Document:

Exhibit 10.6

 

AMENDED AND
RESTATED CREDIT AGREEMENT

between

SOUTHWEST WATER COMPANY

and

UNION BANK OF CALIFORNIA, N.A.

July 7, 2004

 

1

 

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.

  	
  The Term Loan

  	
   

  
	
   

  	
  (a)

  	
  Term
  Loan Advance

  	
   

  
	
   

  	
  (b)

  	
  Term Note

  	
   

  
	
  SECTION 2.03.

  	
  Mandatory Repayment

  	
   

  
	
  SECTION 2.04.

  	
  Interest Computation and Payment; Fee
  Computation

  	
   

  
	
  SECTION 2.05.

  	
  Unused commitment fee

  	
   

  
	
  SECTION 2.06.

  	
  Annual Credit Facility Fee

  	
   

  
	
  SECTION 2.07.

  	
  Front End Fee

  	
   

  
	
   

  	
   

  
	
  ARTICLE III
  GENERAL PROVISIONS CONCERNING THE LOANS

  	
   

  
	
  SECTION 3.01.

  	
  Use of Proceeds

  	
   

  
	
  SECTION 3.02.

  	
  Payment on Non-Business Days

  	
   

  
	
  SECTION 3.03.

  	
  Reduced Return

  	
   

  
	
  SECTION 3.04.

  	
  Indemnities

  	
   

  
	
  SECTION 3.05.

  	
  Funding Sources

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV
  CONDITIONS OF LENDING

  	
   

  
	
  SECTION 4.01.

  	
  Conditions Precedent to Initial Revolving Loan

  	
   

  
	
  SECTION 4.02.

  	
  Conditions Precedent to the Term Advance

  	
   

  
	
  SECTION 4.03.

  	
  Conditions Precedent to Each Revolving
  Loan

  	
   

  
	
   

  	
   

  
	
  ARTICLE V
  REPRESENTATIONS AND WARRANTIES

  	
   

  
	
  SECTION 5.01.

  	
  Representations and Warranties

  	
   

  
	
   

  	
  (a)

  	
  Organization

  	
   

  
	
   

  	
  (b)

  	
  Authorization;
  No Conflict

  	
   

  
	
   

  	
  (c)

  	
  Governmental Consents

  	
   

  
	
   

  	
  (d)

  	
  Validity

  	
   

  
	
   

  	
  (e)

  	
  Financial Condition

  	
   

  
	
   

  	
  (f)

  	
  Litigation

  	
   

  
	
   

  	
  (g)

  	
  Employee Benefit Plans

  	
   

  
	
   

  	
  (h)

  	
  Disclosure

  	
   

  
	
   

  	
  (i)

  	
  Environmental Matters

  	
   

  
	
   

  	
  (j)

  	
  Employee
  Matters

  	
   

  
					

 

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

  	
   

  
	
   

  	
  (i)

  	
  Equity Offering

  	
   

  
	
  SECTION 6.02.

  	
  Negative Covenants

  	
   

  
	
   

  	
  (a)

  	
  Consolidated Tangible
  Net Worth

  	
   

  
	
   

  	
  (b)

  	
  Consolidated Net Profit

  	
   

  
	
   

  	
  (c)

  	
  EBITDA Coverage Ratio

  	
   

  
	
   

  	
  (d)

  	
  Liens Etc.

  	
   

  
	
   

  	
  (e)

  	
  Debt

  	
   

  
	
   

  	
  (f)

  	
  Consolidation,
  Merger or Dissolution

  	
   

  
	
   

  	
  (g)

  	
  Loans, Investments,
  Acquisitions, Secondary Liabilities

  	
   

  
	
   

  	
  (h)

  	
  Asset
  Sales

  	
   

  
	
   

  	
  (i)

  	
  Hostile Tender Offers

  	
   

  
	
   

  	
  (j)

  	
  Distributions

  	
   

  
	
   

  	
  (k)

  	
  Transactions with
  Affiliates

  	
   

  
	
   

  	
  (l)

  	
  Books
  and Records

  	
   

  
	
   

  	
  (m)

  	
  Restructure

  	
   

  
	
   

  	
   

  
	
  ARTICLE VII EVENTS
  OF DEFAULT

  	
   

  
	
  SECTION 7.01.

  	
  Events of Default

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII
  MISCELLANEOUS

  	
   

  
	
  SECTION 8.01.

  	
  Amendments, Etc.

  	
   

  
	
  SECTION 8.02.

  	
  Notices, Etc.

  	
   

  
	
  SECTION 8.03.

  	
  Right of Setoff:  Security Interest in Deposit Accounts

  	
   

  
	
  SECTION 8.04.

  	
  No Waiver; Remedies

  	
   

  
	
  SECTION 8.05.

  	
  Costs and Expenses

  	
   

  
	
  SECTION 8.06.

  	
  Participations

  	
   

  
	
  SECTION 8.07.

  	
  Effectiveness: Binding Effect

  	
   

  
	
  SECTION 8.08.

  	
  Governing Law

  	
   

  
	
  SECTION 8.09.

  	
  Dispute Resolution

  	
   

  
					

 

ii

 

	
  SECTION 8.10.

  	
  Waiver of Notices

  	
   

  
	
  SECTION 8.11.

  	
  Entire Agreement

  	
   

  
	
  SECTION 8.12.

  	
  Severability of Provisions

  	
   

  
	
  SECTION 8.13.

  	
  Execution in Counterparts

  	
   

  
	
  SECTION 8.14.

  	
  Further Assurances

  	
   

  

 

iii

 

	
  Schedules

  
	
   

  
	
  5.01(a) -
  Subsidiaries

  
	
   

  
	
  5.01(f) - Litigation

  
	
  5.01(i) -
  Environmental Matters

  
	
  6.02(d) -
  Liens

  
	
  6.02(e) –
  Other secured debt

  
	
   

  
	
  Exhibits

  
	
   

  
	
  A - Form of Revolving Note

  
	
  B - Form of Term Note

  
	
  C - Form of Pledge Agreement

  
	
  D - Form of
  Legal Opinion

  

 

iv

 

AMENDED AND
RESTATED CREDIT AGREEMENT

 

This Amended and Restated
Credit Agreement dated as of July 7, 2004 is entered into between
SOUTHWEST WATER COMPANY, a Delaware corporation (the “Borrower”), and UNION
BANK OF CALIFORNIA, N.A., a national banking association (the “Bank”), with
reference to the following facts:

 

RECITALS

 

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

 

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

 

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 the 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.

 

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

 

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

 

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

 

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

 

“BofA Loan
Documents”:  That certain Amended and
Restated Credit Agreement dated as of July 7, 2004, between Bank of
America and Borrower, and each agreement, document, instrument and guarantee
required by Bank of America in connection with such

 

1

 

Amended and Restated
Credit Agreement and/or the credit extended thereunder, in each case as
amended, supplemented or modified from time to time.

 

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

 

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

 

“Capistrano Letter of
Credit”: The standby letter of credit issued by Bank of America, N.A., for the
account of the 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 the 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, NMUI, ECO, MTI or, following the Tecon Acquisition, Tecon, or shall lose
voting control of Aqua’s, Suburban’s, SWUC’s, NMUI’s, ECO’s, MTI’s or,
following the Tecon Acquisition, Tecon’s issued and outstanding common stock 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.

 

“Collateral Agent”:  The Bank acting in its capacity as
collateral agent under the Pledge Agreement and its successors in such
capacity.

 

2

 

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

 

“Consolidated
EBITDA”:  For any period of the Borrower
and its Subsidiaries on a consolidated basis, Consolidated Net Profit for such
period, plus interest expense (net of capitalized interest expense) and
provision for income taxes for such period, plus depreciation and amortization
for such period, plus the non-cash expense of the Borrower
and its Subsidiaries recognized during such period for any stock options granted
by the Borrower and its Subsidiaries permitted hereunder.

 

“Consolidated Net
Profit”:  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 the 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 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 the 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.

 

“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

 

3

 

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

 

“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 the 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.

 

4

 

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

 

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

 

“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 Term
Note, the Pledge 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.

 

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

 

“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.

 

5

 

“Permitted
Acquisition”:  An Acquisition by the
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 the 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 the Borrower or such Subsidiary
substantially simultaneously with the 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 result after giving
effect to such Permitted Acquisition, and (c) the Acquisition shall have
been consummated in compliance with all applicable laws.

 

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

 

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

 

“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.

 

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

 

“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.

 

6

 

“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 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.

 

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

 

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

 

“Tecon Acquisition”: The
acquisition by the Borrower of all of the issued and outstanding capital stock
of Tecon.

 

“Term Loan”: as defined
in Section 2.02.

 

“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.

 

7

 

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

 

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

 

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

 

SECTION 1.02.                 Other Definitional Provisions.

 

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

 

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

 

8

 

(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 2.04. The
Bank is hereby authorized to record in its books and records and on any
schedule annexed to the Revolving Note, the date and amount of each
Revolving Loan made by the Bank, the date and amount of each payment of
principal thereof, and the applicable interest rate, and any such recordation
shall constitute prima facie evidence of the accuracy of the information so
recorded; provided that failure by the Bank to effect such recordation shall
not affect the Borrower’s obligations hereunder.  Prior to the transfer of 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 Reference 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

 

9

 

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.

 

(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.                 The Term Loan.

 

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

 

(b)                                 Term Note.  The Term
Loan 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 “Term Note”), payable to the
order of the Bank and representing the obligation of the Borrower to pay the
aggregate unpaid principal amount of the Term Loan made by the Bank, with
interest thereon as prescribed in Section 2.04.

 

10

 

SECTION 2.03.                 Mandatory
Repayment.  The aggregate principal
amount of the Revolving Loans outstanding on the Maturity Date, together with
accrued interest thereon, shall be due and payable in full on the Maturity
Date.  On or before September 30,
2005, the Borrower shall make a payment that will reduce the outstanding
principal balance of the Term Loan to no more than $10,000,000; provided,
however, if the outstanding principal balance of the Term Loan on
September 30, 2005 is equal to or less than $10,000,000, whether as a
result of a payment or payments pursuant to Section 6.01(i) or otherwise,
then no principal payment on the Term Loan shall be required.  The remaining principal balance of the Term
Loan, together with accrued and unpaid interest thereon, shall be due and
payable in full on September 30, 2006. 
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 2.04.                 Interest
Computation and Payment; Fee Computation. 
The outstanding principal balance of the Revolving Loans shall bear
interest as set forth in the Revolving Note. The outstanding principal balance
of the Term Loan shall bear interest as set forth in the Term Note.   Interest on all Loans 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 and the Term Note.  All
fees under this Agreement shall be computed on the basis of a 360-day year,
actual days elapsed.

 

SECTION 2.05.                 Unused commitment
fee.  The Borrower agrees to pay a fee
calculated at 0.25% per year times the sum of (a) any difference between
(i) the Revolving Commitment and (ii) the amount of Revolving Loans
it actually borrows, determined by the weighted average credit outstanding
during the specified period and (b) the Unfunded Term Commitment. 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 2.06.                 Annual Credit
Facility Fee.  The Borrower agrees to
pay, on the Closing Date and on each September 30 (commencing with September 30,
2005), an annual credit facility fee in the amount of
$                   .  Each such fee shall be fully earned when
paid and shall be non-refundable.

 

SECTION 2.07.                 Front End
Fee.  The Borrower agrees to pay, on the
Closing Date a 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.

 

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

 

11

 

acquisitions permitted hereunder of the Borrower and those Subsidiaries
of the Borrower as to which the 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 the Borrower as to which the Borrower owns at least 80% of the
outstanding equity. The Proceeds of the Term Loan shall be used for the Tecon
Acquisition.

 

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

 

SECTION 3.03.                 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 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

 

12

 

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 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
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 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;

 

(ii)                                  Copies of the 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 the 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)                           Opinion from Latham & Watkins LLP, on
behalf of the Borrower, substantially in the form of Exhibit D hereto; and

 

(viii)                        Executed copies of the amended BofA Loan
Documents.

 

13

 

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

 

(c)                                  All information previously furnished by
the Borrower to the 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 the
Bank shall have been made with respect to the payment thereof;

 

(e)                                  The 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 the
Borrower contained in Article V shall be true and correct in all respects;

 

(g)                                 The 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;

 

(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 the Borrower and its Subsidiaries taken as a whole;

 

SECTION 4.02.                 Conditions
Precedent to the Term Advance. The obligation of the Bank to make the Term Loan
is subject to the satisfaction on or before December 31, 2004 of each of
the following conditions:

 

(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 Term Loan the following, each dated prior to or as of such day,
in form and substance satisfactory to the Bank:

 

14

 

(i)                                     The Term 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 Agreement set forth as Exhibit
C, duly executed by the Borrower, together with delivery to the Collateral
Agent of the stock certificates evidencing the shares of Tecon’s capital stock
pledged thereunder, duly endorsed in blank;

 

(iv)                              The Intercreditor Agreement, duly
executed by the Bank, Bank of America, and the Collateral Agent, and duly
acknowledged by the Borrower; and

 

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

 

SECTION 4.03.                 Conditions
Precedent to Each Revolving Loan.  The
obligation of the Bank to make a Revolving Loan on the occasion of each
Revolving Loan (including the initial Revolving Loan) shall be subject to the
further conditions precedent that on the date of such Revolving Loan
(a) the following statements shall be true and the Bank shall have
received the notice required by Section 2.01(b), which notice shall be
deemed to be a certification by the Borrower that:

 

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

 

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

 

(iii)                               Nothing shall have occurred and the Bank
shall not have become aware of any fact or condition not previously known,
which the Bank shall determine has, or could reasonably be expected to have, a
material adverse effect on the rights or remedies of the Bank, or on the ability
of the Borrower to perform 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
the 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.

 

15

 

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 organization. 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, except to the extent that the
failure to be so authorized, qualified or licensed would not have a material
adverse effect on the Borrower’s business, 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 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 the Borrower is a party or by which its assets or
properties may be bound.

 

(c)                                  Governmental Consents.  No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body (except
routine reports required pursuant to the Securities Exchange Act of 1934, as
amended (if such act is applicable to the Borrower), which reports will be made
in the ordinary course of business) is required for the due execution, delivery
and performance by the Borrower of the Loan Documents.

 

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

 

16

 

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

 

(e)                                  Financial Condition.  The balance sheets of the Borrower and its consolidated
Subsidiaries as at 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 when taken as a whole. There is no
fact known to the Borrower (other than matters of a general economic nature)
which materially adversely affects the business, operations, property, assets
or condition (financial or otherwise) of the Borrower and its Subsidiaries,
taken as a whole, which has not been disclosed herein or in such other
documents, certificates and statements furnished to the Bank for use in
connection with the transactions contemplated hereby.

 

17

 

(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.  The
Borrower and each of its Subsidiaries is Solvent.

 

(l)                                     Title to Properties.  The 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 the Bank and such others as are permitted under Section 6.02(d) hereof.

 

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

 

18

 

extensions provided by law) except as previously disclosed in writing
to the Bank).  All information in such
tax returns, reports and declarations is complete and accurate in all material
respects.  The 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 the 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 the 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 the Borrower or liens upon its
assets) to which it is a party or by which it or any of its assets are bound
and the 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.

 

(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 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. 
The Borrower is not required to be registered as an “investment company”
under the Investment Company Act of 1940.

 

(q)                                 Intangible Assets. 
The Borrower owns, or possesses the right to use to the 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 the 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 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

 

19

 

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

 

20

 

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

 

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

 

(i)                                     promptly upon any officer of the Borrower
obtaining knowledge (a) of any condition or event which constitutes an Event
of Default or Potential Event of Default, (b) that any Person has given
any notice to the Borrower or any Subsidiary of the Borrower or taken any other
action with respect to a claimed default or event or condition of the type
referred to in Section 7.01(e) 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 the 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 the 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;

 

21

 

(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 BofA 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 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 the 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 the 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 (ordinary wear and tear excepted) 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

 

22

 

replacements thereof. The Borrower will maintain or cause to be
maintained, with financially sound and reputable insurers, insurance with
respect to its properties and business and the properties and business of its
Subsidiaries against loss or damage of the kinds customarily insured against by
corporations of established reputation engaged in the same or similar
businesses and similarly situated, of such types and in such amounts as are
customarily carried under similar circumstances by such other
corporations.  The Borrower will comply
with any other insurance requirement set forth in any other Loan Document.

 

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

 

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

 

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

 

(i)                                     Securities
Offerings.  While the Term Loan is
outstanding, the Borrower shall use 50% of any Net Cash Proceeds to repay the
Term Loan and 50% of any Net Cash Proceeds to repay the Additional Revolving
Loans (as defined in the BofA Loan Documents) made to the Borrower by Bank of
America under the BofA Loan Documents.

 

23

 

SECTION 6.02.                 Negative
Covenants.  So long as any 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 the Borrower or
any of its Subsidiaries from the issuance of any capital stock of the 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 the Borrower or a Subsidiary of the Borrower) other  than
any such proceeds received by the 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 the Borrower, permit the
EBITDA Coverage Ratio, determined on a four quarter rolling basis, to be less
than 1.50:1.00.

 

(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 on the
capital stock of Tecon in favor of Bank of America, N.A, under the BofA Loan
Documents; (iii) following the closing of the Tecon Acquisition, Liens on
the assets of Tecon in existence on the closing date of the Tecon Acquisition
which secure the bond indebtedness of Tecon referred to in, and permitted
under, clause (ii) of Section 6.02(e) below; (iv) Liens existing on the
date hereof and set forth in Schedule 6.02(d) hereto;
(v) 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; (vi) Liens
existing on property acquired by the Borrower or any Subsidiary, and all
refundings and extensions of any such Liens; (vii) 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; (viii) Liens for
taxes, assessments or other governmental charges which are not delinquent; and
(ix) 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.

 

24

 

(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 $18,000,000 outstanding at any time, (ii) following the closing of
the Tecon Acquisition, the secured bond indebtedness of Tecon which as of the
closing of the Tecon Acquisition shall be in an aggregate outstanding principal
balance not exceeding $14,674,649.36 and which when repaid may not be
reborrowed, (iii) 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, (iv) other
secured Debt identified on Schedule 6.02(e) not to exceed the
applicable amount indicated on such schedule, (v) the Term Loan,
(vi) the Additional Revolving Loan (as defined in the BofA Loan
Documents), (vii) unsecured senior funded bank debt in a principal amount not
to exceed $40,000,000 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 BofA 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 and
(ii) 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
(vi) intercompany Debt between the Borrower and its majority-owned Subsidiaries.

 

(f)                                    Consolidation,
Merger or Dissolution. 
(i) Consolidate with or merge into any other Person, or permit any
Subsidiary to consolidate with or merge into any other Person, unless the
Borrower or the applicable Subsidiary is the surviving entity and no event has
occurred and is continuing, or would result from such consolidation or merger,
which constitutes an Event of Default or Potential Event of Default, (ii) wind up, liquidate or dissolve (provided,
however, that the corporate existence of any Subsidiary may be
terminated if such termination is in the best interest of the 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,

 

25

 

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 (including
the Tecon Acquisition), provided that the aggregate consideration paid
or payable by the Borrower and its Subsidiaries in connection with all
Permitted Acquisitions consummated in any fiscal year of the Borrower shall not
exceed $5,000,000 (excluding the cost of the Tecon Acquisition), provided
further that such limit on consideration shall be increased to
$10,000,000 (excluding the cost of the Tecon Acquisition) with respect to each
fiscal year of the Borrower if all Permitted Acquisitions are made by the
Borrower in such fiscal year and all purchase price payments to be made by the
Borrower in connection with such Permitted Acquisitions are payable only in
stock of the Borrower;

 

(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 the Borrower as to which the
Borrower owns at least 80% of the outstanding equity;

 

(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, (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,

 

26

 

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, authorize, declare
or pay, or permit any of its Subsidiaries to authorize, declare or pay, any
Distributions other  than Distributions to the Borrower made by a
Subsidiary of the Borrower.

 

(k)                                  Transactions with Affiliates.  Neither the 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
the Borrower’s or its Subsidiary’s business and upon fair and reasonable terms
no less favorable to the Borrower or its Subsidiary than the Borrower or its
Subsidiary would obtain in a comparable arm’s length transaction with an
unaffiliated person.

 

(l)                                     Books and Records. 
The 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 the Borrower’s and its Subsidiaries’
business operations (taken as a whole) or the date of its fiscal year.

 

27

 

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)                                  The 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)                                  The 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 BofA Loan Document,
and such default shall continue after the applicable grace period, if any,
specified in the applicable BofA Loan Document; or

 

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

 

28

 

(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 the (the Bank may, in its discretion, cease making
Revolving Loans during the pendency of such action or proceeding); or
(iii) there shall be commenced against the Borrower or any of its
Subsidiaries any case, proceeding or other action seeking issuance of a warrant
of attachment, execution, 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 (the Bank may, in
its discretion, cease making Revolving Loans during the pendency of such action
or proceeding); or (iv) the Borrower or any of its Subsidiaries shall take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clauses (i), (ii) and
(iii) above; or (v) the Borrower or any of its Subsidiaries shall
generally not, or shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due; or

 

(h)                                 One or more judgments or decrees
shall be entered against the Borrower or any of its Subsidiaries involving in
the aggregate a liability (not paid or fully covered by insurance or
reserves)  equal to or greater than $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)                                     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;

 

(i)                                     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;

 

29

 

(ii)                                  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;

 

(iii)                               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;

 

(iv)                              (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;

 

(v)                                 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 during the continuation of any Event of Default described in
clause 7.01(g) above, the Commitment shall immediately terminate and all
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

 

30

 

to the Borrower, declare
the 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.  The Bank shall have all rights, powers and
remedies available under each of the Loan Documents, or accorded by law,
including, without limitation, the right to resort to any or all security for
any credit accommodation from the Bank subject hereto and to exercise any or
all of the rights of a beneficiary or secured party pursuant to applicable
law.  All rights, powers and remedies of
the Bank in connection with each of the Loan Documents may be exercised at any
time by the 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 and during the continuation 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

 

31

 

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

 

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

 

SECTION 8.05.                 Costs and
Expenses.  The Borrower shall pay to the
Bank immediately upon demand the full amount of all reasonable costs and expenses,
including reasonable attorneys’ fees (to include outside counsel fees and all
allocated costs of the Bank’s in-house counsel), incurred by the 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 the Bank’s rights and/or the collection of any amounts which become due to
the 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: (i) if no Event of Default has occurred and is continuing, the
Bank shall obtain the Borrower’s prior written consent to any such sale,
assignment, transfer, negotiation or participation, which consent shall not be
unreasonably withheld; (ii) any such sale, assignment, transfer, negotiation or
participation shall be in compliance with the applicable federal and state
securities laws; and (iii) 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).

 

32

 

SECTION 8.09.                 Dispute
Resolution.  This Agreement hereby
incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between the Borrower and the Bank.

 

SECTION 8.10.                 Waiver of
Notices.  The 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 the Borrower which the Bank may elect to give
shall entitle the 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 the 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, the Borrower shall, at its expense and
without expense to the Bank, do, execute and deliver such further acts and
documents as the Bank from time to time reasonably requires for the assuring
and confirming unto the 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.

 

	
  UNION BANK OF CALIFORNIA, N.A.

  	
  SOUTHWEST WATER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Richard Madsen

  	
   

  	
   

  	
   

  	
  Peter J. Moerbeek

  
	
   

  	
   

  	
  Regional Vice President

  	
   

  	
   

  	
   

  	
  President and Chief Operating Officer

  
	
   

  	
   

  
	
  Address:

  	
  Address:

  
	
   

  	
   

  
	
  Metro Los Angeles Commercial Banking

  	
  624 South Grand Avenue, Suite 2900

  
	
  445 South Figueroa Street, 10th Floor

  	
  Los Angeles, California 90017

  
	
  Los Angeles, California 
  90071-1602

  	
  Attention: Thomas C. Tekulve

  
	
  Attention: Richard Madsen

  	
  Vice President — Finance

  
	
  Title: Regional Vice President

  	
  Facsimile: (213) 929-1800

  
	
  Facsimile: (213) 236-4013

  	
   

  
								

 

1

 

SCHEDULE 5.01(a)

 

Southwest Water Company

Subsidiaries as of July 2004

 

	
  Subsidiary Name

  	
   

  	
  Entity

  	
   

  	
  State

  	
   

  	
  Parent

  Company

  	
   

  	
  Percent
  Owned

  By Parent

  	
   

  	
  Operating
  Group

  
	
  Aqua
  Services LP

  	
   

  	
  Partnership

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  CDC
  Maintenance, Inc.

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  ECO

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  ECO
  Capistrano Valley, Inc.

  	
   

  	
  Corp

  	
   

  	
  Delaware

  	
   

  	
  ECO

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  ECO Southern
  California, Inc.-INACTIVE

  	
   

  	
  Corp

  	
   

  	
  California

  	
   

  	
  ECO

  	
   

  	
  100%

  	
   

  	
  NA

  
	
  ECO
  Resources, Inc.

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  Hornsby Bend
  Utility Company

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SW Utility Company

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  Lab-tech
  Corporation

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  Master Tek
  International, Inc.

  	
   

  	
  Corp

  	
   

  	
  Colorado

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  Metro H2O
  Utilities, Limited

  	
   

  	
  Partnership

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  51%

  	
   

  	
  Services

  
	
  New Mexico
  Utilities, Inc.

  	
   

  	
  Corp

  	
   

  	
  New Mexico

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  Operations
  Technologies, Inc.

  	
   

  	
  Corp

  	
   

  	
  Georgia

  	
   

  	
  SWC

  	
   

  	
  90%

  	
   

  	
  Services

  
	
  SOCI, Inc. –
  INACTIVE

  	
   

  	
  Corp

  	
   

  	
  Delaware

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  NA

  
	
  Southwest
  Environmental Labs

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Services

  
	
  Southwest
  Resource Management

  	
   

  	
  Corp

  	
   

  	
  California

  	
   

  	
  Suburban Water Systems

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  Suburban
  Water Systems

  	
   

  	
  Corp

  	
   

  	
  California

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  SW-NM, Inc.

  	
   

  	
  Corp

  	
   

  	
  New Mexico

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  SW Operating
  Services Co.-INACTIVE

  	
   

  	
  Corp

  	
   

  	
  Delaware

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  NA

  
	
  SW Resource
  Management Company

  	
   

  	
  Corp

  	
   

  	
  Delaware

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  SW Utility
  Company

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  Wastewater
  Rehabilitation, Inc.

  	
   

  	
  Corp

  	
   

  	
  Texas

  	
   

  	
  SWC

  	
   

  	
  67%

  	
   

  	
  Services

  
	
  Water
  Suppliers Mobile Communication Service

  	
   

  	
  Corp

  	
   

  	
  California

  	
   

  	
  Suburban Water Systems

  	
   

  	
  100%

  	
   

  	
  Utility

  
	
  Windermere
  Utility Co., Inc.

  	
   

  	
  Corp.

  	
   

  	
  Texas

  	
   

  	
  SW Utility Company

  	
   

  	
  80%

  	
   

  	
  Utility

  

 

1

 

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.

 

1

 

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.

 

1

 

SCHEDULE 6.02(d) - LIENS

 

None except as
disclosed in the audited consolidated financial statements of Borrower for the
fiscal year ended 2003.

 

1

 

SCHEDULE 6.02(e) – OTHER SECURED DEBT

 

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

 

1

 

EXHIBIT A

 

REVOLVING NOTE

 

	
  $20,000,000

  	
   

  	
  July 7,
  2004

  	
   

  

 

FOR VALUE RECEIVED, the
undersigned SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”),
promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. (“Bank”) at its
office at 445 South Figueroa Street, 10th Floor, Los Angeles,
California  90071-1602, 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 Reference Rate minus one-quarter of
one percent (0.25%). When interest is determined in relation to the
Reference Rate, each change in the rate of interest hereunder shall become
effective on the opening of business on the day specified in the public
announcement of a change in Bank’s Reference Rate. With respect to each 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.                                       “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.

 

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

 

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.

 

1

 

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

 

5.                                       “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).

 

6.                                       “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.

 

7.                                       “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 Los Angeles office 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.

 

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

 

2

 

interest are calculated
for loans making reference thereto and may not be the lowest or best rate at
which Bank calculates interest or extends credit.  Any change in the Reference Rate announced by Bank shall take
effect at the opening of business on the day specified in the announcement of
such change.

 

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 July 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 Reference 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 Reference 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
Reference 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 Reference 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, than
(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
Reference Rate.

 

3

 

(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 Reference 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:

 

4

 

(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 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
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) Borrower’s Chief Financial Officer,
Vice President-Finance, Vice President-Treasurer, or Controller, any
one acting alone, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or
(b) any person, with respect to advances deposited to the credit of any
account of Borrower with the holder, which advances, when so deposited, shall
be conclusively presumed to have been made to or for the benefit of Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by Borrower.

 

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

 

5

 

4.                                       Prepayment.

 

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

 

(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 Reference Rate in effect from
time to time (computed on the basis of a 360-day year, actual days elapsed).

 

D.                                    EVENTS OF DEFAULT:

 

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

 

E.                                      MISCELLANEOUS:

 

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

 

6

 

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

 

4.                                       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:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Peter J. Moerbeek

  	
   

  	
   

  
	
   

  	
  President and Chief
  Operating Officer

  	
   

  	
   

  
						

 

7

 

EXHIBIT B

 

TERM
NOTE

                

	
  $15,000,000

  	
   

  	
  July 7, 2004

  

 

FOR VALUE RECEIVED, the
undersigned SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”),
promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. (“Bank”) at its
office at 445 South Figueroa Street, 10th Floor, Los Angeles,
California  90071-1602, 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), with interest thereon (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 three-quarters percent (1.75%) or the Reference Rate.
When interest is determined in relation to the Reference Rate, each change in
the rate of interest hereunder shall become effective on the opening of
business on the day specified in the public announcement of a change in Bank’s
Reference Rate. With respect to each 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.                                       “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.

 

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

 

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.

 

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

 

1

 

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.                                       “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 portion of the Term Loan 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 Los Angeles office 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 portion of the Term Loan 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 such portion of the Term 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 portion of the Term Loan.  The determination by Bank of any applicable
Reserve Percentage shall be conclusive in the absence of manifest error.

 

9.                                       “Reference Rate” means the variable per
annum rate of interest most recently announced by Bank at its corporate
headquarters as the “Union Bank of California, N.A. Reference Rate,” with the
understanding that the “Union Bank of California, N.A. Reference Rate” is
one of Bank’s index rates and merely serves as a basis upon which
effective rates of interest are calculated for loans making reference thereto
and may not be the lowest or best rate at which Bank calculates interest or
extends credit.  Any change in the
Reference Rate announced by Bank shall take effect at the opening of business
on the day specified in the announcement of such change.

 

2

 

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 on the first such date to
occur after the funding of the Term Loan evidenced by this Note.

 

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 Reference 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 Reference 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
Reference 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 Reference 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, than
(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
Reference Rate.

 

3

 

(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 Reference 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:

 

4

 

(i)                                     Dollar deposits in the principal amount,
and for periods equal to the LIBOR Rate Term, of any portion of the Term 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 portion of the Term 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. On or before
September 30, 2005, Borrower will make a payment that will reduce the
outstanding principal balance of this Note to no more than $10,000,000; provided
that if the outstanding balance of this Note on September 30, 2005 is
equal to or less than $10,000,000, then no payment will be required.  The outstanding principal balance of this
Note shall be due and payable in full on the earlier of
(a) September 30, 2006 and (b) upon the termination of the
Revolving Commitment, for any reason.

 

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

 

3.                                       Prepayment.

 

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

 

(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

 

5

 

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 Reference Rate in effect from
time to time (computed on the basis of a 360-day year, actual days elapsed).

 

D.                                    EVENTS OF DEFAULT:

 

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

 

E.                                      MISCELLANEOUS:

 

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

 

6

 

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:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Peter J. Moerbeek

  	
   

  	
   

  
	
   

  	
  President and Chief
  Operating Officer

  	
   

  	
   

  
						

 

7

 

EXHIBIT C

 

(See Attached Pledge
Agreement)

 

1

 

EXHIBIT D

 

(See attached Latham & Watkins Opinion)

 

1Exhibit
4.1

 

ASSUMPTION AGREEMENT

 

This ASSUMPTION AGREEMENT (the “Assumption Agreement”), dated as
of July 22, 2004, is made by and between Southwest Casino Corporation, a Nevada
corporation (f/k/a Lone Moose Adventures, Inc., “Parent”) and Southwest
Casino and Hotel Corp., a Minnesota corporation and a wholly-owned subsidiary
of  Parent (“Southwest”).

 

R E C I T A L S

 

WHEREAS, Southwest and Parent are parties to that
certain Agreement and Plan of Reorganization, dated July 14, 2004 (the “Merger
Agreement”), by and among Southwest, Parent, Lone Moose Acquisition
Corporation (“Acquisition Co.”), and the other individuals named as
parties thereto, pursuant to which Acquisition Co. merged with and into
Southwest and Southwest survived and became a wholly-owned subsidiary of Parent
(the “Reverse Merger Transaction”); and

 

WHEREAS, in connection with Southwest’s sale and
issuance of its 8% Convertible Demand Notes, Southwest entered into that
certain Registration Rights Agreement dated as of June 29, 2004 (the “Registration
Rights Agreement”), with the investors listed as parties thereto; and

 

WHEREAS, Section 11.10 of the Registration Rights
Agreement required Southwest to enter an agreement with Parent, pursuant to
which Parent would expressly assume, and be substituted for Southwest with
respect to, all of Southwest’s rights, duties, obligations and liabilities
under Registration Rights Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in
consideration of the foregoing, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Southwest and
Parent, intending to be legally bound, hereby agree as follows.

 

1.             Assignment.  Southwest hereby assigns to Parent all of its
rights, duties, obligations and liabilities under the Registration Rights
Agreement, a copy of which is attached hereto and incorporated herein by
reference as Exhibit A.

 

2.             Assumption.  Parent hereby agrees to (a) succeed and be
substituted for Southwest under the terms of the Registration Rights Agreement;
(b) assume from Southwest all of Southwest’s rights, duties, and obligations
under, and perform and discharge the same in accordance with the terms of, the
Registration Rights Agreement.

 

3.             Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of Parent and Southwest hereto and their
respective successors and assigns.

 

4.             Governing
Law.  This Agreement shall be
governed by and construed in accordance with the laws of the State of Minnesota
without giving effect to any principles of conflict of laws.

 

5.             Counter
Parts.  This Assumption Agreement may
be executed in any number of counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument.

 

 

IN WITNESS WHEREOF, each
of Southwest and Parent has executed this Assumption Agreement, through a duly
authorized officer, as of the date and year first set forth above.

 

	
   

  	
  SOUTHWEST CASINO CORPORATION,

  
	
   

  	
  a Nevada corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SOUTHWEST CASINO AND HOTEL CORP.,

  
	
   

  	
  a Minnesota corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

2

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