**Exhibit 10.5**

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

between

 

SOUTHWEST WATER COMPANY

 

and

 

BANK OF AMERICA, N.A.

July 7, 2004

 

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TABLE OF CONTENTS

 
| 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. Mandatory  Repayment.                                                                 |                                    |
| SECTION 2.03. Interest  Computation and Payment; Fee Computation.                                   |                                    |
| SECTION 2.04. Unused Commitment  Fee.                                                               |                                    |
| SECTION 2.05. Annual Credit Facility  Fee.                                                          |                                    |
| SECTION 2.06. The Additional  Revolving Loans.                                                      |                                    |
| SECTION 2.07. Mandatory  Repayment.                                                                 |                                    |
| SECTION 2.08. Interest  Computation and Payment; Fee Computation                                    |                                    |
| SECTION 2.09. Unused Commitment  Fee.                                                               |                                    |
| SECTION 2.10. Annual Additional  Credit Facility Fee.                                               |                                    |
| SECTION 2.11. Collateral.                                                                           |                                    |
| 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 and Initial Additional Revolving Loan |                                    |
| SECTION 4.02. Conditions  Precedent to Each Revolving Loan.                                         |                                    |
| SECTION 4.03. Conditions  Precedent to Each Revolving Loan and each Additional 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.                                  |   |
| 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. Arbitration and  Waiver of Jury Trial.                          |                                                      |
| SECTION 8.10. Waiver of Notices.                                              |                                                      |
| SECTION 8.11. Entire Agreement.                                               |                                                      |
| SECTION 8.12. Severability of  Provisions.                                    |                                                      |

 

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| SECTION 8.13. Execution in  Counterparts. |   |
|------------------------------------------------|--------|
| SECTION 8.14. Further  Assurances.        |   |

 

 

Schedules

5.01(f) - Litigation

5.01(i) - Environmental Matters

6.02(d) - Liens

6.02(e) – Other secureddebt

 

Exhibits

 

A - Form of Note

 

B – Form of Note

 

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AMENDED AND RESTATED CREDIT AGREEMENT

 

This Amended and RestatedCredit Agreement (“Agreement”) dated as of July 7, 2004 is entered intobetween SOUTHWEST WATER COMPANY, a Delaware corporation (the “Borrower”) andBANK OF AMERICA, N.A. (the “Bank”).

 

RECITALS

 

A.                                   WHEREAS, Borrower and Bank havepreviously entered into that certain Credit Agreement dated as ofOctober 6, 2003 and that certain Amendment No. 1 to Credit Agreement datedas of March 17, 2004 (collectively “Credit Agreement”).

 

B.                                     WHEREAS, Bank and Borrower wish to amendand completely restate the Credit Agreement under the terms and conditions setforth in this Agreement.

 

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 following terms have the followingmeanings:

 

“Acquisition”: Anytransaction, or any series of related transactions, by which Borrower and/orany of its Subsidiaries directly or indirectly (a) acquires the ongoingbusiness or all or substantially all of the assets of any firm, partnership,joint venture, limited liability company, corporation or division thereof, (b)acquires in one transaction or as the most recent transaction in a series oftransactions control of securities of a Person engaged in an ongoing businessrepresenting more than 50% of the ordinary voting power for the election ofdirectors or other governing position if the business affairs of such Personare managed by a board of directors or other governing body or (c) acquirescontrol of more than 50% of the ownership interest in any partnership, jointventure, limited liability company, business trust or other Person that is notmanaged by a board of directors or other governing body.

 

“Additional RevolvingCommitment”:  The amount of $15,000,000,as such amount may be reduced pursuant to Section 2.06(c).

 

“Additional RevolvingLoans”:  As defined inSection 2.06(a).

 

“Additional RevolvingNote”:  As defined inSection 2.06(d).

 

“Agreement”:  This Agreement, as amended, supplemented ormodified from time to time.

 

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

 

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

 

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

 

“Business Day”:  Has the meaning set forth in the RevolvingNote and the Additional Revolving Note.

 

“Capistrano Letter ofCredit”: The standby letter of credit issued by Bank of America, N.A., for theaccount of 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 inRule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,of more than thirty percent (30%) of the total voting power of all classes ofstock then outstanding of Borrower normally entitled to vote in the election ofdirectors; or (b)****the Borrower shall fail to own directly one hundred percent(100%) of the issued and outstanding common stock or other equity interest ofAqua, Suburban, SWUC, TECON, NMUI or ECO or shall lose voting control ofAqua’s, Suburban’s, SWUC’s, TECON’S, NMUI’s or ECO’s issued and outstandingcommon stock or other equity interest; or (c) the Borrower shall fail to owndirectly 50.1% of the issued and outstanding common stock or other equityinterest of Metro or OpTech or shall lose voting control of 50.1% of the issuedand outstanding common stock or other equity interest of Metro or OpTech; or(d) the Borrower shall fail to own directly 67% of the issued and outstandingcommon stock of WRI or shall lose voting control of 67% of the issued andoutstanding common stock of WRI; or (e) ECO shall fail to own directly onehundred percent (100%) of the issued and outstanding common stock of CDC orshall lose voting control of CDC’s issued and outstanding common stock; or (f)SWUC shall fail to own directly one hundred percent (100%) of the issued andoutstanding common stock of Hornsby or shall lose voting control of Hornsby’sissued and outstanding common stock; or (g) SWUC shall fail to own directly 80%of the issued and outstanding common stock of Windermere or shall lose votingcontrol of 80% of the issued and outstanding common stock of Windermere.  A change of control shall not include atransfer of NMUI’s operating assets through a condemnation or sale in lieu ofcondemnation.

 

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

 

“Commitment”:  The Bank’s obligation to make RevolvingLoans and Additional Revolving Loans to the Borrower pursuant toArticle II in the amount or amounts referred to therein.

 

“Consolidated EBITDA”means, for any period of Borrower and its Subsidiaries on a consolidated basis,Consolidated Net Profit for such period, plus interest expense (net ofcapitalized interest expense) and provision for income taxes for such period,plus depreciation

 

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and amortization for suchperiod, plus the non-cash expense of Borrower and itsSubsidiaries recognized during such period for any stock options granted byBorrower and its Subsidiaries permitted hereunder.

 

“Consolidated Net Profit”means, in respect of any period of the Borrower and its Subsidiaries, theconsolidated net profit after taxes of the Borrower and its Subsidiaries assuch would appear on the consolidated statement of earnings of Borrower and itsSubsidiaries prepared in accordance with GAAP, consistently applied, minusnonrecurring or extraordinary income.

 

“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 Subordinate Debentures Due 2021 of Borrower (the “ConvertibleDebentures”) minus (i) treasury stock, (ii) intangible assets (including,without limitation, franchises, patents, patent applications, trademarks, brandnames, goodwill, purchased contracts, deferred charges (including unamortizeddebt discount and expense and organization costs) and research and developmentexpenses, provided, however that water rights shall not beconsidered an intangible asset) and (iii) receivables, advances, loans and allother amounts due from employees, officers, shareholders and/or affiliates(excluding those Subsidiaries of which Borrower owns at least 80% of theoutstanding equity), on a consolidated basis determined in conformity withGAAP.

 

“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 with respectto Capital Leases which is properly classified as a liability on a balancesheet in conformity with GAAP, (iii) notes payableand drafts accepted representing extensions of credit whether or notrepresenting obligations for borrowed money, (iv) any obligation owed for allor any part of the deferred purchase price of property or services whichpurchase price is (y) due more than six months from the date of incurrence ofthe obligation in respect thereof, or (z) evidenced by a note or similarwritten instrument; (v) all indebtedness secured by any Lien on any property orasset owned or held by that Person regardless of whether the indebtednesssecured thereby shall have been assumed by that Person or is non-recourse tothe credit of that person; (vi) reimbursement obligations under letters ofcredit; and (vii) other contingent liabilities.

 

“Default Rate”:  As defined in the Revolving Note and theAdditional 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 made any other distribution, paymentor delivery of property or cash to its stockholders or equity holders as such,or redeemed, retired, purchased, or otherwise acquired, directly or indirectly,for consideration, any shares of any class of its capital stock or equityinterests (or any options, warrants or rights issued by such Person withrespect to its capital stock or equity interests), or set aside any funds forany of the foregoing purposes, or shall have permitted any of its

 

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Subsidiaries to purchaseor otherwise acquire for a consideration any shares of any class of the capitalstock or any equity interests of such Person (or any options, warrants orrights issued by such Person with respect to its capital stock or equityinterests). Without limiting the foregoing, “Distributions” with respect to anyPerson shall also include all payments made or required to be made by suchPerson with respect to any stock appreciation rights plans, equity incentive orthe setting aside of any funds for the foregoing 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 CoverageRatio”:  For any period of Borrower andits Subsidiaries on a consolidated basis, Consolidated EBITDA divided by thesum of the total interest expense plus current portion of long-term Debt****pluscurrent portion of advances for construction 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 the Internal RevenueCode.

 

“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.

 

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

 

“IntercreditorAgreement”:  That certain IntercreditorAgreement to be entered into among Bank, Union and Union as Collateral Agent.

 

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“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,security interest, charge or encumbrance of any kind (including any conditionalsale or other title retention agreement, any lease in the nature thereof, andany agreement to give any security interest).

 

“Loan Documents”:  This Agreement, the Revolving Note, theAdditional Revolving Note, the Pledge and Collateral Agency Agreement, theIntercreditor Agreement, each alternative dispute resolution agreement enteredinto by Borrower and Bank in connection with this Agreement, and each otheragreement, document, instrument and guarantee required by the Bank inconnection with this Agreement and/or the credit extended hereunder.

 

“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.

 

“PermittedAcquisition”:  An Acquisition byBorrower 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 Borrower orsuch Subsidiary, provided that (a) if such Acquisition is of all of thecapital stock or other equity interests of the Acquired Person, such AcquiredPerson is merged with and into Borrower or such Subsidiary substantiallysimultaneously with Borrower’s or such Subsidiary’s acquisition of such capitalstock or other equity interests or becomes a wholly-owned Subsidiary, (b) noPotential Event of Default or Event of Default shall have occurred or becontinuing or would

 

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result after givingeffect to such Permitted Acquisition, (c) the Acquisition shall have beenconsummated in compliance with all applicable laws, and (d) Borrower shall bein compliance with all covenants on a pro forma basis having given effect tothe Acquisition both prior to and upon consummation of such Acquisition.

 

“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 and CollateralAgency Agreement”:  That certain Pledgeand Collateral Agency Agreement to be entered into among Borrower, Bank, Unionand Union as Collateral Agent.

 

“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.

 

“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”:The amount 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.

 

“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)                                    it is 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, bythe Borrower, or (ii) in the case of a partnership

 

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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.

 

“Suburban LoanDocuments”:  That Credit Agreement datedas of July 30, 1999 between Bank and Suburban, and each agreement,document, instrument and guarantee required by Bank in connection with such CreditAgreement and/or the credit extended thereunder, in each case as amended.

 

“SWUC”:   SW Utility Company, a Texas corporation.

 

“TECON”:  Collectively, Tecon Water Companies, Inc., aTexas corporation and TENKILLER UTILITY COMPANY, an Oklahoma corporation.

 

“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 the PensionBenefit Guaranty Corporation under such regulations) with respect to anyPension Plan, or (ii) the withdrawal of the Borrower or any of its ERISAAffiliates from a Pension Plan during a plan year in which it was a“substantial employer” as defined in Section 4001(a)(2) of ERISA, or (iii)the filing of a notice of intent to terminate a Pension Plan or the treatmentof a Pension Plan amendment as a termination under Section 4041 of ERISA,or (iv) the institution of proceedings to terminate a Pension Plan by thePension Benefit Guaranty Corporation under Section 4042 of ERISA, or (v)any other event or condition which might constitute grounds under ERISA for thetermination of, or the appointment of a trustee to administer, any Pension Planunder Section 4042 of ERISA, or (vi) the imposition of a lien with respectto any Pension Plan pursuant to Section 412(n) of the Internal RevenueCode.

 

“Union”:  Union Bank of California.

 

“Union LoanDocuments”:  That certain Amended andRestated Credit Agreement dated as of July 7, 2004 between Union Bank ofCalifornia, N.A. and Borrower, and each agreement, document, instrument andguarantee required by Union Bank of California, N.A., in connection with suchCredit Agreement and/or the credit extended thereunder, in each case asamended.

 

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

 

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

 

SECTION 1.02.  Other Definitional Provisions.  All terms defined in this Agreement shallhave the defined meanings when used in the Revolving Note, the AdditionalRevolving Note, or any certificate or other document made or delivered pursuanthereto.

 

(b)                                 As used herein and in the Revolving Note,the Additional Revolving Note and any certificate or other document made ordelivered pursuant hereto, accounting terms not

 

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defined inSection 1.01, and accounting terms partly defined in Section 1.01 to the extent not defined, shall have the respectivemeanings given to them under GAAP.

 

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

 

(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 not reducethe 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. The Revolving Loans made by the Bank pursuant hereto shall be evidencedby a promissory note of the Borrower, substantially in the form ofExhibit A, with any appropriate insertions (as amended from time to time,the “Revolving Note”), payable to the order of the Bank and representing theobligation of the Borrower to pay the aggregate unpaid principal amount of allRevolving Loans made by the Bank, with interest thereon as prescribed inSection 2.03. The Bank is hereby authorized to record in its books andrecords and on any schedule annexed to the Revolving Note, the date andamount of each Revolving Loan made by the Bank, the date and amount of eachpayment of principal thereof, and the applicable

 

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interest rate, and any such recordation shall constitute prima facieevidence of the accuracy of the information so recorded; provided that failureby the Bank to effect such recordation shall not affect the Borrower’sobligations hereunder.  Prior to thetransfer of the Revolving Note, the Bank shall record such information on anyschedule annexed to and forming a part of the 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 credit andnot yet reimbursed) may not exceed Three Million Dollars****($3,000,000). Each standbyletter of credit must be requested by the Borrower at least three (3) BusinessDays prior to the proposed date of issuance of such standby letter of credit,and any such request may be submitted by telecopy, rapidfax or othertelecommunication method (otherthan telephonic or oraladvice).  The Borrower agrees:

 

(i)                                          to pay the Bank an amount equal to anypayment made by the Bank with respect to each letter of credit within one (1)Business Day after demand made by the Bank therefor, together with interest onsuch amount from the date of any payment made by the Bank at the rateapplicable to advances bearing interest with reference to the Prime Rate forthe period commencing on the date of any such payment and continuing throughthe first Business Day following such demand and thereafter at the Default Rate.  The Borrower also agrees that any sum drawnunder a letter of credit may, without further action of the Bank, upon theBorrower’s failure to make the payment referred to in the preceding sentence,be added to the principal amount outstanding under the Revolving Commitment.The amount will bear interest and be due as described elsewhere in thisAgreement.

 

(ii)                                       if there is an Event of Default underthis Agreement, to immediately prepay and make the Bank whole for anyoutstanding letters 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 fees thatthe 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.

 

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(vii)                                to pay the Bank a non-refundable fee equal to 1.25%per annum of the outstanding undrawn amount of each standby letter of credit, providedthat the minimum amount per annum of such fee with respect to each standbyletter of credit shall be $500.  Thisfee shall be calculated in advance as of the first day of each calendar quarteron the basis of such amount in effect on the day the fee is calculated, and ispayable on the 14th day after each such date of calculation. If thereis a default under this Agreement, at the Bank’s option, the amount of the feeshall be increased to 3.25% per annum, effective starting on the day the Bankprovides notice of the increase to the Borrower.

 

SECTION 2.02.  Mandatory Repayment.  The aggregate principal amount of theRevolving Loans outstanding on the Maturity Date, together with accrued andunpaid interest thereon, shall be due and payable in full on the MaturityDate.  If at any time the aggregateoutstanding Revolving Loans exceed the Revolving Commitment then in effect, theBorrower shall immediately repay the excess to the Bank without penalty orpremium.

 

SECTION 2.03.  Interest Computation and Payment; FeeComputation.  The outstanding principalbalance of the Revolving Loans shall bear interest as set forth in theRevolving Note.  Interest shall becomputed on the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and placeset forth in the Revolving Note.  Allfees under this Agreement shall be computed on the basis of a 360-day year,actual days elapsed.

 

SECTION 2.04.  Unused Commitment Fee.  The Borrower agrees to pay a fee on anydifference between the Revolving Commitment and the amount of credit itactually uses, determined by the weighted average credit outstanding during thespecified period. The fee will be calculated at 0.25% per year. The calculationof credit outstanding shall include the Revolving Loans and the undrawn amountof outstanding letters of credit. This fee shall be calculated in arrears as ofthe end of each calendar quarter, and is payable on the 15th day ofthe calendar month beginning immediately after each calendar quarter end.  Each such fee shall be fully earned whenpaid and shall be non-refundable.

 

SECTION 2.05.  Annual Credit Facility Fee.  The Borrower agrees to pay onSeptember 30th of each year that this Agreement is in effect,an annual credit facility fee in the amount of                                              ($            ).  Each such fee shall be fully earned whenpaid and shall be non-refundable.  Thepayment due, pursuant to this paragraph 2.05, on September 30, 2004, shallbe due and payable on the date of execution by Borrower of this Agreement.

 

SECTION 2.06  The Additional Revolving Loans.

 

(a)                                  TheAdditional Revolving Commitment.  TheBank agrees, on terms and conditions hereinafter set forth, to make additionalloans (“Additional Revolving Loans”) to the Borrower from time to time duringthe period from the date hereof and including the Maturity Date in an aggregateamount not to exceed the Additional Revolving Commitment.  Within the limits of the AdditionalRevolving Commitment and prior to the Maturity Date, the Borrower may borrow,repay, and reborrow subject to the terms of this Agreement and the AdditionalRevolving Note.

 

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(b)                                 Makingthe Additional Revolving Loans.  TheBorrower may borrow under the Additional Revolving Commitment on any BusinessDay, provided that the Borrower shall give the Bank notice pursuant to theterms of the Additional Revolving Note specifying (i) the amount of theproposed Additional Revolving Loan and (ii) the requested date of theAdditional Revolving Loan.  Upon satisfactionof the applicable conditions set forth in Article IV, the proceeds of allsuch Additional Revolving Loans will then be made available to the Borrower bythe Bank by crediting the account of the Borrower on the books of the Bank, oras otherwise directed by the Borrower.

 

(c)                                  Reductionof the Additional Revolving Commitment. The Borrower shall have the right, upon at least two Business Days’notice to the Bank, to terminate in whole or reduce in part the unused portionof the Additional Revolving Commitment, without premium or penalty, providedthat each partial reduction shall be in the aggregate amount of $100,000 or anintegral multiple thereof and that such reduction shall not reduce theAdditional 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)                                 AdditionalRevolving Note.  The AdditionalRevolving Loans made by the Bank pursuant hereto shall be evidenced by apromissory note of the Borrower, substantially in the form of Exhibit B, withany appropriate insertions (as amended from time to time, the “AdditionalRevolving Note”), payable to the order of the Bank and representing theobligation of the Borrower to pay the aggregate unpaid principal amount of allAdditional Revolving Loans made by the Bank, with the interest thereon asprescribed in Section 2.08.  TheBank is hereby authorized to record in its books and records and on anyschedule annexed to the Additional Revolving Note, the date and amount ofeach Additional Revolving Loan made by the Bank, the date and amount of eachpayment of principal thereof, and the applicable interest rate, and any suchrecordation shall constitute prima facie evidence of the accuracy of theinformation so recorded; provided that failure by the Bank to effect suchrecordation shall not affect the Borrower’s obligations hereunder.

 

SECTION 2.07  MandatoryRepayment.  The aggregate principalamount of the Additional Revolving Loans outstanding on the Maturity Date,together with accrued and unpaid interest thereon, shall be due and payable infull on the Maturity Date.  If at anytime the aggregate outstanding Additional Revolving Loans exceed the AdditionalRevolving Commitment then in effect, the Borrower shall immediately repay theexcess to the Bank without penalty or premium.

 

SECTION 2.08  InterestComputation and Payment; Fee Computation. The outstanding principal balance of the Additional Revolving Loansshall bear interest as set forth in the Additional Revolving Note.  Interest shall be computed on the basis of a360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in theAdditional Revolving Note.  All feesunder this Agreement shall be computed on the basis of a 360-day year, actualdays elapsed.

 

SECTION 2.09  UnusedCommitment Fee.  The Borrower agrees topay a fee on any difference between the Additional Revolving Commitment and theamount of credit it actually uses, determined by the weighted average creditoutstanding during the specified period. The fee

 

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will be calculated at0.25% per year.  This fee shall becalculated in arrears as of the end of each calendar quarter, and is payable onthe 15th day of the calendar month beginning immediately after eachcalendar quarter end.  Each such feeshall be fully earned when paid and shall be non-refundable.

 

SECTION 2.10  Front EndFee.  The Borrower agrees to pay, on theClosing Date, a front end fee (“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 ClosingDate.  The Front End Fee shall be fullyearned when paid and shall be non-refundable.

 

SECTION 2.11 Collateral.  The stock of TECONowned by Borrower will secure the Additional Revolving Note.  The collateral is further defined in the Pledgeand Collateral Agency Agreement.

 

ARTICLE IIIGENERAL PROVISIONS CONCERNING THELOANS

 

SECTION 3.01.  Use of Proceeds.  The proceeds of Revolving Loans hereunder shall be used by theBorrower (i) for general corporate purposes, working capital andacquisitions permitted hereunder of the Borrower and those Subsidiaries ofBorrower as to which Borrower owns at least 80% of the outstanding equity, and (ii) to finance capital additions to the waterutility and other operations of the Borrower and those Subsidiaries of Borroweras to which Borrower owns at least 80% of the outstanding equity.  The proceeds of the Additional RevolvingLoans hereunder shall be used by Borrower for the acquisition of TECON (the“TECON Acquisition”).

 

SECTION 3.02.  Payment on Non-Business Days.  Whenever any payment to be made hereunder orunder the Revolving Note or Additional Revolving Note shall be stated to be dueon a day which is not a Business Day, such payment may be made on the next succeedingBusiness Day, and with respect to payments of principal, interest thereon shallbe payable at the then applicable rate during such extension.

 

SECTION 3.03.  Reduced Return.  If the Bank shall have determined that any applicable law,regulation, rule or regulatory requirement generally applicable to bankslocated in California and (collectively in this Section 3.03,“Requirement”) regarding capital adequacy, or any change therein, or any changein the interpretation or administration thereof by any United States federal orstate governmental authority, central bank or comparable agency charged withthe interpretation or administration thereof, or compliance by the Bank withany request or directive regarding capital adequacy (whether or not having theforce of law) of any such authority, central bank or comparable agency, has orwould have the effect of reducing the rate of return on the Bank’s capital as aconsequence of its Commitment and obligations hereunder to a level below thatwhich would have been achieved but for such Requirement, change or compliance(taking into consideration the Bank’s policies with respect to capitaladequacy) by an amount deemed by the Bank to be material (which amount shall bedetermined by the Bank’s reasonable allocation of the aggregate of suchreductions 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

 

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additional amount or amounts as will compensate the Bank for suchreduction.  The Bank does not presentlyhave knowledge of any new Requirement or any pending change in any existingRequirement which would result in such additional amounts being owed.

 

SECTION 3.04.  Indemnities.  The Borrower agrees to indemnify, pay and hold the Bank, and theshareholders, officers, directors, employees and agents of the Bank(“Indemnified Persons”), harmless from and against any and all claims,liabilities, losses, damages, costs and expenses (whether or not any of theforegoing Indemnified Persons is a party to any litigation), including, withoutlimitation, 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 the Borrowerwill assume the defense of such action, suit or proceeding, employing counselselected by Borrower’s insurance carrier, or selected by the Borrower andreasonably 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 andAdditional Revolving Note for a period of six (6) years.

 

SECTION 3.05.  Funding Sources.  Nothing in this Agreement shall be deemed to obligate the Bank toobtain the funds for any Revolving Loan or Additional Revolving Loan in anyparticular place or manner or to constitute a representation by the Bank thatit has obtained or will obtain the funds for any Revolving Loan or AdditionalRevolving Loan in any particular place or manner.

 

ARTICLE IVCONDITIONS OF LENDING

 

SECTION 4.01.  Conditions Precedent to Initial RevolvingLoan.  The obligation of the Bank tomake its initial Revolving Loan is subject to the conditions precedent that:

 

(a)                                  The Bank shall have received on or beforethe day of the initial Revolving Loan the following, each dated prior to or asof such day, in form and substance satisfactory to the Bank:

 

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

 

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(ii)                                       Copies of the Articles of Incorporationor Certificate of Incorporation of the Borrower, certified as of a recent dateby the Secretary of State of Delaware;

 

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

 

(iv)                                   Copies of resolutions of the Board ofDirectors or other authorizing documents of the Borrower, in form and substancesatisfactory to the Bank, approving the Loan Documents and Revolving Loanshereunder;

 

(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)                                Executed copies of the Union Loan Documents;

 

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

 

(c)                                  All information previously furnished byBorrower to 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 Bankshall have been made with respect to the payment thereof;

 

(e)                                  Borrower shall be in compliance with theLoan 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 ofBorrower contained in Article V shall be true and correct in all respects;

 

(g)                                 Bank shall have received evidence of theinsurance 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;

 

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(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 Borrower and its Subsidiaries taken as a whole;

 

SECTION 4.02.  Conditions Precedent to Initial AdditionalRevolving Loan.  The obligation of theBank to make its initial Additional Revolving Loan is subject to the conditionsprecedent that:

 

(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 initial Additional Revolving Loan the following, each datedprior to or as of such day, in form and substance to the Bank:

 

(i)  The Additional Revolving Note issued by theBorrower to the order of the Bank;

 

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

 

(iii)  The Pledge and Collateral Agency Agreementand the Intercreditor Agreement.

 

(iv)  An executed opinion from Akin, Gump,Strauss, Hauer & Feld, LLP, on behalf of Borrower, in form and substancereasonably satisfactory to the Collateral Agent under the IntercreditorAgreement.

 

SECTION 4.03.  Conditions Precedent to Each Revolving Loanand each Additional Revolving Loan.

 

The obligation of theBank to make a Revolving Loan or Additional Revolving Loan on the occasion ofeach Revolving Loan or Additional Revolving Loan (including the initialRevolving Loan and initial Additional Revolving Loan) shall be subject to thefurther conditions precedent that on the date of such Revolving Loan andAdditional Revolving Loan (a) the following statements shall be true andthe Bank shall have received the notice required by Section 2.01(b) or2.06(b), which notice shall be deemed to be a certification by the Borrowerthat:

 

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

 

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

 

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(iii)                                    Nothing shall have occurred and the Bank shall nothave become aware of any fact or condition not previously known, which the Bankshall determine has, or could reasonably be expected to have, a materialadverse effect on the rights or remedies of the Bank, or on the ability of theBorrower 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 ofBorrower and its Subsidiaries taken as a whole; and

 

(iv)                                   All Loan Documents are in full force andeffect, and (b) the Bank shall have received such other approvals, opinions ordocuments as the Bank may reasonably request.

 

ARTICLE VREPRESENTATIONS AND WARRANTIES

 

SECTION 5.01.  Representations and Warranties.  The Borrower represents and warrants asfollows:

 

(a)                                  Organization. The Borrower and each of its Subsidiaries is duly organized, validlyexisting and in good standing under the laws of the state of its orgainzation.The Borrower and each of its Subsidiaries is also duly authorized, qualifiedand licensed in all applicable jurisdictions, and under all applicable laws,regulations, ordinances or orders of public authorities, to carry on itsbusiness in the locations and in the manner presently conducted, and theBorrower and each of its Subsidiaries has all requisite power and authority toconduct its business and to own and lease its properties.  Schedule 5.01(a) attached heretocorrectly sets forth the names, form of legal entity, number of shares ofcapital stock or membership or other equity interests, as applicable, issuedand outstanding, number of shares of capital stock or membership or otherequity interests, as applicable, owned by the Borrower or any of itsSubsidiaries (specifying such owner) and jurisdictions of organization of allSubsidiaries of the Borrower.  Except asset forth on Schedule 5.01(a), there are no outstanding options, warrantsor other rights to purchase any capital stock, membership interests or units ofother equity interest of any Subsidiary other than in favor of the Borrower,and all shares, membership interests or other equity interests issued by theSubsidiaries are****free and clear of all liens, except for liens permitted underSection 6.02(d).

 

(b)                                 Authorization; No Conflict.  The execution, delivery and performance bythe Borrower of the Loan Documents, and the borrowing of Revolving Loans andAdditional Revolving Loans hereunder, are within the Borrower’s corporatepowers, have been duly authorized by all necessary corporate action, do notcontravene (i) the Borrower’s charter, by-laws or other organizationaldocument or (ii) any law or regulation (including, without limitation,Regulations T, U and X and regulations of public utility commissions or similarregulatory authorities) binding on or affecting the Borrower or its properties,and will not constitute an event of default under any material agreement towhich Borrower is a party or by which its assets or properties may be bound.

 

(c)                                  Governmental Consents.  No authorization or approval or other actionby, and no notice to or filing with, any governmental authority or regulatorybody (except routine reports

 

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required pursuant to the Securities Exchange Act of 1934, as amended(if such act is applicable to the Borrower), which reports will be made in theordinary course of business) is required for the due execution, delivery andperformance 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 bankruptcy, insolvency,reorganization, liquidation, moratorium or other similar laws of generalapplication and equitable principles relating to or affecting creditors’rights.

 

(e)                                  Financial Condition.  The balance sheets of the Borrower and its consolidatedSubsidiaries as of 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 consolidated Subsidiariesas at such dates and the results of the operations of the Borrower and itsconsolidated Subsidiaries for the period ended on such date, all in accordancewith GAAP, consistently applied, and since December 31, 2003 there hasbeen no material adverse change in the business, operations, properties, assetsor condition (financial or otherwise) of the Borrower and its Subsidiaries,taken as a whole.

 

(f)                                    Litigation. Except as set forth in the Form 10-K dated December 31, 2003, andon Schedule 5.01(f) hereto, there is no known pending or threatened actionor proceeding affecting the Borrower or any of its Subsidiaries before anycourt, governmental agency or arbitrator, which may materially adversely affectthe consolidated 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 ERISAAffiliates is in compliance in all material respects with any applicableprovisions of ERISA and the regulations and published interpretationsthereunder with respect to all Employee Benefit Plans.  No Termination Event has occurred withrespect to any Pension Plan.  The excessof the actuarial present value of all benefit liabilities under all PensionPlans (excluding in such computation Pension Plans with assets greater thanbenefit liabilities) over the fair market value of the assets allocable to suchbenefit liabilities are not greater than five percent (5%) of ConsolidatedTangible Net Worth.  For purposes of thepreceding sentence, the term “benefit liabilities” shall have the meaningspecified 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. There is no fact known to theBorrower (other than matters of a general economic nature) which materiallyadversely affects the business, operations, property, assets or condition(financial or otherwise)

 

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of the Borrower and its Subsidiaries, taken as a whole, which has notbeen disclosed herein or in such other documents, certificates and statementsfurnished to the Bank for use in connection with the transactions contemplatedhereby.

 

(i)                                     Environmental Matters.  Except as set forth in Schedule 5.01(i)hereto, neither the Borrower nor any Subsidiary, nor any of their respectiveofficers, employees, representatives or agents, nor, to the best of theirknowledge, any other person, has treated, stored, processed, discharged,spilled, or otherwise disposed of any substance defined as hazardous or toxicby any applicable federal, state or local law, rule, regulation, order ordirective, or any waste or by-product thereof, at any real property or anyother facility owned, leased or used by the Borrower or any Subsidiary, inviolation of any applicable statutes, regulations, ordinances or directives ofany governmental authority or court, which violations may result in liabilityto the Borrower or any Subsidiary or any of their respective officers,employees, representatives, agents or shareholders in an amount exceeding$500,000 for all such violations; and the unresolved violations set forth insaid Schedule 5.01(i) will not result inliability 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 not resultin 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 any Subsidiaryor any of their respective officers, employees, representatives, agents orshareholders in an amount exceeding $500,000 for all such outstanding charges.

 

(j)                                     Employee Matters. There is no known strike or work stoppage in existence or 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.  Borrowerand each of its Subsidiaries is Solvent.

 

(l)                                     Title to Properties.  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 Bank and such others as are permitted underSection 6.02(d) hereof.

 

(m)                               Tax Returns. Borrower and each of its Subsidiaries has filed, or caused to be filed,in a timely manner all tax returns, reports and declarations which are requiredto be filed by

 

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it (without requests for extension (other than automatic extensionsprovided by law) except as previously disclosed in writing to Bank).  All information in such tax returns, reportsand declarations is complete and accurate in all material respects.  Borrower and each of its Subsidiaries haspaid or caused to be paid all taxes due and payable or claimed due and payablein any assessment received by it, except taxes the validity of which are beingcontested in good faith by appropriate proceedings diligently pursued andavailable to Borrower or its Subsidiaries and with respect to which adequatereserves have been set aside on its books. Adequate provision has been made for the payment of all accrued andunpaid Federal, State, county, local, foreign and other taxes whether or notyet due and payable and whether or not disputed.

 

(n)                                 Compliance with Other Agreements andApplicable Laws.  Neither Borrowernor any of its Subsidiaries is in default in any material respect under, or inviolation in any material respect of any of the terms of, any agreement,contract, instrument, lease or other commitment (including, but not limited toany such agreement involving the debts or investments of Borrower or liens uponits assets) to which it is a party or by which it or any of its assets arebound and Borrower and each of its Subsidiaries is in compliance in allmaterial respects with all applicable provisions of laws, rules, regulations,licenses, permits, approvals and orders of any foreign, Federal, State or localgovernmental authority.  Such complianceshall be deemed to comprehend the transaction represented by the Acquisition.

 

(o)                                 No Default.  Noevent has occurred and is continuing that is a Potential Event of Default or anEvent of Default.

 

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

 

(q)                                 Intangible Assets. Borrower owns, or possesses the right to use to the extent necessary inits business, all trademarks, trade names, copyrights, patents, patent rights,computer software, licenses and other intangible assets that are used in theconduct of its business as now operated, and no such intangible asset, toBorrower’s actual knowledge, conflicts with the valid trademark, trade name,copyright, patent, patent right or intangible asset of any other Person.

 

ARTICLE VICOVENANTS

 

SECTION 6.01.  Affirmative Covenants.  So long as any Revolving Loan or AdditionalRevolving Loan shall remain unpaid or the Bank shall have any Commitmenthereunder, the Borrower will, unless the Bank shall otherwise consent inwriting:

 

(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 and its

 

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consolidatedSubsidiaries as at the end of each fiscal year and the related consolidatedstatements of income and changes in common stockholders’ equity (or comparablestatement) employed in the business and changes in financial position and cashflow for such year, in each case prepared in accordance with GAAP, settingforth in each case in comparative form the figures for the previous year,accompanied by an unqualified report and opinion thereon of independentcertified public accountants acceptable to the Bank and, if prepared, suchaccountants’ letter to management, and (2) a copy of the Borrower-preparedconsolidating balance sheets and statements of income prepared in connectionwith each of the statements 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, the Borrower’s unaudited consolidated and consolidating balancesheets of itself and its consolidated Subsidiaries as at the end of such periodand the related unaudited consolidated and consolidating statements of incomeand the related unaudited consolidated statement of changes in commonstockholders’ equity (or comparable statement) and changes in financialposition and cash flow for such period and year to date, setting forth in eachcase in comparative form the figures as at the end of the previous fiscal yearas to the balance sheet and the figures for the previous corresponding periodas to the other statements, certified by a duly authorized officer of theBorrower as being fairly stated in all material respects subject to year endadjustments; all such financial statements to be complete and correct in allmaterial respects and to be prepared in reasonable detail acceptable to theBank and in accordance with GAAP applied consistently throughout the periodsreflected therein (except as approved by such accountants and disclosed thereinand except 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 all reports which theBorrower sends to any of its security holders, and copies of all reports andregistration statements which the Borrower or any Subsidiary files with theS.E.C. or any national securities exchange; and

 

(iv)                                   (a) together with each delivery offinancial statements of Borrower and its Subsidiaries pursuant to subdivision(i) above, a certificate, executed by the Borrower’s chairman of the board (ifan officer) or its president or one of its vice presidents or by its chieffinancial officer stating that the signers have reviewed the terms of thisAgreement and have made, or caused to be made under their supervision, a reviewin reasonable detail of the transactions and condition of Borrower and itsSubsidiaries during the accounting period covered by such financial statementsand that such review has not disclosed the existence during or at the end ofsuch accounting period, and that the signers do not have knowledge of theexistence as at the date of such certificate, of any condition or event thatconstitutes an Event of Default or Potential Event of Default, or, if any suchcondition or event existed or exists, specifying the nature and period ofexistence thereof and what action Borrower has taken, is taking and proposes totake with respect thereto; and (b) together with each delivery offinancial statements of Borrower and its Subsidiaries pursuant to subdivision (i) and (ii) above, a certificate demonstrating

 

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in reasonabledetail compliance during and at the end of the applicable accounting periodswith the restrictions 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 anEvent of Default or Potential Event of Default, (b) that any Person hasgiven any notice to the Borrower or any Subsidiary of the Borrower or taken anyother action with respect to a claimed default or event or condition of thetype referred 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 Borrower or anyadverse determination in any litigation involving a potential liability of theBorrower or any of its Subsidiaries equal to or greater than $500,000 which isnot, except for deductibles and self insurance reserves, fully covered byinsurance maintained by Borrower or (d) of a material adverse change inthe 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, Potential Eventof Default, event or condition, and what action the Borrower has taken, istaking 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) allnotices received by the Borrower or any of its ERISA Affiliates of the PensionBenefit Guaranty Corporation’s intent to terminate any Pension Plan or to havea trustee appointed to administer any Pension Plan and (b) all noticesreceived by the Borrower or any of its ERISA Affiliates from a MultiemployerPlan sponsor concerning the imposition or amount of withdrawal liabilitypursuant to Section 4202 of ERISA;

 

(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 by Section 6.02(e)(iv)(including, without limitation, the Union Loan Documents);

 

(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

 

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fromany governmental authority or court in any way concerning any action oromission on the part of the Borrower or any of its Subsidiaries in connectionwith any substance defined as toxic or hazardous by any applicable federal,state or local law, rule, regulation, order or directive or any waste orbyproduct thereof, or concerning the filing of a lien upon, against or inconnection with the Borrower, its Subsidiaries, or any of their leased or ownedreal or personal property, in connection with a Hazardous Substance Superfundor a Post-Closure Liability Fund as maintained pursuant to § 9507 of theInternal 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 Borrower.

 

(c)                                  Corporate Existence, Etc.  At all times preserve and keep in full forceand effect its and its Subsidiaries’ corporate existence and rights, licensesand franchises material to its business and those of each of its Subsidiaries; provided,however, that the corporate existence of any such Subsidiary may beterminated if such termination is in the best interest of Borrower and does notresult in a Change 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 the aggregatefor 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 all material properties used or useful inthe business of the Borrower and its Subsidiaries and from time to time willmake or cause to be made all appropriate repairs, renewals and replacementsthereof. The Borrower will maintain or cause to be maintained, with financiallysound and reputable insurers, insurance with respect to its properties andbusiness and the properties and business of its Subsidiaries against loss ordamage of the kinds customarily insured against by corporations of establishedreputation engaged in the same or similar businesses and similarly situated, ofsuch types and in such amounts as are customarily carried under similarcircumstances by such other corporations. The Borrower will comply with any other insurance requirement set forthin any other Loan Document.

 

(f)                                    Inspection. Permit any authorized representatives designated by the Bank to visitand inspect any of the properties of the Borrower or any of its Subsidiaries,including its and their financial and accounting records, and to make copiesand take extracts therefrom, and to

 

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discuss its and their affairs, finances and accounts with its and theirofficers and independent public accountants, all at such reasonable timesduring 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 Borrower on periodic bases as anormal part of their water delivery and wastewater treatment businesses.

 

(i)         Use of Proceeds of New Debt or Equity. Promptly remit to Bank no less than fifty percent (50%) of the Net CashProceeds of any new debt or equity obtained by Borrower which Net Cash Proceedsshall be applied pro rata to the reduction of any Additional Revolving Loansand to the reduction of that certain credit facility extended to Borrower byUnion to facilitate the TECON Acquisition. All such applications to the Additional Revolving Loans shall representpermanent reductions to the Additional Revolving Commitment.

 

SECTION 6.02.  Negative Covenants.  So long as any Revolving Loan or AdditionalRevolving Loan shall remain unpaid or the Bank shall have any Commitmenthereunder, the Borrower 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) fiftypercent (50%) of the cash proceeds received by Borrower or any of itsSubsidiaries from the issuance of any capital stock of Borrower or any of itsSubsidiaries after the date hereof (net of underwriting discounts andcommissions, professional fees and disbursements in each case not paid to anaffiliate of Borrower or a Subsidiary of Borrower) (otherthanany such proceeds received by Borrower in connection with the Employee StockPurchase 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 ofBorrower, permit the EBITDA Coverage Ratio, determined on a four quarterrolling basis, to be less than 1.50:1.00.

 

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(d)                                 Liens Etc.  Createor suffer 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 now ownedor hereafter acquired, or assign, or permit any of its Subsidiaries to assign,any right to receive income, in each case to secure any Debt of any Personother than (i) Liens in favor of the Bank; (ii) Liens existing on thedate hereof and set forth in Schedule 6.02(d)hereto; (iii) Liens securing the indebtedness of TECON referred to in, andpermitted under clause (iv) of Section 6.02(e) below; (iv) purchasemoney Liens upon or in any equipment acquired or held by the Borrower or anySubsidiary in the ordinary course of business with respect to principalindebtedness up to a maximum of $2,000,000 to secure the purchase price of suchequipment or to secure indebtedness incurred solely for the purpose offinancing the acquisition of such equipment; (v) Liens existing onproperty acquired by the Borrower or any Subsidiary, and all refundings andextensions of any such Liens; (vi) Liens, deposits and/or pledges made tosecure the performance of operating leases; provided that the principal amountof Debt secured by any such Lien permitted hereunder shall not exceed an amountequal to (x) one hundred percent (100%) of thecost of the real property subject to such lien or security interest or(y) one hundred percent (100%) of the cost of the personal property subjectto such lien or security interest, and further provided that none of such liensor security interests shall extend to other assets of the Borrower or itsSubsidiaries, (vii) Liens for taxes, assessments or other governmental chargeswhich are not delinquent, and (viii) materialmen’s, mechanics’ or other similarliens arising in the ordinary course of business the underlying claim withrespect to which is not delinquent or is being contested in good faith.

 

(e)                                  Debt.  Create, incur,assume or permit to exist, or permit any Subsidiary to create, incur, assume orpermit to exist, any indebtedness or liabilities resulting from borrowings,loans or advances, whether matured or unmatured, liquidated or unliquidated,joint or several, secured or unsecured, except for (i) Debt incurred pursuantto the Convertible Debentures in a principal amount not to exceed $20,000,000outstanding at any time, (ii) secured indebtedness for purchase money financingof equipment 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, (v)other secured Debt identified on Schedule 6.02(e) not to exceed theapplicable amount indicated on such schedule, (vi) unsecured senior funded bankdebt in a principal amount not to exceed $40,500,000 outstanding at any time inthe aggregate for the Borrower and its Subsidiaries (including, withoutlimitation, unsecured senior funded bank debt incurred pursuant to the LoanDocuments and the Union Loan Documents, and excluding the undrawn face amountof the Capistrano Letter of Credit); provided that the only unsecuredsenior funded debt of the Subsidiaries which may be outstanding shall be (I)unsecured bank indebtedness of NMUI in an aggregate principal amount not toexceed at any one time $4,000,000; (II) secured debt of TECON not to exceed$15,000,000; and (III) other unsecured senior funded debt in a principal amountnot to exceed $500,000 outstanding at any time in the aggregate for allSubsidiaries,****and (IV) intercompany Debt between Borrower and itsmajority-owned Subsidiaries.  In noevent shall funded debt at Suburban exceed Suburban’s bondable capacity at anytime, and any and all mortgage bonds issued by Suburban and/or NMUI subsequentto the date of this Agreement shall have an NAIC rating of “1” or “2”.

 

(f)                                    Consolidation, Merger or Dissolution.  (i) Consolidate with or merge into anyother Person, or permit any Subsidiary to consolidate with or merge into anyother Person, unless Borrower or the applicable Subsidiary is the survivingentity and no event has occurred and is

 

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continuing, or would result from such consolidation or merger, whichconstitutes 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 Borrower and does notresult in a Change of Control) or (iii) agree to do any of the foregoing orpermit any Subsidiary to agree to do any of the foregoing.

 

(g)                                 Loans, Investments, Acquisitions,Secondary Liabilities.  Make orpermit to remain outstanding, or permit any Subsidiary to make or permit toremain outstanding, any loan or advance to, or guarantee, induce or otherwisebecome contingently liable, directly or indirectly, in connection with theobligations, stock or dividends of, or own, purchase or acquire any stock,obligations or securities of or any other interest in, or make any capital contributionto, any other Person, or make any Acquisition or enter into any agreement tomake any Acquisition, except that the Borrower and its 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, obligations guaranteed by the United States of America, and“money market preferred stock” issued by a corporation incorporated under thelaws of the United States of America or any state thereof given on the date ofsuch investment a credit rating of at least Moody’s Aa (and having aninvestment period not exceeding 50 days);

 

(ii)                                       make Permitted Acquisitions, providedthat the aggregate consideration paid or payable by Borrower and itsSubsidiaries in connection with all Permitted Acquisitions consummated in anyfiscal year of Borrower shall not exceed $5,000,000, providedfurtherthat such limit on consideration shall be increased to $10,000,000 with respectto each fiscal year of Borrower if all Permitted Acquisitions are made byBorrower in such fiscal year and all purchase price payments to be made byBorrower in connection with such Permitted Acquisitions are payable only in stockof Borrower.  Notwithstanding theforegoing, Borrower may undertake and conclude the Permitted Acquisition ofTECON Water Companies, Inc., and Tenkiller Utility Company, with a totalpurchase price not to exceed $71,000,000 (including transaction fees andexpenses);

 

(iii)                                    continue to own the existing capital stock of theBorrower’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 Borrower as to which Borrower ownsat least 80% of the outstanding equity;

 

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(vii)                                with respect to the Borrower only, enter into orpermit to remain outstanding (a) a guaranty of the unsecured bank indebtednessof NMUI in an amount not to exceed at any one time $4,000,000 for principal,plus all interest thereon and all costs and expenses pertaining to theenforcement of the guaranty and/or the collection of such indebtedness, (b) aguaranty of the senior secured bank indebtedness provided by Bank of the Westto Windermere in an amount not to exceed at any one time $10,000,000 forprincipal, plus all interest thereon and all costs and expenses pertaining tothe enforcement of the guaranty and/or the collection of such indebtedness; and(c) guaranties of the obligations of ECO under that certain Service Contractfor the Design, Construction, Financing and Operation of the San Juan BasinDesalter Project dated as of September 3, 2002 between the CapistranoValley Water District and ECO and associated project agreements,****and

 

(viii)                             make or permit to remain outstanding loans andadvances to any of its officers, shareholders or affiliates or enter into orpermit to remain outstanding guarantees in connection with the obligations ofits officers, shareholders or affiliates, in an aggregate amount for all suchloans, advances and guarantees not exceeding $100,000 in addition to the loansoutstanding and reflected on the Borrower’s financial statements datedMarch 31, 2004.

 

(h)                                 Asset Sales. Convey, sell, lease, transfer or otherwise dispose of, or permit anySubsidiary to convey, sell, lease, transfer or otherwise dispose of, in onetransaction or a series of transactions, all or any part of its or itsSubsidiary’s business, 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, orconsummate a purchase or acquisition of, five percent (5%) or more of thecapital stock of any publicly held corporation or other publicly held businessentity, unless the board of directors of such corporation or business entityhas notified the Borrower that it invites or does not oppose such offer orpurchase.

 

(j)                                     Distributions. Upon the occurrence and during the continuance of an Event of Default orPotential Event of Default, authorize, declare or pay, or permit any of itsSubsidiaries to authorize, declare or pay, any Distributions.

 

(k)                                  Transactions with Affiliates.  Neither Borrower nor any of its Subsidiariesshall enter into any transaction for the purchase, sale or exchange of propertyor the rendering of any service to or by any affiliate, except in the ordinarycourse of and pursuant to the reasonable requirements of Borrower’s or itsSubsidiary’s business and upon fair and reasonable terms no

 

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less favorable to the Borrower or its Subsidiary than Borrower or itsSubsidiary would obtain in a comparable arm’s length transaction with anunaffiliated person.

 

(l)                                     Books and Records. Borrower will, and will cause each of its Subsidiaries to, keep properbooks 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. Make any change in the principal nature of Borrower’s and itsSubsidiaries’ business operations (taken as a whole) or the date of its fiscalyear.

 

ARTICLE VIIEVENTS OF DEFAULT

 

SECTION 7.01.  Events of Default.  If any of the following events (“Events of Default”) shall occurand be continuing:

 

(a)                                  Borrower shall fail to pay within three(3) days of the date when due, any principal, interest, fees or other amountspayable 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 connectionwith the Loan Documents shall prove to have been incorrect in any materialrespect when made; or

 

(c)                                  Borrower shall fail to perform or observeany term, any affirmative or negative covenant, including, but not limited to,those covenants set forth in Sections 6.01 and 6.02 hereof, or any otheragreement contained in this Agreement on its part to be performed or observed(other than those referred to in subsections (a) and (b) above); and withrespect to any such default which by its nature can be cured, such defaultshall continue for a period of twenty (20) days from its occurrence; 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 Union LoanDocument, and such default shall continue after the applicable grace period, ifany, specified in the applicable Union Loan Document; or

 

(f)                                    to the extent not already addressed inthis Section 7.01, (i) 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 and Additional Revolving Note), when due(whether by scheduled maturity, required prepayment, acceleration, demand orotherwise) and such failure shall continue after the applicable grace period,if any, specified in the agreement or instrument relating to such Debt, or(B) fail to perform or observe any term, covenant or condition on its partto be performed or observed under any agreement or instrument relating to anysuch Debt or

 

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material to theperformance, business, property, assets, condition (financial or otherwise) orprospects of the Borrower and its Subsidiaries taken as a whole, when requiredto be performed or observed, and such failure shall continue after theapplicable grace period, if any, specified in such agreement or instrument; or

 

(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, custodianor other similar official for it or for all or any substantial part of itsassets, 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 (Bank may, in its discretion, cease making RevolvingLoans and Additional Revolving Loans during the pendency of such action orproceeding); or (iii) there shall be commenced against the Borrower or anyof its Subsidiaries any case, proceeding or other action seeking issuance of awarrant of attachment, execution, distraint or similar process against all orany substantial part of its assets which results in the entry of an order forany such relief which shall not have been vacated, discharged, or stayed orbonded pending appeal within sixty (60) days from the entry thereof (Bank may,in its discretion, cease making Revolving Loans or Additional Revolving Loansduring the pendency of such action or proceeding); or (iv) the Borrower orany of its Subsidiaries shall take any action in furtherance of, or indicatingits consent to, approval of, or acquiescence in, any of the acts set forth inclauses (i), (ii) and (iii) above; or (v) the Borrower or any of itsSubsidiaries shall generally not, or shall be unable to, or shall admit inwriting its inability to, pay its debts as they become due; or

 

(h)                                 One or more judgments or decrees shall beentered against the Borrower or any of its Subsidiaries involving in theaggregate a liability (not paid or fully covered by insurance or reserves)equal to or greater than $500,000 and all such judgments or decrees shall nothave been vacated, discharged, or stayed or bonded pending appeal within thirty(30) days from the entry thereof; or

 

(i)                                                          (i)                                        The Borrower or any of its ERISA Affiliates fails tomake full payment when due of all material amounts which, under the provisionsof any Pension Plan or Section 412 of the Internal Revenue Code, theBorrower or any of its ERISA Affiliates is required to pay as contributionsthereto and such development is not remedied or reversed within fifteen (15)days after the Borrower knows of such development;

 

(ii)                                       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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(iii)                                    the excess of the actuarial present value of allbenefit liabilities under all Pension Plans over the fair market value of theassets of such Pension Plans (excluding in such computation Pension Plans withassets greater than benefit liabilities) allocable to such benefit liabilities are greater than five percent (5%)of Consolidated Tangible Net Worth and such development is not remedied orreversed within fifteen (15)  days afterthe Borrower knows of such development;

 

(iv)                                   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;

 

(v)                                      (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 the dateof the event listed in subclauses (A)-(D) above or any subsequent date, eitherthe Borrower or its ERISA Affiliates has any material liability (such liabilityto include, without limitation, any liability to the Pension Benefit GuarantyCorporation, or any successor thereto, or to any other party under Sections4062, 4063 or 4064 of ERISA or any other provision of law) resulting from orotherwise associated with the events listed in subclauses (A)-(D) above;

 

(vi)                                   As used in this subsection 7.01(i)the term “accumulated funding deficiency” has the meaning specified inSection 412 of the Internal Revenue Code, and the term “benefitliabilities” has the meaning specified in Section 4001of 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 continuation of any Event of Default described in clause 7.01(g)above, the Commitment shall immediately terminate and all Revolving Loans andAdditional Revolving Loans hereunder with accrued interest thereon, and allother amounts owing under the Loan Documents shall automatically become due andpayable, and (ii) upon the occurrence of any other Event of Default, theBank may, by notice to the Borrower, declare the Commitment to be terminatedforthwith, whereupon the Commitment shall immediately terminate; and, by noticeto the Borrower, declare the Revolving Loans and Additional Revolving Loanshereunder, with accrued interest thereon, and all other amounts owing under theLoan Documents to be due and payable forthwith, whereupon the same shallimmediately become due and payable. Bank shall have all rights, powers and remedies available under each

 

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of the Loan Documents, oraccorded by law, including, without limitation, the right to resort to any orall security for any credit accommodation from the Bank subject hereto and toexercise any or all of the rights of a beneficiary or secured party pursuant toapplicable law.  All rights, powers andremedies of Bank in connection with each of the Loan Documents may be exercisedat any time by 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 any provision of the Loan Documents norconsent to any departure by the Borrower therefrom, shall in any event beeffective unless the same shall be in writing and signed by the Bank, and thensuch waiver or consent shall be effective only in the specific instance and forthe specific purpose for which given.

 

SECTION 8.02.  Notices, Etc.  Except as otherwise set forth in this Agreement, all notices andother communications provided for hereunder shall be in writing (includingfacsimile communication) and mailed certified mail, return receipt requested orsent by facsimile or delivered, if to the Borrower, at its address set forth onthe signature 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 of Setoff:  Security Interest in Deposit Accounts.  Upon and only after the occurrence of any Event of Default notcured within any applicable grace period, the Bank is hereby authorized by theBorrower, at any time and from time to time, without notice, (a) to setoff against, and to appropriate and apply to the payment of, the obligationsand liabilities of the Borrower under the Loan Documents (whether matured orunmatured, fixed or contingent or liquidated or unliquidated) any and allamounts owing by the Bank to the Borrower (whether payable in Dollars or anyother currency, whether matured or unmatured, and, in the case of deposits,whether general or special, time or demand and however evidenced) and(b) pending any such action, to the extent necessary, to hold such amountsas collateral to secure such obligations and liabilities and to return asunpaid for insufficient funds any and all checks and other items drawn againstany deposits so held as the Bank in its sole discretion may elect. The Borrowerhereby grants to the Bank a security interest in all deposits and accountsmaintained with the Bank and with any other financial institution. 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.

 

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SECTION 8.04.  No Waiver; Remedies.  No failure on the part of either partyhereto to exercise, and no delay in exercising, any right under any of the LoanDocuments shall operate as a waiver thereof; nor shall any single or partialexercise of any right under any of the Loan Documents preclude any other orfurther exercise thereof or the exercise of any other right. The remediesherein provided are cumulative and not exclusive of any remedies provided by law.

 

SECTION 8.05.  Costs and Expenses.  Borrower shall pay to Bank immediately upondemand the full amount of all costs and expenses, including reasonableattorneys’ fees (to include outside counsel fees and all allocated costs ofBank’s in-house counsel), incurred by Bank in connection with (a) thenegotiation and preparation of this Agreement and each other of the LoanDocuments, and the preparation of any amendments and waivers hereto andthereto, (b) the enforcement of Bank’s rightsand/or the collection of any amounts which become due to Bank under any of theLoan Documents (including, without limitation, in appellate, bankruptcy,insolvency, liquidation, reorganization, moratorium or other similarproceedings) or the restructuring of the Loan Documents, and (c) theprosecution or defense of any action in any way related to any of the LoanDocuments, including, without limitation, any action for declaratory relief.

 

SECTION 8.06.  Participations.  The Bank may sell, assign, transfer, negotiate or grantparticipations to other financial institutions in all or part of theobligations of the Borrower outstanding under the Loan Documents, provided thatany such sale, assignment, transfer, negotiation or participation shall be incompliance with the applicable federal and state securities laws; and providedfurther that any assignee or transferee agrees to be bound by the terms andconditions of this Agreement. The Bank may, in connection with any actual orproposed assignment or participation, disclose to the actual or proposedassignee or participant, any information relating to the Borrower or any of itsSubsidiaries.

 

SECTION 8.07.  Effectiveness: Binding Effect.  This Agreement shall become effective whenit shall have been executed by the Borrower and the Bank and thereafter shallbe binding upon and inure to the benefit of the Borrower, the Bank and theirrespective successors and assigns, except that the Borrower shall not have theright to assign its rights hereunder or any interest herein without the priorwritten consent of the Bank.

 

SECTION 8.08.  Governing Law.  The validity, interpretation and enforcement of this Agreementand the other Loan Documents (except to the extent otherwise provided in anysuch Loan Document) and any dispute arising out of the relationship between theparties hereto or thereto, whether in contract, tort, equity or otherwise,shall be governed by the internal laws of the State of California (withoutgiving effect to principles of conflicts of law).

 

SECTION 8.09.  Arbitration and Waiver of Jury Trial.

 

(a)                                  This paragraph concerns the resolution ofany controversies or claims between Bank and Borrower, whether arising incontract, tort or by statute, including but not limited to controversies orclaims that arise out of or relate to: (i) this Agreement (including anyrenewals, extensions or modifications); or (ii) any of the Loan Documents(collectively a “Claim”).

 

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(b)                                 Atthe request of any party to this Agreement, any Claim shall be resolved bybinding arbitration in accordance with the Federal Arbitration Act (Title 9,U.S. Code) (the “Act”).  The Act willapply even though this Agreement provides that it is governed by the law of theState of California.

 

(c)                                  Arbitrationproceedings will be determined in accordance with the Act, the applicable rulesand procedures for the arbitration of disputes of JAMS or any successor thereof(“JAMS”), and the terms of this paragraph. In the event of any inconsistency, the terms of this paragraph shallcontrol.

 

(d)                                 Thearbitration shall be administered by JAMS and conducted in the State ofCalifornia.  All Claims shall bedetermined by one arbitrator; however, if Claims exceed Five Million Dollars($5,000,000), upon the request of any party, the Claims shall be decided bythree arbitrators.  All arbitrationhearings shall commence within ninety (90) days of the demand for arbitrationand close within ninety (90) days of commencement and the award of thearbitrator(s) shall be issued within thirty (30) days of the close of thehearing.  However, the arbitrator(s),upon a showing of good cause, may extend the commencement of the hearing for upto an additional sixty (60) days.  Thearbitrator(s) shall provide a concise written statement of reasons for theaward.  The arbitration award may besubmitted to any court having jurisdiction to be confirmed, judgment enteredand enforced.

 

(e)                                  Thearbitrator(s) will have the authority to decide whether any Claim is barred bythe statute of limitations and, if so, to dismiss the arbitration on thatbasis. For purposes of the application of the statute of limitations, theservice on JAMS under applicable JAMS rules of a notice of Claim is theequivalent of the filing of a lawsuit. Any dispute concerning this arbitration provision or whether a Claim isarbitrable shall be determined by the arbitrator(s).  The arbitrator(s) shall have the power to award legal feespursuant to the terms of this Agreement.

 

(f)                                    Thisparagraph does not limit the right of any party to: (i) exercise self-helpremedies, such as but not limited to, setoff; (ii) initiate judicial ornon-judicial foreclosure against any real or personal property collateral;(iii) exercise any judicial or power of sale rights, or (iv) act in a court oflaw to obtain an interim remedy, such as but not limited to, injunctive relief,writ of possession or appointment of a receiver, or additional or supplementaryremedies.

 

(g)                                 Thefiling of a court action is not intended to constitute a waiver of the right ofany party, including the suing party, thereafter to require submittal of theClaim to arbitration.

 

(h)                                 Byagreeing to binding arbitration, the parties irrevocably and voluntarily waiveany right they may have to a trial by jury in respect of any Claim.  Furthermore, without intending in any way tolimit this agreement to arbitrate, to the extent any Claim is not arbitrated,the parties irrevocably and voluntarily waive any right they may have to atrial by jury in respect of such Claim. This provision is a material inducement for the parties entering intothis Agreement.

 

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SECTION 8.10.  Waiver of Notices.  Borrower hereby expressly waives demand, presentment, protest andnotice of protest and notice of dishonor with respect to any and allinstruments, included in or evidencing any of the obligations, and any and allother demands and notices of any kind or nature whatsoever with respect to theobligations and this Agreement, except such as are expressly provided forherein.  No notice to or demand onBorrower which Bank may elect to give shall entitle Borrower to any other orfurther notice or demand in the same, similar or other circumstances.

 

SECTION 8.11.  Entire Agreement.  This Agreement with Exhibits and Schedules and the other LoanDocuments embody the entire agreement and understanding between the partieshereto and supersede all prior agreements and understandings relating to thesubject matter hereof.  In the event ofany conflict between the provisions of this Agreement and those of any otherLoan Document, the provisions of this Agreement shall control and govern; providedthat the inclusion of supplemental rights or remedies in favor of Bank in anyother Loan Document shall not be deemed a conflict with this Agreement.

 

SECTION 8.12.  Severability of Provisions.  In case any one or more of the provisionscontained in this Agreement should be invalid, illegal or unenforceable in anyrespect, the validity, legality and enforceability of the remaining provisionscontained herein shall not in any way be affected or impaired thereby.

 

SECTION 8.13.  Execution in Counterparts.  This Agreement may be executed in any numberof counterparts and by different parties hereto in separate counterparts, eachof which when so executed shall be deemed to be an original and all of whichtaken together shall constitute one and the same agreement.

 

SECTION 8.14.  Further Assurances.  Without limiting in any manner any other obligation,requirement or agreement hereunder or under any of the other Loan Documents orotherwise, Borrower shall, at its expense and without expense to Bank, do,execute and deliver such further acts and documents as Bank from time to timereasonably requires for the assuring and confirming unto Bank of the rightshereby created or intended now or hereafter so to be, or for carrying out theintention or facilitating the performance 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.

 
| BANK OF AMERICA, N.A.                                                                                                                                        | SOUTHWEST WATER COMPANY                                                                                                                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                         |                                                                                                                                                                         |
| By:                                                                                                                                                          |                                                                                                                                                                         |   | By: |   |   |
| Name:  Jamie  L. Freeman                                                                                                                           | Name: Peter J.  Moerbeek                                                                                                                                                |
| Title:   Vice  President                                                                                                                      | Title:   President  and Chief Operating Officer                                                                                                               |
|                                                                                                                                                         |                                                                                                                                                                         |
| Address:                                                                                                                                                     | Address:                                                                                                                                                                     |
|                                                                                                                                                         |                                                                                                                                                                         |
| Bank of America  675 Anton Boulevard, 2nd Floor  Costa Mesa, California 92626  Attention: Jamie L. Freeman  Title: Vice President  Facsimile: (714) 850-6586 | One Wilshire Building  624 S. Grand Avenue, Suite 2900  Los Angeles, California 90017  Attention: Thomas C. Tekulve  Vice President and Treasurer  Facsimile: (213) 929-1888 |
|                                                                                                                                                              |                                                                                                                                                                              |  |  |  |  |

 

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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 andForm 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 of Borrowerfor the year ended December 31, 2003.

 

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SCHEDULE 6.02(d) - LIENS

 

None except as disclosedin the audited consolidated financial statements of Borrower for the fiscalyear ended 2003, and as described in Section 6.02(d)(i) through (viii) ofthis Agreement.

 

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SCHEDULE 6.02(e) – OTHER SECURED DEBT

 

Secured bank debt not toexceed $30,000,000 and no other secured Debt except as reported on Form 10-K ofBorrower for the year ended December 31, 2003.

 

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EXHIBIT A

 

REVOLVING NOTE

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

 

FOR VALUERECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation(“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) atits office at 675 Anton Boulevard, 2nd Floor, Costa Mesa, California92626, or at such other place as the holder hereof may designate, in lawfulmoney of the United States of America and in immediately available funds, theprincipal sum of Twenty Million Dollars ($20,000,000), or so much thereof asmay be advanced and be outstanding, with interest thereon, to be computed oneach advance from the date of its disbursement (computed on the basis of a360-day year and actual days elapsed, which results in more interest than if a365-day year were used) at a rate per annum equal to the applicable LIBOR Rateplus one and one-quarter percent (1.25%) or the Prime Rate minus one-quarter ofone percent (0.25%) with respect to all principal sums of less than FifteenMillion Dollars ($15,000,000).  When theaggregate principal sums outstanding are equal to or greater than FifteenMillion Dollars ($15,000,000), the interest thereon shall be computed at a rateper annum equal to the applicable LIBOR Rate plus one and one-half percent(1.50%) or the Prime Rate with respect to the entire principal sums outstanding(to be computed on each advance from the date of its disbursement).  When interest is determined in relation tothe Prime Rate, each change in the rate of interest hereunder shall become effectiveon the opening of business on the day specified in the public announcement of achange in Bank’s Prime Rate. With respect to each LIBOR option selectedhereunder, Bank is hereby authorized to note the date, principal amount,interest rate and applicable LIBOR Rate Term thereto and any payments madethereon on Bank’s books and records (either manually or by electronic entry)and/or on any schedule attached to this Note, which notations shall beprima facie evidence 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.                                       “Agreement” means that certain CreditAgreement between Borrower and Bank dated as of October 6, 2003, asamended from time to time, including, without limitation, those terms relatingto arbitration of disputes.

 

2.                                       “Amended and Restated Credit Agreement”means that certain Amended and Restated Credit Agreement entered into betweenBorrower and Bank on or aboutJuly         , 2004.

 

3.                                       “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 regulation

 

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on which dealings in Dollardeposits are conducted by and among banks in the Designated LIBOR Market.

 

4.                                       “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.

 

6.                                       “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 London Banking Center, London, Great Britain to prime banksin the Designated LIBOR Market on the first day of the applicable LIBOR RateTerm in an aggregate amount approximately equal to the amount of the RevolvingLoan to be made by Bank and for a period of time comparable to the number ofdays in the applicable LIBOR Rate Term. The determination of the LIBOR Base Rate by Bank shall be conclusive inthe absence of manifest error.

 

(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) in effect onthe date the LIBOR Base Rate for the Revolving Loan is determined (whether ornot such reserve percentage is applicable to Bank) under regulations issued fromtime to time by the Federal Reserve Board for determining the maximum reserverequirement (including any emergency, supplemental or other marginalreserve requirement) with respect to eurocurrency funding (currently referredto as “eurocurrency liabilities”) having a term comparable to the LIBOR RateTerm for such Revolving Loan.  Thedetermination by Bank of any applicable Reserve Percentage shall be conclusivein the absence of manifest error.

 

7.                                       “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).

 

8.                                       “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, 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

 

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LIBOR Rate Term would endon a day which is not a Business Day, then such LIBOR Rate Term shall beextended to the next succeeding Business Day.

 

9.                                       “Prime Rate” means the rate of interestpublicly announced from time to time by the Bank as its Prime Rate.  The Prime Rate is set by the Bank based onvarious factors, including the Bank’s costs and desired return, generaleconomic conditions and other factors, and is used as a reference point forpricing some loans.  The Bank may priceloans to its customers at, above or below the Prime Rate.  Any change in the Prime Rate will takeeffect at the opening of business on the day specified in the publicannouncement of a change in the Bank’s Prime Rate.

 

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 June 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 Prime Rate or in relation to the LIBOR Rate for a new LIBORRate Term designated by Borrower. At any time any portion of this Note bearsinterest determined in relation to the Prime Rate, Borrower may convert all ora portion thereof so that it bears interest determined in relation to the LIBORRate for a LIBOR Rate Term designated by Borrower. At the time each advance isrequested hereunder or Borrower wishes to select the LIBOR option for all or aportion of the outstanding principal balance hereof, and at the end of eachLIBOR Rate Term, Borrower shall give Bank notice specifying (a) the interestrate option selected by Borrower, (b) the principal amount subject thereto, and(c) if the LIBOR option is selected, the length of the applicable LIBOR RateTerm. Any such notice may be given by telephone so long as, with respect toeach LIBOR selection, such notice is given to Bank prior to 10:00 a.m.,California time, on the third Business Day prior to the commencement of theLIBOR Rate Term and, with respect to each Prime Rate selection, such notice isgiven to Bank prior to 11:00 a.m., California time, on the day of the requestedadvance. For each LIBOR option requested hereunder, Bank will quote theapplicable LIBOR Rate to Borrower at approximately 10:00 a.m., California time,on the second Business Day prior to the LIBOR Rate Term. If Borrower does notimmediately accept the rate quoted by Bank, any subsequent acceptance byBorrower shall be subject to a re-determination by Bank of the applicable LIBORRate; provided however, that if Borrower fails to accept any such rate by 11:00a.m., California time, on the Business Day such quotation is given, then thequoted rate shall expire and Bank shall have no obligation to permit a LIBORoption to be selected on such day. If no specific designation of interest ismade at the time any advance is requested hereunder or at the end of any LIBORRate Term, Borrower shall be deemed to have made a Prime Rate interestselection for such advance or the principal amount to which such LIBOR RateTerm applied.

 

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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, then (i) nonew LIBOR option may be selected by Borrower, and (ii) any portion of theoutstanding principal balance hereof which bears interest determined inrelation to the LIBOR Rate, subsequent to the end of the LIBOR Rate Termapplicable thereto, shall bear interest determined in relation to the PrimeRate.

 

(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) tomaintain interest rates based on the LIBOR Rate, then in the former event, anyobligation of Bank to make available such unlawful LIBOR options shallimmediately be cancelled, and in the latter event, any such unlawfulLIBOR-based interest rates then outstanding shall be converted, at Bank’soption, so that interest on the portion of the outstanding principal balancesubject thereto is determined in relation to the Prime Rate; provided however,that if any such Change in Law shall permit any LIBOR-based interest rates toremain in effect until the expiration of the LIBOR Rate Term applicablethereto, then such permitted LIBOR-based interest rates shall continue ineffect until the expiration of such LIBOR Rate Term. Upon the occurrence of anyof the foregoing events, Borrower shall pay to Bank immediately upon demandsuch amounts as may be necessary to compensate Bank for any fines, fees,charges, penalties or other costs incurred or payable by Bank as a resultthereof and which are attributable to any LIBOR options made available toBorrower hereunder, and any reasonable allocation made by Bank among itsoperations 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 other chargewith respect to any LIBOR options, or change the basis of taxation of paymentsto Bank of principal, interest, fees or any other amount payable hereunder(except for changes in the rate of tax on the overall net income of Bank); or

 

(ii)                                  impose, modify or hold applicable 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. In determiningwhich

 

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costs incurred by Bankand/or reductions in amounts received by Bank are attributable to any LIBORoptions made available to Borrower hereunder, any reasonable allocation made byBank among its operations shall be conclusive 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:

 

(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)                               an Event of Default has occurred and is continuing; or

 

 (iii)                            the LIBOR Rate does not accurately reflect the cost ofany Revolving Loan which bears 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 Amended and Restated Credit Agreement;provided however, that the total outstanding borrowings under this Note shallnot at any time exceed the principal amount stated above. The unpaid principalbalance of this obligation at any time shall be the total amounts advancedhereunder by the holder hereof less the amount of principal payments madehereon by or for Borrower, which balance may be endorsed hereon from time totime by the holder.  The outstandingprincipal balance of this Note shall be due and payable in full on the“Maturity Date” (as defined in the Amended and Restated Credit 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) Thomas C. Tekulve or Richard Shields any oneacting alone, who are authorized to request advances and direct the dispositionof any advances until written notice of the revocation of such authority isreceived by the holder at the office designated above, or (b) any person, withrespect to advances deposited to the credit of any account of Borrower with theholder, which advances, when so deposited, shall be conclusively presumed tohave been made to or for the benefit of Borrower regardless of the fact thatpersons other than those authorized to request advances may have authority todraw against such account. The holder shall have no obligation to determinewhether any person requesting an advance is or has been authorized by Borrower.

 

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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 Prime Rate, if any, and second, to the outstanding principalbalance of this Note which bears interest determined in relation to the LIBORRate, with such payments applied to the oldest LIBOR Rate Term first.

 

4.                                       Prepayment.

 

(a)                                  Prime Rate. Borrower may prepay principalon any portion of this Note which bears interest determined in relation to thePrime 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 Prime Rate in effect from timeto 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 Amended andRestated Credit Agreement.  Any defaultin the payment or performance of any obligation under this Note, or any definedevent of default under the Amended and Restated Credit Agreement, shallconstitute an “Event of Default” under this Note.

 

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E.                                      MISCELLANEOUS:

 

1.                                       Remedies.  Upon the occurrence of any Event of Default, the holder of thisNote, at the holder’s option, without notice upon the occurrence of an Event ofDefault pursuant to Section 7.01(g) of the Amended and Restated CreditAgreement, and with notice upon the occurrence of any other Event of Default,may declare all sums of principal and interest outstanding hereunder to beimmediately due and payable without presentment, demand, protest or notice ofdishonor, all of which are expressly waived by Borrower, and the obligation, ifany, of the holder to extend any further credit hereunder shall immediatelycease and terminate. Borrower shall pay to the holder immediately upon demandthe full amount of all payments, advances, charges, costs and expenses,including reasonable attorneys’ fees (to include outside counsel fees and allallocated costs of the holder’s in-house counsel), incurred by the holder inconnection with the enforcement of the holder’s rights and/or the collection ofany amounts which become due to the holder under this Note, and the prosecutionor defense of any action in any way related to this Note, including withoutlimitation, any action for declaratory relief, and including any of theforegoing incurred in connection with any bankruptcy proceeding relating toBorrower.

 

2.                                       Obligations Joint and Several. Shouldmore than one person or entity sign this Note as a Borrower, the obligations ofeach 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:                       |   |   |
|   |                      |   |   |
|   | Name:                     |   |   |
|   |                      |   |   |
|   | Title:                    |   |   |
|        |                           |  |  |  |  |

 

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EXHIBIT B

 

REVOLVING NOTE

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

 

FOR VALUERECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation(“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) atits office at 675 Anton Boulevard, 2nd Floor, Costa Mesa, California92626, or at such other place as the holder hereof may designate, in lawfulmoney of the United States of America and in immediately available funds, theprincipal sum of Fifteen Million Dollars ($15,000,000), or so much thereof asmay be advanced and be outstanding, with interest thereon, to be computed oneach advance from the date of its disbursement (computed on the basis of a360-day year and actual days elapsed, which results in more interest than if a365-day year were used) at a rate per annum equal to the applicable LIBOR Rateplus two and one-half percent (2.5%) or the Prime Rate.  When interest is determined in relation tothe Prime Rate, each change in the rate of interest hereunder shall become effectiveon the opening of business on the day specified in the public announcement of achange in Bank’s Prime Rate. With respect to each LIBOR option selectedhereunder, Bank is hereby authorized to note the date, principal amount,interest rate and applicable LIBOR Rate Term thereto and any payments madethereon on Bank’s books and records (either manually or by electronic entry)and/or on any schedule attached to this Note, which notations shall beprima facie evidence of the accuracy of the information noted.

 

A.                                   DEFINITIONS:

 

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

 

1.                                       “Amended and Restated Credit Agreement”means that certain Amended and Restated Credit Agreement entered into betweenBorrower and Bank on or aboutJuly         , 2004.

 

2.                                       “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.

 

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.

 

4.                                       “Dollars” means United States of Americadollars.

 

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5.                                       “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 Additional Revolving Loan to be made by Bank which is to bear interest inrelation to the LIBOR Rate, the interest rate per annum (rounded upward, ifnecessary, to the nearest 1/100th of 1%) at which deposits inDollars are offered by Bank through its London Banking Center, London, GreatBritain to prime banks in the Designated LIBOR Market on the first day of theapplicable LIBOR Rate Term in an aggregate amount approximately equal to theamount of the Revolving Loan to be made by Bank and for a period of timecomparable to the number of days in the applicable LIBOR Rate Term.  The determination of the LIBOR Base Rate byBank shall be conclusive in the absence of manifest error.

 

(b)                                 “Reserve Percentage” means, with respectto any Additional Revolving Loan to be made by Bank which is to bear interestin relation to the LIBOR Rate, the maximum reserve percentage (expressed as adecimal, 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 to eurocurrencyfunding (currently referred to as “eurocurrency liabilities”) having a termcomparable 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.

 

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, 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.

 

8.                                       “Prime Rate” means the rate of interestpublicly announced from time to time by the Bank as its Prime Rate.  The Prime Rate is set by the Bank based onvarious factors, including the Bank’s costs and desired return, generaleconomic conditions and other factors, and is used as a reference point forpricing some loans.  The Bank may priceloans to its customers at, above or below the Prime Rate.  Any change in the Prime Rate will takeeffect at the opening

 

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of business on the dayspecified in the public announcement of a change in the Bank’s Prime Rate.

 

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 August 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 Prime Rate or in relation to the LIBOR Rate for a new LIBORRate Term designated by Borrower. At any time any portion of this Note bearsinterest determined in relation to the Prime Rate, Borrower may convert all ora portion thereof so that it bears interest determined in relation to the LIBORRate for a LIBOR Rate Term designated by Borrower. At the time each advance isrequested hereunder or Borrower wishes to select the LIBOR option for all or aportion of the outstanding principal balance hereof, and at the end of each LIBORRate Term, Borrower shall give Bank notice specifying (a) the interest rateoption selected by Borrower, (b) the principal amount subject thereto, and (c)if the LIBOR option is selected, the length of the applicable LIBOR Rate Term.Any such notice may be given by telephone so long as, with respect to eachLIBOR selection, such notice is given to Bank prior to 10:00 a.m., Californiatime, on the third Business Day prior to the commencement of the LIBOR RateTerm and, with respect to each Prime Rate selection, such notice is given toBank prior to 11:00 a.m., California time, on the day of the requested advance.For each LIBOR option requested hereunder, Bank will quote the applicable LIBORRate to Borrower at approximately 10:00 a.m., California time, on the secondBusiness Day prior to the LIBOR Rate Term. If Borrower does not immediatelyaccept the rate quoted by Bank, any subsequent acceptance by Borrower shall besubject to a re-determination by Bank of the applicable LIBOR Rate; providedhowever, that if Borrower fails to accept any such rate by 11:00 a.m.,California time, on the Business Day such quotation is given, then the quotedrate shall expire and Bank shall have no obligation to permit a LIBOR option tobe selected on such day. If no specific designation of interest is made at thetime any advance is requested hereunder or at the end of any LIBOR Rate Term,Borrower shall be deemed to have made a Prime Rate interest selection for suchadvance or the principal 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, then (i) nonew LIBOR option may be selected by Borrower, and (ii) any portion of theoutstanding principal balance hereof which bears interest determined inrelation to the LIBOR Rate, subsequent to the end of the LIBOR Rate Termapplicable thereto, shall bear interest determined in relation to the PrimeRate.

 

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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) tomaintain interest rates based on the LIBOR Rate, then in the former event, anyobligation of Bank to make available such unlawful LIBOR options shallimmediately be cancelled, and in the latter event, any such unlawfulLIBOR-based interest rates then outstanding shall be converted, at Bank’soption, so that interest on the portion of the outstanding principal balancesubject thereto is determined in relation to the Prime Rate; provided however,that if any such Change in Law shall permit any LIBOR-based interest rates toremain in effect until the expiration of the LIBOR Rate Term applicablethereto, then such permitted LIBOR-based interest rates shall continue ineffect until the expiration of such LIBOR Rate Term. Upon the occurrence of anyof the foregoing events, Borrower shall pay to Bank immediately upon demand suchamounts as may be necessary to compensate Bank for any fines, fees, charges,penalties or other costs incurred or payable by Bank as a result thereof andwhich are attributable to any LIBOR options made available to Borrowerhereunder, and any reasonable allocation made by Bank among its operationsshall 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:

 

(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

 

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

 

(iii)  the LIBOR Rate does not accurately reflectthe cost of any Revolving Loan which bears interest in relation to the LIBORRate.

 

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 Amended and Restated Credit Agreement;provided however, that the total outstanding borrowings under this Note shallnot at any time exceed the principal amount stated above. The unpaid principalbalance of this obligation at any time shall be the total amounts advancedhereunder by the holder hereof less the amount of principal payments madehereon by or for Borrower, which balance may be endorsed hereon from time totime by the holder.  The outstandingprincipal balance of this Note shall be due and payable in full on the“Maturity Date” (as defined in the Amended and Restated Credit 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) Thomas C. Tekulve or Richard Shields, 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) anyperson, with respect to advances deposited to the credit of any account ofBorrower with the holder, which advances, when so deposited, shall beconclusively 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 Prime Rate, if any, and second, to the outstanding principalbalance of this Note which bears interest determined in relation to the LIBORRate, with such payments applied to the oldest LIBOR Rate Term first.

 

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4.                                       Prepayment.

 

(a)                                  Prime Rate. Borrower may prepay principalon any portion of this Note which bears interest determined in relation to thePrime 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 Prime Rate in effect from timeto 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 Amended andRestated Credit Agreement.  Any defaultin the payment or performance of any obligation under this Note, or any definedevent of default under the Amended and Restated Credit Agreement, shallconstitute an “Event of Default” under this Note.

 

E.                                      MISCELLANEOUS:

 

1.                                       Remedies.  Upon the occurrence of any Event of Default, the holder of thisNote, at the holder’s option, without notice upon the occurrence of an Event ofDefault pursuant to Section 7.01(g) of the Amended and Restated CreditAgreement, and with notice upon the occurrence of any other Event of Default,may declare all sums of principal and interest outstanding hereunder to beimmediately due and payable without presentment, demand, protest

 

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or notice of dishonor,all of which are expressly waived by Borrower, and the obligation, if any, ofthe holder to extend any further credit hereunder shall immediately cease andterminate. Borrower shall pay to the holder immediately upon demand the fullamount of all payments, advances, charges, costs and expenses, includingreasonable attorneys’ fees (to include outside counsel fees and all allocatedcosts of the holder’s in-house counsel), incurred by the holder in connectionwith the enforcement of the holder’s rights and/or the collection of anyamounts which become due to the holder under this Note, and the prosecution ordefense of any action in any way related to this Note, including withoutlimitation, any action for declaratory relief, and including any of the foregoingincurred in connection with any bankruptcy proceeding relating to Borrower.

 

2.                                       Obligations Joint and Several. Shouldmore than one person or entity sign this Note as a Borrower, the obligations ofeach 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:                       |   |   |
|   |                      |   |   |
|   | Name:                     |   |   |
|   |                      |   |   |
|   | Title:                    |   |   |
|        |                           |  |  |  |  |

 

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