Document:

Exhibit
10.1

 

FORM OF EMPLOYEE NON-QUALIFIED STOCK OPTION
AGREEMENT

 

THIS AGREEMENT,
dated                   
is made by and between Southwest Water Company, a Delaware corporation (the
“Company”), and                            ,
an employee of the Company or a Subsidiary of the Company (the “Employee”).

 

WHEREAS, the Company wishes to afford the
Employee the opportunity to purchase shares of its $.01 par value common stock
(the “Common Stock”); and

 

WHEREAS, the
Company wishes to carry out the Second Amended and Restated Southwest Water
Company Stock Option Plan (the “Option Plan”) (the terms of which are hereby
incorporated by reference and made a part of this Agreement); and

 

WHEREAS, the
Committee of the Company’s Board of Directors (the “Committee”), appointed to
administer said Option Plan, has determined that it would be to the advantage
and best interest of the Company and its stockholders to grant the
non-qualified option (the “Option”) provided for herein to the Employee as an
inducement to join and remain in the service of the Company or its Subsidiaries
and as an incentive for increased efforts during such service, and has advised
the Company thereof and instructed the undersigned officers to issue said
Option;

 

NOW, THEREFORE, in
consideration of the mutual covenants herein contained and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto do hereby agree as follows:

 

	
  ARTICLE
  I

  	
   

  	
  DEFINITIONS

  

 

Whenever the
following terms are used in this Agreement, they shall have the meanings
specified below unless the context clearly indicates to the contrary.  The masculine pronoun shall include the
feminine and neuter, and the singular the plural, where the context so indicates.

 

Section 1.1 - Code

 

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

 

Section 1.2- Company

 

“Company” shall
mean Southwest Water Company.  In
addition, “Company” shall mean any corporation assuming, or issuing new
employee stock options in substitution for, the Option in a transaction to
which Section 425(a) of the Code applies.

 

Section 1.3 - Director

 

“Director” shall
mean a member of the Board of Directors or a member of the Board of Directors
of a Subsidiary, as the same may be constituted from time to time.

 

1

 

Section 1.4 - Officer

 

“Officer” shall
mean an officer of the Company as defined in Rule 16a-1(f) under the Securities
Exchange Act of 1934, as amended, as such Rule may be amended in the future.

 

Section 1.5 - Option

 

“Option” shall
mean the non-qualified option to purchase Common Stock of the Company granted
under this Agreement.

 

Section 1.6 – Option
Plan

 

“Option Plan”
shall mean the Second Amended and Restated Southwest Water Company Option Plan,
as amended from time to time.

 

Section 1.7 - Parent
Corporation

 

“Parent
Corporation” shall mean any corporation in an unbroken chain of corporations
ending with the Company if each of the corporations other than the Company then
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

 

Section 1.8 - Secretary

 

“Secretary” shall
mean the Secretary of the Company.

 

Section 1.9 - Securities
Act

 

“Securities Act”
shall mean the Securities Act of 1933, as amended.

 

Section 1.10 - Subsidiary

 

“Subsidiary” shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain.

 

Section 1.11 - Termination
of Employment

 

“Termination of
Employment” shall mean the time when the employee-employer relationship between
the Employee and the Company, a Parent Corporation or a Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, removal, death or
retirement, but excluding any termination where there is a simultaneous
reemployment or continuing employment by the Company, a Parent Corporation or a
Subsidiary.  The Committee, in its
absolute discretion, shall determine the effect of all other matters and
questions relating to Termination of Employment, including, but not by way of
limitation, the question of whether a Termination of Employment resulted from a
discharge for good cause, and all questions of whether particular leaves of
absence constitute Terminations of Employment.

 

2

 

	
  ARTICLE
  II

  	
   

  	
  GRANT
  OF OPTION

  

 

Section 2.1 - Grant
of Option

 

In consideration
of the Employee’s agreement to remain in the employ of the Company, its Parent
Corporations or its subsidiaries and for other good and valuable consideration,
on the date hereof the Company irrevocably grants to the Employee the option to
purchase any part or all of an aggregate of                    shares
of its $.01 par value Common Stock upon the terms and conditions set forth in
this Agreement.

 

Section 2.2 - Purchase
Price

 

The purchase price
of the shares of stock covered by the option shall be                 per
share without commission or other charge.

 

Section 2.3 - Consideration
to Company

 

In consideration
of the granting of this Option by the Company, the Employee agrees to render
faithful and efficient services to the Company, a Parent Corporation or a
Subsidiary, with such duties and responsibilities as the Company shall from
time to time prescribe, for a period of at least one (1) year from the date
this Option is granted.  Nothing in this
Agreement or in the Option Plan shall confer upon the Employee any right to
continue in the employ of the Company, any Parent Corporation or any
Subsidiary, or shall interfere with or restrict in any way the rights of the
Company, its Parent Corporations and its Subsidiaries, which are hereby
expressly reserved, to discharge the Employee at any time for any reason
whatsoever, with or without cause.

 

Section 2.4 - Adjustments
in Option

 

In the event that
the outstanding shares of the stock subject to the Option are changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of reorganization, merger
(including reincorporation effected by means of merger), consolidation,
recapitalization, reclassification, stock split up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which the Option, or portions
thereof then unexercised, shall be exercisable, to the end that after such
event the Employee’s proportionate interest shall be maintained as before the
occurrence of such event.  Such
adjustment in the Option shall be made without change in the total price
applicable to the unexercised portion of the Option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices)
and with any necessary corresponding adjustment in the Option price per
share.  Any such adjustment made by the
Committee shall be final and binding upon the Employee, the Company and all
other interested persons.

 

3

 

	
  ARTICLE
  III

  	
   

  	
  PERIOD
  OF EXERCISABILITY

  

 

Section 3.1 - Commencement
of Exercisability

 

(a)           The Option shall become
exercisable in five (5) cumulative installments as follows:

 

(i) The first
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the date of
grant of the Option (the “First Anniversary Date”);

 

(ii) The second
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the First
Anniversary Date (the “Second Anniversary Date”);

 

(iii) The third
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Second
Anniversary Date (the “Third Anniversary Date”);

 

(iv) The fourth
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Third
Anniversary Date (the “Fourth Anniversary Date”); and

 

(v) The fifth
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Fourth
Anniversary Date (the “Fifth Anniversary Date”).

 

(b)           Excluding Saturdays,
Sundays, and nationally recognized holidays, if the Optionee is absent from
employment for any reason other than vacation for an aggregate period exceeding
sixty (60) days during the annual period between the date of grant of the
Option and the First Anniversary Date, or any successive Anniversary Date and
the following Anniversary Date, then the latter Anniversary Date shall be
postponed by the number of all such days of absence.

 

(c)           No portion of the
option, which is unexercisable at Termination of Employment of the Employee,
shall thereafter become exercisable.

 

Section 3.2 - Duration
of Exercisability

 

The installments
provided for in Section 3.1 are cumulative. 
Each such installment, which becomes exercisable pursuant to Section 3.1
shall remain exercisable until it becomes unexercisable under Section 3.3.

 

Section 3.3 - Expiration
of Option

 

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

 

4

 

(a)           The expiration of seven
(7) years and one (1) day from the date the Option was granted; or

 

(b)           The time of the
Employee’s Termination of Employment unless such Termination of Employment
results from his death, retirement, disability or being discharged not for good
cause; or

 

(c)           The time of the
Employee’s Termination of Employment with good cause, including, but not by way
of limitation, a termination by reason of conduct which the Committee
determines to have been knowingly fraudulent, deliberately dishonest, disloyal,
or willful misconduct; or

 

(d)           The expiration of three
(3) months from the date of the Employee’s Termination of Employment by reason
of his retirement or his being discharged not for good cause, unless the
Employee dies within said three (3) month period; or

 

(e)           The expiration of one
(1) year from the date of the Employee’s Termination of Employment by reason of
his disability; or

 

(f)            The expiration of one
(1) year from the date of the Employee’s death; or

 

(g)           The effective date of
either the merger or consolidation of the Company with or into another
corporation, or the acquisition by another corporation or person of all or
substantially all of the Company’s assets or 80% or more of the Company’s then
outstanding voting stock, or the liquidation or dissolution of the Company,
unless the Committee waives this provision in connection with such
transaction.  At least ten (10) days
prior to the effective date of such merger, consolidation, acquisition,
liquidation or dissolution, the Committee shall give the Employee notice of
such event if the Option has then neither been fully exercised nor become
unexercisable under this Section 3.3.

 

Section 3.4 - Acceleration
of Exercisability

 

In the event of
the merger or consolidation of the Company with or into another corporation, or
the acquisition by another corporation or person of all or substantially all of
the Company’s assets or 80% or more of the Company’s then outstanding voting
stock, or the liquidation or dissolution of the Company, the Committee may, in
its absolute discretion and upon such terms and conditions as it deems
appropriate, provide by resolution, adopted prior to such event and
incorporated in the notice referred to in Section 3.3(g), that at some time
prior to the effective date of such event this Option shall be exercisable as
to all the shares covered hereby, notwithstanding that this Option may not yet
have become fully exercisable under Section 3.1(a); provided, however, that
this acceleration of exercisability shall not take place if:

 

(a)           This Option becomes
unexercisable under Section 3.3 prior to said effective date;

 

5

 

(b)           In
connection with such an event, provision is made for an assumption of this
Option or a substitution therefor of a new option by an employer corporation or
a parent or subsidiary of such corporation; or

 

6

 

(c)           The Option has been
granted to an Officer or Director, the exercise would occur in whole or in part
within one (1) year after such Option was granted and the Committee in its
absolute discretion determines that acceleration of exercisability is
undesirable.

 

The Committee may
make such determinations and adopt such rules and conditions as it, in its
absolute discretion, deems appropriate in connection with such acceleration of
exercisability, including, but not by way of limitation, provisions to ensure
that any such acceleration and resulting exercise shall be conditioned upon the
consummation of the contemplated corporate transaction and determinations
regarding whether provisions for assumption or substitution have been made in
accordance with subsection (b) above.

 

	
  ARTICLE
  IV

  	
   

  	
  EXERCISE
  OF OPTION

  

 

Section 4.1 - Person
Eligible to Exercise

 

During the
lifetime of the Employee, only he may exercise the Option or any portion
thereof.  After the death of the
Employee, any exercisable portion of the Option may, prior to the time when the
Option becomes unexercisable under Section 3.3, be exercised by the Employee’s
personal representative or by any person empowered to do so under the
Employee’s will or under the then applicable laws of descent and distribution.

 

Section 4.2 - Partial
Exercise

 

Any exercisable
portion of the Option or the entire option, if then wholly exercisable, may be
exercised in whole or in part at any time prior to the time when the Option or
portion thereof becomes unexercisable under Section 3.3; provided, however,
that each partial exercise shall be for not less than one hundred (100) shares
(or the minimum installment set forth in Section 3.1, if a smaller number of
shares) and shall be for whole shares only.

 

Section 4.3 - Manner
of Exercise

 

The Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or the Secretary’s office of all of the following prior to the time
when such exercisable option or portion thereof becomes unexercisable under
Section 3.3:

 

(a)           Notice in writing
signed by the Employee, or such other person then entitled to exercise the
Option or portion thereof, stating that the option or portion thereof is
thereby exercised, such notice complying with all applicable rules established
by the Committee; and

 

(b)           The payment to the
Company for the aggregate Option exercise price of the shares to which the
Option or portion thereof is being exercised; in:

 

(i) Cash (or
check); or

 

7

 

(vi) Shares of the
Company’s Common Stock owned by the Employee duly endorsed for transfer to the
Company, or issuable to the Employee upon exercise of the Option, with a fair
market value (as determined under Section 4.2(b) of the Option Plan) on the
date of delivery equal to the aggregate exercise price of the shares to which
such Option or portion is exercised; or

 

(vii) With the
consent of the Committee, a full recourse promissory note bearing interest (of
at least such rate as shall then preclude the imputation of interest under the
Code) and payable upon such terms as may be prescribed by the Committee.  The Committee may also prescribe the form of
such note and the security to be given for such note.  The Option may not be exercised, however, by delivery of a
promissory note or by a loan from the Company when or where such loan or other
extension of credit is prohibited by law; or

 

(viii) Any
combination of the consideration provided in the foregoing subparagraphs (i),
(ii) and (iii); and

 

(c)           The payment to the
Company (or other employer corporation) of all amounts which it is required to
withhold under Federal, state or local law in connection with the exercise of
the Option; with the consent of the Committee, shares of the Company’s Common
Stock owned by the Employee duly endorsed for transfer, or issuable to the
Employee upon exercise of the Option, valued in accordance with Section 4.2(b)
of the Option Plan at the date of Option exercise, may be used to make all or
part of such payment; and

 

(d)           A bona fide written
representation and agreement, in a form satisfactory to the Committee, signed
by the Employee or other person then entitled to exercise such Option or
portion thereof, stating that the shares of stock are being acquired for his
own account, for investment and without any present intention of distributing
or reselling said shares or any of them except as may be permitted under the
Securities Act and then applicable rules and regulations thereunder, and that
the Employee or other person then entitled to exercise such Option or portion
thereof will indemnify the Company against and hold it free and harmless from
any loss, damage, expense or liability resulting to the Company if any sale or
distribution of the shares by such person is contrary to the representation and
agreement referred to above.  The
Committee may, in its absolute discretion, take whatever additional actions it
deems appropriate to insure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other Federal or state securities laws or regulations.  Without limiting the generality of the
foregoing, the Committee may require an opinion of counsel acceptable to it to
the effect that any subsequent transfer of shares acquired on an Option
exercise does not violate the Securities Act, and may issue stop-transfer
orders covering such shares.  Share
certificates evidencing stock issued on exercise of this option shall bear an
appropriate legend referring to the provisions of this subsection (d) and the
agreements herein.  The written
representation and agreement referred to in the first sentence of this
subsection (d) shall, however, not be required if the shares to be issued
pursuant to such exercise have been registered under the Securities Act, and
such registration is then effective in respect of such shares; and

 

8

 

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

 

Section 4.4 - Conditions
to Issuance of Stock Certificates

 

The shares of
stock deliverable upon the exercise of the Option, or any portion thereof, may
be either previously authorized but unissued shares or issued shares which have
then been reacquired by the Company. 
Such shares shall be fully paid and non-assessable.  The Company shall not be required to issue
or deliver any certificate or certificates for shares of stock purchased upon
the exercise of the option or portion thereof prior to fulfillment of all of
the following conditions:

 

(a)           The admission of such
shares to listing on all stock exchanges, if any, on which such class of stock
is then listed; and

 

(b)           The completion of any
registration or other qualification of such shares under any state or Federal
law or under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body, which the Committee
shall, in its absolute discretion, deem necessary or advisable; and

 

(c)           The obtaining of any
approval or other clearance from any state or Federal governmental agency which
the Committee shall, in its absolute discretion, determine to be necessary or
advisable; and

 

(d)           The payment
to the Company of all amounts which it is required to withhold under Federal,
state or local law in connection with the exercise of the option; and

 

(e)           The lapse of such
reasonable period of time following the exercise of the Option as the Committee
may from time to time establish for reasons of administrative convenience.

 

Section 4.5 - Rights
as Stockholder

 

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

 

9

 

	
  ARTICLE
  V

  	
   

  	
  OTHER
  PROVISIONS

  

 

Section 5.1 - Administration

 

The Committee
shall have the power to interpret the Option Plan and this Agreement and to
adopt such rules for the administration, interpretation and application of the
Option Plan as are consistent therewith and to interpret, amend or revoke any
such rules.  All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon the Employee, the Company and all other interested
persons.  No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Option Plan or the Option.  The Board of Directors shall have no right
to exercise any of the rights and duties of the Committee under the Option Plan
and this Agreement.

 

Section 5.2 - Transfer
Restrictions

 

Neither the Option
nor any interest or right therein or part thereof shall be subject to or liable
for the debts, contracts or engagements of the Employee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent transfers by will or by the applicable laws of descent and
distribution.

 

Section 5.3 - Shares
to Be Reserved

 

The Company shall
at all times during the term of the Option reserve and keep available such
number of shares of stock as will be sufficient to satisfy the requirements of
this Agreement.

 

Section 5.4 - Notices

 

Any notice to be
given under the terms of this Agreement to the Company shall be addressed to
the Company in care of its Secretary, and any notice to be given to the
Employee shall be addressed to him at the address given beneath his signature
hereto.  By a notice given pursuant to
this Section 5.4, either party may hereafter designate a different address for
notices to be given to him.  Any notice
which is required to be given to the Employee shall, if the Employee is then
deceased, be given to the Employee’s personal representative if such representative
has previously informed the Company of his status and address by written notice
under this Section 5.4. Any notice shall be deemed duly given when enclosed in
a properly sealed envelope or wrapper addressed as aforesaid, deposited (with
postage prepaid) in a post office or branch post office regularly maintained by
the United States Postal Service.

 

Section 5.5 - Titles

 

Titles are
provided herein for convenience only and are not to serve as a basis for
interpretation or construction of this Agreement.

 

10

 

Section 5.6 - Construction

 

This Agreement
shall be administered, interpreted and enforced under the laws of the State of
California.

 

Section 5.7 – Conformity
to Security Laws

 

This Agreement and
the Option granted hereunder are intended to conform to the extent necessary
with all provisions of the Securities Act, the Securities Exchange Act of 1934,
as amended, and any and all regulations and rules promulgated by the Securities
and Exchange Commission thereunder, including without limitation Rule
16b-3.  Notwithstanding anything herein
to the contrary, the Option may be exercised, only in such a manner as to
conform to such laws, rules and regulations. 
To the extent permitted by applicable law, the Option granted hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.

 

 

	
   

  	
  SOUTHWEST WATER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Anton C. Garnier, CEO

  
				

 

 

The Employee,                                       ,

By signing this
Agreement, accepts all

Terms and conditions
herein.

 

	
  Dated: 

  	
   

  	
  , 20

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (Employee Signature)

  

 

Employee’s
Taxpayer Identification Number:

Shares Awarded:

Award Date:

Exercise Price:

 

11Exhibit
10.1(b)

 

FORM OF EMPLOYEE NON-QUALIFIED STOCK OPTION
AGREEMENT

 

THIS AGREEMENT,
dated                      
is made by and between Southwest Water Company, a Delaware corporation (the
“Company”), and                          ,
an employee of the Company or a Subsidiary of the Company (the “Employee”).

 

WHEREAS, the Company wishes to afford the
Employee the opportunity to purchase shares of its $.01 par value common stock
(the “Common Stock”); and

 

WHEREAS, the
Company wishes to carry out the Second Amended and Restated Southwest Water
Company Stock Option Plan (the “Option Plan”) (the terms of which are hereby
incorporated by reference and made a part of this Agreement); and

 

WHEREAS, the
Committee of the Company’s Board of Directors (the “Committee”), appointed to
administer said Option Plan, has determined that it would be to the advantage
and best interest of the Company and its stockholders to grant the
non-qualified option (the “Option”) provided for herein to the Employee as an
inducement to join and remain in the service of the Company or its Subsidiaries
and as an incentive for increased efforts during such service, and has advised
the Company thereof and instructed the undersigned officers to issue said
Option;

 

NOW, THEREFORE, in
consideration of the mutual covenants herein contained and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto do hereby agree as follows:

 

	
  ARTICLE
  I

  	
   

  	
  DEFINITIONS

  

 

Whenever the
following terms are used in this Agreement, they shall have the meanings
specified below unless the context clearly indicates to the contrary.  The masculine pronoun shall include the
feminine and neuter, and the singular the plural, where the context so indicates.

 

Section 1.1 - Code

 

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

 

Section 1.2- Company

 

“Company” shall
mean Southwest Water Company.  In
addition, “Company” shall mean any corporation assuming, or issuing new
employee stock options in substitution for, the Option in a transaction to
which Section 425(a) of the Code applies.

 

Section 1.3 - Director

 

“Director” shall
mean a member of the Board of Directors or a member of the Board of Directors
of a Subsidiary, as the same may be constituted from time to time.

 

1

 

Section 1.4 - Officer

 

“Officer” shall
mean an officer of the Company as defined in Rule 16a-1(f) under the Securities
Exchange Act of 1934, as amended, as such Rule may be amended in the future.

 

Section 1.5 - Option

 

“Option” shall
mean the non-qualified option to purchase Common Stock of the Company
granted under this Agreement.

 

Section 1.6 – Option
Plan

 

“Option Plan”
shall mean the Second Amended and Restated Southwest Water Company Option Plan,
as amended from time to time.

 

Section 1.7 - Parent
Corporation

 

“Parent
Corporation” shall mean any corporation in an unbroken chain of corporations
ending with the Company if each of the corporations other than the Company then
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

 

Section 1.8 - Secretary

 

“Secretary” shall
mean the Secretary of the Company.

 

Section 1.9 - Securities
Act

 

“Securities Act”
shall mean the Securities Act of 1933, as amended.

 

Section 1.10 - Subsidiary

 

“Subsidiary” shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain.

 

Section 1.11 - Termination
of Employment

 

“Termination of
Employment” shall mean the time when the employee-employer relationship between
the Employee and the Company, a Parent Corporation or a Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, removal, death or retirement,
but excluding any termination where there is a simultaneous reemployment or
continuing employment by the Company, a Parent Corporation or a
Subsidiary.  The Committee, in its
absolute discretion, shall determine the effect of all other matters and questions
relating to Termination of Employment, including, but not by way of limitation,
the question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment.

 

2

 

	
  ARTICLE
  II

  	
   

  	
  GRANT
  OF OPTION

  

 

Section 2.1 - Grant
of Option

 

In consideration
of the Employee’s agreement to remain in the employ of the Company, its Parent
Corporations or its subsidiaries and for other good and valuable consideration,
on the date hereof the Company irrevocably grants to the Employee the option to
purchase any part or all of an aggregate of                       shares
of its $.01 par value Common Stock upon the terms and conditions set forth in
this Agreement.

 

Section 2.2 - Purchase
Price

 

The purchase price
of the shares of stock covered by the option shall be                 per
share without commission or other charge.

 

Section 2.3 - Consideration
to Company

 

In consideration
of the granting of this Option by the Company, the Employee agrees to render
faithful and efficient services to the Company, a Parent Corporation or a
Subsidiary, with such duties and responsibilities as the Company shall from
time to time prescribe, for a period of at least one (1) year from the date
this Option is granted.  Nothing in this
Agreement or in the Option Plan shall confer upon the Employee any right to
continue in the employ of the Company, any Parent Corporation or any Subsidiary,
or shall interfere with or restrict in any way the rights of the Company, its
Parent Corporations and its Subsidiaries, which are hereby expressly reserved,
to discharge the Employee at any time for any reason whatsoever, with or
without cause.

 

Section 2.4 - Adjustments
in Option

 

In the event that
the outstanding shares of the stock subject to the Option are changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of reorganization, merger
(including reincorporation effected by means of merger), consolidation,
recapitalization, reclassification, stock split up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which the Option, or portions
thereof then unexercised, shall be exercisable, to the end that after such
event the Employee’s proportionate interest shall be maintained as before the
occurrence of such event.  Such
adjustment in the Option shall be made without change in the total price
applicable to the unexercised portion of the Option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices)
and with any necessary corresponding adjustment in the Option price per
share.  Any such adjustment made by the
Committee shall be final and binding upon the Employee, the Company and all
other interested persons.

 

3

 

	
  ARTICLE
  III

  	
   

  	
  PERIOD
  OF EXERCISABILITY

  

 

Section 3.1 - Commencement
of Exercisability

 

(a)           The Option shall become
exercisable in five (5) cumulative installments as follows:

 

(i) The first
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the date of
grant of the Option (the “First Anniversary Date”);

 

(ii) The second
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the First
Anniversary Date (the “Second Anniversary Date”);

 

(iii) The third
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Second
Anniversary Date (the “Third Anniversary Date”);

 

(iv) The fourth
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Third
Anniversary Date (the “Fourth Anniversary Date”); and

 

(v) The fifth
installment shall consist of one-fifth (1/5th) of the shares covered by the
Option and shall become exercisable on the first anniversary of the Fourth
Anniversary Date (the “Fifth Anniversary Date”).

 

(b)           Excluding Saturdays,
Sundays, and nationally recognized holidays, if the Optionee is absent from
employment for any reason other than vacation for an aggregate period exceeding
sixty (60) days during the annual period between the date of grant of the
Option and the First Anniversary Date, or any successive Anniversary Date and
the following Anniversary Date, then the latter Anniversary Date shall be
postponed by the number of all such days of absence.

 

(c)           No portion of the
option, which is unexercisable at Termination of Employment of the Employee,
shall thereafter become exercisable.

 

Section 3.2 - Duration
of Exercisability

 

The installments
provided for in Section 3.1 are cumulative. 
Each such installment, which becomes exercisable pursuant to Section 3.1
shall remain exercisable until it becomes unexercisable under Section 3.3.

 

Section 3.3 - Expiration
of Option

 

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

 

4

 

(a)           The expiration of seven
(7) years and one (1) day from the date the Option was granted; or

 

(b)           The time of the
Employee’s Termination of Employment unless such Termination of Employment
results from his death, retirement, disability or being discharged not for good
cause; or

 

(c)           The time of the
Employee’s Termination of Employment with good cause, including, but not by way
of limitation, a termination by reason of conduct which the Committee
determines to have been knowingly fraudulent, deliberately dishonest, disloyal,
or willful misconduct; or

 

(d)           The expiration of three
(3) months from the date of the Employee’s Termination of Employment by reason
of his retirement or his being discharged not for good cause, unless the
Employee dies within said three (3) month period; or

 

(e)           The expiration of one
(1) year from the date of the Employee’s Termination of Employment by reason of
his disability; or

 

(f)            The expiration of one
(1) year from the date of the Employee’s death; or

 

(g)           The effective date of
either the merger or consolidation of the Company with or into another
corporation, or the acquisition by another corporation or person of all or
substantially all of the Company’s assets or 80% or more of the Company’s then
outstanding voting stock, or the liquidation or dissolution of the Company,
unless the Committee waives this provision in connection with such
transaction.  At least ten (10) days
prior to the effective date of such merger, consolidation, acquisition,
liquidation or dissolution, the Committee shall give the Employee notice of
such event if the Option has then neither been fully exercised nor become
unexercisable under this Section 3.3.

 

Section 3.4 - Acceleration
of Exercisability

 

In the event of
the merger or consolidation of the Company with or into another corporation, or
the acquisition by another corporation or person of all or substantially all of
the Company’s assets or 80% or more of the Company’s then outstanding voting
stock, or the liquidation or dissolution of the Company, the Committee may, in
its absolute discretion and upon such terms and conditions as it deems
appropriate, provide by resolution, adopted prior to such event and
incorporated in the notice referred to in Section 3.3(g), that at some time
prior to the effective date of such event this Option shall be exercisable as
to all the shares covered hereby, notwithstanding that this Option may not yet
have become fully exercisable under Section 3.1(a); provided, however, that
this acceleration of exercisability shall not take place if:

 

(a)           This Option becomes
unexercisable under Section 3.3 prior to said effective date;

 

5

 

(b)           In
connection with such an event, provision is made for an assumption of this
Option or a substitution therefor of a new option by an employer corporation or
a parent or subsidiary of such corporation; or

 

6

 

(c)           The Option has been
granted to an Officer or Director, the exercise would occur in whole or in part
within one (1) year after such Option was granted and the Committee in its
absolute discretion determines that acceleration of exercisability is
undesirable.

 

The Committee may
make such determinations and adopt such rules and conditions as it, in its
absolute discretion, deems appropriate in connection with such acceleration of
exercisability, including, but not by way of limitation, provisions to ensure
that any such acceleration and resulting exercise shall be conditioned upon the
consummation of the contemplated corporate transaction and determinations
regarding whether provisions for assumption or substitution have been made in
accordance with subsection (b) above.

 

	
  ARTICLE
  IV

  	
   

  	
  EXERCISE
  OF OPTION

  

 

Section 4.1 - Person
Eligible to Exercise

 

During the
lifetime of the Employee, only he may exercise the Option or any portion
thereof.  After the death of the
Employee, any exercisable portion of the Option may, prior to the time when the
Option becomes unexercisable under Section 3.3, be exercised by the Employee’s personal
representative or by any person empowered to do so under the Employee’s will or
under the then applicable laws of descent and distribution.

 

Section 4.2 - Partial
Exercise

 

Any exercisable
portion of the Option or the entire option, if then wholly exercisable, may be
exercised in whole or in part at any time prior to the time when the Option or
portion thereof becomes unexercisable under Section 3.3; provided, however,
that each partial exercise shall be for not less than one hundred (100) shares
(or the minimum installment set forth in Section 3.1, if a smaller number of
shares) and shall be for whole shares only.

 

Section 4.3 - Manner
of Exercise

 

The Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or the Secretary’s office of all of the following prior to the time
when such exercisable option or portion thereof becomes unexercisable under
Section 3.3:

 

(a)           Notice in writing
signed by the Employee, or such other person then entitled to exercise the Option
or portion thereof, stating that the option or portion thereof is thereby
exercised, such notice complying with all applicable rules established by the
Committee; and

 

(b)           The payment to the
Company for the aggregate Option exercise price of the shares to which the
Option or portion thereof is being exercised; in:

 

(i) Cash (or
check); or

 

7

 

(vi) Shares of the
Company’s Common Stock owned by the Employee duly endorsed for transfer to the
Company, or issuable to the Employee upon exercise of the Option, with a fair
market value (as determined under Section 4.2(b) of the Option Plan) on the
date of delivery equal to the aggregate exercise price of the shares to which
such Option or portion is exercised; or

 

(vii) With the
consent of the Committee, a full recourse promissory note bearing interest (of
at least such rate as shall then preclude the imputation of interest under the
Code) and payable upon such terms as may be prescribed by the Committee.  The Committee may also prescribe the form of
such note and the security to be given for such note.  The Option may not be exercised, however, by delivery of a
promissory note or by a loan from the Company when or where such loan or other
extension of credit is prohibited by law; or

 

(viii) Any
combination of the consideration provided in the foregoing subparagraphs (i),
(ii) and (iii); and

 

(c)           The payment to the
Company (or other employer corporation) of all amounts which it is required to
withhold under Federal, state or local law in connection with the exercise of
the Option; with the consent of the Committee, shares of the Company’s Common
Stock owned by the Employee duly endorsed for transfer, or issuable to the
Employee upon exercise of the Option, valued in accordance with Section 4.2(b)
of the Option Plan at the date of Option exercise, may be used to make all or
part of such payment; and

 

(d)           A bona fide written
representation and agreement, in a form satisfactory to the Committee, signed
by the Employee or other person then entitled to exercise such Option or
portion thereof, stating that the shares of stock are being acquired for his
own account, for investment and without any present intention of distributing
or reselling said shares or any of them except as may be permitted under the
Securities Act and then applicable rules and regulations thereunder, and that
the Employee or other person then entitled to exercise such Option or portion
thereof will indemnify the Company against and hold it free and harmless from
any loss, damage, expense or liability resulting to the Company if any sale or
distribution of the shares by such person is contrary to the representation and
agreement referred to above.  The
Committee may, in its absolute discretion, take whatever additional actions it
deems appropriate to insure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other Federal or state securities laws or regulations.  Without limiting the generality of the
foregoing, the Committee may require an opinion of counsel acceptable to it to
the effect that any subsequent transfer of shares acquired on an Option
exercise does not violate the Securities Act, and may issue stop-transfer
orders covering such shares.  Share
certificates evidencing stock issued on exercise of this option shall bear an
appropriate legend referring to the provisions of this subsection (d) and the
agreements herein.  The written
representation and agreement referred to in the first sentence of this
subsection (d) shall, however, not be required if the shares to be issued
pursuant to such exercise have been registered under the Securities Act, and
such registration is then effective in respect of such shares; and

 

8

 

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

 

Section 4.4 - Conditions
to Issuance of Stock Certificates

 

The shares of
stock deliverable upon the exercise of the Option, or any portion thereof, may
be either previously authorized but unissued shares or issued shares which have
then been reacquired by the Company. 
Such shares shall be fully paid and non-assessable.  The Company shall not be required to issue
or deliver any certificate or certificates for shares of stock purchased upon
the exercise of the option or portion thereof prior to fulfillment of all of
the following conditions:

 

(a)           The admission of such
shares to listing on all stock exchanges, if any, on which such class of stock
is then listed; and

 

(b)           The completion of any
registration or other qualification of such shares under any state or Federal
law or under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body, which the Committee
shall, in its absolute discretion, deem necessary or advisable; and

 

(c)           The obtaining of any
approval or other clearance from any state or Federal governmental agency which
the Committee shall, in its absolute discretion, determine to be necessary or
advisable; and

 

(d)           The payment
to the Company of all amounts which it is required to withhold under Federal,
state or local law in connection with the exercise of the option; and

 

(e)           The lapse of such
reasonable period of time following the exercise of the Option as the Committee
may from time to time establish for reasons of administrative convenience.

 

Section 4.5 - Rights
as Stockholder

 

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

 

9

 

	
  ARTICLE
  V

  	
   

  	
  OTHER
  PROVISIONS

  

 

Section 5.1 - Administration

 

The Committee
shall have the power to interpret the Option Plan and this Agreement and to
adopt such rules for the administration, interpretation and application of the
Option Plan as are consistent therewith and to interpret, amend or revoke any
such rules.  All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon the Employee, the Company and all other interested
persons.  No member of the Committee
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Option Plan or the Option.  The Board of Directors shall have no right
to exercise any of the rights and duties of the Committee under the Option Plan
and this Agreement.

 

Section 5.2 - Transfer
Restrictions

 

Neither the Option
nor any interest or right therein or part thereof shall be subject to or liable
for the debts, contracts or engagements of the Employee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings (including
bankruptcy), and any attempted disposition thereof shall be null and void and
of no effect; provided, however, that this Section 5.2 shall not prevent
transfers by will or by the applicable laws of descent and distribution.

 

Section 5.3 - Shares
to Be Reserved

 

The Company shall
at all times during the term of the Option reserve and keep available such
number of shares of stock as will be sufficient to satisfy the requirements of
this Agreement.

 

Section 5.4 - Notices

 

Any notice to be
given under the terms of this Agreement to the Company shall be addressed to
the Company in care of its Secretary, and any notice to be given to the
Employee shall be addressed to him at the address given beneath his signature
hereto.  By a notice given pursuant to
this Section 5.4, either party may hereafter designate a different address for
notices to be given to him.  Any notice
which is required to be given to the Employee shall, if the Employee is then
deceased, be given to the Employee’s personal representative if such
representative has previously informed the Company of his status and address by
written notice under this Section 5.4. Any notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.

 

Section 5.5 - Titles

 

Titles are
provided herein for convenience only and are not to serve as a basis for
interpretation or construction of this Agreement.

 

10

 

Section 5.6 - Construction

 

This Agreement
shall be administered, interpreted and enforced under the laws of the State of
California.

 

Section 5.7 – Conformity
to Security Laws

 

This Agreement and
the Option granted hereunder are intended to conform to the extent necessary
with all provisions of the Securities Act, the Securities Exchange Act of 1934,
as amended, and any and all regulations and rules promulgated by the Securities
and Exchange Commission thereunder, including without limitation Rule
16b-3.  Notwithstanding anything herein
to the contrary, the Option may be exercised, only in such a manner as to
conform to such laws, rules and regulations. 
To the extent permitted by applicable law, the Option granted hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.

 

 

	
   

  	
  SOUTHWEST WATER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Anton C. Garnier, CEO

  
				

 

 

The Employee,                                     ,

By signing this
Agreement, accepts all

Terms and conditions
herein.

 

 

	
  Dated: 

  	
   

  	
  , 20

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (Employee Signature)

  

 

 

Employee’s
Taxpayer Identification Number:

Shares Awarded:

Award Date:

Exercise Price:

 

11

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