**Exhibit 10.3**

 

**NONQUALIFIED STOCK OPTION AGREEMENT**

 

**FOR NON-EMPLOYEE DIRECTORS**

** **

THIS AGREEMENT, dated, ismade by and between Southwest Water Company, a Delaware corporation hereinafterreferred to as the “Company,” and                                                  ,a non-employee director of the Company or Subsidiary of the Company,hereinafter referred to as “Optionee”:

 

WHEREAS, the Companywishes to afford the Optionee the opportunity to purchase shares of its $.01par value Common Stock;

 

WHEREAS, the Companywishes to carry out its Amended and Restated Stock Option Plan for Non-EmployeeDirectors, as amended (the “Plan”) (the terms of which are hereby incorporatedby reference and made a part of this Agreement); and

 

WHEREAS, the Planprovides for the grant of the Non-Qualified Stock Option set forth herein tothe Optionee as an inducement to enter into or remain in the service of theCompany or its Subsidiaries and as an incentive for increased efforts duringsuch service, and has advised the Company thereof and instructed theundersigned officers to issue said Option;

 

NOW, THEREFORE, inconsideration of the mutual covenants herein contained and other good andvaluable consideration, receipt of which is hereby acknowledged, the partieshereto do hereby agree as follows:

 

ARTICLE I.DEFINITIONS

 

Whenever the followingterms are used in this Agreement, they shall have the meaning specified belowunless the context clearly indicates to the contrary.  The masculine pronoun shall include the feminine and neuter, andthe singular the plural, where the context so indicates.

 

Section 1.1                                      Board

 

“Board” shall mean theBoard of Directors of the Company as constituted from time to time.

 

Section 1.2                                      Code

 

“Code” shall mean theInternal Revenue Code of 1986, as amended from time to time.

 

Section 1.3                                      Common Stock

 

“Common Stock” shall meanthe common stock of the Company, par value $.01 per share, of the Company.

 

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Section 1.4                                      Company

 

“Company” shall meanSouthwest Water Company, a Delaware corporation, or any successor entity.

 

Section 1.5                                      Director

 

“Director” shall mean aperson who is a member of the Board as constituted at that time.

 

Section 1.6                                      Employee

 

“Employee” shall mean anyemployee (as defined in accordance with the Regulations and Revenue Rulingsthen applicable under Section 3401(c) of the Code) of the Company, or ofany corporation which is then a Subsidiary or a Parent Corporation, whethersuch employee is so employed at the time the Plan is adopted or becomes soemployed subsequent to the adoption of the Plan.

 

Section 1.7                                      Exchange Act

 

“Exchange Act” shall meanthe Securities Exchange Act of 1934, as amended.

 

Section 1.8                                      Fair MarketValue

 

“Fair Market Value” of ashare of Common Stock as of a given date shall be (i) the closing price of a shareof Common Stock on the principal exchange on which shares of Common Stock arethen trading, if any (or as reported on any composite index which includes suchprincipal exchange), on the trading day preceding such date, or if shares werenot traded on the trading day preceding such date, then on the next precedingtrading day during which a sale occurred, or (ii) if the Common Stock is nottraded on an exchange (*x*) the last sales price of a share of theCommon Stock on The Nasdaq Stock Market (if the stock is then traded on TheNasdaq Stock Market) on the trading day preceding such date, or, if shares werenot traded on the day preceding such date, then on the next preceding tradingday during which a sale occurred; or (*y*) the mean between the closing representativebid and asked prices for the Common Stock on the trading day next precedingsuch date as reported by the National Association of Securities Dealers, Inc.through NASDAQ or a successor quotation system or, if shares were not quoted onthe day immediately preceding such date, then on the next preceding trading dayduring which a quote occurred, or (iii) if the Common Stock is not publiclytraded on an exchange and prices are not provided through The Nasdaq StockMarket, NASDAQ or a successor quotation system, the mean between the closingbid and asked prices for the Common Stock on the trading day next precedingsuch date as determined in good faith by the Board; or (iv) if the Common Stockis not publicly traded, the fair market value of the Common Stock establishedby the Board acting in good faith.

 

Section 1.9                                      Non-EmployeeDirector

 

“Non-Employee Director”shall mean any Director who is not at the same time an Employee.

 

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Section 1.10                                Option

 

“Option” shall mean anon-qualified stock option to purchase Common Stock of the Company grantedunder this Agreement and Article 3 of the Plan.

 

Section 1.11                                Optionee

 

“Optionee” shall mean aNon-Employee Director to whom an Option is granted under this Agreement and thePlan.

 

Section 1.12                                Parent Corporation

 

“Parent Corporation”shall have the meaning given in Section 424(e) of the Code.

 

Section 1.13                                Plan

 

“Plan” shall mean theAmended and Restated Stock Option Plan for Non-Employee Directors of SouthwestWater Company, as the same may be amended or restated from time to time.

 

Section 1.14                                Rule 16b-3

 

“Rule 16b-3” shall meanthat certain Rule 16b-3 under the Exchange Act, as such Rule may be amendedfrom time to time.

 

Section 1.15                                Secretary

 

“Secretary” shall meanthe Secretary of the Company.

 

Section 1.16                                Securities Act

 

“Securities Act” shallmean the Securities Act of 1933, as amended.

 

Section 1.17                                Subsidiary

 

“Subsidiary” shall meanany corporation in an unbroken chain of corporations beginning with the Companyif each of the corporations other than the last corporation in the unbrokenchain then owns stock possessing 50% or more of the total combined voting powerof all classes of stock in one of the other corporations in such chain.

 

Section 1.18                                Termination as aNon-Employee Director

 

“Termination as aNon-Employee Director” shall mean the time when the Optionee who is aNon-Employee Director ceases to be a member of the Board by reason of suchOptionee’s death or disability (within the meaning of Section 22(e)(3) ofthe Code), retirement, resignation or for any other reason.

 

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ARTICLE II.GRANT OF OPTION

 

Section 2.1                                      Grant ofOption

 

In consideration of theOptionee’s agreement to serve as a Non-Employee Director of the Company or itsSubsidiaries until the next annual meeting of stockholders of the Company andfor other good and valuable consideration, effective as of May 13, 2004, theCompany irrevocably grants to the Optionee the option to purchase any part orall of an aggregate of 10,000 shares of its $.01 par value Common Stock upon theterms and conditions set forth in this Agreement.

 

Section 2.2                                      Purchase Price

 

The price per share ofthe Common Stock subject to each Option shall be$           per share (whichis the Fair Market Value of a share of Common Stock on the date of the grantingof this Option) without commission or other charge.

 

Section 2.3                                      Considerationto Company

 

In consideration of thegranting of this Option by the Company, the Optionee agrees to render faithfuland efficient services to the Company until the next annual meeting ofstockholders of the Company.  Nothing inthe Plan or this Agreement shall confer upon any Optionee any right to continueas a director of the Company, or shall interfere with or restrict in any waythe rights of the Company, which are hereby expressly reserved, to dischargethe Optionee at any time for any reason whatsoever, with or without good cause.

 

Section 2.4                                      Adjustments inOption

 

In the event that theoutstanding shares of the Common Stock subject to the Option are changed intoor exchanged for a different number or kind of shares of the Company or othersecurities of the Company by reason of merger (including reincorporation bymeans of merger), consolidation, recapitalization, reclassification, stocksplit-up, stock dividend or combination of shares (a “Recapitalization”), theBoard shall make an appropriate and equitable adjustment in the number and kindof shares as to which the Option, or portions thereof then unexercised, shallbe exercisable, to the end that after such event the Optionee’s proportionateinterest shall be maintained as before the occurrence of such event.  Such adjustment in the Option may includeany necessary corresponding adjustment in the Option price per share, but shallbe made without change in the total price applicable to the Option or theunexercised portion of the Option (except for any change in the aggregate priceresulting from rounding-off of share quantities or prices).  Any such adjustment made by the Board shallbe final and binding upon the Optionee, the Company and all other interestedpersons.

 

Section 2.5                                      Merger,Consolidation, Exchange, Acquisition, Liquidation or Dissolution

 

The Board may, in itsabsolute discretion and upon such terms and conditions as it deems appropriate,provided by resolution adopted prior to the occurrence of any merger orconsolidation of the Company into another corporation, the exchange of all orsubstantially all of

 

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the assets of the Companyfor the securities of another corporation, the acquisition by another corporationof 80% or more of the Company’s then outstanding voting stock or theliquidation or dissolution of the Company provide that, for some period of timeprior to such event, that such Option shall be exercisable as to all sharescovered thereby, notwithstanding anything to the contrary in Sections 3.1(a) or3.1(b) below.  Any determinations madeby the Board pursuant to this Section shall be applied uniformly to allOptions granted hereby and outstanding on the date of such determination.

 

ARTICLE III.PERIOD OF EXERCISABILITY

 

Section 3.1                                      Commencementof Exercisability

 

### (a)                                  The Optionmay not be exercised in whole or in part during the first year after the dateof grant of the Option.

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### (b)                                 Subject tothe provisions of Sections 3.1(a) and 3.1(c), the Option shall becomeexercisable in two (2) cumulative installments as follows:

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#### (i)                                     The firstinstallment shall consist of fifty percent (50%) of the shares covered by theOption and shall become exercisable on the first anniversary of the date theOption is granted.

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#### (ii)                                  The secondinstallment shall consist of fifty percent (50%) of the shares covered by theOption and shall become exercisable on the second anniversary of the date theOption is granted.

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### (c)                                  Subject toSection 3.1(a), the portion, if any, of an Option which is unexercisableon the date of Termination as a Non-Employee Director shall become immediatelyexercisable.

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Section 3.2                                      Duration ofExercisability

 

The installments providedfor in Section 3.1 are cumulative. Each such installment which becomes exercisable pursuant toSection 3.1 shall remain exercisable until it becomes unexercisable underSection 3.3.

 

Section 3.3                                      Expiration ofOption

 

The Option may not beexercised to any extent by anyone after the first to occur of the following events:

 

### (a)                                  Theexpiration of a period of seven years and one day from the date the Option wasgranted; or

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### (b)                                 Theexpiration of one year from the date of the Optionee’s Termination as aNon-Employee Director for any reason, unless the Optionee dies within said oneyear period; or

 

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### (c)                                  Theexpiration of one year from the date of the Optionee’s death.

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ARTICLE IV.EXERCISE OF OPTION

 

Section 4.1                                      PersonEligible to Exercise

 

During the lifetime ofthe Optionee, only the Optionee may exercise the Option or any portion thereof;provided, however, that nothing in this Section 4.1 shall prevent theexercise of the Option by a person to whom the Option was lawfully transferred,in whole or in part, pursuant to a qualified domestic relations order (as definedin the Code) or pursuant to a transfer permitted by the Board pursuant toSection 5.2(ii) hereof and Section 7.1 of the Plan.  After the death of the Optionee, anyexercisable portion of the Option may, prior to the time when the Optionbecomes unexercisable under Section 3.3, be exercised by his personalrepresentative or by any person empowered to do so under the Optionee’s will orunder the then applicable laws of descent and distribution.

 

Section 4.2                                      PartialExercise

 

Any exercisable portionof the Option or the entire Option, if then wholly exercisable, may beexercised in whole or in part at any time and from time to time prior to thetime when the Option or portion thereof becomes unexercisable underSection 3.3; provided, however, that each partial exercise shall be fornot less than one hundred (100) shares or, if less, the number of sharesremaining to be exercised, and shall be for whole shares only.

 

Section 4.3                                      Manner ofExercise

 

The Option, or anyexercisable portion thereof, shall be exercised solely by delivery to theSecretary or his office of all of the following prior to the time when theOption or such portion becomes unexercisable under Section 3.3:

 

### (a)                                  Notice inwriting signed by the Optionee or the other person then entitled to exercisethe Option or portion, stating that the Option or portion is thereby exercised,such notice complying with all applicable rules established by the Board;

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### (b)                                 The paymentto the Company of the aggregate Option exercise price for the shares withrespect to which such Option or portion is exercised in:

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#### (i)                                     Cash;

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#### (ii)                                  With theconsent of the Board, (A) certain shares of the Company’s Common Stock owned bythe Optionee duly endorsed for transfer to the Company or (B) shares of theCompany’s Common Stock issuable to the Optionee upon exercise of the Option,with a Fair Market Value on the date of Option exercise equal to the aggregatepurchase price of the shares with respect to which such Option or portion isexercised;

 

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#### (iii)                               With theconsent of the Board, a full recourse promissory note bearing interest (at noless than such rate as shall then preclude the imputation of interest under theCode or successor provision) and payable upon such terms as may be prescribedby the Board.  The Board may also prescribethe form of such note and the security to be given for such note.  The Option may not be exercised, however, bydelivery of a promissory note or by a loan from the Company when or where suchloan or other extension of credit is prohibited by law; or

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#### (iv)                              With theconsent of the Board, any combination of the consideration provided in theforegoing subparagraphs (i), (ii) and (iii);

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### (c)                                  Full paymentto the Company (or other employer corporation) of all amounts which, underfederal, state or local law, it is required to withhold in connection with theexercise of the Option or a portion thereof; all or any part of such paymentmay be made, with the consent of the Board, (i) with certain shares of theCompany’s Common Stock owned by the Optionee duly endorsed for transfer, or(ii) with shares of the Company’s Common Stock issuable to the Optionee uponexercise of the Option, in each case, having a Fair Market Value at the date ofOption exercise equal to the sums required to be withheld;

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### (d)                                 Suchrepresentations and documents as the Board, in its absolute discretion, deemsnecessary or advisable to effect compliance with all applicable provisions ofthe Securities Act and any other Federal or state securities laws orregulations.  The Board may, in its absolutediscretion, also take whatever additional actions it deems appropriate toeffect such compliance including, without limitation, placing legends on sharecertificates and issuing stop-transfer orders to transfer agents andregistrars; and

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### (e)                                  In the eventthe Option or portion thereof shall be exercised pursuant to Section 4.1by any person or persons other than the Optionee, appropriate proof of theright of such person or persons to exercise the Option.

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### (f)                                    Notwithstandinganything herein to the contrary, the Optionee may satisfy the requirements ofsubsections (b) and (c) of this Section 4.3 concerning payment for theshares and all applicable withholding taxes, with the consent of the Board,through the delivery to the Secretary or his office of (i) an irrevocablewritten exercise notice containing instructions to the Company to deliver toOptionee’s broker the certificate(s) representing the shares with respect towhich the Option or portion is thereby exercised and (ii) timely full payment(in cash or by check) for the shares with respect to which such Option orportion is thereby exercised and all amounts which the Company is required towithhold under federal, state or local law in connection with the exercise ofthe Option or portion thereof.  Notwithstandinganything to the contrary in this Section 4.3, the Board shall not take anydiscretionary action which will result in the failure of the Plan to satisfyany exemptive condition imposed by Rule 16b-3 of the code with respect to theeffected Option or which would be in violation of any applicable law.

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Section 4.4                                      Conditions toIssuance of Stock Certificates

 

The shares of stockissuable and deliverable upon the exercise of the Option, or any portionthereof, may be either previously authorized but unissued shares or issuedshares

 

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which have then beenreacquired by the Company.  Such sharesshall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate orcertificates for shares of stock purchased upon the exercise of the Option orportion thereof prior to fulfillment of all of the following conditions:

 

### (a)                                  Theadmission of such shares to listing on all stock exchanges on which such classof stock is then listed;

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### (b)                                 Thecompletion of any registration or other qualification of such shares under anystate or federal law or under rulings or regulations of the Securities andExchange Commission or of any other governmental regulatory body, which theBoard shall, in its absolute discretion, deem necessary or advisable;

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### (c)                                  Theobtaining of any approval or other clearance from any state or federalgovernmental agency which the Board shall, in its absolute discretion,determine to be necessary or advisable;

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### (d)                                 The receiptby the Company of full payment for such shares, including payment of allamounts which, under federal, state or local tax law, it is required towithhold upon exercise of the Option; and

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### (e)                                  The lapse ofsuch reasonable period of time following the exercise of the Option as the Boardmay establish from time to time for reasons of administrative convenience.

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Section 4.5                                      Rights asStockholder

 

The holder of the Optionshall not be, nor have any of the rights or privileges of, a stockholder of theCompany in respect of any shares purchasable upon the exercise of any part ofthe Option unless and until certificates representing such shares shall havebeen issued by the Company to such holder.

 

ARTICLE V.OTHER PROVISIONS

 

Section 5.1                                      Administration

 

With respect to thisOption, the full Board, acting by a majority of its members in office, shallhave the power to interpret the Plan and this Agreement and to adopt such rulesfor the administration, interpretation and application of the Plan as areconsistent therewith and to interpret or revoke any such rules.  All actions taken and all interpretationsand determinations made by the Board in good faith shall be final and bindingupon the Optionee, the Company and all other interested persons.  No member of the Board shall be personallyliable for any action, determination or interpretation made in good faith withrespect to the Plan or the Option.

 

Section 5.2                                      OptionGenerally Not Transferable

 

Neither the Option norany interest or right therein or part thereof shall be liable for the debts,contracts or engagements of the Optionee or his successors in interest or shallbe

 

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subject to disposition bytransfer, alienation, anticipation, pledge, encumbrance, assignment or anyother means whether such disposition be voluntary or involuntary or byoperation of law by judgment, levy, attachment, garnishment or any other legalor equitable proceedings (including bankruptcy), and any attempted dispositionthereof shall be null and void and of no effect; provided, however, thatnothing in this Section 5.2 shall prevent (i) transfers by will or by theapplicable laws of descent and distribution, or, to the extent not prohibitedby the Code, pursuant to a qualified domestic relations order (as defined inthe Code) or (ii) with the prior written consent of the Board, by gift or as acontribution, to a family member of the Optionee, (as defined under theinstructions to use of Form S-8), provided, that an Option that has been sotransferred shall continue to be subject to all of the terms and conditions asapplicable to the original Optionee, and the transferee shall execute any andall such documents requested by the Board in connection with the transfer,including without limitation to evidence the transfer and to satisfy anyrequirements for an exemption for the transfer under applicable federal andstate securities laws.

 

Section 5.3                                      Shares to BeReserved

 

The Company shall at alltimes during the term of the Option reserve and keep available such number ofshares of stock as will be sufficient to satisfy the requirements of thisAgreement.

 

Section 5.4                                      Notices

 

Any notice to be givenunder the terms of this Agreement to the Company shall be addressed to theCompany in care of its Secretary, and any notice to be given to the Optioneeshall be addressed to him at the address given beneath his signaturehereto.  By a notice given pursuant tothis Section 5.4, either party may hereafter designate a different addressfor notices to be given to him.  Anynotice which is required to be given to the Optionee shall, if the Optionee isthen deceased, be given to the Optionee’s personal representative if suchrepresentative has previously informed the Company of his status and address bywritten notice under this Section 5.4. Any notice shall be deemed duly given when enclosed in a properly sealedenvelope or wrapper addressed as aforesaid, deposited (with postage prepaid) ina post office or branch post office regularly maintained by the United StatesPostal Service.

 

Section 5.5                                      Titles

 

Titles are provided hereinfor convenience only and are not to serve as a basis for interpretation orconstruction of this Agreement.

 

Section 5.6                                      Construction

 

This Agreement shall beadministered, interpreted and enforced under the laws of the State ofCalifornia.

 

Section 5.7                                      Conformity toSecurities Laws

 

The Optionee acknowledgesthat the Plan and this Option grant are intended to conform to the extentnecessary with all provisions of the Securities Act and the Exchange Act

 

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and any and allregulations and rules promulgated by the Securities and Exchange Commissionthereunder, including without limitation Rule 16b-3.  Notwithstanding anything herein to the contrary, the Plan shallbe administered, and the Option is granted and may be exercised, only in such amanner as to conform to such laws, rules and regulations.  To the extent permitted by applicable law,the Plan and this Agreement shall be deemed amended to the extent necessary toconform to such laws, rules and regulations.

 

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IN WITNESS WHEREOF, thisAgreement has been executed and delivered by the parties hereto.

 
|                     | SOUTHWEST WATER  COMPANY, |
|--------------------------|---------------------------|
|                     | a Delaware  corporation   |
|                     |                      |
|                     |                      |
|                     | By:                       |   |   |
|                     |                      | Anton C.  Garnier, CEO & Chairman |
|                     |                      |
|                     | By:                       |   |   |
|                     |                      | Peter J.  Moerbeek, President and COO |
|                     |                      |
|                     |                      |
|                     |                      |   |
| Optionee                 |                      |
|                     |                      |
|                     |                      |
|                     |                      |   |
|                     |                      |   |
|                     |                      |   |
| Address                  |                      |
|                     |                      |
| Optionee’s Taxpayer |                      |
| Identification Number:   |                      |
|                     |                      |
|                     |                      |   |

 

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