-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hfgb61+PVqZ7a6bU3H4wFWAg7ESCZvDcK5lH4s0o8pAG1QCjN8WrBPiy0Um3VJ3e owUdo8x5GaRCEB37yGSMOw== 0000950109-96-004717.txt : 19960731 0000950109-96-004717.hdr.sgml : 19960731 ACCESSION NUMBER: 0000950109-96-004717 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960729 SROS: NONE GROUP MEMBERS: BRIDGE STREET FUND 1996, L.P. GROUP MEMBERS: GOLDMAN SACHS GROUP LP GROUP MEMBERS: GOLDMAN, SACHS & CO. GROUP MEMBERS: GOLDMAN, SACHS & CO. OHG GROUP MEMBERS: GS ADVISORS II (CAYMAN), L.P. GROUP MEMBERS: GS ADVISORS, L.P. GROUP MEMBERS: GS CAPITAL PARTNERS II, (GERMANY) C.L.P. GROUP MEMBERS: GS CAPITAL PARTNERS II, L.P. GROUP MEMBERS: GS CAPITAL PARTNERS II, OFFSHORE, L.P. GROUP MEMBERS: STONE STREET EMPIRE CORP. GROUP MEMBERS: STONE STREET FUND 1996, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: RECOVERY ENGINEERING INC CENTRAL INDEX KEY: 0000818203 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 411557115 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-44835 FILM NUMBER: 96600555 BUSINESS ADDRESS: STREET 1: 2229 EDGEWOOD AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55426 BUSINESS PHONE: 6125411313 MAIL ADDRESS: STREET 1: 2229 EDGEWOOD AVENUE SOUTH CITY: MINNEAPOLIS STATE: MN ZIP: 55426 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: GOLDMAN SACHS GROUP LP CENTRAL INDEX KEY: 0000904571 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133501777 STATE OF INCORPORATION: NY FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 85 BROAD ST CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2129021000 SC 13D 1 SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 Recovery Engineering, Inc. ------------------------------------- (Name of Issuer) Common Stock, $0.01 par value ------------------------------------- (Title of Class of Securities) 756269106 ------------------------------------- (CUSIP Number) David J. Greenwald, Esq. Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 (212) 902-1000 ------------------------------------- (Name, address and telephone number of person authorized to receive notices and communications) July 19, 1996 ------------------------------------- (Date of Event which requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b) (3) or (4), check the following box: [_] Check the following box if a fee is being paid with this statement: [X] Page 1 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Goldman, Sachs & Co. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization New York -------- - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 1,000,000 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 1,000,000 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 1,000,000 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 18.8% - -------------------------------------------------------------------------------- 14. Type of Reporting Person BD-PN-IA - -------------------------------------------------------------------------------- Page 2 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person The Goldman Sachs Group, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 1,000,000 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 1,000,000 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 1,000,000 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 18.8% - -------------------------------------------------------------------------------- 14. Type of Reporting Person HC-PN - -------------------------------------------------------------------------------- Page 3 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person GS Capital Partners II, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 627,428 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 627,428 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 627,428 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 12.7% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 4 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person GS Capital Partners II Offshore, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Cayman Islands - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 249,429 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 249,429 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 249,429 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 5.5% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 5 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person GS Capital Partners II (Germany) C.L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Germany - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 23,143 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 23,143 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 23,143 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) .5% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 6 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person GS Advisors, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 627,428 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 627,428 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 627,428 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 12.7% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 7 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person GS Advisors II (Cayman), L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Cayman Islands - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 249,429 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 249,429 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 249,429 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 5.5% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 8 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Goldman, Sachs & Co. oHG - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) [X] (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) -------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Germany - -------------------------------------------------------------------------------- Number of 7. Sole Voting Power Shares Beneficially -0- Owned By ---------------------------------------------------------------- Each 8. Shared Voting Power Reporting Person With 23,143 ---------------------------------------------------------------- 9. Sole Dispositive Power -0- ---------------------------------------------------------------- 10. Shared Dispositive Power 23,143 ---------------------------------------------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 23,143 - -------------------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares _______ - -------------------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) .5% - -------------------------------------------------------------------------------- 14. Type of Reporting Person PN - -------------------------------------------------------------------------------- Page 9 - ------------------------- CUSIP NO. 756269106 - --------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Stone Sreet Fund 1996, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) X ---- (b) ---- - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) ---------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7 Sole Voting Power Shares Beneficially -0- Owned By ----------------------------- Each 8 Shared Voting Power Reporting Person With 59,589 ----------------------------- 9 Sole Dispositive Power -0- ----------------------------- 10 Shared Dispositive Power 59,589 ----------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 59,589 - ---------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ----- - ---------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 1.4% - ----------------------------------------------------------------------- 14. Type of Reporting Person PN - ----------------------------------------------------------------------- Page 10 - ------------------------- CUSIP NO. 756269106 - ------------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Bridge Street Fund 1996, L.P. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) X ---- (b) ---- - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) ---------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7 Sole Voting Power Shares Beneficially -0- Owned By ----------------------------- Each 8 Shared Voting Power Reporting Person With 40,411 ----------------------------- 9 Sole Dispositive Power -0- ----------------------------- 10 Shared Dispositive Power 40,411 ----------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 40,411 - ---------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ------ - ---------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) .9% - ---------------------------------------------------------------------- 14. Type of Reporting Person PN - ---------------------------------------------------------------------- Page 11 - ---------------- CUSIP NO. 756269106 - ------------ - -------------------------------------------------------------------------------- 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Stone Street Empire Corp. - -------------------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (a) X --- (b) --- - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Source of Funds WC - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) ---------- - -------------------------------------------------------------------------------- 6. Citizenship or place of Organization Delaware - -------------------------------------------------------------------------------- Number of 7 Sole Voting Power Shares Beneficially -0- Owned By ----------------------------- Each 8 Shared Voting Power Reporting Person With 100,000 ----------------------------- 9 Sole Dispositive Power -0- ----------------------------- 10 Shared Dispositive Power 100,000 ----------------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 100,000 - ----------------------------------------------------------------------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ----- - ----------------------------------------------------------------------- 13. Percent of Class Representing by Amount in Row (11) 2.3% - ----------------------------------------------------------------------- 14. Type of Reporting Person CO - ----------------------------------------------------------------------- Page 12 Item 1. Security and Issuer. ------------------- This Statement on Schedule 13D relates to the common stock, par value $.01 per share (the "Common Stock"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"). The principal executive offices of the Company are located at 2229 Edgewood Avenue South, Minneapolis, MN 55426. Item 2. Identity and Background. ----------------------- This Statement is being filed by GS Capital Partners II, L.P. ("GSCP"), GS Capital Partners II Offshore, L.P. ("GSCP II Offshore"), GS Capital Partners II (Germany) C.L.P. ("GSCP II Germany", and, together with GSCP and GSCP II Offshore, "GSCPII"), GS Advisors, L.P. ("GS Advisors"), GS Advisors II (Cayman), L.P. ("GS Advisors Cayman"), Goldman, Sachs & Co. oHG ("GS oHG"), Stone Street Fund 1996, L.P. ("Stone Street"), Bridge Street Fund 1996, L.P. ("Bridge Street" and together with Stone Street, the "Stone/Bridge Funds"), Stone Street Empire Corp. ("Empire Corp."), Goldman, Sachs & Co. ("Goldman Sachs") and The Goldman Sachs Group, L.P. ("GS Group" and, together with GSCP, GSCP II Offshore, GSCP II Germany, GS Advisors, GS Advisors Cayman, GS oHG, Stone Street, Bridge Street, Empire Corp. and Goldman Sachs, the "Filing Persons")/1/. Goldman Sachs and GS Group may be deemed, for purposes of this Statement, to beneficially own 1,000,000 shares of Common Stock through GSCPII and the Stone/Bridge Funds (collectively, the "Limited Partnerships") of which affiliates of Goldman Sachs and GS Group are the general partner or the managing general partner. Goldman Sachs and GS Group each disclaim - --------------- /1/ Neither the present filing nor anything contained herein shall be construed as an admission that any Filing Person constitutes a "person" for any purpose other than Section 13(d) of the Securities Exchange Act of 1934. 13 ownership of shares of Common Stock beneficially owned by the Limited Partnerships to the extent of partnership interests in the Limited Partnerships held by persons other than Goldman Sachs, GS Group or their affiliates. The principal business address of each of Goldman Sachs, GS Group, GSCP, Stone Street, Bridge Street, Empire Corp. and GS Advisors is 85 Broad Street, New York, New York 10004. The principal business address for each of GSCP II Offshore and GS Advisors Cayman is c/o Maples and Calder, P.O. Box 309, Grand Cayman, Cayman Islands. The principal business address for each of GSCP II Germany and GS oHG is Messeturm Friedrich-Ebert-Anlage 49, 60308 Frankfurt am Main, Germany. Each of GSCP, a Delaware limited partnership, GSCP II Offshore, a Cayman Islands exempted limited partnership, and GSCP II Germany, a German civil law partnership, was formed for the purpose of investing in equity and equity-related securities primarily acquired or issued in leveraged acquisitions, reorganizations and other private equity transactions. Stone Street and Bridge Street, each a Delaware limited partnership, were formed for the purpose of investing in equity and equity-related securities primarily acquired or issued in leveraged acquisitions, reorganizations and other private equity transactions and in other financial instruments. GS Advisors, a Delaware limited partnership, is the sole general partner of GSCP. GS Advisors Cayman, a Cayman Islands exempted limited partnership, is the sole general partner of GSCP II Offshore. GS oHG is the sole managing partner of GSCP II Germany. Empire Corp. is the sole general partner of Stone Street and the sole managing general partner of Bridge Street. Goldman Sachs, a New York limited partnership, is an investment banking firm and a member of the New York Stock Exchange, Inc. and other national exchanges. 14 Goldman Sachs also serves as the investment manager for GSCPII. GS Group, one of the general partners of Goldman Sachs, owns a 99% interest in Goldman Sachs. GS Group is a Delaware limited partnership and a holding partnership that engages (directly or indirectly through subsidiaries or affiliated companies or both) in the business of buying and selling securities, both foreign and domestic, and in making investments on behalf of its partners. GS Group is controlled by its general partners (which consist of the general partners of Goldman Sachs other than GS Group) as a group, who have delegated to its Executive Committee the power to act on their behalf with respect to the management of GS Group. The name, business address, present principal occupation or employment and citizenship of each of the general partners of Goldman Sachs and of GS Group that is a natural person are set forth in Schedule I hereto and are incorporated herein by reference. The name, state or place of organization, principal business, address of principal business and address of principal office of each of the general partners of Goldman Sachs (other than GS Group) and of GS Group that is not a natural person are also set forth in Schedule I hereto and incorporated herein by reference. The members of the Executive Committee of GS Group are those persons listed in Schedule I who have an asterisk marked next to their name. The name, business address, present principal occupation or employment and citizenship of each controlling person, if any, director and executive officer of each corporate general partner of Goldman Sachs are set forth in Schedule II-A hereto and are incorporated herein by reference. The name, business address, present principal occupation or employment and citizenship of each director and executive officer of GS Advisors, Inc. and GS 15 Advisors II, Inc., each a Delaware corporation, that serves as the sole general partner of GS Advisors and GS Advisors Cayman, respectively, are set forth in Schedules II-B-i and II-B-ii hereto, respectively, and are incorporated herein by reference. The name, business address, present principal occupation or employment and citizenship of each director and executive officer of Empire Corp. is set forth in Schedules II-B-iii hereto, and are incorporated herein by reference. The name, business address, present principal occupation or employment and citizenship of each Managing Director of Goldman, Sachs & Co. Finanz GmbH which is the managing general partner of GS oHG are set forth in Schedule II-C hereto and are incorporated herein by reference. During the last five years, none of the Filing Persons, or, to the knowledge of each of the Filing Persons, any of the persons listed on Schedule I or Schedule II-A, II-B-i, II-B-ii, II-B-iii or ll-C hereto, (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) except as set forth in Schedule III hereto, has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws, or finding any violation with respect to such laws. Item 3. Source and Amount of Funds or Other ----------------------------------- Consideration. ------------- Pursuant to the Securities Purchase Agreement, dated as of July 19, 1996 (the "Purchase Agreement"), between the Company and the Limited Partnerships, on 16 July 19, 1996, the Limited Partnerships purchased an aggregate principal amount of $15,000,000 of 5% Convertible Notes due 2003 (the "Notes"). The total consideration for the purchase of the Notes was $15,000,000. A copy of the Purchase Agreement is filed as Exhibit (1). The funds used by the Limited Partnerships to purchase the Notes as described above were obtained by the Limited Partnerships from capital contributions by the Limited Partnerships' partners and from the Limited Partnerships' available funds. None of the persons listed on Schedule I, II-A, II-B-i, II-B-ii, II-B-iii or II-C hereto has contributed any funds or other consideration towards the purchase of the Notes, except insofar as they may be general or limited partners of any of Goldman Sachs or the Limited Partnerships and have made capital contributions to any of Goldman Sachs or the Limited Partnerships, as the case may be. Item 4. Purpose of the Transaction. -------------------------- Each of the Limited Partnerships purchased the Notes for the purpose of making an investment in the Company. The aggregate amount of the Notes may be converted into an aggregate of 1,000,000 shares of Common Stock, subject to customary antidilution provisions, at any time at the option of the Limited Partnerships, or after January 18, 2000 by the Company if certain conditions are satisfied. Each of the Filing Persons expects to evaluate on an ongoing basis the Company's financial condition, business, operations and prospects, the market price of the Common Stock, conditions in the securities markets generally, general economic and industry conditions and other factors. The Filing Persons may purchase additional shares of Common Stock or may 17 sell shares of Common Stock from time to time in public or private transactions (subject, in the case of the Limited Partnerships, to any applicable limitations imposed on the sale of any of their Notes or shares of Common Stock by the Securities Act). Pursuant to the Purchase Agreement, the Board of Directors of the Company increased the size of the Board of the Directors of the Company by one and elected a designee of GSCP to the Board of Directors of the Company immediately upon the closing of the purchase of the Notes (the "Closing"). For as long as at least 25% of the initial number of Securities (defined below) remain outstanding and the Limited Partnerships hold a majority of the outstanding Securities, at each meeting for the election of directors of the Company, the Company will include in the slate of directors nominated and recommended by the Board of Directors of the Company to the stockholders for election as directors one person designated by GSCP. If at least 25% of the initial number of securities remain outstanding, but the Limited Partnerships do not own a majority of the outstanding Securities, the holders of a majority of the Securities have the right to designate a representative for election to the Board of Directors of the Company. The Company will use its best efforts to cause the person so designated (the "Representative") to be elected and maintained as a director of the Company. The Representative will be a member of the Company's executive and finance committees, if any, or any committee performing substantially similar functions and, upon request by the Representative, any other committee of the Board of Directors. "Securities" means (i) the shares of Common Stock issued or issuable, in each case, upon conversion of the Notes and (ii) any shares of Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, 18 and any person or entity that holds Notes will be deemed to be the holder of the number of shares of Common Stock issuable upon conversion of the Notes. As to any particular shares of Common Stock which are "Securities", such shares cease to be "Securities" when they have been (a) effectively registered under the Securities Act of 1933, as amended (the "Securities Act") and disposed of in accordance with the registration statement covering them or (b) sold pursuant to Rule 144 under the Securities Act. In addition, for so long as the number of Securities outstanding is at least 25% of the initial number of Securities, under the Purchase Agreement, GSCP is entitled to receive certain current and historical financial data and other financial data as GSCP may reasonably request and to have access to the properties of the Company and to officers of the Company, as GSCP may reasonably request. In addition, the Purchase Agreement provides that, so long as the number of Securities outstanding is at least 25% of the initial number of Securities, the Company will not take any of the following actions (a) without the affirmative vote or consent of GSCP if the Limited Partnerships hold a majority of the outstanding Securities, and (b) without the affirmative vote of the holders of a majority of the Securities if the Limited Partnerships do not own a majority of the outstanding Securities: (i) issue new debt ranking senior to, or pari passu with, the Notes except for up to $5 million of debt issued in connection with real property leases and current indebtedness; (ii) pay, declare or set aside sums for the payment of, any dividends, or make any distributions, in respect of any shares of Common Stock or other equity interests of the Company; 19 (iii) redeem, purchase or otherwise acquire shares of its Common Stock or other equity interests of the Company; (iv) consolidate, merge into, or enter into any similar business combination transaction, sell all or substantially all of its assets, or effect a transaction or series of transactions pursuant to which more than fifty percent of the voting securities of the Company are transferred to another person; (v) acquire a majority of the shares of capital stock or other equity interests or assets of, any person or entity; (vi) enter into any transaction with an affiliate of the Company, other than transactions which are not material to the Company and which are on terms no less favorable to the Company than would be obtained in a comparable arm's length transaction with a person that is not an affiliate of the Company; or (vii) enter into a new line of business other than the designing, manufacturing or marketing of small-scale drinking water treatment systems and related household and consumer products. Notwithstanding the foregoing, for purposes of determining whether the Company has obtained the affirmative vote or prior consent of the holders of a majority of the Securities for actions listed in clauses (i), (ii) and (iii) above, shares of Common Stock issued upon conversion of the Notes will not be considered "Securities". The Purchase Agreement also provides that, as long as the number of Securities outstanding is at least 25% of the initial number of Securities and any of the Limited Partnerships holds any Securities, such Limited Partnerships will have the right to purchase a pro rata portion of any capital stock or other -------- rights to purchase capital stock (with certain exceptions) proposed to be sold or issued by the Company. 20 None of the Filing Persons or, to the knowledge of the Filing Persons, any of the persons listed on Schedule I , II-A, II-B-i, II-B-ii, II-B-iii or II-C hereto has any present plans or intentions other than those disclosed herein which would result in or relate to any of the transactions described in subparagraphs (a) through (j) of Item 4 of Schedule 13D. Item 5. Interest in Securities of the Issuer. ------------------------------------ (a) As described in Item 3, the Limited Partnerships purchased the Notes which may be converted into shares of Common Stock at any time by the holder or after January 18, 2000 by the Company if certain conditions are satisfied. As a result, as of July 19, 1996, GSCP beneficially owned 627,428 shares of Common Stock, GSCP II Offshore beneficially owned 249,429 shares of Common Stock, GSCP II Germany beneficially owned 23,143 shares of Common Stock (aggregating 900,000 shares of Common Stock beneficially owned by GSCPII), Stone Street beneficially owned 59,589 shares of Common Stock and Bridge Street beneficially owned 40,411 shares of Common Stock. Based on information provided by the Company under the Purchase Agreement, 4,321,325 shares of Common Stock were outstanding as of July 9, 1996. Based on the foregoing, GSCP beneficially owns approximately 12.7%, GSCP II Offshore beneficially owns approximately 5.5%, GSCP II Germany beneficially owns less than 1% (aggregating for GSCP II a beneficial ownership of 17.2%), Stone Street beneficially owns 1.4% and Bridge Street beneficially owns 0.9%, in each case of the outstanding shares of Common Stock. 21 Goldman Sachs and GS Group may be deemed to hold through the Limited Partnerships, for purposes of this Statement, the beneficial ownership of 1,000,000 shares of Common Stock. Accordingly, Goldman Sachs and GS Group could be deemed to beneficially own approximately 18.8% of the outstanding shares of Common Stock. None of the Filing Persons beneficially owns any shares of Common Stock other than as set forth herein. (b) Each Filing Person shares the power to vote or direct the vote and to dispose or to direct the disposition of shares of Common Stock beneficially owned by such Filing Person as indicated in pages 2 through 12 above. (c) Except for the purchase of the Notes, no transactions in the Common Stock were effected by the Filing Persons, or to the knowledge of any of the Filing Persons, any of the persons listed on Schedule I, II-A, II-B-i, II-B-ii, II-B-iii or II-C hereto, during the past sixty days. (d) No other person is known by any Filing Person to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, any shares of Common Stock beneficially owned by any Filing Person. (e) Not applicable. 22 Item 6. Contracts, Arrangements, Understandings --------------------------------------- or Relationships with Respect to -------------------------------- Securities of the Issuer. ------------------------ Purchase Agreement. Under the Purchase Agreement and as disclosed in ------------------ Item 4, the Company has agreed that so long as at least 25% of the initial number of Securities remain outstanding and the Limited Partnerships hold a majority of the Securities, the Company will not engage in certain transactions or activities without the affirmative vote or prior consent of GSCP. In addition, pursuant to the Purchase Agreement, the Company has agreed that, so long as at least 25% of the initial number of Securities remain outstanding, it will (i) comply in all material respects with all applicable laws; (ii) refrain from entering into any agreement that would prohibit the Company from performing its obligations pertaining to the Notes; (iii) maintain its corporate existence, rights and franchises in full force and effect; (iv) maintain insurance (including directors' and officers' liability insurance) in such amounts and types as are customarily carried under similar circumstances by companies engaged in the same or a similar business; (v) pay its taxes and other obligations; (vi) not incur any material liability with respect to retiree medical or unfunded benefits payable after the termination of employment; (vii) maintain employee benefits plans in material compliance with applicable law; (viii) provide GSCP with annual audited financial statements, quarterly unaudited financial statements (or alternatively, at the election of the Company, annual reports on Form 10-K or quarterly reports on Form 10-Q, respectively), all registration statements (with certain exceptions) and other regular and periodic reports filed with the Securities and Exchange Commission, all proxy statements, notices and reports sent to the Company's shareholders, and copies of all compliance certificates furnished to lenders of the Company; and (ix) provide GSCP access 23 to the properties and historical financial records of the Company or any of its subsidiaries and to provide GSCP access to officers of the Company to discuss the affairs and finances of the Company. As discussed in Item 4, the Company has agreed to use its best efforts to cause a Representative to be elected to, and to be maintained as a member of, the Board of Directors. If, at any time during which the Company is required to use its best efforts to cause a Representative to be elected to the Board of Directors, a Representative is not elected to the Board of Directors of the Company, GSCP or the holders of a majority of the Securities, as the case may be, will have the right to have one non-voting observer present at all meetings of the Board of Directors, and the observer will have the same access to information concerning the business and operations of the Company as the directors of the Company. The Company has also agreed to reimburse and indemnify each Representative and any non-voting observer for all reasonable expenses and any losses incurred by such person in such person's capacity as a director of the Company, or observer, as applicable. The foregoing shall be in addition to, and not in lieu of, any indemnification or reimbursement obligations of the Company under the Articles of Incorporation or bylaws of the Company or by law. The Notes are unsecured obligations of the Company and mature on July 18, 2003. The Company will pay interest in cash on the unpaid principal amount of the Notes from the Closing, at a rate 5% per annum, payable quarterly, commencing September 30, 1996. Holders may require the Company to redeem (x) up to $5 million principal amount of Notes after July 19, 2001, but before July 18, 2002 and (y) thereafter, up to 24 the excess of $10 million principal amount of Notes over the principal amount of Notes, if any, redeemed during the period described in clause (x). The redemption price equals the principal amount to be redeemed plus accrued and unpaid interest thereon. If a Change in Control (as defined below) occurs at any time, then any holder of the Securities may require the Company to redeem any or all of the Securities held by such holder. If the Securities are (x) in the form of Notes, the redemption price, payable in cash, will equal, at the holder's election, (i) the principal amount of such Notes plus all accrued and unpaid interest thereon, or (ii) the amount such holder would have received pursuant to clause (y) below had such holder converted such Notes into Common Stock and (y) in the form of Common Stock, the cash purchase price per share of Common Stock will equal the average closing price per share of Common Stock over the 20 trading days prior to such Change of Control. A Change in Control means (i) the acquisition, other than from the Company, by any individual, entity or group of beneficial ownership of 35% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote in the election of directors; (ii) a reorganization, merger or consolidation, in each case, where all or substantially all of the beneficial owners immediately prior to the reorganization, merger or consolidation do not, following the transaction, beneficially own a majority of the voting power of the corporation resulting from such transaction; (iii) the sale, lease or disposition of all or a substantial part of the assets or property of the Company; or (iv) the individuals who, immediately after the Closing, constituted the Board of Directors (together with individuals who thereafter were elected as directors and whose election was approved by a majority of the directors who were serving immediately after the Closing) cease to constitute at least 50% of the members of the Board of Directors. 25 As described in Item 4, the Company may convert each Note after January 18, 2000, if certain conditions are satisfied. Conversion is permitted provided that (i) no Event of Default (as defined below) has occurred and is continuing, (ii) the market price of the Common Stock has been at least $30 per share (subject to adjustment) for a specified period of time, and (iii) that for a specified period prior to such conversion (a) the Company has not purchased any shares of Common Stock, and (b) an average daily trading volume of the Common Stock for that period, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System, is at least a specified amount. Events of Default under the Notes include: (i) nonpayment of principal or interest, (ii) certain bankruptcy events, (iii) acceleration of certain indebtedness (iv) certain covenant defaults under the Purchase Agreement and the Executive Agreement (as defined below) and (v) final judgments against the Company in excess of $3 million. Registration Rights. In connection with the purchase of the Notes, the -------------------- Company and the Limited Partnerships entered into a Registration Rights Agreement (the "Registration Rights Agreement"). A copy of the Registration Rights Agreement is filed as Exhibit (2). Under the Registration Rights Agreement, beginning two years after the date of the purchase of the Notes by the Limited Partnerships, holders of the Notes or the shares of Common Stock into which the Notes are convertible (both being referred to as "Registrable Securities"), which hold at least 25% of the shares of Common Stock 26 issuable upon conversion of the Notes, will have the right to require the Company to file a registration statement under the Securities Act covering Registrable Securities. The Limited Partnerships may request up to three such registrations. In addition, beginning two years after the date of the purchase of the Notes by the Limited Partnerships, the Registration Rights Agreement entitles the holders of Registrable Securities to "piggyback" rights (i.e., the right to participate, subject to certain exceptions, in registrations by the Company of its equity securities under the Securities Act). All expenses incurred in connection with such registrations will be borne by the Company. The Registration Rights Agreement provides for customary indemnification of holders of Registrable Securities participating in any registration of securities, including indemnification for liabilities under the Securities Act. Further, the Company has agreed that it will use its best efforts to provide and maintain the requisite public information to facilitate sales pursuant to Rule 144 of the Securities Act of the Notes and the shares of Common Stock into which such Notes are convertible. Executive Restriction Agreement. In connection with the purchase of the -------------------------------- Notes, the Company, the Limited Partnerships and Brian F. Sullivan, the president and chief executive officer of the Company (the "Executive"), have entered into the Executive Restriction Agreement (the "Executive Agreement"), dated as of July 19, 1996. The Executive Agreement prohibits, subject to certain exceptions, the sale by the Executive of Common Stock and Common Stock Equivalents (as defined in the Executive Agreement) until the second anniversary of the Closing. After the second anniversary, 27 the Executive may not sell or otherwise transfer in any transaction (other than certain permitted transfers) the Common Stock and Common Stock Equivalents he then holds in the Company to the extent that the Executive would have sold or otherwise transferred in such transaction or previous transactions in excess of 25% of the Common Stock and Common Stock Equivalents held by the Executive as of the Closing unless the holders of the Securities are allowed to participate in such sale on a pro rata basis. The Executive has also agreed to refrain from --- ---- competing with the Company for three years after (x) his employment with the Company is terminated for cause or (y) he resigns from the Company other than for good reason (as defined in the Executive Agreement). The Executive Agreement terminates at such time as the number of securities outstanding is equal to less than 25% of the Securities issued as of the Closing. A copy of the Executive Agreement is filed as Exhibit (4). The foregoing descriptions of the Purchase Agreement, the Registration Rights Agreement and the Executive Agreement in this Statement are qualified in their entirety by reference to the Purchase Agreement, the Registration Rights Agreement and the Executive Agreement, copies of which are filed as Exhibits (1), (2) and (3) hereto, respectively, and are incorporated herein by reference. Except as described herein, none of the Filing Persons or, to the knowledge of each of the Filing Persons, any of the persons listed on Schedule I or Schedule II-A, II-B-i, II-B-ii, II-B-iii or II-C hereto is a party to any contract, arrangement, understanding or relationship with respect to any securities of the Company. 28 Item 7. Material to be Filed as Exhibits. -------------------------------- (1) Securities Purchase Agreement by and among the Company and the Limited Partnerships, dated as of July 19, 1996 (2) Registration Rights Agreement between the Company and the Limited Partnerships, dated as of July 19, 1996 (3) Executive Agreement, by and among the Company, the Limited Partnerships and Brian F. Sullivan, dated as of July 19, 1996 (4) Joint Filing Agreement 29 SIGNATURE --------- After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth is true, complete and correct. July 26, 1996 GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner of GS Capital Partners, L.P. By: GS Advisors, Inc., its general partner of GS Advisors, L.P. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS ADVISORS, L.P. By: GS Advisors, Inc. its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II. (Cayman), L.P., its general partner By: GS Advisors II, Inc., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS ADVISORS II (CAYMAN), L.P. By: GS Advisors II, Inc., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II (Germany) C.L.P. By: Goldman, Sachs & Co. oHG, its managing partner By: Goldman, Sachs & Co. Finanz GmbH, its managing partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Attorney-in-fact GOLDMAN, SACHS & CO. oHG By: Goldman, Sachs & Co. Finanz GmbH, its managing partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Attorney-in-fact GOLDMAN, SACHS & CO. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: General Partner THE GOLDMAN SACHS GROUP, L.P. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: General Partner STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its managing general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President STONE STREET EMPIRE CORP. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President SCHEDULE I ---------- The following table sets forth the name of each of the general partners of Goldman, Sachs & Co. (other than The Goldman Sachs Group, L.P.) and of The Goldman Sachs Group, L.P. Unless otherwise indicated, the business address of each person listed below is 85 Broad Street, New York, NY 10004, and, unless otherwise indicated, each natural person listed below is a citizen of the United States of America. Nobuyoshi John Ehara Inc., Jun Makihara Inc., Masanori Mochida Inc., Hideo Ishihara, Inc. and Oki Matsumoto, Inc., the only corporate general partners of Goldman, Sachs & Co. and The Goldman Sachs Group, L.P., were each incorporated in the State of Delaware. The principal occupation of each natural person listed below and the principal business of each of Nobuyoshi John Ehara Inc., Jun Makihara Inc., Masanori Mochida Inc., Hideo Ishihara, Inc. and Oki Matsumoto, Inc. is as a general partner of Goldman, Sachs & Co. The persons listed below who have an asterisk marked next to their name are members of the Executive Committee of The Goldman Sachs Group, L.P. Name and Citizenship Business Address - --------------------- ---------------- The persons listed below who have an asterisk marked next to their name are members of the Executive Committee of The Goldman Sachs Group, L.P. Jon Z. Corzine* Henry M. Paulson, Jr.* Roy J. Zuckerberg* David M. Silfen* Richard M. Hayden 133 Fleet Street London EC4A 2BB, England Robert J. Hurst* Howard C. Katz Peter K. Barker 333 South Grand Avenue Los Angeles, CA 90071 Eric S. Dobkin Willard J. Overlock, Jr. Jonathan L. Cohen Name and Citizenship Business Address - --------------------- ---------------- Fredric B. Garonzik Kevin W. Kennedy William C. Landreth 4900 Sears Tower Chicago, IL 60606 Daniel M. Neidich Edward Spiegel Robert F. Cummings, Jr. Angelo DeCaro Steven G. Einhorn David B. Ford David M. Leuschen Michael R. Lynch Michael D. McCarthy Donald C. Opatrny, Jr. Thomas E. Tuft Michael P. Mortara Lloyd C. Blankfein John P. Curtin, Jr. 150 King Street West Toronto M5H 1J9, Canada Gavyn Davies 133 Fleet Street United Kingdom London EC4A 2BB, England Dexter D. Earle Nobuyoshi John Ehara 12-32, Akasaka 1-chome Japan Minato-ku, Tokyo 107, Japan Name and Citizenship Business Address - --------------------- ---------------- Nobuyoshi John Ehara Inc. J. Christopher Flowers Gary Gensler Charles T. Harris III Thomas J. Healey Stephen Hendel Robert E. Higgins Robert J. Katz Ernest S. Liu Eff W. Martin 555 California Street San Francisco, CA 94104 Charles B. Mayer, Jr. Michael J. O'Brien 133 Fleet Street United Kingdom London EC4A 2BB, England Mark Schwartz Stephen M. Semlitz Robert K. Steel John A. Thain* 133 Fleet Street London EC4A 2BB, England John L. Thornton 133 Fleet Street London EC4A 2BB, England Bracebridge H. Young, Jr. 133 Fleet Street London EC4A 2BB, England Joseph R. Zimmel Name and Citizenship Business Address - --------------------- ---------------- Barry L. Zubrow Gary L. Zwerling Jonathan R. Aisbitt 133 Fleet Street United Kingdom London EC4A 2BB, England Andrew M. Alper William J. Buckley Frank L. Coulson, Jr. Connie Kadrovach Duckworth 4900 Sears Tower Chicago, IL 60606 Richard A. Friedman Alan R. Gillespie 133 Fleet Street United Kingdom London EC4A 2BB, England Joseph H. Gleberman Jacob D. Goldfield Steven M. Heller Ann F. Kaplan Robert S. Kaplan Peter D. Kiernan III John P. McNulty T. Willem Mesdag Messe Turm 60308 Frankfurt am Main, Germany Gaetano J. Muzio 555 California Street San Francisco, CA 94104 Robin Illgen Neustein Name and Citizenship Business Address - --------------------- ---------------- Timothy J. O'Neill Scott M. Pinkus John J. Powers Stephen D. Quinn Arthur J. Reimers 133 Fleet Street London EC4A 2BB, England James P. Riley, Jr. Richard A. Sapp 133 Fleet Street London EC4A 2BB, England Donald F. Textor Thomas B. Walker III Patrick J. Ward 133 Fleet Street London EC4A 2BB, England Jeffrey M. Weingarten 133 Fleet Street London EC4A 2BB, England Jon Winkelried Richard Witten Carlos A. Cordeiro 133 Fleet Street London EC4A 2BB, England John O. Downing W. Mark Evans 3 Garden Road Canada Hong Kong Michael D. Fascitelli Sylvain M. Hefes 2 Rue de Thann France Paris, France 75017 Reuben Jeffery III 133 Fleet Street Name and Citizenship Business Address - --------------------- ---------------- London EC4A 2BB, England Lawrence H. Linden Jun Makihara 12-32, Akasaka 1-chome Japan Minato-ku, Tokyo 107, Japan Jun Makihara Inc. Masanori Mochida 12-32, Akasaka 1-chome Japan Minato-ku, Tokyo 107, Japan Masanori Mochida Inc. Robert B. Morris III 133 Fleet Street London EC4A 2BB, England Philip D. Murphy Messe Turm, D-6000 Frankfurt am Main 1, Germany Suzanne M. Nora Johnson 333 South Grand Avenue Los Angeles, CA 90071 Terence M. O'Toole Gregory K. Palm 133 Fleet Street London EC4A 2BB, England Carl G.E. Palmstierna 133 Fleet Street Sweden London EC4A 2BB, England Michael G. Rantz 133 Fleet Street London EC4A 2BB, England J. David Rogers Joseph Sassoon 133 Fleet Street Israel London EC4A 2BB, England Peter Savitz 133 Fleet Street London EC4A 2BB, England Charles B. Seelig Jr. Ralph F. Severson 555 California Street Name and Citizenship Business Address - --------------------- ---------------- San Francisco, CA 94104 Gene T. Sykes 333 South Grand Avenue Los Angeles, CA 90071 Gary A. Syman 12-32, Akasaka 1-chome Minato-ku, Tokyo 107, Japan Leslie C. Tortora John L. Townsend Lee G. Vance 133 Fleet Street London EC4A 2BB, England David A. Viniar John S. Weinberg Peter A. Weinberg Laurence M. Weiss George W. Wellde Jr. 12-32, Akasaka 1-Chome Minato-Ku, Tokyo 107, Japan Jaime E. Yordan Sharmin Mossauar-Rahmani United Kingdom Hideo Ishihara 12-32, Akasaka 1-chome Japan Minato-ku, Tokyo 107, Japan Hideo Ishihara Inc. Paul M. Achleitner Messe Turm 60308 Austria Frankfurt am Main, Germany Armen A. Avanessians Joel S. Beckman David W. Blood 133 Fleet Street London EC4A 2BB, England Zachariah Cobrinik 12-32, Akasaka 1-Chome Name and Citizenship Business Address - --------------------- ---------------- Minato-Ku, Tokyo 107, Japan Gary D. Cohn 133 Fleet Street London EC4A 2BB, England Christopher A. Cole Henry Cornell 3 Garden Road Hong Kong Robert V. Delaney Joseph Della Rosa J. Michael Evans 133 Fleet Street London EC4A 2BB, England Lawton W. Fitt Joseph D. Gatto Peter C. Gerhard Nomi P. Ghez Israel David T. Hamamoto Walter H. Haydock Munsterhof 4 8022 Zurich, Switzerland David L. Henle Francis J. Ingrassia Scott B. Kapnick 133 Fleet Street London EC4A 2BB, England Kevin M. Kelly John C. Kleinert Jonathan L. Kolatch Peter S. Kraus Name and Citizenship Business Address - --------------------- ---------------- Robert Litterman Jonathan M. Lopatin Thomas J. Macirowski Peter G.C. Mallinson 3 Garden Road United Kingdom Hong Kong Oki Matsumoto 12-32 Akasaka 1-chome Japan Minato-ku, Tokyo 107, Japan Oki Matsumoto, Inc. E. Scott Mead 133 Fleet Street New York, New York 10004 Eric M. Mindich Steven T. Mnuchin Thomas K. Montag Edward A. Mule Kipp M. Nelson 133 Fleet Street London EC4A 2BB, England Christopher K. Norton Robert J. O'Shea Wiet H. Pot 133 Fleet Street Netherlands London EC4A 2BB, England Jack L. Salzman Eric S. Schwartz Michael F. Schwerin Richard S. Sharp 133 Fleet Street United Kingdom London EC4A 2BB, England Richard G. Sherlund Michael S. Sherwood 133 Fleet Street Name and Citizenship Business Address - --------------------- ---------------- United Kingdom London EC4A 2BB, England Cody J. Smith Daniel W. Stanton Esta E. Stecher Fredric E. Steck Byron D. Trott 4900 Sears Tower Chicago 60606 Barry S. Volpert Peter S. Wheeler 3 Garden Road United Kingdom Hong Kong Anthony G. Williams 133 Fleet Street United Kingdom London EC4A 2BB, England Gary W. Williams Tracy R. Wolstencroft 100 Crescent Court, Suite 1000 Dallas, Texas 75201 Danny O. Yee 3 Garden Road Hong Kong Michael J. Zamkow Mark A. Zurack John P. Curtin, Jr., L.L.C. Terence James O'Neill Peter D. Sutherland 133 Fleet Street London EC4A 2BB, England SCHEDULE II-A The name, business address, present principal occupation or employment and citizenship of each controlling person, if any, director and executive officer of each general partner of Goldman Sachs & Co. or The Goldman Sachs Group that is a corporation are set forth below. I. Nobuyoshi John Ehara Inc. Nobuyoshi John Ehara Inc. is controlled by Nobuyoshi John Ehara, its President and one of its directors. The business address of each person listed below other than Nobuyoshi John Ehara is 85 Broad Street, New York, New York 10004, and each such person is a citizen of the United States of America. The business address of Nobuyoshi John Ehara, a citizen of Japan, is the Ark Mori Building, 12-32, Akasaka 1-chome, Minato-Ku, Tokyo 107, Japan.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Robert J. Katz Director and General Partner of Goldman, Chairman of the Board Sachs & Co. Nobuyoshi John Ehara President and Director General Partner of Goldman, Sachs & Co. David A. Viniar Director General Partner of Goldman, Sachs & Co. Esta E. Stecher Vice Chairman of the General Partner of Goldman, Board and Treasurer Sachs & Co. James B. McHugh Secretary Vice President of Goldman, Sachs & Co.
II. Masanori Mochida Inc. Masanori Mochida Inc. is controlled by Masanori Mochida, its President and one of its directors. The business address of each person listed below other than Masanori Mochida is 85 Broad Street, New York, New York 10004, and each such person is a citizen of the United States of America. The business address of Masanori Mochida, a citizen of Japan, is 12-32, Akasaka 1-chome, Minato-ku, Tokyo 107, Japan.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Robert J. Katz Director and General Partner of Goldman, Chairman of the Board Sachs & Co. Masanori Mochida President and Director General Partner of Goldman, Sachs & Co.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- David A. Viniar Director General Partner of Goldman, Sachs & Co. Esta E. Stecher Vice Chairman of the General Partner of Goldman, Board and Treasurer Sachs & Co. James B. McHugh Secretary Vice President of Goldman, Sachs & Co.
III. Jun Makihara Inc. Jun Makihara Inc. is controlled by Jun Makihara, its President and one of its directors. The business address of each person listed below other than Jun Makihara is 85 Broad Street, New York, New York 10004, and each such person is a citizen of the United States of America. The business address of Jun Makihara, a citizen of Japan, is 12-32, Akasaka 1- chome, Minato-Ku, Tokyo 107, Japan.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Robert J. Katz Director and General Partner of Goldman, Chairman of the Board Sachs & Co. Jun Makihara President and Director General Partner of Goldman, Sachs & Co. David A. Viniar Director General Partner of Goldman, Sachs & Co. Esta E. Stecher Vice Chairman of the General Partner of Goldman, Board and Treasurer Sachs & Co. James B. McHugh Secretary Vice President of Goldman, Sachs & Co.
IV. Hideo Ishihara Inc. Hideo Ishihara Inc. is controlled by Hideo Ishihara, its President and one of its directors. The business address of each person listed below other than Hideo Ishihara is 85 Broad Street, New York, New York 10004, and each such person is a citizen of the United States of America. The business address of Hideo Ishihara, a citizen of Japan, is the Ark Mori Building, 12-32, Akasaka 1- chome, Minato-Ku, Tokyo 107, Japan.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Robert J. Katz Director and General Partner of Goldman Chairman of the Board Sachs & Co. Hideo Ishihara President and Director General Partner of Goldman,
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Sachs & Co. David A. Viniar Director General Partner of Goldman, Sachs & Co. Esta E. Stecher Vice Chairman of the General Partner of Goldman, Board and Treasurer Sachs & Co. James B. McHugh Secretary Vice President of Goldman, Sachs & Co.
V. Oki Matsumoto Inc. Oki Matsumoto Inc. is controlled by Oki Matsumoto, its President and one of its directors. The business address of each person listed below other than Oki Matsumoto is 85 Broad Street, New York, New York 10004, and each such person is a citizen of the United States of America. The business address of Oki Matsumoto, a citizen of Japan, is the Ark Mori Building, 12-32, Akasaka 1-chome, Minato-Ku, Tokyo 107, Japan.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Robert J. Katz Director, Chairman of the General Partner of Goldman Board and Vice President Sachs & Co. Oki Matsumoto President and Director General Partner of Goldman, Sachs & Co. Esta E. Stecher Director, Vice Chairman of the General Partner of Goldman, Board, Vice President and Sachs & Co. Treasurer James B. McHugh Secretary Vice President of Goldman, Sachs & Co.
SCHEDULE II-B-i --------------- The name, business address, present principal occupation of each director and executive officer of GS Advisors, Inc., the sole general partner of GS Advisors, L.P., which is the sole general partner of GS Capital Partners II, L.P., are set forth below. The business address for all the executive officers and directors listed below except for Henry Cornell is 85 Broad Street, New York, New York 10004. The business address of Henry Cornell is 3 Garden Road, Hong Kong. All executive officers and directors listed below are United States citizens.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Richard A. Friedman Director/President General Partner of Goldman, Sachs & Co. Terence M. O'Toole Director/Vice President General Partner of Goldman, Sachs & Co. Carla H. Skodinski Vice President/Secretary Vice President of Goldman, Sachs & Co. Elizabeth S. Cogan Treasurer Vice President of Goldman, Sachs & Co. James B. McHugh Assistant Secretary Vice President of Goldman, Sachs & Co. Joseph H. Gleberman Director/Vice President General Partner of Goldman, Sachs & Co. Henry Cornell Vice President General Partner of Goldman, Sachs & Co. Barry S. Volpert Director/Vice President General Partner of Goldman, Sachs & Co.
SCHEDULE II-B-ii ---------------- The name, business address, present principal occupation of each director and executive officer of GS Advisors II, Inc., the sole general partner of GS Advisors II (Cayman), L.P., which is the sole general partner of GS Capital Partners II Offshore, L.P., are set forth below. The business address for all the executive officers and directors listed below except for Henry Cornell is 85 Broad Street, New York, New York 10004. The business address of Henry Cornell is 3 Garden Road, Hong Kong. All executive officers and directors listed below are United States citizens.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Richard A. Friedman Director/President General Partner of Goldman, Sachs & Co. Terence M. O'Toole Director/Vice President General Partner of Goldman, Sachs & Co. Carla H. Skodinski Vice President/Secretary Vice President of Goldman, Sachs & Co. Elizabeth S. Cogan Treasurer Vice President of Goldman, Sachs & Co. James B. McHugh Assistant Secretary Vice President of Goldman, Sachs & Co. Joseph H. Gleberman Director/Vice President General Partner of Goldman, Sachs & Co. Henry Cornell Vice President General Partner of Goldman, Sachs & Co. Barry S. Volpert Director/Vice President General Partner of Goldman, Sachs & Co.
SCHEDULE II-B-iii ----------------- The name, business address, present principle occupation of each director and executive officer of Stone Street Empire Corp., the sole general partner of Stone Street Fund 1996, L.P. and the managing general partner of Bridge Street 1996, L.P., are set forth below. The business address for each of the executive officers and directors listed below is 85 Broad Street, New York, New York 10004. All executive officers and directors listed below are United States citizens.
Present Principle Name Position Occupation - ---- -------- ----------------- Friedman, Richard A. Director/Vice General Partner of President Goldman, Sachs & Co. Nash, Avi M. Director/Vice Vice President of President Goldman, Sachs & Co. Henry, Mary C. Director/Vice Vice President of President Goldman, Sachs & Co. Henle, David L. Director/Vice General Partner of President Goldman, Sachs & Co. Spilker, Marc A. Director/Vice Vice President of President Goldman, Sachs & Co. Kolatch, Jonathan L. Director/Vice General Partner of President Goldman, Sachs & Co. Mehra, Sanjeev K. Director/Vice Vice President of President Goldman, Sachs & Co. Mindich, Eric M. Director/Vice General Partner of President/Treasurer Goldman, Sachs & Co.
Sachs, Peter G. Director/Vice Limited Partner of President Goldman, Sachs & Co. Fuhrman, Glenn R. Director/Vice Vice President of President Goldman, Sachs & Co. Sacerdote, Peter M. Director/Chairman/ Limited Partner of C.E.O./President Goldman, Sachs & Co. Greenwald, David J. Vice President/ Vice President of Assistant Secretary Goldman, Sachs & Co. Skodinski, Carla H. Vice President Vice President of Goldman, Sachs & Co.
SCHEDULE II-C ------------- The name, business address, present occupation of each executive officer or director of Goldman, Sachs & Co. Finanz GmbH which is the sole managing general partner of Goldman, Sachs & Co. oHG are set forth below. The business address for each of the persons listed below other than Christopher K. Norton is MesseTurm, Friedrich-Ebert-Anlage 49, 60308 Frankfurt am Main, Germany. All directors and executive officers other than Paul M. Achleitner and Ernst Tschoeke are United States citizens. Paul M. Achleitner is a citizen of Austria. Ernst Tschoeke is a citizen of Germany.
Name and Business Address Position Present Principal Occupation - ------------------------- -------- ---------------------------- Paul M. Achleitner Managing Director General Partner of Goldman, Sachs & Co. Philip D. Murphy Managing Director General Partner of Goldman, Sachs & Co. Christopher K. Norton Managing Director General Partner of Goldman, Sachs & Co. Ernst Tschoeke Managing Director Executive Director of Goldman, Sachs & Co. oHG
SCHEDULE III ------------ In settlement of SEC Administrative Proceeding File No. 3-7646 In the Matter of the Distribution of Securities Issued by Certain Government Sponsored Enterprises, Goldman, Sachs & Co., (the "Firm") without admitting or denying the findings consented to the entry of an Order dated January 16, 1992 along with numerous other securities firms. The SEC found that the Firm in connection with its participation in the primary distributions of certain unsecured debt securities issued by Government Sponsored Enterprises ("GSEs") made and kept certain records that did not accurately reflect the Firm's customers' orders for GSEs' securities and/or offers, purchases or sales by the Firm of the GSEs' securities effected by the Firm in violation of Section 17(a) of the Exchange Act and 17 C.F.R. Sections 240.17a-3 and 240.17a-4. The Firm was ordered to cease and desist from committing or causing future violations of the aforementioned sections of the Exchange Act in connection with any primary distributions of unsecured debt securities issued by the GSEs, pay a civil money penalty to the United States Treasury in the amount of $100,000 and maintain policies and procedures reasonably designed to ensure the Firm's future compliance with the aforementioned sections of the Exchange Act in connection with any primary distributions of unsecured debt securities issued by the GSEs. In SEC Administrative Proceeding File No.3-8282 In the Matter of Goldman, Sachs & Co., the Firm without admitting or denying the allegations settled administrative proceedings involving alleged books and records and supervisory violations relating to eleven trades in the secondary markets for U.S. Treasury securities in 1985 and 1986. The SEC alleged that the Firm had failed to maintain certain records required pursuant to Section 17(a) of the Exchange Act and had also failed to supervise activities relating to the aforementioned trades in violation of Section 15(b)(4)(E) of the Exchange Act. The Firm was ordered to cease and desist from committing or causing any violation of the aforementioned sections of the Exchange Act, pay a civil money penalty to the SEC in the amount of $250,000 and establish policies and procedures reasonably designed to assure compliance with Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. EXHIBIT INDEX Exhibit No. Exhibit (1) Securities Purchase Agreement by and among the Company and the Limited Partnerships, dated as of July 19, 1996 (2) Registration Rights Agreement between the Company and the Limited Partnerships, dated as of July 19, 1996 (3) Executive Agreement, by and among the Company, the Limited Partnerships and Brian F. Sullivan, dated as of July 19, 1996 (4) Joint Filing Agreement EX-99.1 2 SECURITIES PURCHASE AGREEMENT EXHIBIT 1 SECURITIES PURCHASE AGREEMENT AMONG GS CAPITAL PARTNERS II, L.P., GS CAPITAL PARTNERS II OFFSHORE, L.P., GOLDMAN, SACHS & CO. VERWALTUNGS GmbH, STONE STREET FUND 1996, L.P., BRIDGE STREET FUND 1996, L.P., AND RECOVERY ENGINEERING, INC. Dated as of July 19, 1996 TABLE OF CONTENTS Page 1. Issuance and Sale of Notes............................................. 1 1.1. Issuance, Purchase and Sale of Notes............................. 1 1.2. Closing.......................................................... 1 1.3. Actions at the Closing........................................... 1 1.4. Definitions...................................................... 3 2. Representations and Warranties of the Company.......................... 3 2.1. Organization and Qualification................................... 3 2.2. Due Authorization................................................ 3 2.3. Subsidiaries..................................................... 4 2.4. SEC Reports...................................................... 4 2.5. Financial Statements; Material Adverse Change.................... 5 2.6. Litigation....................................................... 5 2.7. Title to Properties; Insurance................................... 5 2.8. Governmental Consents, etc....................................... 5 2.9. Holding Company Act and Investment Company Act................... 6 2.10. Taxes............................................................ 6 2.11. Conflicting Agreements and Charter Provisions.................... 7 2.12. Capitalization................................................... 7 2.13. Disclosure....................................................... 8 2.14. Status of Securities............................................. 8 2.15. Registration Under Exchange Act.................................. 8 2.16. Employee Plans................................................... 8 2.17. Employment Relations and Agreements.............................. 9 2.18. Possession of Franchises, Licenses, Etc.......................... 10 2.19. Compliance with Laws............................................. 10 2.20. Intellectual Property Rights..................................... 10 2.21. Offering of Securities........................................... 11 2.22. Use of Proceeds.................................................. 12 2.23. Unlawful Use of Proceeds......................................... 12 2.24. Brokers or Finders............................................... 12 2.25. Closing Actions.................................................. 12 2.26. Operating Company................................................ 12 2.27. Election of Director............................................. 12 3. Representations and Warranties of the Purchasers....................... 13 (i) Page 3.1. Organization and Qualification................................... 13 3.2. Due Authorization................................................ 13 3.3. Conflicting Agreements and Other Matters......................... 13 3.4. Acquisition for Investment....................................... 13 3.5. Brokers or Finders............................................... 14 3.6. Accredited Investor.............................................. 14 4. Registration, Exchange and Transfer of Notes........................... 14 4.1. The Note Register; Persons Deemed Owners......................... 14 4.2. Issuance of New Notes Upon Exchange or Transfer.................. 14 5. Payment of Notes....................................................... 14 5.1. Home Office Payment.............................................. 14 5.2. Limitation on Interest........................................... 15 5.3. No Offer of Prepayment........................................... 15 5.4. Interest......................................................... 15 6. Covenants of the Company............................................... 15 6.1. Restrictions on the Company...................................... 15 6.2. Compliance with Laws............................................. 17 6.3. Limitation on Agreements......................................... 17 6.4. Preservation of Franchises and Existence......................... 17 6.5. Insurance........................................................ 17 6.6. Payment of Taxes and Other Charges............................... 18 6.7. ERISA............................................................ 18 6.8. Lost, Stolen, Damaged and Destroyed Securities................... 18 6.9. Financial Statements and Other Reports........................... 19 6.10. Inspection of Property; Book and Records......................... 20 6.11. Board Membership................................................. 20 6.12. Reimbursement of Certain Expenses................................ 22 6.13. Preemptive Right................................................. 22 6.14. Notice of Breach................................................. 23 7. Events of Default and Remedies......................................... 23 7.1. Events of Default................................................ 23 7.2. Acceleration of Maturity......................................... 25 7.3. Other Remedies................................................... 25 7.4. Conduct no Waiver; Collection Expenses........................... 26 7.5. Annulment of Acceleration........................................ 26 (ii) Page 7.6. Remedies Cumulative.............................................. 26 8. Redemption of Securities............................................... 27 8.1. Redemptions of Notes on Request.................................. 27 8.2. Change in Control................................................ 28 9. Conversion............................................................. 29 9.1. Holder's Option to Convert Notes into Common Stock............... 29 9.2. Company's Option to Convert Notes into Common Stock.............. 29 9.3. Exercise of Conversion Privilege................................. 29 9.4. Fractions of Shares; Interest.................................... 31 9.5. Reservation of Stock; Listing Rights............................. 31 9.6. Adjustment of Conversion Price................................... 32 9.7. Notice of Certain Corporate Actions.............................. 37 9.8. Reports as to Adjustments........................................ 37 10. Interpretation......................................................... 38 10.1 Definitions...................................................... 38 10.2. Accounting Principles............................................ 45 11. Miscellaneous.......................................................... 45 11.1. Payments......................................................... 45 11.2. Severability..................................................... 46 11.3. Specific Enforcement............................................. 46 11.4. Entire Agreement................................................. 46 11.5. Counterparts..................................................... 46 11.6. Notices and other Communications................................. 46 11.7. Amendments....................................................... 47 11.8. Cooperation...................................................... 48 11.9. Successors and Assigns........................................... 48 11.10.Expenses and Remedies; Environmental Waiver...................... 48 11.11.Survival of Representations and Warranties....................... 50 11.12.Transfer of Securities........................................... 50 11.13.Governing Law.................................................... 50 11.14.Submission to Jurisdiction....................................... 50 11.15.Service of Process............................................... 51 11.16.Waiver of Jury Trial............................................. 51 11.17.Public Announcements............................................. 51 11.18.Signatures....................................................... 51 (iii) SCHEDULES --------- Schedule 1.1 Schedule 2.3 Schedule 2.5 Schedule 2.6 Schedule 2.8 Schedule 2.10 Schedule 2.12 Schedule 2.17 Schedule 2.20 Schedule 2.24 EXHIBITS -------- Exhibit A Form of Note Exhibit B Recovery Engineering, Inc. Lease Proposal, dated June 27, 1996 (iv) THIS SECURITIES PURCHASE AGREEMENT, dated as of July 19, 1996 (this "Agreement"), between RECOVERY ENGINEERING INC., a Minnesota corporation (the "Company"), and GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP"), GS CAPITAL PARTNERS II OFFSHORE, L.P., a Cayman Islands limited partnership, GOLDMAN, SACHS & CO. VERWALTUNGS GmbH, STONE STREET FUND 1996, L.P., a Delaware limited partnership, and BRIDGE STREET FUND 1996, L.P., a Delaware limited partnership (the foregoing parties, other than the Company, being referred to herein collectively as the "Purchasers"). WHEREAS, the Purchasers wish to purchase from the Company, and the Company wishes to sell to the Purchasers, 5% Convertible Notes due 2003 (the "Notes") in the aggregate principal amount of $15,000,000; WHEREAS, the Notes shall be convertible (under the circumstances described herein) into shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"); and WHEREAS, the Purchasers and the Company desire to provide for such purchase and sale and to establish various rights and obligations in connection therewith. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the parties hereto agree as follows: 1. Issuance and Sale of Notes. -------------------------- 1.1. Issuance, Purchase and Sale of Notes. Upon the terms set forth ------------------------------------ herein, the Company shall sell to each Purchaser, and the Purchasers, jointly and severally, shall purchase from the Company, Notes in the aggregate principal amount set forth opposite the Purchasers' names on Schedule 1.1 (the aggregate principal amount of such Notes, the "Initial Principal Balance"), at a price equal to the sum of 100% of each Purchaser's portion of the Initial Principal Balance (the "Purchase Price"). Each Note shall be in the form of Exhibit A hereto. 1.2. Closing. The closing of the transactions contemplated hereby ------- (the "Closing") will take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York, at 9:00 a.m. on the date hereof (the "Closing Date"). 1.3. Actions at the Closing. Simultaneously with, or prior to, the ---------------------- execution and delivery of this Agreement, the following actions (the "Closing Actions") shall occur, or shall have occurred and shall be in full force and effective as of the Closing Date: (a) The Executive Restriction Agreement, dated as of the date hereof, among the Company, Brian F. Sullivan and the Purchasers (the "Executive Restriction Agreement") shall be duly executed and delivered by the parties thereto. (b) The Registration Rights Agreement, dated as of the date hereof, between the Company and the Purchasers (the "Registration Rights Agreement," and together with this Agreement and the Executive Restriction Agreement, the "Agreements") shall be duly executed and delivered by the parties thereto. (c) The Company shall deliver to the Purchasers: (i) long-form certificates of good standing of the Company from the Secretary of State of, or a person with similar authority in, its state of incorporation, dated as of a date no earlier than seven Business Days prior to the Closing, (ii) a certificate of an officer of the Company certifying in writing as to the incumbency of each of the officers of the Company executing the Agreements, (iii) certified copies of the resolutions duly adopted by the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of the Agreements, the issuance of the Notes, the reservation for issuance upon the conversion of the Notes of an aggregate of such number of shares of Common Stock as shall be required to be issued upon conversion of the Notes, and the consummation of all other transactions contemplated hereby and thereby, as applicable. (d) The Company shall deliver to the Purchasers certified copies, as of a date as close as practicable to the Closing, of the Articles of Incorporation and the By-Laws of the Company. (e) The Purchasers shall receive from Winthrop & Weinstine, P.A., counsel to the Company, an opinion addressed to the Purchasers, dated as of the Closing, satisfactory in form and substance to the Purchasers. (f) The Company shall have in place, with financially sound and reputable insurers, directors' and officers' liability insurance in the amount of $5,000,000, in form satisfactory to the Purchasers. (g) The Company shall have terminated and repaid in full all amounts outstanding or owing under the Credit Agreement, dated March 7, 1996, between First Bank National Association and the Company. (h) The Board of Directors of the Company shall have taken all necessary action to increase the size of the Board of Directors by one and as required by GSCP to elect Sanjay Patel (or another person designated by GSCP) (the "Initial Securities Designee") to the Board of Directors of the Company effective, without any further action, immediately upon the Closing. -2- (i) The Company shall deliver to the Purchasers, against payment in full of the Purchase Price, Notes in such denominations as the Purchasers have requested, dated the Closing Date and registered in the names requested by the Purchasers, in an aggregate principal amount corresponding to each Purchaser's portion of the Initial Principal Balance. The Closing of the purchase and sale of the Notes shall be deemed to have taken place in the State of New York. 1.4. Definitions. Certain capitalized terms used in this Agreement ----------- are defined in Section 10 hereof. 2. Representations and Warranties of the Company. --------------------------------------------- The Company represents and warrants to each of the Purchasers as of the date hereof as follows: 2.1. Organization and Qualification. Each of the Company and its ------------------------------ Subsidiaries is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction in which it is incorporated and has all requisite power to own its respective property and to carry on its respective business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the respective business conducted or property owned by it makes such qualification necessary and where the failure so to qualify would be, individually or in the aggregate, reasonably likely to cause a material adverse effect on the business, condition (financial or otherwise), operations, assets, or prospects of the Company and its Subsidiaries taken as a whole (a "Material Adverse Effect"). 2.2. Due Authorization. The execution and delivery of each of the ----------------- Agreements, the issuance and sale of the Notes by the Company and compliance by the Company with all the terms and provisions of each of the Agreements and the Notes, including, without limitation, the issuance of the Common Stock upon conversion of the Notes, (i) are within the corporate power and authority of the Company; (ii) do not or will not require the approval or consent of the stockholders of the Company; and (iii) have been authorized by all requisite corporate proceedings on the part of the Company. Each of the Agreements has been duly executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable in accordance with its respective terms. Prior to the date hereof, a committee of the Board of Directors of the Company formed in accordance with paragraph (d) of Section 302A.673 of the Minnesota Business Corporation Act (the "MBCA") has, in accordance with the provisions of such paragraph, unanimously approved the transactions contemplated by each of the -3- Agreements, including, without limitation, the acquisition by the Purchasers of the Notes and the conversion by the holders thereof of the Notes into shares of Common Stock, for the purposes of Section 302A.673. The Company has furnished to the Purchasers true and correct copies of the Company's Articles of Incorporation and By-laws as in effect on the date of this Agreement. 2.3. Subsidiaries. Schedule 2.3 hereto correctly sets forth the name ------------ of each Subsidiary of the Company, the jurisdiction of its incorporation or organization, the number of issued and outstanding shares of capital stock or other equity interests of each such Subsidiary. Except as set forth on Schedule 2.3 hereto, all of the outstanding shares of capital stock or other equity interests of each of the Company's Subsidiaries have been validly issued, fully paid and nonassessable and free of preemptive rights, and are owned, beneficially and of record, by the Company, free and clear of any liens or encumbrances. As of the date hereof, except as set forth on the Schedule 2.3 hereto, no Subsidiary of the Company has outstanding any Capital Stock Equivalents or any scrip, rights to subscribe to, calls or commitments of any character relating to its capital stock or other equity interests, including, without limitation, its Capital Stock Equivalents, or contracts, commitments, understandings, or arrangements by which it is or may become bound to issue any shares of capital or other equity interests, including without limitation, any Capital Stock Equivalents, or rights to purchase or acquire any shares of capital stock or other equity interests, including, without limitation, any Capital Stock Equivalents. As of the date hereof, no Subsidiary of the Company is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of the shares of its capital stock or other equity interests or any of its Capital Stock Equivalents, except as set forth on Schedule 2.3. Since December 31, 1995, the Company has not adopted or amended, and the Board of Directors of the Company has not authorized the adoption or amendment of, any stock option, stock purchase or similar plan. 2.4. SEC Reports. The Company has filed all proxy statements, reports ----------- and other documents required to be filed by it under the Exchange Act since January 1, 1993; and the Company has furnished the Purchasers copies of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, all proxy statements and reports under the Exchange Act filed by the Company after such date, the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, each as filed with the SEC (collectively, the "SEC Reports"). Each SEC Report was in compliance with the requirements of its respective report form and did not on the date of filing contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and as of the date hereof, there is no fact not disclosed in the SEC Reports which relates to the Company or any of its Subsidiaries and which, individually or in the aggregate, may have a Material Adverse Effect. -4- 2.5. Financial Statements; Material Adverse Change. The financial --------------------------------------------- statements (including any related notes) included in the SEC Reports have been prepared in accordance with generally accepted accounting principles consistently followed (except as indicated in the notes thereto) throughout the periods involved and fairly present the consolidated financial condition, results of operations and changes in stockholders' equity of the Company and its Subsidiaries as of the dates thereof and for the periods ended on such dates (in each case subject, as to interim statements, to changes resulting from year-end adjustments, none of which will be material in amount or effect). Except as set forth on Schedule 2.5 hereto, the Company has no material liabilities, contingent or otherwise, not reflected on the Company's balance sheet as of March 31, 1996 included in the SEC Reports, other than any such liabilities incurred in the ordinary course of business since March 31, 1996. Since December 31, 1995, the Company and each of its Subsidiaries has operated its respective businesses only in the ordinary course and nothing has occurred that has or may cause a Material Adverse Effect, other than as disclosed or referred to in the SEC Reports. 2.6. Litigation. There is no action, suit, investigation or ---------- proceeding pending or, to the knowledge of the Company, threatened, against the Company or any of its Subsidiaries or any of their respective properties or assets by or before any court, arbitrator or governmental body, department, commission, board, bureau, agency or instrumentality, which questions the validity or enforceability of, or seeks to enjoin or invalidate any of the Agreements or the Notes or any action taken or to be taken pursuant hereto or thereto, or, except as set forth in the SEC Reports or in Schedule 2.6 hereto, which, individually or in the aggregate, has or may cause a Material Adverse Effect, and neither the Company nor any of its Subsidiaries is in default in any material respect with respect to any judgment, order, writ, injunction, decree or award. 2.7. Title to Properties; Insurance. Each of the Company and its ------------------------------ Subsidiaries has good and valid title to, or, in the case of property leased by any of them as lessee, a valid and subsisting leasehold interest in, its properties and assets, free and clear of all liens and encumbrances, except in each case for such defects in title and such other liens and encumbrances which are disclosed in the SEC Reports or which do not individually or in the aggregate materially detract from the value to the Company of such properties and assets. The Company and its Subsidiaries maintain insurance in such amounts (to the extent available in the public market), including self insurance, retainage and deductible arrangements, and of such a character as is reasonable for companies engaged in the same or similar business. 2.8. Governmental Consents, etc. Except as set forth on Schedule 2.8 --------------------------- hereto, the Company is not required to obtain any consent, approval or authorization of, or to make any declaration or filing with, any governmental authority as a condition to or in connection with the valid execution, delivery and performance of any of the -5- Agreements and the valid offer, issue, sale or delivery of the Notes, or the shares of Common Stock into which such Notes are convertible, or the performance by the Company of its obligations in respect thereof other than for any filings required pursuant to federal or state securities laws to effect any registration of the Securities pursuant to the Registration Rights Agreement and other than for a filing on Form 8K under the Exchange Act to report the consummation of the transactions contemplated hereby. 2.9. Holding Company Act and Investment Company Act. Neither the ---------------------------------------------- Company nor any Subsidiary is: (i) a "public utility company" or a "holding company," or an "affiliate" or a "subsidiary company" of a "holding company," or an "affiliate" of such a "subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (ii) a "public utility," as defined in the Federal Power Act, as amended, or (iii) an "investment company" or an "affiliated person" thereof or an "affiliated person" of any such "affiliated person," as such terms are defined in the Investment Company Act of 1940, as amended. 2.10. Taxes. (a) Except as set forth on Schedule 2.10 hereto, (i) each ----- of the Company and its Subsidiaries has timely filed all Tax Returns required by Law to have been filed by it, (ii) all such Tax Returns were complete and correct in all material respects, (iii) each of the Company and its Subsidiaries has paid all Taxes, whether or not shown on such Tax Returns, except Taxes the validity or amount of which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside on the Company's balance sheet as of March 31, 1996 included in the SEC Reports, (iv) the accruals and reserves for Taxes reflected in the Company's balance sheet as of March 31, 1996 included in the SEC Reports are adequate in all material respects to cover any liability of the Company or any of its Subsidiaries for Taxes for periods through the date thereof, (v) if each of the Company and its Subsidiaries file its Tax Returns for the taxable year which includes the date hereof in conformance with its past practices and Tax reporting, there will be no basis for any material adverse audit adjustments with respect to any of the Company or its Subsidiaries under any of the provisions of the Code, or any provisions of state, local or foreign tax Law, with respect to operations and activities of the Company and the Subsidiaries during the period which began on April 1, 1996 and ends on the date hereof, and (vi) all amounts required to be collected or withheld by each of the Company and its Subsidiaries have been collected or withheld and any such amounts that are required to be remitted to any taxing authority have been duly remitted. (b) All income Tax Returns of the Company and each of its Subsidiaries with respect to taxable periods through the year ended December 31, 1992 have been examined and closed or are Tax Returns with respect to which the applicable statute of limitations has expired without extension or waiver. No taxing authority in a jurisdiction where any of the Company or its Subsidiaries do not file Tax Returns has made a claim, -6- assertion or threat that such non-filing entity is or may be subject to taxation by such jurisdiction. Except as set forth on Schedule 2.10 hereto, neither the Company nor any of its Subsidiaries is or has been a party to any tax sharing agreement to which any Person not presently included in the consolidated federal income Tax Return filed by the Company is a party. 2.11. Conflicting Agreements and Charter Provisions. Neither the --------------------------------------------- Company nor its Subsidiaries is a party to any contract or agreement or subject to any provision of charter, bylaw or other organizational document or judgment or decree which, individually or in the aggregate, has or may cause a Material Adverse Effect. None of (i) the execution and delivery of any of the Agreements and the issuance, sale or delivery of the Notes, and the Common Stock into which such Notes are convertible, (ii) the fulfillment of and compliance with the terms and provisions hereof and thereof and of the Notes, (iii) the payment of interest on the Notes and the redemption of the Notes as contemplated by the Notes and the Agreements, or (iv) the conversion of the Notes as contemplated by the Notes and the Agreements, will conflict with or result in a breach of the terms, conditions or provisions of, or give rise to a right of termination under, or constitute a default under, or result in any violation of, the Articles of Incorporation, By-laws or other organizational documents of the Company or any of its Subsidiaries or any mortgage, agreement, instrument, or Law, to which the Company or any of its Subsidiaries or any of their respective property is subject. Neither the Company nor any of its Subsidiaries is in default (or has reason to believe that it may or will be in default) in any material respect under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligation for borrowed money. Neither the Company nor any of its Subsidiaries is (or has any reason to believe that it may or will be) in any material respect in default under or in violation of any of their respective contracts or agreements, including without limitation, contracts and agreements, with governmental authorities, or any other instrument by which the Company or any of its Subsidiaries is bound. Neither the execution and delivery of this Agreement nor the issuance, sale or delivery of the Notes or the Common Stock into which the Notes are convertible shall result in adjustment in the number of shares of Common Stock issuable by the Company pursuant to any of its Capital Stock Equivalents. 2.12. Capitalization. The authorized capital stock of the Company -------------- consists of 100,000,000 shares of capital stock. As of July 9, 1996, (i) 4,321,325 shares of Common Stock were issued and outstanding and (ii) no other shares of capital stock of the Company are issued or outstanding. All of the outstanding shares of Common Stock have been validly issued and are fully paid and nonassessable. No capital stock of the Company is entitled to preemptive rights. Except for the Rights, and except for the Capital Stock Equivalents listed on Schedule 2.12 hereto, the Company does not have -7- outstanding any Capital Stock Equivalents or any scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to shares of capital stock or Capital Stock Equivalents of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of its capital stock or any Capital Stock Equivalents or rights to purchase or acquire any shares of its capital stock or any Capital Stock Equivalents. Except as set forth on Schedule 2.12 hereto, since March 31, 1996, the Company has not changed the amount of its authorized capital stock or subdivided or otherwise changed any shares of any class of its capital stock, whether by way of reclassification, recapitalization, stock split or otherwise, or issued or reissued, or agreed to issue or reissue, any of its capital stock. As of the date hereof, the Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of the shares of its capital stock or any of its Capital Stock Equivalents, except as set forth on Schedule 2.12 hereto. 2.13. Disclosure. Neiteher this Agreement nor any Schedule hereto, ---------- nor any of the information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Purchasers and their representatives in connection with the transactions contemplated hereby, contains any untrue statement of material fact or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.14. Status of Securities. The Notes have been duly authorized by all -------------------- necessary corporate action on the part of the Company (no consent or approval of stockholders being required by law, the Articles of Incorporation or the By-laws of the Company or otherwise), and the Common Stock issuable upon conversion of the Notes, will be validly issued and outstanding, fully paid and nonassessable, and the issuance of such Common Stock is not and will not be subject to preemptive rights of any other stockholder of the Company. Such shares of Common Stock have been validly reserved for issuance. 2.15. Registration Under Exchange Act. The Common Stock of the Company ------------------------------- has been registered pursuant to Section 12(g) of the Exchange Act. The Company has not separately registered the Notes or the Common Stock into which the Notes are convertible as a class pursuant to Section 12 of the Exchange Act. Neither the Notes nor the Common Stock into which the Notes will be convertible will be registered as such class and such registration is not required except as otherwise required by the provisions of the Registration Rights Agreement. 2.16. Employee Plans. (a) Each of the Company and its Subsidiaries and -------------- its Subsidiaries and ERISA Affiliates has complied in all material respects with, and performed in all material respects all contractual obligations and all obligations under applicable Laws required to be performed by it under or with respect to, each of the Company Benefit Plans and each -8- related trust agreement or insurance contract. Except for contributions and other payments which are not material, all contributions and other payments required to be made by each of the Company and its Subsidiaries and ERISA Affiliates to any Company Benefit Plan or other Plan prior to the date hereof have been made. All accruals or contributions required to be made under any Company Benefit Plan have been made. There is no material claim, dispute, grievance, charge, complaint, restraining or injunctive order, litigation or proceeding pending, threatened or anticipated (other than routine claims for benefits) against or relating to any Company Benefit Plan or any other Plan with respect to which either the Company or any of its Subsidiaries or ERISA Affiliates may have liability or against the assets of any Company Benefit Plan or any such other Plan. Neither the Company, nor any of its Subsidiaries or ERISA Affiliates has communicated generally to employees or specifically to any employee regarding any future material increase of benefit levels (or future creations of new benefits) with respect to any Company Benefit Plan beyond those currently reflected in the Company Benefit Plans. Neither the Company nor any of its Subsidiaries or ERISA Affiliates presently sponsors, maintains, contributes to, nor is the Company or any of its Subsidiaries or ERISA Affiliates required to contribute to, nor has the Company or any of its Subsidiaries or ERISA Affiliates ever sponsored, maintained, contributed to, or been required to contribute to, any employee pension benefit plan within the meaning of Section 3(2) of ERISA or any multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA (a "Multiemployer Plan"), other than a retirement sharing plan (if any) which is a defined contribution plan qualified under Section 401 of the Code. (b) Neither the Company nor any of its Subsidiaries or ERISA Affiliates has incurred, nor has any event occurred which has imposed or is reasonably likely to impose upon the Company or any of its Subsidiaries or ERISA Affiliates, any material withdrawal liability (partial or complete) in respect of any Multiemployer Plan which withdrawal liability has not been satisfied or discharged in full. (c) The execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in the imposition of any federal excise Tax or penalty with respect to any Company Benefit Plan under the Code or under ERISA. (d) No payment or benefit which will or may be made by the Company or any of its Subsidiaries or ERISA Affiliates with respect to any of their employees under any plan or agreement in effect on the date hereof will be characterized as an "excess parachute payment" within the meaning of section 280G(b)(1) of the Code. 2.17. Employment Relations and Agreements. Except as set forth on ----------------------------------- Schedule 2.17 hereto, (i) each of the Company and its Subsidiaries is, and at all times has -9- been, in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice; (ii) no unfair labor practice complaint against the Company or any of its Subsidiaries is pending before the National Labor Relations Board; (iii) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the knowledge of the Company, threatened against or involving the Company or any of its Subsidiaries; (iv) no representation question exists respecting the employees of the Company or any of its Subsidiaries; (v) no material grievance exists, no arbitration proceeding arising out of or under any collective bargaining agreement is pending and no material claim therefor has been asserted; (vi) no collective bargaining agreement is currently being negotiated by the Company or any of its Subsidiaries; and (vii) the Company and its Subsidiaries taken as a whole have not experienced any material labor difficulty during the last three years. There has not been and, to the knowledge of the Company, there will not be, any change in relations with employees of the Company or any of its Subsidiaries as a result of the transactions contemplated by this Agreement. Other than as contemplated by the Purchaser Documents, neither the Company nor any of its Subsidiaries has any written, or to the knowledge of the Company, any binding oral, employment or severance agreement with any Person. 2.18. Possession of Franchises, Licenses, Etc. The Company and its ---------------------------------------- Subsidiaries possess all franchises, certificates, licenses, permits and other authorizations from governmental or political subdivisions or regulatory authorities, free from burdensome restrictions, that are necessary or appropriate in any material respect to the Company and its Subsidiaries taken as a whole for the ownership, maintenance and operation of their respective properties and assets, and neither the Company nor any of its Subsidiaries is in violation of any thereof in any material respect. 2.19. Compliance with Laws. The Company and its Subsidiaries are in -------------------- compliance in all material respects with all applicable Laws, including, without limitation, all Environmental Laws and all Laws relating to the manufacture, marketing, advertising and distribution of water purification devices containing active ingredients (such as iodine), food and drugs generally, food safety, product safety, protection of human health (including, without limitation, with respect to the handling and disposal of the elemental iodine used in manufacturing resins), equal employment opportunity and employee safety, in all jurisdictions in which the Company and its Subsidiaries are presently doing business. Neither the Company nor any of its Subsidiaries has any reason to believe that it may or will be in any material respect in violation of any of such applicable Laws. 2.20. Intellectual Property Rights. (a) Except as disclosed on ---------------------------- Schedule 2.20 hereto, (i) the Company and its Subsidiaries own or have the right to use -10- pursuant to license, sub-license, agreement or permission all of its Intellectual Property (as defined below), in each case free and clear of any liens, claims or encumbrances, and such Intellectual Property is valid, subsisting and enforceable and constitutes all of the Intellectual Property necessary in any material respect to the Company and its Subsidiaries taken as a whole for the ownership, maintenance and operation of their respective businesses; and (ii) neither the Company nor any of its Subsidiaries has interfered with, infringed upon or misappropriated any Intellectual Property rights of third parties, and neither the Company nor any of its Subsidiaries has received any claim, demand or notice alleging, or otherwise knows of, any such interference, infringement or misappropriation (including any claim that it must license or refrain from using any Intellectual Property rights of any third party). To the Company's knowledge, no third party has interfered with, infringed upon or misappropriated any Intellectual Property rights of the Company or any of its Subsidiaries. (b) "Intellectual Property" means (a) all world-wide inventions ----------------------- and discoveries (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations- in-part, revisions, extensions and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith, (e) all know-how, trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice (including ideas, research and development, formulas, compositions, manufacturing and production process and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all management information systems, (h) all other proprietary rights, (i) all copies and tangible embodiments thereof (in whatever form or medium) and (j) all licenses and agreements in connection therewith. 2.21. Offering of Securities. Neither the Company nor any Person ---------------------- acting on its behalf has offered the Securities or any similar securities of the Company for sale to, solicited any offers to buy the Securities or any similar securities of the Company from or otherwise approached or negotiated with respect to the Company with any Person other than the Purchasers and other "accredited investors" (as defined in Rule 501(a) under the Securities Act). Neither the Company nor any Person acting on its behalf has taken or, except as contemplated by the Registration Rights Agreement, will take any action (including, without limitation, any offering of any securities of the Company under -11- circumstances which would require the integration of such offering with the offering of the Securities under the Securities Act) which could reasonably be expected to subject the offering, issuance or sale of the Securities to the registration requirements of Section 5 of the Securities Act or violate the provisions of any securities, "blue sky", or similar law of any applicable jurisdiction. 2.22. Use of Proceeds. The proceeds of the sale of the Notes will be --------------- used by the Company for the purpose of debt reduction and for general corporate purposes. 2.23. Unlawful Use of Proceeds. (a) The Company does not own, directly ------------------------ or indirectly, any "margin security", as defined in Regulation G issued by the Board of Governors of the Federal Reserve System (12 CFR Part 207); and the Company will not use any proceeds from the sale of the Notes to purchase or carry any "Security", as defined in Section 3(a)(10) of the Exchange Act, or for any other purpose which would result in any transaction contemplated by this Agreement constituting a "purpose credit" within the meaning of said Regulation G, or which would involve a violation of Section 7 of the Exchange Act or Regulation T, U or X of said Board of Governors (12 CFR Parts 220, 221 and 224, respectively). (b) The Company does not intend to apply and will not apply any part of the proceeds of the sale of the Notes in any manner which is unlawful or which would involve a violation of any Law. 2.24. Brokers or Finders. Except as set forth on Schedule 2.24 hereto, ------------------ no agent, broker, investment banker or other firm or Person is or will be entitled to any broker's fee or any other commission or similar fee from the Company in connection with any of the transactions contemplated by the Agreements. 2.25. Closing Actions. As of the date hereof, each of the Closing --------------- Actions has occurred and is of full force and effect. 2.26. Operating Company. Immediately following the Closing, the ----------------- Company will be primarily engaged, directly or through its Subsidiaries, in the production or sale of a product or service other than the investment of capital within the meaning of Department of Labor Regulation (S) 2510.3-101 (c), (d) or (e). 2.27. Election of Director. The Initial Securities Designee has been -------------------- duly elected to the Board of Directors of the Company to serve as a member thereof, effective upon the issuance of, and payment for, the Notes. -12- 3. Representations and Warranties of the Purchasers. ------------------------------------------------ Each Purchaser represents and warrants to the Company as to itself as of the date hereof as follows: 3.1. Organization and Qualification. The Purchaser is a corporation ------------------------------ or other entity duly organized, validly existing and (where applicable) in good standing under the Laws of the jurisdiction of its formation and has the power to own its respective property and to carry on its respective business as now being conducted. The Purchaser is duly qualified to do business and (where applicable) in good standing in every jurisdiction in which the nature of the respective business conducted or property owned by it makes such qualification necessary, except where the failure to so qualify would not prevent consummation of the transactions contemplated hereby or have a material adverse effect on the Purchaser's ability to perform its obligations hereunder. 3.2. Due Authorization. The Purchaser has all right, power and ----------------- authority to enter into the Agreements and to consummate the transactions contemplated thereby. The execution and delivery of the Agreements by the Purchaser and the consummation by the Purchaser of the transactions contemplated thereby have been duly authorized by all necessary action on behalf of the Purchaser. Each of the Agreements has been duly executed and delivered by the Purchaser and constitutes a valid and binding agreement of the Purchaser enforceable in accordance with its terms. 3.3. Conflicting Agreements and Other Matters. Neither the execution ---------------------------------------- and delivery of any of the Agreements nor the performance by the Purchaser of its obligations thereunder will conflict with, result in a breach of the terms, conditions or provisions of, constitute a default under, or require any consent, approval or other action by or any notice to or filing with any court or administrative or governmental body pursuant to, the organizational documents or agreements of the Purchaser or any mortgage, agreement, instrument, order, judgment, decree, statute, law, rule or regulation to which the Purchaser or any of its respective properties are subject, except for filings after the Closing under Section 13(d) and 16(a) of the Exchange Act, and filings under the HSR Act which may be required in connection with the conversion of the Notes. 3.4. Acquisition for Investment. The Purchaser is acquiring the Notes -------------------------- being purchased by it for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, and the Purchaser has no present intention or plan to effect any distribution thereof. The Purchaser acknowledges that the Notes have not been registered under the Securities Act, and may be sold or disposed of in the absence of such registration only pursuant to an exemption from such registration and in accordance with this Agreement. -13- 3.5. Brokers or Finders. No agent, broker, investment banker or ------------------ other firm or Person is or will be entitled to any broker's fee or any other commission or similar fee from the Purchaser in connection with any of the transactions contemplated by this Agreement. 3.6. Accredited Investor. The Purchaser is an "accredited investor" ------------------- within the meaning of Rule 501 promulgated under the Securities Act. 4. Registration, Exchange and Transfer of Notes. -------------------------------------------- 4.1. The Note Register; Persons Deemed Owners. The Company shall ---------------------------------------- maintain, at its office designated for notices in accordance with Section 11.6, a register for the Notes (the "Note Register"), in which the Company shall record the name and address of the person in whose name each Note has been issued and the name and address of each transferee and prior owner of each Note. The Company may deem and treat the person in whose name a Note is so registered as the holder and owner thereof for all purposes and shall not be affected by any notice to the contrary, until due presentment of such Note for registration of transfer as provided in this Article 4. 4.2. Issuance of New Notes Upon Exchange or Transfer. Upon surrender ----------------------------------------------- for exchange or registration of transfer of any Note at the office of the Company designated for notices in accordance with Section 11.6, the Company shall execute and deliver, at its expense, one or more new Notes as requested by the holder of the surrendered Note, each dated the date to which interest has been paid on the Note so surrendered (or, if no interest has been paid, the date of such surrendered Note), but in the same aggregate unpaid principal amount as such surrendered Note, and registered in the name of such person or persons as shall be designated in writing by such holder. Every Note surrendered for registration of transfer shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or by his attorney duly authorized in writing. The Company may also condition the issuance of any new Note or Notes in connection with a transfer by any person on the payment of a sum sufficient to cover any stamp tax or other governmental charge imposed in respect of such transfer. 5. Payment of Notes. ---------------- 5.1. Home Office Payment. The Company will pay to each Purchaser or ------------------- any transferee thereof all sums becoming due on the Notes (including all sums which become due on the Notes at the maturity thereof) (a) prior to the execution of an Indenture pursuant to the Registration Rights Agreement and the exchange of Securities issued under such Indenture for all outstanding Notes (the "Indenture Date"), (i) in the case of the Purchaser or an institutional investor who holds in excess of $300,000 -14- principal amount of the Notes, at the account/address to be specified by the Purchaser for such purpose by notice to the Company, or at the account/address specified by such institutional investor, by wire transfer of immediately available funds, or at such other address or by such other method as the Purchaser or such institutional investor shall have designated by notice to the Company, or (ii) for all other holders of Notes, at the address specified by such holder, by check, in either case without presentment for notation of payment and without surrender and (b) at any time after the Indenture Date, by wire transfer to the Trustee, as specified in such Indenture. Before selling or otherwise transferring any Note, the Purchaser or transferee will make a notation thereon of the aggregate amount of all payments of principal, if any, theretofore made, and of the date to which interest has been paid. 5.2. Limitation on Interest. No provision of this Agreement or of ---------------------- any Note shall require the payment or permit the collection of interest in excess of the maximum rate which is permitted by Law. If any such excess interest is provided for herein or in any Note, or shall be adjudicated to be so provided for, then the Company shall not be obligated to pay such interest in excess of the maximum rate permitted by Law, and the right to demand payment of any such excess interest is hereby waived, any other provisions in this Agreement or in any Note to the contrary notwithstanding. 5.3. No Offer of Prepayment. Neither the Company nor any Subsidiary ---------------------- will offer to prepay or otherwise acquire any Note unless it offers to prepay or acquire Notes pro rata from each holder thereof. 5.4. Interest. Interest on the principal amount of the Notes shall be -------- due and payable as provided in the Notes. 6. Covenants of the Company. ------------------------ The Company covenants that from the Closing Date and thereafter, for so long as the number of Securities outstanding is equal to not less than 25% of the Securities issued as of the Closing Date: 6.1. Restrictions on the Company. (a) Subject to subsection (b) of --------------------------- this Section 6.1, the Company will not, and will not permit any of its Subsidiaries to take, directly or indirectly, any of the following actions (i) without the affirmative vote or the prior written consent of GSCP, so long as GSCP, together with its Affiliates, holds a majority of the Securities, and (ii) thereafter, without the affirmative vote or the prior written consent of the holders of a majority of the Securities, voting together as a class: (i) except as contemplated by the Agreements, authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of any notes or debt securities ranking senior to, or pari passu with, the Notes with -15- respect to the payment of interest, repayment, redemption, distributions upon liquidation or otherwise, other than notes and debt securities issued in connection with (x) obligations relating to real property leases ("Lease Obligations") or (y) Indebtedness which by its terms must be paid or discharged by the Company or its Subsidiaries within one year ("Current Indebtedness") so long as the Company and its Subsidiaries do not have outstanding Lease Obligations and Current Indebtedness, which, in the aggregate (not including Lease Obligations incurred by the Company in connection with the entering into by the Company of a lease for the Northland Interstate Business Center if such lease is pursuant to terms substantially similar to those set forth in the Lease Proposal attached hereto as Exhibit B) exceed $5 million on a consolidated basis; (ii) pay, declare or set aside any sums for the payment of, any dividends, or make any distributions, in respect of any shares of its capital stock or other equity interests; (iii) redeem, purchase or otherwise acquire any shares of its capital stock or other equity interests, including, without limitation, any Capital Stock Equivalents, other than such redemptions, purchases or acquisitions pursuant to any stock option or stock purchase plan approved by the Board of Directors of the Company and by the holders of a majority of the Securities; (iv) consolidate or merge with or into any Person or enter into any similar business combination transaction (including, without limitation, sale of all or substantially all of its assets) or effect any transaction or series of transactions pursuant to which more than fifty percent (50%) of its Voting Securities are transferred to another Person; (v) acquire a majority of the shares of capital stock or other equity interests of, or a majority of the assets of, any Person (it being understood that nothing in this clause (v) shall be interpreted to prohibit the Company from establishing any wholly-owned Subsidiary so long as the establishment of such wholly-owned Subsidiary is not for the purpose of acquiring any shares of capital stock, equity interests or assets in any acquisition otherwise prohibited by this clause (v)); (vi) enter into any transaction with any Affiliate or Associate of the Company or any of its Subsidiaries, including, without limitation, any director or officer of the Company or any of its Subsidiaries (or any relative or Affiliate of any such Person), other than any such transaction or series of related transactions which are not material to the Company or any of its Subsidiaries and which are on terms no less favorable to the Company and its Subsidiaries than would be obtained in a comparable arms' length transaction with any Person not an Affiliate or Associate of the Company or any of its Subsidiaries; or -16- (vii) enter into any line of business other than the designing, manufacturing and marketing of small-scale drinking water treatment systems and related household and consumer products. (b) Notwithstanding subsection (a) of this Section 6.1, for purposes of calculating whether the Company has obtained the affirmative vote or prior written consent of the holders of a majority of the Securities for actions listed in clauses (i), (ii) and (iii) contained in subsection (a) of this Section 6.1, shares of Common Stock which were issued upon conversion of any Notes shall not be considered "Securities". 6.2. Compliance with Laws. The Company will, and will cause each -------------------- of its Subsidiaries to, comply in all material respects with all applicable Laws with respect to the conduct of its business and the ownership of its properties, including without limitation, those referenced in Section 2.19 hereof and the reporting and other requirements of all applicable securities Laws. 6.3. Limitation on Agreements. The Company will not, and will not ------------------------ permit any of its Subsidiaries to, enter into any agreement, or any amendment, modification, extension or supplement to any existing agreement, which contractually prohibits the Company from paying principal and interest on the Notes, effecting the conversion of the Notes, or complying with any of the terms of the Agreements or the Notes. 6.4. Preservation of Franchises and Existence. The Company will (i) ---------------------------------------- maintain its corporate existence, rights and franchises in full force and effect, and (ii) cause each of its Subsidiaries to maintain their respective corporate existences, rights and franchises in full force and effect, provided -------- that nothing in this Section 6.4 shall prevent the Company or any of its Subsidiaries from discontinuing its operations in any particular state or at any particular location or locations within the state, or prevent the corporate existence, rights and franchises of any Subsidiary from being terminated if, in the opinion of the Board of Directors of the Company, the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole and the loss thereof is not disadvantageous in any material respect to the holders of Securities. 6.5. Insurance. The Company will, and will cause each of the --------- Subsidiaries to maintain, with responsible insurers, such insurance, in such amounts and of such types as are customarily carried under similar circumstances by companies engaged in the same or a similar business or having similar properties similarly situated. Notwithstanding the preceding sentence, the Company shall at all times maintain directors' and officers' liability insurance at least as favorable in terms and coverage as that maintained on the date hereof, and the Initial Securities Designee and each Securities Designee (as defined in Section 6.11) shall be covered under such insurance. -17- 6.6. Payment of Taxes and Other Charges. The Company will pay or ---------------------------------- discharge, and will cause each of the Subsidiaries to pay or discharge, before the same shall become delinquent, (i) all Taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income (including, without limitation, such as may arise under Section 4062, 4063 or 4064 of ERISA or any similar provision of Law), and (ii) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, in the case of either clause (i) or clause (ii), if unpaid, might result in the creation of a material lien or encumbrance upon any of its properties, provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such Tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith pursuant to appropriate proceedings. 6.7. ERISA. Neither the Company nor any of its Subsidiaries or ERISA ----- Affiliates shall incur any material liability with respect to retiree medical or death benefits or unfunded benefits payable after termination of employment. All Company Benefit Plans shall be maintained in material compliance with applicable Law, including any reporting requirements. With respect to any Company Benefit Plan, neither the Company nor any of its Subsidiaries or ERISA Affiliates shall fail to make any contribution due from it under the terms of such Plan or as required by Law. Neither the Company nor any ERISA Affiliate will permit any Company Benefit Plan to incur an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, cause a lien or a security interest to attach to any asset of the Company or any of its Subsidiaries or ERISA Affiliates for the benefit of any Plan, or incur any liability which would be material to the Company and its Subsidiaries taken as a whole under Title IV of ERISA, including withdrawal liability (other than the payment of premiums, none of which are overdue). Neither the Company nor any of its Subsidiaries or ERISA Affiliates, nor any other Person including any fiduciary, will engage in any transaction prohibited by Section 406 of ERISA or Section 4975 of the Code which is reasonably likely to subject the Company or any of its Subsidiaries or ERISA Affiliates or any entity that the Company or any of its Subsidiaries or ERISA Affiliates has an obligation to indemnify to any tax or penalty imposed under the Code or ERISA. 6.8. Lost, Stolen, Damaged and Destroyed Securities. Upon receipt of ---------------------------------------------- evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any certificate representing any of the Securities (whether held in the form of Notes or shares of Common Stock) and in the case of loss, theft or destruction, upon delivery of an indemnity satisfactory to the Company (which, in the case of the Purchaser, may be an undertaking by the Purchaser to so indemnify the Company), or, in the case of mutilation, upon surrender and cancellation thereof, the Company will issue, if such Securities are held in the form of shares of Common Stock, a new share certificate of like -18- tenor for a number of shares of Common Stock equal to the number of shares of such stock represented by the certificate lost, stolen, destroyed or mutilated, or, if such Securities are held in the form of Notes, a new Note of like tenor in an amount equal to the amount of such Note lost, stolen, destroyed or mutilated. 6.9. Financial Statements and Other Reports. The Company shall -------------------------------------- deliver to GSCP and to each holder of a number of Securities equal to not less than 10% of the Securities issued as of the Closing Date: (a) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, statements of consolidated net income and cash flows and a statement of changes in consolidated stockholders' equity of the Company and its Subsidiaries for the period from the beginning of the then current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period or date in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, however, that delivery pursuant to clause (c) -------- ------- below of a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly period filed with the Securities and Exchange Commission (the "Commission") shall be deemed to satisfy the requirements of this clause (a); (b) as soon as practicable and in any event within 100 days after the end of each fiscal year, statements of consolidated net income and cash flows and a statement of changes in consolidated stockholders' equity of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as of the end of such year, setting forth in each case in comparative form the corresponding figures from the preceding fiscal year, all in reasonable detail and examined and reported on by independent public accountants of recognized national standing selected by the Company; provided, however, that delivery pursuant to clause (c) below of a copy -------- ------- of the Annual Report on Form l0-K of the Company for such fiscal year filed with the Commission shall be deemed to satisfy the requirements of this clause (b); (c) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its stockholders and copies of all such registration statements (without exhibits), other than registration statements relating to employee benefit or dividend reinvestment plans, and all such regular and periodic reports as it shall file with the Commission; and (d) copies of any compliance certificates furnished to lenders in respect of Indebtedness of the Company and its Subsidiaries and such other financial data -19- of the Company and its Subsidiaries as such Purchaser may reasonably request, including, but not limited to, operating financial information for each facility owned or operated by the Company or any of its Subsidiaries. 6.10. Inspection of Property; Book and Records. The Company shall ---------------------------------------- permit representatives of GSCP and each holder of a number of Securities equal to not less than 10% of the Securities issued as of the Closing Date to visit and inspect any of the properties of the Company and its Subsidiaries and to discuss the affairs, finances and accounts of the Company and its Subsidiaries with, and to make proposals and furnish advice with respect thereto to, the principal officers of the Company, all at such reasonable times, upon reasonable notice and as often as GSCP or any such holder may reasonably request; provided, however, that neither the Board of Directors nor the officers of the Company shall be under any obligation to take any action with respect to any proposals made or advice furnished by GSCP or any such holder of 10% of the Securities pursuant hereto, other than to take such proposals or advice seriously and give due consideration thereto. The Company shall permit representatives of GSCP and each holder of a number of Securities equal to not less than 10% of the Securities issued as of the Closing Date, upon reasonable notice and as often as GSCP or any such holder may reasonably request, to inspect, and the Company shall keep and make available at its principal offices, (i) copies of the Company's federal, state, and local income Tax Returns with respect to the six most recent fiscal years, or for such longer period required by any waivers extending periods of limitation to assess any federal, states or local Taxes, (ii) the audited financial statements of the Company for the six most recent fiscal years, or for such longer period required by any waivers extending periods of limitation to assess any federal, state or local Taxes, and (iii) the Company's books and records for the six most recent fiscal years, or for such longer period required by any waivers extending periods of limitation to assess any federal, state or local Taxes. 6.11. Board Membership. (a) At each meeting for the election of ---------------- directors of the Company, the Company shall include in the slate of directors nominated and recommended by the Board of Directors of the Company to the stockholders for election as directors one representative designated (a) by GSCP, so long as GSCP, together with its Affiliates, holds in excess of a majority of the Securities, and (b) thereafter, by the holders of a majority of the Securities (such representative designated by GSCP or the holders of a majority of the Securities, as the case may be, being referred to herein as the "Securities Designee"). The Company agrees that it shall use its best efforts to cause each Securities Designee (whether designated by GSCP or by the holders of a majority of each Securities) to be elected to, and to be maintained as a member of, the Board of Directors of the Company (including recommending to the stockholders of the Company the election of each Securities Designee to the Board of Directors of the Company and opposing any proposal to remove the Initial Securities Designee or any Securities Designee at each meeting of the stockholders of the Company at which the -20- election or removal of directors is on the agenda), and shall take no action which would diminish the prospects of any Securities Designee being elected to, or the Initial Securities Designee and each Securities Designee being maintained as a member of, the Board of Directors of the Company. In the event of any vacancy arising by reason of the resignation, death, removal or inability to serve of the Initial Securities Designee or any Securities Designee, (a) GSCP, so long as GSCP, together with its Affiliates, holds in excess of a majority of the Securities, and (b) thereafter, the holders of a majority of the Securities shall be entitled to designate a successor to fill such vacancy until the next meeting for the election of directors of the Company. The Initial Securities Designee and each Securities Designee shall be a member of the Company's Board's executive and finance committees, if any, or any committee performing substantially similar functions and, if requested by the Initial Securities Designee or any Securities Designee, as the case may be, shall be a member of each other committee of the Board of Directors so requested. The Company agrees that if at any meeting for the election of directors a Securities Designee is not elected to the Board of Directors of the Corporation, or if for any other reason, at any time, neither the Initial Securities Designee nor any Securities Designee is a member of the Board of Directors, (a) GSCP, so long as GSCP, together with its Affiliates, holds in excess of a majority of the Securities, and (b) thereafter, the holders of a majority of the Securities, will be entitled to have one observer (a "Non-voting Observer") selected by GSCP or the holders of a majority of the Securities, as applicable, present at all meetings of the Board of Directors and such observer shall have the same access to information concerning the business and operations of the Company and its Subsidiaries and at the same time as directors of the Company and shall be entitled to participate in discussions and consult with, and make proposals and furnish advice to, the Board of Directors, without voting; provided, however, that the Board of Directors shall be under no obligation to take any action with respect to any proposals made or advice furnished by any Non-voting Observer, other than to take such proposals or advice seriously and give due consideration thereto. Nothing contained in this Section 6.11(a) shall be interpreted to require the Company at any time to maintain on its Board of Directors more than one Securities Designee. (b) In addition to any requirements specified in the By-Laws of the Company, the Company shall notify the Initial Securities Designee, each Securities Designee and any Non-voting Observer, by telecopy, of (a) every meeting (or action by written consent) of the Board of Directors of the Company and (b) every meeting (or action by written consent) of any committee of the Board of Directors of the Company, to the extent, in the case of clause (b), that such person is on such committee of the Board of Directors of the Company, at least three days in advance of such meeting (or distribution of written consents), or, if such notice under the circumstances is not practicable, as soon before the meeting (or distribution) as is practicable. -21- (c) The Company shall hold regular meetings of its Board of Directors on at least a quarterly basis. The Company agrees, and shall cause its By-laws to be amended to the extent necessary to provide, that the Initial Securities Designee and each Securities Designee shall have the right, upon reasonable notice, to call meetings of the Board of Directors of the Company and of each committee of the Board of Directors on which he or she is a member. The Company agrees that any Non-voting Observer shall have the right to request that the Chairman of the Board of Directors or the Chief Executive Officer of the Company call a meeting of the Board of Directors and that, upon such request, the Chairman of the Board shall promptly call a meeting of the Board of Directors to be held at such time (but not within three days from the date such request is made by the Non-voting Observer) as shall be requested by the Non- voting Observer. (d) The Company and each of the Purchasers acknowledge that the provisions of this Agreement, including this Section 6.11, are intended to provide GSCP with "contractual management rights" within the meaning of ERISA and the regulations promulgated thereunder. 6.12. Reimbursement of Certain Expenses. The Company shall, upon --------------------------------- request therefor, promptly indemnify and reimburse the Initial Securities Designee, each Securities Designee and any Non-voting Observer, as the case may be, for all reasonable expenses incurred and any Losses (as defined in Section 11.10(b)) suffered by them in connection with their attendance at meetings of the Board of Directors or of committees of the Board of Directors and any other activities undertaken by them in their capacity as directors of the Company or observer, as applicable. The foregoing shall be in addition to, and not in lieu of (or in duplication of), any indemnification or reimbursement obligations of the Company under the Articles of Incorporation or By-Laws of the Company or by Law. Any Non-voting Observer shall be entitled to indemnification from the Company to the maximum extent permitted by Law as though he or she were a director of the Company and any of its Subsidiaries. The Initial Securities Designee, each Securities Designee and each Non-voting Observer shall be an express third party beneficiary of the provisions contained in this Section 6.12 and in the last sentence of Section 6.5 and shall be entitled to enforce all of his or her rights hereunder and thereunder. 6.13. Preemptive Right. For so long as any of the Purchasers is the ---------------- holder of record of any Securities, such Purchaser shall have the right to purchase a pro rata portion of New Equity Securities which the Company, from --- ---- time to time, proposes to sell or issue. Each such Purchaser's pro rata portion, --- ---- for purposes of this Section 6.13, is the ratio of the number of Securities which such Purchaser then owns to the total number of shares of Common Stock of the Company then outstanding. In the event that the Company proposes to undertake an issuance or sale of New Equity Securities, the Company shall furnish to each Purchaser which is a holder of record of Securities written -22- notice of such proposal, describing the type of New Equity Securities and the price and the terms upon which the Company proposes to issue or sell the same. For a period of fifteen (15) Business Days following the delivery of such notice by the Company, the Company shall be deemed to have irrevocably offered to sell to each Purchaser which is a holder of Securities such Purchaser's pro rata --- ---- share of such New Equity Securities for the price and upon the terms specified in the notice. Each such Purchaser may exercise its purchase rights hereunder by giving written notice to the Company and stating therein the quantity of New Equity Securities to be purchased. In the event any Purchaser fails to exercise in full such Purchaser's purchase right pursuant to this Section 6.13 within such fifteen (15) Business Day period, the Company shall have ninety (90) Business Days thereafter to sell the New Equity Securities with respect to which such purchase right was not exercised, at a price and upon terms no more favorable to the purchaser thereof than specified in the Company's notice given pursuant to this Section 6.13. This Section 6.13 shall be solely for the benefit of the Purchasers and their Affiliates (but not any transferee thereof other than Affiliates of the Purchasers). 6.14. Notice of Breach. As promptly as practicable, and in any event ---------------- not later than ten (10) Business Days after any officer of the Company becomes aware of any breach by the Company of any provision of this Agreement, including, without limitation, this Article 6 or any Event of Default, the Company shall provide GSCP and each holder of Securities with written notice specifying the nature of such breach or Event of Default and any actions proposed to be taken by the Company to cure such breach or Event of Default. 7. Events of Default and Remedies. ------------------------------ 7.1. Events of Default. Each of the following shall constitute an ----------------- Event of Default with respect to the Notes under this Agreement: (a) Nonpayment of Principal of the Notes. If the Company fails to ------------------------------------ pay the principal of or any other sum (other than interest), if any, due on any Note, when and as the same becomes due and payable, whether at the maturity thereof, on a date fixed for a redemption, or otherwise; (b) Nonpayment of Interest. If the Company fails to pay interest ---------------------- on any of the Notes in full, when and as the same becomes due and payable, and such failure shall be continuing for five (5) Business Days; (c) Voluntary Bankruptcy and Insolvency Proceedings. If the ----------------------------------------------- Company or any Subsidiary shall file a petition in bankruptcy or for reorganization or for an arrangement or any composition, readjustment, liquidation, dissolution or similar relief pursuant to the federal Bankruptcy Code of 1978, as amended, or under any similar -23- present or future federal law or the law of any other jurisdiction or shall be adjudicated a bankrupt or become insolvent, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or such Subsidiary or for all or any substantial part of its respective property, or the Company or any of its Subsidiaries shall make an assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall take any corporate action, as the case may be, in furtherance of any of the foregoing; (d) Adjudication of Bankruptcy. If a petition or answer shall be -------------------------- filed proposing the adjudication of the Company or any of its Subsidiaries as a bankrupt or its reorganization or arrangement, or any composition, readjustment, liquidation, dissolution or similar relief with respect to it pursuant to the Federal Bankruptcy Code of 1978, as amended, or under any similar present or future federal Law or the Law of any other jurisdiction applicable to the Company or any of its Subsidiaries, and the Company or such Subsidiary (as applicable) shall consent to or acquiesce in the filing thereof, or such petition or answer shall not be discharged or denied within 60 days after the filing thereof; (e) Receivership or Sequestration. If a decree or order is ----------------------------- rendered by a court having jurisdiction (i) for the appointment of a receiver or custodian or liquidator or trustee or sequestrator or assignee (or similar official) in bankruptcy or insolvency of the Company or any of its Subsidiaries or of all or a substantial part of its property, or for the winding-up or liquidation of its affairs, and such decree or order shall have remained in force undischarged and unstayed for a period of 60 days, or (ii) for the sequestration or attachment of any property of the Company or any of its Subsidiaries without its return to the possession of the Company or such Subsidiary (as applicable) or its release from such sequestration or attachment within 60 days thereafter; (f) Acceleration of Other Indebtedness. If default shall be made ---------------------------------- with respect to any Indebtedness of the Company (other than the Notes) with a principal amount outstanding in excess of $1,000,000 with the result that such Indebtedness can be accelerated so that the same will become due and payable prior to the date on which the same would otherwise have become due and payable; (g) Covenant Defaults. The Company shall have breached in any ----------------- material respect any of the covenants of the Company set forth in the Agreements or Brian F. Sullivan shall have breached in any respect any of his covenants contained in any of Sections 2, 3 or 4 of the Executive Restriction Agreement and, if capable of being remedied, such breach continues for 15 days after notice in writing by any holder of Securities to the Company; -24- (h) Misrepresentation. The representations and warranties of the ----------------- Company set forth in the Agreements shall not have been true and correct in any material respect as of the date hereof; or (i) Judgments. A final judgment or judgments entered by a court --------- of competent jurisdiction for the payment of money aggregating in excess of $3,000,000 is or are outstanding against the Company or any Subsidiary and any one such judgment in excess of $3,000,000 has, or such judgments aggregating in excess of $3,000,000 have, remained unpaid, unvacated, unbonded, or unstayed by appeal or otherwise for a period of 15 days from the date of entry. 7.2. Acceleration of Maturity. If any Event of Default shall have ------------------------ occurred and be continuing, the holders of a majority of the outstanding principal amount of Notes may, by notice to the Company, declare the entire outstanding principal balance of the Notes, and all accrued and unpaid interest thereon, to be due and payable immediately, and upon any such declaration the entire outstanding principal balance of the Notes, and said accrued and unpaid interest shall become and be immediately due and payable, without presentment, demand, protest or other notice whatsoever, all of which are hereby expressly waived, anything in the Notes or in this Agreement to the contrary notwithstanding; provided that if an Event of Default under clause (c), (d), or -------- (e) of Section 7.1 with respect to the Company shall have occurred, the outstanding principal amount of all of the Notes, and all accrued and unpaid interest thereon, shall immediately become due and payable, without any declaration and without presentment, demand, protest or other notice whatsoever, all of which are hereby expressly waived, anything in the Notes or this Agreement to the contrary notwithstanding; and provided, further, that if an -------- ------- Event of Default under clause (a) or (b) of Section 7.1 shall have occurred and be continuing with respect to any Note held by a Purchaser or an Affiliate of the Purchaser (but not any transferee thereof other than an Affiliate of the Purchaser), such Purchaser may by notice to the Company, declare the entire outstanding principal of all Notes so held by such Purchaser and its Affiliates and all accrued and unpaid interest thereon, to be due and payable immediately, and upon any such declaration the entire outstanding principal of such Notes and said accrued and unpaid interest shall become and be immediately due and payable, without presentment, demand, protest or other notice whatsoever, all of which are hereby expressly waived, anything in such Notes or in this Agreement to the contrary notwithstanding. 7.3. Other Remedies. If any Event of Default shall have occurred and -------------- be continuing, from and including the date of such Event of Default to but not including the date such Event of Default is cured or waived, any holder of a Note may enforce its rights by suit in equity, by action at law, or by any other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or the Notes or in aid of the exercise of any power granted in -25- this Agreement or the Notes, and any holder of a Note may enforce the payment of any Note held by such holder and any of its other legal or equitable rights. The Company shall pay interest on any overdue principal of the Notes and (to the extent legally enforceable) on any overdue installment of interest, at the rate of 10% per annum, until such overdue amount is paid. 7.4. Conduct no Waiver; Collection Expenses. No course of dealing on -------------------------------------- the part of any holder, nor any delay or failure on the part of any holder of any Notes to exercise any of its rights, shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. If the Company fails to pay, when due, the principal or the interest on any Note, the Company will pay to each holder of any Notes, to the extent permitted by law, on demand, all costs and expenses incurred by such holder in the collection of any amount due in respect of any Note hereunder, including reasonable legal fees incurred by such holder in enforcing its rights hereunder. 7.5. Annulment of Acceleration. If a declaration is made in ------------------------- accordance with Section 7.2, then and in every such case, the holders of at least a majority of the outstanding principal amount of the Notes may, by an instrument delivered to the Company, annul such declaration and the consequences thereof, provided that at the time such declaration is annulled: (a) no judgment or decree has been entered for the payment of any monies due on the Notes or pursuant to this Agreement; (b) all arrears of interest on the Notes and all other sums payable on the Notes and pursuant to this Agreement (except any principal of or interest or premium on the Notes which has become due and payable by reason of such declaration) shall have been duly paid; and (c) every other Event of Default shall have been duly waived or otherwise made good or cured; provided, however, that only the Purchaser or an Affiliate of the Purchaser (but - -------- ------- not any transferee thereof other than an Affiliate of the Purchaser) that is a holder of the Note or Notes with respect to which the declaration permitted by the last proviso of Section 7.2 was made may annul such declaration; and provided, further, that no such annulment shall extend to or affect any - -------- ------- subsequent Event of Default or impair any right consequent thereon. 7.6. Remedies Cumulative. No right or remedy conferred upon or ------------------- reserved to the holders of Securities under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now and hereafter existing under -26- applicable Law. Every right and remedy given by this Agreement or by applicable Law to the holders of Securities may be exercised from time to time and as often as may be deemed expedient by such holders. 8. Redemption of Securities. ------------------------ 8.1. Redemptions of Notes on Request. (a) After the fifth anniversary ------------------------------- of the Closing Date, upon the request of any holder of Notes, the Company shall be required to redeem (a "Holder Redemption") the Notes of such holder, in whole or in part, in accordance with the procedures set forth in subsection (b) of this Section 8.1 for an amount of cash equal to the principal amount of Notes requested to be redeemed plus all accrued and unpaid interest thereon to the date of redemption; provided, however, that, from the fifth anniversary of the -------- ------- Closing Date through and including the day immediately prior to the sixth anniversary of the Closing Date (the "First Redemption Period"), the Company shall not be required to redeem an aggregate principal amount of Notes in excess of $5,000,000, and from the sixth anniversary of the Closing Date through and including the day immediately prior to the seventh anniversary of the Closing Date, the Company shall not be required to redeem an aggregate principal amount of Notes in excess of (x) $10,000,000, less (y) the sum of the aggregate principal amount of Notes redeemed by the Company pursuant to this Section 8.1 during the First Redemption Period. The Company shall redeem Notes in accordance with Holder Redemptions in the order in which Redemption Notices (defined below) therefor are received by the Company. (b) Any holder of Notes may request a Holder Redemption at any time during which the holders of Notes are entitled to request a Holder redemption in accordance with subsection (a) of this Section 8.1, as promptly as practicable, and in any event within five (5) Business Days after the surrender of such Notes subject to such Holder Redemption and the receipt of the Redemption Notice relating thereto, the Company shall deliver or cause to be delivered (a) by wire transfer to such holder an amount of cash equal to the aggregate principal amount of Notes of such holder subject to the Redemption Notice, plus all accrued and unpaid interest thereon to the date of redemption, and (b) if less than the entire outstanding principal amount of any Note surrendered in being redeemed pursuant to a Holder Redemption, a new Note in the principal amount which remains outstanding upon such partial redemption. In the event that in accordance with subsection (a) of this Section 8.1, the Company is only required to redeem a part of, or is not required to redeem any of, the aggregate principal amount of Notes requested by any -27- holder to be redeemed pursuant to a Redemption Notice, the Company shall deliver or cause to be delivered (a) to such holder a written explanation detailing the aggregate principal amount of Notes previously redeemed pursuant to this Section 8.1, the date upon which such Notes were redeemed and the Persons from whom they were redeemed, (b) by wire transfer to such holder an amount equal to the aggregate principal amount of Notes of such holder, if any, which the Company is required to redeem pursuant to this Section 8.1, plus all accrued and unpaid interest thereon to the date of redemption, and (c) Notes in the principal amount of any Notes of such holder furnished to the Company which are not required to be redeemed by the Company pursuant to this Section 8.1. 8.2. Change in Control. (a) In the event that there occurs a Change ----------------- in Control, any record holder of Securities, in accordance with the procedures set forth in subsection (b) of this Section 8.2, may require the Company to redeem any or all of the Securities held by such holder, (x) in the case in which such Securities are held in the form of Notes, for an amount of cash equal to, at the holder's election, (i) the outstanding principal amount of such Notes plus all accrued and unpaid interest on the Notes being redeemed to the date of redemption or (ii) the amount of cash per share that such holder would have received pursuant to clause (y) below had such holder converted such Notes into Common Stock and (y) in the case in which such Securities are held in the form of Common Stock, for an amount of cash per share equal to the average Current Market Price per share of Common Stock over the 20 Trading Days prior to such Change of Control (the "Stock Redemption Price"). (b) Promptly following a Change in Control (but in no event more than five Business Days thereafter), the Company shall mail to each holder of Securities, at such holder's address as it appears on the transfer books of the Company, notice of such Change in Control, which notice shall set forth each holder's right to require the Company to redeem any or all Securities held by such holder. The Company shall thereafter during a period of 120 days from the date of such notice (or the date the Company was required to give such notice) redeem any Securities, in whole or in part, at the option of the holder, upon at least five (5) days' written notice to the Company by such holder specifying, (x) in the case in which such Securities are held in the form of Notes, (i) the principal amount of Notes to be redeemed, (ii) the redemption date therefor and (iii) the holder's election with respect to the redemption price therefor as set forth in Section 8.2(a)(x), and (y) in the case in which such Securities are held in the form of Common Stock, (i) the number of shares of Common Stock to be redeemed and (ii) the redemption date therefor. (c) On the date of any redemption being made pursuant to this Section 8.2 which is specified in a notice given pursuant to this Section 8.2, the Company shall wire transfer (x) to each holder of Securities in the form of Notes, the principal amount of Notes of such holder so redeemed, together with an amount equal to all accrued and unpaid interest thereon to the date of redemption or the Stock Redemption -28- Price per share of Common Stock into which the principal amount of Notes of such holder so redeemed is convertible, as specified by the holder in such notice, and (y) to each holder of Securities in the form of Common Stock, the Stock Redemption Price per share of Common Stock of such holder redeemed. 9. Conversion. ---------- 9.1. Holder's Option to Convert Notes into Common Stock. Any Note or -------------------------------------------------- any portion of the outstanding principal amount of such Note shall be convertible at the option of the holder at any time after the Closing into a number of shares of Common Stock computed by dividing (a) the outstanding principal amount of each Note or portion thereof being converted, by (b) the Conversion Price then in effect. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") of the Notes shall be initially $15.00 in principal amount of Notes per share of Common Stock. The Conversion Price shall be adjusted in certain instances provided in Section 9.6. 9.2. Company's Option to Convert Notes into Common Stock. After --------------------------------------------------- January 18, 2000, provided that (i) no Event of Default shall have occurred and be continuing, (ii) the Current Market Price of the Common Stock has, after such date, exceeded 200% of the initial Conversion Price for at least 45 consecutive Trading Days and (iii) during such 45 consecutive Trading Days (x) neither the Company nor any of its Affiliates purchased any shares of Common Stock in open market transactions, privately negotiated transaction or otherwise and (y) an average of 17,000 shares of Common Stock (which number shall be adjusted appropriately in the event of any stock dividend, stock split or reverse stock split) shall have been traded daily (excluding shares transferred between Affiliates) as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, each of the Notes shall be convertible at the option of the Company, in whole but not in part, into a number of shares of Common Stock, computed by dividing (a) the outstanding principal amount of such Note, by (b) the Conversion Price then in effect. 9.3. Exercise of Conversion Privilege. (a) Conversion of the Notes -------------------------------- may be effected by any holder thereof upon the surrender to the Company at the office of the Company designated for notices in accordance with Section 11.6 or at the office of any agent or agents of the Company, as may be designated by the Board of Directors (the "Transfer Agent"), of the Notes to be converted, accompanied by a written notice (a "Note Holder Conversion Notice") stating that such holder elects to convert all or a specified portion of the outstanding principal amount of such Notes in accordance with the provisions of this Article 9 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued; provided, -------- -29- however, that, in the case of the conversion of the Notes into Common Stock in - ------- accordance with Section 9.2, the Company shall provide each holder written notice (a "Mandatory Conversion Notice") stating that such holder's Notes shall be converted pursuant to Section 9.2, and each holder of Notes shall thereupon promptly surrender to the Transfer Agent the Notes so converted specifying the name or names in which such holder wishes the certificates for shares of Common Stock to be issued. In case any holder's Note Holder Conversion Notice shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock or Common Stock in such name or names. Other than such Taxes, the Company will pay any and all issue and other Taxes, whether or not imposed on the Company (other than taxes based on income) that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Notes pursuant hereto. As promptly as practicable, and in any event within five (5) Business Days after the surrender of such Notes and, if applicable, the receipt of a Note Holder Conversion Notice relating thereto by the Company and, if applicable, payment of all transfer taxes (or the demonstration to the satisfaction of the Company that such taxes have been paid), the Company shall deliver or cause to be delivered (i) certificates representing the number of validly issued, fully paid and nonassessable full shares of Common Stock to which the holder of the Notes being converted shall be entitled and (ii) if less than the entire outstanding principal amount of any Note surrendered is being converted, a new Note in the principal amount which remains outstanding upon such partial conversion. In the case of a conversion pursuant to a Mandatory Conversion Notice, such conversion shall be deemed to have been made at the close of business on the date of giving such notice so that the rights of the holder thereof as to the Note or Notes (or portion thereof) being converted shall cease except for the right to receive shares of Common Stock, in accordance herewith, and the Person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. In the case of conversion at the holder's option, the date of delivery of the Notes after or together with the delivery of a Note Holder Conversion Notice shall be deemed to be the date of conversion. (b) Notwithstanding the foregoing, the Company may not deliver any Mandatory Conversion Notice to any holder unless, to the extent required by the HSR Act, (a) the Company shall have filed an HSR Notification with respect to such conversion, (b) the Company shall have informed such holder of such filing (and such holder shall file an HSR Notification promptly after being informed of such filing by the Company), (c) the applicable waiting period under the HSR Act shall have expired or been terminated, and (d) such holder shall not be prohibited by Law from owning or voting any Voting Securities. If at any time a holder of Notes informs the Company that it intends to furnish the Company with a Note Holder Conversion Notice, the Company -30- shall promptly file in connection therewith an HSR Notification if required in the opinion of such holder. 9.4. Fractions of Shares; Interest. In connection with the conversion ----------------------------- of any Note into Common Stock, no fractions of shares shall be issued, but in lieu thereof the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price per share of Common Stock on the Trading Day on which such Note is deemed to have been converted. If more than one Note shall be surrendered for conversion by the same holder at the same time, the number of full shares of Common Stock issuable on conversion thereof shall be computed on the basis of the aggregate outstanding principal amount of Notes so surrendered. Promptly upon conversion, the Company shall pay to holders of Notes so converted an amount equal to any accrued and unpaid interest on the Notes surrendered for conversion to the date of such conversion, together with cash in lieu of any fractional share of Common Stock. 9.5. Reservation of Stock; Listing Rights. (a) The Company shall at ------------------------------------ all times reserve and keep available for issuance upon the conversion of the Notes, free from any preemptive rights, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of the entire outstanding principal amount of the Notes into Common Stock, and shall take all action required to increase the authorized number of shares of Common Stock, if necessary, to permit the conversion of the entire outstanding principal amount of the Notes. (b) If at the time of conversion of any Notes, the Common Stock of the Company is listed on a national securities exchange, or is designated as a "national market system security" on the NASDAQ, the Company shall take all action necessary to cause the shares of Common Stock issuable upon conversion of such Notes to be listed on such exchange, subject to official notice of issuance. (c) If the Company shall issue shares of Common Stock upon conversion of the Notes as contemplated by this Article 9, the Company shall issue together with each such share of Common Stock one Right (or other securities in lieu thereof), or any rights issued to holders of Common Stock in addition thereto or in replacement therefor, whether or not such rights shall be exercisable at such time, but only if such rights are issued and outstanding and held by other holders of Common Stock at such time and have not expired, and only if the Person to whom such shares of Common Stock are issued is not an "Acquiring Person" under the Rights Agreement or such other agreement pursuant to which such rights are issued; provided, however, that, in such event such rights shall be issued to such Person promptly after such time at which such Person is no longer an "Acquiring Person." -31- 9.6. Adjustment of Conversion Price. The Conversion Price will be ------------------------------ subject to adjustment from time to time as follows: (a) If and whenever on or after the Closing Date the Company issues or sells, or in accordance with subsection (b) of this Section 9.6 is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than (a) the Conversion Price in effect immediately prior to the time of such issue or sale or (b) the average Current Market Price of the Common Stock for the twenty Trading Days preceding the date of the first announcement of such issue or sale, then, effective upon the close of business on the date of such issue or sale, the Conversion Price shall be reduced to whichever of the following Conversion Prices is lower: (i) the Conversion Price determined by dividing (1) the sum of (x) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale times the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (2) the number of shares of Common Stock outstanding immediately after such issue or sale; or (ii) the Conversion Price determined by multiplying the Conversion Price in effect immediately prior to such issue or sale by a fraction, the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the average Current Market Price of the Common Stock for the 20 Trading Days preceding the date of the first announcement of such issue or sale, plus (2) the consideration, if any, received by the Company upon such issue or sale, and the denominator of which shall be the product derived by multiplying such average Current Market Price of the Common Stock times the number of shares of Common Stock outstanding immediately after such issue or sale. (b) For purposes of determining the adjusted Conversion Price under subsection (a) of this Section 9.6, the following shall be applicable: (i) If the Company in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than (a) the Conversion Price in effect immediately prior to the time of the granting of such Options or (b) the average Current Market Price of the Common Stock for the 20 Trading Days preceding the date of the first -32- announcement of such grant, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount, if any, received or receivable by the Company in consideration of the granting of such Options, plus the minimum amount of additional consideration, if any, payable to the Company upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) If the Company in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than (a) the Conversion Price in effect immediately prior to the time of such issue or sale or (b) the average Current Market Price of the Common Stock for the twenty Trading Days preceding the date of the first announcement of such grant, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 9.6, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. -33- (iii) If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in effect hereunder shall be adjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the Fair Market Value of such consideration as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the Fair Market Value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. (vi) In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Option or Convertible Security, as the case may be, by the parties thereto, the Option or Convertible Security, as the case may be, shall be deemed to have been issued for a consideration of $.01. (vii) For purposes of this Section 9.6, the number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its Subsidiaries, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. -34- (c) If the Company at any time subdivides (by any stock split, stock dividend, stock distribution, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Company at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. An adjustment made pursuant to this subsection (c) of this Section 9.6(c) shall become effective (x) in the case of any stock dividend or stock distribution, immediately after the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such stock dividend or stock distribution or (y) in the case of any subdivision, stock split, reclassification or combination, at the close of business as the day upon which such corporate action becomes effective. (d) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or a substantial portion of the Company's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as a "Major Transaction". Prior to the consummation of any Major Transaction, the Company shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the outstanding principal amount of the Notes) to insure that each of the holders of the Notes shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Notes, such shares of stock, securities or assets as such holder would have received in connection with such Major Transaction if such holder had converted its Notes immediately prior to such Major Transaction. In each such case, the Company shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the outstanding principal amount of the Notes) to insure that the provisions of this Section 9.6 hereof shall thereafter be applicable to the Notes (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Company, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Common Stock acquirable and receivable upon conversion of the Notes, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Company) resulting from consolidation or merger or the corporation purchasing such assets assumes -35- by written instrument (in form reasonably satisfactory to the holders of a majority of the outstanding principal amount of the Notes then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (e) In case the Company shall at any time or from time to time after the date hereof declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or Capital Stock Equivalents of the Company or any of its Subsidiaries by way of dividend or spinoff), on its Common Stock, then, and in each such case, the Conversion Price shall be adjusted by multiplying (1) the applicable Conversion Price on the day immediately prior to the record date fixed for the determination of stockholders entitled to receive such dividend or distribution by (2) a fraction, the numerator of which shall be the average Current Market Price of the Common Stock for the period of 20 Trading Days preceding such record date less the Fair Market Value per share of Common Stock of such dividend or distribution, and the denominator of which shall be such average Current Market Price of the Common Stock. The Company acknowledges that this Section 9.6(e) shall not constitute a waiver of Section 6.1 of this Agreement. No adjustment shall be made pursuant to this Section 9.6(e) in connection with any transaction to which Section 9.6(c) applies. (f) If any event occurs of the type contemplated by the provisions of this Section 9.6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Notes; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 9.6 or decrease the number of shares of Common Stock of the Company issuable upon conversion of each Note. (g) Anything in this Section 9.6 to the contrary notwithstanding, (a) the Company shall not be required to give effect to any adjustment in the Conversion Price unless and until the net effect of one or more adjustments (each of which shall be carried forward), determined as above provided, shall have resulted in a change of the Conversion Price by at least one percent, and when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Price by at least one percent, such change in Conversion Price shall thereupon be given effect and (b) there shall be no adjustment in the Conversion Price (x) as a result of any issuance or sale of any Excluded Securities or (y) in respect of the issuance of any Rights after the date hereof; provided, however, that nothing herein shall limit the right of any holder of any Notes to an adjustment in the Conversion Price of such Notes in the event there shall -36- occur a "flip-in" or "flip-over" event under the Rights Agreement or any similar plan or agreement of the Company. (h) The certificate of any firm of independent public accountants of recognized national standing selected by the Board of Directors (which may be the firm of independent public accountants regularly employed by the Company) shall be presumptively correct for any computation made under this Section 9.6. (i) If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to stockholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the number of shares of Common Stock issuable upon exercise of the right of conversion granted by this Section 9.6 or in the Conversion Price then in effect shall be required by reason of the taking of such record. 9.7. Notice of Certain Corporate Actions. In case at any time from ----------------------------------- time to time the Company shall pay any stock dividend or make any other non-cash distribution to the holders of its Common Stock, or shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other right, or there shall be any capital reorganization or reclassification of the Common Stock or consolidation or merger of the Company with or into another corporation, or any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then, in any one or more of said cases the Company shall give at least 30 days' prior written notice (the time of mailing of such notice shall be deemed to be the time of giving thereof) to the registered holders of the Notes at the addresses of each as shown in the Note Register of the date on which (i) a record shall be taken for such stock dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale or conveyance, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale or conveyance or participate in such dissolution, liquidation or winding up, as the case may be. Failure to give such notice shall not invalidate any action so taken. 9.8. Reports as to Adjustments. Upon any adjustment of the Conversion ------------------------- Ratio then in effect and any increase or decrease in the number of shares of Common Stock issuable upon the operation of the conversion provisions set forth in this Article 9, then, and in each such case, the Company shall promptly deliver to the holders of the -37- Notes a certificate signed by the Chief Executive Officer or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth in reasonable detail the event requiring the adjustment and the Company by which such adjustment was calculated and specifying the Conversion Price then in effect following such adjustment and shall set forth in reasonable detail the method of calculation of each and a brief statement of the facts requiring such adjustment. 10. Interpretation. -------------- 10.1 Definitions. ----------- "Adjustment Period" shall mean the period of five consecutive ----------------- trading days preceding the date as of which the Fair Market Value of a security is to be determined. "Affiliate" and "Associate" shall have the respective meanings --------- --------- ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Beneficially Own" with respect to any securities shall mean ---------------- having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing. "Business Day" shall mean any day other than a Saturday, Sunday, ------------ or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Capitalized Lease" shall mean, with respect to any Person, any ----------------- lease or any other agreement for the use of property which, in accordance with generally accepted accounting principles, should be capitalized on the lessee's or user's balance sheet. "Capitalized Lease Obligation" of any Person shall mean and ---------------------------- include, as of any date as of which the amount thereof is to be determined, the amount of the liability capitalized or disclosed (or which should be disclosed) in a balance sheet of such Person in respect of a Capitalized Lease of such Person. "Capital Stock Equivalents" shall mean with respect to any ------------------------- Person, any rights, options or warrants to purchase stock or other securities exchangeable for or convertible into capital stock of or any other equity interest in such Person. "Change in Control" shall mean: ----------------- (a) the acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) -38- of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding Voting Securities of the Company entitled to vote generally in the election of directors, but excluding, for this purpose, any such acquisition by (i) the Company or any of its subsidiaries, and (ii) any employee benefit plan (or related trust) of the Company or its subsidiaries; (b) a reorganization, merger or consolidation, in each case, with respect to which all or substantially all the individuals and entities who were the respective beneficial owners of the voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than a majority of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation; (c) the sale, lease or other disposition of all or a substantial part of the assets or property of the Company in one transaction or series of related transactions; or (d) the Incumbent Board shall cease for any reason to constitute at least 50% of the members of the Board. "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Company Benefit Plan" shall mean any employee pension benefit -------------------- plan and any Plan, other than a Multiemployer Plan (as defined in Section 2.16), established by the Company or any of its Subsidiaries or ERISA Affiliates or to which the Company or any of its Subsidiaries or ERISA Affiliates contributes or has contributed (including any such Plan not now maintained by the Company or any of its Subsidiaries or ERISA Affiliates or to which the Company or any of its Subsidiaries or ERISA Affiliates does not now contribute, but with respect to which the Company or any of its Subsidiaries or ERISA Affiliates has or may have any liability). "Consolidated" or "consolidated", when used with reference to any ------------ ------------ financial term in this Agreement (but not when used with respect to any tax return or tax liability), shall mean the aggregate for two or more Persons of the amounts signified by such term for all such persons, with inter-company items eliminated and, with respect to earnings, after eliminating the portion of earnings properly attributable to minority interests, if any, in the capital stock of any such Person or attributable to shares of preferred stock of any such Person not owned by any other such Person. -39- "Current Market Price", when used with reference to shares of -------------------- Common Stock or other securities on any date, shall mean the closing price per share of Common Stock or such other securities on such date and, when used with reference to shares of Common Stock or other securities for any period shall mean the average of the daily closing prices per share of Common Stock or such other securities for such period. The closing price for each day shall be the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ or such other system then in use, or, if on any such date the Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the Common Stock is listed or admitted to trading on a national securities exchange, the closing price shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock or such other securities are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock or such other securities are listed or admitted to trading. If the Common Stock or such other securities are not publicly held or so listed or publicly traded, "Current Market Price" shall mean the Fair Market Value per share of Common Stock or of such other securities. "Environmental Laws" means, without limitation, the Comprehensive ------------------ Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et -- seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. - ---- (S)(S) 11001 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. -- ---- (S)(S) 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601 et -- ---- -- seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. (S)(S) - --- 136 et seq., the Clean Air Act, 42 U.S.C. (S)(S) 7401 et. seq., the Clean Water -- --- Act (Federal Water Pollution Control Act), 33 U.S.C. (S)(S) 1251 et seq., the -- --- Safe Drinking Water Act, 42 U.S.C. (S)(S) 300f et seq., the Occupational Safety -- --- and Health Act, 29 U.S.C. (S)(S) 641, et seq., the Hazardous Materials -- ---- Transportation Act, 49 U.S.C. (S)(S) 1801, et seq., as any of the above statutes -- ---- have been or may be amended from time to time, all rules and regulations promulgated pursuant to any of the above statutes, and any other foreign, federal, state or local law, statute, ordinance, rule or regulation governing environmental matters, as the same have been or may be amended from time to time, including any common law cause of action providing any right or remedy relating to environmental matters, all indemnity agreements and other contractual obligations (including leases, asset purchase and merger agreements) relating to environmental -40- matters, and all applicable judicial and administrative decisions, orders, and decrees relating to environmental matters. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. "ERISA Affiliate" shall mean any trade or business, whether or --------------- not incorporated, which, together with Company, is under common control, as described in Section 414(b) or (c) of the Code. "Event of Default" shall mean each of the happenings or ---------------- circumstances enumerated in Section 7.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934, as amended, shall include reference to the comparable section, if any, of any such successor Federal statute. "Excluded Securities" shall mean (a) any options issued by the ------------------- Company pursuant to any stock option plan of the Company pursuant to the terms of such plan as in effect as of the date hereof, (b) any options issued by the Company and approved by the Board of Directors (or a committee thereof) and the holders of a majority of the Securities, (c) any options issued by the Company so long as all options granted by the Company in any fiscal year are exercisable for no more than 10,000 shares of Common Stock, in the aggregate, and the exercise price per share of Common Stock into which such options are exercisable is no less than the average Current Market Price per share of Common Stock for the five Trading Days preceding the date upon which any such option is granted, (d) any shares of Common Stock issued by the Company upon the exercise of any option referred to in clauses (a), (b) or (c) of this definition, and (e) any shares of Common Stock issued by the Company upon the exercise of (x) the Common Stock Warrant to Purchase 28,750 shares of Common Stock of the Company, dated March 11, 1993, issued to Paul R. Kuehn and (y) the Common Stock Warrant to Purchase 28,750 shares of Common Stock of the Company, dated March 11, 1993, issued to David B. Johnson. "Fair Market Value" shall mean, as to shares of Common Stock or ----------------- any other class of capital stock or securities of the Company or any other issuer which are publicly traded, the average of the Current Market Prices of such shares of securities for each day of the Adjustment Period. The "Fair Market Value" of any security which is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such -41- securities or property selected in good faith by the Board of Directors of the Company or a committee thereof, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board of Directors or such committee available to make such determination, as determined in good faith by the Board of Directors of the Company or such committee. "Guarantee" by any Person shall mean all obligations (other than --------- endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of any Person guaranteeing, or in effect guaranteeing, any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (ii) to advance or supply funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, (iii) to lease property or to purchase securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of such Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of any computations made under this Agreement, a Guarantee in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the outstanding amount of the Indebtedness for borrowed money which has been guaranteed, and a Guarantee in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements ------- Act of 1976, as amended, and the rules and regulations thereunder. "HSR Notification" shall mean the notification of the particular ---------------- transaction pursuant to the requests of the HSR Act. "Incumbent Board" shall mean the individuals who, immediately --------------- after the Closing, constitute the Board of Directors of the Company (including the Initial Securities Designee); provided, however, that any individual becoming a director subsequent to the Closing whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to be a member of the Incumbent Board. "Indebtedness" shall mean, with respect to any person, (i) all ------------ obligations of such person for borrowed money, or with respect to deposits or advances of any kind, -42- (ii) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (iii) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person, (iv) all obligations of such person issued or assumed as the deferred purchase price of property or services (other than accounts payable to suppliers and similar accrued liabilities incurred in the ordinary course of business and paid in a manner consistent with industry practice), (v) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien or security interest on property owned or acquired by such person whether or not the obligations secured thereby have been assumed, (vi) all Capitalized Lease Obligations of such person, (vii) all Guarantees of such person, (viii) all obligations (including but not limited to reimbursement obligations) relating to the issuance of letters of credit for the account of such person, (ix) all obligations arising out of foreign exchange contracts, and (x) all obligations arising out of interest rate and currency swap agreements, cap, floor and collar agreements, interest rate insurance, currency spot and forward contracts and other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. "Law" shall include any foreign, federal, state, or local law, --- statute, ordinance, rule, regulation, order, judgment or decree. "New Equity Securities" shall mean, with respect to securities of --------------------- the Company, any capital stock of the Company and any Capital Stock Equivalents of the Company; provided, however, that "New Equity Securities" shall not -------- ------- include (a) Capital Stock Equivalents granted to the Company's officers or directors pursuant to any stock option or similar plan approved by the Company's Board of Directors, (b) Common Stock issued upon exercise or conversion of the Capital Stock Equivalents referred to in clause (a) of this definition, (c) Common Stock issued upon conversion of the Notes and (d) Common Stock issued upon the exercise of the Rights. "outstanding" shall mean when used with reference to the Notes at ----------- a particular time, all Notes therefore issued as provided in this Agreement, except (i) Notes therefore reported as lost, stolen, damaged or destroyed, or surrendered for transfer, exchange or replacement, in respect to which replacement Notes have been issued, (ii) Notes therefore paid in full, and (iii) Notes therefore cancelled by the Company, except that, for the purpose of determining whether holders of the requisite principal amount of Notes have made or concurred in any waiver, consent, approval, notice or other communication under this Agreement, Notes registered in the name of, or owned beneficially by, the Company or any Subsidiary of any thereof, shall not be deemed to be outstanding. -43- "PBGC" shall mean the Pension Benefit Guaranty Corporation, or ---- any successor thereto. "Person" shall mean any individual, firm, corporation, ------ partnership or other entity, and shall include any successor (by merger or otherwise) of such entity. "Plan" shall mean any bonus, incentive compensation, deferred ---- compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workers; compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or arrangement of any kind, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA "Rights" shall mean the rights to purchase Common Stock issued ------ pursuant to the Rights Agreement (the "Rights Agreement") dated as of January 30, 1996, between the Company and Norwest Bank Minnesota, National Association, as rights agent. "SEC" shall mean the Securities and Exchange Commission. --- "Securities" means (i) the Common Stock issued or issuable upon ---------- conversion of the Notes (or any securities into which the Notes are exchanged in connection with the execution of an Indenture pursuant to the Registration Rights Agreement) and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock divided or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. For purposes of this Agreement, any Person that holds Notes shall be deemed to be the holder of the number of Securities obtainable upon conversion of such Notes. As to any particular shares of Common Stock which are "Securities", such shares shall cease to be "Securities" when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them or (b) sold pursuant to Rule 144 under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as -------------- amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Subsidiary" of any Person means any corporation or other entity ---------- of which a majority of the voting power or the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Taxes" shall mean taxes, assessments, duties, fees, levies, ----- imposts, deductions, withholdings, including, without limitation, income, gross receipts, ad -44- valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever imposed by any government or taxing authority of any country or political subdivision of any country on the Company or any of its Subsidiaries, and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon, and includes any liability of the Company or any of its Subsidiaries arising under any tax sharing agreement to which the Company or Subsidiaries is or has been a party. "Tax Return" shall mean any report, return, statement, estimate, ---------- declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes. "Trading Day" means a Business Day or, if the Common Stock is ----------- listed or admitted to trading on any national securities exchange, a day on which such exchange is open for the transaction of business. "Voting Securities" shall mean at any time shares of capital ----------------- stock of the Company which are then entitled to vote generally in the election of directors. 10.2. Accounting Principles. The character or amount of any asset, --------------------- liability, capital account or reserve and of any item of income or expense required to be determined pursuant to this Agreement, and any consolidation or other accounting computation required to be made pursuant to this Agreement, and the construction of any definition in this Agreement containing a financial term, shall be determined or made, as the case may be, in accordance with generally accepted accounting principles, to the extent applicable, unless such principles are inconsistent with the express requirements of this Agreement. 11. Miscellaneous. ------------- 11.1. Payments. Subject to Section 5.1 hereof, the Company agrees -------- that, so long as the Purchasers shall hold any Securities, it will make all cash interest or dividend payments thereon in immediately available funds in such manner as the Purchasers may reasonably request in writing. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension will be included in the computation of the interest payable on such next succeeding Business Day. -45- 11.2. Severability. If any term, provision, covenant or restriction of ------------ this Agreement or any exhibit hereto is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement and such exhibits shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 11.3. Specific Enforcement. The Purchasers, on the one hand, and the -------------------- Company, on the other, acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the holders of the Securities shall be entitled to an injunction to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they may be entitled at law or equity. 11.4. Entire Agreement. This Agreement (including the documents set ---------------- forth in the schedules and exhibits hereto) and the other Agreements contain the entire understanding of the parties with respect to the transactions contemplated hereby. 11.5. Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 11.6. Notices and other Communications. All notices, consents, -------------------------------- requests, instructions, approvals, financial statements, proxy statements, reports and other communications provided for herein shall be rapidly given, if in writing and delivered personally, by telecopy or sent by registered mail, postage prepaid, if to: THE COMPANY: Recovery Engineering, Inc. 2229 Edgewood Avenue South Minneapolis, Minnesota 55426 Telecopy: (612) 797-8334 Attention: Brian F. Sullivan -46- With a copy to: Eric O. Madson, Esq. Winthrop & Weinstine, P.A. 60 South Sixth Street Minneapolis, Minnesota 55402 Telecopy: (612) 347-0600 PURCHASERS: GS Capital Partners II, L.P. c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Telecopy: (212) 902-3000 Attention: Mr. Sanjay Patel With a copy to: Gail Weinstein, Esq. Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telecopy: (212) 859-4000 or to such other address as any party may, from time to time, designate in a written notice given in a like manner. 11.7. Amendments. This Agreement (other than Section 6.13) may be ---------- amended as to the Purchasers and any subsequent holder of Securities and their successors and assigns, and the Company may take any action herein prohibited, or omit to perform any act required to be performed by it, if the Company shall obtain the written consent of the registered holders of not less than a majority of the outstanding principal amount of the Notes, except that Articles 2 and 6 (other than Section 6.13) and Sections 7.6, 8.2, 11.2, 11.3, 11.7 and 11.9 through 11.16 and each defined term for purposes of its use therein may only be amended, and the Company may only take any action prohibited thereby or omit to perform any act required to be performed by it pursuant thereto, if the Company shall obtain the written consent of the registered holders of not less than a majority of all of the Securities (whether held in the form of Notes or Common Stock). Section 6.13 hereof may only be amended, and the Company may only take any action prohibited thereby, or omit to perform any act required to be performed by it pursuant thereto, if the Company shall obtain the written consent of GSCP. Subject to the foregoing, this Agreement may not be waived, changed, modified, or discharged orally, -47- but only by an agreement in writing signed by the party or parties against whom enforcement of any waiver, change, modification or discharge is sought or by parties with the right to consent to such waiver, change, modification or discharge on behalf of such party. 11.8. Cooperation. The Purchasers and the Company agree to take, or ----------- cause to be taken, all such further or other actions as shall reasonably be necessary to make effective and consummate the transactions contemplated by this Agreement. 11.9. Successors and Assigns. Except as expressly provided herein, all ---------------------- covenants and agreements contained herein shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. In addition, and whether or not express assignment has been made, except as otherwise expressly stated in this Agreement, (a) each of the provisions of this Agreement are for the benefit of, and are enforceable by, any registered holder of Notes and (b) the provisions of Articles 2 and 6 (other than Section 6.13) and Sections 7.3, 8.2, 11.2, 11.3, 11.7 and 11.9 through 11.16 of this Agreement are for the benefit of, and are enforceable by, any registered holder of Securities (whether held in the form of Notes or Common Stock). 11.10. Expenses and Remedies; Environmental Waiver. (a) The Company ------------------------------------------- shall pay all reasonable costs and expenses of the Purchasers (including, without limitation, the fees and expenses of outside legal counsel) in connection with the Agreements and the consummation of all transactions contemplated hereby and thereby, and shall pay to holders of Securities (whether held in the form of Notes or Common Stock), all reasonable costs and expenses relating to any future amendment or supplement to any of the Agreements, any of the Notes or other Securities (or any proposal by the Company for such amendment or supplement) whether or not consummated or any waiver or consent with respect thereto (or any proposal for such waiver or consent) whether or not consummated, and all costs and expenses of the Purchasers and holders of Notes or Securities relating to the enforcement of any of the Agreements, any of the Notes or any of the Securities. (b) The Company further agrees to indemnify and save harmless each of the Purchasers and each holder of Securities (whether held in the form of Notes or Common Stock), and its officers, directors, partners, employees, trustees and agents, and each Person who controls such Person within the meaning of the Securities Act or the Exchange Act, from and against any and all costs, expenses, damages or other liabilities, including without limitation reasonable attorney's fees and expenses (each a "Loss"), resulting from any breach of, or failure by the Company to perform, any of its representations, warranties, covenants or agreements set forth in any of the Agreements. In the event of such breach or failure to perform by the Company, each such indemnified party shall be entitled to be so indemnified and held harmless by the Company for all -48- Losses suffered by such indemnified party, regardless of any Material Adverse Effect, materiality or similar qualifier or any dollar threshold contained in the representation, warranty, covenant or agreement which was breached or which the Company failed to perform. (c) The Purchasers agree to indemnify and save harmless the Company and its officers, directors, partners and employees and each Person who controls the Company within the meaning of the Securities Act or the Exchange Act, from and against any and all Losses resulting from any breach of their representations and warranties set forth in this Agreement. (d) Any indemnified party under this Section 11.10 shall, promptly after the receipt of notice of the commencement of any action against such indemnified party in respect of which indemnity may be sought from an indemnifying party on account of an indemnity agreement contained in this Section 11.10, notify the indemnifying party in writing of the commencement thereof. The omission of any indemnified party so to notify the indemnifying party of any such action shall not relieve the indemnifying party from any liability which it may have to such indemnified party except to the extent the indemnifying party shall have been materially prejudiced by the omission of such indemnified party so to notify the indemnifying party, pursuant to this Section 11.10. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 11.10 for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof nor for any settlement thereof entered into without the consent of the indemnifying party; provided, however, that (i) if the indemnifying party shall elect not to assume - -------- ------- the defense of such claim or action or (ii) if the indemnified party reasonably determines (x) that there may be a conflict between the positions of the indemnifying party and of the indemnified party in defending such claim or action or (y) that there may be legal defenses available to such indemnified party different from or in addition to those available to the indemnifying party, then separate counsel for the indemnified party shall be entitled to participate in and conduct the defense, in the case of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the indemnifying party shall be liable for any reasonable legal or other expenses incurred by the indemnified party in connection with the defense. (e) The Company hereby waives any right it may have at any time in the future to seek contribution or other recovery pursuant to any Environmental Law from any holder of Securities and hereby releases each holder of any Securities from any claim, -49- demand or cause of action that the Company or any of its Subsidiaries may have at any time in the future against any such holder in respect of any Environmental Law. 11.11. Survival of Representations and Warranties. All representations ------------------------------------------ and warranties contained herein or made in writing by any party in connection herewith shall survive the execution and delivery of this Agreement and the issuance and delivery of the Securities, regardless of any investigation made by or on behalf of any party. 11.12. Transfer of Securities. The Purchasers understand and agree ---------------------- that the Securities have not been registered under the Securities Act or the securities laws of any state and that they may be sold or otherwise disposed of only in one or more transactions registered under the Securities Act and, where applicable, such laws or transactions as to which an exemption from the registration requirements of the Securities Act and, where applicable, such laws are available. The Purchasers acknowledge that, except as provided in the Registration Rights Agreement, the Purchasers have no right to require the Company to register the Securities. The Purchasers understand and agree that each Note or certificate representing the Securities shall bear the following legends: "THE TRANSFER OF [THE SECURITIES REPRESENTED BY THIS CERTIFICATE] [THIS NOTE] IS RESTRICTED BY AND PURSUANT TO A SECURITIES PURCHASE AGREEMENT, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE CORPORATION." "[THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE] [THIS NOTE HAS] NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS." 11.13. Governing Law. This Agreement and the Notes shall be construed ------------- and enforced in accordance with, and the rights of the parties shall be governed by, the law of the state of New York excluding choice-of-law principles of the law of such state that would require the application of the laws of a jurisdiction other than such state. 11.14. Submission to Jurisdiction. If any action, proceeding or -------------------------- litigation shall be brought by the Purchaser in order to enforce any right or remedy under this Agreement or any of the Notes, the Company hereby consents and will submit, and will cause each of its Subsidiaries to submit, to the jurisdiction of any state or federal court of competent jurisdiction sitting within the area comprising the Southern District of New -50- York on the date of this Agreement. The Company hereby irrevocably waives any objection, including, but not limited to, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action, proceeding or litigation in such jurisdiction. 11.15. Service of Process. Nothing herein shall affect the right of ------------------ any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. 11.16. Waiver of Jury Trial. The Company hereby waives any right it -------------------- may have to a trial by jury in respect of any action, proceeding or litigation directly or indirectly arising out of, under or in connection with, this Agreement or any of the Notes. 11.17. Public Announcements. Neither the Company nor the Purchaser -------------------- shall make any public statements, including, without limitation, any press releases, with respect to this Agreement and the transactions contemplated hereby without the prior written consent of the other party (which consent shall not be unreasonably withheld) except as may be required by law. If a public statement is required to be made by law, the parties shall consult with each other in advance as to the contents and timing thereof. 11.18. Signatures. This Agreement shall be effective upon delivery ---------- of original signature pages or facsimile copies thereof executed by each of the parties hereto. -51- IN WITNESS WHEREOF, the Company and the Purchasers have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized. RECOVERY ENGINEERING, INC. /s/ Brian F. Sullivan By: _______________________________________________ Name: Brian F. Sullivan Title: President & CEO GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner /s/ Richard A. Friedman By: _______________________________________________ Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P., its general partner By: GS Advisors II, Inc., its general partner /s/ Richard A. Friedman By: _______________________________________________ Name: Richard A. Friedman Title: President -52- GOLDMAN, SACHS & CO. VERWALTUNGS GmbH /s/ Richard A. Friedman By: _______________________________________________ Name: Richard A. Friedman Title: Managing Director and /s/ C.H. Skodinski By: _______________________________________________ Name: C.H. Skodinski Title: Registered Agent STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its general partner /s/ Richard A. Friedman By: _______________________________________________ Name: Richard A. Friedman Title: Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its managing general partner /s/ Richard A. Friedman By: _______________________________________________ Name: Richard A. Friedman Title: Vice President -53- Schedule 1.1 Aggregate Principal Amount Purchasers of Notes Purchased - ---------- -------------------------- GS Capital Partners II, L.P. $9,411,420 GS Capital Partners II Offshore, L.P. $3,741,435 Goldman, Sachs & Co. Verwaltungs GmbH $ 347,145 Stone Street Fund 1996, L.P. $ 893,835 Bridge Street Fund 1996, L.P. $ 606,165 S-1 SCHEDULE 2.3 SUBSIDIARIES ------------ Name Jurisdiction Ownership - ---- ------------ --------- Recovery Engineering International, Ltd. Barbados 100% owned by Recovery Engineering, Inc. SCHEDULE 2.5 MATERIAL LIABILITIES NOT REFLECTED ON MARCH 31, 1996 BALANCE SHEET ------------------------------------------------------------------ None. SCHEDULE 2.6 LITIGATION ---------- None. SCHEDULE 2.8 GOVERNMENTAL CONSENTS, ETC. --------------------------- None. SCHEDULE 2.10 TAXES ----- (a) Tax Returns, Etc. ----------------- None. (b) Tax Sharing Agreements ---------------------- None. SCHEDULE 2.12 CAPITALIZATION -------------- (a) Capital Stock Equivalents ------------------------- Stock options outstanding under 1986 Stock Option Plan 228,275 shares Stock options outstanding under 1994 Stock Option and Incentive Plan 659,100 shares Stock options outstanding under 1993 Director Stock Option Plan 24,000 shares Stock options outstanding, not under any Plan 500 shares Stock warrants outstanding 57,500 shares ------- Total 969,375 shares ======= In addition, the Company periodically issues shares of its common stock pursuant to the Recovery Engineering, Inc. 1994 Stock Purchase Plan, a payroll-deduction stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Pursuant to the terms of the Plans identified above, the Company may from time to time repurchase or acquire shares of its capital stock upon the exercise of stock options. (b) Changes in capitalization ------------------------- On May 9, 1996, Recovery Engineering, Inc., a Delaware corporation, was merged into Recovery Engineering, Inc., a Minnesota corporation, to effect the reincorporation of the Company under the laws of the State of Minnesota. In connection with such transaction, the authorized capital stock of the Company was increased from 20,000,000 shares to 100,000,000 shares. SCHEDULE 2.17 EMPLOYMENT RELATIONS AND AGREEMENTS ----------------------------------- None. SCHEDULE 2.20 LIENS OR CLAIMS AGAINST INTELLECTUAL PROPERTY RIGHTS ---------------------------------------------------- In connection with the Credit Agreement dated March 7, 1996 between the Company and First Bank National Association, the Company executed a Borrrower's Security Agreement pursuant to which it granted to First Bank National Association a security interest in assets of the Company, including the following: "All General Intangibles, including without limitation all tax refunds and tax refund claims, all patents, trademarks, trade secrets and other intellectual property of every type and description." The Credit Agreement and the related Borrower's Security Agreement are to be terminated upon the closing of the Securities Purchase Agreement to which this Schedule 2.20 is attached. SCHEDULE 2.24 BROKERS OR FINDERS ------------------ The Company retained Dain Bosworth Incorporated as its exclusive agent and financial advisor in connection with the private placement of debt or equity securities, and will pay to Dain Bosworth Incorporated a fee equal to 3.5% of the gross proceeds from the sale of the Notes as contemplated by the Securities Purchase Agreement to which this Schedule 2.24 is attached. Exhibit A --------- THE TRANSFER OF THIS NOTE IS RESTRICTED BY AND PURSUANT TO A SECURITIES PURCHASE AGREEMENT DATED AS OF JULY 19, 1996, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS. RECOVERY ENGINEERING, INC. 5% CONVERTIBLE NOTE DUE 2003 No. R-__ $_______ New York, New York July 19, 1996 FOR VALUE RECEIVED, the undersigned, RECOVERY ENGINEERING, INC., (herein called the "Company"), a corporation duly organized and existing under ------- the laws of the State of Minnesota, hereby promises to pay to ___________, a ____________ (the "Purchaser"), or its registered assigns, the principal sum of --------- _____________ ($_________) on July 18, 2003, and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount hereof, from the date hereof, at the rate of 5% per annum, payable quarterly, on the 31st day of March, the 30th day of June, the 30th day of September and the 31st day of December in each year, commencing September 30, 1996, until the principal hereof shall have become due and payable, and to the extent permitted by law, to pay interest at the rate of 10% per annum on any overdue principal or interest, from the date such amount was due and payable until the obligation of the Company with respect to the payment thereof shall be fully discharged, such interest to be payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand). If the date on which any such payment is required to be made pursuant to the provisions of this Note occurs on a day other than a Business Day, such payment shall be due and payable on the next succeeding Business Day. Payments of principal of, and interest on, this Note are to be made in lawful money of the United States of America in the following manner: (i) in the case of the A-1 Purchaser or an institutional investor who holds in excess of $300,000 principal amount of the Notes, at the account/address to be specified by the Purchaser for such purpose by notice to the Company, or at the account/address specified by such institutional investor, by wire transfer of immediately available funds, or at such other address or by such other method as the Purchaser or such institutional investor shall have designated by notice to the Company, or (ii) for all other holders of Notes, at the address specified by such holder, by check, in either case without presentment for notation of payment and without surrender. This Note is one of a series of the Company's 5% Convertible Notes due 2003 (herein called the "Notes") in the aggregate principal amount of ----- $15,000,000 (the "Initial Principal Balance") issued pursuant to a Securities ------------------------- Purchase Agreement, dated as of July 19, 1996 (the "Securities Purchase ------------------- Agreement"), between the Company the Purchaser and the other parties thereto. - --------- Defined terms used herein which are defined in the Securities Purchase Agreement shall have the same meaning as such terms have in the Securities Purchase Agreement. This Note is entitled to the benefits of, and is subject to the terms contained in, the Securities Purchase Agreement. The provisions of the Securities Purchase Agreement are hereby incorporated in this Note to the same extent as if set forth at length herein. The Company may deem and treat the person in whose name this Note is registered pursuant to Section 4 of the Securities Purchase Agreement as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, notwithstanding any notations of ownership or transfer hereon and notwithstanding that this Note is overdue, and the Company shall not be affected by any notice to the contrary until presentation of this Note for registration of transfer as provided in Section 4 of the Securities Purchase Agreement. This Note may be transferred or exchanged and, if lost, stolen, damaged or destroyed, this Note may be replaced, only in the manner and upon the conditions set forth in the Securities Purchase Agreement. This Note is subject to prepayment, in whole or in part, only under the circumstances, and to the extent provided, in the Securities Purchase Agreement. In case an Event of Default shall happen and be continuing, the principal amount of this Note may become or be declared due and payable only in the manner and with the effect provided in the Securities Purchase Agreement. After the fifth and sixth anniversary of the date of the Securities Purchase Agreement, and prior thereto in certain circumstances involving the occurrence of a Change in Control, the holder of this Note shall have the right to require the Company to A-2 repurchase the Note (or any portion of the principal amount hereof) at the price and in accordance with the terms and limitations specified in the Securities Purchase Agreement. Subject to and upon compliance with the provisions of the Securities Purchase Agreement, the holder of this Note is entitled to convert this Note (or any portion of the principal amount hereof) into fully paid and non-assessable shares of Common Stock of the Company at the conversion price, subject to adjustment, specified in the Securities Purchase Agreement. No reference herein and no provision of this Note or of the Securities Purchase Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, place and rate, and in the coin or currency, as prescribed herein and in the Securities Purchase Agreement, or to convert this Note as provided in the Securities Purchase Agreement. No service charge shall be made of any registration of transfer, exchange or conversion, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. This Note shall be governed by and construed and enforced in accordance with the laws of the State of New York. RECOVERY ENGINEERING, INC. By: _______________________________________________ Name: Title: A-3 EXHIBIT B RECOVERY ENGINEERING, INC. LEASE PROPOSAL DATED JUNE 27, 1996 EXHIBIT B RECOVERY ENGINEERING, INC. LEASE PROPOSAL JUNE 27, 1996 TENANT: - ------- Recovery Engineering, Inc. ("RET") LOCATION: - --------- Northland Interstate Business Center, Brooklyn Park, MN. Site is already identified and is located along the frontage road of Highway 169. SIZE: - ----- The initial building size shall be 96,000 square feet with approximately 26,000 square feet of office area and 70,000 square feet of labs, production and warehouse areas. Initial parking will include 300 stalls. INTIAL TERM: - ------------ Ten (10) years commencing April 1, 1997 and terminating March 31, 2007. EARLY ACCESS: - ------------- If the facility is ready, REI and their vendors shall have early access to the facility to install communication systems, production equipment, and warehouse material handling equipment and racks. Rent shall commence April 1, 1997. No unusual penalties or incentives will apply to early access or project completion. ANNUAL NET RENT: - ---------------- The base rent shall be equal to eleven percent (11%) of the total project costs ($4,650,000 per REI's initial underwriting) plus $.10 per square foot of building for roof replacement and structural repairs by Landlord. Total project costs and construction costs will be guaranteed not to exceed a pre-agreed to amount at the time the lease is executed. The developer's fee, contractor's fee and overhead (including project management fee), and design fee will be fixed as part of the total project costs, as follows: Developer's fee $30,000 Contractor's fee 3.4% of construction GMP Project management fee $90,900 as part of overhead Design fee $154,730 1 The base rent will adjust in year six (6) and every five year anniversary date thereafter to the then current market rate consistent with space of comparable use, size, location, and quality for buildings within a ten mile radius of the new facility. The prevailing market base rent shall be determined by arbitration if the parties cannot agree. Alternatively, a fixed fifteen percent (15%) increase in year six (6) and every five year anniversary date thereafter may be used should REI elect a fixed rate increase prior to lease execution. ADDITIONAL RENT: - ---------------- REI will be responsible for managing and maintaining the facility and pay 100% of all operating expenses, utilities, and repairs (excluding roof replacement and structural repairs) associated with their premises. No management fee will be charged by the Landlord in the lease. In addition to operating expenses, REI will be reponsible for paying 100% of real estate taxes and special assessments. The balance of special assessments owed subsequent to the lease commencement date is estimated to be $.10 per square foot of building area. LAND OPTION: - ------------ REI shall have the option to expand an additional 96,000 square feet and add 300 parking stalls on land adjacent to the intial building improvements. This option is annual and automatically renews each year for the entire term of the lease (including renewal terms) unless terminated sooner. At any time REI expands, the land area designated for the expansion shall be included in the actual cost of the expansion at a static $1.98 per square foot of land, and such land area shall be removed from the land option area. The land option cost will be reduced accordingly. The annual land option cost shall be equal to the annual carry cost on the land. Such carry costs shall be the actual annual real estate taxes and installments on future special assessments plus ____% annual interest charge on $1.98 per square foot of land option area. In ____ months the RTC financing on the land option area balloons at which time the interest charged on the land option area will be equal to Ryan Company's cost of borrowing on their line of credit. Any charges or adjustments to the annual carry costs or land option area during the year shall be recalculated and adjusted on each anniversary of the land option. However, at the time of the expansion whereby the land option area becomes to small to construct a minimum of 35,000 square feet of future building expansion, REI will include 100% of the land option area into the cost of such expansion, thereby reducing the land option area and corresponding land option cost to nothing. 2 REI may terminate this land at any time by providing the Landlord 30 days prior written notice of termination. The annual land option cost will be prorated based on the effective date of such termination. OPTIONS TO EXPAND: - ------------------ REI shall have the right to expand up to an additional 96,000 square feet in increments of space at any time (inclusive of lease renewal terms). For any expansions to the premises, the entire lease will be extended so the remaining term will be ten years. The starting base rent on any expansions will be determined by multiplying a lease constant by the capital cost of the expansions. The lease constant will be equal to a debt constant plus 60 basis points. The debt constant will be calculated using a 20 year loan amortization, and completely bid interest rate and loan amount at the time of the expansions. The added 60 basis points is to compensate the Landlord for the equity needed to finance the expansions. The base rent on any expansion space shall be adjusted on the same terms and conditions as the initial space in every respect. For the purpose of calculating any expansion base rent, the capital cost of the expansions shall be the land cost at $1.98 per square foot of land, plus the actual cost of materials and labor for building and site construction, plus the actual cost of design, plus a 4% contractor's fee and construction project management time (based on an hourly charge of $75.00 or $85.00 during years 1-2 or later years, respectively). No development fees or Landlord fees will be charged to the cost of the expansions. OPTIONS TO RENEW: - ----------------- REI shall have four (4) five (5) year renewal options with nine (9) months prior written notice of renewal. The renewal terms will commence upon completion of the initial lease term (as extended by exercising expansion options). The base rent for each renewal term shall be at the then current market rate consistent with space of comparable use, size, location, and quality in buildings within a ten mile radius. The prevailing market base rent shall be determined by arbitration if the parties cannot agree. Alternatively, should REI elect a fixed rate increase prior to lease execution, a flat rate for each five year renewal period will be equal to the previous base rent mutliplied by three percent (3%) annual (simple - not compounded) increase since the last base rent increase. Renewal options will cover the initial space as well as any expansion spaces. ASSIGNMENT AND SUBLET: - ---------------------- Landlord will not unreasonably withhold its consent to assign or sublease the space provided REI remains primarily liable on the lease. However, an assignment of the lease will be allowed in the event REI is acquired or merged with another company who's then combined net worth is equal to or greater than REI. 3 LEASING FEE: - ------------ Landlord will pay Tobin Real Estate Company a $175,000 commission for real estate services, payable 1/2 upon lease execution and 1/2 upon occupancy of the space. MOVING ALLOWANCE: - ----------------- Landlord will pay REI up to a $150,000 moving allowance, payable 1/2 by January 1, 1997 and 1/2 upon occupancy of the space. Such moving allowance shall be amortized over the lease term at 10% as additional rent. ECONOMIC INCENTIVES: - -------------------- Any state economic incentives will be reflected either in the lease rate or refunded to tenant within 45 days after the benefit is received. Ryan Companies has negotiated a master development agreement with the City of Brooklyn Park for Northland Interstate Business Center. This agreement outlines the tax increment benefits for organizations moving into the Park. The City is very interested in bringing quality jobs to this area and provide incentives for those companies with employment opportunities. This master development agreement provides for up to 50% of the tax increment financing to be returned to qualified business. Ryan Companies has had preliminary discussions with the City and feels that REI is an excellent candidate to qualify for the maximum Tax Increment Financing benefits. Ryan Companies will arrange a meeting with the City Community Development Director and Representatives of REI to finalize the tax increment benefits when appropriate. All tax increment financing benefits will be passed onto REI. Ryan estimates this benefit at approximately $.92 per square foot for taxes payable in the years 1998-2004. Tax increment benefits must be finalized as part of the lease. IMPROVEMENTS: - ------------- Ryan will design and construct an inital 96,000 square foot facility, expandable in increments to 192,000 square feet. Ryan will be responsible for all site costs, obtaining all governmental approvals and permits, meeting all applicable codes and ordinances of the project, and constructing all site and building improvements, including any financing costs. Landlord shall provide up to $350,000 of owner initiated additions to the scope of the initial project, which will be financed in the lease as an increase to the above base rent (using the 11% initial lease constant). 4 ENVIRONMENTAL: - -------------- Ryan will perform the environmental due diligence and be responsible for delivering a building and pad ready site free of hazardous materials to the best of its knowledge. CONSTRUCTION COST SAVINGS: - -------------------------- Subject to reviewing the guaranteed total project costs and construction price, REI will decide whether or not a construction cost savings formula is appropriate. They conceptually acknowledge that 10-50% sharing in the savings to certain contractors has been done in the marketplace for various types of projects, subject to specific limitations. REIMBURSEMENT AGREEMENT: - ------------------------ Attached is a reimbursement agreement for pre-construction costs and commitments by the Landlord to design and price the building for REI prior to agreeing to execute a lease. If REI does not enter into a lease, they agree to reimburse Ryan Companies for the actual costs, not to exceed $__________. Should REI execute a lease with Ryan Companies, they do not need to reimburse Ryan and these costs will be part of the total project costs guaranteed by the Landlord. STEEL COMMITMENT: - ----------------- REI and Ryan will re-visit the commitments for maintaining steel deliveries. If REI agrees to commit to steel fabrication and does not execute a lease with Ryan, then they will reimburse Ryan for restocking or cancelling fabricated steel, not to exceed $20,000. LEASE EXECUTION: - ---------------- Ryan and REI will work to have an acceptable guaranteed total project cost, construction cost, and a lease document on or before August 1, 1996. Also, separate from the lease document (and outside the total project costs) but concurrent with the lease execution, Ryan agrees to pay REI $125,000 in lieu of REI retaining a 50% profit sharing interest in the real estate. NON-BINDING LETTER OF INTENT: - ----------------------------- This letter is not an agreement to agree. Rather, it is a non-binding letter of intent. 5 EX-99.2 3 REGISTRATION RIGHTS AGREEMENT EXHIBIT 2 REGISTRATION RIGHTS AGREEMENT, dated as of July 19, 1996 (this "Agreement"), between RECOVERY ENGINEERING, INC., a Minnesota corporation (the - ---------- "Company"), and GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership, GS - -------- CAPITAL PARTNERS II OFFSHORE, L.P., a Cayman Island limited partnership, GOLDMAN SACHS & CO. VERWALTUNGS GmbH, STONE STREET FUND 1996, L.P., a Delaware limited partnership, and BRIDGE STREET FUND, 1996, L.P., a Delaware limited partnership (the foregoing parties, other than the Company, being referred to herein as the "Investors"). 1. Background. The Company and the Investor have entered into a ---------- Securities Purchase Agreement, dated as of the date hereof (the "Securities ---------- Purchase Agreement"). In order to induce the Investors to enter into and - ------------------ consummate the transactions contemplated by the Securities Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. 2. Definitions. As used herein, unless the context otherwise requires, ----------- the following terms have the following respective meanings: "Commission" means the Securities and Exchange Commission or any other ---------- Federal agency at the time administering the Securities Act. "Common Stock" means the common stock, par value $.01 per share, of ------------ the Company. "Conversion Shares" means (a) the shares of Common Stock or other ----------------- equity securities issued or issuable upon conversion of the Notes and (b) any shares of Common Stock or other securities issued or issuable, in respect of the Common Stock or other equity securities referred to in clause (a) above by way of a dividend, distribution, stock split, combination of shares or any similar event. "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such similar federal statute. "Incidental Registration" is defined in Section 3.2. ----------------------- "Notes" means the 5% Convertible Notes due 2003 issued pursuant to the ----- Securities Purchase Agreement and any securities issued in exchange therefor pursuant to any Exchange (as defined in Section 3.3(o)). "Participating Holders" means the holders of Registrable Securities --------------------- participating in the particular registration. "Person" means a corporation, an association, a partnership, a limited ------ liability company, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Registration Expenses" means all expenses incident to the Company's --------------------- performance of or compliance with Section 3, including, without limitation, all registration, filing and applicable fees of the Commission, stock exchange or NASD registration and filing fees and all listing fees and fees with respect to the inclusion of securities in NASDAQ (as defined in Section 3.3(j)), all fees and expenses of complying with state securities or blue sky laws (including fees and disbursements of counsel to the underwriters or the Participating Holders in connection with "blue sky" qualification of the Registrable Securities and determination of their eligibility for investment under the laws of the various jurisdictions), all word processing, duplicating and printing expenses, all messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants including the expenses of any audit and/or "cold comfort" letters required by or incident to such registration, all expenses in connection with any road show, all fees and disbursements of underwriters customarily paid by issuers or sellers of securities, all transfer taxes, and the fees and expenses of one counsel to the Participating Holders (selected by the Requisite Percentage of Participating Holders); provided, however, that Registration Expenses shall exclude and the -------- ------- Participating Holders shall pay all underwriting discounts and commissions in respect of the Registrable Securities being registered. "Registrable Securities" means (i) any Notes and (ii) any Conversion ---------------------- Shares. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities (a) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) when such securities are sold pursuant to Rule 144 (or similar rule adopted by the Commission) under the Securities Act, or (c) when such securities cease to be outstanding. "Requested Registration" is defined in Section 3.1(a). ---------------------- "Requisite Percentage of Outstanding Holders" mean the holders of ------------------------------------------- Registrable Securities who, assuming conversion of all then outstanding Notes into Conversion Shares, would hold 25% or more of the total Conversion Shares that would then be outstanding. 2 "Requisite Percentage of Participating Holders" means Participating --------------------------------------------- Holders of Registrable Securities who, assuming conversion of all then outstanding Notes into Conversion Shares, would hold a majority of the total Conversion Shares that would then be held by all Participating Holders. "Securities Act" means the Securities Act of 1933, or any similar -------------- Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar Federal statute. 3. Registration Under Securities Act, etc. --------------------------------------- 3.1 Requested Registrations. ----------------------- (a) Request for Registration. Subject to the limitations imposed by ------------------------ Sections 3.1(c) below, at any time and from time to time, one or more holders of Registrable Securities representing the Requisite Percentage of Outstanding Holders shall have the right to require the Company to file a registration statement under the Securities Act covering all or any part of their respective Registrable Securities, by delivering a written request therefor to the Company specifying the number and amount of Registrable Securities and the intended method of distribution thereof. Any such request pursuant to this Section 3.1(a) is referred to herein as a "Requested Registration." The Company shall ---------------------- give prompt written notice of each Requested Registration to all other holders of record of Registrable Securities, and thereupon the Company shall use its best efforts to effect the registration under the Securities Act (including, without limitation, by means of a shelf registration pursuant to Rule 415 under the Securities Act if so requested) so as to permit promptly the sale, in accordance with the intended method of distribution, of the Registrable Securities which the Company has been so requested to register in the Requested Registration and all other Registrable Securities which the Company has been requested to register by the holders thereof by written request given to the Company within 30 days after the giving of such written notice by the Company. (b) Registration of Other Securities. Whenever the Company shall -------------------------------- effect a registration pursuant to this Section 3.1 in connection with an underwritten offering by one or more Participating Holders of Registrable Securities, no securities other than Registrable Securities shall be included among the securities covered by such registration unless (i) Participating Holders representing the Requisite Percentage of Participating Holders shall have consented in writing to the inclusion therein of such other securities and (ii) such inclusion shall be permitted only to the extent that it is pursuant to and subject to the terms of the underwriting agreement or arrangements and 3 the inclusion of such securities will not have a material adverse effect on the offering (including, without limitation, on the pricing of the offering). (c) Limitations on Requested Registrations; Expenses. The Company ------------------------------------------------ shall not be obligated to effect any Requested Registration pursuant to this Section 3.1 until the second anniversary of the date hereof. Thereafter, the Company shall be obligated to effect only three Requested Registrations pursuant to this Section 3.1. The Company shall pay all Registration Expenses in connection with each Requested Registration requested pursuant to this Section 3.1. (d) Registration Statement Form. Registrations under this Section 3.1 --------------------------- shall be on Form S-3 or any successor form, if permitted, or such appropriate registration form of the Commission as shall be selected by the Company and as shall be reasonably acceptable to the Requisite Percentage of Participating Holders. The Company agrees to include in any such registration statement all information which, in the opinion of counsel to the Participating Holders and counsel to the Company, is required to be included. (e) Effective Registration Statement. A registration requested -------------------------------- pursuant to this Section 3.1 shall not be deemed to have been effected (including for purposes of paragraph (c) of this Section 3.1) (i) unless a registration statement with respect thereto has become effective and has been kept continuously effective for a period of at least 120 days (or such shorter period which shall terminate when all the Registrable Securities covered by such registration statement have been sold pursuant thereto), (ii) if, after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Participating Holders and has not thereafter become effective, or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Participating Holders. (f) Selection of Underwriters. The managing underwriter or ------------------------- underwriters of each underwritten offering of the Registrable Securities so to be registered shall be selected by the Requisite Percentage of Participating Holders, and shall be reasonably acceptable to the Company (it being agreed that any nationally recognized investment bank firm shall be reasonably acceptable to the Company). (g) Cutbacks in Requested Registration. If the managing underwriter ---------------------------------- of any underwritten offering shall advise the Participating Holders in such offering that not all of the Registrable Securities covered by the registration statement can be sold in such offering within a price range acceptable to the Requisite Percentage of 4 Participating Holders, then the Participating Holders representing the Requisite Percentage of Participating Holders shall have the right to notify the Company in writing that they have determined that the registration statement be abandoned or withdrawn, in which event the Company shall abandon or withdraw such registration statement. If the managing underwriter of any underwritten offering shall advise the Company in writing (with a copy to each Participating Holder) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Requisite Percentage of Participating Holders, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, Registrable Securities requested to be included in such registration, pro rata among the Participating Holders requesting such registration in accordance with the number of Conversion Shares (treating for these purposes Notes requested to be registered as having been converted into Conversion Shares) each such Participating Holder requested to be registered. In connection with any such registration to which this Section 3.1(g) is applicable, no securities other than Registrable Securities shall be covered by such registration. 3.2 Incidental Registration. ----------------------- (a) Incidental Registration. If, at any time, the Company proposes or ----------------------- is required to register any of its equity securities, or any securities convertible into or exchangeable for equity securities, under the Securities Act, whether or not for sale for its own account (other than pursuant to registrations on form S-8 or any similar form solely for registration of securities in connection with an employee benefit plan or dividend reinvestment plan) (an "Incidental Registration"), the Company will give prompt written ----------------------- notice to all holders of record of Registrable Securities of its intention to so register its securities and of such holders' rights under this Section 3.2. Upon the written request of any holder of Registrable Securities made within 20 days following the receipt of any such written notice (which request shall specify the maximum number of Registrable Securities intended to be disposed of by such holder and the intended method of distribution thereof), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof together with any other securities the Company is obligated to register pursuant to incidental registration rights of other security holders of the Company. No registration effected under this Section 3.2 shall relieve the Company of its obligation to effect any Requested Registration under Section 3.1. (b) Abandonment or Delay. If, at any time after the Company has given -------------------- written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine not to register or to delay registration of such securities, the Company 5 may, at its election, give written notice of such determination and its reasons therefor to all holders of record of Registrable Securities and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith) , without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 3.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities for the same period as the delay in registering such other securities. (c) Holder's Right to Withdraw. Each holder of Registrable Securities -------------------------- shall have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to this Section 3.2 at any time by giving written notice to the Company of its request to withdraw. (d) Limitations on Incidental Registrations; Expenses. The Company -------------------------------------------------- shall not be obligated to effect any Incidental Registration pursuant to this Section 3.2 until the second anniversary of the date hereof. Thereafter, there shall be no limitation on the number of Incidental Registrations which the Company shall be obligated to effect pursuant to this Section 3.2. The Company will pay all Registration Expenses in connection with each Incidental Registration requested pursuant to this Section 3.2. (e) Underwriters' Cutback in Incidental Registrations. If the ------------------------------------------------- managing underwriter of any underwritten offering shall inform the Company by letter of its belief that the number of Registrable Securities requested to be included in such registration would materially adversely affect such offering, then the Company will include in such registration, to the extent of the number and type of securities which the Company is so advised can be sold in (or during the time of) such offering, first, the securities proposed by the Company to be ----- sold for its own account and, second, the Registrable Securities and all other ------ securities of the Company which are requested to be included in such registration pursuant to incidental registration rights granted by the Company to other securities holders which are not inconsistent with the rights granted by, or otherwise in conflict with the terms of, this Agreement ("Additional ---------- Incidental Rights"), pro rata among the Participating Holders and such other - ----------------- holders requesting such registration pursuant to Additional Incidental Rights based on the number of shares of Common Stock (with each Note being considered to represent the number of Common Stock into which it is convertible) subject to registration rights originally requested to be included by such holders in such registration. 6 3.3 Registration Procedures. If and whenever the Company is required ----------------------- to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3.1 or 3.2 hereof, the Company will as expeditiously as possible: (a) prepare and file with the Commission as soon as practicable the requisite registration statement to effect such registration (and shall include all financial statements required by the Commission to be filed therewith) and thereafter use its best efforts to cause such registration statement to become effective; provided, however, that -------- ------- before filing such registration statement (including all exhibits) or any amendment or supplement thereto or comparable statements under securities or blue sky laws of any jurisdiction, the Company shall furnish such documents to the Participating Holders, their counsel, and each underwriter, if any, participating in the offering of the Registrable Securities, and its counsel; and provided, further, -------- ------- however, that the Company may discontinue any registration of its ------- securities which are not Registrable Securities, at any time prior to the effective date of the registration statement relating thereto; (b) notify each Participating Holder of the Commission's requests for amending or supplementing the registration statement and the prospectus, and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period (which shall not exceed 120 days) as any seller of Registrable Securities pursuant to such registration statement shall request and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the included methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) furnish, without charge, to each Participating Holder and each underwriter, if any, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such Participating Holder may reasonably request; 7 (d) use its best efforts (i) to register or qualify all Registrable Securities and other securities covered by such registration statement under such securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Participating Holders shall reasonably request, (ii) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (iii) to take any other action which may be reasonably necessary or advisable to enable such Participating Holders to consummate the disposition in such jurisdictions of the securities to be sold by such Participating Holders, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subsection (d) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other federal or state or foreign governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Participating Holders to consummate the disposition of such Registrable Securities; (f) furnish to each Participating Holder and each underwriter, if any, participating in the offering of the securities covered by such registration statement, a signed counterpart of (i) an opinion of outside counsel (or inside counsel if satisfactory to each underwriter) for the Company, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' 8 comfort letters delivered to the underwriters in underwritten public offerings of securities (and dated the dates such opinions and comfort letters are customarily dated) and, in the case of the legal opinion, such other legal matters, and, in the case of the accountants' comfort letter, such other financial matters, as the Requisite Percentage of Participating Holders, or the underwriters, may reasonably request; (g) promptly notify each Participating Holder and each managing underwriter, if any, participating in the offering of the securities covered by such registration statement (i) when such registration statement, any pre-effective amendment, the prospectus or any prospectus supplement related thereto or post-effective amendment to such registration statement has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission for amendments or supplements to such registration statement or the prospectus related thereto or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose; (v) at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and in the case of this clause (v), at the request of any Participating Holder, promptly prepare and furnish to it and each managing underwriter, if any, participating in the offering of the Registrable Securities a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and (vi) at any time when the representations and warranties of the Company contemplated by Section 3.4(a) hereof cease to be true and correct; (h) otherwise comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall 9 satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such Participating Holder a copy of any amendment or supplement to such registration statement or prospectus; (i) provide and cause to be maintained a transfer agent and registrar (which, in each case, may be the Company) for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration; (j) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on a national securities exchange or to secure designation of all such Registrable Securities as a National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") "national market system security" within the meaning of Rule 11Aa2-1 of the Commission, in each case to the extent the shares of the Company's Common Stock are so listed or designated; (k) deliver promptly to counsel to the Participating Holders and each underwriter, if any, participating in the offering of the Registrable Securities, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to such registration statement; (1) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement; (m) provide a CUSIP number for all Registrable Securities, no later than the effective date of the registration statement; (n) make available its employees and personnel and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company's businesses) in their marketing of Registrable Securities; (o) with respect to the registration of any Notes under the Securities Act pursuant to Section 3.1 or 3.2, prior to the effective date of such registration, (i) select a trustee (the "Trustee") ------- reasonably acceptable to the holders of a majority of the outstanding principal amount of the Notes requested to be included in such registration, (ii) prepare, duly authorize, execute and deliver an indenture (the "Indenture") satisfactory in form and substance to the --------- holders of a majority of the outstanding principal of the 10 Notes requested to be included in such registration, reflecting the terms set forth in the Securities Purchase Agreement and the outstanding principal amount of the Notes and qualified under the Trust Indenture Act of 1939, as amended, and (iii) exchange all of the outstanding Notes for Securities (as defined in the Indenture) having an aggregate outstanding principal amount equal to the Notes so exchanged (the "Exchange"), which Securities shall be executed by the -------- Company and authenticated and delivered by the Trustee pursuant to the Indenture. Following such Exchange, the Notes shall be canceled and shall be void and of no further force and effect. The Company may require each Participating Holder as to the Registrable Securities of whom any registration is being effected to furnish the Company such information regarding such holder and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in subsection (g) (iii) or (v) of this Section 3.3, the Participating Holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until, in the case of subsection (g)(iii) of this Section 3.3, such stop order is removed or proceedings therefor terminated, and, in the case of subsection (g) (v) of this Section 3.3, such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subsection (g) (v) of this Section 3.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession, of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 3.4 Underwritten Offerings. ---------------------- (a) Requested Underwritten Offerings. If requested by the -------------------------------- underwriters for any underwritten offering by Participating Holders pursuant to a registration requested under Section 3.1, the Company will use its best efforts to enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnities to the effect and to the extent provided in Section 3.6 hereof. The Participating Holders will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof. The Participating Holders shall be parties to such 11 underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Participating Holders and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of the Participating Holders. No Participating Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's ownership of and title to the Registrable Securities, such holder's intended method of distribution and any other representations required by law, and any liability of the Participating Holder to any underwriter or other person under such underwriting agreement shall be limited to liability arising from misstatements in or omissions from its representations and warranties and shall be limited to an amount equal to the net proceeds that the Participating Holder derives from such registration. (b) Incidental Underwritten Offerings. If the Company proposes to --------------------------------- register any of its securities under the Securities Act as contemplated by Section 3.2 hereof and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Participating Holder, use its best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such Participating Holder among the securities of the Company to be distributed by such underwriters. The Participating Holders shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such Participating Holders and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such Participating Holders. No Participating Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's ownership of and title to the Registrable Securities, such holder's intended method of distribution and any other representations required by law, and any liability of the Participating Holder to any underwriter or other person under such underwriting agreement shall be limited to liability arising from misstatements in or omissions from its representations and warranties and shall be limited to an amount equal to the net proceeds that the Participating Holder derives from such registration. 3.5 Preparation; Reasonable Investigation. In connection with the ------------------------------------- preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the Participating Holders, their underwriters, if any, and their respective counsel and accountants the opportunity to participate in the 12 preparation of such registration statement, each prospectus included therein or filed with the Commission, and, to the extent practicable, each amendment thereof or supplement thereto, and give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and employees and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 3.6 Indemnification. --------------- (a) Indemnification by the Company. In the event of any registration ------------------------------ of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, each Participating Holder, its directors, officers, partners, agents and affiliates or general and limited partners (and the directors, officers, employees, stockholders and affiliates thereof), and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Participating Holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages, or liabilities, joint or several (or actions or proceedings, whether commenced or threatened) to which such Participating Holder or any such director, officer, partner, agent or affiliate or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities, joint or several (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act or under any state securities and "blue sky" laws, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, together with the documents incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such Participating Holder and each such director, officer, partner, agent or affiliate, or general or limited partner, underwriter and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable in any such -------- case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on 13 behalf of such Participating Holder or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof; and provided, further, that the Company shall not be liable to any Person who - -------- ------- participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force regardless of any investigation made by or on behalf of such Participating Holder or any such director, officer, partner, agent or affiliate or controlling Person and shall survive the transfer of such securities by such Participating Holder. (b) Indemnification by the Participating Holders. As a condition to -------------------------------------------- including any Registrable Securities in any registration statement, the Company shall have received an undertaking satisfactory to it from the Participating Holders to, severally but not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in subsection (a) of this Section 3.6) the Company, each director and officer of the Company, and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, but only if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Participating Holder specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the -------- ------- liability of such indemnifying party under this Section 3.6(b) shall be limited to the amount of net proceeds received by such indemnifying party in the offering giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by the Participating Holder. (c) Notices of Claims, etc. Promptly after receipt by an indemnified ---------------------- party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subsections of this Section 3.6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action or proceeding; provided, -------- 14 however, that the failure of any indemnified party to give notice as provided - ------- herein shall not relieve the indemnifying party of its obligations under the preceding subsections of this Section 3.6, except to the extent that the indemnifying party is materially prejudiced by such failure to give notice, and shall not relieve the indemnifying party from any liability which it may have to the indemnified party otherwise than under this Section 3.6. In case any such action or proceeding is brought against an indemnified party, the indemnifying party shall be entitled to participate therein and, unless in the opinion of outside counsel to the indemnified party a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such -------- ------- action or proceeding include both the indemnified party and the indemnifying party and if in the opinion of outside counsel to the indemnified party there may be legal defenses available to such indemnified party and/or other indemnified parties which are different from or in addition to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to defend such action or proceeding on behalf of such indemnified party or parties; provided, further, that the indemnifying party -------- ------- shall be obligated to pay for only one counsel for all indemnified parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation (unless the first proviso in the preceding sentence shall be applicable). No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Contribution. If the indemnification provided for in this Section ------------ 3.6 shall for any reason be held by a court to be unavailable to an indemnified party under subsection (a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under subsection (a) or (b) hereof, the indemnified party and the indemnifying party under subsection (a) or (b) hereof shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the Participating Holders which resulted in such loss, claim, damage or liability, or action in respect thereof, with respect to the statements or omissions which 15 resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect not only the relative fault but also the relative benefits received by the Company and the Participating Holders from the offering of the securities covered by such registration statement as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 3.6(d) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The Participating Holders' obligations to contribute as provided in this subsection (d) are several and not joint in proportion to the relative value of their respective Registrable Securities covered by such registration statement. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. Notwithstanding anything in this subsection (d) to the contrary, no indemnifying party (other than the Company) shall be required to contribute any amount in excess of the net proceeds received by such party from the sale of the Registrable Securities in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate. (e) Other Indemnification. Indemnification and contribution similar --------------------- to that specified in the preceding subsections of this Section 3.6 (with appropriate modifications) shall be given by the Company and each Participating Holder with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. The indemnification agreements contained in this Section 3.6 shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the transfer of any of the Registrable Securities by any of the Participating Holders. (f) Indemnification Payments. The indemnification and contribution ------------------------ required by this Section 3.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 3.7 Certain Rights of the Investor If Named in a Registration --------------------------------------------------------- Statement. If any statement contained in a registration statement under the - --------- Securities Act or in any filing under the state securities laws of any jurisdiction refers to any of the Investors by name or otherwise as the holder of any securities of the Company, then the Investor shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to the Investor, to the effect that the holding by such Investor of such securities does not necessarily make the Investor a "controlling person" of the Company within the meaning of the Securities Act and is not to be construed as a recommendation by such Investor of the investment quality of the Company's debt or equity securities covered thereby and that such holding does not imply that such Investor will assist in meeting any future financial requirements of the Company or (ii) in the event that such reference to such Investor by 16 name or otherwise is not, in the reasonable judgment of such Investor as advised by its counsel, required by the Securities Act or any of the rules and regulations promulgated thereunder, or any state securities laws of any jurisdiction, the deletion of such reference to such Investor. 3.8 Unlegended Certificates. In connection with the offering of any ----------------------- Registrable Securities registered pursuant to this Article 3, the Company shall (i) facilitate the timely preparation and delivery to Participating Holders and the underwriters, if any, participating in such offering, of unlegended certificates representing ownership of such Registrable Securities being sold in such denominations and registered in such names as requested by such Participating Holders or such underwriters and (ii) instruct any transfer agent and registrar of such Registrable Securities to release any stop transfer orders with respect to any such Registrable Securities. 3.9 Limitation on Sale or Distribution of Other Securities. The ------------------------------------------------------ Company hereby agrees that, if it shall previously have received a request for registration pursuant to Section 3.1 or 3.2 hereof, and if such previous registration shall not have been withdrawn or abandoned, (i) the Company shall not effect any public or private offer, sale or other distribution of its securities or effect any registration of any of its equity securities under the Securities Act (subject to the provisions of Section 3.2 hereof) (other than a registration on Form S-8 or any successor or similar form which is then in effect), whether or not for sale for its own account, until a period of 120 days (or such shorter period as the Requisite Majority of Participating Holders shall agree) shall have elapsed from the effective date of such previous registration (and the Company shall so provide in any registration rights agreements hereafter entered into with respect to any of its securities); and (ii) the Company shall use its best efforts to cause each holder of its equity securities purchased from the Company at any time after the date of this Agreement other than in a public offering to agree not to effect any public sale or distribution of any such securities during such period, including a sale pursuant to Rule 144 under the Securities Act. 17 3.10 No Required Sale. Nothing in this Agreement shall be deemed to ---------------- create an independent obligation on the part of any Participating Holder to sell any Registrable Securities pursuant to any effective registration statement. 4. Rule 144. The Company shall take all actions reasonably necessary to -------- enable holders of Registrable Securities to sell such securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144, or (b) any similar rule or regulation hereafter adopted by the Commission including, without limiting the generality of the foregoing, filing on a timely basis all reports required to be filed by the Exchange Act. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 5. Amendments and Waivers. This Agreement may be amended with the consent ---------------------- of the Company, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, in each case only if the Company shall have obtained the written consent to such amendment, action or omission to act, of holders of Registrable Securities, assuming all then outstanding Notes were converted into Conversion Shares, who would then hold not less than a majority of the Conversion Shares that would then be outstanding. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable ------------------------------ Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company (accompanied by a written acknowledgment of, and consent to, such election by such nominee), be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects to be treated as the holder of such Registrable Securities, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. All communications provided for hereunder shall be sent by ------- postage-prepaid first-class mail, shall be deemed to be received three days after being sent, or, if earlier, the date of actual receipt, and shall be addressed as follows: 18 (a) if to the Investors, addressed to it in the manner set forth in the Securities Purchase Agreement, or at such other address as it shall have furnished to the Company in writing; (b) if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or (c) if to the Company, addressed to it in the manner set forth in the Securities Purchase Agreement, or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. 8. Assignment. This Agreement shall be binding upon and inure to the ---------- benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by the Company. This Agreement and/or the registration and other rights contained herein (including these assignment rights) may be assigned by each of the Investors to any one or more transferees or distributees of all or part of such Investor's Registrable Securities. A holder of Registrable Securities shall be permitted, in connection with a transfer or disposition of Registrable Securities, to impose conditions or constraints on the ability of the transferee, as a holder of Registrable Securities, to request a registration pursuant to Section 3.1 and shall provide the Company with copies of such conditions or constraints and the identity of such transferees. 9. Remedies. Each holder of Registrable Securities, in addition to being -------- entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Agreement (including the indemnification provisions thereof), the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. 10. No Inconsistent Agreements. The Company will not, on or after the -------------------------- date of this Agreement, enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person other than the registration rights granted pursuant to this 19 Agreement and the registration rights included in (a) the Common Stock Warrant To Purchase 28,750 shares of Common Stock of the Company, dated March 11, 1993, issued to David B. Johnson and (b) the Common Stock Warrant to Purchase 28,750 Shares of Common Stock of the Company, dated March 11, 1993, issued to Paul R. Kuehn.. The rights granted to the holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with any other agreements to which the Company is a party or by which it is bound. The Company further agrees that if any other registration rights agreement entered into after the date of this Agreement with respect to any of its securities contains terms which are more favorable to, or less restrictive on, the other party thereto than the terms and conditions contained in this Agreement are (insofar as they are applicable) to the holders of Registrable Securities, then the terms and conditions of this Agreement shall immediately be deemed to have been amended without further action by the Company or any of the holders of Registrable Securities so that such holders shall be entitled to the benefit of any such more favorable or less restrictive terms or conditions. 11. Descriptive Headings. The descriptive headings of the several -------------------- sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 12. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This --------------------------------------------------------------- Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, without regard to the conflicts of laws principles thereof. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and the United States of America located in the County of New York for any action or proceeding arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any action or proceeding relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in the Note Purchase Agreement shall be effective service of process for any action or proceeding brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any action or proceeding arising out of this Agreement or the transactions contemplated hereby in the courts of the State of New York or the United States of America located in the County of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. The Company hereby waives any right it may have to a trial by jury in respect of any action, proceeding or litigation directly or indirectly arising out of, under or in connection with, this Agreement. 20 13. Recapitalizations, etc. In the event that any capital stock or other ----------------------- securities are issued in respect of, in exchange for, or in substitution of, any Registrable Securities by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of Registrable Securities or any other change in the Company's capital structure, appropriate adjustments shall be made in this Agreement so as to fairly and equitably preserve, as far as practicable, the original rights and obligations of the parties hereto under this Agreement. 14. Attorneys' Fees. In any action or proceeding brought to enforce any --------------- provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 15. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 21 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. RECOVERY ENGINEERING, INC. By:/s/ Brian F. Sullivan __________________________ Name: Brian F. Sullivan Title: President & CEO GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ Richard A. Friedman --------------------------------- Name: RICHARD A. FRIEDMAN Title: PRESIDENT GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors, II (Cayman), L.P., its general partner By: GS Advisors II, Inc., its general partner By: /s/ Richard A. Friedman ----------------------------------- Name: RICHARD A. FRIEDMAN Title: PRESIDENT GOLDMAN, SACHS & CO. VERWALTUNGS GmbH By: /s/ Richard A. Friedman ----------------------------------- Name: RICHARD A. FRIEDMAN Title: MANAGING DIRECTOR and By: /s/ C.H. Skodinski ----------------------------------- Name: C.H. Skodinski Title: Registered Agent 22 STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its general partner By: /s/ Richard A. Friedman ---------------------------- Name: RICHARD A. FRIEDMAN Title: VICE PRESIDENT BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its managing general partner By: /s/ Richard A. Friedman ----------------------------- Name: RICHARD A. FRIEDMAN Title: VICE PRESIDENT 23 EX-99.3 4 EXECUTIVE AGREEMENT EXHIBIT 3 EXECUTIVE RESTRICTION AGREEMENT, dated as of July 19, 1996, by and among RECOVERY ENGINEERING, INC., a Minnesota corporation (the "Company"), and GS ------- CAPITAL PARTNERS II, L.P., a Delaware limited partnership, GS CAPITAL PARTNERS II OFFSHORE, L.P., a Cayman Islands limited partnership, GOLDMAN, SACHS & CO. VERWALTUNGS GmbH, STONE STREET FUND 1996, L.P., a Delaware limited partnership, and BRIDGE STREET FUND 1996, L.P., a Delaware limited partnership (the foregoing entities, other than the Company, being referred to herein as the "GSCP ---- Parties"), and BRIAN F. SULLIVAN (the "Executive"). --------- WHEREAS, as of the date hereof, the Company and the GSCP Parties are entering into a Securities Purchase Agreement (the "Securities Purchase ------------------- Agreement") pursuant to which the Company is issuing to the GSCP Parties, and - --------- the GSCP Parties are purchasing from the Company, 5% Convertible Notes due 2003 (the "Notes"), in the aggregate principal amount of $15,000,000, which Notes are ----- initially convertible into 1,000,000 shares of Common Stock, par value $.01 per share, of the Company ("Common Stock"); ------------ WHEREAS, as of the date hereof, the Executive is the President and Chief Executive Officer of, and holds Common Stock and Capital Stock Equivalents (as defined below) of, the Company; and WHEREAS, as an inducement to the GSCP Parties to enter into the transactions contemplated by the Securities Purchase Agreement, the Company and the Executive have agreed to enter into this Agreement to establish various rights and obligations between the parties hereto. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the parties hereto agree as follows: Section 1. Definitions. ----------- "Applicable Tag-Along Percentage" shall mean the quotient obtained ------------------------------- (expressed as a decimal) by dividing (A) the Proposed Number (as defined in Section 3(b)) by (B) the number of shares of Executive Stock (assuming that all Executive Stock which are Common Stock Equivalents have been converted, exchanged or exercised for or into shares of Common Stock) held by all Executive Holders as of the date of the applicable Sale Notice. "Average Tag-Along Price Per Share" shall mean, with respect to any Tag- --------------------------------- Along Sale (as defined in Section 3(b)), an amount equal to the quotient obtained by dividing (A) the sum of (x) the aggregate purchase price offered to be paid by the Tag-Along Transferee (as defined in Section 3(b)) in such Tag- Along Sale in respect of all of the Executive Stock proposed to be purchased by such Transferee, plus (y) the aggregate amount payable or deemed payable upon conversion, exchange or exercise of all units of Executive Stock which are Common Stock Equivalents and which are proposed to be purchased in such Participation Sale by such Tag-Along Transferee, by (B) the number of shares of Executive Stock (assuming that all Executive Stock which are Common Stock Equivalents have been converted, exercised or exchanged for or into shares of Common Stock) proposed to be purchased by such Tag-Along Transferee in such Tag-Along Sale. "Cause" shall mean termination of the employment of the Executive by the ----- Company as a result of (i) the Executive's material breach of this Agreement, (ii) conviction of the Executive for (x) any crime constituting a felony in the jurisdiction in which committed or (y) any other criminal act against the Company or any of its subsidiaries involving dishonesty or willful misconduct (whether or not a felony), (iii) substance abuse by the Executive, (iv) the failure or refusal of the Executive to follow one or more lawful and proper directives of the Board of Directors of the Company, which failure or refusal continues for twenty (20) days after written notice thereof from any member of the Board of Directors to the Executive or (iv) willful malfeasance or gross misconduct by the Executive in the performance of his duties as an officer of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Common Stock Equivalents" shall mean any rights, options, or warrants to ------------------------ purchase any shares of Common Stock of the Company and any other securities exercisable or exchangeable for or convertible into shares of Common Stock of the Company. "Executive Holder" shall mean the Executive and each Permitted Family ---------------- Transferee holding any Executive Stock. "Executive Stock" shall mean any shares of Common Stock and Common Stock --------------- Equivalents of the Company (including any shares of Common Stock of the Company issued upon the exercise, exchange or conversion of Common Stock Equivalents) held by the Executive at any time on or after the date hereof. "Excise Tax" shall mean any excise tax imposed under Section 4999 of the ---------- Code. "Good Reason" shall mean termination by the Executive of his employment ----------- with the Company as a result of (a) a substantial reduction by the Company in the rate of the Executive's annual base salary below the base salary received by the Executive during the twelve month period prior to the date of such termination, (b) the Company's reassignment of the Executive to a position of substantially lesser rank, status or relative authority, or (c) the Company's requiring (without the consent of the Executive) the 2 Executive to be based at a place outside a 30-mile radius from his place of employment as of the date hereof except for required travel on the Company's business to the extent substantially consistent with the Executive's present business travel obligations. "Permitted Family Transferee" shall mean (a) any spouse, parent, sibling, --------------------------- child, stepchild or grandchild of the Executive or (b) any trust, charitable foundation or similar entity of which there are no principal beneficiaries other than the Executive or any person listed in clause (a) hereof. "Person" means a corporation, an association, a partnership, a limited ------ liability company, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Securities" means (i) the Common Stock issued or issuable upon conversion ---------- of the Notes (or any securities into which the Notes are exchanged pursuant to the Registration Rights Agreement, dated as of the date hereof, between the Company and the GSCP Parties) and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. For purposes of the Agreement, any Person that holds Notes shall be deemed to be the holder of the number of Securities obtainable upon conversion of such Notes. As to any particular shares of Common Stock which are "Securities", such shares shall cease to be "Securities" when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them or (b) sold pursuant to Rule 144 under the Securities Act. "Sell", as to any Executive Stock, shall mean to sell, or in any other way ---- directly or indirectly transfer, assign, distribute, encumber or otherwise dispose of, either voluntarily or involuntarily, and either with or without consideration; provided, however, that the exercise or conversion by the Executive of any Common Stock Equivalent solely for shares of Common Stock of the Company shall not be deemed to be a "Sale" of such Common Stock Equivalent. The terms "Sale" and "Sold" shall have meaning correlative to the foregoing. ---- ---- "Trade Secrets" means any confidential and proprietary information of the ------------- Company or any of its subsidiaries or relating to the Company's or any of its subsidiaries' business or affairs, including, without limitation, technical information, product information and formulae, processes, business and marketing plans, strategies, customer information, other information concerning the Company's or any of its subsidiaries' products, development, financing, expansion plans, business policies and practices and all other forms of information considered by the Company or any of its subsidiaries to be proprietary and confidential and in the nature of trade secrets; provided, however, that 3 "Trade Secrets" shall not include any such information which (a) was known to the Executive prior to his employment by the Company or (b) was or becomes generally available to the public other than as a result of disclosure by the Executive in violation of his Agreement. Section 2. Limitations on Sales of Executive Stock. For a period of two --------------------------------------- (2) years from the date hereof, no Executive Holder may Sell any Executive Stock; provided, however, that the foregoing restriction shall not apply to any -------- ------- Sale of Executive Stock the proceeds of which are to be used solely for (x) the payment of taxes arising as a result of the exercise by the Executive of options issued to him pursuant to any stock option plan approved by the Board of Directors of the Company and (y) for the payment of the exercise price of any such options. Section 3. Tag-Along Rights. (a) No Executive Holder (a "Selling ---------------- ------- Executive Holder") may Sell any Executive Stock, such that after giving effect - ---------------- to such Sale (whether as a result of such Sale or otherwise) an amount of Executive Stock in excess of 25% of the Executive Stock held by the Executive as of the date hereof will have been Sold, in the aggregate, after the date hereof by all Executive Holders to Persons other than Permitted Family Transferees as permitted by Section 4 hereof (such a Sale being referred to herein as a "Tag- --- Along Sale"), except in accordance with the following procedures: - ---------- (b) The Selling Executive Holder shall first deliver to each holder of Securities a written notice (a "Sale Notice") which shall (x) set forth (a) the ----------- terms of the proposed Tag-Along Sale, including the name of the proposed transferee (the "Tag-Along Transferee"), the number of shares of Executive Stock -------------------- (assuming that all Executive Stock which are Common Stock Equivalents have been converted, exchanged or exercised into or for shares of Common Stock) proposed to be Sold pursuant to such Tag-Along Sale by the Selling Executive Holder (the "Proposed Number"), the Average Tag-Along Price Per Share proposed to be paid --------------- therefor, the payment terms and the type of Sale to be effected, (b) the number of shares of Executive Stock (assuming that all Executive Stock which are Common Stock Equivalents have been converted, exchanged or exercised into or for shares of Common Stock) held as of the date of such Sale Notice by all Executive Holders and (c) the number of shares of Common Stock held as of the date of such Sale Notice by all holders of Securities (assuming that all Notes have been fully converted into shares of Common Stock) and (y) contain an offer (a "Tag- --- Along Offer") by the Tag-Along Transferee to each holder of Securities, which - ----------- shall be irrevocable for twenty (20) days, to purchase the Applicable Tag-Along Percentage of such holder's Securities (regardless of whether such Securities are held in the form of Notes or Common Stock) at a price per share (with each Note deemed to be fully converted for purposes of determining the price thereof) equal to the Average Tag-Along Price Per Share. Each holder of Securities desiring to accept a Tag-Along Offer (a "Tag-Along Participant") shall, within --------------------- twenty (20) days after the date upon which such Sale Notice is received (the 4 "Acceptance Period"), provide written notice to the Tag-Along Transferee setting - ------------------ forth the number of shares of Common Stock or Notes the Tag-Along Participant elects to Sell to the Tag-Along Offer. (c) All Sales of Executive Stock and Securities to the Tag-Along Transferee shall be consummated contemporaneously on the later of (i) a mutually satisfactory business day as soon as practicable, but in no event more than 30 days after the expiration of the Acceptance Period, or (ii) the fifth day following the expiration or termination of all waiting periods under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended, applicable to such Sales, or at such other time and/or place as the parties to such Sales may agree. The delivery of certificates or other instruments evidencing the Securities being Sold duly endorsed for transfer shall be made on such date against payment of the purchase price therefor. Section 4. Transfers to Permitted Family Transferees; Voting Agreement. ----------------------------------------------------------- (a) Any Executive Holder may Sell Executive Stock to any Permitted Family Transferee notwithstanding Section 2 and without complying with Section 3; provided, however, that (a) such Selling Executive Holder may receive no - -------- ------- consideration in connection with such Sale and (b) as a condition to such Sale, such Permitted Family Transferee shall execute and deliver to the Company an agreement pursuant to which such Permitted Family Transferee agrees to be bound by the terms of Sections 2, 3 and 4 of his Agreement. (b) Each Executive Holder hereby agrees that, (x) at each meeting of the stockholders of the Company, such Executive Holder will vote each share of Executive Stock held by such Executive Holder and (y) take all other necessary or desirable action within such Executive Holder's control (including, without limitation, attending all meetings of the Stockholders of the Company in person or by proxy and executing all written consents in lieu of meetings), to cause each Securities Designee (as defined in the Securities Purchase Agreement) to be elected to, and the Initial Securities Designee (as defined in the Securities Purchase Agreement) and each Securities Designee to be maintained as a member of, the Board of Directors of the Company. Section 5. Prohibited and Competitive Activities. The Executive and the ------------------------------------- Company recognize that due to the nature of the Executive's position with the Company and due to the relationship of the Executive to the Company, both prior and subsequent to the date of this Agreement, the Executive has had and will have access to, has had and will acquire, and has assisted and may continue to assist in, developing confidential and proprietary information relating to the business and operations of the Company and its subsidiaries, including, without limitation, Trade Secrets. The Executive acknowledges that such information has been and will be of central importance to the business of the Company and its subsidiaries and that disclosure of it to, or its use by, others (including, without limitation, the Executive (other than with respect to the Company's business and 5 affairs)) could cause substantial loss to the Company. The Executive and the Company also recognize that an important part of the Executive's duties will be to develop goodwill for the Company and its subsidiaries through the Executive's personal contact with customers, suppliers, employees, and others having business relationships with the Company, and that there is a danger that this goodwill, a proprietary asset of the Company, may follow the Executive if and when the Executive's relationship with the Company is terminated. The Executive accordingly agrees that, in the event that (x) his employment with the Company is terminated by the Company for Cause, or (y) the Executive terminates his employment with the Company for any reason other than for Good Reason, then, for three years after the date of any such termination (the "Date of Termination"), the Executive will not (a) become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than two percent (2%) of the outstanding shares of, or any other equity interest in, any Person listed or traded on any national securities exchange or in an over-the-counter securities investment), officer, agent or director of, or otherwise participate in the management operation, control of profits of, any Person who or which directly or indirectly competes with any business of the Company which accounts (either before or after the Date of Termination) for five percent (5%) or more of the Company's and its subsidiaries gross sales, revenues or earnings before taxes on a consolidated basis, (b) directly or indirectly, whether for the Executive's own account or for the account of any other Person, interfere with the relationship of the Company or any of its subsidiaries with, or solicit, divert, or endeavor to employ or entice away from the Company or any of its subsidiaries, any Person who or which is or was an employee, customer or supplier of, or maintained a business relationship with, the Company or any of its subsidiaries (whether before or after the Date of Termination), (c) directly or indirectly, disclose or furnish to any other Person or use for the Executive's own account or for the account of any other Person, any Trade Secrets, and the Executive shall retain all such Trade Secrets in trust for the benefit of the Company, its subsidiaries and their successor and assigns, or (d) publish or make any statement critical of the Company, any of its subsidiaries, or any of its shareholders or in any other way adversely affect or otherwise malign the business reputation of any of the foregoing Persons. Section 6. Severance Payment. (a) The Company agrees that, in the event ----------------- that (x) the Executive's employment with the Company is terminated by the Company other than for Cause, or (y) the Executive terminates his employment with the Company for Good Reason, then, the Company shall pay to the Executive, within the ten (10) days after the date of such termination (the date of such termination being referred to herein as the "Severance Payment Termination ----------------------------- Date"), a lump sum severance payment (the "Severance Payment"), in cash, equal ----------------- to the sum of three times the amount of the base salary and all cash bonuses received by the Executive during the twelve month period immediately prior to such termination. 6 (b) Notwithstanding subsection (a) of this Section 6 in the event that any payments or benefits received or to be received by the Executive in connection with termination of his employment with the Company (whether pursuant to the terms of this Agreement or pursuant to any other plan, arrangement or agreement with the Company) (all such payments and benefits, including the Severance Agreement, being referred to herein collectively, as the "Total ----- Payments") would in the opinion of the Company be subject (in whole or part) to - -------- the Excise Tax, then the Severance Payment, if any, shall be reduced by the Company to the extent necessary so that in the opinion of the Company no portion of the Total Payments is subject to the Excise Tax. The Company shall reduce or eliminate the Total Payments by first reducing or eliminating the portion of the Total Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid farthest in time from the Severance Payment Termination Date. Section 7. Representations and Warranties. (a) Each party hereto ------------------------------ represents and warrants to the other parties hereto as follows: (i) It has full power and authority to execute, deliver and perform its obligations under this Agreement. (ii) This Agreement has been duly and validly authorized, executed and delivered by it, and constitutes a valid and binding obligation of it, enforceable against it in accordance with its terms except to the extent that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally. (iii) The execution, delivery and performance of this Agreement by it does not (x) violate, conflict with, or constitute a breach of or default under its organizational documents, if any, or any material agreement to which it is a party or by which it is bound or (y) violate any law, regulation, order, writ, judgment, injunction or decree applicable to it. (iv) No consent or approval of, or filing with, any governmental or regulatory body is required to be obtained or made by it in connection with the transactions contemplated hereby. (v) It is not a party to any agreement which is inconsistent with the rights of any party hereunder or otherwise conflicts with the provisions hereof. (b) The Executive represents and warrants to the GSCP Parties that he is not a party to any contract or agreement (other than stock option agreements entered into pursuant to stock option plans in effect as of the date hereof), written or oral, (i) with 7 respect to the securities of the Company (including, without limitation, any voting agreement, voting trust, stockholder's agreement, registration rights agreement, etc.) or (ii) otherwise with or relating to the Company. Section 8. No Inconsistent Agreements; No Employment Agreement. Neither --------------------------------------------------- the Company nor the Executive shall take any action or enter into any agreement which is inconsistent with the rights of any party hereunder or otherwise conflicts with the provisions hereof. Nothing contained herein shall be construed (x) as requiring the Company to continue to employ the Executive in any capacity after the date hereof or (y) as requiring the Executive to remain in the employ of the Company in any capacity after the date hereof. Section 9. Further Assurances. At any time or from time to time after the ------------------ date hereof, the parties agree to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and to otherwise carry out the intent of the parties hereunder. Section 10. Legends. The Company and the Executive shall take all such ------- actions as necessary (including issuing new certificates) to cause each certificate representing shares of Executive Stock to promptly, after the date hereof, bear a legend containing the following words: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN THE EXECUTIVE RESTRICTION AGREEMENT DATED AS OF JULY 19, 1996 BY AND AMONG RECOVERY ENGINEERING, INC., BRIAN F. SULLIVAN AND THE OTHER PARTIES THERETO, A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE CORPORATION." The requirement that the above legend regarding this Agreement be placed upon certificates evidencing any shares of Executive Stock shall cease and terminate with respect to shares sold in accordance with the terms of this Agreement upon the consummation of such Sale and, with respect to all other shares of Executive Stock, upon the termination of this Agreement. Upon the occurrence of any event requiring the removal of a legend hereunder, the Company, upon the surrender of certificates containing such legend, shall, at its own expense, deliver to the holder of any such shares of Executive Stock as to which the requirement for such legend shall have terminated, one or more new certificates evidencing such shares not bearing such legend. 8 Section 11. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement. Section 12. Remedies. The Executive agrees that the terms and provisions -------- of Sections 2, 3, 4, 5, 7 and 8 are for the benefit of the Company and each holder of Securities and that any breach of any of the terms and provisions thereof would result in irreparable injury and damage to the Company and each holder of Securities for which the Company and each holder of Securities would have no adequate remedy at law. The Executive therefore agrees that in the event of said breach or any threat of breach, the Company and each holder of Securities shall be entitled to seek an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Executive and/or any and all persons and/or entities acting for and/or with the Executive, without having to prove damages. The terms of this Section 12 shall not prevent the Company or any holder of Securities from pursuing any other available remedies to which the Company or such holder of Securities may be entitled at law or in equity for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Executive. Section 13. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and shall be binding upon the parties hereto and their respective successors, assigns, heirs and personal representatives. In addition, and whether or not an express assignment has been made, each of the provisions of this Agreement pursuant to which the holders of Securities have rights are for the benefit of, and are enforceable by, any registered holder of Securities. Section 14. Notices. All notices, requests, consents and other ------- communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or by telecopy, nationally-recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties: (i) if to the Company, to: Recovery Engineering, Inc. 2229 Edgewood Avenue South Minneapolis, Minnesota 55426 Attention: Chief Financial Officer Telecopy: (612) 797-8334 9 with a copy to: Winthrop & Wienstine, P.A. 60 South Sixth Street Minneapolis, Minnesota 55402 Attention: Eric O. Madson, Esq. Telecopy: (612) 347-0600 (ii) if to the GSCP Parties, to: GS Capital Partners II, L.P. c/o Goldman Sachs & Co. 85 Broad Street New York, New York 10004 Attention: Mr. Sanjay Patel Telecopy: (212) 902-3000 with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Gail L. Weinstein, Esq. Telecopy: (212) 859-4000 (iii) If to the Executive, to: Mr. Brian F. Sullivan 2732 Thomas Avenue South Minneapolis, Minnesota 55416 All such notices, requests, consents and other communications shall be deemed to have been given when received. Section 15. Amendments. The terms and provisions of this Agreement may ---------- only be modified or amended, or any of the provisions hereof waived, temporarily or permanently, pursuant to the written consent of the Company, the Executive and the holders of a majority of the Securities (with all Notes being deemed to be fully converted for purposes of this provision). Section 16. Headings. The headings of the Sections of this Agreement have -------- been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. 10 Section 17. Governing Law; Submission to Jurisdiction; Waiver of Jury --------------------------------------------------------- Trial. This Agreement shall be construed and enforced in accordance with, and - ----- the rights of the parties shall be governed by, the laws of the State of New York, without regard to the conflicts of laws principles thereof. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and the United States of America located in the County of New York for any action or proceeding arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any action or proceeding relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in the Section 14 hereof shall be effective service of process for any action or proceeding brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any action or proceeding arising out of this Agreement or the transactions contemplated hereby in the courts of the State of New York or the United States of America located in the County of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. The Company hereby waives any right it may have to a trial by jury in respect of any action, proceeding or litigation directly or indirectly arising out of, under or in connection with, this Agreement. Section 18. Attorneys' Fees. In any action or proceeding brought to --------------- enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. Section 19. Entire Agreement. This Agreement and the other writings ---------------- referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings with respect thereto. Section 20. Counterparts. This Agreement may be executed in any number of ------------ counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 11 Section 21. Termination. This Agreement shall terminate at such time as ----------- the number of Securities outstanding is equal to less than 25% of the Securities issued pursuant to the Securities Purchase Agreement as of the date hereof. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RECOVERY ENGINEERING, INC. By: /s/ Brian F. Sullivan -------------------------------- Name: Brian F. Sullivan Title: President & CEO GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ Richard A. Friedman --------------------------------- Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors, II (Cayman), L.P., its general partner By: GS Advisors II, Inc., its general partner By: /s/ Richard A. Friedman ------------------------------------- Name: Richard A. Friedman Title: President GOLDMAN, SACHS & CO. VERWALTUNGS GmbH By: /s/ Richard A. Friedman ------------------------------------- Name: Richard A. Friedman Title: Managing Director and By: /s/ C.H. Skodinski ------------------------------------- Name: C.H. Skodinski Title: Registered Agent 13 STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its general partner By:/s/ Richard A. Friedman ------------------------------------ Name: Richard A. Friedman Title: Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its managing general partner By: /s/ Richard A. Friedman -------------------------------------- Name: Richard A. Friedman Title: Vice President /s/ Brian F. Sullivan _______________________________________ BRIAN F. SULLIVAN 14 EX-99.4 5 JOINT FILING AGREEMENT Exhibit 4 JOINT FILING AGREEMENT In accordance with Rule 13d-1(f) promulgated under the Securities Exchange Act of 1934, the undersigned agree to the joint filing of a Statement on Schedule 13D (including any and all amendments thereto) with respect to the shares of common stock, par value $.01 per share of Recovery Engineering, Inc., and further agree that this Joint Filing Agreement be included as an Exhibit thereto. In addition, each party to this Agreement expressly authorizes each other party to this Agreement to file on its behalf any and all amendments to such Statement. July 26, 1996 GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner of GS Capital Partners, L.P. By: GS Advisors, Inc., its general partner of GS Advisors, L.P. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS ADVISORS, L.P. By: GS Advisors, Inc. its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II. (Cayman), L.P., its general partner By: GS Advisors II, Inc., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS ADVISORS II (CAYMAN), L.P. By: GS Advisors II, Inc., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: President GS CAPITAL PARTNERS II (Germany) C.L.P. By: Goldman, Sachs & Co. oHG, its managing partner By: Goldman, Sachs & Co. Finanz GmbH, its managing partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Attorney-in-fact GOLDMAN, SACHS & CO. oHG By: Goldman, Sachs & Co. Finanz GmbH, its managing partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Attorney-in-fact GOLDMAN, SACHS & CO. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: General Partner THE GOLDMAN SACHS GROUP, L.P. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: General Partner STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp., its managing general partner By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President STONE STREET EMPIRE CORP. By: \s\ Richard A. Friedman ----------------------- Name: Richard A. Friedman Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----