Document:

Exhibit 10.27

 

***Text Omitted and Filed Separately

with the Securities and Exchange Commission.

Confidential Treatment Requested

Under 17 C.F.R. Sections 200.80(b)(4)
and 240.24b-2.

 

 

January 18, 2005

 

 

 

Metabasis Therapeutics, Inc.

9390 Towne Centre Drive, Suite 300

San Diego, CA 92121

 

Re:                             Exclusive
License and Research Collaboration Agreement dated as of December 23, 2003
(the “Collaboration Agreement”) between Merck & Co., Inc.  (“Merck”) and Metabasis Therapeutics, Inc.  (“Metabasis”)

 

Ladies and Gentlemen:

 

This Letter (this “Letter”)
will confirm the understanding of Merck and Metabasis regarding certain matters
relating to the Collaboration Agreement and is intended to be legally binding
on both parties.  Capitalized terms used
but not otherwise defined in this Letter shall have the meanings provided in
the Collaboration Agreement.  The Parties
hereby confirm, acknowledge and agree that (a) pursuant to Section 2.7.1
of the Collaboration Agreement, the Research Program Term has been extended by
Merck, with Metabasis’ concurrence, for an additional one (1) year period
beyond the Initial Research Program Term; and (b) without limiting any
other provision of the Collaboration Agreement, such Extended Research Program
Term shall remain subject to Section 2.7.2.

 

Pursuant to this Letter, and in furtherance of the
requirements of Sections 2.3.2 and 2.7.1 of the Collaboration Agreement, the
Parties further confirm, acknowledge and agree as follows:

 

1.             During
the Extended Research Program Term subject to this Letter, Metabasis shall
dedicate [***] FTEs to the Research Program to work directly on the Research
Program, all of which shall be funded by Merck in accordance with Section 5.2
of the Collaboration Agreement and which shall otherwise remain subject to Section 2.3
of the Collaboration Agreement;

 

2.             The
Research Plan has been modified and is fully set forth in its entirety in its
current form in Exhibit A to this Letter
(the “Amended Research Plan”) and the
original Schedule I to the
Initial Research Plan (as defined in that certain Letter Agreement executed
between the Parties on the Effective Date of the Collaboration Agreement) shall
be amended and

 

***Confidential Treatment Requested

 

1

 

restated in its entirety
in its current form as set forth in Schedule I
to Exhibit A to this Letter (and
for the avoidance of doubt, Schedules II, III, IV
and V to the Research Plan shall remain
in the forms attached to the Initial Research Plan);

 

3.             The
definition of “Collaboration Compound” set forth in Section 1.5 of the
Agreement, is hereby amended and restated in its entirety as follows: ““Collaboration Compound” shall mean a chemical entity that
is synthesized solely by a Party or jointly by the Parties prior to or in the
course of the Research Program, or prior to the [***] of the expiration or
termination of the Research Program Term, that is: (a) [***] that [***]
incorporates HepDirect Technology; (b) [***] of a [***] that [***]
incorporates HepDirect Technology; and/or (c) [***] of a [***] that does
not [***] incorporate HepDirect Technology.”;

 

4.             The
definition of “Merck HCV Compound” set forth in Section 1.35 of the
Agreement, is hereby amended and restated in its entirety as follows: ““Merck HCV Compound” shall mean (a) any of the [***]
specifically listed under [***] on Part A of Schedule I
to the Research Plan; and/or (b) any of the Designated Compounds.”;

 

5.             The
definition of “Metabasis Know-How” set forth in Section 1.41 of the
Agreement, is hereby amended and restated in its entirety as follows: ““Metabasis Know-How” shall mean Know-How directed to: (a) HepDirect
Technology or [***] Technology developed [***] prior to the Effective Date or [***]
outside of the course of the Research Program during the Research Program Term;
or (b) any improvement or enhancement to any item described in the
preceding clause (a) developed [***] in the course of the Research Program
during the Research Program Term; but excluding, in each case, Metabasis
Patents.”;

 

6.             The
definition of “Metabasis Patents” set forth in Section 1.42 of the
Agreement, is hereby amended and restated in its entirety as follows: ““Metabasis Patents” shall mean Patents claiming any
Invention directed to: (a) HepDirect Technology or [***] Technology conceived
[***] prior to the Effective Date or [***] outside of the course of the
Research Program during the Research Program Term; or (b) any improvement
or enhancement to any item described in the preceding clause (a) conceived
[***] in the course of the Research Program during the Research Program Term.  Metabasis Patents shall include, without
limitation, the HepDirect Patents.”;

 

7.             The
following definition is hereby added to Article 1 of the Agreement as Section 1.63
thereof: ““Designated Compounds” shall mean [***]
individual compositions of matter, each of which is [***] listed under Part B
of Schedule I to the Research Plan.  No later than February 15, 2005, Merck
shall provide Metabasis with written notice specifically identifying the
Designated Compounds.  In no event shall
Merck have the right to designate any Designated Compound after February 15,
2005 without the mutual agreement of Metabasis.”

 

8.             The
following definition is hereby added to Article 1 of the Agreement as Section 1.64
thereof: ““[***] Technology” shall mean (a) [***];
and/or (b) [***].”;

 

9.             Metabasis
acknowledges and agrees that Merck’s representation and warranty under Section 6.2(c) of
the Agreement extends only to [***] as it existed on the Effective Date;

 

***Confidential Treatment Requested

 

2

 

10.          This
Letter shall become effective as of October 22, 2004.  Except as amended by this Letter, together
with the Schedules and Exhibits attached hereto, the terms and conditions of the
Collaboration Agreement shall remain in full force and effect in all other
respects, unless further amended by written agreement in accordance with Section 11.7
of the Collaboration Agreement.  On and
after the effectiveness of this Letter, each reference in the Agreement to “this
Agreement”, “hereunder”, “hereof’, “herein” or words of like import referring
to the Collaboration Agreement shall mean and be a reference to the
Collaboration Agreement as amended by this Letter.  The Parties hereby further agree that the
terms and conditions set forth in Article 11 of the Collaboration
Agreement, including without limitation the Assignment and Change of Control
provisions of Section 11.2, the Applicable Law provisions of Section 11.5
and the Dispute Resolution provisions of Section 11.6, shall apply to this
Letter as if fully set forth herein; and

 

11.          This
Letter may be executed (including, without limitation, by facsimile signature)
in two counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

 

3

 

If the foregoing is acceptable to you, please sign
this Letter in the space provided below and return it to me.

 

	
   

  	
  Sincerely,

  
	
   

  
	
   

  	
  MERCK & CO., INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mervyn J. Turner

  
	
   

  	
  Name:

  	
  Mervyn J. Turner

  
	
   

  	
  Title:

  	
  Senior Vice President Worldwide

  
	
   

  	
  Licensing and External Research

  

 

Agreed to and accepted as of the date first set forth above:

 

METABASIS THERAPEUTICS, INC.

 

 

 

	
  By:

  	
  /s/ Ed Baracchini

  	
   

  
	
  Name:

  	
  Ed Baracchini, Ph.D., MBA

  
	
  Title:

  	
  Vice President, Business Development

  

 

 

EXHIBIT A

Amended Research Plan

 

The Research Plan may be revised to [***], subject to
mutual agreement by the Parties and subject to availability of FTEs within the
Research Program as described in the Agreement.

 

During the [***] of the Research Program [***]. In
summary, over [***].  One of the most
interesting [***] which was found to be [***]. 
When the compound was [***]. [***], at the same time the [***].  Thus the [***].  A series of [***] was prepared and tested for
[***].  [***] was observed.  [***] was seen, suggesting a [***].

 

[***].  Interestingly,
the [***].  On the basis of [***].  As an additional control [***].

 

	
   

  	
  [***]

  	
   

  
	
  [***]

  	
  [***]

  	
  [***]

  
	
  [***]

  	
  [***]

  	
  [***]

  

 

***Confidential Treatment Requested

 

A – 1

 

Most recently,  the [***].
Approximately [***] seen below have been prepared. Note that the list includes [***].

 

[***]

 

During the Extended Research Program Term the
following are the high priority objectives for the collaboration:

 

•                                          Merck and
Metabasis will [***].

 

•                                          Metabasis
will [***]

 

1)             [***]

 

2)             [***];

 

3)             [***].

 

•                                          Once
[***] will be [***].  If satisfactory [***].  In addition, [***].

 

•                                          Merck
will [***], such as:

 

•                  [***]

 

and [***] of the following (assuming [***]):

 

•                  [***]

•                  [***]

 

•                                          Assuming
[***], Merck will [***].

 

•                  [***]

•                  [***]

•                  [***]

 

Finally, the Committee will determine the [***] listed
on Schedule I to this Research Plan.

 

 

***Confidential Treatment Requested

 

A – 2

 

SCHEDULE I

 

Merck HCV Compounds

 

Part A of Schedule I.

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

***Confidential Treatment Requested

 

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

Part B
of Schedule I. 

 

[***] for Designated
Compounds. 

 

[***]

 

[***]

 

 

***Confidential
Treatment RequestedExhibit 10.1

 

INCENTIVE STOCK OPTION AGREEMENT

 

WATERS INSTRUMENTS, INC.

2004 EQUITY INCENTIVE PLAN

 

THIS
AGREEMENT, made effective as of this          
day of                         ,
20      , by and between Waters Instruments, Inc.,
a Minnesota corporation (the “Company”), and                                                                            
(“Participant”).

 

W I T N E S S E T H:

 

WHEREAS,
Participant on the date hereof is a key employee or officer of the Company or
one of its Subsidiaries; and

 

WHEREAS,
the Company wishes to grant an incentive stock option to Participant to
purchase shares of the Company’s Common Stock pursuant to the Company’s 2004
Equity Incentive Plan (the “Plan”); and

 

WHEREAS,
the Board of Directors has authorized the grant of an incentive stock option to
Participant and has determined that, as of the effective date of this
Agreement, the fair market value of the Company’s Common Stock is $           per
share;

 

NOW,
THEREFORE, in consideration of the premises and of the mutual covenants herein
contained, the parties hereto agree as follows:

 

1.                                       Grant of Option.  The Company hereby grants to Participant on
the date set forth above (the “Date of Grant”), the right and option (the “Option”)
to purchase all or portions of an aggregate of                                          
(                 )
shares of Common Stock at a per share price of $             
on the terms and conditions set forth herein, and subject to adjustment
pursuant to Section 13 of the Plan. 
This Option is intended to be an incentive stock option within the
meaning of Section 422, or any successor provision, of the Internal
Revenue Code of 1986, as amended (the “Code”), and the regulations thereunder,
to the extent permitted under Code Section 422(d).

 

2.                                       Duration and Exercisability.

 

a.                                       General.  The term during which this Option may be
exercised shall terminate on the close of business on                                         ,
        , except
as otherwise provided in Paragraphs 2(b) through 2(d) below.  This Option shall become exercisable
according to the following schedule:

 

 

	
  Vesting Date

  	
   

  	
  Number of Shares

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

Once the Option becomes
exercisable to the extent of one hundred percent (100%) of the aggregate number
of shares specified in Paragraph 1, Participant may continue to exercise this
Option under the terms and conditions of this Agreement until the termination
of the Option as provided herein.  If
Participant does not purchase upon an exercise of this Option the full number
of shares which Participant is then entitled to purchase, Participant may
purchase upon any subsequent exercise prior to this Option’s termination such
previously unpurchased shares in addition to those Participant is otherwise
entitled to purchase.

 

b.                                      Termination of Employment (other than Disability
or Death).  If Participant’s
employment with the Company or any Subsidiary is terminated for any reason
other than disability or death, this Option shall completely terminate on the
earlier of (i) the close of business on the three-month
anniversary date of such termination of employment, and (ii) the
expiration date of this Option stated in Paragraph 2(a) above.  In such period following the termination of
Participant’s employment, this Option shall be exercisable only to the extent
the Option was exercisable on the vesting date immediately preceding such
termination of employment, but had not previously been exercised.  To the extent this Option was not exercisable
upon such termination of employment, or if Participant does not exercise the
Option within the time specified in this Paragraph 2(b), all rights of
Participant under this Option shall be forfeited.

 

c.                                       Disability.  If Participant’s employment terminates
because of disability (as defined in Code Section 22(e), or any successor
provision), this Option shall terminate on the earlier of (i) the close of
business on the twelve-month anniversary date of
the such termination of employment, and (ii) the expiration date of this
Option stated in Paragraph 2(a) above. 
In such period following the termination of Participant’s employment,
this Option shall be exercisable only to the extent the Option was exercisable
on the vesting date immediately preceding such termination of employment, but
had not previously been exercised.  To
the extent this Option was not exercisable upon such termination of employment,
or if Participant does not exercise the Option within the time specified in
this Paragraph 2(c), all rights of Participant under this Option shall be
forfeited.

 

d.                                      Death.  In the event of Participant’s death, this
Option shall terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the date of Participant’s
death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.  In such period following Participant’s death,
this Option shall be exercisable by the person or persons to whom Participant’s
rights under this Option shall have passed by Participant’s will or by the laws
of descent and distribution only to the extent the Option was exercisable on
the vesting date immediately preceding the date of Participant’s death. To the
extent this Option was not exercisable upon the date of Participant’s death, or
if such person or persons do not exercise

 

2

 

this Option within the
time specified in this Paragraph 2(d), all rights under this Option shall be
forfeited.

 

3.                                       Manner of Exercise.

 

a.                                       General.  The Option may be exercised only by
Participant (or other proper party in the event of death or incapacity),
subject to the conditions of the Plan and subject to such other administrative rules as
the Board may deem advisable, by delivering within the Option Period written
notice of exercise to the Company at its principal office. The notice shall
state the number of shares as to which the Option is being exercised and shall
be accompanied by payment in full of the Option price for all shares designated
in the notice.  The exercise of the
Option shall be deemed effective upon receipt of such notice by the Company and
upon payment that complies with the terms of the Plan and this Agreement.  The Option may be exercised with respect to
any number or all of the shares as to which it can then be exercised and, if
partially exercised, may be so exercised as to the unexercised shares any
number of times during the Option period as provided herein.

 

b.                                      Form of Payment.  Subject to approval by the Administrator,
payment of the option price by Participant shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof.  Any
stock so tendered as part of such payment shall be valued at its Fair Market
Value as provided in the Plan.  For
purposes of this Agreement, “previously acquired shares of Common Stock” shall
include shares of Common Stock that are already owned by Participant for at
least six (6) months prior to the exercise of the stock option, or for
such other period of time as may be required by generally accepted accounting
principles.

 

c.                                       Stock Transfer Records.  As soon as practicable after the effective
exercise of all or any part of the Option, Participant shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Participant one or more duly issued stock
certificates evidencing such ownership. 
All requisite original issue or transfer documentary stamp taxes shall
be paid by the Company.

 

4.                                       Miscellaneous.

 

a.                                       Employment; Rights as Shareholder.  This Agreement shall not confer on
Participant any right with respect to continuance of employment by the Company
or any of its Subsidiaries, nor will it interfere in any way with the right of
the Company or any of its Subsidiaries to terminate such employment.  Participant shall have no rights as a
shareholder with respect to shares subject to this Option until such shares
have been issued to Participant upon exercise of this Option.  No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property), distributions
or other rights for which the record date is prior to the date such shares are
issued, except as provided in Section 13 of the Plan.

 

b.                                      Securities Law Compliance.  The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall
have determined that

 

3

 

the issuance and delivery
of Common Stock pursuant to such exercise will not violate any state or federal
securities or other laws.  Participant
may be required by the Company, as a condition of the effectiveness of any
exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Participant’s own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.

 

c.                                       Mergers, Recapitalizations, Stock Splits, Etc.  Pursuant and subject to Section 13 of
the Plan, certain changes in the number or character of the Common Stock of the
Company (through sale, merger, consolidation, exchange, reorganization,
divestiture (including a spin-off), liquidation, recapitalization, stock split,
stock dividend or otherwise) shall result in an adjustment, reduction or
enlargement, as appropriate, in Participant’s rights with respect to any
unexercised portion of the Option (i.e., Participant shall have such “anti-dilution”
rights under the Option with respect to such events, but shall not have “preemptive”
rights).

 

d.                                      Shares Reserved.  The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.

 

e.                                       Withholding Taxes on Disqualifying Disposition.  In the event of a disqualifying disposition
of the shares acquired through the exercise of this Option, Participant hereby
agrees to inform the Company of such disposition.  Upon notice of a disqualifying disposition,
the Company may take such action as it deems appropriate to insure that, if
necessary to comply with all applicable federal or state income tax laws or
regulations, all applicable federal and state payroll, income or other taxes
are withheld from any amounts payable by the Company to Participant.  If the Company is unable to withhold such
federal and state taxes, for whatever reason, Participant hereby agrees to pay
to the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law.  Participant may, subject to the approval and
discretion of the Board or such administrative rules it may deem
advisable, elect to have all or a portion of such tax withholding obligations
satisfied by delivering shares of the Company’s Common Stock or by electing to
have the Company withhold shares of Common Stock otherwise issuable to
Participant.  Such shares shall have a
Fair Market Value equal to the minimum required tax withholding, based on the
minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes, that are applicable to the supplemental income
resulting from the disqualifying disposition of the shares acquired through the
exercise of this Option.  In no event may
the Company withhold shares having a Fair Market Value in excess of such
statutory minimum required tax withholding.

 

f.                                         Nontransferability.  During the lifetime of Participant, the
accrued Option shall be exercisable only by Participant or by the Participant’s
guardian or other legal representative, and shall not be assignable or
transferable by Participant, in whole or in part, other than by will or by the
laws of descent and distribution.

 

4

 

g.                                      2004 Equity Incentive Plan.  The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Participant and is hereby incorporated into this Agreement.  This Agreement is subject to and in all
respects limited and conditioned as provided in the Plan.  All defined terms of the Plan shall have the
same meaning when used in this Agreement. 
The Plan governs this Option and, in the event of any questions as to
the construction of this Agreement or in the event of a conflict between the
Plan and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.

 

h.                                      Lockup Period Limitation.  Participant agrees that in the event the
Company advises Participant that it plans an underwritten public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended, and
that the underwriter(s) seek to impose restrictions under which certain
shareholders may not sell or contract to sell or grant any option to buy or
otherwise dispose of part or all of their stock purchase rights of the
underlying Common Stock, Participant hereby agrees that for a period not to
exceed 180 days from the prospectus, Participant will not sell or contract to
sell or grant an option to buy or otherwise dispose of this option or any of
the underlying shares of Common Stock without the prior written consent of the
underwriter(s) or its representative(s).

 

i.                                          Blue Sky Limitation.  Notwithstanding anything in this Agreement to
the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the
Board of Directors of the Company shall have the right (i) to accelerate
the exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Participant 15 days’ prior written
notice of such acceleration, and (ii) to cancel any portion of this Option
or any other option granted to Participant pursuant to the Plan which is not
exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered
personally or when deposited in the United States mail, first class postage
prepaid and addressed to Participant at the address of Participant on file with
the Company.

 

j.                                          Accounting Compliance.  Participant agrees that, if a merger,
reorganization, liquidation or other “transaction” as defined in Section 13
of the Plan occurs and Participant is an “affiliate” of the Company or any
Subsidiary (as defined in applicable legal and accounting principles) at the
time of such transaction, Participant will comply with all requirements of Rule 145
of the Securities Act of 1933, as amended, and the requirements of such other
legal or accounting principles, and will execute any documents necessary to
ensure such compliance.

 

k.                                       Stock Legend.  The Board may require that the certificates
for any shares of Common Stock purchased by Participant (or, in the case of
death, Participant’s successors) shall bear an appropriate legend to reflect
the restrictions of Paragraph 4(b) and Paragraphs 4(h) through 4(j)
of this Agreement.

 

5

 

l.                                          Scope of Agreement.  This Agreement shall bind and inure to the
benefit of the Company, its Subsidiaries and its successors and assigns and
Participant and any successor or successors of Participant permitted by
Paragraph 2 or Paragraph 4(f) above.

 

m.                                    Arbitration.  Any dispute arising out of or relating to
this Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of
any such controversy.  If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration.  Judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.  The arbitrator
shall be a retired state or federal judge or an attorney who has practiced
securities or business litigation for at least 10 years.  If the parties cannot agree on an arbitrator within
20 days, any party may request that the chief judge of the District Court for
Hennepin County, Minnesota, select an arbitrator.  Arbitration will be conducted pursuant to the
provisions of this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the
provisions of this Agreement.  Limited
civil discovery shall be permitted for the production of documents and taking
of depositions.  Unresolved discovery
disputes may be brought to the attention of the arbitrator who may dispose of
such dispute.  The arbitrator shall have
the authority to award any remedy or relief that a court of this state could
order or grant; provided, however, that punitive or exemplary damages shall not
be awarded.  The arbitrator may award to
the prevailing party, if any, as determined by the arbitrator, all of its costs
and fees, including the arbitrator’s fees, administrative fees, travel
expenses, out-of-pocket expenses and reasonable attorneys’ fees.  Unless otherwise agreed by the parties, the
place of any arbitration proceedings shall be Hennepin County, Minnesota.

 

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.

 

	
   

  	
  WATERS INSTRUMENTS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Its: President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Participant

  

 

6

 

NONQUALIFIED STOCK OPTION AGREEMENT

 

WATERS INSTRUMENTS, INC.

2004 EQUITY INCENTIVE PLAN

 

THIS
AGREEMENT, made effective as of this         
day of                           ,
20    , by and between Waters Instruments, Inc., a
Minnesota corporation (the “Company”), and                                    
(“Participant”).

 

W I T N E S S E T H:

 

WHEREAS,
Participant on the date hereof is a consultant or advisor to, or a key
employee, officer or director of the Company or one of its Subsidiaries; and

 

WHEREAS,
the Company wishes to grant a nonqualified stock option to Participant to
purchase shares of the Company’s Common Stock pursuant to the Company’s 2004
Equity Incentive Plan (the “Plan”); and

 

WHEREAS,
the Administrator has authorized the grant of a nonqualified stock option to
Participant and has determined that, as of the effective date of this
Agreement, the fair market value of the Company’s Common Stock is $          per
share;

 

NOW,
THEREFORE, in consideration of the premises and of the mutual covenants herein
contained, the parties hereto agree as follows:

 

1.                                       Grant of Option.  The Company hereby grants to Participant on
the date set forth above (the “Date of Grant”), the right and option (the “Option”)
to purchase all or portions of an aggregate of                        
(               )
shares of Common Stock at a per share price of $     
on the terms and conditions set forth herein, and subject to adjustment
pursuant to Section 13 of the Plan. 
This Option is a nonqualified stock option and will not be treated as an
incentive stock option, as defined under Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the “Code”), and
the regulations thereunder.

 

2.                                       Duration and Exercisability.

 

a.                                       General.  The term during which this Option may be
exercised shall terminate on the close of business on                                       ,
         , except
as otherwise provided in Paragraphs 2(b) through 2(d) below.  This Option shall become exercisable
according to the following schedule:

 

7

 

	
  Vesting Date

  	
   

  	
  Number/Percentage of Shares

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

Once the Option becomes
fully exercisable to the extent of one hundred percent (100%) of the aggregate
number of shares specified in Paragraph 1, Participant may continue to exercise
this Option under the terms and conditions of this Agreement until the termination
of the Option as provided herein.  If
Participant does not purchase upon an exercise of this Option the full number
of shares which Participant is then entitled to purchase, Participant may
purchase upon any subsequent exercise prior to this Option’s termination such
previously unpurchased shares in addition to those Participant is otherwise
entitled to purchase.

 

b.                                      Termination of Relationship (other than Disability
or Death).  If Participant’s
employment or other relationship with the Company or any Subsidiary is
terminated for any reason other than disability or death, this Option shall
completely terminate on the earlier of (i) the close of business on the three-month anniversary date of the termination of such
employment or other relationship, and (ii) the expiration date of this
Option stated in Paragraph 2(a) above. 
In such period following the termination such employment or other
relationship, this Option shall be exercisable only to the extent the Option
was exercisable on the vesting date immediately preceding the date on which all
of such Participant’s employment or other relationship with the Company or
Subsidiary has terminated, but had not previously been exercised.  To the extent this Option was not exercisable
upon the termination of such employment or other relationship, or if
Participant does not exercise the Option within the time specified in this
Paragraph 2(b), all rights of Participant under this Option shall be forfeited.

 

c.                                       Disability.  If Participant’s employment or other relationship
with the Company or any Subsidiary terminates because of disability (as defined
in Code Section 22(e), or any successor provision), this Option shall
completely terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the termination of such
employment or other relationship, and (ii) the expiration date of this
Option stated in Paragraph 2(a) above. 
In such period following the termination of such employment or other
relationship, this Option shall be exercisable only to the extent the Option
was exercisable on the vesting date immediately preceding the date on which
Participant’s employment or other relationship with the Company or Subsidiary
have terminated, but had not previously been exercised.  To the extent this Option was not exercisable
upon the termination of such employment or other relationship, or if
Participant does not exercise the Option within the time specified in this
Paragraph 2(c), all rights of Participant under this Option shall be forfeited.

 

d.                                      Death.  In the event of Participant’s death, this
Option shall terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the date of Participant’s
death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above.  In such period following Participant’s death,
this Option may be exercised by the person or persons

 

8

 

to whom Participant’s
rights under this Option shall have passed by Participant’s will or by the laws
of descent and distribution only to the extent the Option was exercisable on
the vesting date immediately preceding the date of Participant’s death.  To the extent this Option was not exercisable
upon the date of Participant’s death, or if such person or persons fail to
exercise this Option within the time specified in this Paragraph 2(d), all
rights under this Option shall be forfeited.

 

3.                                       Manner of Exercise.

 

a.                                       General.  The Option may be exercised only by
Participant (or other proper party in the event of death or incapacity),
subject to the conditions of the Plan and subject to such other administrative rules as
the Board may deem advisable, by delivering within the option period written
notice of exercise to the Company at its principal office.  The notice shall state the number of shares
as to which the Option is being exercised and shall be accompanied by payment
in full of the option price for all shares designated in the notice.  The exercise of the Option shall be deemed
effective upon receipt of such notice by the Company and upon payment that
complies with the terms of the Plan and this Agreement.  The Option may be exercised with respect to
any number or all of the shares as to which it can then be exercised and, if
partially exercised, may be exercised as to the unexercised shares any number
of times during the option period as provided herein.

 

b.                                      Form of Payment.  Subject to the approval of the Administrator,
payment of the option price by Participant shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof.  Any
stock so tendered as part of such payment shall be valued at its Fair Market
Value as provided in the Plan.  For
purposes of this Agreement, “previously acquired shares of Common Stock” shall
include shares of Common Stock that are already owned by Participant for at
least six (6) months prior to the exercise of the stock option, or for
such other period of time as may be required by generally accepted accounting
principles.

 

c.                                       Stock Transfer Records.  As soon as practicable after the effective
exercise of all or any part of the Option, Participant shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Participant one or more duly issued stock
certificates evidencing such ownership. 
All requisite original issue or transfer documentary stamp taxes shall
be paid by the Company.

 

4.                                       Miscellaneous.

 

a.                                       Rights as Shareholder.  This Agreement shall not confer on
Participant any right with respect to the continuance of any relationship with
the Company or any of its Subsidiaries, nor will it interfere in any way with
the right of the Company or any of its Subsidiaries to terminate any such
relationship.  Participant shall have no
rights as a shareholder with respect to shares subject to this Option until
such shares have been issued to Participant upon exercise of this Option.  No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property),
distributions or other rights for

 

9

 

which the record date is
prior to the date such shares are issued, except as provided in Section 13
of the Plan.

 

b.                                      Securities Law Compliance.  The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.  Participant may be required by the Company,
as a condition of the effectiveness of any exercise of this Option, to agree in
writing that all Common Stock to be acquired pursuant to such exercise shall be
held, until such time that such Common Stock is registered and freely tradable
under applicable state and federal securities laws, for Participant’s own
account without a view to any further distribution thereof, that the
certificates for such shares shall bear an appropriate legend to that effect
and that such shares will be not transferred or disposed of except in
compliance with applicable state and federal securities laws.

 

c.                                       Mergers, Recapitalizations, Stock Splits, Etc.  Pursuant and subject to Section 13 of
the Plan, certain changes in the number or character of the Common Stock of the
Company (through sale, merger, consolidation, exchange, reorganization,
divestiture (including a spin-off), liquidation, recapitalization, stock split,
stock dividend or otherwise) shall result in an adjustment, reduction or
enlargement, as appropriate, in Participant’s rights with respect to any
unexercised portion of the Option (i.e., Participant shall have such “anti-dilution”
rights under the Option with respect to such events, but shall not have “preemptive”
rights).

 

d.                                      Shares Reserved.  The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.

 

e.                                       Withholding Taxes.  In order to permit the Company to comply with
all applicable federal or state income tax laws or regulations, the Company may
take such action as it deems appropriate to insure that, if necessary, all
applicable federal or state payroll, income or other taxes are withheld from
any amounts payable by the Company to Participant.  If the Company is unable to withhold such
federal and state taxes, for whatever reason, Participant hereby agrees to pay
to the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law.  Participant may, subject to the approval and
discretion of the Board or such administrative rules it may deem
advisable, elect to have all or a portion of such tax withholding obligations
satisfied by delivering shares of the Company’s Common Stock or by electing to
have the Company withhold shares of Common Stock otherwise issuable to
Participant.  Such shares shall have a
Fair Market Value equal to the minimum required tax withholding, based on the
minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes, that are applicable to the supplemental income
resulting from the exercise of this Option. 
In no event may the Company withhold shares having a Fair Market Value
in excess of such statutory minimum required tax withholding.

 

f.                                         Nontransferability.  During the lifetime of Participant, the
accrued Option shall be exercisable only by Participant or by the Participant’s
guardian or other legal

 

10

 

representative, and shall
not be assignable or transferable by Participant, in whole or in part, other
than by will or by the laws of descent and distribution.

 

g.                                      2004 Equity Incentive Plan.  The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Participant and is hereby incorporated into this Agreement.  This Agreement is subject to and in all
respects limited and conditioned as provided in the Plan. All defined terms of
the Plan shall have the same meaning when used in this Agreement.  The Plan governs this Option and, in the
event of any questions as to the construction of this Agreement or in the event
of a conflict between the Plan and this Agreement, the Plan shall govern,
except as the Plan otherwise provides.

 

h.                                      Lockup Period Limitation.  Participant agrees that in the event the
Company advises Participant that it plans an underwritten public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended, and
that the underwriter(s) seek to impose restrictions under which certain
shareholders may not sell or contract to sell or grant any option to buy or
otherwise dispose of part or all of their stock purchase rights of the
underlying Common Stock, Participant hereby agrees that for a period not to
exceed 180 days from the prospectus, Participant will not sell or contract to
sell or grant an option to buy or otherwise dispose of this option or any of
the underlying shares of Common Stock without the prior written consent of the
underwriter(s) or its representative(s).

 

i.                                          Blue Sky Limitation.  Notwithstanding anything in this Agreement to
the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Participant 15 days’ prior written
notice of such acceleration, and (ii) to cancel any portion of this Option
or any other option granted to Participant pursuant to the Plan which is not
exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered
personally or when deposited in the United States mail, first class postage
prepaid and addressed to Participant at the address of Participant on file with
the Company.

 

j.                                          Accounting Compliance.  Participant agrees that, if a merger,
reorganization, liquidation or other “transaction” as defined in Section 13
of the Plan occurs and Participant is an “affiliate” of the Company or any
Subsidiary (as defined in applicable legal and accounting principles) at the
time of such transaction, Participant will comply with all requirements of Rule 145
of the Securities Act of 1933, as amended, and the requirements of such other
legal or accounting principles, and will execute any documents necessary to
ensure such compliance.

 

k.                                       Stock Legend.  The Board may require that the certificates
for any shares of Common Stock purchased by Participant (or, in the case of
death, Participant’s successors) shall bear an appropriate legend to reflect
the restrictions of Paragraph 4(b) and Paragraphs 4(h) through 4(j)
of this Agreement.

 

11

 

l.                                          Scope of Agreement.  This Agreement shall bind and inure to the
benefit of the Company, its Subsidiaries and its successors and assigns and
Participant and any successor or successors of Participant permitted by Paragraph
2 or Paragraph 4(f) above.

 

m.                                    Arbitration.  Any dispute arising out of or relating to
this Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of
any such controversy.  If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration.  Judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.  The arbitrator
shall be a retired state or federal judge or an attorney who has practiced
securities or business litigation for at least 10 years.  If the parties cannot agree on an arbitrator
within 20 days, any party may request that the chief judge of the District
Court for Hennepin County, Minnesota, select an arbitrator.  Arbitration will be conducted pursuant to the
provisions of this Agreement, and the commercial arbitration rules of the
American Arbitration Association, unless such rules are inconsistent with
the provisions of this Agreement. 
Limited civil discovery shall be permitted for the production of
documents and taking of depositions. 
Unresolved discovery disputes may be brought to the attention of the
arbitrator who may dispose of such dispute. 
The arbitrator shall have the authority to award any remedy or relief
that a court of this state could order or grant; provided, however, that
punitive or exemplary damages shall not be awarded.  The arbitrator may award to the prevailing
party, if any, as determined by the arbitrator, all of its costs and fees,
including the arbitrator’s fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys’ fees.  Unless otherwise agreed by the parties, the
place of any arbitration proceedings shall be Hennepin County, Minnesota.

 

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.

 

	
   

  	
  WATERS
  INSTRUMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Participant

  
					

 

12

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