Document:

Exhibit 10.4

 

AMENDMENT TO THE

AMENDED AND RESTATED STOCK OPTION PLAN

FOR NON-EMPLOYEE DIRECTORS

OF

SOUTHWEST WATER COMPANY

 

This Amendment (“Amendment”) to the Amended and Restated Stock
Option Plan for Non-Employee Directors of Southwest Water Company (the “Plan”)
is adopted by Southwest Water Company, a Delaware corporation (the “Company”),
effective as of May 13, 2004.

 

RECITALS

 

WHEREAS, the Board of Directors (the “Board”) originally adopted
the Stock Option Plan for Non-Employee Directors on March 27, 1996 and the
Plan, as amended, was approved by the stockholders on May 23, 2000;

 

WHEREAS, Section 7.2 of the Plan provides that the Plan may be
amended from time to time by the Board, subject in certain circumstances to
stockholder approval of such amendment; and

 

WHEREAS, the Board believes it is in the best interests of the
stockholders to: (i) increase the number of shares issuable under the Plan by
an additional 250,000 shares, (ii) increase the number of options to purchase
shares automatically granted to Non-Employee Directors upon initial election or
appointment and annually (subject to continued service on the Board) to 10,000
shares, subject to adjustment in the event of future stock splits, stock
dividends or stock combinations, and (iii) extend the Plan’s termination date
to May 13, 2014.

 

NOW, THEREFORE, the following amendments to the Plan are adopted by the
Company.

 

AMENDMENTS

 

Effective as of May 13, 2004, Section 2.1 of the Plan is hereby
amended and replaced in its entirety as follows:

 

Section 2.1                                      “Shares
Subject to Restated Director Option Plan.

 

Subject to Section 4.6 (relating to
adjustments in shares upon a Recapitalization, as defined therein), the shares
of stock subject to Options shall be shares of Common Stock.  The aggregate number of shares of Common
Stock which may be issued upon exercise of Options shall not exceed Six Hundred
Eighty Seven Thousand Five Hundred Fifty Five (687,555).  The foregoing gives effect to stock splits
and stock dividends through February 12, 2004.

 

 

Effective as of May 13, 2004, the Section 3.2 of the Plan is
hereby amended and replaced in its entirety as follows:

 

“Subject to Section 3.3 below, effective
as of the 2004 Annual Meeting of Stockholders, each person who is a
Non-Employee Director immediately as of and following the 2004 Annual Meeting
of Stockholders shall be granted automatically on the date of the 2004 Annual
Meeting of Stockholders an additional option to purchase 10,000 of Common
Stock.  Each person who first becomes a
Non-Employee Director after the 2004 Annual Meeting of Stockholders by election
or appointment to the Board shall be granted automatically on the date of such
person’s election or appointment to the Board, an initial Option to purchase
10,000 shares of Common Stock. Each Non-Employee Director shall thereafter be
automatically granted on the date of each subsequent Company Annual Meeting of
Stockholders as of and following which such person continues as a Non-Employee
Director, an additional option to purchase 10,000 shares of Common Stock.  The 10,000 share option grants provided by
this paragraph are subject to anti-dilution adjustments in connection with any
stock split, stock dividend, or stock combination as governed by Section 4.6
hereof.”

 

Effective as of May 13, 2004, Section 4.6 of the Plan is hereby
amended and replaced in its entirety as follows:

 

“Section 4.6 – Adjustments in Outstanding Securities

 

In the event that the outstanding shares of
the Common Stock subject to Options are changed into or exchanged for a
different number or kind of shares of the Company or other securities of the
Company by reason of merger (including reincorporation by means of merger),
consolidation, recapitalization, reclassification, stock split-up, stock
dividend or combination of shares (a “Recapitalization”), the Board shall make
an appropriate and equitable adjustment in (i) the number and kind of shares as
to which all outstanding Options, or portions thereof then unexercised, shall
be exercisable, to the end that after such event the Optionee’s proportionate
interest shall be maintained as before the occurrence of such event; (ii) the
limitations Section 2.1 above on the maximum number and kind of shares
which may be issued under this Plan; and (iii) the number of options specified
in Section 3.2 automatically granted to Directors.  Any adjustment in an outstanding Option
shall be made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in option price per share.  Any such adjustment made by the Board shall
be final and binding upon all Optionees, the Company and all other interested persons.”

 

Effective as of May 13, 2004, the last sentence of Section 7.2 of
the Plan is hereby amended and replaced in its entirety as follows:

 

 

“No Option may be granted during any period
of suspension nor after termination of the Restated Director Option Plan, and
in no event may any Option be granted under this Restated Director Option Plan
after May 13, 2014.”

 

 

* 
*  *  *  *

 

The undersigned, Shelley A. Farnham, Secretary of the Company, hereby
certifies that amendments described above were adopted by the Board on
February 12, 2004, and that the amendment increasing the number of shares
authorized under the Plan was approved by the Company’s stockholders on May 13,
2004.

 

Executed at Los Angeles, California this 13th day of May,
2004.

 

	
   

  	
  Southwest Water Company,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Shelley A. Farnham

  
	
   

  	
   

  	
  SecretaryExhibit 10.5

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

between

 

SOUTHWEST WATER COMPANY

 

and

 

BANK OF AMERICA, N.A.

July 7, 2004

 

 

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.

  	
   

  

 

i

 

	
  (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.

  	
   

  

 

ii

 

	
  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 secured
debt

 

Exhibits

 

A - Form of Note

 

B – Form of Note

 

iii

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

This Amended and Restated
Credit Agreement (“Agreement”) dated as of July 7, 2004 is entered into
between SOUTHWEST WATER COMPANY, a Delaware corporation (the “Borrower”) and
BANK OF AMERICA, N.A. (the “Bank”).

 

RECITALS

 

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

 

B.                                     WHEREAS, Bank and Borrower wish to amend
and completely restate the Credit Agreement under the terms and conditions set
forth in this Agreement.

 

NOW THEREFORE, in
consideration of the premises and of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:

 

ARTICLE I

DEFINITIONS

 

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

 

“Acquisition”: Any
transaction, or any series of related transactions, by which Borrower and/or
any of its Subsidiaries directly or indirectly (a) acquires the ongoing
business 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 of
transactions control of securities of a Person engaged in an ongoing business
representing more than 50% of the ordinary voting power for the election of
directors or other governing position if the business affairs of such Person
are managed by a board of directors or other governing body or (c) acquires
control of more than 50% of the ownership interest in any partnership, joint
venture, limited liability company, business trust or other Person that is not
managed by a board of directors or other governing body.

 

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

 

“Additional Revolving
Loans”:  As defined in
Section 2.06(a).

 

“Additional Revolving
Note”:  As defined in
Section 2.06(d).

 

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

 

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

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

“Change of Control”:  Shall be deemed to have occurred at such
times as:  (a) a “person” or “group”
(within the meaning of Sections 13(d) and 14(d)(2)
of the Securities Act of 1934), becomes the “beneficial owner” (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,
of more than thirty percent (30%) of the total voting power of all classes of
stock then outstanding of Borrower normally entitled to vote in the election of
directors; or (b)  the Borrower shall fail to own directly one hundred percent
(100%) of the issued and outstanding common stock or other equity interest of
Aqua, Suburban, SWUC, TECON, NMUI or ECO or shall lose voting control of
Aqua’s, Suburban’s, SWUC’s, TECON’S, NMUI’s or ECO’s issued and outstanding
common stock or other equity interest; or (c) the Borrower shall fail to own
directly 50.1% of the issued and outstanding common stock or other equity
interest of Metro or OpTech or shall lose voting control of 50.1% of the issued
and 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 outstanding
common stock of WRI or shall lose voting control of 67% of the issued and
outstanding common stock of WRI; or (e) ECO shall fail to own directly one
hundred percent (100%) of the issued and outstanding common stock of CDC or
shall 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 and
outstanding common stock of Hornsby or shall lose voting control of Hornsby’s
issued and outstanding common stock; or (g) SWUC shall fail to own directly 80%
of the issued and outstanding common stock of Windermere or shall lose voting
control of 80% of the issued and outstanding common stock of Windermere.  A change of control shall not include a
transfer of NMUI’s operating assets through a condemnation or sale in lieu of
condemnation.

 

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

 

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

 

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

 

2

 

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

 

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

 

“Consolidated Tangible
Net Worth”:  At any date of
determination, the sum of the capital stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of the Borrower and its
consolidated Subsidiaries plus the outstanding principal amount of the
Convertible Subordinate Debentures Due 2021 of Borrower (the “Convertible
Debentures”) minus (i) treasury stock, (ii) intangible assets (including,
without limitation, franchises, patents, patent applications, trademarks, brand
names, goodwill, purchased contracts, deferred charges (including unamortized
debt discount and expense and organization costs) and research and development
expenses, provided, however that water rights shall not be
considered an intangible asset) and (iii) receivables, advances, loans and all
other amounts due from employees, officers, shareholders and/or affiliates
(excluding those Subsidiaries of which Borrower owns at least 80% of the
outstanding equity), on a consolidated basis determined in conformity with
GAAP.

 

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

 

“Debt”:  As applied to any Person, (i) all
indebtedness for borrowed money, (ii) that portion of obligations with respect
to Capital Leases which is properly classified as a liability on a balance
sheet in conformity with GAAP, (iii) notes payable
and drafts accepted representing extensions of credit whether or not
representing obligations for borrowed money, (iv) any obligation owed for all
or any part of the deferred purchase price of property or services which
purchase price is (y) due more than six months from the date of incurrence of
the obligation in respect thereof, or (z) evidenced by a note or similar
written instrument; (v) all indebtedness secured by any Lien on any property or
asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is non-recourse to
the credit of that person; (vi) reimbursement obligations under letters of
credit; and (vii) other contingent liabilities.

 

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

 

“Distribution”:  With respect to any Person shall mean that
such Person has paid any dividend or returned any capital to its stockholders
or equity holders as such or authorized or made any other distribution, payment
or delivery of property or cash to its stockholders or equity holders as such,
or redeemed, retired, purchased, or otherwise acquired, directly or indirectly,
for consideration, any shares of any class of its capital stock or equity
interests (or any options, warrants or rights issued by such Person with
respect to its capital stock or equity interests), or set aside any funds for
any of the foregoing purposes, or shall have permitted any of its

 

3

 

Subsidiaries to purchase
or otherwise acquire for a consideration any shares of any class of the capital
stock or any equity interests of such Person (or any options, warrants or
rights issued by such Person with respect to its capital stock or equity
interests). Without limiting the foregoing, “Distributions” with respect to any
Person shall also include all payments made or required to be made by such
Person with respect to any stock appreciation rights plans, equity incentive or
the setting aside of any funds for the foregoing purposes.

 

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

 

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

 

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

 

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

 

“Employee Benefit
Plan”:  Any Pension Plan, any employee
welfare benefit plan, or any other employee benefit plan which is described in
Section 3(3) of ERISA and which is maintained
for employees of the Borrower or any ERISA Affiliate of the Borrower.

 

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

 

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

 

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

 

“Event of Default”: As
defined in Section 7.01.

 

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

 

“Hornsby”:  Hornsby Bend Utility Company, a Texas
corporation.

 

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

 

4

 

“Internal Revenue
Code”:  The Internal Revenue Code of
1986, as amended to the date hereof and from time to time hereafter and any
successor statute.

 

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

 

“Loan Documents”:  This Agreement, the Revolving Note, the
Additional Revolving Note, the Pledge and Collateral Agency Agreement, the
Intercreditor Agreement, each alternative dispute resolution agreement entered
into by Borrower and Bank in connection with this Agreement, and each other
agreement, document, instrument and guarantee required by the Bank in
connection with this Agreement and/or the credit extended hereunder.

 

“Maturity Date”:  September 30, 2006.

 

“Metro”: Metro-H20
Utilities, Limited, a Texas limited partnership.

 

“MTI”:  Master Tek International, Inc., a Colorado
corporation.

 

“Multiemployer
Plan”:  A “multiemployer plan” as
defined in Section 4001(a)(3) of ERISA which is
maintained for employees of the Borrower or any ERISA Affiliate of the
Borrower.

 

“Net Cash Proceeds” means
the cash proceeds received by the Borrower or any of its Subsidiaries from the
issuance of any capital stock or Debt securities of the Borrower or any of its
Subsidiaries after the date hereof net of (i) underwriting discounts and
commissions, professional fees and disbursements in each case not paid to an
affiliate of the Borrower or a Subsidiary of the Borrower and (ii) that portion
of the cash proceeds of any new Debt securities issued by a Subsidiary of the
Borrower which are used to refinance existing Debt of such Subsidiary (other
than any such proceeds received by the Borrower in connection with the
Employee Stock Purchase Plan or the Dividend Reinvestment Plan).

 

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

 

“OpTech”: Operations
Technologies, Inc., a Georgia corporation.

 

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

 

“Permitted
Acquisition”:  An Acquisition by
Borrower or any of its Subsidiaries of all or substantially all of the assets
of, 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 or
such Subsidiary, provided that (a) if such Acquisition is of all of the
capital stock or other equity interests of the Acquired Person, such Acquired
Person is merged with and into Borrower or such Subsidiary substantially
simultaneously with Borrower’s or such Subsidiary’s acquisition of such capital
stock or other equity interests or becomes a wholly-owned Subsidiary, (b) no
Potential Event of Default or Event of Default shall have occurred or be
continuing or would

 

5

 

result after giving
effect to such Permitted Acquisition, (c) the Acquisition shall have been
consummated in compliance with all applicable laws, and (d) Borrower shall be
in compliance with all covenants on a pro forma basis having given effect to
the 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 other
entity of whatever nature.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(ii)                                       it has sufficient capital to conduct its
business; and

 

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

 

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

 

6

 

or limited liability
company, of which a majority of the partnership or limited liability company or
other ownership interest are at the time owned directly, or indirectly through
one or more intermediaries, or both, by the Borrower.

 

“Suburban”:  Suburban Water Systems, a California
corporation.

 

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

 

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

 

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

 

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

 

“Union”:  Union Bank of California.

 

“Union Loan
Documents”:  That certain Amended and
Restated Credit Agreement dated as of July 7, 2004 between Union Bank of
California, N.A. and Borrower, and each agreement, document, instrument and
guarantee required by Union Bank of California, N.A., in connection with such
Credit Agreement and/or the credit extended thereunder, in each case as
amended.

 

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

 

“WRI”: Wastewater
Rehabilitation, Inc., a Texas corporation.

 

SECTION 1.02.  Other Definitional Provisions.  All terms defined in this Agreement shall
have the defined meanings when used in the Revolving Note, the Additional
Revolving Note, or any certificate or other document made or delivered pursuant
hereto.

 

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

 

7

 

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

 

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

 

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

 

ARTICLE II

THE CREDIT

 

SECTION 2.01.  The Revolving Loans.

 

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

 

(b)                                 Making the Revolving Loans.  The Borrower may borrow under the Revolving
Commitment on any Business Day, provided that the Borrower shall give the Bank
notice pursuant to the terms of the Revolving Note specifying (i) the
amount of the proposed Revolving Loan and (ii) the requested date of the
Revolving Loan.  Upon satisfaction of
the applicable conditions set forth in Article IV, the proceeds of all
such Revolving Loans will then be made available to the Borrower by the Bank by
crediting the account of the Borrower on the books of the Bank, or as otherwise
directed by the Borrower.

 

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

 

(d)                                 Revolving Note. 
The Revolving Loans made by the Bank pursuant hereto shall be evidenced
by a promissory note of the Borrower, substantially in the form of
Exhibit A, with any appropriate insertions (as amended from time to time,
the “Revolving Note”), payable to the order of the Bank and representing the
obligation of the Borrower to pay the aggregate unpaid principal amount of all
Revolving Loans made by the Bank, with interest thereon as prescribed in
Section 2.03. The Bank is hereby authorized to record in its books and
records and on any schedule annexed to the Revolving Note, the date and
amount of each Revolving Loan made by the Bank, the date and amount of each
payment of principal thereof, and the applicable

 

8

 

interest rate, and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded; provided that failure
by the Bank to effect such recordation shall not affect the Borrower’s
obligations hereunder.  Prior to the
transfer of the Revolving Note, the Bank shall record such information on any
schedule annexed to and forming a part of the Revolving Note.

 

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

 

(i)                                          to pay the Bank an amount equal to any
payment 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 on
such amount from the date of any payment made by the Bank at the rate
applicable to advances bearing interest with reference to the Prime Rate for
the period commencing on the date of any such payment and continuing through
the first Business Day following such demand and thereafter at the Default Rate.  The Borrower also agrees that any sum drawn
under a letter of credit may, without further action of the Bank, upon the
Borrower’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 this
Agreement.

 

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

 

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

 

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

 

(v)                                      to pay any issuance and/or other fees that
the Bank notifies the Borrower will be charged for issuing and processing
letters of credit for the Borrower.

 

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

 

9

 

(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, provided
that the minimum amount per annum of such fee with respect to each standby
letter of credit shall be $500.  This
fee shall be calculated in advance as of the first day of each calendar quarter
on the basis of such amount in effect on the day the fee is calculated, and is
payable on the 14th day after each such date of calculation. If there
is a default under this Agreement, at the Bank’s option, the amount of the fee
shall be increased to 3.25% per annum, effective starting on the day the Bank
provides notice of the increase to the Borrower.

 

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

 

SECTION 2.03.  Interest Computation and Payment; Fee
Computation.  The outstanding principal
balance of the Revolving Loans shall bear interest as set forth in the
Revolving Note.  Interest shall be
computed on the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and place
set forth in the Revolving Note.  All
fees 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 any
difference between the Revolving Commitment and the amount of credit it
actually uses, determined by the weighted average credit outstanding during the
specified period. The fee will be calculated at 0.25% per year. The calculation
of credit outstanding shall include the Revolving Loans and the undrawn amount
of outstanding letters of credit. This fee shall be calculated in arrears as of
the end of each calendar quarter, and is payable on the 15th day of
the calendar month beginning immediately after each calendar quarter end.  Each such fee shall be fully earned when
paid and shall be non-refundable.

 

SECTION 2.05.  Annual Credit Facility Fee.  The Borrower agrees to pay on
September 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 when
paid and shall be non-refundable.  The
payment due, pursuant to this paragraph 2.05, on September 30, 2004, shall
be due and payable on the date of execution by Borrower of this Agreement.

 

SECTION 2.06  The Additional Revolving Loans.

 

(a)                                  The
Additional Revolving Commitment.  The
Bank agrees, on terms and conditions hereinafter set forth, to make additional
loans (“Additional Revolving Loans”) to the Borrower from time to time during
the period from the date hereof and including the Maturity Date in an aggregate
amount not to exceed the Additional Revolving Commitment.  Within the limits of the Additional
Revolving Commitment and prior to the Maturity Date, the Borrower may borrow,
repay, and reborrow subject to the terms of this Agreement and the Additional
Revolving Note.

 

10

 

(b)                                 Making
the Additional Revolving Loans.  The
Borrower may borrow under the Additional Revolving Commitment on any Business
Day, provided that the Borrower shall give the Bank notice pursuant to the
terms of the Additional Revolving Note specifying (i) the amount of the
proposed Additional Revolving Loan and (ii) the requested date of the
Additional Revolving Loan.  Upon satisfaction
of the applicable conditions set forth in Article IV, the proceeds of all
such Additional Revolving Loans will then be made available to the Borrower by
the Bank by crediting the account of the Borrower on the books of the Bank, or
as otherwise directed by the Borrower.

 

(c)                                  Reduction
of the 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 portion
of the Additional Revolving Commitment, without premium or penalty, provided
that each partial reduction shall be in the aggregate amount of $100,000 or an
integral multiple thereof and that such reduction shall not reduce the
Additional Revolving Commitment to an amount less than the amount outstanding
hereunder on the effective date of the reduction.  Such notice shall be irrevocable and such reduction shall not be
reinstated.

 

(d)                                 Additional
Revolving Note.  The Additional
Revolving Loans made by the Bank pursuant hereto shall be evidenced by a
promissory note of the Borrower, substantially in the form of Exhibit B, with
any appropriate insertions (as amended from time to time, the “Additional
Revolving Note”), payable to the order of the Bank and representing the
obligation of the Borrower to pay the aggregate unpaid principal amount of all
Additional Revolving Loans made by the Bank, with the interest thereon as
prescribed in Section 2.08.  The
Bank is hereby authorized to record in its books and records and on any
schedule annexed to the Additional Revolving Note, the date and amount of
each Additional Revolving Loan made by the Bank, the date and amount of each
payment of principal thereof, and the applicable interest rate, and any such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded; provided that failure by the Bank to effect such
recordation shall not affect the Borrower’s obligations hereunder.

 

SECTION 2.07  Mandatory
Repayment.  The aggregate principal
amount of the Additional Revolving Loans outstanding on the Maturity Date,
together with accrued and unpaid interest thereon, shall be due and payable in
full on the Maturity Date.  If at any
time the aggregate outstanding Additional Revolving Loans exceed the Additional
Revolving Commitment then in effect, the Borrower shall immediately repay the
excess to the Bank without penalty or premium.

 

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

 

SECTION 2.09  Unused
Commitment Fee.  The Borrower agrees to
pay a fee on any difference between the Additional Revolving Commitment and the
amount of credit it actually uses, determined by the weighted average credit
outstanding during the specified period. 
The fee

 

11

 

will be calculated at
0.25% per year.  This fee shall be
calculated in arrears as of the end of each calendar quarter, and is payable on
the 15th day of the calendar month beginning immediately after each
calendar quarter end.  Each such fee
shall be fully earned when paid and shall be non-refundable.

 

SECTION 2.10  Front End
Fee.  The Borrower agrees to pay, on the
Closing Date, a front end fee (“Front End Fee”) in the amount of
$                  .  The Bank acknowledges and agrees that it
received $              
in connection with its issuance of a commitment letter to the Borrower and will
credit such amount toward payment of the Front End Fee on the Closing
Date.  The Front End Fee shall be fully
earned when paid and shall be non-refundable.

 

SECTION 2.11 
Collateral.  The stock of TECON
owned by Borrower will secure the Additional Revolving Note.  The collateral is further defined in the Pledge
and Collateral Agency Agreement.

 

ARTICLE III

GENERAL PROVISIONS CONCERNING THE
LOANS

 

SECTION 3.01.  Use of Proceeds.  The proceeds of Revolving Loans hereunder shall be used by the
Borrower (i) for general corporate purposes, working capital and
acquisitions permitted hereunder of the Borrower and those Subsidiaries of
Borrower as to which Borrower owns at least 80% of the outstanding equity, and (ii) to finance capital additions to the water
utility and other operations of the Borrower and those Subsidiaries of Borrower
as to which Borrower owns at least 80% of the outstanding equity.  The proceeds of the Additional Revolving
Loans 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 or
under the Revolving Note or Additional Revolving Note shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next succeeding
Business Day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.

 

SECTION 3.03.  Reduced Return.  If the Bank shall have determined that any applicable law,
regulation, rule or regulatory requirement generally applicable to banks
located in California and (collectively in this Section 3.03,
“Requirement”) regarding capital adequacy, or any change therein, or any change
in the interpretation or administration thereof by any United States federal or
state governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the Bank with
any request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on the Bank’s capital as a
consequence of its Commitment and obligations hereunder to a level below that
which would have been achieved but for such Requirement, change or compliance
(taking into consideration the Bank’s policies with respect to capital
adequacy) by an amount deemed by the Bank to be material (which amount shall be
determined by the Bank’s reasonable allocation of the aggregate of such
reductions resulting from such events), then from time to time, within five (5)
Business Days after demand by the Bank, the Borrower shall pay to the Bank such

 

12

 

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

 

SECTION 3.04.  Indemnities.  The Borrower agrees to indemnify, pay and hold the Bank, and the
shareholders, officers, directors, employees and agents of the Bank
(“Indemnified Persons”), harmless from and against any and all claims,
liabilities, losses, damages, costs and expenses (whether or not any of the
foregoing Indemnified Persons is a party to any litigation), including, without
limitation, reasonable attorneys’ fees and costs (including, without
limitation, the reasonable estimate of the allocated cost of in-house legal
counsel and staff) and costs of investigation, document production, attendance
at a deposition, or other discovery, prior to the assumption of defense by the
Borrower, with respect to or arising out of any proposed acquisition by the
Borrower or any of its Subsidiaries of any Person or any securities (including
a self-tender), this Agreement or any use of proceeds hereunder, or any claim,
demand, action or cause of action being asserted against the Borrower or any of
its Subsidiaries (collectively, the “Indemnified Liabilities”), provided that
the Borrower shall have no obligation hereunder with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of any such
Indemnified Persons. If any claim is made, or any action, suit or proceeding is
brought, against any Indemnified Person with respect to Indemnified
Liabilities, the Indemnified Person shall notify the Borrower within thirty (30) days of the Bank being notified in writing of any
such claim or the commencement of such action, suit or proceeding, and the Borrower
will assume the defense of such action, suit or proceeding, employing counsel
selected by Borrower’s insurance carrier, or selected by the Borrower and
reasonably satisfactory to the Indemnified Person, and pay the fees and
expenses of such counsel. This covenant shall survive termination of this
Agreement and payment of the amounts outstanding under the Revolving Note and
Additional 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 to
obtain the funds for any Revolving Loan or Additional Revolving Loan in any
particular place or manner or to constitute a representation by the Bank that
it has obtained or will obtain the funds for any Revolving Loan or Additional
Revolving Loan in any particular place or manner.

 

ARTICLE IV

CONDITIONS OF LENDING

 

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

 

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

 

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

 

13

 

(ii)                                       Copies of the Articles of Incorporation
or Certificate of Incorporation of the Borrower, certified as of a recent date
by 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 of
Directors or other authorizing documents of the Borrower, in form and substance
satisfactory to the Bank, approving the Loan Documents and Revolving Loans
hereunder;

 

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

 

(vi)                                   Executed copies of all other Loan
Documents;

 

(vii)                                Executed copies of the Union Loan Documents;

 

(b)                                 The Bank shall have completed its due
diligence review of the Borrower, and the scope and results thereof shall be
satisfactory to Bank in its discretion;

 

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

 

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

 

(e)                                  Borrower shall be in compliance with the
Loan Documents, and after giving effect to the initial Revolving Loan, no
Potential Event of Default or Event of Default shall have occurred and be
continuing;

 

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

 

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

 

(h)                                 All corporate and legal proceedings and
all instruments and documents in connection with the transactions contemplated
by this Agreement shall be reasonably satisfactory in content, form and
substance to the Bank and its counsel, and the Bank and such counsel shall have
received any and all further information and documents which the Bank or such
counsel may reasonably have requested in connection therewith, such documents
where appropriate to be certified by proper corporate or governmental
authorities;

 

14

 

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

 

SECTION 4.02.  Conditions Precedent to Initial Additional
Revolving Loan.  The obligation of the
Bank to make its initial Additional Revolving Loan is subject to the conditions
precedent that:

 

(a)  All of the conditions set forth in
Section 4.01 shall have been satisfied;

 

(b)  The Bank shall have received on or before
the day of the initial Additional Revolving Loan the following, each dated
prior to or as of such day, in form and substance to the Bank:

 

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

 

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

 

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

 

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

 

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

 

The obligation of the
Bank to make a Revolving Loan or Additional Revolving Loan on the occasion of
each Revolving Loan or Additional Revolving Loan (including the initial
Revolving Loan and initial Additional Revolving Loan) shall be subject to the
further conditions precedent that on the date of such Revolving Loan and
Additional Revolving Loan (a) the following statements shall be true and
the Bank shall have received the notice required by Section 2.01(b) or
2.06(b), which notice shall be deemed to be a certification by the Borrower
that:

 

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

 

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

 

15

 

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

 

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

 

ARTICLE V

REPRESENTATIONS AND WARRANTIES

 

SECTION 5.01.  Representations and Warranties.  The Borrower represents and warrants as
follows:

 

(a)                                  Organization. 
The Borrower and each of its Subsidiaries is duly organized, validly
existing and in good standing under the laws of the state of its orgainzation.
The Borrower and each of its Subsidiaries is also duly authorized, qualified
and licensed in all applicable jurisdictions, and under all applicable laws,
regulations, ordinances or orders of public authorities, to carry on its
business in the locations and in the manner presently conducted, and the
Borrower and each of its Subsidiaries has all requisite power and authority to
conduct its business and to own and lease its properties.  Schedule 5.01(a) attached hereto
correctly sets forth the names, form of legal entity, number of shares of
capital stock or membership or other equity interests, as applicable, issued
and outstanding, number of shares of capital stock or membership or other
equity interests, as applicable, owned by the Borrower or any of its
Subsidiaries (specifying such owner) and jurisdictions of organization of all
Subsidiaries of the Borrower.  Except as
set forth on Schedule 5.01(a), there are no outstanding options, warrants
or other rights to purchase any capital stock, membership interests or units of
other equity interest of any Subsidiary other than in favor of the Borrower,
and all shares, membership interests or other equity interests issued by the
Subsidiaries are  free and clear of all liens, except for liens permitted under
Section 6.02(d).

 

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

 

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

 

16

 

required pursuant to the Securities Exchange Act of 1934, as amended
(if such act is applicable to the Borrower), which reports will be made in the
ordinary course of business) is required for the due execution, delivery and
performance by the Borrower of the Loan Documents.

 

(d)                                 Validity.  The Loan
Documents are the binding obligations of the Borrower or other executing
Person, if any, enforceable in accordance with their respective terms; except
in each case as such enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws of general
application and equitable principles relating to or affecting creditors’
rights.

 

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

 

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

 

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

 

(h)                                 Disclosure.  No
representation or warranty of the Borrower contained in this Agreement or any
other document, certificate or written statement furnished to the Bank by or on
behalf of the Borrower for use in connection with the transactions contemplated
by this Agreement contains any known untrue statement of a material fact or
omits to state a known material fact (known to the Borrower in the case of any
document not furnished by it) necessary in order to make the statements
contained herein or therein not misleading. There is no fact known to the
Borrower (other than matters of a general economic nature) which materially
adversely affects the business, operations, property, assets or condition
(financial or otherwise)

 

17

 

of the Borrower and its Subsidiaries, taken as a whole, which has not
been disclosed herein or in such other documents, certificates and statements
furnished to the Bank for use in connection with the transactions contemplated
hereby.

 

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

 

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

 

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

 

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

 

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

 

18

 

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

 

(n)                                 Compliance with Other Agreements and
Applicable Laws.  Neither Borrower
nor any of its Subsidiaries is in default in any material respect under, or in
violation in any material respect of any of the terms of, any agreement,
contract, instrument, lease or other commitment (including, but not limited to
any such agreement involving the debts or investments of Borrower or liens upon
its assets) to which it is a party or by which it or any of its assets are
bound and Borrower and each of its Subsidiaries is in compliance in all
material respects with all applicable provisions of laws, rules, regulations,
licenses, permits, approvals and orders of any foreign, Federal, State or local
governmental authority.  Such compliance
shall be deemed to comprehend the transaction represented by the Acquisition.

 

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

 

(p)                                 Regulation U; Investment Company Act.  No part of the proceeds of any Revolving
Loan 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 as
an “investment company” under the Investment Company Act of 1940.

 

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

 

ARTICLE VI

COVENANTS

 

SECTION 6.01.  Affirmative Covenants.  So long as any Revolving Loan or Additional
Revolving Loan shall remain unpaid or the Bank shall have any Commitment
hereunder, the Borrower will, unless the Bank shall otherwise consent in
writing:

 

(a)                                  Financial Information.  Furnish to the Bank:

 

(i)                                          as soon as available, but in any event
within 120 days after the end of each fiscal year of the Borrower, (1) a
copy of the Borrower’s annual report to shareholders containing the audited
consolidated balance sheets of itself and its

 

19

 

consolidated
Subsidiaries as at the end of each fiscal year and the related consolidated
statements of income and changes in common stockholders’ equity (or comparable
statement) employed in the business and changes in financial position and cash
flow for such year, in each case prepared in accordance with GAAP, setting
forth in each case in comparative form the figures for the previous year,
accompanied by an unqualified report and opinion thereon of independent
certified public accountants acceptable to the Bank and, if prepared, such
accountants’ letter to management, and (2) a copy of the Borrower-prepared
consolidating balance sheets and statements of income prepared in connection
with each of the statements provided in subpart (1) above; and

 

(ii)                                       as soon as available, but in any event
within forty-five (45) days after the end of each
fiscal quarter, the Borrower’s unaudited consolidated and consolidating balance
sheets of itself and its consolidated Subsidiaries as at the end of such period
and the related unaudited consolidated and consolidating statements of income
and the related unaudited consolidated statement of changes in common
stockholders’ equity (or comparable statement) and changes in financial
position and cash flow for such period and year to date, setting forth in each
case in comparative form the figures as at the end of the previous fiscal year
as to the balance sheet and the figures for the previous corresponding period
as to the other statements, certified by a duly authorized officer of the
Borrower as being fairly stated in all material respects subject to year end
adjustments; all such financial statements to be complete and correct in all
material respects and to be prepared in reasonable detail acceptable to the
Bank and in accordance with GAAP applied consistently throughout the periods
reflected therein (except as approved by such accountants and disclosed therein
and except for the exclusion of certain information and footnote disclosures
omitted pursuant to the rules and regulations of the S.E.C.); and

 

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

 

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

 

20

 

in reasonable
detail compliance during and at the end of the applicable accounting periods
with the restrictions contained in Section 6.02 hereof.

 

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

 

(i)                                          promptly upon any officer of the Borrower
obtaining knowledge (a) of any condition or event which constitutes an
Event of Default or Potential Event of Default, (b) that any Person has
given any notice to the Borrower or any Subsidiary of the Borrower or taken any
other action with respect to a claimed default or event or condition of the
type referred to in Section 7.01(e) or Section 7.01(f), (c) of
the institution of any litigation involving an alleged liability (including
possible forfeiture of property) of the Borrower or any of its Subsidiaries
equal to or greater than $500,000 which is not, except for deductibles and self
insurance reserves, fully covered by insurance maintained by Borrower or any
adverse determination in any litigation involving a potential liability of the
Borrower or any of its Subsidiaries equal to or greater than $500,000 which is
not, except for deductibles and self insurance reserves, fully covered by
insurance maintained by Borrower or (d) of a material adverse change in
the business, operations, properties, assets or condition (financial or
otherwise) of the Borrower and its Subsidiaries, taken as a whole, an officers’
certificate specifying the nature and period of existence of any such condition
or event, or specifying the notice given or action taken by such holder or
Person and the nature of such claimed default, Event of Default, Potential Event
of Default, event or condition, and what action the Borrower has taken, is
taking and proposes to take with respect thereto;

 

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

 

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

 

(iv)                                   promptly, and in any event within 10 days
after the effective date thereof, a copy of all amendments to any of the loan
documents 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 days
after receipt thereof, a copy of any notice, summons, citation, directive,
letter or other form of communication

 

21

 

from
any governmental authority or court in any way concerning any action or
omission on the part of the Borrower or any of its Subsidiaries in connection
with any substance defined as toxic or hazardous by any applicable federal,
state or local law, rule, regulation, order or directive or any waste or
byproduct thereof, or concerning the filing of a lien upon, against or in
connection with the Borrower, its Subsidiaries, or any of their leased or owned
real or personal property, in connection with a Hazardous Substance Superfund
or a Post-Closure Liability Fund as maintained pursuant to § 9507 of the
Internal Revenue Code; and

 

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

 

(c)                                  Corporate Existence, Etc.  At all times preserve and keep in full force
and effect its and its Subsidiaries’ corporate existence and rights, licenses
and franchises material to its business and those of each of its Subsidiaries; provided,
however, that the corporate existence of any such Subsidiary may be
terminated if such termination is in the best interest of Borrower and does not
result in a Change of Control.

 

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

 

(e)                                  Maintenance of Properties; Insurance.  Maintain or cause to be maintained in good
repair, working order and condition all material properties used or useful in
the business of the Borrower and its Subsidiaries and from time to time will
make or cause to be made all appropriate repairs, renewals and replacements
thereof. The Borrower will maintain or cause to be maintained, with financially
sound and reputable insurers, insurance with respect to its properties and
business and the properties and business of its Subsidiaries against loss or
damage of the kinds customarily insured against by corporations of established
reputation engaged in the same or similar businesses and similarly situated, of
such types and in such amounts as are customarily carried under similar
circumstances by such other corporations. 
The Borrower will comply with any other insurance requirement set forth
in any other Loan Document.

 

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

 

22

 

discuss its and their affairs, finances and accounts with its and their
officers and independent public accountants, all at such reasonable times
during normal business hours and as often as may be reasonably requested.

 

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

 

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

 

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

 

SECTION 6.02.  Negative Covenants.  So long as any Revolving Loan or Additional
Revolving Loan shall remain unpaid or the Bank shall have any Commitment
hereunder, the Borrower will not, without the written consent of the Bank:

 

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

 

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

 

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

 

23

 

(d)                                 Liens Etc.  Create
or suffer to exist, or permit any of its Subsidiaries to create or suffer to
exist, any Lien upon or with respect to any of its properties, whether now owned
or hereafter acquired, or assign, or permit any of its Subsidiaries to assign,
any right to receive income, in each case to secure any Debt of any Person
other than (i) Liens in favor of the Bank; (ii) Liens existing on the
date hereof and set forth in Schedule 6.02(d)
hereto; (iii) Liens securing the indebtedness of TECON referred to in, and
permitted under clause (iv) of Section 6.02(e) below; (iv) purchase
money Liens upon or in any equipment acquired or held by the Borrower or any
Subsidiary in the ordinary course of business with respect to principal
indebtedness up to a maximum of $2,000,000 to secure the purchase price of such
equipment or to secure indebtedness incurred solely for the purpose of
financing the acquisition of such equipment; (v) Liens existing on
property acquired by the Borrower or any Subsidiary, and all refundings and
extensions of any such Liens; (vi) Liens, deposits and/or pledges made to
secure the performance of operating leases; provided that the principal amount
of Debt secured by any such Lien permitted hereunder shall not exceed an amount
equal to (x) one hundred percent (100%) of the
cost of the real property subject to such lien or security interest or
(y) one hundred percent (100%) of the cost of the personal property subject
to such lien or security interest, and further provided that none of such liens
or security interests shall extend to other assets of the Borrower or its
Subsidiaries, (vii) Liens for taxes, assessments or other governmental charges
which are not delinquent, and (viii) materialmen’s, mechanics’ or other similar
liens arising in the ordinary course of business the underlying claim with
respect 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 or
permit to exist, any indebtedness or liabilities resulting from borrowings,
loans or advances, whether matured or unmatured, liquidated or unliquidated,
joint or several, secured or unsecured, except for (i) Debt incurred pursuant
to the Convertible Debentures in a principal amount not to exceed $20,000,000
outstanding at any time, (ii) secured indebtedness for purchase money financing
of equipment which is permitted under Section 6.02(d)(iv) in a principal
amount 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 the
applicable amount indicated on such schedule, (vi) unsecured senior funded bank
debt in a principal amount not to exceed $40,500,000 outstanding at any time in
the aggregate for the Borrower and its Subsidiaries (including, without
limitation, unsecured senior funded bank debt incurred pursuant to the Loan
Documents and the Union Loan Documents, and excluding the undrawn face amount
of the Capistrano Letter of Credit); provided that the only unsecured
senior funded debt of the Subsidiaries which may be outstanding shall be (I)
unsecured bank indebtedness of NMUI in an aggregate principal amount not to
exceed 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 amount
not to exceed $500,000 outstanding at any time in the aggregate for all
Subsidiaries,  and (IV) intercompany Debt between Borrower and its
majority-owned Subsidiaries.  In no
event shall funded debt at Suburban exceed Suburban’s bondable capacity at any
time, and any and all mortgage bonds issued by Suburban and/or NMUI subsequent
to 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 any
other Person, or permit any Subsidiary to consolidate with or merge into any
other Person, unless Borrower or the applicable Subsidiary is the surviving
entity and no event has occurred and is

 

24

 

continuing, or would result from such consolidation or merger, which
constitutes an Event of Default or Potential Event of Default, (ii) wind up, liquidate or dissolve (provided,
however, that the corporate existence of any Subsidiary may be
terminated if such termination is in the best interest of Borrower and does not
result in a Change of Control) or (iii) agree to do any of the foregoing or
permit any Subsidiary to agree to do any of the foregoing.

 

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

 

(i)                                          own, purchase or acquire certificates of
deposit issued by a bank, commercial paper rated Moody’s P-1, municipal bonds
rated Moody’s AA or better, direct obligations of the United States of America
or its agencies, obligations guaranteed by the United States of America, and
“money market preferred stock” issued by a corporation incorporated under the
laws of the United States of America or any state thereof given on the date of
such investment a credit rating of at least Moody’s Aa (and having an
investment period not exceeding 50 days);

 

(ii)                                       make Permitted Acquisitions, provided
that the aggregate consideration paid or payable by Borrower and its
Subsidiaries in connection with all Permitted Acquisitions consummated in any
fiscal year of Borrower shall not exceed $5,000,000, provided  further
that such limit on consideration shall be increased to $10,000,000 with respect
to each fiscal year of Borrower if all Permitted Acquisitions are made by
Borrower in such fiscal year and all purchase price payments to be made by
Borrower in connection with such Permitted Acquisitions are payable only in stock
of Borrower.  Notwithstanding the
foregoing, Borrower may undertake and conclude the Permitted Acquisition of
TECON Water Companies, Inc., and Tenkiller Utility Company, with a total
purchase price not to exceed $71,000,000 (including transaction fees and
expenses);

 

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

 

(iv)                                   endorse negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business;

 

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

 

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

 

25

 

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

 

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

 

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

 

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

 

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

 

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

 

26

 

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

 

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

 

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

 

ARTICLE VII

EVENTS OF DEFAULT

 

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

 

(a)                                  Borrower shall fail to pay within three
(3) days of the date when due, any principal, interest, fees or other amounts
payable under any of the Loan Documents; or

 

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

 

(c)                                  Borrower shall fail to perform or observe
any term, any affirmative or negative covenant, including, but not limited to,
those covenants set forth in Sections 6.01 and 6.02 hereof, or any other
agreement contained in this Agreement on its part to be performed or observed
(other than those referred to in subsections (a) and (b) above); and with
respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence; or

 

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

 

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

 

(f)                                    to the extent not already addressed in
this 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 the
aggregate outstanding principal amount of which is at least $500,000 (excluding
Debt evidenced by the Revolving Note and Additional Revolving Note), when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument relating to such Debt, or
(B) fail to perform or observe any term, covenant or condition on its part
to be performed or observed under any agreement or instrument relating to any
such Debt or

 

27

 

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

 

(g)                                 (i) The Borrower or any of its
Subsidiaries shall commence any case, proceeding or other action (A) under
any existing or future law of any jurisdiction, domestic or foreign, relating
to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have
an order for relief entered with respect to it, or seeking to adjudicate it a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets, or the Borrower or any of its Subsidiaries shall make a general
assignment for the benefit of its creditors; or (ii) there shall be
commenced against the Borrower or any of its Subsidiaries any case, proceeding
or other action of a nature referred to in clause (i) above which
(A) results in the entry of an order for relief or any such adjudication
or appointment or (B) remains undismissed, undischarged or unbonded for a
period of sixty (60) days (Bank may, in its discretion, cease making Revolving
Loans and Additional Revolving Loans during the pendency of such action or
proceeding); or (iii) there shall be commenced against the Borrower or any
of its Subsidiaries any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof (Bank may,
in its discretion, cease making Revolving Loans or Additional Revolving Loans
during the pendency of such action or proceeding); or (iv) the Borrower or
any of its Subsidiaries shall take any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the acts set forth in
clauses (i), (ii) and (iii) above; or (v) the Borrower or any of its
Subsidiaries shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or

 

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

 

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

 

(ii)                                       any material accumulated funding
deficiency occurs or exists, whether or not waived, with respect to any Pension
Plan and such development is not remedied or reversed within fifteen (15) days
after the Borrower knows of such development;

 

28

 

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

 

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

 

(v)                                      (A) Any Pension Plan maintained by
the Borrower or any of its ERISA Affiliates shall be terminated within the
meaning of Title IV of ERISA in a distress termination, or (B) a trustee
shall be appointed by an appropriate United States district court in accordance
with Section 4042 of ERISA to administer any Pension Plan, or (C) the
Pension Benefit Guaranty Corporation (or any successor thereto) shall institute
proceedings to terminate any Pension Plan or to appoint a trustee to administer
any Pension Plan in accordance with Section 4042
of ERISA, or (D) the Borrower or any of its ERISA Affiliates shall
withdraw (under Section 4063 of ERISA) from a Pension Plan, if as of the date
of the event listed in subclauses (A)-(D) above or any subsequent date, either
the Borrower or its ERISA Affiliates has any material liability (such liability
to include, without limitation, any liability to the Pension Benefit Guaranty
Corporation, or any successor thereto, or to any other party under Sections
4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or
otherwise associated with the events listed in subclauses (A)-(D) above;

 

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

 

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

 

(k)                                  A Change of Control shall have occurred.

 

Then, (i) upon the
occurrence and continuation of any Event of Default described in clause 7.01(g)
above, the Commitment shall immediately terminate and all Revolving Loans and
Additional Revolving Loans hereunder with accrued interest thereon, and all
other amounts owing under the Loan Documents shall automatically become due and
payable, and (ii) upon the occurrence of any other Event of Default, the
Bank may, by notice to the Borrower, declare the Commitment to be terminated
forthwith, whereupon the Commitment shall immediately terminate; and, by notice
to the Borrower, declare the Revolving Loans and Additional Revolving Loans
hereunder, with accrued interest thereon, and all other amounts owing under the
Loan Documents to be due and payable forthwith, whereupon the same shall
immediately become due and payable. 
Bank shall have all rights, powers and remedies available under each

 

29

 

of the Loan Documents, or
accorded by law, including, without limitation, the right to resort to any or
all security for any credit accommodation from the Bank subject hereto and to
exercise any or all of the rights of a beneficiary or secured party pursuant to
applicable law.  All rights, powers and
remedies of Bank in connection with each of the Loan Documents may be exercised
at any time by Bank and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any
other rights, powers or remedies provided by law or equity.  Except as expressly provided above in this
Section, presentment, demand, protest and all other notices of any kind are
hereby expressly waived. Notwithstanding any other provision of this Agreement,
including Section 8.02, notices to the Borrower under this
Section shall be communicated in writing (including telex or facsimile
transmissions).

 

ARTICLE VIII

MISCELLANEOUS

 

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

 

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

 

SECTION 8.03.  Right of Setoff:  Security Interest in Deposit Accounts.  Upon and only after the occurrence of any Event of Default not
cured within any applicable grace period, the Bank is hereby authorized by the
Borrower, at any time and from time to time, without notice, (a) to set
off against, and to appropriate and apply to the payment of, the obligations
and liabilities of the Borrower under the Loan Documents (whether matured or
unmatured, fixed or contingent or liquidated or unliquidated) any and all
amounts owing by the Bank to the Borrower (whether payable in Dollars or any
other currency, whether matured or unmatured, and, in the case of deposits,
whether general or special, time or demand and however evidenced) and
(b) pending any such action, to the extent necessary, to hold such amounts
as collateral to secure such obligations and liabilities and to return as
unpaid for insufficient funds any and all checks and other items drawn against
any deposits so held as the Bank in its sole discretion may elect. The Borrower
hereby grants to the Bank a security interest in all deposits and accounts
maintained with the Bank and with any other financial institution. The Bank is
authorized to debit any account maintained with it by the Borrower for any
amount of principal, interest or fees which are then due and owing to the Bank.

 

30

 

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

 

SECTION 8.05.  Costs and Expenses.  Borrower shall pay to Bank immediately upon
demand the full amount of all costs and expenses, including reasonable
attorneys’ fees (to include outside counsel fees and all allocated costs of
Bank’s in-house counsel), incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and each other of the Loan
Documents, and the preparation of any amendments and waivers hereto and
thereto, (b) the enforcement of Bank’s rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents (including, without limitation, in appellate, bankruptcy,
insolvency, liquidation, reorganization, moratorium or other similar
proceedings) or the restructuring of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including, without limitation, any action for declaratory relief.

 

SECTION 8.06.  Participations.  The Bank may sell, assign, transfer, negotiate or grant
participations to other financial institutions in all or part of the
obligations of the Borrower outstanding under the Loan Documents, provided that
any such sale, assignment, transfer, negotiation or participation shall be in
compliance with the applicable federal and state securities laws; and provided
further that any assignee or transferee agrees to be bound by the terms and
conditions of this Agreement. The Bank may, in connection with any actual or
proposed assignment or participation, disclose to the actual or proposed
assignee or participant, any information relating to the Borrower or any of its
Subsidiaries.

 

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

 

SECTION 8.08.  Governing Law.  The validity, interpretation and enforcement of this Agreement
and the other Loan Documents (except to the extent otherwise provided in any
such Loan Document) and any dispute arising out of the relationship between the
parties hereto or thereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of California (without
giving effect to principles of conflicts of law).

 

SECTION 8.09.  Arbitration and Waiver of Jury Trial.

 

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

 

31

 

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

 

(c)                                  Arbitration
proceedings will be determined in accordance with the Act, the applicable rules
and 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 shall
control.

 

(d)                                 The
arbitration shall be administered by JAMS and conducted in the State of
California.  All Claims shall be
determined by one arbitrator; however, if Claims exceed Five Million Dollars
($5,000,000), upon the request of any party, the Claims shall be decided by
three arbitrators.  All arbitration
hearings shall commence within ninety (90) days of the demand for arbitration
and close within ninety (90) days of commencement and the award of the
arbitrator(s) shall be issued within thirty (30) days of the close of the
hearing.  However, the arbitrator(s),
upon a showing of good cause, may extend the commencement of the hearing for up
to an additional sixty (60) days.  The
arbitrator(s) shall provide a concise written statement of reasons for the
award.  The arbitration award may be
submitted to any court having jurisdiction to be confirmed, judgment entered
and enforced.

 

(e)                                  The
arbitrator(s) will have the authority to decide whether any Claim is barred by
the statute of limitations and, if so, to dismiss the arbitration on that
basis. For purposes of the application of the statute of limitations, the
service on JAMS under applicable JAMS rules of a notice of Claim is the
equivalent of the filing of a lawsuit. 
Any dispute concerning this arbitration provision or whether a Claim is
arbitrable shall be determined by the arbitrator(s).  The arbitrator(s) shall have the power to award legal fees
pursuant to the terms of this Agreement.

 

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

 

(g)                                 The
filing of a court action is not intended to constitute a waiver of the right of
any party, including the suing party, thereafter to require submittal of the
Claim to arbitration.

 

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

 

32

 

SECTION 8.10.  Waiver of Notices.  Borrower hereby expressly waives demand, presentment, protest and
notice of protest and notice of dishonor with respect to any and all
instruments, included in or evidencing any of the obligations, and any and all
other demands and notices of any kind or nature whatsoever with respect to the
obligations and this Agreement, except such as are expressly provided for
herein.  No notice to or demand on
Borrower which Bank may elect to give shall entitle Borrower to any other or
further notice or demand in the same, similar or other circumstances.

 

SECTION 8.11.  Entire Agreement.  This Agreement with Exhibits and Schedules and the other Loan
Documents embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings relating to the
subject matter hereof.  In the event of
any conflict between the provisions of this Agreement and those of any other
Loan Document, the provisions of this Agreement shall control and govern; provided
that the inclusion of supplemental rights or remedies in favor of Bank in any
other 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 provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.

 

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

 

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 or
otherwise, Borrower shall, at its expense and without expense to Bank, do,
execute and deliver such further acts and documents as Bank from time to time
reasonably requires for the assuring and confirming unto Bank of the rights
hereby created or intended now or hereafter so to be, or for carrying out the
intention or facilitating the performance of the terms of any Loan Document.

 

33

 

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

 

	
  BANK OF AMERICA, N.A.

  	
  SOUTHWEST WATER COMPANY

  
	
   

  	
   

  
	
  By: 

  	
   

  	
   

  	
  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

  
						

 

34

 

SCHEDULE 5.01(f) - LITIGATION

 

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

 

35

 

SCHEDULE 5.01(i) - ENVIRONMENTAL MATTERS

 

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

 

36

 

SCHEDULE 6.02(d) - LIENS

 

None except as disclosed
in the audited consolidated financial statements of Borrower for the fiscal
year ended 2003, and as described in Section 6.02(d)(i) through (viii) of
this Agreement.

 

37

 

SCHEDULE 6.02(e) – OTHER SECURED DEBT

 

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

 

38

 

EXHIBIT A

 

REVOLVING NOTE

 

	
  $20,000,000

  	
  July           ,
  2004

  

 

FOR VALUE
RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation
(“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) at
its office at 675 Anton Boulevard, 2nd Floor, Costa Mesa, California
92626, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Twenty Million Dollars ($20,000,000), or so much thereof as
may be advanced and be outstanding, with interest thereon, to be computed on
each advance from the date of its disbursement (computed on the basis of a
360-day year and actual days elapsed, which results in more interest than if a
365-day year were used) at a rate per annum equal to the applicable LIBOR Rate
plus one and one-quarter percent (1.25%) or the Prime Rate minus one-quarter of
one percent (0.25%) with respect to all principal sums of less than Fifteen
Million Dollars ($15,000,000).  When the
aggregate principal sums outstanding are equal to or greater than Fifteen
Million Dollars ($15,000,000), the interest thereon shall be computed at a rate
per 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 to
the Prime Rate, each change in the rate of interest hereunder shall become effective
on the opening of business on the day specified in the public announcement of a
change in Bank’s Prime Rate. With respect to each LIBOR option selected
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and applicable LIBOR Rate Term thereto and any payments made
thereon on Bank’s books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.

 

A.                                   DEFINITIONS:

 

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

 

1.                                       “Agreement” means that certain Credit
Agreement between Borrower and Bank dated as of October 6, 2003, as
amended from time to time, including, without limitation, those terms relating
to arbitration of disputes.

 

2.                                       “Amended and Restated Credit Agreement”
means that certain Amended and Restated Credit Agreement entered into between
Borrower and Bank on or about
July         , 2004.

 

3.                                       “Business Day” means any day except a
Saturday, Sunday or any other day designated as a holiday under Federal or
California statute or regulation, or for amounts bearing interest based on the
LIBOR Rate, any Business Day is any day except a Saturday, Sunday or any other
day designated as a holiday under Federal or California statute or regulation

 

39

 

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

 

4.                                       “Designated LIBOR Market” means the
regular established market located in London by and among banks for the
solicitation, offer and acceptance of Dollar deposits in such banks.

 

5.                                       “Dollars” means United States of America
dollars.

 

6.                                       “LIBOR Rate” means the interest rate
determined by the following formula, rounded upward, if necessary, to the
nearest 1/100 of one percent. (All amounts in the calculation will be
determined by Bank as of the first day of the interest period.)

 

	
  LIBOR Rate =

  	
  LIBOR

  	
  Base

  	
  Rate

  
	
   

  	
  (1.00 - Reserve
  Percentage)

  

 

(a)                                  “LIBOR Base Rate” means, with respect to
any Revolving Loan to be made by Bank which is to bear interest in relation to
the LIBOR Rate, the interest rate per annum (rounded upward, if necessary, to
the nearest 1/100th of 1%) at which deposits in Dollars are offered
by Bank through its London Banking Center, London, Great Britain to prime banks
in the Designated LIBOR Market on the first day of the applicable LIBOR Rate
Term in an aggregate amount approximately equal to the amount of the Revolving
Loan to be made by Bank and for a period of time comparable to the number of
days in the applicable LIBOR Rate Term. 
The determination of the LIBOR Base Rate by Bank shall be conclusive in
the absence of manifest error.

 

(b)                                 “Reserve Percentage” means, with respect
to any Revolving Loan to be made by Bank which is to bear interest in relation
to 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 on
the date the LIBOR Base Rate for the Revolving Loan is determined (whether or
not such reserve percentage is applicable to Bank) under regulations issued from
time to time by the Federal Reserve Board for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal
reserve requirement) with respect to eurocurrency funding (currently referred
to as “eurocurrency liabilities”) having a term comparable to the LIBOR Rate
Term for such Revolving Loan.  The
determination by Bank of any applicable Reserve Percentage shall be conclusive
in the absence of manifest error.

 

7.                                       “LIBOR Rate Portion” means a portion of
the principal amount outstanding under this Note which is bearing interest at a
rate related to LIBOR. No LIBOR Rate Portion shall be less than Two Hundred
Fifty Thousand Dollars ($250,000).

 

8.                                       “LIBOR Rate Term” means a period
commencing 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 by
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to Bank’s LIBOR; provided
however, that no LIBOR Rate Term shall extend beyond the scheduled maturity
date hereof. The last day of the interest period will be determined by Bank
using the Designated LIBOR Market. If any

 

40

 

LIBOR Rate Term would end
on a day which is not a Business Day, then such LIBOR Rate Term shall be
extended to the next succeeding Business Day.

 

9.                                       “Prime Rate” means the rate of interest
publicly announced from time to time by the Bank as its Prime Rate.  The Prime Rate is set by the Bank based on
various factors, including the Bank’s costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans.  The Bank may price
loans to its customers at, above or below the Prime Rate.  Any change in the Prime Rate will take
effect at the opening of business on the day specified in the public
announcement of a change in the Bank’s Prime Rate.

 

B.                                     INTEREST:

 

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

 

2.                                       Selection of Interest Rate Options. At
any time any portion of this Note bears interest determined in relation to the
LIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Term
applicable thereto so that all or a portion thereof bears interest determined
in relation to the Prime Rate or in relation to the LIBOR Rate for a new LIBOR
Rate Term designated by Borrower. At any time any portion of this Note bears
interest determined in relation to the Prime Rate, Borrower may convert all or
a portion thereof so that it bears interest determined in relation to the LIBOR
Rate for a LIBOR Rate Term designated by Borrower. At the time each advance is
requested hereunder or Borrower wishes to select the LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each
LIBOR Rate Term, Borrower shall give Bank notice specifying (a) the interest
rate option selected by Borrower, (b) the principal amount subject thereto, and
(c) if the 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
each 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 the
LIBOR Rate Term and, with respect to each Prime Rate selection, such notice is
given to Bank prior to 11:00 a.m., California time, on the day of the requested
advance. For each LIBOR option requested hereunder, Bank will quote the
applicable 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 not
immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a re-determination by Bank of the applicable LIBOR
Rate; provided however, that if Borrower fails to accept any such rate by 11:00
a.m., California time, on the Business Day such quotation is given, then the
quoted rate shall expire and Bank shall have no obligation to permit a LIBOR
option to be selected on such day. If no specific designation of interest is
made at the time any advance is requested hereunder or at the end of any LIBOR
Rate Term, Borrower shall be deemed to have made a Prime Rate interest
selection for such advance or the principal amount to which such LIBOR Rate
Term applied.

 

41

 

3.                                       Additional LIBOR Provisions.

 

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

 

(b)                                 If any law, treaty, rule, regulation or
determination of a court or governmental authority or any change therein or in
the interpretation or application thereof (each, a “Change in Law”) shall make
it unlawful for Bank (i) to make LIBOR options available hereunder, or (ii) to
maintain interest rates based on the LIBOR Rate, then in the former event, any
obligation of Bank to make available such unlawful LIBOR options shall
immediately be cancelled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank’s
option, so that interest on the portion of the outstanding principal balance
subject thereto is determined in relation to the Prime Rate; provided however,
that if any such Change in Law shall permit any LIBOR-based interest rates to
remain in effect until the expiration of the LIBOR Rate Term applicable
thereto, then such permitted LIBOR-based interest rates shall continue in
effect until the expiration of such LIBOR Rate Term. Upon the occurrence of any
of the foregoing events, Borrower shall pay to Bank immediately upon demand
such amounts as may be necessary to compensate Bank for any fines, fees,
charges, penalties or other costs incurred or payable by Bank as a result
thereof and which are attributable to any LIBOR options made available to
Borrower hereunder, and any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.

 

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

 

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

 

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

 

(iii)                               impose on Bank any other condition; and
the result of any of the foregoing is to increase the cost to Bank of making,
renewing or maintaining any LIBOR options hereunder and/or to reduce any amount
receivable by Bank in connection therewith, then in any such case, Borrower
shall pay to Bank immediately upon demand such amounts as may be necessary to
compensate Bank for any additional costs incurred by Bank and/or reductions in
amounts received by Bank which are attributable to such LIBOR options. In determining
which

 

42

 

costs incurred by Bank
and/or reductions in amounts received by Bank are attributable to any LIBOR
options made available to Borrower hereunder, any reasonable allocation made by
Bank among its operations shall be conclusive and binding upon Borrower.

 

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

 

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

 

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

 

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

 

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

 

C.                                     BORROWING AND REPAYMENT:

 

1.                                       Loan and Repayment. Borrower may from
time to time during the term of this Note borrow, partially or wholly repay its
outstanding borrowings, and re-borrow, subject to all of the limitations, terms
and conditions of this Note and of any document executed in connection with or
governing this Note, including the Amended and Restated Credit Agreement;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made
hereon by or for Borrower, which balance may be endorsed hereon from time to
time by the holder.  The outstanding
principal balance of this Note shall be due and payable in full on the
“Maturity Date” (as defined in the Amended and Restated Credit Agreement).

 

2.                                       Advances. Advances hereunder, to the
total amount of the principal sum stated above, may be made by the holder at
the oral or written request of (a) Thomas C. Tekulve or Richard Shields any one
acting alone, who are authorized to request advances and direct the disposition
of any advances until written notice of the revocation of such authority is
received by the holder at the office designated above, or (b) any person, with
respect to advances deposited to the credit of any account of Borrower with the
holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of Borrower regardless of the fact that
persons other than those authorized to request advances may have authority to
draw against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by Borrower.

 

43

 

3.                                       Application of Payments. Each payment
made on this Note shall be credited first, to any interest then due and second,
to the outstanding principal balance hereof. Unless instructed otherwise by
Borrower, all payments credited to principal shall be applied first, to the
outstanding principal balance of this Note which bears interest determined in
relation to the Prime Rate, if any, and second, to the outstanding principal
balance of this Note which bears interest determined in relation to the LIBOR
Rate, with such payments applied to the oldest LIBOR Rate Term first.

 

4.                                       Prepayment.

 

(a)                                  Prime Rate. Borrower may prepay principal
on any portion of this Note which bears interest determined in relation to the
Prime Rate at any time, in any amount and without penalty.

 

(b)                                 LIBOR. Each prepayment of a LIBOR Rate
Portion 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 the
date that is five (5) Business Days before the date of such prepayment (which
notice 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 accompanied
by the amount of accrued interest on the amount prepaid, and a prepayment fee
as described below. A “prepayment” is a payment on a date earlier than the last
day of the applicable LIBOR Rate Term. The prepayment fee shall be equal to the
amount (if any) by which:

 

(i)                                     the additional interest which would have
been payable during the applicable LIBOR Rate Term on the amount prepaid had it
not been prepaid, exceeds

 

(ii)                                  the interest which would have been
recoverable by Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or other
appropriate money market selected by Bank for a period starting on the date on
which it was prepaid and ending on the last day of the applicable LIBOR Rate
Term.

 

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

 

D.                                    EVENTS OF DEFAULT:

 

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

 

44

 

E.                                      MISCELLANEOUS:

 

1.                                       Remedies.  Upon the occurrence of any Event of Default, the holder of this
Note, at the holder’s option, without notice upon the occurrence of an Event of
Default pursuant to Section 7.01(g) of the Amended and Restated Credit
Agreement, and with notice upon the occurrence of any other Event of Default,
may declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are expressly waived by Borrower, and the obligation, if
any, of the holder to extend any further credit hereunder shall immediately
cease and terminate. Borrower shall pay to the holder immediately upon demand
the full amount of all payments, advances, charges, costs and expenses,
including reasonable attorneys’ fees (to include outside counsel fees and all
allocated costs of the holder’s in-house counsel), incurred by the holder in
connection with the enforcement of the holder’s rights and/or the collection of
any amounts which become due to the holder under this Note, and the prosecution
or defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, and including any of the
foregoing incurred in connection with any bankruptcy proceeding relating to
Borrower.

 

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

 

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

 

	
   

  	
  “Borrower”

  
	
   

  	
   

  
	
   

  	
  SOUTHWEST WATER
  COMPANY,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

45

 

EXHIBIT B

 

REVOLVING NOTE

 

	
  $15,000,000

  	
  July           ,
  2004

  

 

FOR VALUE
RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation
(“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) at
its office at 675 Anton Boulevard, 2nd Floor, Costa Mesa, California
92626, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Fifteen Million Dollars ($15,000,000), or so much thereof as
may be advanced and be outstanding, with interest thereon, to be computed on
each advance from the date of its disbursement (computed on the basis of a
360-day year and actual days elapsed, which results in more interest than if a
365-day year were used) at a rate per annum equal to the applicable LIBOR Rate
plus two and one-half percent (2.5%) or the Prime Rate.  When interest is determined in relation to
the Prime Rate, each change in the rate of interest hereunder shall become effective
on the opening of business on the day specified in the public announcement of a
change in Bank’s Prime Rate. With respect to each LIBOR option selected
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and applicable LIBOR Rate Term thereto and any payments made
thereon on Bank’s books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.

 

A.                                   DEFINITIONS:

 

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

 

1.                                       “Amended and Restated Credit Agreement”
means that certain Amended and Restated Credit Agreement entered into between
Borrower and Bank on or about
July         , 2004.

 

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

 

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

 

4.                                       “Dollars” means United States of America
dollars.

 

46

 

5.                                       “LIBOR Rate” means the interest rate
determined by the following formula, rounded upward, if necessary, to the
nearest 1/100 of one percent. (All amounts in the calculation will be
determined by Bank as of the first day of the interest period.)

 

	
  LIBOR Rate =

  	
  LIBOR

  	
  Base

  	
  Rate

  
	
   

  	
  (1.00 - Reserve
  Percentage)

  

 

(a)                                  “LIBOR Base Rate” means, with respect to
any Additional Revolving Loan to be made by Bank which is to bear interest in
relation to the LIBOR Rate, the interest rate per annum (rounded upward, if
necessary, to the nearest 1/100th of 1%) at which deposits in
Dollars are offered by Bank through its London Banking Center, London, Great
Britain to prime banks in the Designated LIBOR Market on the first day of the
applicable LIBOR Rate Term in an aggregate amount approximately equal to the
amount of the Revolving Loan to be made by Bank and for a period of time
comparable to the number of days in the applicable LIBOR Rate Term.  The determination of the LIBOR Base Rate by
Bank shall be conclusive in the absence of manifest error.

 

(b)                                 “Reserve Percentage” means, with respect
to any Additional Revolving Loan to be made by Bank which is to bear interest
in relation to 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 on the date the LIBOR Base Rate for the Revolving Loan is determined
(whether or not such reserve percentage is applicable to Bank) under
regulations issued from time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect to eurocurrency
funding (currently referred to as “eurocurrency liabilities”) having a term
comparable to the LIBOR Rate Term for such Revolving Loan.  The determination by Bank of any applicable
Reserve Percentage shall be conclusive in the absence of manifest error.

 

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

 

7.                                       “LIBOR Rate Term” means a period
commencing 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 by
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to Bank’s LIBOR; provided
however, that no LIBOR Rate Term shall extend beyond the scheduled maturity
date hereof. The last day of the interest period will be determined by Bank
using the Designated LIBOR Market. If any LIBOR Rate Term would end on a day
which is not a Business Day, then such LIBOR Rate Term shall be extended to the
next succeeding Business Day.

 

8.                                       “Prime Rate” means the rate of interest
publicly announced from time to time by the Bank as its Prime Rate.  The Prime Rate is set by the Bank based on
various factors, including the Bank’s costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans.  The Bank may price
loans to its customers at, above or below the Prime Rate.  Any change in the Prime Rate will take
effect at the opening

 

47

 

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

 

B.                                     INTEREST:

 

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

 

2.                                       Selection of Interest Rate Options. At
any time any portion of this Note bears interest determined in relation to the
LIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Term
applicable thereto so that all or a portion thereof bears interest determined
in relation to the Prime Rate or in relation to the LIBOR Rate for a new LIBOR
Rate Term designated by Borrower. At any time any portion of this Note bears
interest determined in relation to the Prime Rate, Borrower may convert all or
a portion thereof so that it bears interest determined in relation to the LIBOR
Rate for a LIBOR Rate Term designated by Borrower. At the time each advance is
requested hereunder or Borrower wishes to select the LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each LIBOR
Rate Term, Borrower shall give Bank notice specifying (a) the interest rate
option selected by Borrower, (b) the principal amount subject thereto, and (c)
if the 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 each
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 the LIBOR Rate
Term and, with respect to each Prime Rate selection, such notice is given to
Bank prior to 11:00 a.m., California time, on the day of the requested advance.
For each LIBOR option requested hereunder, Bank will quote the applicable 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 not immediately
accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be
subject to a re-determination by Bank of the applicable LIBOR Rate; provided
however, that if Borrower fails to accept any such rate by 11:00 a.m.,
California time, on the Business Day such quotation is given, then the quoted
rate shall expire and Bank shall have no obligation to permit a LIBOR option to
be selected on such day. If no specific designation of interest is made at the
time any advance is requested hereunder or at the end of any LIBOR Rate Term,
Borrower shall be deemed to have made a Prime Rate interest selection for such
advance or the principal amount to which such LIBOR Rate Term applied.

 

3.                                       Additional LIBOR Provisions.

 

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

 

48

 

(b)                                 If any law, treaty, rule, regulation or
determination of a court or governmental authority or any change therein or in
the interpretation or application thereof (each, a “Change in Law”) shall make
it unlawful for Bank (i) to make LIBOR options available hereunder, or (ii) to
maintain interest rates based on the LIBOR Rate, then in the former event, any
obligation of Bank to make available such unlawful LIBOR options shall
immediately be cancelled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank’s
option, so that interest on the portion of the outstanding principal balance
subject thereto is determined in relation to the Prime Rate; provided however,
that if any such Change in Law shall permit any LIBOR-based interest rates to
remain in effect until the expiration of the LIBOR Rate Term applicable
thereto, then such permitted LIBOR-based interest rates shall continue in
effect until the expiration of such LIBOR Rate Term. Upon the occurrence of any
of the foregoing events, Borrower shall pay to Bank immediately upon demand such
amounts as may be necessary to compensate Bank for any fines, fees, charges,
penalties or other costs incurred or payable by Bank as a result thereof and
which are attributable to any LIBOR options made available to Borrower
hereunder, and any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.

 

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

 

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

 

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

 

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

 

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

 

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

 

49

 

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

 

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

 

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

 

C.                                     BORROWING AND REPAYMENT:

 

1.                                       Loan and Repayment. Borrower may from
time to time during the term of this Note borrow, partially or wholly repay its
outstanding borrowings, and re-borrow, subject to all of the limitations, terms
and conditions of this Note and of any document executed in connection with or
governing this Note, including the Amended and Restated Credit Agreement;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made
hereon by or for Borrower, which balance may be endorsed hereon from time to
time by the holder.  The outstanding
principal balance of this Note shall be due and payable in full on the
“Maturity Date” (as defined in the Amended and Restated Credit Agreement).

 

2.                                       Advances. Advances hereunder, to the
total amount of the principal sum stated above, may be made by the holder at
the oral or written request of (a) Thomas C. Tekulve or Richard Shields, any
one acting alone, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (b) any
person, with respect to advances deposited to the credit of any account of
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by Borrower.

 

3.                                       Application of Payments. Each payment
made on this Note shall be credited first, to any interest then due and second,
to the outstanding principal balance hereof. Unless instructed otherwise by
Borrower, all payments credited to principal shall be applied first, to the
outstanding principal balance of this Note which bears interest determined in
relation to the Prime Rate, if any, and second, to the outstanding principal
balance of this Note which bears interest determined in relation to the LIBOR
Rate, with such payments applied to the oldest LIBOR Rate Term first.

 

50

 

4.                                       Prepayment.

 

(a)                                  Prime Rate. Borrower may prepay principal
on any portion of this Note which bears interest determined in relation to the
Prime Rate at any time, in any amount and without penalty.

 

(b)                                 LIBOR. Each prepayment of a LIBOR Rate
Portion 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 the
date that is five (5) Business Days before the date of such prepayment (which
notice 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 accompanied
by the amount of accrued interest on the amount prepaid, and a prepayment fee
as described below. A “prepayment” is a payment on a date earlier than the last
day of the applicable LIBOR Rate Term. The prepayment fee shall be equal to the
amount (if any) by which:

 

(i)                                     the additional interest which would have
been payable during the applicable LIBOR Rate Term on the amount prepaid had it
not been prepaid, exceeds

 

(ii)                                  the interest which would have been
recoverable by Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or other
appropriate money market selected by Bank for a period starting on the date on
which it was prepaid and ending on the last day of the applicable LIBOR Rate
Term.

 

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

 

D.                                    EVENTS OF DEFAULT:

 

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

 

E.                                      MISCELLANEOUS:

 

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

 

51

 

or notice of dishonor,
all of which are expressly waived by Borrower, and the obligation, if any, of
the holder to extend any further credit hereunder shall immediately cease and
terminate. Borrower shall pay to the holder immediately upon demand the full
amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys’ fees (to include outside counsel fees and all allocated
costs of the holder’s in-house counsel), incurred by the holder in connection
with the enforcement of the holder’s rights and/or the collection of any
amounts which become due to the holder under this Note, and the prosecution or
defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, and including any of the foregoing
incurred in connection with any bankruptcy proceeding relating to Borrower.

 

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

 

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

 

	
   

  	
  “Borrower”

  
	
   

  	
   

  
	
   

  	
  SOUTHWEST WATER
  COMPANY,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

52

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