Amendments,Etc.  No amendment or waiver of anyprovision of the Loan Documents nor consent to any departure by the Borrowertherefrom, shall in any event be effective unless the same shall be in writingand signed by the Bank, and then such waiver or consent shall be effective onlyin the specific instance and for the specific purpose for which given.

 

SECTION 8.02.                 Notices, Etc.Except as otherwise set forth in this Agreement, all notices and othercommunications provided for hereunder shall be in writing (including facsimilecommunication) and mailed certified mail, return receipt requested or sent byfacsimile or delivered, if to the Borrower, at its address set forth on thesignature page hereof; and if to the Bank, at its address set forth on thesignature page hereof; or, as to each party, at such other address as shall bedesignated by such party in a written notice to the other parties. All suchnotices and communications shall be effective upon personal delivery or uponreceipt when sent by facsimile, or on the date of receipt or refusal indicatedon the return receipt if sent by certified mail, except that notices andcommunications to the Bank pursuant to Article II or VII shall not beeffective until received by the Bank.

 

SECTION 8.03.                 Right ofSetoff:  Security Interest in DepositAccounts.  Upon and only after theoccurrence and during the continuation of any Event of Default not cured withinany applicable grace period, the Bank is hereby authorized by the Borrower, atany time and from time to time, without notice, (a) to set off against,and to appropriate and apply to the payment of, the obligations and liabilitiesof the Borrower under the Loan Documents (whether matured or unmatured, fixedor contingent or liquidated or unliquidated) any and all amounts owing by theBank to the Borrower (whether payable in Dollars or any other currency, whethermatured or unmatured, and, in the case of deposits, whether general or special,time or demand and however evidenced) and (b) pending any such action, tothe extent necessary, to hold such amounts as collateral to secure suchobligations and liabilities and to return as unpaid for insufficient funds anyand all checks and other items drawn against any deposits so held as the Bankin its sole discretion may elect. The Borrower hereby grants to the Bank asecurity interest

 

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in all deposits and accounts maintained with the Bank. The Bank isauthorized to debit any account maintained with it by the Borrower for anyamount of principal, interest or fees which are then due and owing to the Bank.

 

SECTION 8.04.                 No Waiver;Remedies.  No failure on the part ofeither party hereto to exercise, and no delay in exercising, any right underany of the Loan Documents shall operate as a waiver thereof; nor shall anysingle or partial exercise of any right under any of the Loan Documentspreclude any other or further exercise thereof or the exercise of any otherright. The remedies herein provided are cumulative and not exclusive of anyremedies provided by law.

 

SECTION 8.05.                 Costs andExpenses.  The Borrower shall pay to theBank immediately upon demand the full amount of all reasonable costs and expenses,including reasonable attorneys’ fees (to include outside counsel fees and allallocated costs of the Bank’s in-house counsel), incurred by the Bank inconnection with (a) the negotiation and preparation of this Agreement andeach other of the Loan Documents, and the preparation of any amendments andwaivers hereto and thereto, (b) the enforcementof the Bank’s rights and/or the collection of any amounts which become due tothe Bank under any of the Loan Documents (including, without limitation, inappellate, bankruptcy, insolvency, liquidation, reorganization, moratorium orother similar proceedings) or the restructuring of the Loan Documents, and(c) the prosecution or defense of any action in any way related to any ofthe Loan Documents, including, without limitation, any action for declaratoryrelief.

 

SECTION 8.06.                 Participations.  The Bank may sell, assign, transfer,negotiate or grant participations to other financial institutions in all orpart of the obligations of the Borrower outstanding under the Loan Documents,provided that: (i) if no Event of Default has occurred and is continuing, theBank shall obtain the Borrower’s prior written consent to any such sale,assignment, transfer, negotiation or participation, which consent shall not beunreasonably withheld; (ii) any such sale, assignment, transfer, negotiation orparticipation shall be in compliance with the applicable federal and statesecurities laws; and (iii) any assignee or transferee agrees to be bound by theterms and conditions of this Agreement. The Bank may, in connection with anyactual or proposed assignment or participation, disclose to the actual orproposed assignee or participant, any information relating to the Borrower orany of its Subsidiaries.

 

SECTION 8.07.                 Effectiveness:Binding Effect .  This Agreementshall become effective when it shall have been executed by the Borrower and theBank and thereafter shall be binding upon and inure to the benefit of theBorrower, the Bank and their respective successors and assigns, except that theBorrower shall not have the right to assign its rights hereunder or anyinterest herein without the prior written consent of the Bank.

 

SECTION 8.08.                 GoverningLaw.  The validity, interpretation andenforcement of this Agreement and the other Loan Documents (except to theextent otherwise provided in any such Loan Document) and any dispute arisingout of the relationship between the parties hereto or thereto, whether incontract, tort, equity or otherwise, shall be governed by the internal laws ofthe State of California (without giving effect to principles of conflicts oflaw).

 

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SECTION 8.09.                 DisputeResolution.  This Agreement herebyincorporates any alternative dispute resolution agreement previously,concurrently or hereafter executed between the Borrower and the Bank.

 

SECTION 8.10.                 Waiver ofNotices.  The Borrower hereby expresslywaives demand, presentment, protest and notice of protest and notice ofdishonor with respect to any and all instruments, included in or evidencing anyof the obligations, and any and all other demands and notices of any kind ornature whatsoever with respect to the obligations and this Agreement, exceptsuch as are expressly provided for herein. No notice to or demand on the Borrower which the Bank may elect to giveshall entitle the Borrower to any other or further notice or demand in thesame, similar or other circumstances.

 

SECTION 8.11.                 EntireAgreement.  This Agreement with Exhibitsand Schedules and the other Loan Documents embody the entire agreement andunderstanding between the parties hereto and supersede all prior agreements andunderstandings relating to the subject matter hereof.  In the event of any conflict between the provisions of this Agreementand those of any other Loan Document, the provisions of this Agreement shallcontrol and govern; provided that the inclusion of supplemental rightsor remedies in favor of the Bank in any other Loan Document shall not be deemeda conflict with this Agreement.

 

SECTION 8.12.                 Severability ofProvisions.  In case any one ormore of the provisions contained in this Agreement should be invalid, illegalor unenforceable in any respect, the validity, legality and enforceability ofthe remaining provisions contained herein shall not in any way be affected orimpaired thereby.

 

SECTION 8.13.                 Execution inCounterparts.  This Agreement may beexecuted in any number of counterparts and by different parties hereto inseparate counterparts, each of which when so executed shall be deemed to be anoriginal and all of which taken together shall constitute one and the sameagreement.

 

SECTION 8.14.                 FurtherAssurances.  Without limiting in anymanner any other obligation, requirement or agreement hereunder or under any ofthe other Loan Documents or otherwise, the Borrower shall, at its expense andwithout expense to the Bank, do, execute and deliver such further acts anddocuments as the Bank from time to time reasonably requires for the assuringand confirming unto the Bank of the rights hereby created or intended now orhereafter so to be, or for carrying out the intention or facilitating theperformance of the terms of any Loan Document.

 

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IN WITNESS WHEREOF, theparties hereto have caused this Agreement to be executed by their respectiveofficers thereunto duly authorized, as of the date first above written.

 
| UNION BANK OF CALIFORNIA, N.A.            | SOUTHWEST WATER COMPANY            |
|-------------------------------------------|------------------------------------|
|                                      |                               |
|                                      |                               |
| By:                                       |                               |   | By: |   |   |
|                                      |                               | Richard Madsen |   |   |   | Peter J. Moerbeek |
|                                      |                               | Regional Vice President |   |   |   | President and Chief Operating Officer |
|                                      |                               |
| Address:                                  | Address:                           |
|                                      |                               |
| Metro Los Angeles Commercial Banking      | 624 South Grand Avenue, Suite 2900 |
| 445 South Figueroa Street, 10th Floor     | Los Angeles, California 90017      |
| Los Angeles, California   90071-1602 | Attention: Thomas C. Tekulve       |
| Attention: Richard Madsen                 | Vice President — Finance      |
| Title: Regional Vice President            | Facsimile: (213) 929-1800          |
| Facsimile: (213) 236-4013                 |                               |
|                                           |                                    |  |  |  |  |  |  |

 

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SCHEDULE 5.01(a)

 

**Southwest Water Company**

**Subsidiaries as of July 2004**

 
| **Subsidiary Name**                           |   | **Entity**  |   | **State**  |   | **Parent  Company**    |   | **Percent  Owned  By Parent** |   | **Operating  Group** |
|-----------------------------------------------|--------|-------------|--------|------------|--------|------------------------|--------|-------------------------------|--------|----------------------|
| Aqua  Services LP                             |   | Partnership |   | Texas      |   | SWC                    |   | 100%                          |   | Services             |
| CDC  Maintenance, Inc.                        |   | Corp        |   | Texas      |   | ECO                    |   | 100%                          |   | Services             |
| ECO  Capistrano Valley, Inc.                  |   | Corp        |   | Delaware   |   | ECO                    |   | 100%                          |   | Services             |
| ECO Southern  California, Inc.-INACTIVE       |   | Corp        |   | California |   | ECO                    |   | 100%                          |   | NA                   |
| ECO  Resources, Inc.                          |   | Corp        |   | Texas      |   | SWC                    |   | 100%                          |   | Services             |
| Hornsby Bend  Utility Company                 |   | Corp        |   | Texas      |   | SW Utility Company     |   | 100%                          |   | Utility              |
| Lab-tech  Corporation                         |   | Corp        |   | Texas      |   | SWC                    |   | 100%                          |   | Services             |
| Master Tek  International, Inc.               |   | Corp        |   | Colorado   |   | SWC                    |   | 100%                          |   | Services             |
| Metro H2O  Utilities, Limited                 |   | Partnership |   | Texas      |   | SWC                    |   | 51%                           |   | Services             |
| New Mexico  Utilities, Inc.                   |   | Corp        |   | New Mexico |   | SWC                    |   | 100%                          |   | Utility              |
| Operations  Technologies, Inc.                |   | Corp        |   | Georgia    |   | SWC                    |   | 90%                           |   | Services             |
| SOCI, Inc. –  INACTIVE                   |   | Corp        |   | Delaware   |   | SWC                    |   | 100%                          |   | NA                   |
| Southwest  Environmental Labs                 |   | Corp        |   | Texas      |   | SWC                    |   | 100%                          |   | Services             |
| Southwest  Resource Management                |   | Corp        |   | California |   | Suburban Water Systems |   | 100%                          |   | Utility              |
| Suburban  Water Systems                       |   | Corp        |   | California |   | SWC                    |   | 100%                          |   | Utility              |
| SW-NM, Inc.                                   |   | Corp        |   | New Mexico |   | SWC                    |   | 100%                          |   | Utility              |
| SW Operating  Services Co.-INACTIVE           |   | Corp        |   | Delaware   |   | SWC                    |   | 100%                          |   | NA                   |
| SW Resource  Management Company               |   | Corp        |   | Delaware   |   | SWC                    |   | 100%                          |   | Utility              |
| SW Utility  Company                           |   | Corp        |   | Texas      |   | SWC                    |   | 100%                          |   | Utility              |
| Wastewater  Rehabilitation, Inc.              |   | Corp        |   | Texas      |   | SWC                    |   | 67%                           |   | Services             |
| Water  Suppliers Mobile Communication Service |   | Corp        |   | California |   | Suburban Water Systems |   | 100%                          |   | Utility              |
| Windermere  Utility Co., Inc.                 |   | Corp.       |   | Texas      |   | SW Utility Company     |   | 80%                           |   | Utility              |

 

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SCHEDULE 5.01(f) - LITIGATION

 

None other than asreported on Form 10-Q of Borrower for the quarter ended March 31,2004, and Form 10-K of Borrower for the year ended December 31, 2003.

 

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SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS

 

See Form 10-Q ofBorrower for the quarter ended March 31, 2004, and Form 10-K ofBorrower for the year ended December 31, 2003.

 

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SCHEDULE 6.02(d) - LIENS

 

None except asdisclosed in the audited consolidated financial statements of Borrower for thefiscal year ended 2003.

 

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SCHEDULE 6.02(e) – OTHER SECURED DEBT

 

None other than asreported on Form 10-K of Borrower for the year ended December 31,2003.

 

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EXHIBIT A

 

REVOLVING NOTE

 
| $20,000,000 |   | July 7,  2004 |   |
|-------------|--------|--------------------|--------|

 

FOR VALUE RECEIVED, theundersigned SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”),promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. (“Bank”) at itsoffice at 445 South Figueroa Street, 10th Floor, Los Angeles,California  90071-1602, or at such otherplace as the holder hereof may designate, in lawful money of the United Statesof America and in immediately available funds, the principal sum of TwentyMillion Dollars ($20,000,000), or so much thereof as may be advanced and beoutstanding, with interest thereon, to be computed on each advance from thedate of its disbursement (computed on the basis of a 360-day year and actualdays elapsed, which results in more interest than if a 365-day year were used)at a rate per annum equal to the applicable LIBOR Rate plus one andone-quarter percent (1.25%) or the Reference Rate minus one-quarter ofone percent (0.25%). When interest is determined in relation to theReference Rate, each change in the rate of interest hereunder shall becomeeffective on the opening of business on the day specified in the publicannouncement of a change in Bank’s Reference Rate. With respect to each LIBORoption selected hereunder, Bank is hereby authorized to note the date,principal amount, interest rate and applicable LIBOR Rate Term thereto and anypayments made thereon on Bank’s books and records (either manually or byelectronic entry) and/or on any schedule attached to this Note, whichnotations shall be prima facie evidence of the accuracy of the informationnoted.

 

A.                                   DEFINITIONS:

 

Capitalized terms usedand not otherwise defined herein shall have the meanings given such terms inthe Credit Agreement referred to below. As used herein, the following terms shall have the meanings set forthafter each:

 

1.                                       “Business Day” means any day except aSaturday, Sunday or any other day designated as a holiday under Federal orCalifornia statute or regulation, or for amounts bearing interest based on theLIBOR Rate, any Business Day is any day except a Saturday, Sunday or any otherday designated as a holiday under Federal or California statute or regulationon which dealings in Dollar deposits are conducted by and among banks in theDesignated LIBOR Market.

 

2.                                       “Credit Agreement” means that certainAmended and Restated Credit Agreement between Borrower and Bank dated as ofJuly 7, 2004, as amended from time to time, including, without limitation,those terms relating to arbitration of disputes.

 

3.                                       “Designated LIBOR Market” means theregular established market located in London by and among banks for thesolicitation, offer and acceptance of Dollar deposits in such banks.

 

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4.                                       “Dollars” means United States of Americadollars.

 

5.                                       “LIBOR Rate Portion” means a portion ofthe principal amount outstanding under this Note which is bearing interest at arate related to LIBOR. No LIBOR Rate Portion shall be less than Two HundredFifty Thousand Dollars ($250,000).

 

6.                                       “LIBOR Rate Term” means a period commencingon a Business Day and continuing for one (1) month, two (2) months,three (3) months, six (6) months or twelve (12) months, as designated byBorrower, during which all or a portion of the outstanding principal balance ofthis Note bears interest determined in relation to Bank’s LIBOR; providedhowever, that no LIBOR Rate Term shall extend beyond the scheduled maturitydate hereof. The last day of the interest period will be determined by Bankusing the Designated LIBOR Market. If any LIBOR Rate Term would end on a daywhich is not a Business Day, then such LIBOR Rate Term shall be extended to thenext succeeding Business Day.

 

7.                                       “LIBOR Rate” means the interest ratedetermined by the following formula, rounded upward, if necessary, to thenearest 1/100 of one percent. (All amounts in the calculation will bedetermined by Bank as of the first day of the interest period.)

 
| LIBOR Rate = |   | LIBOR Base Rate             |
|--------------|--------|-----------------------------|
|         |   | (1.00 - Reserve Percentage) |

 

(a)                                  “LIBOR Base Rate” means, with respect toany Revolving Loan to be made by Bank which is to bear interest in relation tothe LIBOR Rate, the interest rate per annum (rounded upward, if necessary, tothe nearest 1/100th of 1%) at which deposits in Dollars are offeredby Bank through its Los Angeles office to prime banks in the Designated LIBORMarket on the first day of the applicable LIBOR Rate Term in an aggregateamount approximately equal to the amount of the Revolving Loan to be made byBank and for a period of time comparable to the number of days in the applicableLIBOR Rate Term.  The determination ofthe LIBOR Base Rate by Bank shall be conclusive in the absence of manifesterror.

 

(b)                                 “Reserve Percentage” means, with respectto any Revolving Loan to be made by Bank which is to bear interest in relationto the LIBOR Rate, the maximum reserve percentage (expressed as a decimal,rounded upward, if necessary, to the nearest 1/100 of one percent) ineffect on the date the LIBOR Base Rate for the Revolving Loan is determined(whether or not such reserve percentage is applicable to Bank) underregulations issued from time to time by the Federal Reserve Board fordetermining the maximum reserve requirement (including any emergency,supplemental or other marginal reserve requirement) with respect toeurocurrency funding (currently referred to as “eurocurrency liabilities”)having a term comparable to the LIBOR Rate Term for such Revolving Loan.  The determination by Bank of any applicableReserve Percentage shall be conclusive in the absence of manifest error.

 

8.                                       “Reference Rate” means the variable perannum rate of interest most recently announced by Bank at its corporateheadquarters as the “Union Bank of California, N.A. Reference Rate,” with theunderstanding that the “Union Bank of California, N.A. Reference Rate” is one ofBank’s index rates and merely serves as a basis upon which effective rates of

 

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interest are calculatedfor loans making reference thereto and may not be the lowest or best rate atwhich Bank calculates interest or extends credit.  Any change in the Reference Rate announced by Bank shall takeeffect at the opening of business on the day specified in the announcement ofsuch change.

 

B.                                     INTEREST:

 

1.                                       Payment of Interest. Interest accrued onthis Note shall be payable on the fifteenth (15th) day of each monthfor the prior month or portion thereof, commencing July 15, 2004.

 

2.                                       Selection of Interest Rate Options. Atany time any portion of this Note bears interest determined in relation to theLIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Termapplicable thereto so that all or a portion thereof bears interest determinedin relation to the Reference Rate or in relation to the LIBOR Rate for a newLIBOR Rate Term designated by Borrower. At any time any portion of this Notebears interest determined in relation to the Reference Rate, Borrower mayconvert all or a portion thereof so that it bears interest determined inrelation to the LIBOR Rate for a LIBOR Rate Term designated by Borrower. At thetime each advance is requested hereunder or Borrower wishes to select the LIBORoption for all or a portion of the outstanding principal balance hereof, and atthe end of each LIBOR Rate Term, Borrower shall give Bank notice specifying (a) theinterest rate option selected by Borrower, (b) the principal amountsubject thereto, and (c) if the LIBOR option is selected, the length ofthe applicable LIBOR Rate Term. Any such notice may be given bytelephone so long as, with respect to each LIBOR selection, such notice isgiven to Bank prior to 10:00 a.m., California time, on the third Business Dayprior to the commencement of the LIBOR Rate Term and, with respect to eachReference Rate selection, such notice is given to Bank prior to 11:00 a.m., Californiatime, on the day of the requested advance. For each LIBOR option requestedhereunder, Bank will quote the applicable LIBOR Rate to Borrower atapproximately 10:00 a.m., California time, on the second Business Day prior tothe LIBOR Rate Term. If Borrower does not immediately accept the rate quoted byBank, any subsequent acceptance by Borrower shall be subject to are-determination by Bank of the applicable LIBOR Rate; provided however, thatif Borrower fails to accept any such rate by 11:00 a.m., California time, onthe Business Day such quotation is given, then the quoted rate shall expire andBank shall have no obligation to permit a LIBOR option to be selected on suchday. If no specific designation of interest is made at the time any advance isrequested hereunder or at the end of any LIBOR Rate Term, Borrower shall bedeemed to have made a Reference Rate interest selection for such advance or theprincipal amount to which such LIBOR Rate Term applied.

 

3.                                       Additional LIBOR Provisions.

 

(a)                                  If Bank at any time shall determine thatfor any reason adequate and reasonable means do not exist for ascertaining theLIBOR Rate, then Bank shall promptly give notice thereof to Borrower. If suchnotice is given and until such notice has been withdrawn by Bank, than(i) no new LIBOR option may be selected by Borrower, and (ii) anyportion of the outstanding principal balance hereof which bears interestdetermined in relation to the LIBOR Rate, subsequent to the end of the LIBORRate Term applicable thereto, shall bear interest determined in relation to theReference Rate.

 

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(b)                                 If any law, treaty, rule, regulation ordetermination of a court or governmental authority or any change therein or inthe interpretation or application thereof (each, a “Change in Law”) shall makeit unlawful for Bank (i) to make LIBOR options available hereunder, or(ii) to maintain interest rates based on the LIBOR Rate, then in theformer event, any obligation of Bank to make available such unlawful LIBORoptions shall immediately be cancelled, and in the latter event, any suchunlawful LIBOR-based interest rates then outstanding shall be converted, atBank’s option, so that interest on the portion of the outstanding principalbalance subject thereto is determined in relation to the Reference Rate;provided however, that if any such Change in Law shall permit any LIBOR-basedinterest rates to remain in effect until the expiration of the LIBOR Rate Termapplicable thereto, then such permitted LIBOR-based interest rates shallcontinue in effect until the expiration of such LIBOR Rate Term. Upon theoccurrence of any of the foregoing events, Borrower shall pay to Bankimmediately upon demand such amounts as may be necessary to compensate Bank forany fines, fees, charges, penalties or other costs incurred or payable by Bankas a result thereof and which are attributable to any LIBOR options madeavailable to Borrower hereunder, and any reasonable allocation made by Bankamong its operations shall be conclusive and binding upon Borrower.

 

(c)                                  If any Change in Law or compliance byBank with any request or directive (whether or not having the force of law)from any central bank or other governmental authority shall:

 

(i)                                     subject Bank to any tax, duty or othercharge with respect to any LIBOR options, or change the basis of taxation ofpayments to Bank of principal, interest, fees or any other amount payablehereunder (except for changes in the rate of tax on the overall net income ofBank); or

 

(ii)                                  impose, modify or hold applicable anyreserve, special deposit, compulsory loan or similar requirement against assetsheld by, deposits or other liabilities in or for the account of advances orloans by, or any other acquisition of funds by any office of Bank; or

 

(iii)                               impose on Bank any other condition; andthe result of any of the foregoing is to increase the cost to Bank of making,renewing or maintaining any LIBOR options hereunder and/or to reduce any amountreceivable by Bank in connection therewith, then in any such case, Borrowershall pay to Bank immediately upon demand such amounts as may be necessary tocompensate Bank for any additional costs incurred by Bank and/or reductions inamounts received by Bank which are attributable to such LIBOR options. Indetermining which costs incurred by Bank and/or reductions in amounts receivedby Bank are attributable to any LIBOR options made available to Borrowerhereunder, any reasonable allocation made by Bank among its operations shall beconclusive and binding upon Borrower.

 

(d)                                 Bank will have no obligation to accept anelection of Borrower for the LIBOR option if any of the following describedevents has occurred and is continuing:

 

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(i)                                     Dollar deposits in the principal amount,and for periods equal to the LIBOR Rate Term, of any Revolving Loan which bearsinterest in relation to the LIBOR Rate are not available in the DesignatedLIBOR Market; or

 

(ii)  anEvent of Default has occurred and is continuing; or

 

(iii) theLIBOR Rate does not accurately reflect the cost of any Revolving Loan whichbears interest in relation to the LIBOR Rate.

 

4.                                       Default Interest. During the continuanceof an Event of Default, the outstanding principal balance of this Note shallbear interest until paid in full at an increased rate per annum (computed onthe basis of a 360-day year and actual days elapsed, which results in moreinterest than if a 365-day year were used) equal to two percent (2.00%) abovethe rate of interest from time to time applicable to this Note (the “DefaultRate”).

 

C.                                     BORROWING AND REPAYMENT:

 

1.                                       Loan and Repayment. Borrower may fromtime to time during the term of this Note borrow, partially or wholly repay itsoutstanding borrowings, and re-borrow, subject to all of the limitations, termsand conditions of this Note and of any document executed in connection with orgoverning this Note, including the Credit Agreement; provided however, that thetotal outstanding borrowings under this Note shall not at any time exceed theprincipal amount stated above. The unpaid principal balance of this obligationat any time shall be the total amounts advanced hereunder by the holder hereofless the amount of principal payments made hereon by or for Borrower, whichbalance may be endorsed hereon from time to time by the holder.  The outstanding principal balance of thisNote shall be due and payable in full on the “Maturity Date” (as defined in theCredit Agreement).

 

2.                                       Advances. Advances hereunder, to thetotal amount of the principal sum stated above, may be made by the holder atthe oral or written request of (a) Borrower’s Chief Financial Officer,Vice President-Finance, Vice President-Treasurer, or Controller, anyone acting alone, who are authorized to request advances and direct thedisposition of any advances until written notice of the revocation of suchauthority is received by the holder at the office designated above, or(b) any person, with respect to advances deposited to the credit of anyaccount of Borrower with the holder, which advances, when so deposited, shallbe conclusively presumed to have been made to or for the benefit of Borrowerregardless of the fact that persons other than those authorized to requestadvances may have authority to draw against such account. The holder shall haveno obligation to determine whether any person requesting an advance is or hasbeen authorized by Borrower.

 

3.                                       Application of Payments. Each paymentmade on this Note shall be credited first, to any interest then due and second,to the outstanding principal balance hereof. Unless instructed otherwise byBorrower, all payments credited to principal shall be applied first, to theoutstanding principal balance of this Note which bears interest determined inrelation to the Reference Rate, if any, and second, to the outstandingprincipal balance of this Note which bears interest determined in relation tothe LIBOR Rate, with such payments applied to the oldest LIBOR Rate Term first.

 

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4.                                       Prepayment.

 

(a)                                  Reference Rate. Borrower may prepayprincipal on any portion of this Note which bears interest determined inrelation to the Reference Rate at any time, in any amount and without penalty.

 

(b)                                 LIBOR. Each prepayment of a LIBOR RatePortion shall be not less than $250,000 and shall be in an integral multiple of$100,000, and Bank shall have received notice of each such prepayment on thedate that is five (5) Business Days before the date of such prepayment (whichnotice shall identify the date and amount of the prepayment).  Each prepayment of a LIBOR Rate Portion,whether voluntary, by reason of acceleration or otherwise, will be accompaniedby the amount of accrued interest on the amount prepaid, and a prepayment feeas described below. A “prepayment” is a payment on a date earlier than the lastday of the applicable LIBOR Rate Term. The prepayment fee shall be equal to theamount (if any) by which:

 

(i)                                     the additional interest which would havebeen payable during the applicable LIBOR Rate Term on the amount prepaid had itnot been prepaid, exceeds

 

(ii)                                  the interest which would have beenrecoverable by Bank by placing the amount prepaid on deposit in the domesticcertificate of deposit market, the eurodollar deposit market, or otherappropriate money market selected by Bank for a period starting on the date onwhich it was prepaid and ending on the last day of the applicable LIBOR RateTerm.

 

Borrower acknowledgesthat prepayment of such amount may result in Bank incurring additional costs,expenses and/or liabilities, and that it is difficult to ascertain the fullextent of such costs, expenses and/or liabilities. Borrower, therefore, agreesto pay the above-described prepayment fee and agrees that said amountrepresents a reasonable estimate of the prepayment costs, expenses and/orliabilities of Bank. If Borrower fails to pay any prepayment fee when due, theamount of such prepayment fee shall thereafter bear interest until paid at arate per annum two percent (2.00%)****above the Reference Rate in effect fromtime to time (computed on the basis of a 360-day year, actual days elapsed).

 

D.                                    EVENTS OF DEFAULT:

 

This Note is madepursuant to and is subject to the terms and conditions of the CreditAgreement.  Any default in the paymentor performance of any obligation under this Note, or any defined event ofdefault under the Credit Agreement, shall constitute an “Event of Default”under this Note.

 

E.                                      MISCELLANEOUS:

 

1.                                       Remedies.  Upon the occurrence and during the continuation of any Event ofDefault, the holder of this Note, at the holder’s option, without notice uponthe occurrence and during the continuation of an Event of Default pursuant toSection 7.01(g) of the Credit Agreement, and with notice upon theoccurrence of any other Event of Default, may declare all

 

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sums of principal andinterest outstanding hereunder to be immediately due and payable withoutpresentment, demand, protest or notice of dishonor, all of which are expresslywaived by Borrower, and the obligation, if any, of the holder to extend anyfurther credit hereunder shall immediately cease and terminate. Borrower shallpay to the holder immediately upon demand the full amount of all payments,advances, charges, costs and expenses, including reasonable attorneys’ fees (toinclude outside counsel fees and all allocated costs of the holder’s in-housecounsel), incurred by the holder in connection with the enforcement of theholder’s rights and/or the collection of any amounts which become due to theholder under this Note, and the prosecution or defense of any action in any wayrelated to this Note, including without limitation, any action for declaratoryrelief, and including any of the foregoing incurred in connection with anybankruptcy proceeding relating to Borrower.

 

2.                                       Obligations Joint and Several. Shouldmore than one person or entity sign this Note as a Borrower, theobligations of each such Borrower shall be joint and several.

 

3.                                       Replacement of Prior Revolving Note.  This Note amends, restates, replaces andsupercedes (but does not create a novation of the indebtedness evidenced by)the Revolving Note, dated June 6, 2003, in the principal amount of$15,000,000, executed by Borrower to the order of Bank in connection with theOld Credit Agreement.

 

4.                                       Governing Law. This Note shall begoverned by and construed in accordance with the laws of the State ofCalifornia, except to the extent Bank has greater rights or remedies underFederal law, whether as a national bank or otherwise, in which case such choiceof California law shall not be deemed to deprive Bank of any such rights andremedies as may be available under Federal law.

 

“Borrower”

 

SOUTHWEST WATER COMPANY,a Delaware corporation

 

 
| By:    |                                   |   |   |   |
|--------|----------------------------------------|--------|--------|--------|
|   | Peter J. Moerbeek                      |   |   |
|   | President and Chief  Operating Officer |   |   |
|        |                                        |        |        |        |  |

 

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EXHIBIT B

 

TERMNOTE

                
| $15,000,000 |   | July 7, 2004 |
|-------------|--------|-------------------|

 

FOR VALUE RECEIVED, theundersigned SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”),promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. (“Bank”) at itsoffice at 445 South Figueroa Street, 10th Floor, Los Angeles,California  90071-1602, or at such otherplace as the holder hereof may designate, in lawful money of the United Statesof America and in immediately available funds, the principal sum of FifteenMillion Dollars ($15,000,000), with interest thereon (computed on the basis ofa 360-day year and actual days elapsed, which results in more interest than ifa 365-day year were used) at a rate per annum equal to the applicable LIBORRate plus one and three-quarters percent (1.75%) or the Reference Rate.When interest is determined in relation to the Reference Rate, each change inthe rate of interest hereunder shall become effective on the opening ofbusiness on the day specified in the public announcement of a change in Bank’sReference Rate. With respect to each LIBOR option selected hereunder, Bank ishereby authorized to note the date, principal amount, interest rate and applicableLIBOR Rate Term thereto and any payments made thereon on Bank’s books andrecords (either manually or by electronic entry) and/or on anyschedule attached to this Note, which notations shall be prima facieevidence of the accuracy of the information noted.

 

A.                                   DEFINITIONS:

 

Capitalized terms usedand not otherwise defined herein shall have the meanings given such terms inthe Credit Agreement referred to below. As used herein, the following terms shall have the meanings set forthafter each:

 

1.                                       “Business Day” means any day except aSaturday, Sunday or any other day designated as a holiday under Federal orCalifornia statute or regulation, or for amounts bearing interest based on theLIBOR Rate, any Business Day is any day except a Saturday, Sunday or any otherday designated as a holiday under Federal or California statute or regulationon which dealings in Dollar deposits are conducted by and among banks in theDesignated LIBOR Market.

 

2.                                       “Credit Agreement” means that certainAmended and Restated Credit Agreement between Borrower and Bank dated as ofJuly 7, 2004, as amended from time to time, including, without limitation,those terms relating to arbitration of disputes.

 

3.                                       “Designated LIBOR Market” means theregular established market located in London by and among banks for thesolicitation, offer and acceptance of Dollar deposits in such banks.

 

5.                                       “Dollars” means United States of Americadollars.

 

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6.                                       “LIBOR Rate Portion” means a portion ofthe principal amount outstanding under this Note which is bearing interest at arate related to LIBOR. No LIBOR Rate Portion shall be less than Two HundredFifty Thousand Dollars ($250,000).

 

7.                                       “LIBOR Rate Term” means a periodcommencing on a Business Day and continuing for one (1) month, two (2)months, three (3) months, six (6) months or twelve (12) months, asdesignated by Borrower, during which all or a portion of the outstandingprincipal balance of this Note bears interest determined in relation to Bank’sLIBOR; provided however, that no LIBOR Rate Term shall extend beyond thescheduled maturity date hereof. The last day of the interest period will bedetermined by Bank using the Designated LIBOR Market. If any LIBOR Rate Termwould end on a day which is not a Business Day, then such LIBOR Rate Term shallbe extended to the next succeeding Business Day.

 

8.                                       “LIBOR Rate” means the interest ratedetermined by the following formula, rounded upward, if necessary, to thenearest 1/100 of one percent. (All amounts in the calculation will bedetermined by Bank as of the first day of the interest period.)

 
| LIBOR Rate = |   | LIBOR Base Rate             |
|--------------|--------|-----------------------------|
|         |   | (1.00 - Reserve Percentage) |

 

(a)                                  “LIBOR Base Rate” means, with respect toany portion of the Term Loan which is to bear interest in relation to the LIBORRate, the interest rate per annum (rounded upward, if necessary, to the nearest1/100th of 1%) at which deposits in Dollars are offered by Bankthrough its Los Angeles office to prime banks in the Designated LIBOR Market onthe first day of the applicable LIBOR Rate Term in an aggregate amountapproximately equal to the amount of the Revolving Loan to be made by Bank andfor a period of time comparable to the number of days in the applicable LIBORRate Term.  The determination of theLIBOR Base Rate by Bank shall be conclusive in the absence of manifest error.

 

(b)                                 “Reserve Percentage” means, with respectto any portion of the Term Loan which is to bear interest in relation to theLIBOR Rate, the maximum reserve percentage (expressed as a decimal, roundedupward, if necessary, to the nearest 1/100 of one percent) in effect onthe date the LIBOR Base Rate for such portion of the Term Loan is determined(whether or not such reserve percentage is applicable to Bank) under regulationsissued from time to time by the Federal Reserve Board for determining themaximum reserve requirement (including any emergency, supplemental orother marginal reserve requirement) with respect to eurocurrency funding(currently referred to as “eurocurrency liabilities”) having a term comparableto the LIBOR Rate Term for such portion of the Term Loan.  The determination by Bank of any applicableReserve Percentage shall be conclusive in the absence of manifest error.

 

9.                                       “Reference Rate” means the variable perannum rate of interest most recently announced by Bank at its corporateheadquarters as the “Union Bank of California, N.A. Reference Rate,” with theunderstanding that the “Union Bank of California, N.A. Reference Rate” isone of Bank’s index rates and merely serves as a basis upon whicheffective rates of interest are calculated for loans making reference theretoand may not be the lowest or best rate at which Bank calculates interest orextends credit.  Any change in theReference Rate announced by Bank shall take effect at the opening of businesson the day specified in the announcement of such change.

 

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B.                                     INTEREST:

 

1.                                       Payment of Interest. Interest accrued onthis Note shall be payable on the fifteenth (15th) day of each monthfor the prior month or portion thereof, commencing on the first such date tooccur after the funding of the Term Loan evidenced by this Note.

 

2.                                       Selection of Interest Rate Options. Atany time any portion of this Note bears interest determined in relation to theLIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Termapplicable thereto so that all or a portion thereof bears interest determinedin relation to the Reference Rate or in relation to the LIBOR Rate for a newLIBOR Rate Term designated by Borrower. At any time any portion of this Notebears interest determined in relation to the Reference Rate, Borrower mayconvert all or a portion thereof so that it bears interest determined inrelation to the LIBOR Rate for a LIBOR Rate Term designated by Borrower. At thetime each advance is requested hereunder or Borrower wishes to select the LIBORoption for all or a portion of the outstanding principal balance hereof, and atthe end of each LIBOR Rate Term, Borrower shall give Bank notice specifying(a) the interest rate option selected by Borrower, (b) the principalamount subject thereto, and (c) if the LIBOR option is selected, thelength of the applicable LIBOR Rate Term. Any such notice may be given bytelephone so long as, with respect to each LIBOR selection, such notice isgiven to Bank prior to 10:00 a.m., California time, on the third Business Dayprior to the commencement of the LIBOR Rate Term and, with respect to eachReference Rate selection, such notice is given to Bank prior to 11:00 a.m.,California time, on the day of the requested advance. For each LIBOR optionrequested hereunder, Bank will quote the applicable LIBOR Rate to Borrower atapproximately 10:00 a.m., California time, on the second Business Day prior tothe LIBOR Rate Term. If Borrower does not immediately accept the rate quoted byBank, any subsequent acceptance by Borrower shall be subject to are-determination by Bank of the applicable LIBOR Rate; provided however, that ifBorrower fails to accept any such rate by 11:00 a.m., California time, on theBusiness Day such quotation is given, then the quoted rate shall expire andBank shall have no obligation to permit a LIBOR option to be selected on suchday. If no specific designation of interest is made at the time any advance isrequested hereunder or at the end of any LIBOR Rate Term, Borrower shall bedeemed to have made a Reference Rate interest selection for such advance or theprincipal amount to which such LIBOR Rate Term applied.

 

3.                                       Additional LIBOR Provisions.

 

(a)                                  If Bank at any time shall determine thatfor any reason adequate and reasonable means do not exist for ascertaining theLIBOR Rate, then Bank shall promptly give notice thereof to Borrower. If suchnotice is given and until such notice has been withdrawn by Bank, than(i) no new LIBOR option may be selected by Borrower, and (ii) anyportion of the outstanding principal balance hereof which bears interestdetermined in relation to the LIBOR Rate, subsequent to the end of the LIBORRate Term applicable thereto, shall bear interest determined in relation to theReference Rate.

 

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(b)                                 If any law, treaty, rule, regulation ordetermination of a court or governmental authority or any change therein or inthe interpretation or application thereof (each, a “Change in Law”) shall makeit unlawful for Bank (i) to make LIBOR options available hereunder, or(ii) to maintain interest rates based on the LIBOR Rate, then in theformer event, any obligation of Bank to make available such unlawful LIBORoptions shall immediately be cancelled, and in the latter event, any suchunlawful LIBOR-based interest rates then outstanding shall be converted, atBank’s option, so that interest on the portion of the outstanding principalbalance subject thereto is determined in relation to the Reference Rate;provided however, that if any such Change in Law shall permit any LIBOR-basedinterest rates to remain in effect until the expiration of the LIBOR Rate Termapplicable thereto, then such permitted LIBOR-based interest rates shallcontinue in effect until the expiration of such LIBOR Rate Term. Upon theoccurrence of any of the foregoing events, Borrower shall pay to Bankimmediately upon demand such amounts as may be necessary to compensate Bank forany fines, fees, charges, penalties or other costs incurred or payable by Bankas a result thereof and which are attributable to any LIBOR options madeavailable to Borrower hereunder, and any reasonable allocation made by Bankamong its operations shall be conclusive and binding upon Borrower.

 

(c)                                  If any Change in Law or compliance byBank with any request or directive (whether or not having the force of law)from any central bank or other governmental authority shall:

 

(i)                                     subject Bank to any tax, duty or othercharge with respect to any LIBOR options, or change the basis of taxation ofpayments to Bank of principal, interest, fees or any other amount payablehereunder (except for changes in the rate of tax on the overall net income ofBank); or

 

(ii)                                  impose, modify or hold applicable anyreserve, special deposit, compulsory loan or similar requirement against assetsheld by, deposits or other liabilities in or for the account of advances or loansby, or any other acquisition of funds by any office of Bank; or

 

(iii)                               impose on Bank any other condition; andthe result of any of the foregoing is to increase the cost to Bank of making,renewing or maintaining any LIBOR options hereunder and/or to reduce any amountreceivable by Bank in connection therewith, then in any such case, Borrowershall pay to Bank immediately upon demand such amounts as may be necessary tocompensate Bank for any additional costs incurred by Bank and/or reductions inamounts received by Bank which are attributable to such LIBOR options. Indetermining which costs incurred by Bank and/or reductions in amounts receivedby Bank are attributable to any LIBOR options made available to Borrowerhereunder, any reasonable allocation made by Bank among its operations shall beconclusive and binding upon Borrower.

 

(d)                                 Bank will have no obligation to accept anelection of Borrower for the LIBOR option if any of the following describedevents has occurred and is continuing:

 

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(i)                                     Dollar deposits in the principal amount,and for periods equal to the LIBOR Rate Term, of any portion of the Term Loanwhich bears interest in relation to the LIBOR Rate are not available in theDesignated LIBOR Market; or

 

(ii)                                  an Event of Default has occurred and iscontinuing; or

 

(iii)                               the LIBOR Rate does not accuratelyreflect the cost of any portion of the Term Loan which bears interest inrelation to the LIBOR Rate.

 

4.                                       Default Interest. During the continuanceof an Event of Default, the outstanding principal balance of this Note shallbear interest until paid in full at an increased rate per annum (computed onthe basis of a 360-day year and actual days elapsed, which results in moreinterest than if a 365-day year were used) equal to two percent (2.00%) abovethe rate of interest from time to time applicable to this Note (the “DefaultRate”).

 

C.                                     BORROWING AND REPAYMENT:

 

1.                                       Loan and Repayment. On or beforeSeptember 30, 2005, Borrower will make a payment that will reduce theoutstanding principal balance of this Note to no more than $10,000,000; providedthat if the outstanding balance of this Note on September 30, 2005 isequal to or less than $10,000,000, then no payment will be required.  The outstanding principal balance of thisNote shall be due and payable in full on the earlier of(a) September 30, 2006 and (b) upon the termination of theRevolving Commitment, for any reason.

 

2.                                       Application of Payments. Each paymentmade on this Note shall be credited first, to any interest then due and second,to the outstanding principal balance hereof. Unless instructed otherwise byBorrower, all payments credited to principal shall be applied first, to theoutstanding principal balance of this Note which bears interest determined inrelation to the Reference Rate, if any, and second, to the outstandingprincipal balance of this Note which bears interest determined in relation tothe LIBOR Rate, with such payments applied to the oldest LIBOR Rate Term first.

 

3.                                       Prepayment.

 

(a)                                  Reference Rate. Borrower may prepayprincipal on any portion of this Note which bears interest determined inrelation to the Reference Rate at any time, in any amount and without penalty.

 

(b)                                 LIBOR. Each prepayment of a LIBOR RatePortion shall be not less than $250,000 and shall be in an integral multiple of$100,000, and Bank shall have received notice of each such prepayment on thedate that is five (5) Business Days before the date of such prepayment (whichnotice shall identify the date and amount of the prepayment).  Each prepayment of a LIBOR Rate Portion,whether voluntary, by reason of acceleration or otherwise, will be accompaniedby the amount of accrued interest on the amount prepaid, and a prepayment feeas described below. A “prepayment” is a payment on a date earlier than the lastday of the

 

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applicable LIBOR RateTerm. The prepayment fee shall be equal to the amount (if any) by which:

 

(i)                                     the additional interest which would havebeen payable during the applicable LIBOR Rate Term on the amount prepaid had itnot been prepaid, exceeds

 

(ii)                                  the interest which would have beenrecoverable by Bank by placing the amount prepaid on deposit in the domesticcertificate of deposit market, the eurodollar deposit market, or otherappropriate money market selected by Bank for a period starting on the date onwhich it was prepaid and ending on the last day of the applicable LIBOR RateTerm.

 

Borrower acknowledgesthat prepayment of such amount may result in Bank incurring additional costs,expenses and/or liabilities, and that it is difficult to ascertain the fullextent of such costs, expenses and/or liabilities. Borrower, therefore, agreesto pay the above-described prepayment fee and agrees that said amountrepresents a reasonable estimate of the prepayment costs, expenses and/orliabilities of Bank. If Borrower fails to pay any prepayment fee when due, theamount of such prepayment fee shall thereafter bear interest until paid at arate per annum two percent (2.00%)****above the Reference Rate in effect fromtime to time (computed on the basis of a 360-day year, actual days elapsed).

 

D.                                    EVENTS OF DEFAULT:

 

This Note is madepursuant to and is subject to the terms and conditions of the Credit Agreement.  Any default in the payment or performance ofany obligation under this Note, or any defined event of default under theCredit Agreement, shall constitute an “Event of Default” under this Note.

 

E.                                      MISCELLANEOUS:

 

1.                                       Remedies.  Upon the occurrence and during the continuation of any Event ofDefault, the holder of this Note, at the holder’s option, without notice uponthe occurrence and during the continuation of an Event of Default pursuant toSection 7.01(g) of the Credit Agreement, and with notice upon theoccurrence of any other Event of Default, may declare all sums of principal andinterest outstanding hereunder to be immediately due and payable withoutpresentment, demand, protest or notice of dishonor, all of which are expresslywaived by Borrower, and the obligation, if any, of the holder to extend anyfurther credit hereunder shall immediately cease and terminate. Borrower shallpay to the holder immediately upon demand the full amount of all payments,advances, charges, costs and expenses, including reasonable attorneys’ fees (toinclude outside counsel fees and all allocated costs of the holder’s in-housecounsel), incurred by the holder in connection with the enforcement of theholder’s rights and/or the collection of any amounts which become due to theholder under this Note, and the prosecution or defense of any action in any wayrelated to this Note, including without limitation, any action for declaratoryrelief, and including any of the foregoing incurred in connection with any bankruptcyproceeding relating to Borrower.

 

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2.                                       Obligations Joint and Several. Shouldmore than one person or entity sign this Note as a Borrower, theobligations of each such Borrower shall be joint and several.

 

3.                                       Governing Law. This Note shall begoverned by and construed in accordance with the laws of the State ofCalifornia, except to the extent Bank has greater rights or remedies underFederal law, whether as a national bank or otherwise, in which case such choiceof California law shall not be deemed to deprive Bank of any such rights andremedies as may be available under Federal law.

 

“Borrower”

 

SOUTHWEST WATER COMPANY,a Delaware corporation

 

 
| By:    |                                   |   |   |   |
|--------|----------------------------------------|--------|--------|--------|
|   | Peter J. Moerbeek                      |   |   |
|   | President and Chief  Operating Officer |   |   |
|        |                                        |        |        |        |  |

 

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EXHIBIT C

 

(See Attached PledgeAgreement)

 

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EXHIBIT D

 

(See attached Latham & Watkins Opinion)

 

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