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Strategic Relationship Agreement

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STRATEGIC RELATIONSHIP AGREEMENT


This Strategic Relationship Agreement (the "Agreement") is made and entered into as of the 13th day of October 1998 by and between Western Water Company, a Delaware corporation (the "Company") and Sociedad General de Aguas de Barcelona, S.A., a Spanish corporation ("Agbar").


RECITALS


1. The Company and Agbar desire to establish a strategic relationship to facilitate the development of the Company's and Agbar's water-related businesses.


2. As part of this relationship, Agbar has agreed, subject to the terms of this Agreement, to acquire up to 25,000 shares of the Company's newly-established Series D Convertible Redeemable Preferred Stock, the rights, preferences and privileges of which are set forth in the Certificate of Designations attached to this Agreement as Exhibit A (the "Preferred Stock"). The proceeds from Agbar's purchase of shares of Preferred Stock will be used to provide capital for water-related projects undertaken by the Company and approved by Agbar.


3. The Company has also agreed to assist Agbar in the development of its water-related business and to grant Agbar certain registration, preemptive, Board, approval and other rights as set forth in this Agreement.


AGREEMENT


NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:


1. INITIAL SALE AND PURCHASE OF PREFERRED STOCK. Subject to the terms and conditions hereof and in reliance upon the representations and warranties contained herein, the Company agrees to sell to Agbar, and Agbar agrees to purchase from the Company, 10,000 shares of Preferred Stock at a cash purchase price of $1,000 per share. The initial sale to and purchase by Agbar of the Preferred Stock (the "Initial Closing") shall take place on or before October 31, 1998, or on such other date as the Company and Agbar shall mutually determine. At the Initial Closing, the Company will execute and deliver to Agbar, or to Agbar's representative, a stock certificate or certificates dated as of the date of the Initial Closing for 10,000 shares of Preferred Stock registered in Agbar's name, against delivery to the Company of a bank cashier's check or a confirmation of the wire transfer of funds in the amount of $10,000,000 in payment of the total purchase price of the Preferred Stock initially being pur-


2 chased by Agbar. Agbar may assign its rights to acquire shares of Preferred Stock pursuant to this Section 1 to any of its majority-owned subsidiaries.


2. CONDITIONS TO THE INITIAL CLOSING; USE OF PROCEEDS. Agbar's obligation to purchase the shares of Preferred Stock at the Initial Closing shall be subject to (i) the accuracy and completeness as of the date of the Initial Closing of the representations and warranties of the Company as set forth in this Agreement, (ii) the delivery to Agbar of a legal opinion substantially in the form attached hereto as Exhibit B and (iii) the receipt by Agbar of all necessary approvals from relevant governmental agencies or departments in Spain. Exhibit C to this Agreement sets forth a description together with a proposed budget for the water-related projects approved by Agbar that are to be financed utilizing the proceeds for the initial sale of Preferred Stock.


3. SUBSEQUENT SALES AND PURCHASES OF PREFERRED STOCK. Subject to the terms and conditions set forth in Section 4 hereof and following the request of the Company, during the two-year period ending on October 31, 2000, the Company agrees to sell to Agbar, and Agbar agrees to purchase from the Company, up to an additional 15,000 shares of Preferred Stock at a cash purchase price of $1,000 per share. Any such purchase shall be for a minimum of 5,000 additional shares of Preferred Stock and shall be made within 45 days of Agbar's receipt of written request from the Company that Agbar purchase such shares. At the consummation of any such subsequent sale and purchase of Preferred Stock, the Company will execute and deliver to Agbar, or to Agbar's representative, a stock certificate or certificates dated as of the date of the consummation of such subsequent sale for the number of shares of Preferred Stock being purchased by Agbar, registered in Agbar's name, against delivery to the Company of a bank cashier's check or a confirmation of the wire transfer of funds in the amount of the total purchase price of the additional shares of Preferred Stock being purchased by Agbar. Agbar may elect to cause any of its affiliates to purchase all or any portion of the Preferred Stock to be purchased by Agbar pursuant to the provisions of this Section 3. The two-year period referred to in the initial sentence of this Section 3 can be extended for up to an additional two years upon the mutual agreement of Agbar and the Company.


4. CONDITIONS TO AGBAR'S OBLIGATION TO PURCHASE ADDITIONAL SHARES OF PREFERRED STOCK; USE OF PROCEEDS. Agbar's obligation to purchase additional shares of Preferred Stock pursuant to the provisions of Section 3 shall be subject to (i) the approval by the Company's Board of Directors and each of Agbar's designees to the Company's Board of Directors of the water-related projects to be funded utilizing the proceeds from Agbar's purchase of such additional shares of Preferred Stock (which approval such Agbar designees can grant or withhold in their sole discretion), (ii) the absence of any material adverse change with respect to the Company from and after the date of this Agreement through the date of such purchase of additional shares of Preferred Stock, (iii) the absence of any dispute between the Company and Agbar with respect to the use of the proceeds from Agbar's prior purchases of shares of Preferred Stock, (iv) the Company's material compliance with the covenants and agreements of the Company set forth in this Agreement and (v) the obtaining of any required governmental or other third party consents, including, as necessary, the consent of the Company's stockholders and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act").


3 The Company shall (i) circulate, at its expense, a proxy statement among its stockholders to obtain any necessary consent of such stockholders to the purchase by Agbar of additional shares of Preferred Stock pursuant to the provisions of Section 3 and (ii) pay all legal, filing and other fees and expenses incurred by Agbar in connection with the preparation and filing of any materials under the HSR Act. The Company and Agbar shall take the steps necessary to prepare and make the necessary filing to obtain clearance under the HSR Act within 45 days of the date of the Initial Closing and, in connection with such filing, request early termination of the relevant waiting period under the HSR Act.


At the time the Company submits its written request to Agbar that Agbar purchase additional shares of Preferred Stock pursuant to the provisions of Section 3, the Company shall provide Agbar with a written summary of the water-related project(s) that the Company intends to finance utilizing the proceeds from any such subsequent issuance and sale of shares of Preferred Stock to Agbar. Such written summary shall include (i) the location, nature, and description of such water-related project(s), (ii) the revenues and profits/losses anticipated to be generated from such water-related project(s), including the estimated time period when such revenues and profits/losses are expected to be realized, (iii) a budget for each of such water-related project(s), including a reasonable itemization of the categories and related amounts of expenses that the Company expects to incur in connection with such project(s), (iv) the anticipated financing that the Company expects to obtain in connection with such project(s) and the related capital costs and (v) the identity and general business background and experience of any third party that will play a meaningful role in the development of any such project(s). The Company will also promptly provide Agbar with any additional information that Agbar may reasonably request with respect to any such project(s). The Company shall provide all such information not less than 10 days prior to the date of any meeting of the Company's Board of Directors called to review and approve such project(s).


5. USE OF PROCEEDS FROM THE SALE OF PREFERRED STOCK. The proceeds from the sale of Preferred Stock pursuant to the provisions of Sections 2 or 4 of this Agreement shall be used only to finance the water-related projects approved by Agbar, as set forth in Sections 2 and 4 of this Agreement, or as otherwise provided in this Section 5. Except as otherwise provided in this Section 5, the Company shall not use any of such proceeds to finance any activity of the Company not within the scope of the water-related projects approved by Agbar pursuant to the provisions of Sections 2 and 4 of this Agreement.


The Company shall provide Agbar with monthly status reports with respect to each water-related project that Agbar has approved pursuant to the provisions of Sections 2, 4 and 5 of this Agreement and that is being financed out of the proceeds from the sale of Preferred Stock. Such monthly reports shall, on a project specific basis, identify the costs, including the related capital costs, that have been incurred through the end of the reporting period with a reasonable degree of detail, provide an updated good-faith estimate of the costs that remain to be incurred to completion of such project and compare such costs to the amounts budgeted with respect to each such project. The Company shall also provide Agbar with any additional information concerning the status of any such project, and the expenditure of the proceeds from the sale of Preferred


4 Stock, that Agbar reasonably requests. The Company shall notify Agbar, as promptly as possible, if the Company reasonably believes that the costs to be incurred in connection with any such project will exceed by 15% or more the budgeted costs for such project. The Company may not expend any portion of the proceeds from the sale of Preferred Stock if such expenditure(s) exceed by 15% or more the budgeted costs for any water-related project approved by Agbar without the prior written approval of each of Agbar's designees to the Company's Board of Directors, which approval such Agbar designees may grant or withhold in their sole discretion. The Company shall provide such designees with any information that such designees reasonably request in connection with a proposed change in a budget for a water-related project approved by Agbar. If such Agbar designees approve such budget change, the Company may not expend any portion of the proceeds from the sale of Preferred Stock if such expenditures exceed by 15% or more the revised budgeted costs for any water-related project without again obtaining the prior written approval of each of Agbar's designees to the Company's Board of Directors in the manner set forth above.


6. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. Except as otherwise indicated on the attached Schedules to this Agreement, the Company represents and warrants to Agbar that as of the date hereof, the date of the Initial Closing and as of the date of any subsequent purchase by Agbar of shares of Preferred Stock pursuant to the provisions of this Agreement:


6.1 ORGANIZATION, GOOD STANDING, ETC.


(a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own its properties and to carry on its business as now being conducted.


(b) The Company is duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction in which the nature of the business conducted by it or the properties owned, leased or operated by it make such qualification, licensing or domestication necessary and failure to be so qualified, licensed or domesticated would have a material adverse effect upon the Company.


6.2 CAPITAL STOCK. The authorized capital stock of the Company consists of (i) 20,000,000 shares of common stock, par value $.001 per share (the "Common Stock"), of which 8,239,816 shares are issued and outstanding; and (ii) 1,000,000 shares of preferred stock, par value $.001 per share, of which 9,809.2915 shares of Series C Convertible Redeemable Preferred Stock ("Series C Preferred") are issued and outstanding. All issued and outstanding shares of Common Stock and Series C Preferred of the Company are duly authorized, validly issued, fully paid and nonassessable. Except as set forth in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 or the Company's Definitive Proxy Statement circulated in connection with the Company's September 15, 1998 Annual Meeting of Stockholders, there are no outstanding options,


5 warrants, rights, convertible securities or other agreements or plans under which the Company may become obligated to issue, sell or transfer shares of its capital stock or other securities. All prior issuances of capital stock by the Company have been made in compliance with applicable federal and state securities laws.


6.3 AUTHORITY RELATIVE TO THIS AGREEMENT. The execution, delivery and performance of, and compliance with, this Agreement and the sale and issuance of the Preferred Stock (and the Common Stock issuable upon the conversion of such Preferred Stock) have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally and general principles of equity (whether enforcement is sought by proceedings in equity or at law). Except as otherwise indicated in Section 3 of this Agreement, no consent, license, approval or authority of, or registration or declaration with, any governmental authority, bureau or agency is required in connection with the execution, delivery and performance of this Agreement by the Company or the issuance of the Preferred Stock hereunder (or the Common Stock issuable upon the conversion of such Preferred Stock), except under Regulation D under the Securities Act of 1933 (the "Act") and applicable state securities laws. Neither the execution nor the delivery of this Agreement, the performance by the Company of its obligations hereunder nor the consummation of the transactions contemplated hereby will conflict with, or, with or without the giving of notice or passage of time, result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in the imposition of any lien or encumbrance upon any asset or property of the Company pursuant to, any applicable law, administrative regulation or judgment, order or decree of any court or governmental body, any contract or agreement to which the Company is a party or by which it or any of its properties, assets or rights is bound or affected, or the Certificate of Incorporation or Bylaws of the Company. The Company is not party to, and the assets of the Company are not subject to, any agreement, contract, judgment, order or decree that could interfere, in any material respect, with the performance by the Company of its obligations hereunder. Upon delivery of the Preferred Stock under this Agreement and payment of the purchase price thereof, good and marketable title thereto, free and clear of all pledges, liens, claims, encumbrances and restrictions, except for the transfer restrictions set forth in Sections 7.1 and 7.5 of this Agreement, will pass to Agbar. At the time of delivery, the Preferred Stock (and the Common Stock issuable upon the conversion of such Preferred Stock) will be duly authorized, validly issued, fully paid and nonassessable.


6.4 TAX RETURNS AND AUDITS. All required federal, state and material local tax returns of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made and the Company is not delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. The Company does not have any material tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of the Company's federal income


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tax returns nor any state or local income or franchise tax return has been audited by governmental authorities in a manner to bring such audit to the Company's attention.


6.5 FINANCIAL STATEMENTS. The Company's Annual Report on Form 10-K for the year ended March 31, 1998 includes certain financial statements, including the audited consolidated balance sheets of the Company as of March 31, 1998 and 1997 and the audited consolidated statements of operations for the years ended March 31, 1998, 1997 and 1996. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 includes the Company's consolidated balance sheets as of June 30, 1998 (unaudited) and March 31, 1998, and the consolidated statement of operations for the three months ended June 30, 1998 and 1997 (unaudited). All of the financial statements included within such Form 10-K and Form 10-Q are herein collectively referred to as the "Financial Statements". The Financial Statements are complete and accurate and present fairly, in all material respects, the financial position of the Company and the results of its operations and cash flow, all as of the dates of such Financial Statements. At the respective dates of the balance sheets referred to in this Section 6.5, the Company did not have any material liability or obligation of any nature, whether accrued, absolute, fixed or contingent, and whether due or to become due, that, in accordance with GAAP applied on a consistent basis, should have been shown or reflected in the balance sheets but was not, except for the omission of notes in unaudited balance sheets with respect to contingent liabilities that in the aggregate did not materially exceed those so reported in the latest audited balance sheets included in the Financial Statements and that were substantially the same type as so reported. Since March 31, 1998, there has been no change in the business or condition (financial or otherwise) of the Company which is materially adverse to the Company, or to its business, operations, prospects or condition (financial or otherwise), or any material increase in any contingent liabilities of the Company, and no reports on Form 8-K have been filed by the Company.


6.6 LITIGATION. There are no legal actions, suits, arbitrations, investigations or any other legal, administrative or governmental proceedings pending or, to the knowledge of the Company, threatened against the Company, its properties, assets or business, which, if decided adversely, would have a material adverse effect upon the business, properties, operations, prospects or condition (financial or otherwise) of the Company. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality.


6.7 TITLE TO PROPERTIES AND ENCUMBRANCES. All property, including real and personal property (tangible or intangible) that is used in, or available for use in, the business or operations of the Company as now conducted, is owned, leased or licensed by the Company, except for such property which if not owned, leased or licensed by the Company, individually or in the aggregate, would not have a material adverse effect upon the business, properties, operations, prospects or condition (financial or otherwise) of the Company. The Company has good and marketable title to all of its material properties and assets, including, without limitation, the properties and assets reflected in the Financial Statements, except for property disposed of in the ordinary course of business since the date of the Financial


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Statements, subject to no mortgage, pledge, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described in the Financial Statements or the notes thereto and (b) those which do not materially affect the value of or interfere with the uses made of such properties and assets.


6.8 SECURITIES LAWS. Based in part upon the representations and warranties of Agbar contained in Section 7 of this Agreement, and except as otherwise indicated in Section 3 of this Agreement, no consent, authorization, approval, permit or order of, or filing with, any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement, the performance by the Company of its obligations hereunder or the offer, issuance, sale or delivery of the Preferred Stock to Agbar, other than the filing of a Notice on Form D under the Act and the qualification thereof, if required, under applicable state securities laws, which qualification has been effected. Under the circumstances contemplated hereby, the offer, issuance, sale and delivery of the Preferred Stock to Agbar will not under current laws and regulations require compliance with the prospectus delivery or registration requirements of the Act.


6.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation of its Certificate of Incorporation or its Bylaws, nor is it in violation of, or in default under, any material lien, indenture, mortgage, lease, agreement, instrument, commitment or arrangement, or subject to any restriction which would prohibit the Company from entering into or performing its obligations under this Agreement.


6.10 LICENSES AND PERMITS. The Company holds all material licenses, permits and any other governmental approvals that are required to be held by the Company or which are necessary to permit the Company to carry on its business as now conducted.


6.11 DISCLOSURE. Neither the Report on Form 10-K for the year ended March 31, 1998, the Report on Form 10-Q for the quarter ended June 30, 1998 nor any representation or warranty of the Company in this Agreement or in any writing furnished or to be furnished pursuant hereto or in connection herewith, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact required to be stated therein or herein or necessary to make the statements therein or herein not misleading as of the date of this Agreement.
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