EXHIBIT 4.2
NONQUALIFIED STOCK OPTION AGREEMENT
FOR NON-EMPLOYEE DIRECTORS
THIS AGREEMENT, dated ____________, 19__, is made by and between Southwest
Water Company, a Delaware corporation hereinafter referred to as the "Company,"
and _________________________, a non-employee director of the Company or
Subsidiary of the Company, hereinafter referred to as "Optionee":
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Common Stock;
WHEREAS, the Company wishes to carry out its Stock Option Plan for Non-
Employee Directors (the "Plan") (the terms of which are hereby incorporated by
reference and made a part of this Agreement); and
WHEREAS, the Board of Directors of the Company, appointed to administer the
Plan, has determined that it would be to the advantage and best interest of the
Company and its stockholders to grant the Non-Qualified Stock Option provided
for herein to the Optionee as an inducement to enter into or 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
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Whenever the following terms are used in this Agreement, they shall have
the meaning 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 - Board
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"Board" shall mean the Board of Directors of the Company as constituted
from time to time.
Section 1.2 - Code
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"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
Section 1.3 - Common Stock
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"Common Stock" shall mean the common stock of the Company, par value $.01
per share, of the Company.
Section 1.4 - Company
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"Company" shall mean Southwest Water Company, a Delaware corporation.
Section 1.5 - Director
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"Director" shall mean a person who is a member of the Board as constituted
at that time.
Section 1.6 - Employee
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"Employee" shall mean any employee (as defined in accordance with the
Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company, or of any corporation which is then a Subsidiary or a
Parent Corporation, whether such employee is so employed at the time the Plan is
adopted or becomes so employed subsequent to the adoption of the Plan.
Section 1.7 - Exchange Act
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"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
Section 1.8 - Fair Market Value
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"Fair Market Value" of a share of Common Stock as of a given date shall be
(i) the closing price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any (or as reported on any
composite index which includes such principal exchange), on the trading day
preceding such date, or if shares were not traded on the trading day preceding
such date, then on the next preceding trading day during which a sale occurred,
or (ii) if the Common Stock is not traded on an exchange (x) the last sales
price of a share of the Common Stock on The Nasdaq Stock Market (if the stock is
then traded on The Nasdaq Stock Market) on the trading day preceding such date,
or, if shares were not traded on the day preceding such date, then on the next
preceding trading day during which a sale occurred; or (y) the mean between the
closing representative bid and asked prices for the Common Stock on the trading
day next preceding such date as reported by the National Association of
Securities Dealers, Inc. through NASDAQ or a successor quotation system or, if
shares were not quoted on the day immediately preceding such date, then on the
next preceding trading day during which a quote occurred, or (iii) if the Common
Stock is not publicly traded on an exchange and prices are not provided through
The Nasdaq Stock Market, NASDAQ or a successor quotation system, the mean
between the closing bid and asked prices for the Common Stock on the trading day
next preceding such date as determined in good faith by the Board; or (iv) if
the Common Stock is not publicly
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traded, the fair market value of the Common Stock established by the Board
acting in good faith.
Section 1.9 - Non-Employee Director
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"Non-Employee Director" shall mean any Director who is not at the same time
an Employee.
Section 1.10 - Option
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"Option" shall mean a non-qualified stock option to purchase Common Stock
of the Company granted under this Agreement and Article III of the Plan.
Section 1.11 - Optionee
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"Optionee" shall mean a Non-Employee Director to whom an Option is granted
under this Agreement and the Plan.
Section 1.12 - Parent Corporation
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"Parent Corporation" shall have the meaning given in Section 424(e) of the
Code.
Section 1.13 - Plan
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"Plan" shall mean the Stock Option Plan for Non-Employee Directors of
Southwest Water Company.
Section 1.14 -- Removal as a Non-Employee Director
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"Removal as a Non-Employee Director" shall mean the time when the Optionee
who is a Non-Employee Director is removed from the Board as provided in Section
141 of the Delaware General Corporation Law.
Section 1.15 - Rule 16b-3
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"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended from time to time.
Section 1.16 - Secretary
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"Secretary" shall mean the Secretary of the Company.
Section 1.17 - Securities Act
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"Securities Act" shall mean the Securities Act of 1933, as amended.
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Section 1.18 - Subsidiary
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"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 1.19 - Termination as a Non-Employee Director
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"Termination as a Non-Employee Director" shall mean the time when the
Optionee who is a Non-Employee Director ceases to be a member of the Board by
reason of such Optionee's death or disability (within the meaning of Section
22(e)(3) of the Code) or any other manner other than Removal as a Non-Employee
Director.
ARTICLE II
GRANT OF OPTION
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Section 2.1 - Grant of Option
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In consideration of the Optionee's agreement to serve as a Non-Employee
Director of the Company or its Subsidiaries until the next annual meeting of
stockholders of the Company and for other good and valuable consideration,
effective as of ____________, the Company irrevocably grants to the Optionee the
option to purchase any part or all of an aggregate of 1,000 shares of its $.01
par value Common Stock upon the terms and conditions set forth in this
Agreement.
Section 2.2 - Purchase Price
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The price per share of the Common Stock subject to each Option shall be
$_____ per share (which is the Fair Market Value of a share of Common Stock on
the date of the granting of this Option) without commission or other charge.
Section 2.3 - Consideration to Company
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In consideration of the granting of this Option by the Company, the
Optionee agrees to render faithful and efficient services to the Company or a
Subsidiary, with such duties and responsibilities as the Company shall from time
to time prescribe, until the next annual meeting of stockholders of the Company.
Nothing in the Plan or this Agreement shall confer upon any Optionee any right
to continue as a director of the Company, or shall interfere with or restrict in
any way the rights of the Company and any Subsidiary, which are hereby expressly
reserved, to discharge the Optionee at any time for any reason whatsoever, with
or without good cause.
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Section 2.4 - Adjustments in Option
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In the event that the outstanding shares of the Common Stock subject to the
Option are changed into or exchanged for a different number or kind of shares of
the Company or other securities of the Company by reason of merger (including
reincorporation by means of merger), consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares (a
"Recapitalization"), the Board shall make an appropriate and equitable
adjustment in 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 Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in the Option may include any
necessary corresponding adjustment in the Option price per share, but shall be
made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices). Any such adjustment
made by the Board shall be final and binding upon the Optionee, the Company and
all other interested persons.
Section 2.5 - Merger, Consolidation, Exchange, Acquisition, Liquidation or
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Dissolution
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The Board may provide by the terms of the Option that the Option cannot be
exercised after the merger or consolidation of the Company into another
corporation, the exchange of all or substantially all of the assets of the
Company for the securities of another corporation, the acquisition by another
corporation of 80% or more of the Company's then outstanding voting stock or the
liquidation or dissolution of the Company; or the Board may, in its absolute
discretion and on such terms and conditions as it deems appropriate, also
provide that the Option shall be assumed or an equivalent option substituted by
any successor corporation of the Company, or the Board may, in its absolute
discretion and upon such terms and conditions as it deems appropriate, provided
by resolution adopted prior to the occurrence of such merger, consolidation,
exchange, acquisition, liquidation or dissolution, that, for some period of time
prior to such event, that such Option shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in Sections 3.1(a) or
3.1(b) below. Any determinations made by the Board pursuant to this Section
shall be applied uniformly to all Options outstanding on the date of such
determination.
ARTICLE III
PERIOD OF EXERCISABILITY
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Section 3.1 - Commencement of Exercisability
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(a) The Option may not be exercised in whole or in part during the first
year after the date of grant of the Option.
(b) Subject to the provisions of Sections 3.1(a) and 3.1(c), the Option
shall become exercisable in two (2) cumulative installments as follows:
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(i) The first installment shall consist of fifty percent (50%) of
the shares covered by the Option and shall become exercisable on the first
anniversary of the date the Option is granted.
(ii) The second installment shall consist of fifty percent (50%) of
the shares covered by the Option and shall become exercisable on the second
anniversary of the date the Option is granted.
(c) No portion of an Option which is unexercisable on the date of Removal
as a Non-Employee Director shall thereafter become exercisable. The portion, if
any, of an Option which is unexercisable on the date of Termination as a Non-
Employee Director shall become immediately exercisable.
Section 3.2 - Duration of Exercisability
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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
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The Option may not be exercised to any extent by anyone after the first to
occur of the following events:
(a) The expiration of a period of ten years and one day from the date the
Option was granted; or
(b) The expiration of three months from the date of the Optionee's Removal
as a Non-Employee Director for any reason unless the Optionee dies within said
three-month period; or
(c) The expiration of six months from the date of the Optionee's
Termination as a Non-Employee Director for any reason other than such Optionee's
death unless the Optionee dies within said six month period; or
(d) The expiration of one year from the date of the Optionee's death.
ARTICLE IV
EXERCISE OF OPTION
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Section 4.1 - Person Eligible to Exercise
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During the lifetime of the Optionee, only the Optionee may exercise the
Option or any portion thereof; provided, however, that nothing in this Section
4.1 shall prevent the exercise 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 defined in the Code).
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After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.3, be
exercised by his personal representative or by any person empowered to do so
under the Optionee's will or under the then applicable laws of descent and
distribution.
Section 4.2 - Partial Exercise
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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 and from time to
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 and shall be for whole shares only.
Section 4.3 - Manner of Exercise
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The Option, or any exercisable portion thereof, shall be exercised solely
by delivery to the Secretary or his office of all of the following prior to the
time when the Option or such portion becomes unexercisable under Section 3.3:
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion, stating that the Option or portion
is thereby exercised, such notice complying with all applicable rules
established by the Board;
(b) The payment to the Company of the aggregate Option exercise price for
the shares with respect to which such Option or portion is exercised in:
(i) Cash;
(ii) With the consent of the Board, (A) shares of the Company's
Common Stock owned by the Optionee duly endorsed for transfer to the
Company or (B) subject to the timing requirements of Section 4.4, shares of
the Company'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 aggregate purchase price of the shares with respect to which such
Option or portion is exercised;
(iii) With the consent of the Board, a full recourse promissory note
bearing interest (at no less than such rate as shall then preclude the
imputation of interest under the Code or successor provision) and payable
upon such terms as may be prescribed by the Board. The Board 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
(iv) With the consent of the Board, any combination of the
consideration provided in the foregoing subparagraphs (i), (ii) and (iii);
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(c) Full payment to the Company (or other employer corporation) of all
amounts which, under federal, state or local law, it is required to withhold in
connection with the exercise of the Option or a portion thereof; all or any part
of such payment may be made, with the consent of the Board, (i) with shares of
the Company's Common Stock owned by the Optionee duly endorsed for transfer, or
(ii) subject to the timing requirements of Section 4.4, with shares of the
Company's Common Stock issuable to the Optionee upon exercise of the Option, in
each case, having a Fair Market Value at the date of Option exercise equal to
the sums required to be withheld;
(d) Such representations and documents as the Board, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other Federal or state
securities laws or regulations. The Board may, in its absolute discretion, also
take whatever additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and issuing
stop-transfer orders to transfer agents and registrars; and
(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 Optionee, appropriate
proof of the right of such person or persons to exercise the Option.
Notwithstanding anything herein to the contrary, the Optionee may satisfy
the requirements of subsections (b) and (c) of this Section 4.3 concerning
payment for the shares and all applicable withholding taxes, with the consent of
the Board, through the delivery to the Secretary or his office of (i) an
irrevocable written exercise notice containing instructions to the Company to
deliver to Optionee's broker the certificate(s) representing the shares with
respect to which the Option or portion is thereby exercised and (ii) a copy of
Optionee's irrevocable written instructions to such broker to deliver to the
Company, within five business days from the date of the Company's receipt of
such exercise notice, full payment (in cash or by check) for the shares with
respect to which such Option or portion is thereby exercised and all amounts
which the Company is required to withhold under federal, state or local law in
connection with the exercise of the Option or portion thereof. Provided the
Optionee complies with clauses (i) and (ii) above and the Company receives such
full payment the Optionee shall be deemed to have such exercised such Option on
the date of the Company's receipt of the deliveries specified in clauses (i) and
(ii) above. Notwithstanding anything to the contrary in this Section 4.3, the
Board shall not take any discretionary action which will result in the failure
of the Plan to satisfy any exemptive condition imposed by Rule 16b-3 of the code
with respect to the effected Option.
Section 4.4 - Certain Timing Requirements
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To the extent required by Rule 16b-3, shares of the Company's Common Stock
issuable to the Optionee upon exercise of the Option may be used to satisfy the
Option price or the tax withholding consequences of such exercise only (i)
during the period beginning on the third (3rd) business day following the date
of release of the quarterly or annual summary statement of sales and earnings of
the Company and ending on the twelfth (12th) business day following such date or
(ii) pursuant to an irrevocable written election by the Optionee to use shares
of the Company's Common Stock issuable to the Optionee upon
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exercise of the Option to pay all or part of the Option price or the withholding
taxes (subject to the approval of the Board) made at least six (6) months prior
to the payment of such Option price or withholding taxes.
Section 4.5 - Conditions to Issuance of Stock Certificates
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The shares of stock issuable and 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 nonassessable. 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 on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under rulings or regulations of the
Securities and Exchange Commission or of any other governmental regulatory body,
which the Board shall, in its absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Board shall, in its absolute discretion,
determine to be necessary or advisable;
(d) The receipt by the Company of full payment for such shares, including
payment of all amounts which, under federal, state or local tax law, it is
required to withhold upon exercise of the Option; and
(e) The lapse of such reasonable period of time following the exercise of
the Option as the Board may establish from time to time for reasons of
administrative convenience.
Section 4.6 - Rights as Stockholder
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The holder of the Option shall not be, nor 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 certificates
representing such shares shall have been issued by the Company to such holder.
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ARTICLE V
OTHER PROVISIONS
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Section 5.1 - Administration
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With respect to this Option, the full Board, acting by a majority of its
members in office, shall have the power to interpret the Plan and this Agreement
and to adopt such rules for the administration, interpretation and application
of the Plan as are consistent therewith and to interpret or revoke any such
rules. All actions taken and all interpretations and determinations made by the
Board in good faith shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Option.
Section 5.2 - Option Not Transferable
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Neither the Option nor any 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 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 nothing in this
Section 5.2 shall prevent transfers by will or by the applicable laws of descent
and distribution, or, to the extent not prohibited by the Code, pursuant to a
qualified domestic relations order (as defined in the Code).
Section 5.3 - Shares to Be Reserved
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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
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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 Optionee 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 Optionee shall, if the Optionee is
then deceased, be given to the Optionee'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.
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Section 5.5 - Titles
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Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
Section 5.6 - Construction
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This Agreement shall be administered, interpreted and enforced under the
laws of the State of California.
Section 5.7 - Conformity to Securities Laws
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The Optionee acknowledges that the Plan and this Option grant are intended
to conform to the extent necessary with all provisions of the Securities Act and
the Exchange Act 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 Plan shall be
administered, and the Option is granted and 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 Plan and this Agreement shall be deemed amended
to the extent necessary to conform to such laws, rules and regulations.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
SOUTHWEST WATER COMPANY,
a Delaware corporation
By:
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President
By:
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Secretary
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Optionee
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Address
Optionee's Taxpayer
Identification Number:
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