**EXHIBIT 10 (b)**

 

**OPTION AGREEMENT**

 

OPTION AGREEMENT madeeffective as of March 15, 1999, between Osmonics, Inc., a Minnesota corporation(the “Company”) , and Michael L. Snow (“Director”).

 

**BACKGROUND**

 

A.           Director has been elected to serve as a member of theBoard of Directors of the Company.

 

B.           The Company desires to reward Director for his significantservice to the Company and to provide incentive for future exceptional service.

 

NOW, THEREFORE, the partieshereto agree as follows:

 

1.            Grant of Option. The Company hereby irrevocably grants to Director, subject to approvalby the Board of Directors of the Company (the Director did not participate inthe discussion or consideration of such matter), the right and option (the“Option”), to purchase all or any part of an aggregate of Forty-five Thousand(45,000) shares of the common stock, $0.01 par value per share, of the Company(the “Common Stock”) (such number being subject to adjustment as provided inSection 8 hereof) subject to the terms and conditions herein set forth.

 

2.            Purchase Price. The purchase price of the shares of Common Stock covered by the optionshall be $7.9375 per share.

 

3.            Exercise and Vesting of Option.  Subject to the provisions of Section 12 ofthis Agreement, the Option shall be exercisable only to the extent that all, orany portion thereof, has vested in the Director.  The Option shall vest in the Director in Four (4) equalinstallments of Eleven

 

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ThousandTwo Hundred Fifty (11,250) shares each beginning on the first anniversary ofthis Agreement and continuing on each of the next three subsequent anniversarydates (hereinafter referred to singularly as a “Vesting Date” and collectivelyas “Vesting Dates”) until the Option is fully vested.

 

In the event that theDirector is terminated as a Director for cause, or voluntarily resigns orrefuses to stand for reelection to be a director of the Company, prior to anyVesting Date, that part of the Option scheduled to vest on such Vesting Date,and all parts of the Option scheduled to vest in the future, shall not vest andall of Director’s rights to and under such non-vested parts of the Option shallterminate.

 

4.            Term of Option. To the extent vested, and except as otherwise provided in thisAgreement, the Option shall be exercisable for ten (10) years from the date ofthis Agreement; provided, however, that in the event that Director isterminated as a Director for cause, or voluntarily resigns or refuses to standfor reelection, the Director or his legal representative shall have six (6)months from the date of such termination of his position as a director toexercise any part of the Option vested pursuant to Section 3 of thisAgreement.  Upon the expiration of suchsix (6) month period, or, if earlier, upon the expiration date of the Option asset forth above, the option to the extent not then exercised shall terminateand become null and void.

 

5.            Manner of Exercise.  The Option may be exercised, in whole or in part, by givingwritten notice to the Company, specifying the number of shares of Common Stockto be purchased and accompanied by the full purchase price for suchshares.  The purchase price shall bepayable in United States dollars upon exercise of the Option and may be paid bycash; uncertified or certified check; bank draft; by delivery of shares ofCommon Stock in payment of all or any part of the

 

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purchase price, which shares shall be valued for this purpose at theFair Market Value (as herein defined) on the date such option is exercised; byinstructing the Company to withhold from the shares of Common Stock issuableupon exercise of the option, shares of Common Stock, in payment of all or anypart of the purchase price, which shares shall be valued for this purpose attheir then Fair Market Value or in such other manner as may be authorized fromtime to time by the Company.

 

6.            Rights of Option Holder.  Director, as holder of the Option, shall not have any of therights of a shareholder with respect to the shares covered by the Option exceptto the extent that one or more certificates for such shares shall be deliveredto him upon the due exercise of all or any part of the option.

 

7.            Non-Transferability.  The option shall not be transferable otherwise than by will orthe laws of descent and distribution, and the option may be exercised, duringthe lifetime of Director, only by Director. The Option may not be assigned, transferred (except as provided above),pledged, or hypothecated in any way, shall not be assignable by operation oflaw, and shall not be subject to execution, attachment, or similarprocess.  Any attempted assignment,transfer, pledge, hypothecation, or other disposition of the Option contrary tothe provisions hereof, and the levy of any execution, attachment, or similarprocess upon the Option shall be null and void and without effect.

 

8.            Adjustment. In the event of any merger, consolidation or reorganization of theCompany with any other corporation or corporations, there shall be substitutedfor each of the shares of Common Stock then, subject to the Option, the numberand kind of shares of stock or other securities to which the holders of theshares of Common Stock will be entitled pursuant to the transaction.  In the event of any recapitalization, stockdividend, stock split, combination of shares or

 

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otherchange in the Common Stock, the number of shares of Common Stock then subjectto the Option, shall be adjusted in proportion to the change in outstandingshares of Common Stock.  In the event ofany such adjustments, the purchase price of the option and the shares of CommonStock issuable pursuant thereto shall be adjusted as and to the extent appropriate,in the reasonable discretion of the Board of Directors of the Company, toprovide Director with the same relative rights before and after suchadjustment.

 

9.            Additional Condition.  Notwithstanding anything in this Agreement to the contrary: (a) theCompany may, if it shall determine it necessary or desirable for any reason, atthe time of the issuance of any shares of Common Stock pursuant to the Optionrequire the Director, as a condition to the receipt of shares of Common Stockissued pursuant thereto, to deliver to the Company a written representation ofpresent intention to acquire the shares of Common Stock issued pursuant theretofor his own account for investment and not for distribution; and (b) if at anytime the Company further determines, in its sole discretion, that the listing,registration or qualification (or any updating of any such document) of theshares of Common Stock issuable pursuant thereto is necessary on any securitiesexchange or under any federal or state securities or blue sky law, or that theconsent or approval of any governmental regulatory body is necessary ordesirable as a condition of, or in connection with the issuance of shares ofCommon Stock pursuant thereto, or the removal of any restrictions imposed onsuch shares, such shares of Common Stock shall not be issued or suchrestrictions shall not be removed, as the case may be, in whole or in part,unless such listing, registration, qualification, consent or approval shallhave been effected or obtained free of any conditions not acceptable to theCompany.

 

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10.          Withholding.

 

(a)           The Company shall have the right towithhold from any payments made under this Agreement, or to collect as acondition of payment, any taxes required by law to be withheld.  At any time when Director is required to payto the Company an amount required to be withheld under applicable income taxlaws in connection with a distribution of Common Stock or upon exercise of anoption, Director may satisfy this obligation in whole or in part by electing(the “Election”) to have the Company withhold from the distribution shares ofCommon Stock having a value up to the amount required to be withheld.  The value of the shares to be withheld shallbe based on the Fair Market Value of the Common Stock on the date that theamount of tax to be withheld shall be determined (“Tax Date”).

 

(b)           Each Election must be made prior tothe Tax Date.  The Company maydisapprove of any Election or may suspend or terminate the right to makeElections.  An Election once made isirrevocable.

 

(c)           An Election must comply with all ofthe requirements of the Securities Exchange Act of 1934 (the “1934 Act”).

 

11.          Definition of Fair Market Value.  Whenever “Fair Market Value” of Common Stockshall be determined for purposes of this Agreement, it shall be determined byreference to the last sale price of a share of Common Stock on the principalUnited States Securities Exchange registered under the 1934 Act on which theCommon Stock is listed (the “Exchange”) , or, on the National

 

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Association of Securities Dealers, Inc.  Automatic Quotation System (including the National Market System)(“NASDAQ”) on the applicable date.  Ifthe Exchange or NASDAQ is closed for trading on such date, or if the CommonStock does not trade on such date, then the last sale price used shall be theone on the date the Common Stock last traded on the Exchange or NASDAQ.

 

12.          Immediate Acceleration of the Option.  Notwithstanding any provision in thisAgreement to the contrary, all of the shares of Common Stock subject to theoption will become exercisable immediately, if, subsequent to the date thatthis Agreement is approved by the Board of Directors of the Company, any of thefollowing events occur unless otherwise determined by the board of directorsand a majority of the Continuing Directors (as defined below):

 

(a)           any person or group of personsbecomes the beneficial owner of 25% or more of any equity security of theCompany entitled to vote for the election of directors;

 

(b)           a majority of the members of theboard of directors of the company is replaced within the period of less thantwo years by directors not nominated and approved by the board of directors; or

 

(c)           the stockholders of the Companyapprove an agreement to merge or consolidate with or into another corporationor an agreement to sell or otherwise dispose of all or substantially all of theCompany’s assets (including a plan of liquidation).

 

For purposes of this Section12, beneficial ownership by a person or group of persons shall be determined inaccordance with Regulation 13D (or any similar successor regulation)promulgated by the Securities and Exchange Commission pursuant to the 1934Act.  Beneficial ownership of more than25% of an equity security may be established by any reasonable method, butshall be presumed

 

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conclusively as to any person who files a Schedule 13D report with theSecurities and Exchange Commission reporting such ownership.  If the restrictions and forfeitabilityperiods are eliminated by reason of subsection 12(a), the limitations of thisAgreement shall not become applicable again should the person cease to own 25%or more of any equity security of the Company.

 

For purposes of this Section12, “Continuing Directors” are directors (1) who were in office prior to thetime any of provisions subsections 12(a), (b) or (c) occurred or any personpublicly announced an intention to acquire 20% or more of any equity securityof the Company, (2) directors in office for a period of more than two years,and (3) directors nominated and approved by the Continuing Directors.

 

13.          General.  TheCompany shall at all times during the term of the Option reserve and keepavailable such number of shares of Common Stock as will be sufficient tosatisfy the requirements of this Option Agreement.

 

IN WITNESS WHEREOF, theundersigned have executed this Agreement effective as of the date first writtenabove.

 
|   | OSMONICS,  INC. |
|--------|-----------------|
|   |            |
|   | By              |
|   |            | Name: | /s/  D. Dean Spatz |   |
|   |            | Title: | CEO |
|   |            |
|   |            | /s/  Michael L. Snow |   |
|   |            | Michael  L. Snow |

 

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